Entrepreneurship has been continuously linked to economic development of countries and has often been championed as a key path for transforming developing countries toward greater economic growth, innovation, competitiveness and alleviation of poverty. However, researchers have bemoaned the fact that, as described by Lingelbach et al., “. . . entrepreneurship in developing countries is arguably the least studied significant economic and social phenomenon in the world today”. For example, while as of 2004 there were literally hundreds of millions of “entrepreneurs”, generally defined as owners of managers of new firms, in developing countries as opposed to just under 18 million entrepreneurs in the US, leading books on entrepreneurship research often had no more than a handful of pages on entrepreneurship in important developing countries such as China and India.
Research on entrepreneurship in developing countries is important for a number of reasons, not the least of which is providing policymakers with a better idea of how to encourage entrepreneurship as part of an overall strategy for private sector development in developing countries. A strictly Western model of entrepreneurship is not apt to work well in developing countries due not only to differences in societal culture but also the distinctive nature of entrepreneurship in emerging markets where resources readily available in developed countries are scarce or even non-existent.
Decolonization was the trigger for the first attempts to study entrepreneurship in developing countries and most researchers have, until recently, focused their attention on small-scale industrialization and microenterprises. As time has gone by, and initiatives such as the Global Entrepreneurship Monitor were launched, the analysis of entrepreneurship in developing countries has become more nuanced and it is now recognized that entrepreneurial firms in those countries can fall into one of several different categories such as newly established, established by not growing, established but growing slowly, and graduates to a larger size. This movement has opened the door for studying a small, yet very important, subset of businesses in developing countries: new firms formed with a growth-orientation and strategies tied to entry into global markets. It is apparent that there are now a number of promising areas for further research with respect to entrepreneurship in developing countries, all with important policy implications. Lingelbach et al., for example, offered up the following list as a suggested research agenda for entrepreneurship in developing countries:
- Increased focus on new and growth-oriented firms in developing countries, which are important given that these firms are most likely to contribute to economic growth and provide new sources of higher quality employment in developing countries;
- Analysis of the dynamics of firm creation and destruction in developing countries;
- Analysis of the strategies used by entrepreneurs in developing countries to overcome poor access to finance including the use of funds provided by personal savings and intra-familial financial linkages;
- Further exploration of the link, if any, between the general business environment and the level of entrepreneurial activities in poorer countries;
- Development of more information on “models of success” among entrepreneurs in developing countries in order to provide a better picture of the common features of successful entrepreneurship in developing countries and the extent to which those features differ from successful entrepreneurship in the US and other developed countries;
- Development of strategies for designing markets for entrepreneurial finance in developing countries including introduction of various methods for managing risk such as hedging and insurance;
- Application of behavioral economics and finance to entrepreneurship in developing countries to determine how cognitive biases identified by researchers in those fields vary in entrepreneurs in developing countries; and
- Development of models of entrepreneurship that adequately take into account how entrepreneurship is carried out in developing countries.
In this post I’ll continue discussing definitions and types of entrepreneurship in developing countries by describing some of the factors that Lingelbach et al. perceived as making entrepreneurs in developing countries “different”. They first noted that researchers had identified several categories of entrepreneurial firms in developing countries including “newly established”, “established but not growing”, “established but growing slowly”, “graduates of a larger size” and, a somewhat recent phenomenon, “new and growth-oriented firms”. Turning their attention to the specifics of building successful growth-oriented firms in developing countries, Lingelbach et al. mentioned the following “distinctive attributes of entrepreneurship in developing countries”:
- Since developing countries lack a “stable of mature markets”, entrepreneurs in those countries have a broader range of opportunities available to them than their counterparts in developed countries. In other words, while entrepreneurs in developed countries generally operate on the fringes of the economy, developing country entrepreneurs can, if they wish, place themselves in the core of their economies pursuing solutions for needs and opportunities that are more widespread.
- The fragmented and immature markets in developing countries reduce the threat of well-established incumbents; however, entrepreneurs must contend with the much higher levels of risk associated with the economic, political and regulatory uncertainties that generally exist in developing countries. Lingelbach et al. suggested that entrepreneurs in developing countries cope with these risks by operating a portfolio of businesses to manage risks through diversification. Capital raised in one business can be used to providing financing for other businesses and Lingelbach et al. suggested that “interlocking businesses provide a source of informal information flow, access to a broader pool of skills and resources and, when well implemented, a brand name that can be leveraged across all businesses”.
