Enabling Entrepreneurial - Vivek Wadhwa

innovations

volume 7 | issue 2

A quarterly journal published by MIT Press

TECHNOLOGY | GOVERNANCE | GLOBALIZATION

Enabling Entrepreneurial

Ecosystems Lead Essays

Susan Davis Enabling Entrepreneurial Ecosystems Ovais Naqvi Entrepreneurship in MENA: Opening the Floodgates Cases Authored by Innovators

Horacio Melo Prosperity through Connectedness commentaries: Vivek Wadhwa; Ted Gonder

Francis J. Skrobiszewski Market Making William Green & Susan Amat Entrepreneurship as a Career Analysis Dylan Higgins et al. Mobile Money Usage Patterns of Kenyan Small and Medium Enterprises Perspective on Policy Mohamed El Dahshan et al. Enabling Entrepreneurship in Egypt Philip Auerswald et al. Creating a Place for the Future ENTREPRENEURIAL SOLUTIONS TO GLOBAL CHALLENGES

Editors Philip Auerswald Iqbal Quadir Contributing Editors Bob Litan Lesa Mitchell Jonathan Ortmans Jonathan Robinson Dane Stangler Senior Editor Winthrop Carty Managing Editor Michael Youngblood Senior Researcher Adam Hasler Associate Editors Dody Riggs Helen Snively

Strategic Advisor Erin Krampetz OpenInnovations Team Adam Hasler Colleen Kaman Kate Mytty Laura Neuhaus Publisher Nicholas Sullivan

Advisory Board Susan Davis Bill Drayton David Kellogg Eric Lemelson Granger Morgan Jacqueline Novogratz Roger Stough James Turner Xue Lan Editorial Board David Audretsch Matthew Bunn Maryann Feldman Richard Florida Peter Mandaville Julia Novy-Hildesley Francisco Veloso Yang Xuedong

Innovations: Technology | Governance | Globalization is co-hosted by the School of Public Policy, George Mason University (Fairfax VA, USA); the Belfer Center for Science and International Affairs, Kennedy School of Government, Harvard University (Cambridge MA, USA); and the Legatum Center for Development and Entrepreneurship, Massachusetts Institute of Technology (Cambridge MA, USA). Support for the journal is provided in part by the Lemelson Foundation and the Ewing Marion Kauffman Foundation.

Innovations (ISSN 1558-2477, E-ISSN 1558-2485) is published 4 times per year by the MIT Press, 55 Hayward Street, Cambridge, MA 02142-1315. Subscription Information. An electronic, full-text version of Innovations is available from the MIT Press. Subscription rates are on a volume-year basis: Electronic only—Students $25.00, Individuals $48.00, Institutions $172.00. Canadians add 5% GST. Print and Electronic—Students $28.00, Individuals $54.00, Institutions $199.00. Canadians add 5% GST. Outside the U.S. and Canada add $23.00 for postage and handling. Single Issues: Individuals $15.00, Institutions $50.00. Canadians add 5% GST. Outside the U.S. and Canada add $6.00 per issue for postage and handling. For subscription information, to purchase single copies, or for address changes, contact MIT Press Journals, 55 Hayward Street, Cambridge, MA 02142-1315; phone: (617) 253-2889; U.S./Canada: (800) 207-8354; fax: (617) 577-1545. Claims for missing issues will be honored if made within three months after the publication date of the issue. Claims may be submitted to: [email protected]. Prices subject to change without notice. Advertising and Mailing List Information: Contact the Marketing Department, MIT Press Journals, 55 Hayward Street, Cambridge, MA 02142-1315; (617) 253-2866; fax: (617) 253-1709; e-mail: [email protected]. Innovations: Technology | Governance | Globalization is indexed and/or abstracted by AgBiotech News & Information, CAB Abstracts, Forestry Abstracts, Global Health Abstracts, RePec, PAIS International, and World Agricultural Economics & Rural Sociology Abstracts. website: http://www.mitpressjournals.org/innovations/ © 2012 Tagore LLC.

innovations TECHNOLOGY | GOVERNANCE | GLOBALIZATION

Lead Essays 3 11

Enabling Entrepreneurial Ecosystems Susan Davis Entrepreneurship MENA: Opening the Floodgates Ovais Naqvi

Case Narratives 19 25 29 33

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Analysis

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Start-Up Chile Prosperity Through Connectedness Horacio Melo Commentary: Vivek Wadhwa Commentary: Ted Gonder Enterprise Funds Market Making: How Enterprise Funds Can Jump-Start Stagnant Economies Francis J. Skrobiszewski The Launch Pad Entrepreneurship as a Career: The Launch Pad at the University of Miami and the Blackstone LaunchPad Program William Scott Green and Susan Wills Amat

Mobile Money Usage Patterns of Kenyan Small and Medium Enterprises Dylan Higgins, Jake Kendall, Ben Lyon

volume 7 | issue 2

Perspective on Policy 83

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Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin Creating a Place for the Future: Strategies for Entrepreneurship-Led Development in Pakistan Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Organization of the Journal Each issue of Innovations consists of four sections: 1. Lead essay. An authoritative figure addresses an issue relating to innovation, emphasizing interactions between technology and governance in a global context. 2. Case narratives. Case narratives of innovations are authored either by, or in collaboration with, the innovators themselves. Each includes discussion of motivations, challenges, strategies, outcomes, and unintended consequences. Following each case narrative, we present commentary by a discussant. The discussant highlights the aspects of the innovation that are analytically most interesting, have the most significant implications for policy, and/or best illustrate reciprocal relationships between entrepreneurship, technology and governance. 3. Analysis. Accessible, policy-relevant research articles emphasize links between practice and policy—alternately, micro and macro scales of analysis. The development of meaningful indicators of the impact of innovations is an area of editorial emphasis. 4. Perspectives on policy. Analyses of innovations by large-scale public actors— national governments and transnational organizations—address both success and failure of policy, informed by both empirical evidence and the experience of policy innovators. The development of improved modes of governance to facilitate and support innovations is an area of editorial focus.

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Susan Davis

Enabling Entrepreneurial Ecosystems An aspiring entrepreneur in Uganda has an uphill climb. A landlocked country, Uganda is hemmed in by areas where conflicts break out sporadically, including South Sudan and the Nord-Kivu province of the Democratic Republic of the Congo. Moreover, the country still lives under the shadow of former president Idi Amin, whose policies included not only torture and hundreds of thousands of extra-judicial killings, but also, in 1972, the wholesale expulsion of tens of thousands of ethnic South Asians. Locally born and raised, this group had constituted much of the country’s merchant and entrepreneurial class. When a team of Bangladeshis led by Ariful Islam arrived in 2005 to set up a local operation for BRAC, a global development organization based in Dhaka, they had a long and difficult road ahead of them. The organization had already pioneered speedy scale-ups in difficult terrain, including in Afghanistan in 2002, where it began its first operation outside Bangladesh, providing development assistance with programs in health care, microfinance, rural livelihood development, and girls’ education. Nevertheless, Uganda’s historical legacy with people of South Asian origin working within its borders would present unavoidable cultural hurdles. Six years later, BRAC Uganda’s success has been remarkable. By most measurable standards the largest nongovernmental organization in the world, BRAC is also the largest in Uganda. As of March 2012, it has over 110,000 microfinance borrowers and a cumulative loan disbursement of $116 million in Uganda, thanks largely to a partnership with The MasterCard Foundation, a private, Torontobased foundation launched in 2006 with a gift from MasterCard Worldwide at the time of its initial public offering. The partnership with BRAC was one of the first major projects of the foundation, which was created to test and scale innovative poverty solutions with a focus on youth learning and microfinance. Begun in 2008, the partnership with The MasterCard Foundation has helped BRAC increase its reach from 60,000 Ugandans in 2006 to 2.8 million today, a number projected to reach 4.2 million, or 12 percent of the country’s population, by 2016. The obvious question is how the partnership accomplished this growth. It is due in part to a strategy to multiply the impact of microfinance by combining it with livelihood development and youth empowerment. The result of the program Susan Davis is the President and CEO of BRAC USA. © 2012 Susan Davis innovations / volume 7, number 2

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Susan Davis is a job-creation machine that relies not only on wage employment—although, with 1,960 employees, that in itself is substantial—but also on fostering entrepreneurship. The goal is to lower the barriers to entrepreneurship by touching multiple points in the respective value chains of the agriculture, poultry, livestock, and health-care sectors. The education and empowerment of adolescent girls are also key aims, as is the economic empowerment of women, who constitute the vast majority of BRAC-trained entrepreneurs. The interventions include BRAC’s own social enterprise, a nonprofit business that mirrors the organization’s success in Bangladesh, where it runs 18 social enterprises In short, BRAC Uganda has created an entrepreneurial ecosystem in which employment for the poor is created from the bottom up. This has proven to be a more viable strategy than waiting for jobs that may never come from large enterprises, factories, and direct foreign investment. Working with The MasterCard Foundation, BRAC has created this ecosystem by building on and adapting practices developed over four decades in Bangladesh. The results so far suggest that, given a chance to do so, the poor in developing countries—a group that is disproportionately either young, female, or both—will not hesitate to seize the advantages provided by an environment that is conducive to entrepreneurship. As the examples below will show, BRAC’s experience is that free markets often exclude the poor and marginalized from economic systems. Ultimately, when the poor lack so much as the opportunity to take control of their lives, society as a whole is worse off. We cannot afford to wait and see whether or not free markets left to their own devices will ultimately create these opportunities. Upfront investment is needed due to the urgency of the global poverty problem. BRAC’s approach to creating entrepreneurship shows how nonprofits can catalyze change at the local level by using a complex set of measures that ultimately smooth the inefficiencies that work against the poor. In short, where free markets conspire against the poor and raise barriers to their success, BRAC tweaks the knobs with interventions that help the poor—a convergence of lower costs, better options, and a greater understanding of rights that offer a fairer deal to society’s most vulnerable. RISE OF THE MICROFRANCHISES Sarah Mukama is a smallholder farmer from the village of Mawuba in eastern Uganda, close to the shore of Lake Victoria. She supports a family of seven by rearing livestock and growing beans and vegetables on a small plot of land. Sarah’s experience provides an example of how BRAC and The MasterCard Foundation are replicating 40 years of success fighting poverty in Bangladesh by adapting BRAC’s job-creation tactics to the Ugandan context. Thanks to BRAC, Sarah now earns part of her income by distributing high-yield seed varieties for maize, beans, and vegetables to other farmers in her village and the surrounding areas. She gets a regular supply of high-quality seeds for her own use, but she also fills a gap in the market by offering her neighbors doorstep access to much needed, high-quality 4

innovations / Entrepreneurial Ecosystems

Enabling Entrepreneurial Ecosystems agricultural inputs and other affordable goods and services. BRAC’s assistance includes both livelihood training and microloans to help Sarah start a business, but the hard work, and the fruits of it, are hers alone. Instead of charging a fee for her training, BRAC only insists that she offer her own neighbors free advice on more efficient farming techniques. Sarah’s story is remarkable, not only because of the changes in her life— although she talks excitedly about being able educate her daughter in the best school in the district—but for the example she sets for other farmers in her village. With a small amount of help from BRAC, she saw her farm yield increase threefold. Amazed at this success, other farmers in the village soon came to Sarah for training and to buy seeds. In villages like Mawuba, the transformation is visible. Farmers in areas where BRAC has intervened have reported that their yields are doubling and sometimes even tripling as a result of the inputs and advice provided by these entrepreneurs. Furthermore, boosting agricultural yields has a ripple effect on poor communities, as it creates increased wealth that catalyzes demand and increases purchasing power in a way that benefits everybody, from tomato vendors to seamstresses, beauticians, and shopkeepers. Sarah is part of a larger ecosystem, a network of likeminded people from poor communities who are driven to help both their neighbors and themselves. About 5,000 BRAC-trained microentrepreneurs like Sarah currently work in Uganda. Each is an independent enterprise; BRAC does not pay them wages or salaries, but it does give them the opportunity to make money on their own by reselling goods at a small markup. These entrepreneurs are, essentially, one-person social enterprises whose activities serve a dual purpose: they generate income, and they also reduce the barriers others face on the path out of poverty. Sarah’s customers are rural farmers who have not been served by existing distribution systems. Similar networks provide cattle insemination and distribute chicken vaccines. The latter has been a critical improvement, for at the time BRAC entered Uganda, chicken mortality stood out as one of the biggest problems facing local poultry farmers. About 35 percent of Uganda’s chickens succumbed to disease before laying a single egg, which hobbles the sector and limits the effectiveness of the microloans made to these farmers. BRAC responded by creating and then scaling up a network of microfranchised chicken inoculators. So far, these self-employed inoculators have delivered 13 million doses of vaccine in a bid to bring the chicken mortality rate down to the level achieved in Bangladesh, currently about 10 percent, thanks in part to the efforts of BRAC and other private, NGO, and state actors. The vaccinations not only raised the yields of chicken farmers but led to higher repayment rates for microborrowers working with poultry, which allowed BRAC to redeploy capital that much faster. Of course, it is not enough to train Sarah and others like her to buy and sell goods. They already know how to do that. For this model to work, Sarah has to be able to buy her seeds at a price low enough to earn a profit on resale margins. Furthermore, if the system is to avoid dependence on external subsidies that might not be there for the long haul, the producer at least has to break even. That is why innovations / volume 7, number 2

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Susan Davis BRAC’s end-to-end value chain approach includes, in addition to Sarah’s doorstep seed distribution, a system of mass production. BRAC Uganda, for instance, set up its own seed production and processing enterprise early in 2011. The seed production unit reduces the unit cost of high-yield seeds by engaging a network of contract growers and leveraging a low-cost, community-based distribution network built on top of BRAC’s microfinance network. The production facility is expected to break even in mid-2013. BRAC’s approach uses economies of scale to its advantage, establishing prices that allow these systems to pay for themselves. The organization’s businesslike approach has allowed it to hit a sweet spot that makes prices fair for everybody in the value chain, from producer to end user— BRAC’s approach uses something that market mechanisms driven economies of scale to purely by profit have failed to do. This impetus for scale also explains the dual reaits advantage, soning behind BRAC Uganda’s rapid establishing prices that growth plan for the 10-year period that started in 2006. There is the obvious imperallow these systems to ative for the organization to grow quickly so it can allay the urgent needs of the poor by pay for themselves. reaching as many people as possible, but easily overlooked, at least in the nonprofit sector, is the cost benefit of operating at scale. Doing so passes savings onto other actors in the value chain, who are mainly poor and disadvantaged women. BRAC has to operate like any large business that is expanding rapidly and competing on price. It streamlines its operations; it routinizes its processes by removing unnecessary steps or “trimming the fat” where possible; and it minimizes waste and inefficiency—for example, by taking a zero-tolerance stance on corruption in its ranks. All of this works in the service of a bottom line that is not financial return but social good. The agricultural services BRAC provides now reach 75,000 Ugandan farmers, a number expected to double by 2014. It is rare that agricultural interventions in sub-Saharan Africa are able to bridge the last mile to poor communities so effectively. BRAC is now working in 10 countries, often in remote, hard-to-reach areas that have barely functioning economies, using a practical lowtech approach to serving a clientele long neglected by profit-driven enterprises. The grassroots distribution model described above has its origins in Bangladesh’s system of community health promoters, or shasthya shebikas in Bengali, which is the core of BRAC’s approach to providing low-cost health care. The shasthya shebika is a self-employed woman who, after receiving training from BRAC, goes door to door in the villages and slums of Bangladesh—much like direct sales models for Tupperware and cosmetics in the U.S.—with a basket of simple but vital goods and services, such as vitamins, sanitary napkins, anti-malarial pills, sterile bandages, and condoms, all offered at affordable prices. She also 6


Enabling Entrepreneurial Ecosystems inquires about her neighbors’ health needs—for instance, about a persistent cough and fever that may suggest a case of tuberculosis. The media have dubbed the shasthya shebikas an “army of housewives,” for they now number 91,000 in Bangladesh alone. They are able to generate extra income from the sale of the items described due to BRAC’s training and provision of low-cost supplies, some of which, like the Ugandan seeds, are manufactured by BRAC. The academic literature has dubbed BRAC’s approach “microfranchising” in recent years. It cites such examples such as Fan Milk in Ghana, which has become the second-largest consumer goods company traded on the country’s stock exchange, thanks largely to the efforts of its bicycle-based retailers who are ubiquitous in Ghana, pedaling the streets with their own mobile freezers; Ruma in Indonesia, which was established to put poor woman into business as retailers of mobile phone air time, offering business start-up kits to those living on less than $2.50 a day; VisionSpring, founded by optometrist Jordan Kassalow, which uses a microfranchised network to distribute glasses to the poor in India, Bangladesh (in partnership with BRAC), El Salvador, and South Africa; and LivingGoods, which got its start through a partnership with BRAC Uganda’s community health promoter program and now aims to offer others a microfranchised system of health care distribution in Africa. Some have called this a “business in a box” approach to job creation. Although BRAC did not call its efforts either microfranchising or business in a box when it began to experiment with this distribution model in the 1980s, all of these enterprises are following a path pioneered by BRAC in Bangladesh. BRAC’s microfranchising is now at work in multiple countries in an array of areas, and its efforts are always geared toward providing a vital social benefit not provided by existing market solutions. It is part of a larger set of interventions that reaches across entire values chains in diverse sectors, such as poultry, silk manufacture, and handicrafts, creating an estimated nine million jobs in Bangladesh alone. ENTREPRENEURS IN THE CLASSROOM Creating entrepreneurial ecosystems begins at a much more basic level than chicken inoculations and seed distribution. When BRAC first arrived in Uganda, it found much of the country, especially in the north, still recovering from the 20year conflict between the government and Joseph Kony’s rebel Lord’s Resistance Army, which displaced an estimated 1.5 million people. Using rented houses in remote areas, BRAC partnered with the government to create a Ugandan version of the nonformal primary education model it established in Bangladesh—essentially a “second chance” learning center for disadvantaged children who had been denied an opportunity for formal education in a government school, whether due to poverty, violence, or both. The BRAC education model acts as a bridge to formal state schooling. Using government-approved curricula, the model emphasizes life-skills training to help build self-esteem in children who dropped out of school or who might never have innovations / volume 7, number 2

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Susan Davis set foot in a classroom before, with the aim of awakening their curiosity and inculcating in them a joy of learning—all of which are the building blocks of entrepreneurship. In countries like Uganda, financial education and life skills, which include social and emotional learning, are the keys to successfully navigating the transition from adolescence to adulthood. These learning centers effectively provide a feeder system for entrepreneurship among the poor. In post-colonial Africa and much of the developing world, traditional models of education have proven to be an inadequate tool for fostering change, partly because poor people find too much of what schools teach to be irrelevant. Schoolwork becomes drudgery, not joy, and education ends up alienating the poor from their environment rather than encouraging people to create new opportunities for themselves. BRAC’s nonformal primary education model takes a different philosophical approach. It treats the children of day laborers and rickshaw drivers as assets, not liabilities; not just as future job seekers but as potential job creators. Uganda is faced with the challenge of being the country with the lowest median age of any nation on earth. Its bulging youth population, especially girls, is burdened with multiple vulnerabilities. Some research suggests that a majority of adolescent girls in Uganda have engaged in sexual intercourse in exchange for money or gifts at least once in their lives.1 In 2008, BRAC responded to a perceived need for “safe spaces” for this group by setting up a chain of girls’ clubs under the name Empowerment and Livelihood for Adolescents (ELA), which has already had a statistically significant impact on rates of teen pregnancy and condom use by teenage girls. An unpublished random control trial shows that, over a two-year period among a group of girls where pregnancy rates are in the range of 10 to 12 percent, pregnancy rates were about 2.5 percentage points lower in villages with an ELA program than for a control sample from another village that did not have a program. The intervention sample included girls in the village who did not even take part in the program, suggesting a significant spillover effect of healthy learning. Encouraging condom use and creating safe spaces for girls may seem a long way from creating entrepreneurship, but according to BRAC’s holistic approach to reducing poverty, all these elements are part of the same package. Staying in school and seizing control of one’s reproductive health are the starting points for building a class of entrepreneurs at the base of the economic pyramid. In fact, BRAC’s ELA program makes the link explicit: in addition to frank discussions of topics such as sex and contraception, the clubs offer financial literacy and livelihood training as part of the empowerment package, including training to develop the skills needed to spot business opportunities when they arise. As the girls grow older, they may receive livelihood training for their chosen profession, take out a microloan, or start a microfranchise.

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Enabling Entrepreneurial Ecosystems BRINGING DOWN BARRIERS It is worth taking a step back to examine from a more philosophical perspective just what brings these diverse activities together under the umbrella of entrepreneurship creation. The answer is that each of them, in various ways, deals with barriers to what, for lack of a better word, might be deemed “success” in one’s life— that is, the freedom to lead the life one wants. This includes the freedom to be a self-employed and self-empowered economic actor, which is especially important in places where wage employment is scarce. In Development as Freedom, Amartya Sen writes of “poverty as capability deprivation,” arguing that there is a strong case for judging individual advantage in terms of the capabilities that a person has, that is, the substantive freedoms he or she enjoys to lead the kind of life he or she has reason to value. In this perspective, poverty must be seen as the deprivation of basic capabilities rather than merely as lowness of incomes, which is the standard criterion of identification of poverty.2 BRAC sees the poor, and disadvantaged youth in particular, in terms of the capabilities and freedoms their circumstances have deprived them of. They are considered diamonds in the rough, potential entrepreneurs with untapped talents and latent capabilities that are only waiting to break through the many barriers that keep them from achieving their potential. Traditionally, education has been seen as a way of giving people the capabilities they need to survive. In the traditional view, students’ minds are seen as reservoirs to be filled with the knowledge and skills necessary to allow their true potential to flow. Development practitioners should instead view “the reservoir” as already full and focus instead on the many barriers that stand in the way of success. Young people dealing with violence, displacement, and poverty have innate capabilities that can be tapped, not taught; we need to view them as assets on the social balance sheet rather than liabilities. Tapping this potential can happen in many ways, but as we have seen, they are by no means limited to a classroom education. One can view microfinance, microfranchising, pro-poor value-chain interventions, health care, education, social enterprises, and girls’ empowerment through a single lens: one of bringing down barriers to entrepreneurship. This lens can also reframe the ongoing debate about the efficacy of microfinance as a way to fight poverty.3 One should not view microfinance as a stand-alone tactic to fight poverty—which, as Sen points out, has already been too narrowly defined as “lowness of income”—but as an essential tool for providing opportunities and reducing the barriers that prevent the poor from exercising their capabilities. And these barriers are many. One is lack of capital; another, less obvious, is exposure to risk. In normal market environments, the poor do not make ideal entrepreneurs because they cannot afford to take the same risks as those with cash in the bank or other means of sustaining themselves. Getting food on the table innovations / volume 7, number 2

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Susan Davis takes priority over gambling on a venture that may or may not succeed. Microfranchising, a “business in a box,” is a developmental tool that lowers the risk barrier by using business models that others in similar circumstances have already tested. A lack of adequate health care is another barrier, as frequent illness reduces people’s ability to work and keeps children out of the classroom, thus continuing the cycle of poverty. Even for those who remain healthy, lack of access to schooling—or, as we have seen, a lack of access to the kind of schooling that inculcates a joy of learning—is often an obstacle to an individual’s economic and social growth, which includes the potential for becoming an entrepreneur. Another still is the anti-poor bias of free markets in places with poor infrastructure. In village environments, monopolistic practices by the sellers hold sway when the poor lack the means to compare goods, services, and prices from multiple vendors, due to a lack of cost-effective transport options. Each one of BRAC’s interventions seeks to break down a barrier but, taken as a whole, they represent a powerful combination that fosters a culture of entrepreneurship at the base of the economic pyramid. These tools are often viewed as ways to amplify or multiply the effectiveness of microloans, which is why BRAC and The MasterCard Foundation have called their rapid scale-up in Uganda “microfinance multiplied.” We often read and speak of interventions that “distort” free markets, but these examples show how, left to their own devices, markets can often distort themselves in ways that work against poor and otherwise marginalized populations, thus creating barriers to entrepreneurship. It is the task of the poor themselves to step over these barriers, but development organizations, working at scale, can at least make them surmountable. Finally, these barriers can make it difficult to weave the fabric of a society that allows all people, regardless of the circumstances of their birth, the opportunity to climb the economic ladder through hard work. The core of the BRAC philosophy is that talent is scattered evenly at birth; opportunity is not. Violence and poverty have long deprived too many Ugandans of opportunity, keeping them waiting in vain for jobs that may never arrive, the barriers to building their own livelihoods too high and too numerous to surmount. But for the next generation of the world’s youngest nation, the wait may be over, if the right type of market interventions can bring out their latent talent and foster bottom-up entrepreneurship. 1. Ann Moore, Ann E. Biddlecom, and Eliya Zulu. “Prevalence and Meanings of Exchange of Money for Sex in Unmarried Adolescent Sexual Relationships in Sub-Saharan Africa.” African Journal of Reproductive Health, 11, no. 3 (2007): 44-61; J. Kinsman., S. Nyanzi, R. Pool. “Socialising Influences and the Value of Sex: the Experience of Adolescent School Girls in Rural Masaka, Uganda.” Culture, Health and Sexuality 2, no. 1 (2000): 151-166. 2. Amartya Sen, Development as Freedom. Oxford, England: Oxford University Press, 1999. 3. David Roodman, Due Diligence: An Impertinent Inquiry into Microfinance. Washington, DC: Center for Global Development, 2011.

