‘Innovative’ Entrepreneurs Drive Economic Growth; Entrepreneurs in Middle Income Countries Play Catch-up, Tap into New Technologies
Global Entrepreneurship Monitor (GEM): The Definitive Study of Entrepreneurship in 2005
Wellesley, MA, and London, UK: Entrepreneurs in middle income countries are beginning to catch-up to their counterparts in richer economies by tapping into technologies unavailable to them just a year ago, according to the seventh annual Global Entrepreneurship Monitor (GEM). Directed by Babson College and London Business School, the report is the largest annual measure of entrepreneurial activity worldwide, compiled by more than 150 scholars from 35 countries.
GEM 2005 also found that entrepreneurs with ‘innovative’ businesses drive higher growth rates of GDP per capita. Additionally, middle income countries tend to start more businesses than high income countries. Yet ‘quantity’ of start-ups does not necessarily translate into ‘established’ businesses.
Classic venture capital is up for the first time since the year 2000, according to GEM’s focus section on finance. More importantly, GEM sees ‘microfinancing’ as the new banking solution for entrepreneurs everywhere. Viewing access to credit as a human right, GEM believes microfinancing is an innovative antidote to world poverty.
The GEM focus report on ‘high-expectation’ entrepreneurship places North America at the top, and pulling in the highest numbers in new job creation among early-stage entrepreneurs.
For the first time, the GEM report divided countries into middle and high-income clusters. Strong variations exist among these clusters in both the frequency and quality of entrepreneurial activity.
This year, GEM researchers took their policy recommendations to the next level by showcasing new initiatives among GEM nations that have been successful in growing entrepreneurial activity.
“This year’s GEM report gives us a clear understanding of the importance of free markets to the livelihood of an entrepreneurial society,” said Maria Minniti, Associate Professor of Economics and Entrepreneurship, Babson College, and GEM Research Director. “In all countries, regardless of living standards, governments need to remove barriers to competition, promote fiscal responsibility, and ensure transparency of the law and a clear legal framework for property rights and regulatory oversights.”
“Open global markets are also vital to continued entrepreneurial growth,” said Professor Michael Hay, Deputy Dean of London Business School. “Trade restrictions tend to penalize entrepreneurs more than other groups due to the nature of their enterprises. Liberalized world markets also allow for the free flow between nations of previously unavailable financial capital.”
See presentation videos from the GEM launch.
KEY FINIDINGS FROM THE GEM 2005 GLOBAL REPORT
Entrepreneurial Activity, Motivation, Innovation, Growth, and Industries
Middle income countries are tapping into new technologies. Both early-stage and established business owners in middle-income countries are using technologies unavailable to them a year ago. Starting at a lower level, they have more room and opportunities to upgrade than entrepreneurs in high-income countries.
‘Innovative’ entrepreneurs drive economic growth. Middle income countries with higher levels of innovative entrepreneurship demonstrate higher growth rates of GDP per capita. Early-stage entrepreneurs claim more often to offer innovative products then established entrepreneurs. Still, findings show that innovation is relatively rare in all countries.
Middle income countries tend to start more businesses than high income countries. For the first time, GEM 2005 divides 35 countries into middle and high-income clusters; findings show a strong variation across clusters both in frequency and quality of entrepreneurial activity. Middle income nations such as Venezuela (25%) and Thailand (20.7%) outperformed high income countries like Japan (2.2%) and Belgium (3.9%) in early-stage entrepreneurial activity.
High rates of early-stage entrepreneurship do not necessarily translate into high rates of established business ownership. Japan for example scores very low in early-stage entrepreneurial activity but ranks in the middle group of countries for established businesses. Early-stage entrepreneurs in high income countries are more likely to become established business owners than the more numerous early-stage entrepreneurs in middle income countries.
Success is best among ‘opportunity-driven entrepreneurs’, who have lower failure rates among early-stage businesses. In general, countries with healthy and diversified labor markets or stronger safety nets in terms of social welfare provisions can be more selective in the kinds of businesses they choose to start….and have higher ratios of opportunity to necessity-driven motivation. Denmark comes in number one with a 27 to 4 ratio of early-stage opportunity to early-stage necessity ventures.
All entrepreneurs believe they face strong competition, but established business owners (65%) perceive more competition in their marketplace than early-stage entrepreneurs (55%). Additionally, early-stage businesses in high-income countries feel they are more successful in finding market niches than their counterparts in the middle income cluster.