- Entrepreneurs in developing countries face significant challenges with obtaining the necessary financial resources and use several strategies to overcome those problems. They typically start downstream businesses to reduce initial capital requirements and gain access to customers and information flow. They also rely on informal funding provided through well-developed family networks rooted in both urban and rural areas—Lingelbach et al. noted that there are “greater pools of private saving in the countryside”.
- Family-owned and –operated businesses remain more common in emerging markets than in developed countries since entrepreneurs in developing countries still lack mentorship and apprenticeship opportunities that can expose them to the skills and experiences needed to launch and expand businesses in challenging environments. Developing country entrepreneurs must have different skills including the ability to “see through the fog of politics and economics in crisis-prone developing countries” and to be perceived as “trustworthy” in a situation where transactions are most often based on trust rather than formal contracting rules.
Popular media reports often make it seem like dozens, if not hundreds, of new companies are achieving quick success. However, the reality is that launching and building an emerging growth company is challenging adventure that typically takes a substantial amount of time. One study of companies in high technology industries in the US found that 80% of new start-up firms exited the market after one year and that among firms that actually survived until the fourth year, the exit rate within the following year remained over 60%. In fact, it was not until the seven or eighth year that firms could anticipate more than a 50% survival rate into the future, which means that it generally takes that long for the company to establish sufficient credibility in the marketplace and build an inventory of resources that can be used for sustainable growth. For those firms that were able to survive long enough to establish a foothold in the target market, there was a strong likelihood that they would eventually be integrated into the operations of another company.
Another study of technology-based firms that were all formed and organized in the 1960s indicated that a third of those firms had been acquired, including by merger, by 1980 and in that survey the mean age of the acquired firms was 6.4 years when the deal was completed. In their comprehensive study of the evolution of emerging companies, researchers from the University of Chicago Graduate School of Business found that, on average, it took six years for the 49 companies included in their study group to move from their earliest business plan to the date that they released their third annual report following completion of an initial public offering.
Entrepreneurs generally understand and accept these enormous risks of failure; however, that doesn’t mean that they shouldn’t try to avoid some of the most common reasons that emerging companies fail. In order to be smart, entrepreneurs need to be mindful, in advance, of some of the hurdles they’ll need to overcome. This means, for example, considering the following list of “10 Reasons Why Emerging Technology Companies Fail”:
- Myopic or extraneous market research
- Product development guided by internal perceptions and biases
- Over optimistic marketing plan
- Incomplete product
- Undifferentiated products
- Weak or confused market focus
- Vague messaging and poor positioning
- Channel confusion
- Executive thinking that promotion is marketing
- Marketing and sales teams disconnected
Diversity has been a major issue for larger law firms in recent years and it is now standard for those firms to have formal diversity programs and an infrastructure of resources and practices focused on increasing diversity within the attorney pool and recruiting and retaining women and minorities. Clients have also taken a proactive role in this area by creating incentive for law firms to support diversity efforts including bonuses based on whether law firms achieve concrete diversity results.
A number of organizations, such as National Association of Law Placement (“NALP”) and the Minority Corporate Counsel Association, regularly analyze and release statistics regarding diversity among large law firms along with a menu of recommendations to law firms to improve their diversity profile. They generally begin by identifying and explain reasons why law firm diversity programs have failed including lack of commitment at the top; failure to assess the firm’s environment when creating and implementing diversity initiatives; over emphasis on recruitment and hiring and failure to focus on retention and development; failure to include diversity objectives in the firm’s strategic plan; lack of understanding of diversity phases and the need to view creation of a diverse organizational as a developmental process; ignoring the importance of training and development; and “cultural incompetence”, including fostering an a work environment that continues to place a high value on “sameness”. In order to overcome these problems law firms need to have strong and demonstrated commitment from firm management to diversity as a core value of the organization and overriding policies that incorporate communication, resources, involvement of leadership in day-to-day diversity work, representation of diverse lawyers at all leadership levels, training and accountability. In addition, law firms need to consider and implement a variety of suggestions for creating and maintaining a firm culture that values and pursues diversity and inclusiveness including the following recommendations that have been made over the years by the NALP:
- Analyze existing systems and policies for unintended and/or historic bias, including the firm’s work allocation system, the process for inclusion at firm events, the internal training programs, and the committee appointment process;
- Require annual reports by practice area leaders on goals and efforts to diversify practice groups and make all firm leaders accountable for meeting diversity goals, including achievement of diversity goals as a factor in the compensation process;
- Encourage all firm members to participate in women’s and minority bar associations and minority counsel programs;
- Count diversity-related activities toward “firm commitment” or other qualified billable hours;
- Promote work/life balance through equity/non-equity partnership options, on-site day care and free emergency child care, a sabbatical program, and part-time/flex-time options that maintain partnership eligibility.