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Ovais Naqvi

Entrepreneurship in the Middle East and North Africa: Opening the Floodgates Stimulating entrepreneurship is intrinsic to creating both sustained economic value and jobs. It is also clear that no more critical a goal exists in the Middle East and North Africa (MENA) region than creating stability and common prosperity through the long-term employment—and positive deployment—of youth. Studies make extensive connections between entrepreneurial activity and economic development, and a 2010 report by the Kauffman Foundation makes explicit the role of start-ups in job creation. The study specifically states, “Startups are not everything when it comes to job creation. They are the only thing.” Related Kauffman studies from the U.S. (see Kane, 2010) provide conclusive evidence that start-ups account for a substantial proportion of all net job creation. Mapped onto domestic and/or regional recession, further evidence suggests that job creation in the start-up segment remains consistent in economic downturns, whereas larger businesses are more adversely affected by the cyclical economic factors typical to the boom/bust cycle. Finally, in a 2009 study by Litan and Stangler, Kauffman concludes that two-thirds of new jobs come from firms that are between one and five years old. It is clear that emerging and developing economies are impacted by similar dynamics, based on evidence from Brazil, Jordan, and other entrepreneur-centric economies (Ali et al, 2010; Castanhar, Dias, and Dias, 2008), in that entrepreneurship stimulus and growth metrics in such places supersedes even the pace of startup activity in the U.S. Mapped onto the above dynamics, it is also possible to gain insight from studies such as the Startup Genome Report (Marmer, Herrmann, & Berman, 2011) as to how and why start-ups succeed, thereby creating an effective framework to facilitate such success. Projects such as Oasis 500 in Jordan have (with some early sucOvais Naqvi serves as a Senior Advisor to Abraaj Capital. Ovais is responsible for strategic marketing and brand creation challenges, currently as CMO/Brand owner at the wholly owned Riyada Enterprise Development, a US$1 billion investment fund focused on SME investment across 14 markets in the Middle East and North Africa. © 2011 Ovais Naqvi innovations / volume 7, number 2

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Ovais Naqvi cess) begun to create the structured pipeline of incubated businesses that may well ensure quality. Thus the flow of venture capital may accelerate in the region over time and in a sustained fashion. Of course, success through entrepreneurship does not depend solely on the rate of growth in the volume of start-ups. A core factor in the success of such businesses is access to an open channel of active “angel” and earlystage investors, who operate individually or through dedicated vehicles or seed funds and plug the gap of earlystage capital requirements below the $1-$2 million threshold of conventional venture capital firms. Such an approach may well give entrepreneurs the access to quality strategic insight, possibly to mentoring, and to the reasonable performance reporting requirements of a sophisticated earlystage investor. A joint Harvard-MIT study estimated that angel-funded firms have a greater chance of survival and typically outperform their non-angel-funded counterparts (Kerr, Lerner, and Schoar 2010). THE ECOSYSTEM Startups cannot exist in a vacuum, nor are they isolated from cultural, political, and structural factors. It is clear that an entrepreneurship ecosystem, typically at the national level to start with, is the defining factor in creating a sustainable entrepreneurship culture and in repeated success. In the words of pioneering jazz musician Dizzy Gillespie, “The professional is the guy who can do it twice.” A large part of that ethos is embedded learning, culture, and the impact of repeated success that benefits the whole ecosystem, fraternity, or community. The broad factors that are required to make the ecosystem work in a region like MENA are: Entrepreneurship education and relevant academia: One lynchpin is the “anchor” role of an innovation-driven academic institution like MIT. Its role is in entrepreneurship education, incubation, and acting as a long-term bridge for academic insight allied to closely affiliated or even in-house business expertise. Regional universities such as The American University in Cairo and the American University of Beirut also seek to create the content, bridge, and pipeline of future success stories. However, as Bill Aulet, head of the MIT Entrepreneurship Center, points out from his travels to far-flung Romania and other emerging or growth markets, it is perfectly possible to create entrepreneurial vibrancy without a single top-500 university in the vicinity, primarily because the innate characteristics and hardiness of the population lend themselves to business endeavors and entrepreneurial behavior. Capital and markets equity, markets and debt: Much is said about the need to unlock capital from venture capital, angel investors, and private equity firms to make entrepreneurship happen. This can go as far as the evolution and maturity of capital markets and exchanges for flotation, and the IPOs of midsized enterprises, such as the Alternative Investment Market in the UK. While a vibrant pool of equity capital is key, so, in parallel, is the role of banks and debt. The first 12


Entrepreneurship in MENA: Opening the Floodgates thing to suffer in an economic downturn is the ready availability of “cheap” bank financing, from bridge loans to positive debt financing that accelerates growth without equity dilution. One area where stakeholders need to step up to the plate far more is regional and domestic banks that dedicate both capital and specialists to supporting the growth goals of national small and midsize (SME) enterprises. Parallel to this is the role of cash-rich family enterprises and holding companies in creating entrepreneurship-focused vehicles within their corporate structures to seed and participate in businesses, which may eventually act as a growth hormone to their core businesses. Regional businesses, such as logistic provider Aramex, have already begun to do this through the venture funding of e-commerce-led businesses, for which Aramex can be both a physical incubator and a service provider in logistics, distribution, and customer fulfillment of the earlystage business. Shift in culture: As per the example of Romania and closer to home in Jordan, Egypt, Lebanon, and similar markets, the cultural “X” factor is key in defining the backdrop against which entrepreneurs prosper. The key factors there include the family and society structures; the role of and deference toward age; the existence and encouragement of innovation, creativity, arts, music, and literature communities; freedom of speech and expression; respect for the radical, maverick, and even seemingly crazy view and for nonconformity; cultural openness and the breadth and depth of that embrace; and the “continuous beta” versus product perfection culture. That is, a new culture of “get the product out, let it live, and get the user franchises’ active support to improve it”—the Google way. Two other factors also appear to be key: • The willingness to let go and exit the business at an optimal moment of value creation, versus holding onto it as an heirloom or cash cow • The acceptance, tolerance, and positive embrace of failure; the most gifted entrepreneurs and most visionary investors would argue that failure is merely a normal, necessary, and valuable step on the path to success. To quote Steve Jobs (and why not?), “Sometimes when you innovate, you make mistakes. It is best to admit them quickly and get on with improving your other innovations.” Knowledge and best practice: Most entrepreneurs are smart but not geniuses. The basics of knowledge sharing, best practices, continuous learning, and exploring the behaviors of the best are the way to learn to integrate these into a unique personal work style. Online platforms, open-source content, and community portals play a key role in that. Community creation, partnership/alliance and connection: Find likeminded people and network for positive economic advantage versus mindlessly adding numbers to the personal network. This is especially critical in countries that are relatively and largely “disconnected,” sometimes from their own regions let alone globally (Syria, Libya, Yemen, and Iran are examples). The models of the future, especially in the service sector, are more than likely to be virtual, where partners and stakeholders in the organization could be so disconnected geographically innovations / volume 7, number 2

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Ovais Naqvi and so connected digitally that they have never and don’t even feel the need to meet each other. Mentoring framework: Commonly neglected and easy to identify is the role of the mentor, typically someone outside the business and family circle who can offer their wisdom, experience, and wider insight, or just give time and an ear to the entrepreneur and even the seasoned business leader at key business or personal inflection points. In The Critical Phases of Mentoring (Bury, 2011), Tony Bury, founder of mentoring organization Mowgli, identifies the start-up, growth, and—quoting post-meltdown Jim Collins’s How The Mighty Fall (2009)—even the “success/hubris” stages of the business’ history and the role for tailored and precise mentoring interventions at those key moments. Role modeling and success stories: For every Steve Jobs, Mark Zuckerberg, Reid Hoffman, and, in the regional context, Naguib Sawiris of Orascom and Fadi Ghandour of Aramex, there are multiple aspirants, and the role of such entrepreneurs is key in knowledge sharing and in shifting the paradigms. Leading entrepreneurs are often mavericks who are capable of thinking and staying outside the box. It is critical to recognize the real drivers of their successes, as opposed to the shallow factors: typically their innovative and disruptive thinking (often at early age), tenacity, determination and drive, taking others with them versus force-fitting their perspectives, an anti-establishment ethos and lack of deference, and a constant thirst for what one might call “new-frontiering” and the ability to “remake/remodel/remaster” their businesses and their thinking. Equally critical is the role knowledge platforms play in creating new success models and identifying newer role models as the old ones potentially start defining or epitomizing a past generation. Government, thought leadership-bridging platforms, and universal stakeholders in general: Government has a central role to play, both as the defining authority in society and the primary stakeholder in the legal, jurisdictional, and regulatory context in which businesses operate. “Ease of doing business” measures (World Bank) provide a quantified and relative measure of whether entrepreneurs are unleashed or tied up. Regional think tanks that bridge the public and private sectors and encourage the active participation of development finance institutions all contribute to the opportunity to access capital, best practice, governance structures, sustainability insights, and globalizing the strategic depth, planning skill, and customer reach of a business. WHAT ABOUT US? Abraaj Capital’s entry point into this whole debate and the action it has created lies at the very heart of the fabric of the firm. Established in 2002 by Arif Naqvi, Abraaj pioneered regional private equity through a combination of having a clearly enshrined founder-led vision, embracing and then redefining best practices within global private equity, successfully creating and reinforcing market leadership through a continuous learning, adopting best practices and global operation stan14


Entrepreneurship in MENA: Opening the Floodgates dards and hiring practice culture, and two critical differentiators: delivering superior returns to investors over a sustained period, having an active stakeholder engagement program that is focused on deeply embedding itself in the region, and being regional rather than global in focus, depth, insight, and expertise. Over time, the firm has grown to have assets under management of $6 billion and a team of more than 90 investment professionals. Central to the above has been an approach to taking responsibility, recognizing the community versus customer footprint of the firm and its partner companies, an inclusive and innovative approach to wider strategic partnership and social/strategic platforming, an early embrace of community and (later) wider environmental, social, and governmetal practices, and treating the entrepreneur and business leader within the invested business as a principal, aligned strategic partner in the common growth and value creation plan of the business. As a result of the economic impact and value created by the firm’s private equity business, Abraaj has been able to leverage significant resources to fund and accelerate a series of initiatives and outcomes, all of which reinforce the firm’s pedigree as an entrepreneur-centric business. The firm has recognized the components of both creating an effective entrepreneurship ecosystem and creating a layer of investment and capability to execute deals, derived from private equity and then remixed for the small and midsize segment, and even into angel-stage investments. The core components of this strategy are: Abraaj Sustainable and Stakeholder Engagement Track (ASSET): ASSET has a wide-ranging, five-pronged mandate at Abraaj, central to which is maximizing impact, value, and return on investment from all the noninvestment activities of the firm, which in this context embrace and include strategic and social platform partnerships such as Endeavor, Global Compact, Injaz al-Arab, and Ruwwad, among others in the fields of business and social entrepreneurship, sustainability and ESG, classic strategic philanthropy and capacity-building in children and youth. Riyada Enterprise Development (RED) Growth Capital Fund: A $650 million fund focused on investing in a diverse deal flow covering eight core economic sectors, with around $100 million of capital either deployed or committed to nearly 20 investments by November 2011. Central to the RED ethos is the reinterpretation of private equity best practices by framing them in a faster-moving venture capital-style context, actively identifying entrepreneurs who have a track record, growth potential, and the ability to exist successfully within a well-governed corporate framework, going yet deeper into the region but setting up relatively small office infrastructures across multiple geographies. Finally, embracing the development finance institutions co-investment model and fast-tracking ESG and sustainable practices within a new and emerging layer of regional growth businesses. Wamda: Conceived, initially operated, and seed-funded by Abraaj, Wamda.com is the centerpiece of a content and community vision that creates a common diginnovations / volume 7, number 2

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Ovais Naqvi ital frequency of knowledge, content-sharing, and community engagement in MENA that is targeted at all segments of the entrepreneurial community. Wamda already plays a defining role in the regional SME knowledge and community space by: • Helping professionalize SME business practices and operational capacity • Ensuring a level playing field in access to knowledge and best practices • Driving critical regional themes, such as corporate governance, transparency, female-empowerment, and social entrepreneurship • Supporting government to ensure that ecosystem support is core to SME development • Connecting regional with global behavior through the commonality of best practices In a final act of entrepreneurialism, Abraaj decided in 2011 to spin out Wamda into an entity within which it remains a shareholder, but which operates autonomously across Dubai and Beirut hubs under CEO Habib Haddad; builds its own offline and online integrated content, community, event, and partnership strategies; and works toward a revenue-generation goal by 2013. Wamda Angel Fund: In 2011, Abraaj seeded the Wamda Angels fund with an initial drawdown of up to $5 million. The fund is effectively a Silicon Valley-style “micro-VC” or seed fund with a mandate focused on earlystage investment opportunities. The business feasibility around such a platform recognized both U.S. and global best practices within the angel investment/platforming space, and the need (and opportunity) within the region for a single angel platform that, over time, attracted co-investors and served as the region’s leading seed investment community, largely driven through online submission of business plans, smart screening, and fast-tracked deal execution and closure. Celebration of Entrepreneurship: The Abraaj conceived, funded, and executed “Celebration of Entrepreneurship” (CoE) in Dubai in 2010 has been generally regarded as a landmark content and networking event in MENA regional entrepreneurship, and it has perhaps even set the standard globally for multiplatform, multiformat, parallel-speaker, and multicontent event programming in the entrepreneurship space. It attracted 2,500 attendees over two days at over 230 individual speaker events. It further centralizes Abraaj and RED in regional entrepreneurship and reinforces the firm’s stated credentials as an entrepreneurcentric investment organization and culture. CoE has played its part in unleashing entrepreneurial energy, reinforcing the firm’s capacity-building and community engagement intent, and its regional authenticity, even as a positive changemaker. This in itself is a globally unique positioning for a private equity firm: to be seen as a double bottom line value creator, a force for positive change, an agent for sustainable and community impact, and as a thought leader in harnessing and celebrating regional and youth capacity. As of now, the firm is also identifying the growth and development path for CoE, which may well involve, like Wamda, spinning out the platform into a separate for-profit entity. 16


Entrepreneurship in MENA: Opening the Floodgates References Ali, Abdul et al. 2010. Global Entrepreneurship Monitor 2009 Executive Report: National Entrepreneurship Assessment for the United States of America. Global Entrepreneurship Monitor, September 15, 2010. Available at http://www.gemconsortium.org/document.aspx?id=1062. Accessed June 26, 2011. Bury, Tony. 2011. The Critical Phases of Mentoring. The Mowgli Foundation. Available at http://www.wamda.com/web/uploads/resources/Critical-Phases-of-Mentoring-2011.pdf. Accessed November 14, 2011. Castanhar, José C., Dias, J. F., and Dias, José. “Identifying the Determinants of Entrepreneurship in Brazil and Linking It to Economic Growth: An Econometric Analysis.” Frontiers of Entrepreneurship Research 28: no. 20 (2008): article 5. CVR (Center for Venture Research). Available at http://wsbe.unh.edu/cvr. Accessed June 26, 2011. Jabbour, Abdallah, Hanyen, Greg, Kasabdji, Andres, Kawadler, Matt, and Levy, Jordan. 2011. Brazil’s IT Start-Up Ecosystem. Working paper, Kellogg School of Management, Evanston, Illinois. Kane, Tim. The Importance of Start-ups in Job Creation and Job Destruction. Kauffman Foundation Research Series, July 2010. Kerr, William R., Lerner, Josh, and Schoar, Antoinette. 2010. The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis. March 18, 2010. Harvard Business School Entrepreneurial Management Working Paper No. 10-086. Litan, Robert and Stangler, Dane. Where Will the Jobs Come From? Kauffman Foundation Research Series, November 2009. Marmer, Max, Herrmann, Bjoern Lasse, and Berman, Ron. 2011. Available at Startup Genome Report 01. http://startupgenome.cc/pages/startup-genome-report-1. Startup Genome–Cracking the Code of Innovation. Contents under Creative Commons License. Accessed November 14, 2011. The World Bank. 2004. Unlocking the Employment Potential in the Middle East and North Africa: Toward a New Social Contract. Washington, D.C.: World Bank Publications. Wamda. 2011. Usama Fayyad: Building an Accelerator in MENA. Jan 2, 2011. Available at http://www.wamda.com/2011/01/usama-fayyad-building-an-accelerator-in-mena. Accessed November 14, 2011.

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Horacio Melo

Prosperity through Connectedness Innovations Case Narrative: Start-Up Chile Chile’s geographical isolation has resulted in a culture that values external connections. Chileans have had to develop innovative ways to reach out to the world. This mindset provides the backdrop to the creation of Start-Up Chile. By bringing entrepreneurs to Chile from all over the world, Start-Up Chile not only makes Chile better connected to the rest of the world, it also contributes to a cultural change that creates more openness toward entrepreneurship. Start-Up Chile is a program created by the Chilean government. It depends on the Ministry of Economy and is executed by the Chilean Economic Development Agency (CORFO), the leading organization for promoting innovation and entrepreneurship in the country. The premise of Start-Up Chile is simple: Chileans should invest in talented people no matter where they come from. The program should look at their projects and capabilities first, passports second. So far, Start-Up Chile’s results have exceeded expectations. In less than two years the program has received over 2,000 applications; of these, over 300 projects have been selected; of the selected projects, approximately 100 have already graduated to be part of the program’s Alumni Network. While Start-Up Chile’s objectives are long term, the impact that it currently is generating in the local ecosystem is evident. As of April 2012 there were 220 foreign start-ups operating in Chile, 60 percent of which are developing their prototypes and 34 percent of which already have some market traction (users or sales). These 220 startups have raised almost $10 million in equity investments, primarily from the United States. Tech meetups that once attracted only 20 or 30 people per week now attract more than 100—foreign and local entrepreneurs who gather to share knowledge and ideas in their areas of expertise. Ex-participants of StartUp Chile have also created the Association of Entrepreneurs of Chile (ASECH), of which many Chilean entrepreneurs are members.

Horacio Melo is the Executive Director of Start-Up Chile. © 2012 Horacio Melo innovations / volume 7, number 2

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Horacio Melo ORIGINS Start-Up Chile was born in 2010 from the ideas of two people: a Chilean, Nicolas Shea, who was living in the United States and finishing his master’s at Stanford University, and Vivek Wadhwa, an Indian academic and technology entrepreneur who lives in Silicon Valley. They believed that the best way to go to the next level in innovation and entrepreneurship in Chile was through immigration. Their idea: to bring foreign entrepreneurs to launch their start-ups in Chile, and in so doing to increase the countries access to worldwide business networks. Shortly after the massive earthquake that shook the country in February 2010, Nicolas Shea began knocking on the doors of the Chilean Government and the Ministry of Economy, trying to sell his idea. Finding the possibilities very attractive, the government authorized him to start a pilot program that would fund twenty-three projects. One hundred applications came in. The chosen applicants went to live in Chile for a six month period; each entrepreneur received $40,000 and a work visa valid for one year. The pilot was very successful. It created links between the local ecosystem and the global business community. It nuturned successful start-ups that today are being further developed in Silicon Valley, and in Santiago. Upon seeing the success of the program, the Chilean government decided to expand it. The governmnt set a goal with the hope of having 1,000 entrepreneurs involved by 2014. In 2011, the first round the competition drew 320 projects applications from more than 30 countries. Of these, 100 were selected and 84 accepted the challenge. In the second round, which occurred in July 2011, more 650 applications came in—this time from more than 70 countries—of which 154 projects were selected. Finally, in the third round at the end of 2011, 570 applications came in, of which 100 were selected. My own participation in the program began in June 2011, when Jean Boudeguer, then the executive director of the program, invited me to participate as assistant director. From the beginning, I was impressed with the dynamism of the program. My primary responsibility was help to organize the structure and processes required to move the program to the next level. As a start-up itself, StartUp Chile needed three types of leaders. First, a leader to take the organization from idea to reality (Nicholas Shea); second, a manager to consolidate and extend processes in order to scale (Jean Boudeguer); and, third, a strategic thinker and communicator to provide the larger vision of what was needed and how the organization could maximize its impact (my role as the current executive director). THE START-UP CHILE ENTREPRENEURS’ EXPERIENCE When entrepreneurs are accepted into the program, the first thing we do is facilitate the issuance of a one-year work visa so they can start working legally upon their arrival. We also provide participants with a visa checklist to explain in detail 20


Prosperity through Connectedness the various requirements of their application, a step-by-step process by which the application should be completed. We have this “soft landing” system in order to quickly acclimate them to their circumstances and enable them to begin developing their business plans without delay. The soft landing relies on our “padrino system,” through which we pair the program participant with a local member of the Santiago business community, based on compatibility in both background interests and language. The local buddy meets the new program participant at the airport, escorts them to their residence, and customarily invites them for a night out on their first evening in Chile. Padrinos will continue to check in with the entrepreneurs once or twice a month throughout their stay in the country. Start-Up Chile also ensures a soft landing by helping entrepreneurs take care of basic details, like opening a Chilean bank account, obtaining a local ID and police registration, and securing housing and a mobile phone. We also provide all entrepreneurs with free office space in downtown Santiago, equipped with WiFi. Moreover, today the program is more focused on giving the entrepreneurs all the necessary tools they need. We conduct weekly workshops on lean start-ups, think tanking, and pitch training that is principally based on peerto-peer teaching. These activites contribute to a collaborative environment. The final crucial element of support Start-Up Chile provides is the $40,000 in seed money. This money is not delivered up front but is reimbursed as spent. This ensures accountability to the program for entrepreneurs’ expenditures, as well as providing Start-Up Chile with important feedback about the spending needs of its participants. This $40,000 constitutes a grant from which Start-Up Chile does not take any equity. DEFINING AND MAXIMIZING THE PROGRAM’S IMPACT In continuing to expand this program, we seek two categories of impact. First, we seek to make Chile a country that promotes an entrepreneurship, not only by bringing in more entrepreneurs but also by creating a much better-developed ecosystem of supporting institutions—including venture capital firms and angel investors. Second, we aim to select at least one project that, in the medium term, grows into a billion-dollar company. To ensure a long-term impact on the local ecosystem, Start-Up Chile staff is working on merging and expanding global and local networks, working more closely with universities and student entrepreneurs; stimulating internal innovation in big companies; and helping local angels and the venture capital industry to move forward. Toward these ends, we organized our first Demo Day, which was held on May 23th, 2012 and attended by over 600 participants. We have confirmed representatives from Google, Mercado Libre, 500 Startups, and other organizations. In terms of social return, Start-Up Chile has a system that helps assess the percentage return from the projects to the program and the community. This is known as the return value agenda, and it is organized as a sort of game or compeinnovations / volume 7, number 2

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Horacio Melo tition among program participants. The return value agenda awards points based on three metrics: attendance, organization, and innovation. Attendance refers to participation in local events, such as meetings and conferences at which entrepreneurs make themselves available to share knowledge and to network with locals. Organization can include giving a talk at a school, presenting a pitch to a local investor, or mentoring a local entrepreneur or student. Innovation refers to initiatives that actively engage the Chilean business community, such as starting a new business with a Chilean partner or patenting a product in Chile. Finding an effective way to assess this shorter-term social impact is important. However, the greatest interest is in encouraging entrepreneurs to start their projects in Chile because they see this as an opportunity to create value in the country in the long term. In terms of fostering a culture of innovation, Start-Up Chile depends on CORFO, the entity that promotes innovation and entrepreneurship in Chile. Through CORFO, Start-Up Chile has created tools that contribute to the ecosystem, such as corporate meet-ups, where companies and entrepreneurs come together to solve specific problems the corporation faces, a process that creates connections and opens up the possibility of future business collaborations. There are also university meet-ups, where entrepreneurs meet with teachers or students to find business opportunities within the universities that they may wish to pursue together. Thanks to these sorts of initiatives, Start-Up Chile is becoming a point of reference for generating new ideas and trends, which, when successful, are usually integrated into other departments within CORFO, resulting in specific topics that may have a useful impact on the local ecosystem. Start-Up Chile depends 100 percent on the government of Chile. The program costs $15 million a year, which comes from taxes paid by the Chilean people. This is a public policy that goes against the normal arrangement in which public spending is supposed to return direct benefits to taxpayers. Instead, this policy seeks to create a long-term impact on the national economy and the Chilean business ecosystem, precisely by not investing directly only in Chileans but in a group of talented people regardless of their country of origin. The government’s commitment to Start-Up Chile derives from its convinction that the program will generate a benefit the people of Chile in the longterm that will more than justify the investment made today. Start-Up Chile understands that the individual entrepreneur is best equipped to recognize opportunities and will go where those opportunities are. For that reason, Start-Up Chile does not oblige entrepreneurs to stay for any longer than they consider necessary, once the six-month program comes to an end. However, if an entrepreneur decides that is worthwhile to stay in Chile for more than the initial six months, the program will give him or her whatever assistance is required to make that possible. In exchange for this flexibility and support, the program seeks to ensure that the projects continue to have an impact in the local community. The entrepreneurs and their projects are expected to carry out activities consistent with the return value agenda on an ongoing basis—again, such as holding guest lectures 22


Prosperity Through Connectedness at universities, serving as mentors to local start-ups, and organizing meet-ups, among other things. CONCLUSION To date, Start-Up Chile has received applications from citizens of 70 countries, with American applicants accounting for the largest single group. Start-Up Chile also has entrepreneurs from almost all Latin American countries. In the case of Latinos, once they become part of Start-Up Chile, the impact they can generate when they return home to their countries to work with the community is much larger than if they had never left. Ranked as one of the two major start-up hubs in Latin America by a recent analysis by TechCrunch, Santiago provides ideal opportunities for Latinos to participate in a growing culture of innovation and to help spread that cultural change across the region. Start-Up Chile is not only a garden of innovation and entrepreneurship in Latin America. It is also helping to promote the creation of similar programs in other parts of the world. During the Global Entrepreneurship Congress held in Liverpool, England, in March 2012, we met with representatives of Start-up Britain, Start-up America, Start-up Canada, and Start-up Spain, among others. For Start-Up Chile this is great news, because, as more organizations like these develop, it becomes increasingly likely that more entrepreneurs will be willing to go to Chile. Of equal or greater importance, it becomes increasingly likely that Chileans will become interested in going to Spain, Malaysia, or any other country that believes in entrepreneurship. This is a win-win relationship on a global scale, one that attracts talent to Chile and ensures that Chileans have the opportunity to leave the country to pursue opportunities elsewhere. The endpont is an increase in the connections among entrepreneurial communities that are vital to long-term increased prosperity in Chile and worldwide.