Job creation remains stagnant -- but middle income countries have a higher share of entrepreneurs in businesses with growth potential than both early-stage and established entrepreneurs from high-income countries.
Middle income countries are more involved in businesses focused on the consumer. Within four groups of more than 500 industry sectors -- extraction, transformation, business services and consumer oriented -- there is a strong link between income-level of a country and its business activities. As countries develop, entrepreneurial activity shifts from consumer activity, such as retail, to business services that are twice as high in high-income countries that can access skilled knowledge workers.
Entrepreneurial Capacity
Early-stage businesses catch young entrepreneurs (25-34 years old) while more mature adults (45-54) own and operate established ventures. Men continue to lead women in starting businesses. The gender gap exists for both early-stage and established businesses, and in both country clusters.
‘Already’ employed workers -- in both middle and high- income countries -- most likely to start new businesses. More than 70% of early-stage entrepreneurs and more than 80% of established business owners work full time in their own businesses.
Education is key to success for every entrepreneur, in every country. Yet, the least educated are just as likely as the highly educated to own an established business in high-income countries.
Entrepreneurs with ample income are more likely to start businesses and are more likely to own established businesses in high-income countries than middle-income countries.
Shaping the entrepreneurial mindset -- entrepreneurs, both early stage and established, are more confident in their skills, likely to know more entrepreneurs, alert to new opportunities, and rank low on the fear of failure scale. But fear of failure is more prevalent among individuals not involved in entrepreneurial activity than among people involved in it at any level and in all countries. Women worldwide are less optimistic, less confident in their entrepreneurial skills, and are more concerned about failure.
Policy Implications
Entrepreneurs do not operate in a vacuum. The political, legal, and cultural environment directly impacts their activity and their ability to contribute to the economic development of their country. A major component of GEM 2005 is the platform it provides governments to develop more effective entrepreneurial policies and best practices.
Government’s role is key to develop real political and economic stability in an entrepreneurial society. Governments must ease barriers to competition, provide and improve efficiency and effectiveness of services, promote fiscal responsibility, and insure a clear legal framework for property rights and regulatory oversight.
Open global markets -- liberalizing world markets is vital to entrepreneurial growth. Entrepreneurship is at the cutting edge of new market development and technological innovation. Trade restrictions tend to penalize entrepreneurs more than other groups.
Globalization also allows the free-flow among countries of previously unavailable financial capital and it puts pressure on large corporations, threatened by market erosion, to adjust in an entrepreneurial manner.
High-income countries need policies to help businesses survive and to develop technological innovation and growth through exports. GEM 2005 includes many examples of successful initiatives in countries such as Austria, where AplusB centers fund innovative, technology-oriented spin-offs from the academic sector, and provide professional support for scientists turning new ideas into viable businesses. In Australia, the State Government of Queensland began a “pipeline” concept to build stronger connections between entrepreneurs and public servants. The private/public partnership is an educational resource for budding entrepreneurs who need investment guidance and overseas linkages to new markets. Education systems in high-income countries need to emphasize programs for ‘advanced’ entrepreneurship and networking.
Middle-income countries moving from ‘technology adopting’ to ‘technology creating’ also need to foster an entrepreneurial culture and business sector. Financial constraints and the lack of a clear definition of property rights are of particular concern. A government-backed program from the Brazilian Ministry of Science and Technology provides financial support, without interest rates, to businesses with innovative technologies. GEM 2005 cites many examples of new government policies that help entrepreneurs market their businesses locally and globally.
Low-income countries need policies that insure “fundamental institutional conditions” to develop active markets. These must evolve before focusing on entrepreneurial framework conditions. Besides upgrading education at the primary and secondary levels, low-income countries must welcome major established firms so that conditions -- rule of law, labor market flexibility, infrastructure, financial market efficiency, management skills -- will further encourage employment, technology transfer, exports, and tax revenues.
KEY FINDINGS FROM THE GEM 2005 REPORT ON HIGH-EXPECTATION ENTREPRENEURSHIP
High-Expectation Entrepreneurship is defined as all early-stage businesses that expect to employ at least 20 employees within five years time. Globally, GEM 2005 shows that high-expectation entrepreneurial activity is a rare phenomenon but…
North America dominates with approximately 1.5% participation rate; Europe and Asia are at the low end with a 0.5% participation rate.
High-expectation entrepreneurship = more new jobs -- GEM 2005 found that some 10.1% of all new firms promise to create nearly 75% of all new jobs by early-stage entrepreneurs.
