Starting your own business may not end you up a datuk
Throughout Southeast Asia,
attempts by governments to promote the creation of entrepreneurs have almost
unquestionably been regarded as a policy instrument for promoting economic
growth. But reality doesn’t support the image. Creating new entrepreneurs may
actually be dampening economic growth, a far sight from the creative economies
many governments aspire to develop.
The data in most developing
Southeast Asian countries just doesn't seem to support this. The truth of the
matter may be very different. While lightning strikes people figuratively about
as often as it strikes literally, entrepreneurship can be more aptly described
as a narrative about survival and subsistence than growth and glory. Are Asian
policymakers fooled by the hype that entrepreneur development creates economic
growth?
Entrepreneurship: Open a Kedai Kopi
On the ground across Southeast
Asia, very little innovation can actually be seen. The majority of new SMEs do
not create any new innovation and as a consequence do not contribute to
economic growth. The Global Entrepreneurship Monitor (GEM), a body founded by
Babson College and the London Business School, has found that the majority of
new enterprise start-ups occur within the service and retail industries.
It appears that very few people
actually formally scan the environment for opportunities. If people did, they
would not start up in industries with high competition and low profit margins,
as the majority do. In fact most people have a natural inclination to imitate
others, employing no innovation whatsoever – witness for instance entire
streets made up of shops selling exactly the same things side by side, an odd
phenomenon in Asian cities. Witness any beach in Asia where an entrepreneur
opens a string of tourist huts, only to see a half-dozen just like it sprout
up, driving down the price for beachgoers and cluttering the landscape.
The Global Entrepreneurship
Monitor Thailand Executive Report indicates that most such ventures are small
and focus on the consumer service sector in retailing, restaurants, and
personal services, such as health and beauty services. As with the rest of the
region, these businesses are the prime source of income of most entrepreneurs
and operated for the purpose of earning a living. Local entrepreneurs select an
activity that is very locally oriented, suggesting that they are opportunistic
in the limited sense of the word. There is little, if any value created.
Few Rocket Scientists
The reality is that most new
businesses employ existing technologies and create no new technologies at all.
Although so much entrepreneurship literature focuses on high-tech start-ups,
these types of firms are only a very small percentage of new firm start-ups.
Entrepreneurship creates less
employment than many people think. From data provided by the Global
Entrepreneurship Monitor 2011 Global Report it can be seen that less than 2
percent of firms in most countries expect to provide more than 20 jobs, about
the same percentage 5–19 jobs, with the overwhelming majority of firms
expecting to employ between 0–4 people. This is strongly supported by SME data
in Malaysia where almost 80 percent of firms in the country are self employed
micro-enterprises, employing no one outside the family. An additional 19
percent of existing enterprises employ less than 4 persons per enterprise,
indicating the SMEs actually contribute little to the growth in employment.
According to another piece of
research most entrepreneur incomes are lower than what they would earn working
for someone else, with less benefits, and longer hours of work. This is logical
given that most entrepreneurial ventures enter into highly fragmented, localized
markets, with no source of competitive advantage.
Not only is the average
entrepreneur earning less than his or her salaried counterparts, income is
spasmodic, varying from day to day, week to week, month to month, and year to
year. There is a good chance that a person and his or her family will drop down
into a lower socioeconomic group during their tenure as an entrepreneur. In the
region many owner operator firms are seen as part of the marginal or informal
economy.
There is also little chance that
an entrepreneur will be able to sell his or her business and make any
substantial capital gain. Therefore many Southeast Asian countries over the
next few years will face the problem of how to support elderly populations with
little means to survive. On the whole, starting a business will make a person
and their family relatively worse off than if they were working for someone
else.
The low profitability of SMEs
means there is little reinvestment, thus insuring that firms’ technology bases
remain low. As a consequence very few SMEs transform into something bigger and
better, since most enter non-attractive, low growth industries, resembling the
present mix of industries, i.e., no product and economic evolution, high levels
of competition, competing on price, using resources inefficiently, and
haphazard management.