- Institute “reverse mentoring”, whereby senior attorneys are paired with junior diverse attorneys to open channels of communication and potentially learn about the challenges these attorneys face;
- Create a diversity statement embodying the firm’s commitment and disseminate both internally and externally;
- Develop and implement a firm-wide diversity strategic plan and incorporate measurable benchmarking goals;
- Develop a Diversity Committee composed of a staff diversity director, attorneys, and staff across all offices, with access to/participation from the Management Committee and key decision makers, to identify key internal issues and to propose solutions, diversity events, and diversity training;
- Provide annual diversity training for all lawyers and staff, and management training for supervisors, including hiring attorneys, management, and practice area leaders;
- Develop a firm webpage focused solely on diversity;
- Establish ongoing relationships with law school affinity groups and support activities, conferences, job fairs, and other events organized by the groups; and
- Provide domestic partner benefits and a salary gross-up to make whole and associates who are taxed differently for those benefits and include gender identity in the firm’s EEO statement and provide health insurance benefits related to transgender needs/status.
Effective diversity programs also emphasize professional development activities that are flexible, fully supported by adequate resources and monitored to ensure accountability and attainment of the desired goals and objectives for the firm as a whole and for each of the individual attorneys involved in the program.
For an example of a law firm diversity statement, see Gutterman, Business Transactions Solution § 30:149.
Acs and Virgill observed that the term “entrepreneurship” is often used in several different ways when discussed in connection with developing countries. For example, studies of entrepreneurship in developing countries often focus explicitly and primarily on “small- and medium-sized enterprises” (“SMEs”). In other cases, discussions of entrepreneurial activities in developing countries include persons and firms found in the “informal sector” as well as those engaged in “petty capitalism”. In many cases, combining firms in the informal sector with SMEs in developing regions such as Africa results in a large group of small traders which is collectively responsible for 65%-70% of total GDP and this means that efforts to study and incentivize entrepreneurial activities in developing countries must take into account firms operating both inside and outside the formal institutional framework. Petty capitalism can be found in many forms and has been described as including “small businesses which employ relatively few employees and rely heavily on their owner’s and owner’s family’s labor”. Acs and Virgill cited several examples of petty capitalism including the numerous export enterprises of Hong Kong, the maquila workshops in Mexico and furniture manufacturers in Italy.
The terminology landscape in developing countries clearly contrasts with the approach taken by scholars of entrepreneurship in the US and other developed countries—they make a strong distinction between entrepreneurship and SMEs based on their intentions with respect to growth; however, in developing countries it is generally advisable to adopt a broader definition of entrepreneurship that includes SMEs, the informal sector, petty capitalists and the relatively rare dynamic entrepreneur given that each of these actors is capable of generating something that is “new” in what Schumpeter probably meant when he referred to “the humblest levels of the business world”.
Studies of entrepreneurship in developing countries have often focused extensively on distinctions between “necessity-based” and “opportunity-based” entrepreneurs, which is often viewed as a distinction between proprietors who start their own businesses when no other options are available in order to find a way to sustain their families and persons who start businesses with the intent of not only bringing in sufficient income to support themselves and their families but also to generate excess capital that can be reinvested in order to underwrite business growth and development. The lack of institutions in many developing countries often results in a shortage of formal employment opportunities in those countries and leaves substantial portions of the population with little choice but to set out on own. So-called “reluctant entrepreneurship” of this type also follows loss of employment, which may be caused by one of the frequent economic shocks that developing countries are prone to suffer. Several extensive studies of global entrepreneurship, including the Global Entrepreneurship Monitor, commonly referred to as the “GEM”, and the Global Entrepreneurship and Development Index, have provided additional information on entrepreneurial types in developing countries, the factors that have motivated them to choose and pursue entrepreneurship and the impact that economic development is likely to have on the face of entrepreneurship in those countries.
In my next post I’ll discuss some of the factors that make entrepreneurship in developing countries “different” than what observers in the West are used to.