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Industrial Policy Training Workshop (TIPS-SADRN-CREI) Promotion of Entrepreneurship and New Firm Growth (with emphasis on SMEs) Hugo Kantis (PhD) A) The entrepreneurial process: a systemic approach B) Entrepreneurship policy Entrepreneurship & development Population’s effective capacity of creating and developing dynamic and sustainable organizations- firmsinnovative projects: key driver Entrepreneurship: main contributions Employment, Innovation, Growth, Local and regional development, Equalization of opportunities, Economic power dissemination, A) The entrepreneurial process: a systemic approach Entrepreneurial development and local development It contributes to develop … Institutional platform (generates externalities) Business platform (it rejuvenates, diversifies, and creates firms critical mass) It generates jobs and channels of self-realization for the population (i.e.: young people) It develops endogenous capacities/local drivers. It increases the local appeal for extra-local agents. The birth of a firm ... Personal Aspects Opportunities Resources New Firm ... Towards and integrated approach Socio-economic conditions Personal Aspects Regulations Factors Market Opportunities Resources New Firm Conceptual Framework The Entrepreneurial Process Start-up Inception Acquisition of motivations and skills Identification of the opportunity Business planning Resources Final decision Early Years Market entry Firm management Conceptual Framework The Entrepreneurial Process Start-up Inception Acquisition of motivations and skills Identification of the opportunity Business planning Access to resouces Final decision Early Years Market entry Firm management The Entrepreneurial Development System Culture and educational system Socioeconomic conditions Personal Aspects Industrial structure and dynamism Networks Inception Start-up Factor Markets conditions Early years Regulations and policies A new generation of dynamic entrepreneurs Middle-class families University graduates Entrepreneurial teams Start young A new generation of dynamic entrepreneurs • 5 main initial motivations: 1. To achieve self realization 2. To put their knowledge into practice 3. To increase their income 4. To be their own boss 5. To contribute to society The ventures • Grow fast and become SMEs very soon (about 40 employees in the 6th year) • Main clients: other firms in the domestic market • Most important source of business opportunity: differentiation Key factors influencing the entrepreneurial process Technical knowledge (University) Key factors influencing the entrepreneurial process Entrepreneurial competences (work experience) Key factors influencing the entrepreneurial process Entrepreneurial teams Key factors influencing the entrepreneurial process Projects profile Key factors influencing the entrepreneurial process Networks Key factors influencing the entrepreneurial process Bootstrapping Key factors influencing the entrepreneurial process Technical knowledge (Univ) Teams Networks Entrepreneurial Projects profile competences (work experience) Bootstrapping Typical negative factors Culture & social structure Typical negative factors Entrepreneurial competences (educational system) Typical negative factors Institutional networks Typical negative factors Links with large companies (industry structure) Typical negative factors Finance Typical negative factors Links with large companies Finance Entrepreneurial competences (educational system) Regulatory framework Culture & social structure New enterprises in knowledgeintensive sectors • Positive contribution to the economy: More dynamic and innovative ventures Higher educational level of human resources Higher presence of entrepreneurial teams • But some structural obstacles: Lower presence of role models Weaker learning contexts (university/work experience) Less developed specific networks Lower access to financial resources New enterprises in local areas • Broader door to the entrepreneurial process Broader social origin More first-time entrepreneurs Higher presence of role models More support from social networks • But in some regions: lower dynamism More locally oriented networks More traditional activities Lower access to financial resources More restricted to local market Role of entrepreneurs in technology based clusters The role of entrepreneurship in the emergence of TBCs is “often one of the least well documented, but most critical, elements of successful clusters” Many of the factors that are identified as vital to cluster development (e.g. agglomeration economies, venture capital) lag rather than lead cluster emergence –outcomes of entrepreneurial activity rather than being causal. Key questions: – What drives the spin-off process? – Why does it only occur in certain locations? Role of entrepreneurs in technology based clusters Proposition: entrepreneurial activity has been the central