The follwoing article is from the Economist and Malaysia is quoted as an example as a failure in innovative entrepreneurship.:
Fish out of water
UNEMPLOYMENT is creeping ever higher. In the United States it will soon exceed 10%. In parts of Europe it is closer to 20%. Around the world young people are finding it all but impossible to get a job.
So far policymakers have focused on rescuing the economy from free fall, boosting demand, however indiscriminately, and rescuing failing companies, however expensively (AIG received $180 billion-worth of government support). But policymakers are beginning to turn their minds to the potentially more rewarding question of creating tomorrow’s jobs, rather than trying to save yesterday’s. The buzzwords in government circles are entrepreneurship, innovation and venture capital.
This makes perfect sense, in theory. Innovative start-ups are efficient engines of job creation and long-term economic growth. In America start-ups have accounted for almost all the net job creation in the past couple of decades. In the developing world, new technologies are helping to break the cycle of poverty. An extra ten mobile phones per 100 people in a typical developing country boosts GDP growth by 0.8 percentage points, according to the World Bank, by helping small entrepreneurs flourish.
Governments have also played an important role in igniting entrepreneurship. As well as creating some of the vital infrastructure of innovation by investing in higher education, they have also had a direct hand in driving entrepreneurship itself. Governments helped bring into being the venture-capital industry: witness the work of American Research and Development (ARD) after the second world war or the Yozma Fund in Israel in the 1990s. They have also supercharged high-tech clusters: Silicon Valley was created as much by the Pentagon’s demand for new kit as by freewheeling entrepreneurs. Most of the world’s other great entrepreneurial hubs, from Bangalore to Guangdong, bear the stamp of government intervention.
But replicating these successes is difficult. The road to the entrepreneurial future is littered with failed government schemes. Malaysia’s massive BioValley complex, which opened in 2005 at a cost of $150m, is now known as the “Valley of the BioGhosts”. Dubai’s entrepreneurial hub is awash in a sea of red ink. Australia has little to show for its ambitious BITS (Building on Information Technology Strengths) programme. The European Union’s European Investment Fund, which was started in 2001 with an endowment of more than €2 billion ($1.8 billion at the time), has failed in its mission to burnish the sorry record of the European venture-capital industry.
How can governments do a better job? Two well-timed new books provide some clues: “Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do About it”, by Josh Lerner, and “Start-Up Nation: The Story of Israel’s Economic Miracle”, by Dan Senor and Saul Singer.
Mr Lerner, a professor at Harvard Business School, outlines some common failures. Too many countries are seized by ambitions that bear no relation to their particular comparative advantages. Although Malaysia had few skilled biologists, its politicians decided to build BioValley on the ruins of Entertainment Village, an attempt to create a Malaysian Hollywood that failed for lack of media nous.
Too many politicians treat entrepreneurship as yet another gravy train. Norway squandered much of its oil wealth investing in new businesses that were founded by the relatives of politicians and bureaucrats. Policymakers are also lax when it comes to designing venture funds. They try to insulate them from risk or allow public investments to crowd out private ones. The Canadian government’s experiment with venture capital failed because the Canadian Labor Fund Program had so much money that it frightened off private venture capitalists, while earning mediocre returns itself. New Zealand’s government, in contrast, did much better because it invested public money in private funds.
Mr Lerner points out that two foolish tendencies are particularly hard to resist when politicians are struggling with high unemployment. The first is the temptation to spread the wealth around to every region and interest group. France’s attempt to transform Brittany from one of its more backward regions into a hive of high-tech activity failed dismally for an obvious reason: entrepreneurial firms cluster in particular places. The second is a suspicion of foreign investors. The Japanese government lavished money on start-ups in the 1990s but was reluctant to embrace foreign venture capitalists. Japan now has one of the rich world’s weakest venture-capital markets.
The country that has led the world in promoting entrepreneurship has also done the most to plug itself into global markets. The Israeli government’s venture-capital fund, which was founded in 1992 with $100m of public money, was designed to attract foreign venture capital and, just as importantly, expertise. The government let foreigners decide what to invest in, and then stumped up a hefty share of the money required. Foreign venture capital poured into the country, high-tech companies boomed, domestic venture capitalists learned from their foreign counterparts and the government felt able to sell off the fund after just five years.