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Vivek Wadhwa

The Magic Happens When You Focus on People Innovations Case Commentary: Start-Up Chile Governments the world over have tried to re-create the magic of Silicon Valley by focusing on infrastructure and industry. They follow the prescriptions of management consultants who tout Michael Porter’s cluster theory. They act on the belief that if you build a magnificent technology park next to a research university, provide incentives for chosen businesses to locate there, and bring in some venture capital, then innovation will happen. These efforts inevitably fail, because entrepreneurial ecosystems simply can’t be built from the top down. They must be built from the ground up, with entrepreneurs helping entrepreneurs. What is needed—and what governments can’t create—is a culture of information-sharing and mentorship, which is what has made Silicon Valley a success. Chile is among the countries that drank the “cluster Kool-Aid.” It spent hundreds of millions of dollars building a series of clusters, including one focused on IT outsourcing, but none of them was able to create an indigenous innovation capability because they were focused on the wrong things and weren’t tailored to Chile’s needs. Chile’s Economic Development Agency (CORFO) invited me to Santiago in September 2009 to meet executives of its IT outsourcing industry. They wined and dined me, and tried to impress me with the progress they had made in creating an $840 million services industry, which they predicted would grow to $5 billion by 2015. I was impressed with their progress—and I loved the Chilean wine—but I told them that their projections were baloney. I told them that, before long, the IT services would choke off other industries and then implode, as labor shortages got Vivek Wadhwa is Vice President of Academics and Innovation at Singularity University; Fellow, Arthur & Toni Rembe Rock Center for Corporate Governance, Stanford University; Director of Research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering, Duke University; and distinguished visiting scholar, Halle Institute of Global Learning, Emory University. © 2012 Vivek Wadhwa innovations / volume 7, number 2

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Vivek Wadhwa more severe and salaries began to rise. After all, Chile only had a population of 16 million people and was graduating a mere 1,400 engineers per year. Their vocational schools were producing another 4,500, but most didn’t speak English. Where would the necessary IT workers come from? I was very blunt in my meetings with CORFO executives. After returning to the U.S., I felt bad that I had upset my Chilean hosts, so I wrote a BusinessWeek column praising their efforts and detailing my views on how they should move forward. A few weeks later, in meetings with Chile’s innovation chief Nico Shea and The fears the locals had had economics minister Juan Andres Fountaine, I sugabout the program taking their gested a strategy to help jobs away proved to be Chile by taking advantage of weaknesses in U.S. immiunfounded. In fact, the opposite gration policy. I recomoccurred. Foreign start-ups mended that Chile build an innovation economy by scoured local colleges for talent importing the skilled immiand started hiring and partnering grants the U.S. was chasing away. I suggested that they with locals. Meanwhile, Chilean could attract these innovators and job creators to entrepreneurs saw tremendous Chile by offering visas and value in having access to global financial incentives, and by providing them with mennetworks and in the knowledge toring and entrepreneurial they could gain. networks like what they were leaving behind in Silicon Valley. As Horacio Melo’s article highlighted, Chile tried the experiment, and so far it has been a runaway success. There are valuable lessons to be learned from this, but first, let’s understand the challenges Chile faces. Chile not only has a small population, its entrepreneurial ecosystem has the same disadvantages as most regions of the world: failure is vilified, secrecy is highly valued, and mentoring and social networks are lacking. Then there is Chile’s remote location—its southern end borders the South Pole, and entrepreneurs there are not only disconnected from one another but from the rest of the world. Cultures often take generations to change, and connecting entrepreneurs even within the same city is often a challenge, let alone across the world. That’s why the Start-Up Chile experiment made so much sense for the country. Skeptics had argued that the small amount of money Start-Up Chile was offering would not attract entrepreneurs from anywhere but the poorest Latin 26


The Magic Happens When You Focus on People American countries. They said it would be almost impossible to attract 1,000 global start-ups. Others argued that a tech center could not be built without a large venture-capital fund as its foundation. There were also concerns that the program would be politically untenable, because some Chileans would regard educated immigrants as a competitive threat and voice the same fear that nativists in the U.S. do:1 that foreigners take jobs away. The skeptics were wrong. As Melo noted, the program has received more than 1,600 applications from 70 countries—most of them from the U.S. Venture capital has started flowing in from a number of countries, including Argentina, Brazil, France, the U.S., and Uruguay. Most important, Silicon Valley-style entrepreneurship has been spreading across the country. The events I attended during my last two trips to Chile were at least as dynamic as those that take place in Silicon Valley every night. The entrepreneurs had organized themselves into tribes and were sharing their knowledge with locals on diverse topics, from biotech to social media. Participants were sharing their own product ideas and business plans, and at the same time building networks. Many told me they had never imagined they could get this type of assistance and were now considering starting companies of their own. The fears the locals had had about the program taking their jobs away proved to be unfounded. In fact, the opposite occurred. Foreign start-ups scoured local colleges for talent and started hiring and partnering with locals. Meanwhile, Chilean entrepreneurs saw tremendous value in having access to global networks and in the knowledge they could gain. They started asking to be part of the action. So, in July 2011, the government opened the program to local would-be entrepreneurs and was flooded with applicants. Although it is too early to declare the overall program a success, a key lesson has been learned: the magic happens when you focus on people, rather than on industry. Lesa Mitchell, the Kauffman Foundation’s vice president of innovation, who is researching the program, says it is a model other regions of the world should emulate. The Foundation is already advising leaders from more than two dozen countries, from Australia to Venezuela, on how to replicate the model. The program may not work everywhere because the local conditions and challenges aren’t the same, but the lesson remains the same: the regions will only gain by investing in entrepreneurs rather than in industry. 1. Nativism is a sociopolitical policy that favors the interests of established inhabitants over those of immigrants.


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Ted Gonder

An Early Assessment of Start-Up Chile Innovations Case Commentary: Start-Up Chile In just two years and with no marketing budget, Start-Up Chile has generated remarkable buzz. Young entrepreneurs in Santiago—a city that until recently was not considered a major entrepreneurship hub,1 often recognize the program’s name. Start-Up Chile has become the central convening force for a national entrepreneurial movement: although its collaborative office space is in the nation’s capital, its ripple effects are felt throughout the country, where entrepreneurs and local leaders have begun organizing meet-up events and conferences to promote discussions around innovation. The program has received even more attention internationally: plaudits have come from sources as wide-ranging as technology bloggers,2 start-up hacker societies,3 the Kauffman Foundation,4 and The Economist.5 In Chile, excitement around the program may stem mainly from the community and university events, new opportunities for aspiring entrepreneurs, and the program’s inspiring messaging, which conveys a vision for the country’s cultural transformation. The excitement abroad comes from less Chile-centric aspects of the program. For earlystage, location-independent foreign entrepreneurs—thus far, applying from over 70 countries globally—Start-Up Chile seems to be a proposition that cannot lose. Selected applicants receive an almost instantly deployed one-year working visa without having to work for another company, US$40,000 without having to give up an equity stake in their company, and a welcoming community of fellow founders from all around the world—and many more benefits. For proponents of entrepreneurship and innovation in the academic and foundation worlds, Start-Up Chile offers not only a new model to boost regional entrepreneurship but also the potential for a global movement of interconnected start-up networks. For Chileans, foreign applicant entrepreneurs, and hopeful influencers of policy alike, the project’s early successes seem to predict future ones.6 However, it is important to discern Ted Gonder is an Entrepreneur-in-Residence at the U.S. Department of Homeland Security and a graduate of the University of Chicago, where his thesis focused on Start-Up Chile. In 2011, he interned at the Kauffman Foundation to explore StartUp Chile’s scalability and influence. © 2012 Ted Gonder innovations / volume 7, number 2

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Ted Gonder substance from enthusiasm in order to understand whether and why Start-Up Chile actually merits the recognition it has received. Most of the excitement about the program—even when negative—has related to its design. Equity-free seed capital and incubation, community, and adventure offer entrepreneurs a refreshingly simple and rare package. Compelling for advocates in the macroeconomic policy discussion are the concepts of importing talent to drive regional economic growth and unlocking transnational entrepreneurship networks through immigration.7 In theory, both the entrepreneurial offerings and the macroeconomic benefits of Start-Up Chile hold value and novelty. In practice, however, as a government-administered program these concepts lack an extensive track record. In the absence of hard proof, the promises of Start-Up Chile’s model can only be evaluated in the implementation of the program itself. One notable indicator that the program is being implemented effectively is that it collects data and conducts evaluations internally: Every two weeks, when the entrepreneurs visit the program’s central offices to be reimbursed for their business expenses, government officials collect current data on the companies’ employment (jobs created), sales and revenue, investment status, etc. To this end, some might ask whether and how the program measures its impact on the local and international economy. Such questions of medium- and long-term outcomes ask too much, however. What is important, especially given its young age, is to ensure that the program collects enough data in the short term to serve its participants’ business goals. The more companies that succeed in raising capital from either local or international investors, gaining traction with local and international customers, and integrating with both local and international networks, the more successful the program will be. That said, at this stage in its growth, the program has enough processes and systems in operation that it would now be appropriate for external research partners such as universities and foundations to begin collecting and analyzing data more rigorously. Outside the question of measurement, other factors indicate strong implementation at Start-Up Chile. The program’s staff members meet regularly with their entrepreneurs to understand how they can help. The dynamic feedback loop between staff and entrepreneurs allows for fast learning, and iterative experimentation from one class of arriving participants to the next. After running a pilot to work out kinks in the design, the program launched into its first cycle of entrepreneurs. After the first cycle, once the international and open-minded culture had been established within the program, Start-Up Chile opened its doors to Chilean residents to speed the transformation of the country’s entrepreneurial culture, planting roots domestically to allow for organic change. (Note that this is wisely the opposite of a synthetic attempt to replicate Silicon Valley.) Staff members are also remarkably open to active participation from the entrepreneurs, letting them organize networking and training events in the program offices. By the same token, the program places no strong restraints on its entrepreneurs about relocating once the six months of incubation end: they can incorporate and receive invest30


An Early Assessment of Start-Up Chile ment wherever in the world it suits their business needs. Finally, Start-Up Chile is sharing its model and networks transnationally, putting the country on the world map as a leader in entrepreneurial collaboration. Some have expressed concern that the program was launched as a publicity stunt for Chile;8 if so, it is working! Investment capital is beginning to follow talent into and back out of Chile,9 strengthening pathways10 for financial and human resources to flow more in the future. The effects of this phenomenon are only beginning to show but are likely to grow exponentially. The program is not without challenges, however. The venture market in Chile is still undeveloped: risk-averse traditional investors have been known to require equity stakes in excess of 60 percent to compensate for their lack of familiarity with new technology businesses.11 Although some entrepreneurs (both Chilean and foreign) have succeeded in raising capital from Chilean investors,12 these cases are rare. More entrepreneurs are seeking investment from outside the country. Although that is not necessarily a bad thing from a foreign domestic investment standpoint, it also does not help the program retain more successful entrepreneurs, since investors in Silicon Valley and elsewhere often want their companies to “be within a 20-minute drive.”13 The program’s retention rates still hover around 20 percent to 30 percent and although Start-Up Chile is wise not to force participants to stay in Chile after the initial six months, it could certainly do more to target and select applicants with businesses that leverage Chile’s strong industries—agriculture, mining, energy, etc.—rather than just consumer web companies. Fostering closer relationships between businesses and customers through guided selection and entrepreneur orientation is one area where Start-Up Chile could improve its retention rates without sacrificing its companies’ success rates. Start-Up Chile may not be replicating Silicon Valley, but it is certainly offering a new model for governments to think about using entrepreneurship to transform culture, build the economy, and enhance human and investment capital flow transnationally. The team administering the program has effectively side-stepped the design and implementation errors of historically similar efforts, learning quickly and early to prioritize the entrepreneurs, building internal systems for continued success, and collecting basic data. Other countries have been inspired by these early efforts to launch similar efforts14—called Start-up “Nations”15—and every day more entrepreneurs around the world consider applying to Start-Up Chile. The program has told its story well and has sparked lively discussion around the topic of immigrant founders, attracting talent, and transnational entrepreneurship. More rigorous evaluation of the program’s impact would ground these discussions in fact, offering ammunition for policymakers to reap the same benefits for their respective countries and collectively opening up the world’s entrepreneurship communities to collaborate for a better future. 1. Rip Empson, “Silicon Valley, London, NYC: Startup Genome Data Reveals How the World’s Top Tech Hubs Stack Up,” TechCrunch website, April 10, 2012. Available at


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Ted Gonder http://techcrunch.com/2012/04/10/startup-genome-compares-top-startup-hubs/. 2. Vivek Wadhwa, Chile’s Grand Innovation Experiment, Tech Crunch website, December 18, 2010. Available at http://techcrunch.com/tag/start-up-chile/http://techcrunch.com/tag/start-up-chile/. 3. “Hackers and Founders Launch New Website,” StartupChile website, October 7, 2011. Available at http://startupchile.org/hackers-founders-launch-new-website/#.T7QBN59YvcY. 4. Jonathan Ortmans, “The State of Entrepreneurship in Chile,” Entrepreneurship website, August 30, 2010. Available at http://www.entrepreneurship.org/en/Blogs/Policy-ForumBlog/2010/August/The-State-of-Entrepreneurship-in-Chile.aspx. 5. “Startup Nations,” The Economist website, March 29, 2011. Available at http://www.economist.com/blogs/schumpeter/2011/03/entrepreneurship. 6. Rich Yang, “Start-Up Chile Entrepreneur Responds to Investor’s Departure,” TNW Latin America website, December 27, 2011. Available at http://thenextweb.com/la/2011/12/27/start-up-chileentrepreneur-responds-to-investors-departure/. 7. Vivek Wadhwa, “A Better Formula for Economic Growth: Connecting Smart Risk Takers,” The Chronicle of Higher Education, November 18, 2010. Available at http://chronicle.com/article/ABetter-Formula-for-Economic/125441/. 8. Hacker News conversation. Available at http://hackerne.ws/item?id=1605311. 9. “How Startups in Chile and Australia Can Raise Capital,” Brophy World, February 25, 2012. Available at http://brophyworld.com/how-startups-in-chile-and-australia-can-raise-capital./ 10. AnnaLee Saxenian, The New Argonauts: Regional Advantage in a Global Economy. Cambridge, MA: Harvard University Press, 2006, p. 4. 11. Nathan Lustig, “Who Will Be Chile’s Paul Graham or Dave McClure?” Nathan Lustig blog, May 12, 2012. Available at http://www.nathanlustig.com/2012/05/12/who-will-be-chiles-paul-graham-or-dave-mcclure/. 12. Anna Heim, “Argentine Ad Network Taggify Has Just Raised $1M—and 100% of It Comes from Chile,” TNW Media website, March 12, 2012. Available at http://thenextweb.com/media/2012/03/12/argentine-ad-network-taggify-has-just-raised-1mand-100-of-it-comes-from-chile/. 13. Randall Stross, “It’s not the people you know: It’s where you are.” New York Times, October 22, 2006. Available at http://www.nytimes.com/2006/10/22/business/yourmoney/22digi.html?pagewanted=all. 14. Start-Up Britain, “United Startup Nations Plan Global Growth at the GEC,” Startup Britain website, March 20, 2012. Available at http://www.startupbritain.org/new/2012/03/20/startupnations/. 15. “Startup Nations,” The Economist.

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Francis J. Skrobiszewski

Market Making

How Enterprise Funds Can Jump-Start Stagnant Economies Innovations Case Narrative: Enterprise Funds With a population of nearly 40 million and a GDP of approximately US$765 billion in 2011, Poland ranks as one of the largest and most dynamic economies in Europe and among the top 21 economies globally.1 The country boasted nearly a 4 percent annual GDP growth in 2011, up from 1.5 percent in 2009—the only country in Europe that year to achieve a positive growth rate. Poland’s history as an oppressed Soviet satellite state for 45 years following World War II, with a command economy as recently as 1989, makes these statistics all the more impressive. So to what does Poland owe its success? Certainly, Poland’s industrious, entrepreneurial people and insightful policymakers deserve most of the credit, but catalytic vehicles provided through U.S. assistance in 1989, like the Polish-American Enterprise Fund, played an important role in jump-starting the Polish private sector with business financing and technical assistance. Over the last 20 years and more, Poland has developed a vibrant market economy driven by a strong entrepreneurial spirit, leveraged its deep educational legacy, and built upon the Soviet period’s emphasis on science and technology to capitalize on the country’s inclusion in the European Union and on the global advantages that convergence affords. Now Poland is wedging its way into Silicon Valley and seeking to build its own innovative economy that perhaps, as George Friedman predicted in his book, The Francis J. Skrobiszewski is the Investment Committee member of the Polish National Capital Fund which is financing the development of Polish venture capital funds focused on innovative SMEs. He also serves as a Director of the Silicon Valley-based US-Polish Trade Council. Previously, Skrobiszewski served as VP of the PolishAmerican Enterprise Fund; Director of Portfolio Management of a fund in Poland’s Mass Privatization Program; SVP of the Hungarian-American Enterprise Fund, and Managing Director of the Hungarian Innovative Technologies Fund. He’s been an advisor on the establishment and management of funds in the Middle East, Central Asia, and Africa. © 2012 Francis J. Skrobiszewski innovations / volume 7, number 2

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Francis J. Skrobiszewski Next Hundred Years,2 will create a powerhouse of new technologies that the United States and Poland can both benefit from. This new possibility is not developing of its own accord; there are numerous ongoing and ad hoc initiatives undertaken by various institutions and individuals that are contributing to Poland’s high-tech potential. For example, in the past few months, the first groups of the “Top 500 Polish Innovators”3 have been participating in two-month-long educational programs at Stanford University, assisted by the US-Polish Trade Council (USPTC),4 and the first alumni Today, few realize the role the of this program are now calling for a “revolution in science” in United States and its partners Poland!5 In addition, after a in the newly established postdecade of building technology communist Polish government and business links between the United States and Poland, played after the fall of the USPTC recently opened the US-Poland Innovation Hub Berlin Wall to ensure that the Center6 in Palo Alto, California, drive and ingenuity of Poland’s to support the physical presence of Polish tech entreprepeople could be unleashed neurs in the heart of Silicon quickly to achieve their fullest Valley. It is becoming apparent that the diverse independent entrepreneurial expression. actors involved in these and other such efforts are, like the free market’s “invisible hand,” beginning to represent a “Fourth Strand” to the so-called “Triple Helix” concept of industry, government, and academia combining to create new innovative technologies.7 Looking back from my own experiences over the past 20-plus years of transformation in Poland, it is fascinating to see what a big impact seemingly small incremental changes stemming from initiatives like those mentioned above have had in the aggregate over time. Such “marginal” developments all have added up to making Poland a vibrant market economy increasingly focused on creating new technologies and an innovative economy. I am honored to have been able to make my own incremental contributions to this process, and to similar processes of entrepreneurial development in other countries. It is essential to appreciate that progress and development do not happen in a vacuum; rather, critical catalysts are needed, and that usually involves someone assuming risks and taking action to accelerate the process of change. If you get off on the right foot, the progress has a better chance of proceeding smoothly. On the other hand, if you get off on the wrong foot, progress can be hampered for years to come, and catching up can be difficult. 34


Market Making Faced with the collapse of Soviet Communism in 1989, U.S. policymakers could have opted to • do practically nothing while taking a wait-and-see attitude • take a traditional longer-term, government-to-government development assistance approach of supporting systemic policy change, undertaking institutionbuilding, providing training for capacity-building, and the like • design a bold and innovative initiative that could respond quickly to the pressing needs of the local population and play a catalytic role in helping them rebuild their country. Fortunately for the people of Poland and indeed those of Central and Eastern Europe (CEE), the U.S. government chose the third option, while still employing traditional development assistance where that approach would work best. Today, few realize the role the United States and its partners in the newly established post-communist Polish government played after the fall of the Berlin Wall to ensure that the drive and ingenuity of Poland’s people could be unleashed quickly to achieve their fullest entrepreneurial expression. Nor do many see the broad array of current initiatives stimulated by Polish, Polish American, and U.S. entrepreneurs who are creating links between businesspeople, scientists, and engineers in both countries and are contributing to the development of a “Silicon Valley mindset” in Poland. What a great distance has been traveled over the past 20 years! Poland’s vast transformation did not just happen; rather, it was spurred on by the conscious, active decisions of risk-takers in government and the private sector, who drove the transformation process in a selected direction and accelerated change to the point of irreversibility. Moreover, the entrepreneurial models and private-sector mechanisms employed in Poland have by now been employed successfully in other countries and regions.8 It should be clear to policymakers that the fundamentals behind these private-sector approaches can be further adapted under varying circumstances to address today’s seemingly insurmountable challenges in economic development elsewhere in the world. In 1989, the transformation of a Soviet-style command economy to a free market had not yet been attempted, and there were no guideposts. Poland’s economy had already been suffering under the impact of martial law imposed to stifle the Solidarity labor union’s threat to Communist Party supremacy. State-owned enterprises that dominated the Polish economy were unprepared for compete under market conditions, and under Poland’s so-called shock therapy approach to market liberalization, it seemed clear that if Poland’s experiment in liberty was to succeed, it was going to be the Polish private sector that would pull the country through. Obviously, something dramatic needed to be done to support Poland’s emergent private-sector businesses, and to drive the economic growth so critical to social stability and the development of democratic political institutions. U.S. policymakers recognized that, after the communist regimes began collapsing in the former Soviet satellites, the first of these countries to gain independence—Poland and Hungary—needed support far beyond traditional development assistance. These countries needed to quickly jump-start their private businesses in innovations / volume 7, number 2

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Francis J. Skrobiszewski order to provide their local populations with goods, services, and sustainable jobs. In 1989, in a stroke of genius not seen since the creation of the Marshall Plan, and certainly not seen in U.S. reconstruction efforts in Iraq and Afghanistan or during the Arab Spring,9 smart U.S. policymakers in the first Bush administration and the U.S. Congress turned to American free-market, private-sector approaches and to seasoned business professionals for solutions. American ingenuity’s answer Not only did the enterprise took the form of legislation funds launch a new era in that created enterprise funds for Poland and Hungary, private entrepreneurial through which U.S. taxpaydevelopment, they launched me ers’ money would be managed by private investment on an exciting adventure in professionals to finance prihelping emergent entrepreneurs vate enterprises in the respective countries. and policymakers in Poland and Not only did the enterprise funds launch a new era Hungary, and later other in private entrepreneurial frontier economies, to build development, they launched me on an exciting adventure businesses and develop in helping emergent entrepreneurs and policymakers ecosystems to support in Poland and Hungary, and entrepreneurial activity. later other frontier economies, to build businesses and develop ecosystems to support entrepreneurial activity. By now my work in Poland has included participation in the establishment of the Polish-American Enterprise Fund (PAEF) and the management of one of 15 National Investment Funds in the Polish Mass Privatization Program of 550 stateowned enterprises. It continues through the investment activity of the Polish National Capital Fund—a fund-of-funds financing new Polish venture capital (VC) funds (KFK, for Krajowy Fundusz Kapitałowy10)—as well as the building of links between Silicon Valley and Poland as a director of the US-Polish Trade Council. I am also involved in helping Poland’s Intellectual Property Management Institute promote a conducive ecosystem for entrepreneurism and create an appropriate intellectual property rights regime critical for the development of new technologies and an innovative economy. But my work has not been limited to Poland; I have been adapting my experiences there and applying them in other countries and under varying circumstances. While this part of my career journey started in 1989, when President Bush called me to the White House to discuss U.S. strategy for rebuilding the Polish 36


Market Making economy, the foundation for that invitation was laid some 20 years earlier, when I studied Eastern European politics and economics in Austria at the University of Vienna—good preparation for this eventual opportunity. In those days of 1968-1969, as I prepared to embark on my studies in Vienna, the Prague Spring had just been crushed by the Warsaw Pact, “Polish jokes” were popular, and the Iron Curtain was thought by many to be a permanent fixture. When a fund manager from London asked me in 1990 how I had connected at such high levels as President Bush and Lech Walesa, I simply said, “I was Polish when Polish wasn’t cool,” and added, “I knew ‘Hungary’ was not a state of appetite!” The point was that my long interest in the region and deep knowledge was being recognized. In 1990, when the Polish-American Enterprise Fund was being organized, I was retained by the newly hired CEO of PAEF to draft the business plan for the fund, and I served as its vice president until 1995. At that point I had participated in a winning bid to manage a Polish Mass Privatization Fund, which would be taking deals to PAEF and other investors, and I was also advising PAEF’s sister fund in Hungary. In 1994, when a new CEO joined the Hungarian-American Enterprise Fund (HAEF), my manager at PAEF asked me to split my time between the two funds in an effort to provide him with seasoned support in the special challenges of running an enterprise fund. Thus I applied in Hungary the lessons I had learned in Poland, in the restructuring of the Hungarian-American Enterprise Fund. Once that was accomplished, I helped raise HAEF’s parallel private fund, modeled on what PAEF did in Poland when it established its first side-by-side private fund with the European Bank for Reconstruction and Development and private institutional investors. Eventually I served as HAEF’s senior vice president until 2004, when we began to wind up HAEF and established its legacy foundation.11 I also conceived and managed HAEF’s high-tech venture capital fund—Hungarian Innovative Technologies Fund (HITF)—which was one of the first such focused funds in the CEE region. On this basis, I reengaged in Poland with support from political leaders interested in creating a similar high-tech VC fund to finance Polish technology entrepreneurs. I was invited to speak at high-level conferences, where I organized panels to highlight the need for Poland to focus on innovation and its wealth of intellectual capital in order to remain competitive in the 21st century. The bursting of the technology bubble slowed interest, but in 2007 I was recruited as a member of the investment committee of KFK, where I bring lessons learned in hands-on management at HITF in Hungary back to Poland to inform my advice on investing in Polish VC funds. Along the way, I advised the Southern Africa Enterprise Development Fund (SAEDF), which was established post-apartheid for 11 countries in southern Africa to finance the development and growth of indigenous and other businesses there. I also applied the lessons learned from working for PAEF and HAEF when I was called on to help structure and prepare fundamental documents for the Millennium Challenge Corporation’s Regional Development Fund for the innovations / volume 7, number 2

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Francis J. Skrobiszewski Republic of Georgia, and when I advised on the formation of the Eurasian Development Bank, created by presidents Putin and Nazarbeyev, and on development of the bank’s investment policies and operations. In the innovation and entrepreneurism realm I have worked closely with Armenian technology entrepreneurs and government officials on an initiative to enhance innovative small and medium enterprise (SME) competitiveness, and through my connections in Silicon Valley I have helped the Armenian entrepreneurs access opportunities there. I also advised the Government of Armenia (GOA) on structuring a VC fund tailored to Armenia’s conditions and its need to reach external markets, and I It never ceases to amaze negotiated a memorandum of underme how experiences in standing between the GOA and the San Francisco Global Trade Council to one country can be assist Armenia in Silicon Valley and adapted and transferred to California. I am currently serving as the operaanother, or how they help tions advisor to the newly launched Serbian Innovation Fund,12 which is to inform judgment in seeking to build the foundation in unrelated circumstances. Serbia to support the development and commercialization of new technologies. I am working there with a former chief scientist of Israel, who serves as the fund’s strategic advisor, and with prominent international technology and investment professionals outside of Serbia, who serve on the fund’s investment committee. Together we are helping build the capacity of the local Serbian fund managers. It is a rewarding experience for me to be working at the outset of such an exciting initiative. Last year I worked in Mozambique advising on the restructuring of an innovative new private corporation that was established and owned by Mozambican government agencies and conceived to facilitate private international investment in local tourism development. Like the enterprise funds, it too is a hybrid vehicle that presents special challenges in achieving commercial objectives while being driven by public policy considerations. The challenges the company faced were little different from those I saw at the beginning of the transition in Poland and Hungary, when private firms operated at the cusp of change and needed to have the flexibility to adjust to new realities.13 It never ceases to amaze me how experiences in one country can be adapted and transferred to another, or how they help to inform judgment in unrelated circumstances. There is a sense of “I’ve read this chapter before, and I know where this is going—unless I do something to influence change!” Additionally, these interrelated experiences across different countries have demonstrated to me that everything you do is a learning experience and that the fundamental principles in business and investment, in entrepreneurship, in technology and innovation are 38