mechanism in the emergence of technology clusters (TCs) The essence of high-tech regions such as Silicon Valley and Route 128 “lies in their continuous ability to create firms” Existing firms are too preoccupied with their existing business and so under-emphasise the significance of new technology or are unwilling or unable to exploit them because it would involve cannibalising or writing-off much of their existing activities. By exploiting new technological opportunities that existing firms either fail to recognise or resist, this entrepreneurial process results in an upgrading of the regional economy. Role of entrepreneurs in technology based clusters Evidence from ‘genealogical trees’ show the organizational origins of entrepreneurs – Small number of organizations have been the source of a disproportionate number of entrepreneurs – This spawning sets off a self-reinforcing cycle » More start-ups » Enhancement of entrepreneurial environment: (i) successful entrepreneurs become mentors, investors, institution builders; (ii) specialized infrastructure is established, (iii) suppliers and service providers emerge, (iv) local universities develop courses and research to meet the needs of companies » Companies attracted from elsewhere » Within a couple of decades there is a sizeable cluster of technology companies Role of entrepreneurs in technology based clusters Modeling the emergence and growth of TBCs – Seeds of the future cluster are put in place: investing in the research base – Emergence of a proto-cluster: a few pioneering individuals leave established organizations in the area to start their own firms – Emergent phase: increased level of entrepreneurial spin-offs in a narrow range of sectors; supportive ecosystem begins to emerge (finance, support, institutions), collective sense of identity emerges, early entrepreneurs begin to ‘recycle’. Now selfsustaining. Role of entrepreneurs in technology based clusters – Fully functioning entrepreneurial environment: √ spin-offs in a wide range of technologies; √ local sources of venture capital, √ wide range of customers and suppliers and specialized service organizations, √ region-wide support networks, √ universities and colleges offer specialized programmes; √ a few of the early spin-offs will have become large; √ MNEs will have a significant presence through acquisition and inward investment; √ government is actively involved in supporting the cluster How does it work the Entrepreneurial Development System in the South African countries? B) Entrepreneurship promotion: Policy justification ED policies on an international level... The number of countries that take on proactive strategies to encourage the creation of companies is growing, as is the range of policy areas to achieve this purpose Justification: entrepreneurship and its contribution There’s a growing consensus about its contribution to economic and social growth, to the creation of work positions, to the strengthening of SMEs, to innovation (Audretch and Thurik 2001, Acs and Armington 2004, OCDE 2001, Reynolds and others 2001, Kantis and others 2002, Birch 1979, Schumpeter 1934) Justification: Growing demand of entrepreneurial capabilities The demand of entrepreneurial capabilities grows: – – – To create a company (whether it’s a profit-driven or a non-profit company) or institution, To face innovative initiatives in preexisting organizations, To increase employment The concept of entrepreneurial society appears: a community in which the population is capable of generating initiatives and innovative projects in different spaces of action, and of adapting flexibly to changes in a world that’s more uncertain every day (Ministerie van Economische Zaken 2000, FORFAS 2007). Justification: to promote entrepreneurial development The existence of gaps between the desired behavior of the entrepreneurial development system and its effective operation. An effective functioning of the factors that form the entrepreneurial system cannot be reached only through the market (i.e.: the entrepreneurial education or the creation of an entrepreneurial culture in society). The existence of markets failures (i.e.: the presence of information asymmetries) makes the supply for entrepreneurs (i.e.: financial, consultancy services) to be inadequate. There may be barriers blocking the access to social capital (i.e.: a very hierarchical culture or social structure that’s too polarized). The entrepreneurs’ transactions costs are higher than the ones of established companies: an uneven competition. Justification: to promote youth entrepreneurship Human capital is one the columns of entrepreneurial development: the entrepreneurial vocations and capacities are forged from early on. Young people face major problems when trying to enter the labor market: a proactive strategy of entrepreneurial development can increase youth employment in a preventive way, contributing to a greater social