High-expectation entrepreneurs tend to be young males less than 44-years old. They are also more often employed, better educated, and have higher household incomes compared to low-expectation entrepreneurs.
Policies that help existing entrepreneurs realize their growth ambitions will also bolster new job creation. Especially in highly-developed economies, quality in high-expectation entrepreneurship matters more than overall entrepreneurial activity.
KEY FINDINGS FROM THE GEM 2005 FINANCING REPORT
‘Microfinance’ the world’s poorest -- to make poverty history, leaders in private, public, and civil-society organizations need to embrace entrepreneurship and innovation as antidotes to deprivation. Six hundred million Africans live on less than $3 per day; for China the number may be 400 million and India 500 million. GEM 2005 strongly suggests throwing out traditional banking principles based on “the more you have, the more you can borrow.” Microfinancing is the new banking and it regardsaccess to credit as a human right. The Grameen bank in the village of Jobra, Bangladesh microfinances its entrepreneurs. Almost 300,000 Bangladeshis took micro-enterprise loans and the loan recovery rate was near 99%...when relied on personal trust instead of collateral.
Upswing in classic venture capital -- first time since 2000. In the USA, the pacesetter for investing in high-technology companies, classic venture capital rose to $21 billion up from $18.9 billion in 2003. The USA invests 84.1% (or 16 times as much) into high-technology companies compared with only 20% in Europe. And the USA invested 4.6 times as much in biotech. Europe invested much more in consumer related companies.
Venture capital matters; how it’s invested also matters. American venture capitalists invest more funds in fewer companies than their counterparts in Europe and Japan. They are highly selective, providing more in emerging high-technologies, a chief reason why American companies dominate this sector. Sweden and Norway are two European exceptions. They are closing the VC gap with USA. Sweden raised 480% more than in 2003 and Norway 170% more. In the UK, which is the largest venture capital market in Europe, VC funding declined by 21%.
Most entrepreneurs still funded through the ‘4Fs’ of informal investment -- founders, family, friends, and foolhardy strangers. On average, founders supply 66% of their startup financing. For every new venture funded with classic VC, there are more than 10,000 financed from entrepreneurs themselves. Entrepreneurs should expect to invest two-thirds of the initial capital needed to launch their ventures.
Policymakers, educators, and researchers must pay more attention to informal investors and less to venture capitalists. Financing from entrepreneurs and informal investors pumps 3.6% into GDP of GEM nations compared to 0.1% from classic venture capital.
FOUNDING AND SPONSORING INSTITUTIONS: GEM 2005
Babson College, Wellesley, Mass., USA, is recognized internationally as a leader in entrepreneurial management education. Babson grants BS degrees through its innovative undergraduate program and grants MBA and custom MS and MBA degrees through the F.W. Olin Graduate School of Business at Babson College. Babson Executive Education offers executive development programs to experienced managers worldwide. For information, visit www.babson.edu.
London Business School’s Vision is to be the pre-eminent global business school, nurturing talent and advancing knowledge in a multi-national, multicultural environment. Founded in 1965, the School graduated over 800 MBAs, Executive MBAs, Masters in Finance, Sloan Fellows and PhDs from over 70 countries last year. The School’s executive education department serves 6,000 executives and 60 corporate clients on its programmes every year. London Business School is based in the most accessible and international city in the world and is one of only two UK business schools to have twice been awarded the highest research rating of five-star (5*), by the Higher Education Funding Council for England (HEFCE), confirming the School as a centre of world-class research in business and management. www.london.edu
The GEM report: This is the seventh annual Global Entrepreneurship Monitor (GEM) cross-national assessment of entrepreneurship. Started in 1999 with 10 participating countries, the project has expanded to include 35 countries in 2005. GEM has developed into one of the world’s leading research consortia concerned with improving our understanding of the relationships between entrepreneurial activity and national economic growth. No other research exists that can provide consistent cross-country information and measures of entrepreneurial activity in a global context.
GEM focuses on three main objectives:
- To measure differences in the level of entrepreneurial activity among countries
- To uncover factors determining the levels of entrepreneurial activity
- To identify policies that may enhance the level of entrepreneurial activity.
New developments, and all national reports, can be found at www.gemconsortium.org. The program is sponsored by Babson College and London Business School.
For more information contact:
Barbara Spies Blair
blairb@babson.edu
781-239-4621
Kerry Taylor
kerrytaylor@london.edu
+44 (0) 20 7706 6972