Market Making much the same whether you are in Warsaw or Washington, Serbia or Silicon Valley, Budapest or Boston, Armenia or Africa. While remaining deeply connected to efforts in Poland and elsewhere in Central and Eastern Europe as an advisor and consultant on new initiatives to develop venture capital funds and the ecosystem for an innovative economy, I also specialize in encouraging creative financing vehicles to support the development of private enterprise as a critical component of stability in post-conflict reconstruction. This stems from work as far back as 1994, following the Oslo Middle East Peace Agreement, when a prominent Arab businessman approached me to prepare a proposal for a Palestinian Enterprise Fund, and invited me to attend the 1994 Middle East and North Africa (MENA) Economic Summit in Casablanca to assist him in presenting the concept.14 This gave me a fuller appreciation of how the concepts behind the enterprise fund model could be more universally applied in postconflict and other reconstruction circumstances. I continue to explore the application of similar fund models in environments that face unique challenges and conditions. After speaking at National Defense University and other public policy seminars on the role of a vibrant local private sector in post-conflict reconstruction and how the enterprise fund model could be adapted to support development even in those difficult environments as a means of creating to social stability, I was recruited by the Afghan-American Chamber of Commerce (AACC).15 From my vantage point on the AACC’s board, I am helping to promote the development of the Afghan private sector and the creation of an enterprise-fund-like vehicle for that country, based on my experiences in the CEE’s transformation. As a result of these efforts to encourage adaptation of the enterprise fund model, along with my long experience in implementation, I have been asked to brief U.S. officials on the challenges in structuring and managing the enterprise funds proposed for Egypt, Tunisia, and the Afghanistan-Pakistan region, and have also assisted U.S. Senate staff members in the development of legislation calling for enterprise funds in Syria and in Haiti. PART 1: BEGINNINGS TO 2004—A BOLD EXPERIMENT My relationship with Eastern Europe that launched me on a career path began at a very early stage in my life and was shaped by various people who not only offered guidance, encouragement, and support in risk-taking but also served as intermediaries willing to introduce me to others. Their critical support was an important lesson for me, and I try to do the same for other deserving people, both young and old, wherever I can offer insight, introductions, and the like. Looking back on more than 30 years of experience, there is another lesson I learned—and that is to be genuinely nice to people and treat them with respect. Even today I routinely cross paths with individuals I met back in the 1970s, and I’ve come to deeply appreciate the fact that you should treat everyone properly, because you never know the people you’ll deal with again far down the road of life. innovations / volume 7, number 2

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Francis J. Skrobiszewski Reputation matters—especially when you have a name like mine, which despite the problems Americans have had pronouncing it, they never seem to forget. Credibility and reputation are ever more critical in the Internet age, when old friends, classmates, and associates that I haven’t seen in decades come across my name almost daily through social media. Just in the past month a Hungarian lawyer who advised our fund in Budapest in the 1990s contacted me from Australia, telling me he comes regularly to Serbia, where I advise the newly launched Serbian Innovation Fund. Similarly, a classmate from University of Vienna whom I hadn’t seen in over 40 years tracked me down for a barbecue gathering of fellow Vienna classmates in the Washington suburbs. To all those young people starting their careers, I advise As a student in Vienna, I visited you to always try to be at your best, because what goes Budapest in 1969. I walked the around, comes around—and now, with the digital age and streets where freedom rallies the Internet, it will keep cirhad been held and saw the culating for the rest of your lives! monuments where the I come originally from revolution had been sparked, Virginia. My parents, while born in the United States, the buildings still badly grew up in Polish communities and spoke Polish as their pockmarked with bullet holes. mother tongue. At the turn of the 20th century, my grandparents had helped establish our little Polish farming community on the edge of the Dismal Swamp, where the peat decomposed into rich, black dirt. My mother went to school with local Indians at the Indian Mission School at the back end of their farm. During my childhood I knew everyone in our community, and as we traipsed across our neighbors’ farms hunting or playing, my older brothers counseled me to respect their property. They allowed us free access to their fields, and we were careful to avoid damaging their crops, animals, and equipment. Much of our life centered around the church my grandfather and other original settlers built nearly 100 years ago across the street from our house, which remains in my family. In the early 1960s, when we could not get Polish priests any longer, the bishop arranged for a retired Dutch priest, who had spent his career as a missionary in Chile, to come to our parish. He spoke six languages, none of which was English. With our family home across from the church, the priest became a regular fixture when he was not involved in his religious duties. I was preparing to study French, and his tutoring was instrumental in helping me perfect my accent and got me off to a great start with my teacher.

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Market Making Understandably, a community like ours remained deeply connected with the issues of Eastern Europe. We were well aware of the tragedy of communist oppression around the world and were particularly sensitive to matters in Poland and the rest of the CEE trapped behind the Iron Curtain. I still vividly remember as an eight-year-old watching the scenes of the 1956 Hungarian Revolution unfold, and I recall the hope we all felt then for the Freedom Fighters and the Poles—a hope that was eventually dashed by the Soviet invasion and executions. These were events that would continue to resonate with me when, as a student in Vienna, I visited Budapest in 1969. I walked the streets where freedom rallies had been held and saw the monuments where the revolution had been sparked, the buildings still badly pockmarked with bullet holes. In 2006, after working for HAEF the prior 12 years in building Hungarian businesses and creating new funds for Hungary, I was moved when the Hungarian ambassador in Washington invited me to participate in a year of celebrations honoring the Hungarian Freedom Fighters, and I again saw many of the same photos I had first seen broadcast live 50 years before. Similarly, I remembered Castro entering Havana and the euphoria at the fall of Batista, followed suddenly by the shock of the summary executions we saw on TV and the imposition of the communist dictatorship that has ruled for the past 50 years and more. In my grade school class, we had a couple of “Peter Pan” children the Catholic Church had brought up from Cuba who were among some 50,000 who had left their parents there, so we were very sensitized to world affairs and to the impact of faraway events on our lives. Closer to home than Poland, I am looking forward these days—when events permit—to applying in Cuba the lessons learned in the CEE to jump-start private business development. Recently, in this regard, I spoke on a panel in Washington at the American Enterprise Institute that was exploring strategies for restoring economic opportunity in a post-Castro Cuba,16 and gave a radio interview on the enterprise fund model and Cuba’s needs in a transition.17 My father was a retired U.S. naval officer who had traveled the world for 26 years and had pictures and mementos of places like Italy and various South American countries from the 1930s. His comrades-in-arms during World War II would visit our farm and send postcards from their travels. As a small child, I would thumb through these items, wistfully hoping to see these places myself one day. In my pre-teen and teen years I got early work experience on our family farm— in fact, the first money I made was before I even went to school, for picking cucumbers! My father paid me at the same rate as my older siblings, which amounted to only a few dollars, but with it my parents opened my own bank savings account, which taught me about saving money. During the summers I would drive our tractor mindlessly back and forth down the ruts in the field of our Virginia farm and dream of going off to Europe and other “exotic” places. So already by the eighth grade, when the Dutch priest arrived in our parish and tutored me in French, I had an abiding interest in travel. innovations / volume 7, number 2

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Francis J. Skrobiszewski With the growth of government in America and the burgeoning of intrusive government regulations, I wonder now if I were a farm child today whether I could get that same early work experience that my father provided. We also rode in the open bed of pickup trucks, jumped out of haylofts, and after months of helping an 18-year-old neighbor of ours rebuild a single-engine airplane, we took off from the airstrip he fashioned out of his mother’s pasture. He was already acknowledged locally as an accomplished pilot, so I learned how to take risks and experience new things safely. “We have to change things” When I went off to college at Virginia Tech, I brought my heritage and my interest in the world outside of the United States with me to school. Like two brothers before me, I started there in mechanical engineering, and in those days VA Tech was largely a military school seeking to educate well-rounded graduate engineers. Thus I had to take a series of required courses in arts and sciences and humanities, and I found that I certainly preferred the history and politics courses. Ultimately I ended up in a life-changing honors class in economics, taught by Paul Craig Roberts, who was also studying at Merton College Oxford and was a scholar of the Soviet economy. He understood the Soviet system, and since he disagreed with Keynesian economics, he taught a different approach, which later became known as supply-side economics, of which he became one of the leading architects. What he was teaching made good common sense to me, and I approached him, saying that he was providing intellectual support for what I felt intuitively. As bright as he was, I asked why he was in academia instead of in industry making a fortune; he replied, “We have to change things.” And 13 years later I saw firsthand how the power of ideas can come to fruition, as it did during the Reagan Revolution. In the 1980s, I watched as the Soviet Communists sought to crush the Solidarity labor union in Poland by arresting many of its leaders and imposing martial law, yet the Polish people had a powerful idea and an unquenchable desire for human liberty. By the end of the decade, the Solidarity movement had come roaring back, and this time it was the communist regime in Poland that buckled and broke. Again, it was the power of ideas that prevailed, and the recognition that if you are true to your principles, you will ultimately succeed. I switched my major at VA Tech to economics, and Craig became my mentor. He introduced me to some of the giants in economics at the time, like Ludwig von Mises, James Buchanan, and Gordon Tullock, whom I studied under in my senior year, after he and Buchanan established their Center for Public Choice at VA Tech. Meanwhile, Craig had recommended me to a study abroad program at the University of Vienna, Austria. Many of my classmates ridiculed my plans. Back in 1968, VA Tech was focused on agriculture, engineering, and the sciences and did not have a study abroad program. I had to resign from Tech, reapply to return, and had no guarantee that my class hours in Vienna would be accepted. But I took the risk of going off to Europe to study, and it was such a terrific educational experience that I returned to Europe a few years later to study law in Paris. Today, when42


Market Making ever I have a chance, I encourage students to take advantage of today’s ubiquitous study abroad programs. My studies in Vienna focused on Eastern European politics and economics, and I traveled extensively across Europe. My experience in Austria included a skiing accident that put me in a provincial hospital for weeks; I had several operations and spent three months with my leg in a cast, but it endowed me with a much improved ability to speak German, which I’ve used a good deal since. Also, as noted, it was my education in Vienna that positioned me for President Bush’s invitation to the White House 20 years later, when he called me in to discuss strategy for rebuilding the Polish economy, and a few months later to meet Lech Walesa, which, as it turned out, was only days after the fall of the Berlin Wall. When I returned to the States in 1969 I found a different world—postWoodstock. Classmates who wore coats and ties when I left VA Tech were now wearing granny glasses and Sergeant-Pepper-style band uniforms around campus! You always have to be prepared for change. There were anti-Vietnam War protests, and my uncle—Uncle Sam—required my services, so I joined the U.S. Naval Reserve to do my duty and get back to school as soon as I could. With a year of reserve duty to kill before I could go on active duty, I went out to California and worked as a swing-shift laborer in a glass factory in East Los Angeles, where I learned a little Spanish from my blue-collar coworkers. Ultimately, my active duty orders arrived, and I was assigned to a ship leaving for a nine-month WestPac cruise, but days before its departure I was told I was being sent to “TAD”—temporary additional duty—to the office that assigned personnel to the Pacific Fleet theater, and that meant shore duty for the rest of my enlistment. Working there, I took full advantage of my situation and picked up a master’s in systems management from the University of Southern California. During my leave time I stayed close to Craig Roberts, who was a Resident Fellow at Stanford’s Hoover Institution on War, Revolution, and Peace. I attended a workshop there, and that experience established my deep admiration for education at Stanford. It is with great pleasure that I find myself periodically speaking now at workshops at Stanford on innovation finance and my fund experiences in Central and Eastern Europe. After completing my military service, I started law school at the University of San Diego (USD). I excelled in the studies there, which allowed me to transfer to the University of Virginia to pursue a broader experience in international law. Already at USD during my first year, I became active in the American Bar Association’s Section of International Law. I volunteered to help the chairman of the Multinational Corporations Committee, who lived in San Diego, and he took me onto his committee. Ultimately he was impressed by my personal demeanor and my focus on getting the job done. When I expressed interest in transferring to UVA, he offered to mobilize support for my application, and I was accepted. At UVA I was selected for the Virginia Journal of International Law, and was ultimately elected to the journal’s editorial board as its executive editor. The discipline I learned in that position honed my writing skills; as a result, friends and innovations / volume 7, number 2

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Francis J. Skrobiszewski associates are still bringing their work to me for a critical proofread. While at UVA I continued working on ABA Section of International Law projects with my lawyer friend in San Diego. The following year he moved to Washington, D.C., to launch the National Legal Center for the Public Interest as a conservative counterweight to activist groups that presumed their own views were representing what was in the public interest. I worked part-time for him at the center, and four years later, after I practiced law in California, he offered me a job at a different Washington-based public policy research institute he was then managing, which was analyzing how the national TV news and other media were covering U.S. business and economic issues. Looking back, I marvel at how seemingly disparate experiences thread together in life. Meanwhile, after graduating from UVA Law School, I returned to California to work for Bank of America in San Francisco. I specialized in credit advice and focused primarily on real estate and construction finance. It was during the Jimmy Carter years, and my mentor in economics, Craig Roberts, who had been serving as Jack Kemp’s economic advisor, wrote the famous Kemp-Roth Tax Bill and became the economics editor of the Wall Street Journal. He periodically called me to D.C. as part of the “shock troops” for the Reagan Revolution. Eventually I agreed to come for interviews on Capitol Hill, and I find it curious today, over 30 years later, that I am still in touch with some of the people I met on that trip. Serendipitously, I had dinner with my lawyer friend, who was now managing the Media Institute, analyzing media coverage of business and economic issues, and three days later he called me in San Francisco to suggest that I come to work for him, as we had worked so well together before. He offered me the position of his deputy “to learn all about running a Washington public policy shop and how the news media works.” I agreed, and this opportunity opened a whole new world of experience for me. I also had remained involved in the American Bar Association while I worked for Bank of America. Eventually I became an officer of the Section of International Law, and I helped create and also chaired the International Communications Law Committee. From the vantage point of these positions, I came into regular contact with prominent international lawyers and senior policymakers in government. A challenging assignment in government Members of the Media Institute’s board of directors and board of advisors later put me on the path to two future positions. The first was in a consulting firm headed by the political director for George Bush’s 1988 presidential campaign, who was also close to Ronald Reagan and had worked in a senior position on their combined 1980 campaign. The second opportunity was with a strategic and crisis communications firm established by a member of the Institute’s board of advisors; a leading network news correspondent and lawyer, he had also served as vice chairman on the ABA committee I had chaired. I still see the former periodically in D.C. and have been meeting regularly with the latter for over 30 years now. My work managing the public policy institute and for the business and politi44


Market Making cal consulting firm eventually positioned me to transition into government service at the U.S. Environmental Protection Agency (EPA). There I designed and executed Reagan administration reform initiatives to streamline government operations and increase efficiency. One EPA task force I worked on was devoted to bringing together the career managers and staff in procurement with other senior career managers and political appointees from around the agency, with the goal of streamlining the agency’s procurement processes and making them more responsive. Interestingly, our These individuals worked approach was to present recommenin their organizations for dations in “modules” to a steering group of senior EPA managers. Once so long that it was a vetted by them, the recommendations struggle for them to deal would go to the EPA’s assistant administrator for approval, and implementawith anything outside the tion would begin immediately. Through this approach, we avoided norm or to look at the producing a voluminous report at the processes of their job in end of the review process that then would require implementation; rather, any new and creative way. by the time the recommendations on the last module went forward, the recommendations on earlier modules were largely completed. Next, following President Reagan’s firing of the EPA administrator and much of its political leadership as a result of a controversy over management, mainly of the Superfund program, I was tapped to serve on a three-person team that was designing and implementing a comprehensive review process of EPA’s operations and to prepare the new EPA administrator’s report to President Reagan on the agency’s internal control, material weaknesses, and planned corrective actions. For my work on the two EPA task forces, I was awarded two Bronze Medals for outstanding service, after which the EPA sent me to the President’s Council on Management Improvement. There I worked on an interagency team to streamline an across-the-board process for reviewing operations in federal civilian agencies for the purpose of preventing fraud, waste, and abuse. What a great experience government service was. During that time, I began to encounter top professionals in the bureaucracy and others who were quintessential “bureaucrats” locked into an institutional mindset. The latter were not unlike their counterparts I met later in advising major multinational corporations (MNCs) embroiled in high-profile controversies. These individuals worked in their organizations for so long that it was a struggle for them to deal with anything out of the norm or to look at the processes of their job in any new and creative way. So, in the time after law school, I continued to build on the relationships that would bring me to Washington, D.C., and to work in Reagan-style public policy innovations / volume 7, number 2

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Francis J. Skrobiszewski reform. Drawing on my master’s in systems management and subsequent law degree, I had come to specialize in how to analyze organizational systems effectively and be able to implement new creative vehicles for change. After EPA, I built on my Media Institute experiences to deepen my ability in crisis and strategic communications work in the private consultancy realm. The firm was made up mainly of lawyers with media experience who could walk the fine line of assisting companies in the midst of public affairs crises while ensuring that the company’s response to the public’s concerns did not later jeopardize their legal position. Sometimes the issues were brought on by innocent mistakes by company personnel, but also by unfounded allegations that threatened to escalate an incident into a corporate crisis. These companies tasked us with the development of their comprehensive communications strategy to make sure that such problems didn’t spin out of control. Our first rule was to advise our clients to always tell the truth to avoid losing their credibility and also to be responsive to the public. The company would know more about the problem and its solutions than anyone else and needed to focus on getting the truth out, because it could not rely on others who knew less about the situation or the problem to tell the company’s story. On that basis, we helped put in place the strategies and systems for the company to deal with the public and prevent, to the extent possible, such a problem from occurring again. I typically dealt with senior functional managers and either the CEO or the chairman of the MNC. My work called on me for both high-level strategic development and tactical implementation, as well as for learning thoroughly about the company, its internal culture, its relevant products or technology, its manufacturing processes, and frequently its environmental practices. I accompanied legal counsel to court, prepared scientists and engineers for public hearings, helped PR staff develop the communication materials, and prepared senior executives to respond to national investigative media. Like the challenges I would later encounter during the transformation of Central and Eastern Europe, there frequently were no roadmaps for what the company needed to do, and our advice, experience, and level-headed judgment under fire made a real difference. On this kind of strategic communications consulting for major MNCs, I became involved in an opportunity that helped to define my career for two decades to follow, through a stint as an advisor to the first President Bush’s 1988 presidential campaign. I had offered to help out the campaign and was assigned to the team developing strategy to inform and attract ethnic voters. I took on the drafting of some op-ed pieces focused on the interests and values of Americans of ethnic origins, which came to the attention of senior campaign staff. They were ultimately approved for George Bush’s signature, and this brought me personally to the attention of the future president as someone who understood issues of relevance to Polish Americans. One such op-ed that I was particularly proud of was entitled, “Our Values Make Us Great,” which focused on faith, patriotism, and the work ethic—the values that so many who were still in touch with what had brought their families to 46


Market Making America could still identify with. Another juxtaposed the September 17, 1862, Battle of Antietam—the bloodiest day in American history—with September 17, 1939, when the Soviet Army attacked Poland from the east as the Poles tried to stave off the Nazi blitzkrieg in the west which led to betrayal and a totalitarian takeover of Poland. After George Bush became president, the “Roundtable Talks” in Poland led to the legalization of the Solidarity labor union and to the communist regime’s agreement to the first free elections in a Soviet bloc country since the Iron Curtain descended on Central and With the collapse of Eastern Europe. While planning his first trip to Poland and Hungary in communism in the CEE, the summer of 1989, President Bush U.S. political leaders knew called me to the White House to meet with him and his national that the U.S. government security advisor, other senior offihad to quickly take tangible cials, and the leadership of the Polish American community from action to instill hope in the New York and Chicago to discuss local populations to strategy for U.S. support for Poland’s economic development. There were contribute to stability. about a dozen of us assembled in the Teddy Roosevelt Room adjacent to the Oval Office to exchange ideas. A couple of months later, the president invited me back to the White House to be present when he awarded the U.S. Medal of Freedom to Lech Walesa. This was with his cabinet, the heads of all federal agencies, the Supreme Court justices, the heads of the unions comprising the AFL-CIO, and selected congressional and other officials, as well as the leadership of the Polish American community and a few distinguished guests, such as Henry Kissinger. Stunningly, a few days before the Walesa event, the Berlin Wall fell, making that evening truly momentous! With the collapse of communism in the CEE, U.S. political leaders knew that the U.S. government had to quickly take tangible action to instill hope in the local populations to contribute to stability. It was feared that places like Poland and Hungary would face widespread socioeconomic and political upheaval in the wake of the collapse of the Soviet regimes, and that this could cause them to turn back. Suddenly this region needed massive support for an almost immediate, and totally unprecedented, transformation from command economies to free markets. The Poles were doing their part with the introduction of Shock Therapy, which proved highly effective but also resulted in difficult adjustments. Traditional development assistance, while still necessary to solve some problems, would be insufficient for the task of rebuilding Poland’s private business sector as the engine of the nation’s economic development. There were no roadmaps for how to quickly get a society


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Francis J. Skrobiszewski that had been operating under Marxist principles to make the leap to free-market principles, and effective strategies and implementation would be critical. In my outreach to ethnic communities for the Bush 1988 campaign I had met many Polish American community leaders. By convening a meeting in July, the president showed his openness to work with the Polish American population in the United States, which understandably had a strong interest in the U.S. government’s response to the changes in Poland’s government and economy. In that earlier White House meeting there was a recognition that something dramatic had to be done to support the Polish people, and by the time the president arrived on his visit to Poland and Hungary, the idea of enterprise funds of $40 million to help Polish businesses and $10 million for Hungary were woven into the his announcements in those countries. On his return, though, while Congress appreciated the value of the enterprise fund concept, it recognized that the amounts proposed were insufficient for the task at hand. Congress thus increased the size of the enterprise funds for each country sixfold and enshrined this in the Support for Eastern European Democracy (SEED) Act legislation passed in November 1989. The policymakers in the Bush administration and in Congress knew that capital was the essential fuel needed to generate local business development, and they sensed that savvy entrepreneurs and private business and investment professionals, not bureaucrats in the new governments or in U.S. institutions, could do the best job of conceiving and executing private-sector development strategies. In particular, they appreciated that American private-sector professionals could most effectively develop the necessary strategy and take the business risks in deploying that public-sourced capital quickly in accordance with sound commercial disciplines. Indeed, as is all too frequently illustrated by disastrous “investment” attempts by government, U.S. officials learned sometimes too late that they are no more effective at business decisionmaking than the Soviet bureaucrats who were managing their command economies (and who thankfully bankrupted the Soviet bloc nations).18 The problem in Poland and Hungary was that indigenous capital and investment skills were scarce, and sophisticated foreign financial investors were not ready to run unknown risks in these countries emerging from 45 years of communism. As a result the U.S. Congress enacted the SEED Act,19 which creatively provided US$240 million for a Polish American Enterprise Fund and US$60 million for a Hungarian American Enterprise Fund, along with a package of other development assistance. Conceived as a mini-Marshall Plan, the architects of these initiatives intended, as the hallmark of the enterprise fund approach, that this U.S. public-sourced capital would be privately managed by professionals to finance viable local private businesses in the respective countries. The statutory objective of these enterprise funds was to promote the development of the Polish and Hungarian private sectors and to encourage policies and practices conducive to private-sector

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Market Making development. The boards of directors and management teams of these two funds were mandated to devise creative strategies to achieve these ends. Under the SEED Act and, and applying the principles behind the enterprise fund concept, private-sector professionals would manage the funds’ operations in accordance with sound commercial practices to allocate financing quickly and efficiently to local businesses, with an eye toward contributing to the economy’s longterm success. In 1990, Kenneth Juster, then-senior advisor to the deputy secretary of state, would capture well the fundamental concepts behind the enterprise fund model when he said: The enterprise funds are a bold experiment in a new way of delivering economic assistance. Rather than have the U.S. Government provide a one-time grant to Poland or Hungary, we have developed, instead, the enterprise funds as a means for tapping into private sector expertise to manage U.S. Government grants. The President, in consultation with Congress, has asked a group of prominent private citizens from the United States, and from Poland and Hungary for each of the two funds, respectively, to form a corporation to use U.S. Government money to make loans, grants, equity investments and other forms of financial transactions designed to promote private sector development in Poland and Hungary. The hope is that these enterprise funds will be able to manage the U.S. Government grants in a way that an investment banker might do—unencumbered by the bureaucratic constraints normally associated with government activities—and that they will be able to multiply many times over the financial impact of the initial grant.20 In accordance with this approach, President Bush appointed boards of directors, reaching out to leading investment and other professionals to volunteer their skills, as the enterprise funds’ board members served without compensation. They in turn recruited professional management, which these boards worked with in devising investment strategies best suited in their business judgment to jumpstarting their respective host countries’ private enterprise growth, thus achieving the developmental objectives Congress and the president were seeking to both benefit the Polish and Hungarian peoples and serve U.S. national security interests. For example, President Bush tapped John Whitehead, formerly chairman of Goldman Sachs and deputy secretary of state, to chair the Hungarian Fund, with George Gould, formerly a founder and chairman of Donaldson, Lufkin and Jenrette as well as undersecretary of the treasury, to serve as John’s vice chairman and, later, successor. For the Polish Fund, the president brought in John Birkelund, then-chairman of Dillon Read, as the chairman, along with the chairmen of General Motors and ConAgra and knowledgeable people like Lane Kirkland and Zbigniew Brzezinski. The boards hired seasoned professionals to manage the funds. For me, working for such prominent investment professionals, as well as for my CEO at PAEF, innovations / volume 7, number 2

