Innovation & Technology Transfer

The developing countries of Asia and Latin America are far ahead of Europe in starting new businesses, according to a recent survey of global entrepreneurial activity. But few start-ups have the potential to make an impact on jobs and growth, and a negligible number benefit from venture capital, with the vast majority reliant on informal funding.

The 2002 annual survey by the Global Entrepreneurship Monitor (GEM) was carried out across 37 countries representing 92% of world GDP. It finds that 286 million people, 12% of the workforce in these countries, are engaged in starting or running a new business, implying a global figure of about 460 million.

The "total entrepreneurial index" varies from less than 2% of adults in Japan to more than 18% in India and Thailand. The nominally still-communist China has 12.3% while the newly capitalist Russia manages only 2.5%. The European Union average occupies a middle ground ahead of the Eastern European countries but behind the "former British empire Anglo" nations. Activity dropped between 2001 and 2002, reflecting a worldwide fall in growth, but the rank order of countries was little changed suggesting that entrepreneurial activity is affected as much by cultural differences between countries as macroeconomic conditions.

Developing countries lead

"We were quite shocked by how high the index is in the developing countries," admits Paul Reynolds, the GEM project co-ordinator. "Only now do we have a fuller understanding that half of the people in many developing countries are doing it out of necessity because they cannot find work, and that is what drives the rate up so high."

The distinction between people who are voluntarily pursuing an attractive business opportunity (opportunity entrepreneurs) and those who are doing it because they have no other source of income (necessity entrepreneurs) is key to understanding many, although not all, of the national differences. As one might expect, the number of necessity entrepreneurs is smallest in countries with developed welfare systems.

Japan is a case in point, lying in bottom place with 1.8%. Reynolds says that Japan is an ageing society and its numerous old, small businesses are not being replaced. He points out that life remains comfortable despite the economic problems of recent years. "They have enough to eat, they have shelter, they work hard but they're not overworking. Apparently, the social security system is supporting people so they are not forced to start a business if things are not going well."

Few 'high-potential' start-ups

Few of the new businesses identified in the survey are likely to make a major impact on national economies. The proportion of 'high-potential' start-ups, those employing new technology and expecting to create jobs, new markets and exports, is no more than 10%. Such firms are more likely to be run by opportunity entrepreneurs - favouring the developed countries - but the report notes that if only a tiny percentage of the developing world's necessity entrepreneurs hit on a new market niche they could create millions of innovative ventures. Reynolds agrees that Europe has advantages in this area. "There is a very well educated population and an active research and development sector. The problem in Europe is that entrepreneurship is not seen as an appropriate career choice."

The survey also looked at the role of venture capital, finding that fewer than 1 in 10,000 start-ups benefits from this kind of support. The vast majority of new businesses are supported by informal funding, such as borrowing from family and friends, which in 2001 amounted to $298 billion in the GEM countries, five times the volume of venture capital support and almost 1% of their combined GDPs.

Contact

P. Reynolds, London Business School Tl. +44 20 7706 6759 Fx. +44 20 7723 8534 preynolds@london.edu www.gemconsortium.org/

By invitation: Paul Reynolds

Western Europe represents 10% of the workforce in the GEM survey but only 4% of the entrepreneurial activity. We asked GEM co-ordinator Paul Reynolds, Professor of Entrepreneurship at the London Business School and Babson College, Massachusetts, what Europe should do to improve its less-thansparkling record.

Does Europe have cultural obstacles to entrepreneurship?

Paul Reynolds: They are mostly cultural, plus the idea that people should not work too hard and that economic matters should not be the primary focus of a society. Europeans have the highest fear of failure among the countries in our study and there is a very high level of economic security for people who lose their job for one reason or another – there is a whole set of things in Europe that seem to be consistent with this idea that Europeans are uncomfortable with starting businesses.

Are European governments and the European Union doing enough to encourage new businesses?

Well, they are actually doing quite a bit. The thing I find encouraging is that very few people have been fighting the numbers. They are not arguing with the statistics in our survey. Instead they are saying, ‘well that does not look so great – what can we do to fix it?’ So I think that is encouraging and certainly the EU is working very hard to try to figure out what it can do. But it is very hard to change this cultural bias that somehow it is unseemly to be starting a business and creating great personal wealth. It is reflected, for example, in the widespread avoidance of the word ‘entrepreneurship’. More and more, particularly in the UK, the word ‘enterprise’ is used because it is found to be less unsavoury than the concept of ‘entrepreneur.

Is there anything governments are not doing that they should be?

I do not think that is so much the issue as the fact that it just does not happen overnight. It took a long time for Europeans to feel that – somehow – starting a business was not an appropriate career path, and it is going to take a couple of generations to reverse that. What may happen in the mean time is that as Europe begins to lag behind the rest of the world as a source of economic growth, the governments are not going to be able to afford all these welfare programmes. There is now conflict in almost every European country as the governments try to restructure their retirement programmes and reduce economic security – voters do not like the idea of having their retirement and welfare benefits cut back. But it is really an issue of whether European governments can continue to afford them and lose out in world competition.

So is it mainly a matter of time?

Time is certainly important. It is going to take a while for people to redirect their career plans. But as businesses begin to cut wages and benefits and life becomes less secure, that will help too.

Does that mean that Europe can look forward to an increase in necessity entrepreneurship?

That might happen. When I make presentations about this to European audiences they all say: ‘Are we going to have to cut benefits to get more necessity entrepreneurship?’ and maybe the answer is yes. The issue is how much. You would not want to have no social benefits at all, but when you begin to realise that there are tens of millions of people engaged in entrepreneurship in the rest of the world, particularly in Asia, compared to hundreds of thousands in Europe, you begin to ask, ‘what does this mean a couple of generations down the road?’ And the outlook is not promising.

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