Global Entrepreneurship in the G20

Despite international cooperation, not all countries are entrepreneurially equal

By: Grace Kennedy, staff writer

“Crisis delenda est, Entrepreneurship est memorandum.”

Under the revised words of Cato the Elder, 400 young entrepreneurs gathered in Moscow for the 2013 G20 Youth Entrepreneurs’ Alliance Summit in mid-June to discuss the future of entrepreneurship in their countries. Together, they crafted a report outlining the actions leaders of the 20 major economies should take to promote entrepreneurship in their countries.

“One of the major concerns of many modern economies is structural unemployment, in particular among young people,” the 2013 communiqué reads.

“Entrepreneurship is a tool that provides targeted support for those who are currently unemployed or underemployed, and who have high potential in the innovation economy …. There is ample evidence to say that any seriously grounded policy to reinvigorate growth and job creation should have entrepreneurship at its core, with a strong emphasis on youth.”

The actions that the G20 entrepreneurs advocate for certainly have that at their centre. Along with increased access to financing and sustainable labour laws, they also included recommendations for improved education and digital access.

The national level, however, has a much different dynamic than the international.

The G20 countries range from fourth to 132nd place based on the level of ease they have doing business in the International Finance Corporation (IFC) and World Bank’s evaluation of “Doing Business”. For starting a business, it ranges from second to 173rd.

Many of these countries have a very different entrepreneurial culture than North America, as well as different levels of red tape, corruption, and bureaucracy. They may favour the independent entrepreneur or hinder them. Their government may be directly involved in the country’s economy – such as the German government, who has approximately a 45 per cent share in the country’s GDP – or may allow it to meander down its own path.

China – 91 for Ease of Doing Business

For many people, the idea of entrepreneurship in the People’s Republic of China is an oxymoron and a half. The perceived atmosphere of closed policies and hushed bribery, along with the communist dislike of capitalism, does not seem conducive to the innovation of entrepreneurial activity.

However, even under the early days of the communist regime Chinese entrepreneurs survived. Though most of these entrepreneurs were part of the Getihu (small-scale retail and service businesses like street vendors) and many were criminals or illegal migrants, they still demonstrated entrepreneurial characteristics. They often worked primarily to obtain benefits for themselves – an activity known as rent-seeking – and dominated the black market and underground economy.

But in 1987, a change in policy and a repeal of the law limiting private employment to seven people saw a change in the demographic of entrepreneurship. Private enterprises increased by 93 per cent in 1987 alone – by 1990, township and village enterprises accounted for 20 per cent of China’s gross output. Although the traditionally negative connotations of starting a business remained, the times were changing.

Now, entrepreneurship has emerged from the Getihu. The Communist Party of China estimates that over 113,000 of their members run businesses, and small- and medium-size enterprises (SMEs) provide 60 per cent of China’s industrial output, according to the International Entrepreneurship website. The private enterprise sector has been growing by 20 per cent each year, compared to 9.5 per cent over the past two decades.

Despite these impressive numbers, entrepreneurs in China do not have it easy. The fates of many businesses are dictated by the whims of government policy.

“There is no long term strategic planning because you don’t know what’s going to happen from one day to the next,” famous translator and art critic, Lei Fu was recorded saying in the Spring 2001 edition of the Stanford Journal of East Asian Affairs. “You just take it one step at a time.”

Because of this instability, many Chinese entrepreneurs tend to be more opportunistic, focusing on short-term profits and maintaining safety-nets independent of their business, such as leaving their family abroad while they return to work in China for months at a time.

They also develop guanxi, the Chinese equivalent to networking or relationship building. However, guanxi encompasses more than just genial relations – it tiptoes around the edge of bribery and corruption to ensure speedy government approval, it creates trust to overcome natural and man-made obstacles.

As Lin Wang put it in another interview for the Stanford Journal of East Asian Affairs, “You don’t just need connections, you need the right kind of connections.”

Other obstacles are financial. In 1999, only 0.9 per cent of working capital loans went to the private sector. According to an article written by the specialist foreign direct investment practice, Dezan Shira and Associates, Chinese banks continue to pour billions of dollars into state-owned enterprises (SOEs), which may motivate youth to return to the security and benefits of SOE work.

“Many young people are now actively seeking careers back in China’s SOEs as they seek more protection and state assurances,” the article reads.

“This bodes ill for the ability for future generations being able to provide China with innovations that could turn it into a global leader. China as an innovator? Not unless the Chinese banks start to encourage and fund the nation’s entrepreneurs, and China gets its politics out of business.”

Argentina – 124 for Ease of Doing Business

Argentina is quite a contrast to China. Instead of employing 75 per cent of the urban workforce as is the case in China, entrepreneurs represent only 9.2 per cent of Argentina’s. Although this difference could be because of a difference in identifying an entrepreneur, the percentages are still telling.

Only slightly more than five per cent of the Argentinian entrepreneurs polled by the Inter-American Development Bank (IDB) own equipment or machinery; the average entrepreneur employs nine workers for his or her business.

This is largely because of the Argentinian tax system. According to the IDB paper, “Entrepreneurship, Entrepreneurial Values, and Public Policy in Argentina”, is “highly non-continuous, meaning that the marginal rates for business have drastic jumps in size”.