Last year Israel, a country of just over 7m people, attracted as much venture capital as France and Germany combined. Israel has more start-ups per head than any other country (a total of 3,850, or one for every 1,844 Israelis), and more companies listed on the NASDAQ exchange, a hub for fledgling technology firms, than China and India combined. It may not have the same comforting ring as “the Swedish model” or “the polder model”, but when it comes to promoting entrepreneurship, “the Israeli model” is the one to emulate.
Some of the comments:
caribis wrote: Oct 30th 2009 5:37 GMT
There are two types of entrepreneurship. The first is someone starting up a low-tech business. The guy who has a small machine shop in his garage as a hobby for ten years who then realizes one day he could be doing what he does as a business. The person who is working for someone else and one day sees that he or she could be doing the same thing but on their own. These types of businesses only start up in a recession because their owner was laid off and had to do something. More often these small businesses are started in good times. The key to this type of entrepreneurship is keeping start up costs small. And that primarily means not having to obtain twenty permits and pass ten inspections before you can earn your first dime.
The type of new companies politicians want are high-tech start ups that will become the next GE, HP, Microsoft or Monsanto. These are ultimately the result of basic university research. That means building up a research faculty over a couple of decades, not starting a multi-million dollar fund. The environment comes first, the fund comes second. Why did the computer industry take off in Silicon Valley? Because the university’s in the bay area had quality electrical engineering programs. This led to a lot of engineers in the area. These guys then started experimenting, both the ones in school but especially the ones who were working real day jobs, with cast off hardware and they founded the Home Brew Computer Club. From there, over quite a few decades, sprang the personal computer industry and all its software. Sure, Bill Gates was never there, but without the Home Brewers there wouldn’t have been a PC for IBM to try and make money from, in a new niche market.
If you want a biotech industry, my recommendation is going back in time and start funding basic research in biology at a university in a nice climate. Then get a bunch of biology orientated companies in the area of the university to hire all those biology graduates. Then in twenty years the VC’s will give out a little money here and there. Then there will be some success and in another twenty years VC money will be flooding in and you’ll have an industry.
Nov 1st 2009 8:17 GMT
There is little doubt that many Government backed initiatives in the field of entrepreneurship and innovation have failed for the very reasons that are outlined here. The Israeli experience shows the importance of a system that attracts foreign investments, but I would argue that the relative success of this model is attributed to two things.
First, there is the presence of a massive military-industrial complex supporting the foundations of this system. Not only does the Israeli Government spend big on military systems, but it collaborates with many other countries in doing this, particularly the US. Second, there is the ability of Israel to leverage the large and well healed international Jewish community who spend a good deal of time investing in these ventures in terms of money and intellectual capital.
However, the focus on high technology, venture capital driven start ups needs to be placed into context. While such ventures are valuable wealth creators, they still represent only a tiny fraction of the actual entrepreneurial activity taking place within an economy. Of much greater importance from the perspective of employment generation and wealth creation for families is small to medium enterprise.
Such firms are not particularly high tech in nature and many or most are family owned and operated. The vast majority have few employees and almost all of them never need or want venture capital. In most of the world’s economies these firms represent all but a small fraction of the total number of businesses in operation.
What small firms need is not venture capital, but a competent and competitive domestic banking system that can provide loans for more modest expansion as well as efficient transactions to assist with daily operations. They need low cost and secure business premises and the ability to hire and fire employees with a high degree of flexibility, not subject to the constant interference of militant trade unions. They also need access to an efficient and low cost broadband and telecommunications network.
The wealth created by small, often family owned, businesses is vital to the overall economic well being of the broad community. For this reason, the national taxation system needs to be designed to encourage enterprise rather than stifle it. Governments can also assist small firms by making access to business mentoring and support easier and management education for the business owners and their key personnel. A good education and training system is just as important for the small firm as an efficient banking system.
We need to spend more time encouraging the real entrepreneurs who are out there battling the world with little or no external support in the millions of small businesses spread around the world, and less time focusing on venture capital fuelled start ups