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Francis J. Skrobiszewski Bob Faris, and at HAEF, Scoci Scocimara, was an unparalleled educational experience. I had the added benefit of the advice and counsel of the former chairman and CEO of Dow Chemical, Zoltan Mersei, who chaired the board of advisors of the Hungarian Innovative Technologies Fund. Meanwhile, in early 1990, I completed an assignment for the U.S. Department of Labor to help it devise a labor technical assistance strategy for Poland and Hungary, where monies were already authorized under the SEED Act, and The enterprise fund program, then to do the forward thinking about the approwhile ambitious and potentially priate approaches for labor very useful, had its fair share of to take in the rest of the Communist Bloc counchallenges. How would the tries, as each became eligiprogram garner support from ble for U.S. development assistance. In doing so, I stakeholders ranging from Polish drew on the foundation I government officials and citizens, had developed in Vienna when studying the politito the U.S. taxpayers who would cal and economic systems provide the initial funds for the of Central and Eastern Europe, supplemented the program, to the various federal research current at the time. Without such deep agencies involved, to the Polishunderstanding of the hisAmerican community and, tory, cultures, and dynamultimately, any potential investors ics of the countries in question, the task would to contribute further funds? have been much more difficult. My studies in Vienna also paid off in an unexpected way. One of my university classmates there, who was by now a Catholic priest in Washington, D.C., knew of my meetings with the president and with Lech Walesa at the White House a few days after the fall of the Berlin Wall. He also knew the lawyers who had volunteered to organize the enterprise funds, and he mentioned to them my broad connections in the Polish American community and my knowledge of the CEE region. We met, and I ended up helping them pro bono without any real thought that I would become involved in the enterprise funds. They thought that with my background and network, I could be an asset to the newly hired CEO of the Polish Fund, Bob Faris. When Bob Faris came down to Washington from New York City at the end of May 1990 to meet with the heads of the international sections of the U.S. treasury 50


Market Making and commerce departments and with other key players at USAID and elsewhere in the federal government, the lawyers arranged for us to meet. I gave him my advice based on years of experience, from my time in real estate and credit advice at Bank of America to my involvement with USAID consultancies, from my work with executives of major MNCs in the strategic and crisis communications business to my experience having met Walesa and other Solidarity leaders and my relationships in the Polish American community. As I outlined my background and the issues he would likely have to deal with, he asked if I could write a business plan for the Polish Fund. When I said yes, he hired me on the spot to do so. That opportunity would lead to a new job a few months later as vice president of the PolishAmerican Enterprise Fund. The enterprise fund program, while ambitious and potentially very useful, had its fair share of challenges. How would the program garner support from stakeholders ranging from Polish government officials and citizens, to the U.S. taxpayers who would provide the initial funds for the program, to the various federal agencies involved, to the Polish American community and, ultimately, any potential investors to contribute further funds? Observers were asking, “What is an ‘enterprise fund?’” Many groups and individuals seeking to tap into these significant pools of capital attempted to define the funds in terms of the services they sought to offer. For example, they said the fund needed to provide “entrepreneurship training,” or it needed to support “agricultural development,” or it needed to focus on “XYZ” sector, etc. But the direction the enterprise funds took, within their legislative mandate, was driven by their boards and management, as the view was that a special business-to-business approach was needed, and the development of effective strategy and its implementation could be best accomplished by seasoned investment and business professionals with knowledge of the host countries. Given my strategic communications background, I had a particular strength in my ability to communicate the principles behind the funds’ actions. Nonetheless, once I joined the PAEF as a vice president and became its spokesperson, I was the one in the hot seat and had to wear a different hat than when I was a communications consultant. Previously I gave advice to senior executives of MNCs on responding to the media, and now, as the chief spokesperson for the Polish Fund, I would have to respond immediately in media interviews and the like, and frequently there were tough questions. Initially, I also often dealt directly with the Polish American community by traveling around the United States to give speeches on what we at the PAEF were already doing, what we intended to do, and how we were doing or intended to do it. Often the issue of what and who we did this for came up—namely, the issue of why U.S. taxpayers’ money should be invested in private businesses in Poland and managed by private investment professionals. I explained that the enterprise funds were an instrument supporting U.S. national security, and if America wanted to build a private sector practically from scratch in Poland, who would be most capable of doing that? People in the private sector. And what fuels business developinnovations / volume 7, number 2

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Francis J. Skrobiszewski ment? Capital. Most staff in government and typical NGO firms generally did not have the hands-on experience in investing and building private businesses or the stomach for the risks necessary to effectively deploy capital to emergent Polish entrepreneurs. The government could not just hand the money out; rather, to protect its value, the capital needed to be professionally deployed and managed effectively as a valuable asset. What was needed were people who could understand calculated risk-taking, exercise sound business judgment, and make choices about resource allocation based on market realities. At the enterprise funds I often thought back to my time working for the Reagan administration, when I would encounter some career staff, and particularly auditors, who only knew how to tell those of us who needed to introduce changes to the status quo how our idea was not in compliance with some rule or regulation; when asked how to make adjustments to solve the noncompliance issue, they had difficulty answering. They just couldn’t think out of the box, and in implementing dramatic change and new vehicles in Poland, we needed professionals who could think creatively and strategically—with an appreciation for established bureaucratic practice and regulation but with the vision to be an active agent of change. We needed investors who, driven by private-sector principles, could use good judgment to take risks, learn from missteps, and move forward flexibly to make better decisions as conditions evolved. In my years at the Polish-American Enterprise Fund, and later in my role as an executive for its Hungarian counterpart, we encountered many challenges in our endeavor to build an ecosystem that supported investment in a new free market, where conducive rules, regulations, and practices were evolving. Initially we had to work with Poland’s notaires to help educate them on new kinds of legal transactions that had to be approved in order for capital to flow into new private businesses in a proper way. We brought over American corporate and commercial lawyers to work on our deals and help introduce new approaches to practices in Poland. In another effort to reach out broadly to many Polish SMEs, PAEF set up loan windows at eight state-owned regional banks to begin to support and grow small business loans and to transfer skills to local Polish bankers. Eventually that small loan program made 10,000 small business loans and turned around $300 million in loans. Later, PAEF built a microloan program that ultimately made approximately 160,000 loans to 126,000 business over its lifetime. While such lending may seem commonplace in the United States, business loans were new to Poland. We were told even by those who did not qualify for a loan that they found just the process of completing the loan application helpful and worthwhile in better understanding their businesses. That educational effort became an important part of PAEF’s contribution to the foundation for a vibrant private-sector economy in Poland. In a sense, such programs succeeded before even making the loans, because they demonstrated that in a market economy there would be access to credit and decisions would be based on creditworthiness, offering hope for a fairer, more transparent future.

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Market Making Among the other institutions PAEF financed were commercial, agriculture, and mortgage banks as well as Poland’s first leasing company. With a shortage of approximately two million homes, PAEF recognized strategically that home construction would be an important engine behind the Polish economy and needed to be supported. The fund invested in construction companies and then developed Poland’s first mortgage bank to create market mechanisms for construction finance. The fund used its dedicated technical assistance funds to bring leading American mortgage bankers to Poland to help educate senior Polish officials on how mortgage banking worked and its value for social development. It also encouraged USAID to create a technical assistance program to reach out more broadly to educate others on principles of mortgage banking. Eventually the PAEF obtained a change in regulation that allowed for expedited foreclosure, and at that point took the risk of opening the mortgage bank without waiting to develop the perfect system. Rather, the system developed around the institution to meet Poland’s needs. In the years that followed, the Polish-American Enterprise Fund made about 50 equity investments totaling over $200 million dollars, established a series of banks and other intermediary institutions, extended 10,000 small business loans and over 150,000 microloans, and recouped over $375 million in investment proceeds. Ten years after commencing operations, the Polish Fund was the first of the enterprise funds to establish the tradition of returning its capital to the U.S. Treasury and of creating a legacy foundation,21 which PAEF has by now capitalized with approximately $250 million. This, apparently, was the first time a U.S. foreign assistance program had returned its capital since the Finnish government repaid its post-WWI debt to the United States over 50 years before. More enterprise funds were established for other countries of Central and Eastern Europe and the former Soviet Union, as those countries achieved levels of political and economic change. In all, U.S. public funding of approximately $1.2 billion (including earmarked technical assistance) helped to establish ten funds throughout the Central and Eastern European region, an area that covers 18 countries and 346 million people. The funds established and financed 30 banks and microloan institutions. Lenders created by the funds extended more than a billion dollars worth of mortgage loans. It is estimated that every dollar invested by the enterprise funds in the region has attracted an extra two dollars from other investors. Of $1.105 billion the U.S. government provided in the aggregate to the ten enterprise funds in the CEE for investment purposes, total net assets of these funds, including distributions, stood at the end of 2009 at approximately $1.612 billion, which equals 144 percent of the capital provided by the government.22 With regard to wind-down, six enterprise funds have already started to return their public-sourced capital to the U.S. Treasury and have established charitable legacy foundations to carry on development activities in their host countries and beyond. Although the Bulgarian-American Enterprise Fund, which was established in 1991, had encountered difficulties in Bulgaria’s challenging marketplace, it was well managed by dedicated professionals on its board and among its officers, innovations / volume 7, number 2

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Francis J. Skrobiszewski and when it began its liquidation in 2007, it returned to the U.S. Treasury half of its original $55 million grant, along the lines of the precedent established by the PAEF, and established its legacy foundation in Bulgaria with investment proceeds of more than $400 million!23 Most informed accounts of the experience of enterprise funds in the postSoviet reconstruction of Central and Eastern Europe would characterize them as a tremendous success. Indeed, it should be noted that while the primary objective of the enterprise funds was developmental—an objective that all significantly contributed to in some form or other—most of these funds also succeeded financially under very difficult conditions in countries where they were the pioneers in investing in local private-sector businesses. As many of these funds wrap up or metamorphose into legacy foundations and/or vibrant private equity management firms, it is obvious from the example of KFK in Poland that the concept spawned can be cloned to achieve new private-sector development objectives. It should be clear that the enterprise fund model still has a tremendous untapped potential for deployment in countries and regions that face similar challenges to those faced by U.S. policymakers and the enterprise fund managers at the onset of the 1990s. PART 2: THE ENTERPRISE FUNDS— BUILDING ON A SUCCESSFUL MODEL As the enterprise funds in the CEE wind up and take new forms, the question remains as to whether governments and societies facing their own unique challenges can benefit from replicating the enterprise fund model when considering how to jump-start their own private-sector development. This approach can apply when the country’s transition is still continuing, as in Poland and other countries of the CEE seeking to build high-tech SMEs and the foundation for an innovative economy. In the same way it built indigenous private business under post-communist conditions in the CEE and post-apartheid conditions in southern Africa, the enterprise fund approach can serve as a useful model to achieve related economic development objectives of rejuvenating private business activity in the aftermath of oppressive regimes, conflicts, disasters, and other systemic problems. By now, the Polish private equity industry has grown from its inception with the Polish-American Enterprise Fund to multiple billions of dollars today. However, an equity gap existed in Poland for high-risk technology start-ups that private investors were reluctant to take the risks to fill. This was not unlike what the U.S. policymakers faced in supporting Poland’s economic development in 1989. This time, though—taking a page from the enterprise fund model of drawing on public funds to jump-start private business activity—it was Polish policymakers who conceived of the KFK, or Polish National Capital Fund, as a publicly capitalized fund-of-funds. KFK was created to invest in new Polish venture capital 54


Market Making funds, which in turn would invest in small, innovative tech entrepreneurs developing new Polish technology businesses à la Silicon Valley models. It is my privilege to have been appointed to serve on the investment committee of KFK since 2007. Like the PAEF, KFK is managed independently of government bureaucracy by the investment professionals who, along with myself—the only non-Polish citizen associated with this fund-of-funds—make up its investment committee. KFK is designed to serve as a catalyst for the Polish venture capital industry to fill the equity gap faced by start-up high-tech SMEs. It does this by providing investment capital and grants to subsidize the operating costs of new, relatively small VC funds set up to finance these innovative SMEs. The maximum investment size of KFK’s investee funds is currently 1.5 million euros, but there are expectations that, as market needs demand larger follow-on investment, this limit likely will be increased accordingly. With KFK’s seed funding from the Polish government in place, its management commenced operations and made their initial investments in two Polish VC funds, demonstrating their investment capabilities and allowing KFK to attract an additional 180 million euros in EU structural funds. As KFK expanded its investment activities in additional Polish local VC funds, Swiss development fund money increased KFK’s capital base to its current level of approximately $300 million. Since KFK can commit a maximum of only 50 percent of total capital to any investee VC fund, its capital will leverage at least an equal amount from other sources. Thus, in coming years, with KFK’s currently available funding, approximately $600 million dollars will be available through KFK portfolio VC funds for investment in Polish seed and early stage innovative SMEs. So far, KFK has made commitments of more than $160 million to 15 funds, nine of which are operational. KFK is but one example of funds that have arisen in Poland and other countries since the introduction of the basic enterprise fund model of investing publicsourced capital managed by private professionals to achieve public and, increasingly, commercial objectives. In many countries today there is still a lack of access to capital for large segments of the small business community. In 2007, the Organization for Economic Cooperation and Development invited me to speak at a MENA conference at the Dubai International Conference Centre on the topic of enterprise financing to explain how the approach of the enterprise funds could help meet those needs and contribute to social stability. I saw after the 1994 MENA Economic Summit how the needs of the small Palestinian entrepreneurs in the West Bank and Gaza were being ignored, and how, without economic opportunity, civil unrest has followed for years. Similarly, we are now witnessing the Arab Spring, which has toppled several Arab country governments, much like what happened in Central and Eastern Europe during the fall of communism; yet America’s response has not seemed as bold and aggressive as it was in 1989. While there may be numerous reasons for the approaches taken, it seems clear that many of the needs of Arab small businessinnovations / volume 7, number 2

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Francis J. Skrobiszewski people could be addressed quickly through well-designed and well-implemented enterprise fund vehicles. Congressional legislators and U.S. civilian and military officials continue to grapple with the challenge of achieving sustainable development in countries like Afghanistan and Iraq in the wake of a decade of conflict. After having spent tens of billions of dollars with limited results, officials in the executive branch have moved to rethink U.S. development strategy with an eye toward cost effectiveness. Meanwhile, it would seem that the efficacy of the enterprise fund approach in financing private businesses that create jobs and contribute to stability already has been demonstrated and could offer viable solutions to private-sector development challenges in other markets. Moreover, the enterprise funds’ active engagement in their host countries has supported policy change from the bottom up to create the institutional infrastructure or ecosystem for private-sector development effectively on a sustained basis. This is in contrast to traditional development strategies, where models are created from the top down, take years to design and implement, and likely don’t fit the needs of the local business community. While policymakers and administrators in the United States have begun to express interest in enterprise funds as an effective development alternative, especially given the growth in innovation and entrepreneurship as a national economic strategy among countries around the world, we have only just begun the conversation. Through its hands-on, commercially disciplined approach, the enterprise fund model encouraged the bottom-up creation of critical institutional infrastructure supporting private enterprise in response to local needs. This approach also encouraged indigenous investment and strengthened local management capacity. In the case of the CEE, the enterprise funds played an important role in jumpstarting the local private sector, with capital as the critical fuel. Government programs, on the other hand, which disburse grants to business with few strings attached, can create market distortions because that strategy lacks a quid pro quo from the recipients. The enterprise fund approach to development creates a different mindset from most other development strategies, because those who manage the funds require repayment in the case of loans and recouping their investment with capital appreciation in the case of successful equity investments. This approach can lead more effectively to the creation of viable businesses of unlimited life that create permanent jobs and generate returns for investors. While public-sector “projects” might achieve short-term goals, they can create market distortions and unfairly empower politically anointed competitors over legitimate businesses that don’t have similar subsidies. And with regard to the creation of employment, when the project funding dries up, usually the jobs do too. Targeted government programs might provide short-term income for workers, but they don’t generally create the kind of permanent jobs that private businesses do. While they can achieve a specific good that others can build on, it’s not the same as what the enterprise funds can accomplish in a holistic way. The enterprise funds took risks, jump-started businesses, and looked at development strategically—thus 56


Market Making the results were sustained both through the institutions that followed as professional investment management firms and through the individual businesses created. Some officials have reservations about the enterprise fund model, because public money is turned over to private individuals to manage on behalf of the government and in the interests of the host countries—all subject to multiple layers of oversight and governance. Like any governmental development program, there can be instances of impropriety, but selecting investment professionals who understand their fiduciary responsibilities goes a long way toward preventing any such problems. Nevertheless, investing is a risk business, and in frontier markets it runs an especially high risk when driven to achieve critical developmental objectives. Some uninformed commentators question the payment of incentive compensation to enterprise fund managers. In the case of Poland and Hungary, no such compensation was paid on the gain from the enterprise fund’s public money; rather, a traditional “carried interest” was provided from the parallel private funds raised. Otherwise, enterprise fund officer and staff salaries were subject to a cap. Ultimately, however, proper market-based salaries and incentive structures have to be in place to retain staff. In Hungary, I lost a key manager I had spent more than two years training because the enterprise funds initially could not pay a carried interest on their public capital. Later, because some other enterprise funds had trouble raising parallel private capital, Congress permitted such payments to ensure the retention of key staff to continue to manage the funds’ public capital through liquidation. In those cases, some highly successful fund managers received incentive compensation on a portion of the capital appreciation they contributed to, in line with commercial practice. This was largely in exchange for their long-term commitment to the funds to protect the investment assets through wind-down and closure of the fund. As a result, some took the risk to stay with their funds in the expectation of an eventual payout, spending 15 to 20 years of their careers working for the same funds operating in difficult frontier market countries. Where there is money, there is also a concern over corruption, but because the enterprise funds worked on the level of business-to-business rather than government-to-government, it was easier to avoid the potential for corruption. Part of our mission was to help introduce proper policies and practices conducive to local private-sector development, and we encouraged our portfolio companies to play by the rules as good corporate citizens. Moreover, we would only cooperate with government officials we felt were seeking to develop their communities and not seeking to benefit themselves through individual gain, and who supported the changes toward transparency that we needed in order to do business. If there were any implications of impropriety, we would simply go elsewhere. With that approach, the message was clear that we would support only legitimate transparent business ventures, and that everyone involved was expected to cooperate and contribute to the transformation we sought to achieve. Officials in Poland and in Hungary understood the value of the enterprise funds’ approach. innovations / volume 7, number 2

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Francis J. Skrobiszewski I believe that the enterprise fund model can be adapted to the difficult conditions of post-conflict and even “conflict-affected” states, and that it can empower those segments of society that don’t have capital but need it to grow legitimate businesses. Commerce takes place every day in places that receive development aid where there is conflict. If the commerce is being conducted in legitimate ways, why not support it? Change is not accomplished by waving a magic wand, but by incremental developments that can be built upon. The enterprise funds supported entrepreneurs like these when we built the ecosystems for access to capital from the ground up. Beyond issues like tax collection and establishing property rights, these individuals drive economic growth, and stability The enterprise funds comes when such people have a supported entrepreneurs like stake in the future. They can own their own businesses, have a place these when we built the to live, put food on the family table, and send their children to ecosystems for access to school. They can have a better capital from the ground up. life. We need to see more strategies that address those fundaBeyond issues like tax mental human needs, no matter collection and establishing what the local conditions are. This issue has reemerged relproperty rights, these ative to the conflicts in Iraq and individuals drive economic Afghanistan, with military and civilian officials discussing ways growth, and stability comes to encourage post-conflict reconstruction. Since serving on the when such people have a board of directors of the Afghanstake in the future. American Chamber of Commerce and as chair of AACC’s working group on access to capital, I have been involved in helping organize public policy conferences with the National Defense University. At our annual AACC Business Matchmaking Conferences, I have emphasized the need to mobilize the private sector in stabilization and have discussed the lessons learned in Eastern Europe and the applicability of that experience to Afghanistan’s situation. With Landis & Co., headed by Emily Walker, the former U.S. executive director of the European Bank for Reconstruction and Development, I have designed an Iraqi SME fund based on the enterprise fund model.24 As policymakers struggle with how to best stabilize Afghanistan now that America is winding down its involvement there, answers will have to come from private-sector, sustainable solutions that create opportunities for the Afghan people and give them a real stake in economic and political progress. Clearly, local cit58


Market Making izens will be less inclined to blow up a cell phone tower if they have a stake in the benefits of that tower by relying on it to generate income to support themselves and their families. The myriad opportunities for enterprise funds present themselves constantly, and while officials begin to ask questions about the promotion of economic stability and enterprise in these environments, the enterprise fund approach can provide some solutions. Until recent proposals for enterprise funds in the MENA region, however, few realized that the U.S. government had financed and promoted such a very successful program only a couple of decades before. Since my work with the enterprise funds in Poland, Hungary, and elsewhere, I have continued to advise government officials, development professionals, and businesspeople with an interest in employing the enterprise fund approach in a variety of environments. However, we cannot just impose an abstract enterprise fund model for development on countries and expect it to work. The needs vary from situation to situation, and each requires a unique approach. In order to develop that, I start with three questions: What are the objectives? What are the conditions? What are the needs? There are certain things some funds can’t do or accomplish because of the individual conditions, and, similarly, the objectives of the fund’s strategy should reflect the real needs of the citizens and the market where the fund intends to operate. By focusing on these questions, I can usually find a creative way to design a fund to carry out the desired mission. In 2010, I testified at a congressional hearing on the potential for an enterprise fund for rebuilding the Haitian private sector.25 My invitation followed an op-ed I penned in Forbes with Ambassador Roger Noriega in the weeks after the January 2010 earthquake that devastated the country.26 Our op-ed was prompted by news commentators who questioned what entities could best rebuild Haiti: the government? NGOs? the private sector? Government can play an important role, but between 1994 and the 2010 Haitian earthquake, the United States had expended by some count about three billion dollars in assistance to Haiti, and had allocated substantial additional funds and resources in disaster relief since the earthquake. One has to ask: What did the U.S. or Haiti get for all this spending? Many NGOs and the world’s donor community have poured additional resources into Haiti, and still, what are the results? A Senate bill proposing a Haitian-American Enterprise Fund failed to gain support in Congress. By now, if it had proceeded, such an enterprise fund might have already begun supporting the foundation of an emerging Haitian SME sector, which up to now has not had access to the capital needed to grow local businesses. The creation of such businesses would contribute to rebuilding the Haitian economy from the bottom up, so that Haitian entrepreneurs with a meaningful stake in their society could capably contribute to rebuilding their own country. To do so, however, they would need access to professionally deployed capital. Given the past 20 years of unprecedented growth and transformation, the opportunities for growth in Poland and other countries of the CEE region have begun to multiply by orders of magnitude, and vehicles to meet that demand have innovations / volume 7, number 2

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Francis J. Skrobiszewski developed in order to meet new market demands. Thankfully, I’ve had the luck and position to count myself among those who could participate in contributing to that transition. The enterprise funds had a mission driven by private-sector principles. They built businesses, and those businesses created jobs. They put the public’s money to work in a commercially disciplined way to achieve significant development objectives. They built institutions crucial to a market, and they built human capacity for local investing and for growing companies. Furthermore, when their missions were complete, the enterprise funds returned money to the U.S. Treasury, and with the residue from investment proceeds, have had money left over for the legacy funds. While the enterprise funds clearly have demonstrated their impact, many of the positive results confound measure. In fact, much of the language we heard from the local beneficiaries tended toward the simple but powerful idea of “the hope” that the enterprise funds instilled. We implemented an abstract concept and strategy, which demonstrated the local risks and opportunities and eventually proved itself. The reality of accomplishments speaks for itself so much more clearly than the original idea. When we see real and lasting development and watch emergent entrepreneurs grow from small-time merchants to larger players in the market, we know we contributed to creating not just something sustainable but something that has its own satisfying rewards in the results achieved. 1. See https://www.cia.gov/library/publications/the-world-factbook/geos/pl.html, $765 billion by Purchasing Power Parity and $532 billion by official exchange rate 2. Friedman, George, The Next 100 Years: A Forecast for the 21st Century 3. http://www.paccpnw.org/2011/12/top-500-polish-innovators-visit-silicon-valley/ 4. See www.usptc.org 5. http://www.youtube.com/watch?v=D6u6xGP0jvs 6. http://www.youtube.com/watch?v=8qebyJ-w0LA 7. Moncarz, Skrobiszewski, Pnieska, Successfully Transferring Silicon Valley Innovation Approaches: the Polish Way – “Krok po Kroku” (Step-by-Step), IX Triple Helix International Conference “Silicon Valley: Global Model or Unique Anomaly?” Stanford University, July 13, 2011 www.triplehelixconference.org 8. Whiton, Kristofer and Szrom, U.S. Foreign Aid Spread Economic Freedom After The Fall of the Iron Curtain—Examining The Success Of The Enterprise Funds, Hamilton Foundation Report (Dec. 2010) 9. There have been selective attempts in Congress and the Administration to introduce the Enterprise Fund approach, but none have advanced. 10. See www.kfk.org.pl 11. See www.haesf.org 12. See www.innovationfund.rs 13. Strategic Review of Mozaico do Indigo S.A. Operations and Business Plan, SPEED Program, USAID – Mozambique, Final Report, June 2011 www.speed-program.com 14. See “Investing for Stability,” Francis J. Skrobiszewski, Crisis Response Journal, September 2009. 15. See www.a-acc.org 16. Post-Castro Cuba: What Future Will Raúl Leave Behind? Strategies for Restoring Genuine Economic Opportunity and Freedom to the Cuban People, American Enterprise Institute,

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Market Making Washington, DC, May 16, 2012 http://www.aei.org/events/2012/05/16/post-castro-cuba-whatfuture-will-ral-leave-behind/ 17. Christina Radio SiriusXM Channel 146, FromWashington to Al Mundo, interview with Mauricio Calder-Carone, May 21, 2012 at 4pm EDT. 18. One clear exception has been the Overseas Private Investment Corporation. 19. Support for Eastern European Democracy (SEED) Act of 1989, 101st Congress of the United States, November 1989. 20. Kenneth Juster, Esq., Senior Advisor to the Deputy Secretary of State, U.S. Department of State, Rand Corporation Conference, September 21, 1990. 21. See Polish-American Freedom Foundation http://www.pafw.pl 22. See “Building Free Markets—SEED Act 1989-2009 Enterprise Funds – a closed chapter or a model to be followed?” by Krzysztof Bobinski at www.seedact.com 23. http://www.americaforbulgaria.org 24. http://www.invest-iraq.com 25. See The “Enterprise Fund” Model Employed as a Tool in Haiti’s Reconstruction, Congressional Hearing Testimony on “Rebuilding Haiti’s Competitiveness and Private Sector,” US House of Representatives’ Committee on Financial Services Subcommittee on International Monetary Policy and Trade, Washington, DC, March 16, 2010 http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr_031210.shtml 26. See Haiti Needs Business, Not Bureaucracy, Forbes, February 17, 2010 http://www.forbes.com/2010/02/17/haiti-earthquake-private-sector-business-opinions-contributors-francis-skrobiszewski-roger-noriega_print.html