Most new enterprises do not last
very long. It is not difficult to understand these high rates of failure when
the majority of new firms seek to compete in highly fragmented markets with
heavy competition, where the market environment provides very low profitability
levels. In addition, 80 percent of new products fail after being launched,
although this sometimes takes some time to acknowledge. Other products may partially
fail and not generate enough revenue, provide sufficient level of consumer
satisfaction, or return on investment.
Many new firms are particularly
vulnerable because the strategies that founders select to exploit opportunities
do not create any new value within the competitive marketplace. These casualty
statistics would not be acceptable to any military general on the battlefield,
nor would the low success rate be acceptable to any college football coach.
The concept of Schumpeter’s
‘creative destruction’ is not apt here. It is more a case of enterprise
stagnation with SMEs having undifferentiated products, locked in small
fragmented markets with little ambition for growth and marginal income ability.
Entrepreneurs are far from the heroes of capitalism as Alfred Marshall
suggested. The majority resemble the survivors of capitalism, in no way
achieving the espoused freedom and empowerment often associated with the
rhetoric of entrepreneurship.
Policy Implications
Although the data presented above
may come from diverse sources, debate about the real benefits of
entrepreneurship to the economy is an overdue one. Many policy planners have
incorrectly formulated their economic strategies utilizing entrepreneurship as
a vehicle of growth. The danger of not grappling with this issue could lock the
economy into an imitative malaise where firms are only capable of providing a
meager living for its proprietors rather than catalyzing new enterprises into
the much desired creative base for the economy.
In this scenario the economy will
underperform relative to its potential and in absolute terms fall behind its
trading competitors. Creating economic growth and diversity is not just about
creating new businesses which look good as KPIs, but about developing new
skills on a regional scale that enable a large number of these businesses to
create news forms of value greater than what is currently harvested out of
existing resources. Although this may be achieved within a sprinkling of firms,
it is extremely difficult to do at any aggregate level. And this is the real
challenge facing both policy makers and those charged with implementation.
In fact some entrepreneurship
development programs like Malaysia’s Ministry of Agriculture promoting the
birds’ nest industry, which exports birds’ nests, particularly to China. The
industry is already growing naturally without government intervention. The
ministry may be actually be increasing the disparity of incomes. Birds nest is
an industry where the wealthy get wealthier and kampung (village) families are
shut out due to the high capital costs.
A further example of
entrepreneurship development policy widening the income gap goes back to when
the Malaysian Premier Mahathir Mohamed and deputy Premier Anwar Ibrahim during
the 1990s created crony entrepreneurs intended to share wealth and business
opportunities with those around them. This "policy in action," still
operating today, seems to be adding to rent seeking activities rather than
innovative businesses with little flow on benefits to the community.
Other programs like OTOP – one
tambon (local government unit), one product -- in Thailand may be transferring
skills to communities where these skills may create only limited value, leading
to no real economic growth. Entrepreneurship development only creates self
employment at an income level far below what people could earn while working
for others.
Economic growth only comes out of
creating more value from existing resources and/or creating new resources
through innovation which the majority of Asian enterprises are not doing. It
could be argued the income disparities between rural and urban groups are
contributing to the present structural conflict occurring in Thailand today (if
one accepts this economic paradigm as a partial explanation).
As competition within SMEs is
very competitive and in many cases price based, it doesn’t add value to the
economy, create employment other than the proprietor, where most of the pursued
opportunities don’t require value adding strategies. Other than replicating
someone else's idea, there is no increase of economic diversity and
entrepreneurship actually tends to reallocate income rather than add value to
the economy.
Policy makers in Asia have
adopted the premise that entrepreneurship creates economic growth from
consultants and emulated western government policies without question. It's
time to look critically at the connection between entrepreneurship development
and economic growth.
Murray Hunter
Business & Investment Opportunities
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