Entrepreneurs and their role in Economic Development Entrepreneurs, firms and business membership organizations: their role in politics and development Leipzig, Germany, 29th 31th October 2014 Prof. Dr. Utz Dornberger What type of Entrepreneurs (Entrepreneurship) do we need for Economic Development? 2 1
Back to History Long decline of self employment 19th and early 20th century showed a continuous decline in the share of agricultural employment, with both manufacturing and services gradually gaining ground (Wennekers et al., 2010) Importance of investment in production, distribution, and management needed to exploit economies of scale > bigger enterprises Continual rise of real wages But, in the last 30 years we see a revival of independent entrepreneurship in developed countries U.S. Germany 1880 36,9 38,2 1890 33,8 34,6 1900 30,8 1910 26,3 34,8 1920 23,5 33,5 1930 20,3 32,9 1940 19,5 29,3 1950 16,5 28,5 1960 13,0 22,6 1970 9,5 16,5 1980 6,8 1990 10,8 7,2 2007 9,9 9,7 3 Revival of Entrepreneurship Third Industrial Revolution (Jensen, 1993) 5 th Kondratieff cycle, emergence of small Software, IT and Biotech firms with comparative advantage of small firms in inventing radically new products New technologies have reduced the importance of scale economies Deregulation and privatization movement Tendency of large firms to concentrate on their core competences Increasing incomes and wealth have led to an increase in the demand for variety Emergence of the Service Industry Source: Carree and Thurik, 2002. 4 2
Entrepreneurial Rates Worldwide Global Entrepreneurship Monitor: www.gemconsortium.com Total Early Stage Entrepreneurial Activity (TEA rate) Individuals who are actively involved in business start ups: in the phase in advance of the birth of the firm (nascent entrepreneurs) in the phase spanning 42 months after the birth of the firm (owner managers of new firms) 5 Entrepreneurial Rates Worldwide Source: Global Entrepreneurship Monitor 2013. 6 3
U Shape Relationship 7 Entrepreneurs motivated by Necessity and Opportunity Phase of economic development Source: Global Entrepreneurship Monitor 2013. 8 4
Opportunity based Entrepreneurship Source: Worldbank [2012]. 9 Quality of Start up Entrepreneurship matters Necessity based Entrepreneurship firms with a low growth potential Employment substitution and generating additional income Opportunity based Entrepreneurship firms with a substantial growth potential Technology oriented enterprises and customer oriented companies There is a clear negative correlation between the quantity of necessity based start ups and the income per capita, as well as the integration in the world market. In the majority of developing countries predominates a necessity based entrepreneurship. This could establish a negative correlation between number of startups and economic growth. 10 5
Quality of Start up Entrepreneurship matters More selective in promoting start up entrepreneurship focus on opportunitydriven business models with growth potential Universities and other research institutions play a crucial in fostering opportunitybased entrepreneurship There is a need for new financial instruments to support start ups with high growth potential Encouragement of executive managers to leave big companies and to start their own business 11 Entrepreneurship and Growth Start up Entrepreneur International Entrepreneur 12 6
Small Mittelstand in East Germany Small scale firm structure, large number of small firms and small medium sized firms (20 50 employees) 63% of all East German employees in the manufacturing sector in companies with fewer than 250 employees, in West Germany only 41% Only a few large firms with more than 500 Mio. EUR annual turnover Only a few globally operating companies with high quality activities (Management, Marketing, R&D) located in East Germany 13 Limited Export Orientation Less internationalization degrees compared to west German companies Export ratio of the new German states between 10 and 20% below the West German level Less international markets (<10) vs. 10 to 20 destinations in West Germany Less distant markets in Asia and America Focus on direct export activities (hardly any other international activities in the form of own sales offices or manufacturing facilities ) 14 7
