It is a proven fact that new companies are one of the driving forces of economic growth. For developing nations, business startups are particularly beneficial as they generate employment, broaden market horizons, increase the production of goods and services, and instill an infectious energy.
But what prompts would-be entrepreneurs to jump into the market? What motivates them? Are they driven by money, power, a dream, the example of a successful businessman, financing from a bank, family savings, or the completion of a master’s degree?
In Japan, fear of failure paralyzes potential entrepreneurs, who worry about losing their homes and families as a result of the high collateral required by banks. In Japanese society, when a business fails it tends to take down the entrepreneur’s reputation along with it. In Korea, however, the appearance of a successful businessman on television can motivate thousands of young people to start a business. In Latin America, many new entrepreneurs start businesses without any preparation or planning. Some consider the latter an advantage, because if they know beforehand what the risks are, they may decide not to go through with the venture.
If having a large, flourishing pool of entrepreneurs is of paramount importance for the economies of developing nations, the respective governments would surely be delighted to learn about some measures used to entice new entrepreneurs and eliminate the obstacles hindering their path to success.
Contrasts. A recent study conducted by the IDB, with support from the government of Japan, compared the experiences of business startups in the emerging economies of East Asia and Latin America (See link at right, Entrepreneurship in Emerging Economies: The Creation and Development of New Firms in Latin America and East Asia).
Broadly speaking, and recognizing that specialists point out that each of the two regions is at a different phase of economic development, the profiles of new entrepreneurs and new businesses in East Asia and Latin America showed significant differences.
In East Asia, companies expand more and faster and reach higher productivity levels. They also use knowledge-based technology more intensively and their expansion is more robust, helping them reach export markets in greater numbers. East Asian entrepreneurs come from the middle or lower classes; they are highly motivated, often by the example of a successful businessman; and their financial support system is sound and structured, in both the public and private sectors.
Latin American startups, however, are generally small, their growth is slower, and they tend to produce more conventional goods and services that are primarily marketed domestically. Latin American entrepreneurs are typically from the middle and upper classes; successful businesses are less publicized in the region; financial contributions from family and friends are crucial to starting a business; and outside financing, especially from the public sector, is often viewed as an obstacle, causing unnecessary delays.
Clearly, starting a business is much more difficult for entrepreneurs in Latin America than in East Asia, due to the lack of motivation, promotion and support for new enterprises and for the first few years of operation.
Easier for some. The study—based on some 1,300 personal interviews in nine countries in the two regions—analyzes three critical stages in the creation of new businesses: inception, startup, and early development.
The inception phase was slower in Latin America: from the time entrepreneurs had that initial spark of inspiration until they identified their business opportunities, an average of four to five years elapsed. Their East Asian counterparts needed between two and three years. This discrepancy can be explained by the personal and professional contacts of the future entrepreneurs. In both regions, having networks of friends and relatives is important, but in East Asia contacts with business networks are much stronger and more decisive, particularly during the inception phase, when information and advice from established companies is crucial.
Likewise, there are more sectors with business opportunities in East Asia, particularly in new technology and the provision of services to larger companies, which occurs much less frequently in Latin America.
Unequal ground. The main sources of entrepreneurial motivation are quite similar in the two regions. They have more to do with self-realization than economic ambition, although the image of the millionaire businessman is always present in the East Asian subconscious. Unfortunately, the education system doesn’t seem to play an important role in boosting entrepreneurship in Latin America or in Asia. Many entrepreneurs, however, cited previous work experience as useful in accumulating nonfinancial resources, such as information or equipment.
Although personal savings accounted for around 70 percent of the investment capital put up by most new entrepreneurs, Asians have easier access to external financing, something that in Latin America is practically nonexistent. Latin Americans seek alternatives to the lack of funds by obtaining supplier credit and client advances, postponing payment of utility bills, taxes, and wages, and purchasing second-hand machinery.
During the early development stage, the two regions diverge in their paths to financial investment. While East Asian entrepreneurs increasingly turn to bank loans and “angel” investors, in Latin America, this tendency, to the extent that it is exists at all, is decreasing. At this stage, the main concerns of Latin American entrepreneurs are to obtain a balanced cash flow, expand their clientele, and hire qualified staff. Asians, in turn, encounter difficulties hiring managerial staff and managing their relationships with large companies.
Asian firms have higher sales in the first year, and on average sell twice as much as Latin American firms. After three years, the gap widens: Asians sell five times more, totaling an average of $2 million a year, a volume that very few of the surveyed Latin American companies reach.
Where to begin. The experts agree that isolated, disjointed interventions do not yield lasting results when it comes to cultivating entrepreneurs. To revitalize entrepreneurship in a country, they recommend attacking the problem from different sectors through a comprehensive strategy. Initiatives must have a long-term vision and a combination of political, economic and social commitments, because it takes many years to change mentalities, create a new business class and promote startups.
Disseminating profiles of business role models will help motivate many young entrepreneurs to follow their lead, as has been the case in East Asia. Becoming an entrepreneur is not among the most attractive professional options in the minds of many young people today, a situation that could be improved, according to the study, through outreach and information campaigns. The lack of inspiration and adequate training for entrepreneurs are shortcomings in the education system—secondary schools, universities, and vocational schools—where the curriculum is based on traditional courses such as planning and accounting. An innovative approach is needed to promote the skills that successful entrepreneurs need, such as analytical capacity, creativity for problem-solving and risk management, and teamwork.
Interaction among entrepreneurs is another weakness in Latin America. Networks of entrepreneurs interested in a given topic and forums and clubs for business people can help new and future entrepreneurs think strategically, develop business opportunities, and gain access to resources and contacts.
Latin American entrepreneurs complain about the problems they face in obtaining financing, since most of the resources in the region are channeled to established companies and venture capital for business startups is practically nonexistent. Establishing tax incentives, creating business “angel” networks, reducing bankruptcy costs, streamlining red tape, and adopting guarantee systems that will help startups gain access to the capital market are among the measures that can help to address these difficulties.
The goal in Latin American countries should be to help promote a model the entrepreneur as a person who is inspired by success and is innovative, well informed, connected to other businessmen, and a team player. Instead of considering them a high-risk factor, the public and private systems should view future entrepreneurs as one of the most profitable investments they could make to advance their countries’ development.