Almost 40 per cent of Argentinian entrepreneurs are not registered as taxpayers because of the complexity of the registration process and the cost of expected taxes.  A medium-size company can spend over 453 hours preparing, filing, and paying taxes, compared to 194 hours for countries in the Organization for Economic Cooperation and Development.

In addition, 47 per cent of entrepreneurs do so by necessity, and not by choice or opportunity. Although Argentina has a large middle class – the class most likely to take advantage of entrepreneurial activity – its financial sector is largely underdeveloped.

Credit to the private sector amounts for only 14 per cent of Argentina’s GDP, compared to Brazil’s 53 per cent and Chile’s 97. Only half of Argentina’s registered firms have a loan, which the IDB says may be because of the effect of inflation and political instability on the financial market.

This political instability also breeds the possibility of corruption among entrepreneurs; almost one fourth of businesspersons say that a typical firm would bribe government workers to secure a contract. Additionally, senior management spends 20 per cent of its time complying with government regulations, which the IDB takes to mean possible lobbying for special treatment.

Registered Argentinian entrepreneurs cite this corruption and instability, along with tax rates, to be their three main problems, whereas non-registered entrepreneurs give crime and a lack of access to credit.

However, some focus is being given on the latter issue. The “Financial Support for Young Entrepreneurs” program allows companies sponsoring youth involved in entrepreneurial activity to receive a tax credit bond, which would authorize the company to deduct the payment from their income tax.

This provides more incentive for companies to give young start-ups a boost in the Argentinian market. Even with this incentive though, 80 per cent of those polled in a survey during the Argentine Chapter of 2010 World Entrepreneurship Forum believe that further incentives are needed to promote entrepreneurship in Argentina.

Although Argentina was the internet centre of Latin America during the 1990’s, and many ventures gained backers from the Silicon Valley, the long-term investments are still missing that could help drive the country towards opportunity-based entrepreneurship.

Saudi Arabia – 22 for Ease of Doing Business

Saudi Arabia, a country that many North Americans consider austere and restrictive, is actively (and successfully) driving towards that opportunity-based entrepreneurship.

“There is a new breed of entrepreneurs that is gradually reshaping the economic landscape,” David Hamod, president and CEO of the National US-Arab Chamber of Commerce, wrote in the 2010 edition of US –Arab Tradeline.

“These talented men and women are ‘pushing the envelope’ in their respective communities and challenging longstanding assumptions about value creation and risk aversion in the Arab world.”

Although these entrepreneurs have created the SMEs that contribute to over 90 per cent of businesses in the countries like the United Arab Emirates and Saudi Arabia, they only contribute to 30 per cent of the GDP, a figure that Saudi Arabian officials are trying to change.

Abdulkareem Abu Al Nasr, CEO of the National Commercial Bank, said that economic diversity needs a “thriving, innovative entrepreneurial culture” built on supportive infrastructure in order to further the growth of SMEs in Saudi Arabia.

“When I look at the culture in KAUST (King Abdullah University of Science and Technology) I can see that this is a culture that embraces innovation, diversity and critical thinking,” he said during his keynote seminar at the University in 2011.

“There is a support system here with all the pieces coming together to support the people to develop their business ideas and help them to the next level.”

Like KAUST, the King Saud University is focused on entrepreneurship and innovation and is home to the Riyadh Technology Incubation Center and the Entrepreneurship Centre, which organized the Kingdom’s first international conference on entrepreneurship in 2009.

The Kingdom also has the 100 Saudi Fast Growth Companies – a program meant to reward the fastest growing SMEs in Saudi Arabia. The 2009 and 2010 Fast Growth Companies created more than 35,000 jobs since they were established. In addition, these companies serve as incubators for other entrepreneurial activity – employees from these fast growth companies have launched 41 new enterprises in two years.

Despite this growth in innovation, the Saudi Arabian culture still has some entrepreneurial issues to contend with. There is still cumbersome government regulation and red tape, as well as a culture that is not conducive to the failure required for large-scale entrepreneurial success, nevertheless, Saudi Arabia still has its blocks in place for future growth.

“Saudi Arabia has been the home of business leaders for a very long time,” Hamod wrote.

“The Prophet Muhammad and many of his early supporters were traders and merchants. Equally impressive, Khadija, his wife, was a highly successful businesswoman long before she met the Prophet. But the Kingdom’s business environment has not always favored start-ups. Fifteen years ago, the entrepreneurial environment there was akin to Saudi Arabia’s vast Empty Quarter. Today, that start-up ‘desert’ is in full bloom.”

The differences between the various G20 countries are bountiful. Each country suffers through different levels of red tape and corruption, government involvement and distance. Their entrepreneurs begin because of necessity or opportunity.

However, the similarities between all can unite them during events the G20 Youth Entrepreneurs’ Alliance Summit. For many people, entrepreneurship is the key to prolonged economic growth; and together, young entrepreneurs from all different backgrounds, classes, and races will focus on the issues they all share in their development towards entrepreneurial prosperity.

Grace Kennedy is a journalism student at the University of King’s College in Halifax, Nova Scotia. She has done freelance journalism on both the East and West coasts and has a particular interest in science journalism.

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