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William Scott Green and Susan Wills Amat

Entrepreneurship as a Career Innovations Case Narrative: The Launch Pad Entrepreneurship is fundamental to rebuilding the American economy, and young people are of necessity critical players in that effort. It follows, then, that to participate fully in the mission of national renewal, higher education should make studies in entrepreneurship broadly available to its students. The Launch Pad, a novel entrepreneurship initiative developed at the University of Miami (UM), aims to address that goal. The Launch Pad has two fundamental aims: to open entrepreneurship studies to all UM undergraduates, and to encourage and enable them to start new ventures in South Florida. The Launch Pad achieves these aims by treating entrepreneurship as a mainstream career and a legitimate way to make a living, and by linking young entrepreneurs to regional commercial and community networks. Because of The Launch Pad, entrepreneurship is a fundamental component of career counseling at UM. The Launch Pad teaches undergraduates that entrepreneurship is a valid career option, and it reaches an exceptional number and range of students through its connection to MU’s Toppel Career Center. Since its establishment in August 2008, The Launch Pad has become the largest single student activity at the University of Miami. Over 2,100 students and young alumni have participated in the program, 80 percent of them from fields other than business, The Launch Pad has generated 65 new companies, which have created approximately 150 new jobs. The Launch Pad’s programs by design are experiential, cocurricular, and voluntary. Pragmatic and concrete, they provide the knowledge young entrepreneurs need to assess and develop their ideas and plans for new enterprises. The Launch Pad offers guidance, encouragement, and immediate access to a dedicated group of mentors from the local business community. The Launch Pad process is outlined in the text box on the following page. The Launch Pad sponsors regular programming—workshops, seminars, and networking events—and maintains a website that is both a clearinghouse of events William Scott Green is Senior Vice Provost and Dean of Undergraduate Education at the University of Miami. In 2008 he cofounded The Launch Pad with Dr. Susan Amat, who is now its Executive Director. © 2012 William Scott Green and Susan Wills Amat innovations / volume 7, number 2

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William Scott Green and Susan Wills Amat Process The student entrepreneur fills out a profile accessible only to other members of The Launch Pad community. After membership is approved, the entrepreneur or entrepreneurial team submits a Venture Assessment Form to Launch Pad staff that details the new business concept and expected needs. The Launch Pad staff reviews the Venture Assessment Form and the individualized consultation process begins. The Launch Pad staff identifies and engages additional experts as needed. Those with the most promising proposals are invited to participate in the Venture Coaching Program, a volunteer network of over 60 local business leaders from diverse fields who divide into teams to mentor the young entrepreneurs as they develop new ventures. and resources and a searchable database would-be entrepreneurs can use to find team members, strategic partners, and service providers. THE BLACKSTONE LAUNCHPAD PROGRAM In 2010, The Blackstone Charitable Foundation established the Blackstone LaunchPad program, which enables the University of Miami to replicate The Launch Pad model in other universities across the nation. Blackstone LaunchPads were established at two higher education institutions in the Detroit area: Wayne State University and Walsh College. Their goal is to enable their students to start businesses in Detroit and Southeast Michigan. The early results of these programs are promising. In the first 15 months of operation, the two Blackstone LaunchPads in Detroit generated 195 Venture Assessment Forms; 8 percent of the students who submitted them are already engaged in the Venture Coaching Program. The Blackstone LaunchPad program has catalyzed entrepreneurial activity that most likely would not have been launched without it. In 2012, as the result of a collaboration between The Blackstone Charitable Foundation and The Burton D. Morgan Foundation, Blackstone LaunchPads will be established at four additional higher education institutions in northeastern Ohio: Case Western University, Kent State University, Baldwin-Wallace College, and Lorain Community College. This will create a unique national network of seven universities with a total enrollment of nearly 100,000 students. The Blackstone LaunchPad initiative demonstrates that The Launch Pad model is effective, productive, adaptable to varied institutions, and scalable. As part of the Startup America Initiative, The Blackstone Foundation has committed to establishing Blackstone LaunchPads in additional regions across the nation.

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Entrepreneurship as a Career Basic Facts The Launch Pad began on August 27, 2008. Through The Launch Pad’s programs and guidance, its participants have created more than 65 new businesses and 150 new jobs. Of the new businesses, 29 percent involve new products and 71 percent are service companies. Since The Launch Pad’s founding, over 2,100 members, primarily undergraduates, have created profiles on www.thelaunchpad.org, 80 percent of them from fields other than business. No other single student activity at the University of Miami has this level of participation. Over 1,100 Venture Assessment Forms have been submitted, 60 percent for new products and 40 percent for new services. These ventures range from the early ideation stage to requests for help with the expansion of a 40-employee company. The Launch Pad’s 60-member volunteer Venture Coaching Program has mentored 65 entrepreneurial teams. The Launch Pad presents more than 100 events each year; they are open to the community and free to all. INNOVATIVE ASPECTS OF THE LAUNCH PAD MODEL Entrepreneurship as a Career Nearly all students go through some sort of reflection on their choice of career—if not actually planning—during their college years. Thus, presenting entrepreneurship as a career in itself makes it a routine component of education. Treating entrepreneurship as a mainstream career makes it less exotic and more accessible, thereby demystifying it and diminishing the conventional perception that it is either a narrow business practice or an “alternative career.” This approach also exposes all students to entrepreneurship early in their education by including it in the orientation programs for first-year students. The Launch Pad’s Advising The Launch Pad approach allows students to experiment with entrepreneurship on their own timetable. A student may begin to receive counseling from the program in the first week of freshman year and continue for the next two years or more before they have completed a prototype or acquired a customer. The Launch Pad’s staff—all of whom have entrepreneurial experience—is regularly available, especially at critical junctures in students’ projects, and the frequency of consulting sessions is guided by the students’ needs. The Launch Pad focuses on immediately delivering information the students request—which is precisely what entrepreneurs need. Because each business and entrepreneur have discrete and distinctive needs, The Launch Pad does not take a cookie-cutter approach to offering advice. innovations / volume 7, number 2

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William Scott Green and Susan Wills Amat Experiential Learning The Launch Pad is a laboratory of experiential learning in which students encounter entrepreneurship through firsthand experience with authentic enterprises—there is nothing virtual or hypothetical about The Launch Pad. The program complements, but is not part of the curriculum. Participants neither receive academic credit nor depend on faculty, thus the student entrepreneurs can make decisions for their businesses without fear of affecting their GPAs. The rewards for students are intrinsic; nothing is noted on their records, but the experience and confidence they gain have lasting value. Slow Success The Launch Pad model is based on the notion of “slow success” rather than “fast failure,” the conventional mantra of entrepreneurial consulting. The Launch Pad focuses on developing individuals’ skills and abilities, rather than merely on the venture alone. The Launch Pad model is about supporting passion and dedication, training students to develop their instincts, and teaching them to understand the importance of research. The Launch Pad’s approach is not to pass judgment on the quality of a student’s idea or to mandate specific tactics or practices, but to ask questions and help students find answers without imposing paradigms on their projects. This approach makes The Launch Pad model both educational and practical. Venture Coaches The Launch Pad Venture Coaches are members of the business community in South Florida—or, in Detroit, Southeast Michigan—who donate five hours per month to work with new student businesses. The coaches represent a wide array of expertise—from attorneys to venture capitalists to accountants, etc. At a monthly breakfast, select student teams present their ideas to the Venture Coaches, who then form teams to advise the students in developing their new enterprises. Thus, each new venture is supported by an engaged group of experts who help students plan it and make it grow. The Venture Coaches have become a network of their own, and they routinely introduce students and their new enterprises to other members of the local business community. The Launch Pad Network There may be areas in which student entrepreneurs need particular expertise not available locally, but The Launch Pad can help them through its network of universities. For example, students in Miami have contacts in Detroit who have exported to Canada or designed automobiles; Blackstone LaunchPad users in Detroit in turn appreciate the expertise the Miami entrepreneurs can offer about the Latin American and Caribbean markets. The Launch Pad’s consultants have documented and employed best practices to create a repository of knowledge that will continue to grow and provide value as the network expands to Ohio and beyond. 66


Dylan Higgins, Jake Kendall, and Ben Lyon

Mobile Money Usage Patterns of Kenyan Small and Medium Enterprises Some people expect to see small and medium enterprises (SMEs) benefit substantially from using mobile money (MM). SMEs are often seen to process large numbers of payments and can have a surprising amount of money flowing through them. At the same time, their need for payment and transactional services are not always well served by traditional banks. They do not always find it easy or cost effective to adopt a full-featured package of banking services as a larger business might. Anecdotal evidence seems to confirm that many small businesses use MM intensively in markets where it is available; however, the phenomenon is not well documented or researched. In response, in late 2011, we conducted a survey of 865 SMEs in Kenya to better understand MM adoption patterns in one of the most active markets in the world. We found that whether Kenyan SME owners use MM to pay utility bills or salaries or suppliers, they are driving higher volumes of both MM adoption and transactions. Our data show that of the 865 SME owners who responded, 861 (99.5%) used MM in their personal or business dealings, and 67% used it for business. SMEs are intensive users compared to consumers; 80% report using MM once per week or more, whereas the average usage in Kenya is closer to twice a month. SMEs also appear to promote viral adoption along the supply chain; many say they adopted it because clients or suppliers asked them to. For these reasons SMEs should be a critical market segment for mobile network operators who seek to make MM usage pervasive across the value chain from consumers, to merchants, to suppliers. We also found that while MM use by SMS is widespread, it is not yet deep and SMEs are not yet “closing the e-loop.” Most SMEs use MM on a one-off basis and do not actively promote MM at the point of sale. In particular, SMEs are not yet Dylan Higgins is the CEO and Cofounder of Kopo Kopo, a merchant aggregator for mobile money systems. Jake Kendall is the Program Officer managing the research strategy in the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation. Ben Lyon is the Head of Product and Cofounder of Kopo Kopo.

© 2012 Dylan Higgins, Jake Kendall, and Ben Lyon innovations / volume 7, number 2

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Dylan Higgins, Jake Kendall, and Ben Lyon closing the e-loop by receiving large volumes of retail transactions electronically and then paying out to employees in electronic value – both retail transactions and wage payments were predominantly cash. We did find that 28% reported accepting MM retail payments, a figure we found higher than expected given the high pricing of transactions and lack of a convenient interface. Enticing SMEs and other businesses to close the loop will be a major part of the endgame for MM operators who hope to move toward a cash-light world.1 Finally, our survey found several barriers that have prevented people from using MM. Specifically, respondents cited high tariffs and inadequate access to record-keeping and payment-management interfaces as main barriers to adoption. In order to make MM ubiquitous, MM providers and their partners will need to keep an eye on cost and convenience and offer value-added services beyond the transaction. CONTEXT Three recent studies document how MSMEs (micro, small, and medium enterprises) are using MM, but the data sets are limited.2 In general, this work shows that MSMEs are using MM more intensively than regular consumers, but it also shows that MSMEs are not “going digital” and using MM extensively for a large percentage of their business transactions. One study of users of MTN MM in and around Kampala, Uganda, was conducted in 2009 by Ali Ndiwalana, Olga Morawczynski, and Oliver Popov.3 They did not set out to investigate business users, but when they asked their survey respondents what they were using MM for, aside from airtime purchases, they found that nearly 33% of transactions were to purchase or sell goods or services, while the remaining two thirds were for money transfers. Larger formal businesses in Uganda do not usually accept MTN MM as a means of payment, so it’s likely that most of these purchases and sales transactions were conducted by entrepreneurial individuals or small businesses on one side or the other. This is a significant level of usage, given that MM has never been marketed for retail or business payments. It speaks to the high level of need in this group. In another study, Lennart Bångens and Björn Söderberg4 interviewed 110 MSEs in Tanzania about their use of MM. (These were just micro and small enterprises, not medium-sized ones). They found that, in Tanzania, business owners use MM much more than the national average, and that many report significant benefits. The main benefit these entrepreneurs reported was increased efficiency, because of time saved and improved logistics. Most find MM much easier than banks: the locations are more accessible, customer service is better, transactions are quicker, and it’s much easier to sign up for an account. That said, agents often didn’t have the float to meet the larger transaction sizes that SMEs require and some reported having to visit two or three agents to get the cash or float they needed. The authors also believe that SMEs may help “diffuse” MM by prompting cus-

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Mobile Money Usage Patterns of Kenyan SMEs tomers and suppliers to sign up—yet another reason they may be of high value to mobile network operators as early adopters. Our data also support this claim. In a more recent study, Ignacio Mas and Amolo N’gweno5 investigated how businesses in Kenya use the M-PESA product, focusing on medium and large businesses rather than on micro and small businesses. They found that formal businesses were very slow to adopt MM. In discussions, such businesses identified multiple barriers to integrating MM more fully into their payment systems. They say MM is hard to integrate into corporate IT systems, and it is impossible to move money quickly between bank accounts and M-PESA accounts; they also see challenges with adapting legacy paper-based processes to a new system. Also, the system offers no options for paper receipts or transaction confirmation, and has no way to handle misidentified transactions. And, without any arbitration process, they fear fraud and transaction reversals. The product’s existing features are limited: web interfaces are inflexible, application program interfaces (APIs) are inadequate, and they experience too much system downtime. Finally, Safaricom does not target its sales, marketing, and services to this segment. Given all these barriers, most formal businesses rely on checks, bank transfers, and cash to make payments. The authors do note that many small and informal businesses—like those our survey focuses on—do not have ready access to these options, so they use MM more frequently out of necessity. This is the point of departure for our survey; we seek to understand how this segment uses MM and to diagnose the barriers to greater use and integration. OUR SURVEY: SAMPLE SIZE, DATA, SECTORS, CONNECTIVITY Our goal in this study was to collect data to answer three questions: Do SMEs leverage MM for business purposes, and if so, how? What challenges do they face in doing so? And how can commercial providers better serve this important market segment? Our survey team approached 1,000 SMEs throughout Kenya: 600 in Nairobi, 200 in Mombasa, 100 in Nakuru, and 100 in Kisumu. SMEs were selected at random from Mocality.com, a database of over 160,000 Kenyan SMEs. By necessity, our sample focused on urban and semi-urban businesses that had registered with Mocality. Thus our sample is biased toward larger, formal businesses and away from the large pool of informal single-person businesses that dominate the landscape in much of Africa. Nevertheless, 50 percent of our sample was small businesses engaged in various lines of work (e.g., airtime vendor, salon, restaurant, etc.); 13.6 percent of them, or 127 respondents, were one-person businesses. The remaining 50 percent were medium-sized businesses. We received quality responses from 932 businesses. The 932 Kenyan SMEs in our sample had a total of 13,000 employees. The average number of employees per business across all cities was 14.3, with a median of 5; 13.6 percent were sole proprietorships. The mean was significantly higher than the median because several businesses employed over 100 people. Though innovations / volume 7, number 2

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Figure 1. Do you have regular access to the Internet? small by definition (under 50 percent had five employees or fewer), the SMEs in our sample were likely larger on average than a fully representative national sample, given that we did not sample in rural areas and may have missed many informal, one-person businesses since we used the Mocality database. The SMEs in our sample were highly connected. Of the SMEs that responded, 94.1 percent own a mobile phone, compared to the national average of 74 percent.6 As Figure 1 shows, Internet connectivity was also high; 60.6 percent of respondents have regular Internet access via either a mobile phone or a PC. The fact that the SMEs in the sample were highly connected highlights the opportunity to reach them with properly-designed mobile and Internet-enabled services. The SMEs in our sample did a significant volume of business daily, a total of about Kenya Shillings (KSE) 49M (US$515,000). Though most of them have only a few employees—or only one—their average daily revenue was KSE 56,825 ($600) with a median of KSE 10,000 ($105). Of the 617 respondents who were willing to supply revenue information, the sum of revenues was KSE 36.7M ($390,000) per day. This high turnover indicates many payments and much cash moving in and out of businesses. Services and retail were by far the dominant business activities. Of these businesses, 50% classified themselves as services, 33% as retail or trading, 12% as manufacture, and 5% as other. Thus this sample is biased more toward services and retail than the Kenyan economy as a whole; over 20% of the Kenyan GDP comes from industry or manufacturing. This is to be expected for a sample of SMEs, as manufacturing firms tend to be larger. These are businesses with large unmet needs for payment services, especially in the retail sector. 70


Mobile Money Usage Patterns of Kenyan SMEs

Figure 2. Do you use any of the following MM services? How Has Mobile Money Spread to Small and Medium Enterprises? In our sample of SMEs, rates of MM adoption are extremely high. All but one of the 865 SMEs that responded to the question on MM usage had used MM; four had used it but stopped. Thus 99% of those who responded had at least one active MM account. Additionally, 67% of respondents reported using MM for business purposes while the others reported personal uses. Of the users, 72% had one account and 28% had more than one. Figure 2 shows which services they reported using.7 While Safaricom is clearly the leader in total numbers, it also seems to have a lower churn rate, as evidenced by the smaller proportion of users who are former users. Many businesses used MM quite intensively. A total of 80.3% of respondents claimed to use MM at least once a week; 25.1% use it every day, 43.8% use it a few times a week, and 11.4% use it once a week. Data from Safaricom in 2010 showed that the average M-PESA user was making two transactions a month;8 this indicates that SMEs are quite intensive users of the MM service compared to the rest of the population. That said, many were still making many of their payments in cash, as Table 1 shows. This indicates that MM still has some way to go to displace cash significantly within Kenyan SMEs. MM usage by SMEs may promote viral adoption. Most respondents said they use MM either because customers ask to pay with it (47.8%), or because sales agents or suppliers ask to be paid with it (38.6%)—and many (13.7%) indicated that requests from both customers and suppliers were a factor. Most of those who responded “other” indicated that convenience and safety were their paramount reasons for choosing MM over other methods. The fact that customers value the ability to pay with MM and that SMEs’ business partners prompt each other to take up the service shows it spreads virally up and down the supply chain. This indi-


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Figure 3. Which (if any) do you use for business? cates that MM operators may wish to target SMEs to encourage the viral adoption cycle. SMEs are more frequent adopters and more intensive users than other customers and they appear to promote viral adoption to their customers and along the supply chains. Thus, SMEs would appear to be a very important segment for MM schemes to target. How Do Small and Medium Enterprises Currently Use Mobile Money? The idea that MSMEs use MM should come as no surprise, since they have a lot to gain from it’s use. As our data shows, they need to pay and be paid frequently, sometimes in quite large amounts or over long distances. This implies that they could lower their costs and save time with a cheaper and more convenient way to pay electronically. They also need to manage their working capital to get the most from it, which means turning it over as often as possible: speeding up the cycle from cash to inventory to receivables and back to cash, but replacing cash with electronic value. SMEs also find it useful to have a record of transactions, as they often do not keep formal records but do deal with many customers and suppliers. Thus they often hold many ledgers, receipts, and debts in their head. MM is gaining ground against cash for many types of payments While cash is still king for all types of receipts and payments, MM has made significant progress, especially in the areas of paying suppliers and paying bills: two areas where more sophisticated counterparties may ask or even require MM payments, as compared to employees and customers. Differences in the level of adop72



Figure 4. How do Customers pay? tion for bill-paying between Mombasa and Nairobi illustrate this trend. Respondents in Mombasa use MM the least (24.22%) and those in Nairobi use it the most (34.15%). The fact that SME owners in Mombasa use MM to pay suppliers suggests that bill providers there may have less access to corporate MM accounts than their counterparts in Nairobi where penetration in the corporate sector is greater. Cash, MM, and bank transfers are the most common ways businesses pay bills, at 38.21%, 30.8%, and 26.95% respectively, as shown in Table 1. Respondents across all cities prefer to use cash and MM to pay suppliers, with bank transfers accounting for only 18.34% of responses. Conversely, it appears that cash and bank transfers remain the most popular methods for paying employees, with only 11.39% of respondents using MM. Paying rent is the one area where cash does not dominate all other forms of payment; here, bank transfers are the most common way to pay, across all four cities.9 Given the potential benefits of converting their various payment streams to electronic forms of payment, it is no surprise that SMEs are converting to MM, despite the lack of convenient interfaces, ways to track transactions and manage records, and limited pricing options. Being able to receive MM payment from clients more quickly allows them to more quickly convert receivables to cash; similarly, being able to arrange delivery and pay over the phone increases efficiency on the other end by moving cash into inventory more quickly and making arrangements at lower cost. At the same time, because business owners can more quickly order more supplies, they can reduce the inventory they hold and not wait to run


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Figure 5. What is the main benefit of receiving mobile payments? out before ordering more, which also speeds turnover. In this sense they are moving toward the just-in time style of production practiced by many larger firms. Mobile Money penetration for retail payments is surprisingly high As expected, cash remains king at the point of sale: 62.14% of respondents across all cities said their customers use cash. Nevertheless, 28% of respondents across all cities claim that customers pay them with MM. While these respondents receive payments in other forms, it is striking that so many report receiving some payments via mobile, especially given the lack of a convenient interface for retail payments and pricing geared toward money transfer. Mobile Money is safer and helps with record keeping and tracking When asked about the benefits of accepting MM, respondents across all cities said safety was the paramount benefit, followed by better accountability, as the SMS receipt leaves a paper trail. This paper trail helps reduce leakage and error, whether by employees or customers, and makes business owners more confident that their books are accurate. This point is especially salient for businesses that sell services, which cannot be easily accounted for in the same way that payments can be tracked against inventory for retail and manufacturing businesses. Barriers to Adoption MM is becoming a prominent method of transaction for business purposes. Still, it is clear that several impediments, especially tariffs and the user interface, prevent MM from becoming even more prominent. As Figure 6 shows, tariffs are the biggest impediment to more businesses adopting MM. The high cost of person-to-person transfers and the lack of differ74



Figure 6. What would make it easier to accept mobile payments? entiated pricing for different types of bulk users or for different types of transactions (e.g., in-store retail payments) is a significant barrier to market growth. The customer and/or business pays a variable tariff, depending on the kind of transaction: e.g., Send Money, Buy Goods, or Pay Bill. If a business sells inexpensive goods, the relative tariff is either prohibitively high to the customer, the margin less the tariff is prohibitively high to the business, or both. Thus, the existing tariff structure is not compatible with most common transactions–the small, frequent payments for daily servings of fast-moving consumer goods. A second barrier is the lack of a user-friendly interface to facilitate business uses and record-keeping. While M-PESA has a limited interface where users can check their transaction history, it is very basic and lacks the kind of record management and other functionality that would make it easy for businesses to use it. So, while many MSMEs do report relying on their SMS history from M-PESA as a crude form of electronic record-keeping, the lack of functionality here is a clear barrier. These two barriers were echoed in two recent studies on new financial products that leverage the MM platform in Kenya. Both found that pricing and poorly performing APIs are significant barriers to developing products that leverage MM.10 Only 17 respondents (1.94 percent) said they do not accept MM because no agent is nearby. This is not to say that agent service is not a major concern of SMEs; instead it shows how successfully Safaricom has blanketed the Kenyan landscape, with over 30,000 agents. Other services, in Kenya and abroad that have significantly fewer agents have experienced significant churn among SMEs (see Figure 2).11 We asked the respondents who do not accept MM or who discourage their customers from paying with it for their reasons. Across all cities, 38.47 percent of innovations / volume 7, number 2

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Dylan Higgins, Jake Kendall, and Ben Lyon Mini-case: Dennis, furniture business Dennis is 35 years old. He is one of the five partners who operate Sakaki Enterprise, located at the Githurai 45 roundabout. Githurai is a mixture of slums and suburbs in the eastern part of Nairobi. Sakaki makes and sells furniture— sofa sets, tables, chairs, etc.—at prices that range from KES 3,000 to KES 30,000 ($34.76 to $347.60). Dennis says their business operates with mostly cash. They use no accounting software, and they keep their records in paper notebooks. Sakaki relies heavily on M-PESA for most of its transactions. It buys raw materials every week from the Gikomba market, using M-PESA. “We usually pay the supplier with M-PESA in advance so that he can deliver the raw materials to us once or twice every week,” says Dennis. Dennis pays the suppliers between KES 10,000 and KES 20,000 ($116 and $232) every week using MPESA. Sakaki also pays its employees with M-PESA. This is very convenient for Sakaki; it saves them time. Many of Dennis’s customers ask to pay with M-PESA, especially those who buy furniture worth KES 20,000 or more. Dennis says that Githurai is a very insecure area and that paying with M-PESA is the best option for his customers and for Sakaki too. Dennis says that the greatest challenge he and his partners face is lack of capital to expand and grow their business. Thanks to Peter Gakure-Mwangi

respondents said, “I prefer cash,” and 28.54 percent said the tariffs are too high. The responses above were corroborated by those to our Question 11—“What would make it easier for you to accept MM?”—to which 44.21 percent of respondents chose lower tariffs. It is worth noting that 22.26 percent of respondents said they would like an electronic record of MM transactions. If respondents use individual MM accounts to accept business payments, this response makes sense as few MM systems enable users to access a transaction statement. How can mobile money schemes and service providers best reach small and medium enterprises? Our analysis and discussions with SME owners have uncovered a few possible ways that commercial players could target SMEs as an MM user group. To drive adoption, MM players need to understand the unique needs of SMEs that tend to be intensive users, in terms of both volume and number of counterparties. To manage their relationships and higher volume, SMEs need good tools for records management and tracking. Paper record-keeping remains the status quo for many SMEs in Kenya. The electronic record associated with an MM transaction presents a unique opportunity to incentivize SMEs to adopt electronic recordkeeping for the first time. Specifically, electronic records allow SMEs to reduce the 76



Figure 7. Why do you NOT accept mobile payments? “cost of cash”: security, counterfeit and leakage risks, transport, customer anonymity, etc. Because SMEs have varied needs, mobile operators can avoid the cost of providing these record-keeping tools by offering data interfaces such as application programming interfaces, which can be leveraged by the software community. The challenge will lie in finding the market-appropriate tools and processes that nudge an SME to adopt an electronic method to replace existing mental or paper records. Our findings indicate that a significant step driving adoption would be to improve both the content of the transaction record, by including the source and purpose of payments, and to improve access to the record in the form of an online or SMSbased interface. In addition to better record-keeping, SMEs need a set of features that motivate them to adopt MM. These features include the ability to manage the reversal of transactions and to accept retail payments with fees that are at or below credit card rates, and flexible and speedy bank settlement options. Perhaps more than anything, SMEs need to be offered a platform to change their consumers’ perspective on MM. Customers are still forced to inquire whether an SME accepts MM payments. To reach scale, they must be able to assume that every merchant does so—just as many merchants now assume that every individual has an MM account. When the two-sided payment market is in place, Kenya will be well on its way to becoming a cash-light society. Consumers will not be forced to convert MM value into cash in order to transact with businesses. Similarly, businesses will be able to use their electronic value to pay their suppliers and avoid the need to deliver cash payments in person. Along the way, these different payments will be bet-


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Dylan Higgins, Jake Kendall, and Ben Lyon ter managed and tracked by all of the parties in the payment value chain because of the electronic records associated with these transactions. Fast forward. Imagine a Kenya where MM has fully saturated the SME value chain: merchants use it to pay suppliers, suppliers use it to pay employees, employees use it to pay merchants, and so on. That is the “endgame” for MM providers: a system whereby MM is issued, cycled, and retained within a closed loop. The same ubiquity that made M-PESA the preferred way to send money home would then become the impetus for using MM on a daily basis for (mostly) frequent, small transactions. Operators would benefit from a virtuous circle resulting in higher average revenue per user, consumers would benefit from increased security and convenience, and merchants would benefit from increased business intelligence and accountability. To achieve the endgame, our results indicate that operators will need to keep a close eye on cost and convenience and should focus on developing tools in-house and through partnerships that offer market-appropriate solutions to SMEs. CONCLUSIONS SMEs are a valuable market segment for mobile operators and their service providers but they have special needs. First, SMEs may be especially valuable as nodes in driving the viral uptake of the MM product or product features. As we noted above, they tend to adopt MM because their customers and/or suppliers do. And because they are just as often customers and suppliers of other small or large firms, they are likely to be strong propagators of the product along the value chain. Similarly, because SMEs are often in the retail business, they also represent an opportunity to begin to drive customers to adopt MM for retail payments; for that to happen, it will have to become a ubiquitous form of payment that is both convenient and affordable. Businesses want to use MM, and many do. But, many more would do so if the tariffs were lower and if the service quality and product features associated with M-PESA fit the special needs of SMEs. Mas and N’gweno12 list seven ways the MPESA platform could be improved to serve business better: features to assure verification of the sender/receiver, easier process for reversing payments sent to the wrong number, a paper receipt option, secure APIs to allow business integration, easy sweeping of funds to/from bank accounts, an integrated interface for paying and receiving and records management, and efficient dispute resolution. Most of these features would be useful for MSMEs too. In addition, MSMEs have special needs that should be taken into account. In particular, an MM offering for merchants should incorporate ways to access these features through limited interfaces like web and smartphone, rather than integrating them into back-end IT systems that few MSMEs have.