equity. Access to information on entrepreneurial options for young people is unequal (lack of information) Justification: to promote youth entrepreneurship There are cultural barriers that block perception and identification of opportunities. There is a gap between supply and demand of entrepreneurial capacities (they are not provided by families, the educational system, companies, or the market) The development of entrepreneurial capacities is distributed unequally. The are market failures (i.e.: financing, human resources) and transaction costs are more significant for young people (liability of newness, moral hazard) The social capital accumulated by young people is lower and, among them, it is distributed unequally. The entrepreneurial process, market failures and policy areas Culture Education Social Capital DEVELOPMENT Market Failure Institutional Capital Tacit knowledge and Technical Information about the information entrepreneurial option Asistence Entrepreneurial human Networks Financing capital PROJECT ELABORATION IDEA IDENTIFICATION DEVELOPMENT OF CAPACITIES VOCATION/MOTIVATION entrepreneurial process NEW COMPANY Financial Capital C) Typologies of policies and main areas Policies Space SMEs Policies DEVELOPMENT NEW COMPANY Short term policies PROJECT Entrepreneurship Policies IDEA MOTIVATION Long term policies Evolutional Perspective 80’s Extension of SMEs policies 90’s Policies for new firm creation Programs and institutions exclusively oriented towards assisting new ventures appear. Integrality. Generic policies Directed towards creating companies in general Niche policies Directed towards specific segments (of the population or of the companies) Strategy types 80’s Extension of SMEs policies 90’s Generic policies Policies for new firm creation Niche policies People: social inclusion Firms: competitiveness Directed towards creating new fast growing companies or technology-based. Directed towards groups that are under represented in the population of entrepreneurs (women, young people) Entrepreneurship policies Generic entrepreneurship policies “Niche” entrepreneurship policies Social Inclusion Competitiveness Action areas Promotion of the entrepreneurial culture in the population (USA, Taiwan, Canada, Sweden, Scotland, Japan) Entrepreneurship education (Canada, Scotland, Finland, Holland, Australia, UK) Simplification of the regulatory framework (Spain, Finland, Holland, UK) Action areas Improvement of the support infrastructure One-stop shops (Holland, Finland, Canada, UK, Japan, Taiwan) Online Portals (Ireland, UK, USA) Mentoring and technical assistance (USA, UK, Australia, Ireland, Taiwan) Incubators (Taiwan, Australia, Japan, USA, Ireland, UK) Networks development (Taiwan, Holland, Australia, Scotland, Canada) Access to seed capital and financing: public sources, development of private supply, bridges, investment readiness (USA, UK, Japan, Canada, Finland, Ireland) Las CCdel emprendedor ¨ del desarrollo emprendedor Las The ¨44C “C’s” ofdesarrollo the Entrepeneurial Development Human Capital Social Capital Financial Capital Institutional Capital Institutional subsystem of entrepreneurial development Public Sector ( universities, R+D institutions Governments, incubators, colleges, etc. Private Sector (Banks, existing companies, Business chambers, Venture capital funds, investors, etc.) Entrepreneurial Development Institutions Root Institution “ ” Program Root Institution “ “ ” Root Institution Beneficiarios Graduates University Students Program Young people Program Program Program Rapid growth firms Root Institution” “ ” Root Institution Technology Based firms Young firms Third Sector (Fundations, non-gubernamental organizations THE MISSION OF THE ENTREPRENEURSHIP SUPPORT INSTITUTIONS: REDUCING TRANSACTION COSTS BY NETWORKS DEVELOPMENT Opportunities/ resources Suppliers Clients $ Human Resources Business networks? ? Technical assistance ?? Knowledge Financing sources?? sources?? Training? Government instruments?? Regulation s?? Contacts with entrepreneurs ?? D) Generic policies? High growth policies? Dynamic entrepreneurship policies? Just generic entrepreneurship? 1- Selecting potential high-growth firms is too difficult. 2- Venture capitalist are able to pick winners, with the inclusion of a considerable number of potential winners that turned out to be losers while public policy would seek to back all the winners and avoid any losers. 3- Start-ups in general deserve policy support, due to their seedbed function, unequal access to finance and information, their employment creation (still most of the jobs in the small business sector come from non high-growth firms), and their effect on regional prosperity in the long run 4- What is needed is an entrepreneurial culture that has effect on all layers of society: new firms, small firms, large firms, public organizations. Or high growth entrepreneurship? … there are at least as many arguments in favor of targeting (potential) high growth firms: 1- It increases the effectiveness and efficiency of support measures. Focusing resources on a small group of ambitious entrepreneurs – i.e. where they are most needed and where they can produce the best results – is more effective than more generalized support. 