Entrepreneurs in Southeast Asia

Posted on November 10, 2012

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Starting your own business may not end you up a datuk

Throughout Southeast Asia, attempts by governments to promote the creation of entrepreneurs have almost unquestionably been regarded as a policy instrument for promoting economic growth. But reality doesn’t support the image. Creating new entrepreneurs may actually be dampening economic growth, a far sight from the creative economies many governments aspire to develop.

The data in most developing Southeast Asian countries just doesn’t seem to support this. The truth of the matter may be very different. While lightning strikes people figuratively about as often as it strikes literally, entrepreneurship can be more aptly described as a narrative about survival and subsistence than growth and glory. Are Asian policymakers fooled by the hype that entrepreneur development creates economic growth?

Entrepreneurship: Open a Kedai Kopi

Careful with the green shoots.

On the ground across Southeast Asia, very little innovation can actually be seen. The majority of new SMEs do not create any new innovation and as a consequence do not contribute to economic growth. The Global Entrepreneurship Monitor (GEM), a body founded by Babson College and the London Business School, has found that the majority of new enterprise start-ups occur within the service and retail industries.

It appears that very few people actually formally scan the environment for opportunities. If people did, they would not start up in industries with high competition and low profit margins, as the majority do. In fact most people have a natural inclination to imitate others, employing no innovation whatsoever – witness for instance entire streets made up of shops selling exactly the same things side by side, an odd phenomenon in Asian cities. Witness any beach in Asia where an entrepreneur opens a string of tourist huts, only to see a half-dozen just like it sprout up, driving down the price for beachgoers and cluttering the landscape.

The Global Entrepreneurship Monitor Thailand Executive Report indicates that most such ventures are small and focus on the consumer service sector in retailing, restaurants, and personal services, such as health and beauty services. As with the rest of the region, these businesses are the prime source of income of most entrepreneurs and operated for the purpose of earning a living. Local entrepreneurs select an activity that is very locally oriented, suggesting that they are opportunistic in the limited sense of the word. There is little, if any value created.

Few Rocket Scientists
The reality is that most new businesses employ existing technologies and create no new technologies at all. Although so much entrepreneurship literature focuses on high-tech start-ups, these types of firms are only a very small percentage of new firm start-ups.

Entrepreneurship creates less employment than many people think. From data provided by the Global Entrepreneurship Monitor 2011 Global Report it can be seen that less than 2 percent of firms in most countries expect to provide more than 20 jobs, about the same percentage 5–19 jobs, with the overwhelming majority of firms expecting to employ between 0–4 people. This is strongly supported by SME data in Malaysia where almost 80 percent of firms in the country are self employed micro-enterprises, employing no one outside the family. An additional 19 percent of existing enterprises employ less than 4 persons per enterprise, indicating the SMEs actually contribute little to the growth in employment.

According to another piece of research most entrepreneur incomes are lower than what they would earn working for someone else, with less benefits, and longer hours of work. This is logical given that most entrepreneurial ventures enter into highly fragmented, localized markets, with no source of competitive advantage.

Not only is the average entrepreneur earning less than his or her salaried counterparts, income is spasmodic, varying from day to day, week to week, month to month, and year to year. There is a good chance that a person and his or her family will drop down into a lower socioeconomic group during their tenure as an entrepreneur. In the region many owner operator firms are seen as part of the marginal or informal economy.

There is also little chance that an entrepreneur will be able to sell his or her business and make any substantial capital gain. Therefore many Southeast Asian countries over the next few years will face the problem of how to support elderly populations with little means to survive. On the whole, starting a business will make a person and their family relatively worse off than if they were working for someone else.

The low profitability of SMEs means there is little reinvestment, thus insuring that firms’ technology bases remain low. As a consequence very few SMEs transform into something bigger and better, since most enter non-attractive, low growth industries, resembling the present mix of industries, i.e., no product and economic evolution, high levels of competition, competing on price, using resources inefficiently, and haphazard management.

Most new enterprises do not last very long. It is not difficult to understand these high rates of failure when the majority of new firms seek to compete in highly fragmented markets with heavy competition, where the market environment provides very low profitability levels. In addition, 80 percent of new products fail after being launched, although this sometimes takes some time to acknowledge. Other products may partially fail and not generate enough revenue, provide sufficient level of consumer satisfaction, or return on investment.

Many new firms are particularly vulnerable because the strategies that founders select to exploit opportunities do not create any new value within the competitive marketplace. These casualty statistics would not be acceptable to any military general on the battlefield, nor would the low success rate be acceptable to any college football coach.

The concept of Schumpeter’s ‘creative destruction’ is not apt here. It is more a case of enterprise stagnation with SMEs having undifferentiated products, locked in small fragmented markets with little ambition for growth and marginal income ability. Entrepreneurs are far from the heroes of capitalism as Alfred Marshall suggested. The majority resemble the survivors of capitalism, in no way achieving the espoused freedom and empowerment often associated with the rhetoric of entrepreneurship.

Policy Implications
Although the data presented above may come from diverse sources, debate about the real benefits of entrepreneurship to the economy is an overdue one. Many policy planners have incorrectly formulated their economic strategies utilizing entrepreneurship as a vehicle of growth. The danger of not grappling with this issue could lock the economy into an imitative malaise where firms are only capable of providing a meager living for its proprietors rather than catalyzing new enterprises into the much desired creative base for the economy.

In this scenario the economy will underperform relative to its potential and in absolute terms fall behind its trading competitors. Creating economic growth and diversity is not just about creating new businesses which look good as KPIs, but about developing new skills on a regional scale that enable a large number of these businesses to create news forms of value greater than what is currently harvested out of existing resources. Although this may be achieved within a sprinkling of firms, it is extremely difficult to do at any aggregate level. And this is the real challenge facing both policy makers and those charged with implementation.

In fact some entrepreneurship development programs like Malaysia’s Ministry of Agriculture promoting the birds’ nest industry, which exports birds’ nests, particularly to China. The industry is already growing naturally without government intervention. The ministry may be actually be increasing the disparity of incomes. Birds nest is an industry where the wealthy get wealthier and kampung (village) families are shut out due to the high capital costs.

A further example of entrepreneurship development policy widening the income gap goes back to when the Malaysian Premier Mahathir Mohamed and deputy Premier Anwar Ibrahim during the 1990s created crony entrepreneurs intended to share wealth and business opportunities with those around them. This “policy in action,” still operating today, seems to be adding to rent seeking activities rather than innovative businesses with little flow on benefits to the community.

Other programs like OTOP – one tambon (local government unit), one product — in Thailand may be transferring skills to communities where these skills may create only limited value, leading to no real economic growth. Entrepreneurship development only creates self employment at an income level far below what people could earn while working for others.

Economic growth only comes out of creating more value from existing resources and/or creating new resources through innovation which the majority of Asian enterprises are not doing. It could be argued the income disparities between rural and urban groups are contributing to the present structural conflict occurring in Thailand today (if one accepts this economic paradigm as a partial explanation).

As competition within SMEs is very competitive and in many cases price based, it doesn’t add value to the economy, create employment other than the proprietor, where most of the pursued opportunities don’t require value adding strategies. Other than replicating someone else’s idea, there is no increase of economic diversity and entrepreneurship actually tends to reallocate income rather than add value to the economy.

Policy makers in Asia have adopted the premise that entrepreneurship creates economic growth from consultants and emulated western government policies without question. It’s time to look critically at the connection between entrepreneurship development and economic growth.

Asia Sentinel

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