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Mobile Money Usage Patterns of Kenyan SMEs Given that a majority of the Kenyan economy operates informally, at low margins, for small value purchases, the tariffs alone are a significant impediment to more MSMEs adopting MM. In order to take MM to the next step—retail and value chain payments—it is imperative that tariffs be reduced. Businesses also want marketing materials in order to educate customers that they can pay with MM—in the same way that VISA, MasterCard, and Amex provide stores with logos and other signage to show which merchants accept their cards. Mobile operators are particularly adept at marketing and should launch campaigns to encourage people and organizations to pay with MM. At the heart of any successful business lies a strong record-keeping system. Mobile operators should recognize that they can help businesses grow through better communication and better payments, and also by enabling them to improve their accounting. Many MSMEs could benefit from even rudimentary Internet- or smartphone-based record-keeping and customer relationship management systems to manage payments and cash flow. Such functionality could induce them to take up mobile payments. Smart regulations are required to protect existing players and allow new ones to flourish. Regulators have enabled innovation to flourish in Kenya. Now, many of the payment innovators are well established and it is time to level the playing field. Regulators should facilitate healthy competition between MM providers and encourage new market entrants by reducing barriers to entry. They should be especially careful to ensure that MM players do not abuse their control of the communications channels (voice, SMS, or USSD) that facilitate mobile financial transactions and thus disadvantage other entrants, like banks, that could also offer financial products and services over the network. Additionally, regulators and policymakers should take a market-level view of encouraging the transition to electronic “cash light” by engaging with operators and other players around issues of pricing, service quality, and the platform functionality to enable the widest range of uses, and thereby greater innovation. New and unique business models will need to be tested to serve the Kenyan market. These models will be tested by banks, mobile operators, and third parties, and no party should be given an unfair advantage over the others. Empowering SMEs empowers the economy: SMEs are major drivers of employment and economic activity. M-PESA revolutionized the Kenyan market and inspired a global industry. It has slashed the transport and opportunity costs associated with domestic remittances, lowered the cost of distributing airtime, and helped millions access basic financial tools for the first time.


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Dylan Higgins, Jake Kendall, and Ben Lyon Mini-case: Juma, shopkeeper Juma is 34 and operates a mini shop (duka) at Dandora Phase 2 estate. Dandora is a populous low-income estate in the Eastlands area of Nairobi. He runs the shop with his wife and they have two small children. Juma serves an average of 30 customers each day; most are neighbors. He sells mostly foodstuffs like milk and bread, and detergent in small packets. His most common transaction size is KES 200 ($2.30). Juma says that very few of his customers ask to pay him with M-PESA. “My customers always pay me with cash. They mostly buy small quantities of things like sugar, soap, and bread, so there is no point in them paying with M-PESA.” But Juma says that some customers pay with M-PESA. “The customers who pay me with M-PESA are only the ones that I know and trust. Some take goods on credit and they pay with M-PESA at the end of the month.” However, Juma says that he cannot turn away a customer who has only M-PESA and has no cash at hand. He says he would accept M-PESA plus an additional withdrawal amount. “But in a case where I don’t know the customer, I have to withdraw the money immediately, or just hope that the customer will not reverse the transaction.” He explains, “I pay my supplier with M-PESA in advance so he can deliver the goods to my shop. That way I don’t have to leave my business to go and buy things. It saves me a lot of time.” Juma says for other products like milk and bread, he has an arrangement in which the supplier delivers the goods but he only pays for them at the end of the day, after selling them. He uses M-PESA to make the payment. “Initially the suppliers used to come to my shop to collect the money but nowadays I just ‘M-PESA them.’” When I ask Juma what one thing he needs most to expand his business, he tells me it is capital. “I would love to expand my business but I do not have the capital to do that.” Thanks to Peter Gakure-Mwangi

As our survey found, most businesses and consumers want to use MM more regularly. They find it to be safer, more efficient, and convenient than other payment channels. Most mobile operators define an “active user” as someone who uses MM several times a month. By facilitating the broader payment ecosystem, from utility and value chain payments to payments at the point of sale, MM providers could enable customers to use MM several times a day. This would give customers the potential to benefit from lower transport and opportunity costs, as well as increased security. Moving informal cash-based transactions to an electronic medium will also benefit financial institutions and governments. Consumer transactions can be fed into credit reference bureaus, enabling banks to properly assess the credit worthi80


Mobile Money Usage Patterns of Kenyan SMEs ness of customers and adjust interest rates accordingly. Governmental bodies would be able to pay workers and welfare recipients more efficiently and at lower cost. Cash is the enemy of financial inclusion. By fostering the widespread use and acceptance of MM, financial services will continue to become more accessible and affordable for consumers at the base of the pyramid. 1. See David Porteous and Ignacio Mas, “A LiFi World,” CGAP Technology Blog, January 11, 2012. Available at http://technology.cgap.org/2012/01/11/a-lifi-world/. 2. Jake Kendall summarized two of these pieces in “Small Business Might Be Big Business for Mobile Money,” Next Billion blog, March 23, 2011. Available at http://www.nextbillion.net/blogpost.aspx?blogid=2216. 3. Adi Ndiwalana, Olga Morawczynski, and Oliver Popov, “Mobile Money Use in Uganda: A Preliminary Study.” Available at http://scholar.mak.ac.ug/andiwalana/files/m4dmobilemoney.pdf. 4. Lennart Bångens and Björn Söderberg, “Mobile Money Transfers and Usage among Micro and Small Businesses in Tanzania.” Available at http://www.southcliff.se/docs/SME_AND_MMT_FINAL_DRAFT.pdf. 5. Ignacio Mas and Amolo N’gweno, “Why Doesn’t Every Kenya Business Have a Mobile Money Account? A Study of the Business Uses of Mobile Money in Kenya,” paper presented at 8th Research Colloquium, hosted by FSDK, Nairobi, April 2012. Available at http://www.fsdkenya.org/pdf_documents/12-04-20_Business_uses_of_M-PESA.pdf. 6. Pew Research Center, Global Digital Communication: Texting, Social Networking Popular Worldwide. Available at http://www.pewglobal.org/2011/12/20/global-digital-communicationtexting-social-networking-popular-worldwide/. 7. Non-users may have been less likely to respond to a question about whether or not they use MM; this would imply an actual rate of usage among SMEs somewhat lower than 99 percent but it would still be quite high. 8. Ignacio Mas and Dan Radcliffe, “Mobile Payments Go Viral: M-Pesa in Kenya.” Available at http://www.microfinancegateway.org/gm/document-1.9.43376/Mobile%20Payments%20Go%20 Viral_M-PESA%20in%20Kenya.pdf. On rent, Nakuru is a significant outlier: 22.47 percent of respondents chose “other” and wrote in “cheques” when asked to explain. 9. See Jake Kendall, Bill Maurer, Phillip Machoka, and Clara Veniard, “An Emerging Platform: From Money Transfer System to Mobile Money Ecosystem,” Innovations 6, no. 4 (2011): 49-64; Mukesh Sadana, George Mugweru, Joyce Murithi, David Cracknell, and Graham A. N. Wright, “Analysis of Financial Institutions Riding the M-PESA Rails.” Available at http://www.microsave.org/research_paper/analysis-of-financial-institutions-riding-the-m-pesarails. 10. For example, Bångens and Söderberg document the frustrations many Tanzanian SMEs face in getting quality service from agents. 11. Mas and N’gweno, “Why Doesn’t Every Kenya Business.”


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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin

Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model The objective of this report is to assess the current status of entrepreneurship in Egypt, and to offer strategic and actionable recommendations that will enable entrepreneurship and significantly impact the Egyptian economy. The report offers a fresh look at entrepreneurship in Egypt and the support mechanisms currently at play, assesses the initiatives and challenges at hand, and provides multilevel recommendations on how to tackle them. On a deeper level, this work aims to constructively question the entire model by which we view the tasks of entrepreneurial support in Egypt and develops a new mechanism to replace the existing model currently in operation. This is a more dynamic, comprehensive, and flexible model that allows both for a feedback mechanism and for customization, acknowledging that new businesses demand different types of support based on their stage of development and that of the industry in which they operate. This report starts with a brief introduction that explains the importance of entrepreneurship and its potential for driving economic growth. Sections I and II offer a transversal snapshot, an assessment of the Egyptian economy and its entrepreneurial sector and the problems it faces. Sections III, IV, and V present three levels of recommendations, from the most paradigm altering to the most punctual. Section I discusses Egypt’s economic and entrepreneurial fundamentals, seeking to give an overview of the local economy and put it in perspective by making of international comparisons gathered from the most recent surveys. With high levels of unemployment and underemployment, as well as a strong predisposition for private work and below-trend new business creation ratio, Egypt displays both Mohamed El Dahshan is an economist and a writer at The Guardian, among other publications. Ahmed H. Tolba is an assistant professor of marketing at the Department of Management, School of Business, The American University in Cairo (AUC). He also is the director of El-Khazindar Business Research and Case Center at AUC. Tamer Badreldin is the Chairman at Entrepreneurs Business Forum-Egypt and the Chairman and CEO of El Badr Plastic Company. © 2011 El-Khazindar Business Research & Case Center, American Univ. in Cairo innovations / volume 7, number 2 83


Figure 1. Entrepreneurship and GDP, purchasing power parity (PPP) the will and the need for entrepreneurship—which promises to maximize its impact. Section II begins by looking more particularly at existing initiatives and support organizations. The main handicap of these organizations is the lack of coordination and the duplication in the tasks conducted, which is significantly inefficient and prevents specialization and scalability. Some of the major problems in the Egyptian entrepreneurial environment are identified, including the negative reputation associated with business, the emphasis on “formal” and textual reforms more than their enforcement, weak contract enforcement, and the lack of collaboration in business relationships. Those challenges point to a clear conclusion: there is a great necessity for an actionable plan to support entrepreneurship in Egypt. This actionable plan is subsequently developed on three levels. Section III is concerned with the holistic model of entrepreneurship currently at work: a linear process, it is a succession of tasks and of support organizations until the economic venture is on its feet. This model needs to be replaced with a dynamic, self-sustainable model in which cooperative work by individuals with the entrepreneurial, technical, and managerial skills join forces to develop a project that will itself feed back into the pool of qualified persons. Section IV deals with the strategic actions that have a longterm impact. These include changing the entrepreneurial mindset, prioritizing target sectors, coordinating initiatives, developing an innovation network, and giving more attention to

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Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model developing management skills and financing opportunities. Section V develops the third and last level of recommendations and suggests some punctual, focused interventions that could have a potentially large impact; such as the creation of an entrepreneurship advisory board, a ministry for entrepreneurial development, reviewing business-related legislation, integrating incubators into an innovation-education matrix, improving the image of entrepreneurship in the public eye, including entrepreneurship in the elementary and secondary education curricula, revamping schools of commerce in public universities, and supporting the creation of angel funding networks and private venture capital funds. The future belongs to countries with a solid and dynamic private sector capable of creating jobs, contributing to GDP growth, and generating innovative ideas. But the development of entrepreneurship is seldom automatic or spontaneous. Concerted efforts by all stakeholders in the national economy, led by an enlightened government, are necessary to create the environment and conditions for value creation. The policies developed in Egypt, in this report and in the future, need to have a clear purpose: Encouraging new knowledge-driven business creation, particularly in high-addedvalue domains, with a view to creating an economy with clear areas of competitive advantage and nascent clusters of competitiveness. Entrepreneurship is a potential major source of jo b creation, of growth, and of innovation for Egypt. A strong, dynamic entrepreneurial sector can bring the entire national economy into new areas, breaking the boundaries of the traditional economic sectors the economy is built upon. The link between entrepreneurship and economic development has been proven by a growing body of research, including most notably the work of Acs and Szerb (2008), who developed the Global Entrepreneurship Index, which is largely based on data from the Global Entrepreneurship Monitor (GEM), data that we use across this paper. They identify a positive and strong relationship between entrepreneurship and economic growth, with findings consistent with the various stages of countries’ development. Figure 1, which plots GDP versus Global Entrepreneurship Index scores, graphically illustrates this positive relationship. This report has been designed to be output oriented, with an emphasis on developing recommendations to be implemented by the various stakeholders, and provide an actionable plan for the way forward. The role of entrepreneurship support organizations, whether state-sponsored or nongovernmental, was given particular thought for its importance and crucial role. A coherent, target-oriented strategy for Egypt’s entrepreneurial community is missing. This report hopes to fill this important gap. While entrepreneurship necessarily entails business creation and self-employment, it differentiates itself from the latter two in several points: 1. Entrepreneurship assumes innovation—new products, new production methinnovations / volume 7, number 2

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Table 1. Cross-country comparisons of entrepreneurship readiness. Source: Global Entrepreneurship Monitor (GEM). All figures are a percentage of adult respondents (ages 18-64) unless otherwise specified.

ods, new markets. 2. Entrepreneurship creates added value: the market value of the output must be greater than the combination of input. Reselling may be a business, but it is not entrepreneurship. 3. Entrepreneurship entails risk-taking: failure is an option, but it must be transformed into a lesson learned that feeds into the next venture. 4. Entrepreneurship does not just “happen.” From the French “entreprendre,” “to do” or “to undertake,” entrepreneurship assumes intelligence built around a good idea, boldness and risk-taking based on great effort. I. EGYPT: ECONOMIC AND ENTREPRENEURIAL PROFILE In the second half of the past decade, Egypt has registered a strong growth performance, culminating in a 7.2% GDP growth rate in 2007 and 2008, before slumping back—due in no small figure to the global crisis—to 5.2% in 2009. This growth is led by the private sector: in 2005, 2006, 2007, and 2008, the private sector explained 63%, 60%, 72% and 68% of total growth, respectively. Furthermore, it is led by high-skill sectors, such as manufacturing, communications, and financial services, as well as capital-intensive industries, such as construction. 86


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Table 2. Inventory of entrepreneurship-related initiatives in Egypt Unemployment officially hovers at 9% (2009), yet unofficial figures, combined with underemployment estimates, put the unemployment figure at significantly higher. More than half of the Egyptian working force is employed in the agriculture and government sectors. Only 13% are employed in manufacturing, and 11% in the hospitality industry. Demographic growth shows few signs of abatement. With a 1.9% annual growth rate, we are looking at a population increase of 1.5 million people a year for the period 2002-2015. Most importantly, however, is the Egyptian demographic profile, which heavily skewed toward youth. With 32.8% of the population below the age of 15 and 19.5% between the ages of 15 and 24, we are looking at 52.3% of the population below the age of 25 (UN-ESCWA estimations for 2010). This demographic profile can either be seen as an unstoppable pressure, or as an unequalled demographic window of opportunity, with a strong and youthful population reaching the labor market and taking part in the productive process. There is therefore wide room for expansion of the Egyptian private sector, preferably via new enterprise creation, to strengthen the leading growing sectors in the economy, and provide employment opportunities—and make use of—a diverse and strong labor force.


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Table 3. Categories of interventions to build entrepreneurial ecosystems ENTREPRENEURSHIP IN EGYPT AND THE REST OF THE WORLD How does Egypt compare to other countries worldwide in terms of readiness for entrepreneurship? Until recently this was a difficult question to answer, but a growing body of research, led by the Global Entrepreneurship Monitor report. The GEM conducted surveys and opinion polls within the expert and non-expert community in Egypt. Below are a few comparisons with select countries around the world across a few main indicators. It should be noted in this context that the results appear particularly optimistic in the case of Egypt; research analysis professionals point out the necessity of normalizing Egyptian survey results to bring them in line with comparable results from other countries. Furthermore they do not distinguish between “opportunity-based” and “necessity-based” entrepreneurship; the former entails spotting a market opportunity and taking it, while the latter refers to self-employment due to lack of other options. Some definitions tend to only consider the opportunity-based variety as real entrepreneurship. In this report, the distinction is based not on the impetus but on the characteristics of the business-creation process. This caveat notwithstanding, the numbers remain particularly promising. With 35% of surveyed individuals suggesting that they plan to start a business within the next three years, it becomes clear that there is great potential for enter88



Figure 2. Al-Ahram Newspaper, February 17, 2010 prise creation in Egypt. Nevertheless, from the final two columns of Table 1, we see that few people are indeed trained and equipped to start and manage their business; entrepreneurship education appears to be of low quality and penetration in the Egyptian market. Furthermore, this apparent readiness to join the private marketplace does not translate as optimistically as the raw number would suggest. Compared to states in similar economic conditions, Egypt’s prevalence of entrepreneurial activity appears below the trend—pointing out both a structural weakness and an opportunity for development. The immediate goal is therefore to capitalize on Egyptian society’s apparent readiness for entrepreneurship. This report will therefore analyze the strengths and weaknesses of the Egyptian entrepreneurial sector, while integrating innovative lessons from around the world, to develop actionable suggestions that are ready to be implemented at once. ENTREPRENEURSHIP IN EGYPT: INITIATIVES & CHALLENGES The following section attempts to answer a question, where do we stand? It is therefore a critical assessment of the efforts made, and left to be made, regarding entrepreneurship support in Egypt. Many initiatives exist, generally developed in response to a particular and specific need. Others have begun with the ambition of supporting young ventures innovations / volume 7, number 2

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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin through the various stages of their development, often only to fall into the trap of non-scalability. Following this, we develop an overview of the main difficulties and challenges facing the Egyptian entrepreneurial environment. 1. Entrepreneurship support initiatives in Egypt: A first assessment This section does not have the pretension of conducting an evaluation of all entrepreneurship support organizations in Egypt. Rather, it aims to give a quick and handy overview of the main organizations available on the Egyptian market and the tasks they perform, or which represent an area of strength. It is acknowledged that this table is very simplified and may be omitting some minor information. That most of those organizations are present across the various phases of the entrepreneurship process, which we will discuss at length later in this report, is proof of both their commitment to the development of entrepreneurship in Egypt and a possible duplication of their tasks. Save for a few organizations that target particular sectors of the industry or society, most initiatives herein described conduct the same set of tasks vis-à-vis nascent entrepreneurs. Not only is this less efficient, as it precludes specialization, it also perpetuates a “hand-holding” culture, with an organization accompanying a same entrepreneur throughout multiple steps of the process on the assumption that tailored support is best offered—which in fact only creates a higher level of dependency of the entrepreneurs on the support organizations, making it significantly more difficult for the entrepreneurial venture to fly on its own wings it has passed the establishment stage. 2. Main challenges in the entrepreneurship market in Egypt This section seeks to highlight the main problems facing the practice, not the theory, of entrepreneurship in Egypt. This section has benefited greatly from a series of interviews conducted with experts in the Egyptian entrepreneurial marketplace. Table 3 covers what would be considered the essentials issues that face entrepreneurship: administrative barriers, lack of education, absence of appropriate financing, and unsupportive mindset. There is no silver bullet to tackle each of those issues. In fact, intervention can be divided into three main categories: Level 1: Those that target individual entrepreneurs or projects, offering unshared, private support to the specific target of the intervention Level 2: Those that target the entrepreneurial environment, i.e., the conditions in which entrepreneurs in particular evolve. These reforms touch the general entrepreneurial public, with potential spillovers to the rest of the economy. Level 3: Interventions that will either involve or benefit the whole community by facilitating or improving conditions for other sectors of the economy besides entrepreneurship. Cells contain the most direct interventions for each of those essential issues at each outreach level. Interventions that have already been under-

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Figure 3. The general profile of the entrepreneurial business creation as it currently stands Source: Authors

taken or are in the course of action are highlighted. It becomes clear that our interventions so far have focused heavily on providing support to entrepreneurs on an individual level, whether it’s in seed funding, training or incubation services; some initiatives have also attempted to improve the business environment by cutting red tape, offering administrative “one-stop shops” to facilitate paperwork, and improve the work of commercial litigation courts. But we realize that our policy interventions are lacking at Levels 2 and 3— addressing the business community as a whole, then the economy at large. Yet cross-country research points out (Monitor, 2009) that beyond what we traditionally deem to be the most important elements—such as venture capital funding, incubation, etc, “other policy areas are more important to entrepreneurial success,” such as the mindset, skills development, and education at all levels, and financing strategies beyond venture capital funds. The challenges facing Egyptian entrepreneurs follow them from the earliest stages, with a lack of exposure and trust vis-à-vis entrepreneurs, to the administrative difficulties and lack of institutional support they face and, at a later stage, to a deficient culture of cooperation. The section below elaborates on those challenges as follows: A. Entrepreneurship is a word unheard of to most of the Egyptian public; indeed, until recently, no term existed for it in Arabic. The concept is largely foreign and indistinct from MSME creation. The silver lining is that it is relatively unscathed by the negative reputation that the term “business” suffers from—which is a factor to capitalize upon. B. Businesspeople have a very negative reputation, due to numerous highprofile scandals surrounding nonperforming loans. Businesspeople are near automatically associated with to thieving, dishonest tycoons. A recent Cairo University survey (February 2010) showed that people believe that “businessperinnovations / volume 7, number 2

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Figure 4. The Recommended T-E-A-M Model Source: Authors

sons are the most corrupt” socioeconomic category. C. Emphasis in entrepreneurship support has so far been put on nominally easing administrative burdens—which is severely insufficient. Egypt’s improveDoing Business ranking is proof of the formal legal and regulatory reforms. But large jumps in ranks year-to-year are not just proof of success but of the fact that we had a very low ranking to begin with. Currently, Egypt is ranked 106th out of 183 countries. Furthermore, such rankings reveal an unavoidable bias in the calculation methodology. While Egypt may have, for example, successfully simplified the process to start a business–putting it in a 24th position and pushing up the overall ranking—if elements such as contract enforcement remains particularly weak (we are at the 148th position), it is likely to act as a binding constraint and hamper the entire business creation process. D. Existing government-led initiatives are excellent but are drastically insufficient, and only limitedly scalable. Organizations such as the Social Fund for Development and the Industrial Modernisation Centre provide remarkable services to thousands of companies every year—which remains painfully short of covering the 1.34 million in the nascent stages across the country. 92


Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model According to experts, the model of “nursing” or “hand holding” a nascent business may be effective but is assuredly not efficient, as it limits the number of companies that can be served and does not allow them to take part in the initiative. The purpose is not to standardize the assistance offered—far from it. There is a balance to be achieved between an inefficient nursing model and a supply-driven, perhaps equally inefficient one. E. Weakness of contract enforcement, as mentioned earlier, can be a severely binding constraint on collaboration, as well as discourage business creation in a sector operating, at least in its first phase, on thin margins and tight schedules that cannot afford delays in payments, deliveries, etc. In environments of weak contract enforcement and limited legal recourse, parties usually revert to alternative enforcement mechanisms, with voluntary binding arbitration being one. This mechanism remains relatively weak in Egypt still. F. Absence of a collaboration culture in business relationships. Entrepreneurial ventures in Egypt are a lonely business. With an average start-up team of 2.21 people, entrepreneurs favor very small, and for nearly half of them, individual ventures. Individuals do not seek to complement one another, despite deliberately knowing they are unlikely to be a “one (wo)man band,” and that a solo act can only hamper their medium- and long-term growth. Teamwork is a drastically missing skill, from entrepreneurs in general, and from their staff and the Egyptian society at large. As one expert put it—“teamwork in Egypt is about one person doing all the work, and everyone sharing in the credit.” III. TOWARDS A DYNAMIC MODEL OF ENTREPRENEURSHIP IN EGYPT: THE TEAM MODEL This section and the following present our recommendations for various stakeholders and at multiple levels of interventions, going from the paradigm shifting modification of the way we view the entrepreneurial model, to the strategic recommendations which we grouped in six categories, down to rapidly actionable, implementable steps. The dynamic model of entrepreneurship we develop is based on three principal pillars, augmented by a support pillar; for the sake of consistency, the strategic and actionable recommendations we put forth will follow the order and logic of those pillars. As it stands, entrepreneurship is an almost linear process, with support organizations intervening at various stages to answer punctual needs—and sometimes to hold the entrepreneurs’ hand, in the words of one expert, until their venture is successful, before moving onto another case. Effectively, the model covers only the start-up phase of the business. Currently, the process a nascent entrepreneurial venture is as follows: a. The emergence of the entrepreneur, an exogenous event, represents the