2- It provides a clearer strategic focus on the needs of high growth businesses; high levels of expertise are more likely to be developed both in the public sector as well as in the related support fields (such as venture capitalists, bankers, and consultants). 3- In some countries more start-ups are not needed. Dynamic entrepreneurship Dynamic company: Those that transform into SMEs (includes high growth but it is a broader concept) ≠ Vegetative micro enterprises Recent studies show that growth oriented entrepreneurs generate growth (Acs 2006, Jena 2007) Dynamic entrepreneurship In a few years less than 10% of the new companies (the most dynamic) generate half of the sustainable jobs UK, USA, Argentina: companies of at least 10 employees; 25 average by the third year Dynamic entrepreneurship: % of companies at birth Dynamic Companies <10% % of employment N years after % with IANGs <0,5% Dynamic entrepreneurship: the challenge % of companies At birth Dynamic Companies: <10% % with IANGs < 0,5% Challenge Sustainability and dynamic entrepreneurship Sustainable employment in long term Competitive Growth Innovation Dynamic entrepreneurship Self-employment and micro by necessity: social net Does the “theory of the business agent” work? E) Examples and lessons: key factors in the design and implementation of policies Some international experiences USA * Venture corps: retired businessmen (mentoring) * Entrepreneurship education (Kauffman Foundation) * Financing and promotion of innovation in a pro- entrepreneurial cultural context (SBIR, SBIC, SBDC, simplified loans) Italy and Brazil * Information, training, tutoring and financing * Incubation *The SOFTEX experience Some international experiences Scotland: integrality, alliances and learning * Diagnosis *Massive cultural campaign (PC, PES. LH) *Entrepreneurial education *Mentoring program *Incentives and support for the creation of entrepreneurship centers in universities *Entrepreneurs’ network: entrepreneurial exchange *Promotion of financing via VC and angels networks *Financing via guarantee funds and simplified loans *Special programs designed to promote rapid growth companies Some international experiences Germany (EXIST): •Fund for regional entrepreneurship strategies presented by alliances composed by universities and local partners • Grants for the development of entrepreneurial projects and coaching in marketing and finance • Keim model based on the formation of capacities, the link of investigation with potential entrepreneurs, technical assistance to the process, network development Some international experiences • Chile (Chile Innova): 2 lines of seed capital for innovative projects (less than 18 months): Prefeasibility and start up • Institutional platform providing support to those entrepreneurs receiving seed capital • Creation and strengthening of incubators Main lessons • There are no single recipes • Initiatives differ in strategic scope, budget, and geography • Knowledge about the initial conditions is crucial • Adoption of strategies with a systemic approach based on institutional value chains is needed • If there is no overall strategic framework, ex post actions must be taken to coordinate efforts • Mix (generic and niche) initiatives are possible and necessary (i.e: young, growth oriented, innovatives…) Main lessons • Role models dissemination to foster entrepreneurial vocations (cultural change) • Entrepreneurial competencies promotion through the educational system (but in connection with the business world) • Widening the space of opportunities to start a dynamic business (i.e.: innovation) Main lessons • Development of networks and teams • Improvement of the business environment and financing • Training, consulting, and advisory programs appropriate to the profile and demands of entrepreneurs and new ventures Main lessons • There must be an appropriate institutional setting, or when it is weak, it must be strengthened • The commitment of the private sector and civil society is key for sustainability • The intervention entrepreneurial style should itself be Main lessons » The State must take the role of a second floor, delegating direct support to specialized and decentralized institutions (private, mixed, foundations, chambers, etc) » It is very important that alliances with other institutions are created, to generate a system of entrepreneurial development that brings integrative support to the entrepreneurs. » Alliances with the communication media must be included » A flexible strategy demands an evaluation and learning system Thank you ! 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