Limited Export Orientation Strategy Key personnel Enterprise culture & capabilities Resources East German SMEs Incremental internationalization starting with close neighbors Tailor made products Weak distribution and support strategy Limited international experience and exposure Focus on developing the company and solving the daily problems Trust based relations Regional affiliation, homogeneity in work attitude emphasized Limited foreign language skills Constraint in financing continuous expansion Limited willingness in investment in international market development West German SMEs Incremental internationalization starting with close neighbors Tailor made products Innovative and pro active distribution and support strategy Broad experience and exposure to different countries and environments More time for strategy development and implementation Diversity emphasized Individualism promoted Higher foreign language skill Better financial base Higher commitment for investing in market expansion 15 International Entrepreneurship Firms creatively discover and exploit opportunities outside their domestic markets in order to develop a competitive advantage Entrepreneurship has become a global phenomenon as internationalization typically leads to improved firm performance Two third of the German Mittelstand is involved in international activities Large multinational companies (MNCs) generate roughly 54% of their sales outside their domestic market, and more than 50% of their employees work outside of the home country 16 8
International Entrepreneurship Start up Entrepreneurs Born Global Companies Diaspora Entrepreneurship Managerial Business Owners Internationalization of SMEs Intrapreneurs Internationalization of larger enterprises 17 Low Export Volumes in Developing Countries Exports of goods and services 2009 2013 (Source: World Bank, 2014) 18 9
The Role of an Entrepreneur Economic Leader??? Political Leader 19 Motivations of Entrepreneurs Schumpeter denominates three different motivations: (Theory of the Economic Development (1912), p. 138 and following) The wish to establish a private realm The wish to triumph The wish to be successful just for being successful, Pleasure by creating The essence of entrepreneurship lies in the perception and exploration of new opportunities in the realm of business it always has to do with bringing about a different use of national resources in that they are withdrawn from their traditional employ and subjected to new combinations. 20 10
Case of Korean Chaebols Development stage 1960 1990 Close ties between military government and the chaebols (large, family owned industrial conglomerates) During the crucial developmental time: Import and FDI restrictions, direct credit, and tax relief Democratization stage 1990 Chaebols are still dominating the political arena, but increasing discussion about their role, e.g. several corruption cases In 2012, exports by the 30 largest chaebol accounted for 82 percent of Korea s output, compared with 53 percent in 2002. They hire about 80 percent of new college graduates. 21 Case of Korean Chaebols Potential virtues of Korean Chaebols Leadership: visions by charismatic leader High degree of entrepreneurship: aggressive in launching new products and services, buying and merging with existing corporations and entering new markets Varied management systems: autocratic and more grouporiented (Samsung and Hyundai, for example, vertically organized, others more horizontal) Agility of decision making Internal capital and labor market for affiliated companies: mutual assistance, know how, skilled labor and executives flow throughout the group Source: Murillo, Sung 2013. 22 11
Case of Korean Chaebols Korea often labeled as an example of crony capitalism (Kang 2002) Chaebols are involved in scandals of political finance, influencing on policy making influencing on public opinion Need for policies to reduce their power and influence are crucial to fight corruption Empowering the existing anti trust office with quasi judicial power Pressure from international investors and small shareholders Source: Trautvetter 2010. 23 Entrepreneurs as Political Actors Entrepreneurs have an interest to build their own Kingdom and here they can not follow democratic rules Entrepreneurs are decision takers and they are weak in delegating decision power For an entrepreneur the development of compromises with other players is the last not the first option Entrepreneurs can serve as political leaders in reconstruction phases/ re start situations of a country, e.g. after a strong crisis They can serve as political leader for a short time (after a crisis) but not for long periods because one can not manage a country like a company. 24 12
The Role of an Entrepreneur International Entrepreneurs Start up Entrepreneurs Entrepreneurs in Politics 25 Centre of Excellence: Internationalization of SMEs Services offered by Leipzig University to SMEs from Germany and developing countries Centre of Excellence Practical Projects in International Market Research and Marketing Support acquiring Public Funding Training Course: Export Manager Start Export Online Access to International Executives Applied Research on Internationalization 26 13
International SEPT Program Office: Beethovenstrasse 15 D 04107 Leipzig Germany E Mail: dornberger@uni leipzig.de Web: www.sept.uni leipzig.de 14