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Table 4. Means of knowledge transfer Source: Authors

beginning of the process. b. The next step is for the entrepreneur to develop an applicable, feasible idea with possible market opportunities; business incubators were created to answer this particular need. c. Once that idea is developed, the entrepreneurs can seek technical training to improve their ability to implement their ideas. It is very possible that such training could be provided by the same organisation or government-dependent body that assisted in developing the project idea into a business plan in the previous phase. d. The following step, particularly complex in the Egyptian environment, has the entrepreneur navigating the difficult bureaucratic environment to register his ideas into recognized and protected intellectual property when appropriate—as well as legally establishing his business. Once again, a number of organizations were developed to answer this need. e. The entrepreneur, in need of funding, will be supported by family and friends at a first stage, and potentially by a loan or grant from a nongovernmental organization or a private fund. f. Once the business is established and operative, the role of support organizations, as well as any follow-up to the entrepreneurial venture, ends. Clearly, the linear model is ineffective. It discourages specialization in support functions and does not allow for the customization of support that depends on the various industries. Furthermore, the system as it stands fails to assist in the development of the business beyond the initial phase or its longterm growth; nor does it systemize

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Table 5. Distribution of university students by fields of study (percentage most recent year) Source: The World Bank, “the Road not Traveled: Education Reform in the Middle East and North Africa,” 2005.

feedback into the system from the successful business venture to support further growth. We need to evolve into a collaborative, dynamic system as described on the next page. The recommended T-E-A-M Model is organized around the three pillars of enterprise development, along with the support of a number of enabling functions that regard the health and viability of the entrepreneurial environment as a whole. The model pillars are therefore as follows: � Technical skills and ideas development � Entrepreneurs � Assisting and enabling functions � Management and business skills The Recommended T-E-A-M Model a. The collaborative efforts of management capacities, ideas, and technical skills, come together in an equal partnership with the entrepreneurial spirit—an element missing from the linear model, which expects all skills to be acquired by the same individual and does not encourage cooperation, despite its being crucial to ensure growth opportunities for the company. b. They benefit from the elaborate and nurturing complex organizational support from educational institutions, incubators, and training organisms. innovations / volume 7, number 2

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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin c. They operate in a healthy entrepreneurial environment, with the support of the necessary institutions, such as funding organisms. d. The feedback mechanism of the system is also crucial to its functioning; it also introduces the long-term life of the venture in the model. The successful business venture generates new ideas for growth, which is transformed, via the re-investment of profits (or via further external funding) into projects allowing for the growth of the venture or, alternatively, the creation of a new one. It could also serve to fund research and development to create the production technology necessary to bring those new ideas to life. The successful venture not only encourages new entrepreneurs, it also creates them. A successful collaborative venture will develop the entrepreneurial spirit of some of the team members—some who will go on to lead future ventures. Working on a new company with limited staff both demands and, crucially, also generates versatility. The on-the-job training and exposure to a multitude of managerial and administrative issues offers a skill-building opportunity probably unmatched in the realm of formal education. As those researchers, entrepreneurs, and managers are already parts of an entrepreneurial system (and acquainted with the environment), they will be better integrated in the system and more capable of tapping its resources to find the support, training, etc., that they require, before they begin a venture of their own— again, with the right partnerships and in the same spirit of cooperation. e. The system therefore becomes autonomous and self-sustaining. IV. STRATEGIC RECOMMENDATIONS The following are a series of strategic recommendations, or guidelines, by definition long term, which does not mean they shouldn’t be tackled immediately—quite the opposite—but that their impact will be increasingly felt with time. Our recommendations will follow the pillars of the dynamic TEAM model: A. Changing the entrepreneurial mindset: Attitude, risk, coordination, partnership This takes the first position in the list of strategic recommendations, both for importance and urgency, as well as for the multiple levels of intervention necessary At level 1, entrepreneurs need to enter the business realm and address risk with a positive attitude, fully aware that failure is an option—but from which they can recuperate and should learn from. Equally importantly, though, entrepreneurs need to start thinking cooperatively. The era of lone geniuses has passed, and the future belongs to interdisciplinary collaborative ventures. The development of teamwork skills is key. At level 2, business-related regulations, on the part of the state as well as private organizations, must engage with entrepreneurs. Banks, for example, must consider entrepreneurs as long-term solvent clients and partners and be understand96


Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model ing, without jeopardizing their own interest of course, of the difficulties or limitations of entrepreneurs. At level 3, the image of entrepreneurs and businesspeople in the community need to be amended and improved: rather than profiteers, they should be viewed as what they truly are—as important contributors to the economy and society as a whole. B. Building a knowledge infrastructure for innovation, and entrepreneurship Two of the major pillars of entrepreneurship are innovation and value creation, both of which would increase significantly if more “knowledge” were to be made accessible to entrepreneurs and entrepreneurial ventures. Steps need to be taken to actively disseminate knowledge into the Egyptian economy. Egypt’s universities and research centers hold a wealth of knowledgeable individuals, often working on cutting-edge theoretical and applied science. But for most, their ideas do not reach beyond the academic or at most the prototype stage. Conversely, entrepreneurs are often hardpressed to find the technical knowledge required and the qualified thinkers and skilled workers capable of carrying the project to fruition. Therefore, there is an urgent need for a coordination system to ensure that the innovative ideas are effectively channelled and ultimately commercialized. C. Management skills development Not unlike technically qualified personnel and entrepreneurs, good managers are hard to come by. Management skills range from personal or first-level skills— such as planning and organization, etc.—to managing teams, all the way to leadership. Aside from the strictly managerial skills, however, a host of soft skills is also necessary, not only for managers but for all parties to the entrepreneurial venture. Unfortunately, our education system does not equip students with those skills and they are, further along their career, penalized by their absence. It is therefore necessary to provide all, but the partners to the entrepreneurial venture in particular, with those skills. D. Access to support Coordinating institutional initiatives As shown in the second chapter of this report, government and nongovernmental initiatives do not coordinate activities. The result is an absence of complementary planning, a duplication of tasks, and a limited market outreach, mostly geographically concentrated on Cairo and Alexandria. Better coordination would allow for specialization, better handling of an increased number of beneficiaries, and better coverage of services countrywide. The reliance of organizations on another will have positive, secondary sideeffects: as organisations will naturally seek the best organizations to work with— resulting in a system of natural selection of the most efficient organizations, weeding out the least reliable, and pulling up the entire entrepreneurship support enviinnovations / volume 7, number 2

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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin ronment into higher work standards. Financing opportunities Financing is often cited as one of the major hurdles for new businesses; for many experts, however, finance is often sufficiently available—but not accessible or properly advertised. � The lack of information regarding appropriate sources of finance—which may include direct lending, microloans, commercial loans, and government-supported loan programs—translates into the need for a mapping of available financing and its dissemination to potential beneficiaries. � Angel-funding networks and venture capital funds need to be developed, allowing for an injection of funds when necessary for the growth of the business. � A state funding facility, which could particularly target sectors prioritized or deemed of high-value to the economy, is also needed. E. Evolution toward a knowledge-based economy As knowledge takes its rightful place as a production factor with labor and capital—ultimately replacing capital as a productive driving force—it maps the future orientation of global growth. Without neglecting traditional manufacturing processes, which very much stand to be supported and grown, it is undeniable that the infusion of knowledge directly into nascent and existing businesses is key to growing entrepreneurial ventures and creating highly innovative and value-adding businesses. Helping Egypt to become a knowledge-based economy is closely pertinent to the recommendations on prioritization developed below. F. Prioritisation and clusters selection While we know that Egypt must target high added-value productive sectors, the question of selecting priorities or designing clusters of competitiveness is a very tricky one—both because it hopes that a centrally determined area of specialization will be as efficient as one developed by market forces, but also because it supposes that the decisionmakers will select a set of industries that will be attuned to the country’s industrial profile. Obviously, this is not always the case. How do we select areas of competitiveness? For this task, it is only reasonable that we: � Build upon our current areas of specialization or competitiveness to move to more sophisticated sectors with higher added value � Avoid heading toward areas in which we are particularly behind—this would only represent sunk investments with no possibility of catching up with market leaders � Ensure that the necessary factors for the success of a sector of the economy be present before we seek to develop it (it would be foolish, for example, to attempt to develop a high-tech industrial sector if the education system does not provide adequately trained staff and technicians). In this respect, is it inter98


Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model esting to look at the main fields of study in Egypt: Egypt has the lowest rate of students in scientific, technical, and engineering fields in the MENA region, with a mere 10.2%. Comparatively, 38.2% of all Iranian students or 31% of their Tunisian counterparts choose that domain. In South Asia, the mean is of 30.8%—with China at a towering 46.8%. Obviously, the intention is to ignore developing technical industries—quite the contrary. The take-away from this graph is that more work is necessary to bring our technical education skills up to the required level. Development economics literature offers models to determine the industrial clusters a local economy can move toward given its existing industrial profile; see, for instance, Hausmann and Klinger (2006). Further research needs to be conducted in that direction. How to select a model of entrepreneurship development? Research suggests four different models of entrepreneurship; their appropriateness depends on the region or the country: The first model may appear to be the most interventionist or the most demanding of all four. This is, however, inaccurate, as all four models demand great efforts and support from the state and other organizations. a. The classic model needs assistance with a university-led research process to connect them with entrepreneurs/marketers (via the suggested “Innovation Network” we discuss below) and to help finance the venture by making funding sources available. b. The anchor firm model requires state intervention for an earlier stage than above. Attracting the anchor firm(s) requires both the creation of a strong physical and institutional infrastructure and an actively attractive policy for such firms—which could include tax breaks, industrial zones, facilitated labor regulations, etc. c. The “homegrown genius” demands alertness—spotting this “genius” and allowing them to develop their project. On a latter stage, the government should be capable of capitalizing on this company’s success and encourage the creation of new ventures, generally in the same or in sectors connected to the original firm. d. Likewise, an event-driven model requires a rapid reactive policy from the state and support organizations. In the face of adversity and to prevent further shrinking of the local economy, In the Egyptian case, we recommend a mix of the first two models. Greater efforts need be exerted to attract selected productive foreign direct investment. Costa Rica’s competitiveness in hardware and computer parts, for example, is based in large part on its success in attracting Intel to establish its main North America plant there. The creation of free zones in Egypt is a good initiative, but weak infrastructure remains a problem that keeps Egypt from achieving its full potential as an attractive Foreign Direct Investment destination. Better incentives need to be offered to high-added-value foreign direct investment than to low-end industrial ventures.


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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin In the same time, support to existing research institutions needs to be increased, their profiles raised, and their exposure to potential partners. Strategic recommendation #4 suggests a solution for this. V. ACTIONABLE STEPS The following section attempts to bring about an action plan for some key issues facing Egyptian entrepreneurship today by offering actionable suggestions based on best practices around the world on how to implement them. Boxes, scattered throughout the section, offer interesting international experiences and best practices from around the globe. While each country, each economy is different, there is much we can learn from international experience in entrepreneurship—if we find the most appropriate experience and eventually conduct the necessary modifications for it to fit Egypt’s industrial profile. A. Create a Ministry for Entrepreneurship Development Many government ministries today have programs and initiatives relating to the development of entrepreneurship and/or small and medium businesses. Though it is nice to see all these efforts started across the various government bodies, there remains a strong lack of coordination between the different initiatives in the absence of a unifying overall national strategy for entrepreneurship, and the authority to implement it. � The Small and Medium Enterprises Development Unit is an excellent initiative but is insufficient to answer the specific needs of the entrepreneurial sector. � In addition, a number of initiatives dependent on other ministries operate independently, as do other government-sponsored initiatives, such as the Social Fund for Development. As we head into a period of better and more relevant state support for entrepreneurship, a centralized agency to link support services and government programs becomes necessary. There is therefore a need to have a single government body coordinating the various national organizations. B. Create the Entrepreneurship Advisory Board There is an urgent need for a unified voice to lobby for the interest of entrepreneurs. For this reason, we suggest the creation of an Entrepreneurship Advisory Board, to be composed of entrepreneurs, as well as representatives from the nongovernmental support sector, from the private funding sectors, as well from the most relevant government ministries and organizations. This Board would serve as an interface between entrepreneurs, the state, and other relevant stakeholders in the community. The board would also assume the tasks of ombudsman for small businesses. C. Include entrepreneurship in the elementary and secondary education curricula 100


Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model Liaise with the ministry of education, most notably with its Technological Development Centre, to integrate positive models of businesspersons in the elementary school curricula. On the secondary school level, include basic business skills as part of the essential courses taught, most notably courses on economics and commerce/business administration; or as standalone programs. D. Redesign schools of commerce in public and private universities All across Egypt’s universities, there is not a single compulsory class, module, or training on entrepreneurship, despite its proven importance and the global trend toward the inclusion of entrepreneurship in university curricula. In cooperation with the ministry of higher education and with the few private universities that have them, design courses on entrepreneurship can be taught at the undergraduate levels. •Encourage universities to recruit entrepreneurs to teach those classes as guest speakers. •Introduce the culture of summer and graduate internships in Egyptian universities, potentially making it a graduation requirement •Develop continuing education courses for mid-career professionals. E. Improve the image of entrepreneurship in the public eye The media plays a major role in shaping public perceptions, and media organizations need to stepup to their role as educators as well as entertainers: •Mainstream, independent and specialized media sources must be regularly invited to entrepreneurship-related events, conferences. •Establish a weekly column in a major newspaper where issues of entrepreneurship and self-employment are discussed. •Entrepreneurs and entrepreneurship support organisations need to be in touch with the business/economic news editors of various media outlets, making themselves personally known to them and assuring their availability to them (and following up on this assurance). •Air TV programs featuring success stories of various local entrepreneurs and highlighting their journey, perseverance, and struggles. F. InnovNet: The Egyptian Innovation Network This is a long-term autonomous project with full work autonomy and openness of membership that operates under the umbrella of the Entrepreneurship Advisory Board. Members of the InnovNet would be entrepreneurs, as well as researchers, professors, and technically qualified personnel. It would provide a forum for contact, exchange, and relationship development between those two elements of the production triangle at the heart of the entrepreneurial model. G. Diversify funding sources, via the creation of angel-funding networks, and private venture capital funds • Encourage banks to lend to small businesses—potentially via a minimum SME lending requirement innovations / volume 7, number 2

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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin • Streamline regulation and support for buyouts and mergers • Support the creation of angel-funding networks • Establish new venture capitalists, with government assistance at first •Support, when necessary, the emergence of sector-specific VC and equity funds • Coordinate with funds in other countries and regions, in the Middle East and beyond, Dubai-based funds, for example, have some experience dealing with Egypt-based entrepreneurs in various domains •Encourage links between local and international VC funds, transferring knowledge and experience from the latter to the former H. Review business-related legislation Ensure that existing legislation, such as: • Tax legislation • Use of stock options • Competition law • Commercial courts • Bankruptcy law does not interfere with the businesses’ launch or growth—and is not prohibitively discouraging to entrepreneurs • Improve the functioning of economic arbitrage and commercial courts to ensure a speedy dispute resolution process and ensure real legal protection for all • Develop tax incentives for entrepreneurs, as well for R&D institutions • Encourage input from entrepreneurs during the drafting of economic legislations I. A more streamlined integration of the innovation-education matrix The purpose is to integrate incubators with universities, research centers, and ultimately with the industry. • Better integration of incubators will also mean the need to create more specialized incubators for certain industries and for certain targeted publics. • This will allow incubators to begin working with future entrepreneurs at the beginning of their career. • A clear presence or representation of incubators on campuses will also assist in changing the students’ mindset—explicitly offering business creation as an alternative when they graduate. • It also has the clear advantage of seeking the budding entrepreneurs rather than waiting for them to seek. J. Encourage the creation of alternative entrepreneurship models: Franchising

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Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model • Franchizng is among the most interesting and growing ways of expansion in international markets • A partnership between the franchizor, who owns the brand but also provides the technology, training, know-how, and quality control; and the franchisee, the local entrepreneur who provides accurate knowledge of the local market’s needs and is responsible for the implementation of the production system • Franchises touch upon all areas of economic activity—from retail to child care • Attracting franchising opportunity requires a stable economy and solid credit ratings At current outlooks, Egypt is fully qualified to take franchizing to the next level and diversify out of traditional franchizing options (fast food and retail, primarily) into higher added value firms. K. Markets opportunities: The demand side of entrepreneurship Just as the of the above is a recipe for assisting the emergence of entrepreneurs by working with factors that affect the supply of entrepreneurs, efforts must also be taken to drive the demand for entrepreneurs side of the equation. These can include: • Government programs aiming at purchasing quotas from newly established businesses • Readily available studies on the different market opportunities • Readily available reports on different industries; these can work closely with initiatives to develop clusters of competitiveness and include market studies, supplier information, industry publications, and related feasibility studies


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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin CONCLUDING NOTES The potential for entrepreneurship development in Egypt as a source of economic growth remains very real. Despite the official and enduring commitment of the state, reforms remain incomplete and must go beyond legislation reforms— necessary as those may be—to their implementation and, optimally, to changing the mindset of implementers. Entrepreneurship needs to become a positive societal value. Particularly in the mind of those in a position of power or control vis-à-vis entrepreneurs, the link between assisting entrepreneurs and social and economic improvement needs to be present. Legal and entrepreneurial environment reform is not about unlocking a series of closed doors but a door with multiple locks. Conducting the least constraining reforms without the more difficult will not bring us closer to our goal. In fact, it can even be counterproductive as disappointment on the part of entrepreneurs as well as reformers could slow down the reform pace. As such, those legal and institutional reforms need to be conducted in parallel, in concerted efforts, and publicly, if we are to guarantee a positive response from the market. Such a wide effort necessitates the involvement of numerous governmental and nongovernmental stakeholders, which begs the creation of umbrella institutions to interface and to coordinate with their respective members to achieve carefully planned tasks. Further research remains necessary, particularly in terms of prioritisation and the creation of clusters of competitiveness, which, we believe, will both involve and lead the entire economy. While our recommendations largely tackle the entrepreneurial infrastructure and hence address the entirety of the business environment, certain specialised areas of entrepreneurship, such as micro and small entrepreneurship development and social entrepreneurship, warrant a closer look to determine if tailored measures would be necessary to assist them in particular. Bibliography Acs, Z. J., and L. Szerb. “Gearing Up to Measure Entrepreneurship in a Global Economy,” mimeo, Faculty of Business and Economics, University of Pecs, 2008 Egyptian National Competitiveness Council (ENCC). “The 6th Egyptian Competitiveness Report— beyond the financial crisis.” Cairo: ENCC, June 2009 Global Entrepreneurship Monitor, Global Report, 2008. Global Entrepreneurship Monitor, Global Report, 2009. Global Entrepreneurship Monitor, Egypt National Report, 2008. Hausmann, R., and Klinger, B. “South Africa’s Export Predicament.” Harvard University, Center for International Development (CID), working paper No. 129, August 2006 Kaufmann Foundation. “Entrepreneurship Summit Executive Summary,” September 2008 Liyan, Zhang. “Entrepreneurship Education within India’s Higher Education System,” in The Asian Scholar, no. 2 (2006). Asian Scholarship Foundation. Available at www.asianscholarship.org. Lesson, P., Coyne, C. “Read All About It! Understanding the Role of Media in Economic

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Enabling Entrepreneurship in Egypt: Toward a Sustainable Dynamic Model Development.” Kyklos 57, no. 1 (2004): pp. 21-44. MENA-OECD Investment Programme, “Business Climate Development Strategy. Phase 1: Policy Assessment—Egypt.” Forthcoming, 2010. Monitor Group, “Paths to Prosperity: Promoting Entrepreneurship in the 21st Century,” 2009. Monitor Group, “Overview of the Monitor Competitiveness Network: Entrepreneurship,” 2008. Senor, D. and Singer, S. Start-up Nation. New York: Grand Central Publishing. 2009. UN ESCWA. “Population and Development: The Demographic Profile of the Arab Countries.” Beirut, 2002. Van Stel, A., Carree, M., and Thurik, R. “The Effect of Entrepreneurship on National Economic Growth: An Analysis Using the GEM Database”. Presentation to the first GEM research conference “Entrepreneurship, Government Policies, and Economic Growth.” April 2004. World Bank. The Road not Traveled: Education Reform in the Middle East and North Africa, 2005. World Bank, IFC, Doing Business 2010, Arab Republic of Egypt, 2009.

Expert meetings and interviews The following experts and practitioners have graciously shared their time, knowledge, and ideas with us, and we are greatly indebted for their contribution. Of course, all shortcomings remain our own. Mr. AbdelKarim Mardini, Google Dr. Ahmed Ezzat, Endeavor Egypt, Managing Director Mr. Ahmed Laiali, The Information Technology Industry Development Agency, ITIDA Dr. Aliaa El Mahdi, Faculty of Economics & Political Science Dean, Cairo University Dr. Ashraf Sheta, Shetatex / American University in Cairo Eng. Azmy Mostafa, Social Fund for Development, Technical Office Chief Director Prof. David Kirby, British University in Egypt Mr. Eric Zoetmulder, Occidental Oriental Consult Dr. Eng. Hany Barakat , Ministry of Trade & Industry, First Undersecretary Prof. Hassan Azzazy, American University in Cairo Dr. Ibrahim El-Ghanam, SMES, Personal, and Organizational Development Consultant Ms. Inji El Abd, Ashoka Dr. Lois Stevenson, International Development Research Center Dr. Magued Osman, The Cabinet Information and Decision Support Center (IDSC), Chairman Mr. Mike Ducker, J.E. Austin Associates, Tapr II Mr. Mohamed Abdel Aziz, Ministry of Finance Dr. Mohamed Abdel Hamid, Credit Guarantee Company, Chairman & Managing Director Mr. Mohamed Ismail, Industrial Modernisation Center Mr. Mohamed Mo’men, Mo’men Group Chairman Ms. Raghda El Ebrashi, Alashanek ya Baladi Ms. Randa Abdu, Marketing Mix, CEO Dr. Samir Radwan, General Authority for Investment and Free Zones, Advisor to the Chairman Mr. Samir Shawky, SMEs Training & Development Consultant Eng. Sherif Delawer, Arab Academy for Sciences & Technology, Strategic Management Professor Mr. Sherif Fawzy, Errada Initiatives


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Mohamed El Dahshan, Ahmed H. Tolba, and Tamer Badreldin Mr. Tamer Badreldin, El Badr Plastics / Entrepreneurs Business Forum Mr. Tarek Sadek, McMaster University Dr. Yomn El Hamaky, Faculty of Commerce, Economics Department Chief Director, Ein Shams University

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Philip Auerswald, Elmira Bayrasli, and Sara Shroff

Creating a Place for the Future Strategies for Entrepreneurship-Led Development in Pakistan

For six decades, Pakistan has faced, and overcome, conflict and calamity. Despite many obstacles, the country’s economy has grown steadily. At critical junctures, successive governments have adopted strategies suited to the circumstances of the day, and the nation has developed steadily due to these particular well-conceived initiatives. Yet, as a consequence of the reactive nature of policy formulation and implementation, the institutions of government are conditioned to think in terms of projects rather than strategies to support growth. Today Pakistan confronts a new round of immediate challenges and urgent demands. Yet, it is precisely at this moment of apparent crisis—in the aftermath of the devastating flood of 2010 and with security concerns continuing to dominate the national agenda—that the need to change the discourse about the country’s development has become most apparent. Reactive tactics and dependence on external aid have not helped Pakistan to develop or to realize its potential. Sustained and sustainable development cannot come from a collection of projects, no matter how well intended. A new development approach is needed: Building markets. Building opportunity. Building cities. Building good governance. Including youth. To realize Pakistan’s 21st-century potential, the nation’s political and business leaders must not only meet the demands of the present, but also—and perhaps more importantly—create a space for the future. Philip Auerswald is the Cofounder and Coeditor of Innovations. He is also an associate professor of public policy at George Mason University and an adviser to the Clinton Global Initiative. Elmira Bayrasli writes and work on economic development issues. She blogs for Forbes and is a project leader for World Policy Journal. Sara Shroff is Senior Consultant and Strategist at Bob Carter Companies and the Founder and Managing Partner at Tessera Global. This paper was written in support of work undertaken by the Planning Commission in Pakistan under the direction of Dr. Nadeem Ul Haque. That work resulted in an economic strategy document adopted by the government of Pakistan in Spring 2011. © 2012 Tagore LLC innovations / volume 7, number 2

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Philip Auerswald, Elmira Bayrasli, and Sara Shroff For the government, creating a space for the future means removing obstacles to innovation and entrepreneurship—that is, long-term investments that have tpotential to provide needed services to a youthful and growing population. It means supporting entrepreneurs as they seek to build innovative high-growth companies—even when those new businesses challenge the dominance of existing firms. It means radically remaking the nation’s cities so they are focal points for creativity, not flashpoints for conflict. It means creating mechanisms to support and empower public servants who push back against powerful interests and overcome institutional inertia. For business, creating a space for the future means seeking advantage not in regulatory protections that stifle social development but in market innovations that accelerate it. It means developing new products for the global marketplace, in which branded Pakistani producers are underrepresented, and for the domestic marketplace, which underserves Pakistani consumers. It means looking beyond short-term interest and local advantage, and instead building foundations for organizations with the potential to compete over the long term anywhere in the world. Conditions that allow markets to function normally—that is, economic agents being enabled to operate, compete, and interact with each other on a level playing field1—create the environment essential for private initiative to thrive and business enterprises to realize optimum productive efficiency. This contributes substantively to economic growth and development. A functioning market without government intervention (albeit with competent regulation as needed) and protected from anticompetitive practices is fundamental to achieving productive efficiency, innovation, and entrepreneurship. Cognizant of today’s demands as well as those of the future, this paper argues that developing a culture of productive entrepreneurship in Pakistan requires immediate action by the government of Pakistan: • Enhance Competition—Despite serious but sporadic initiatives aimed at market liberalization, Pakistan’s economy remains dominated by the government. It is important that all government ministries carefully examine the rationale behind and consequences of direct involvement in the economy, and act assertively to eliminate programs and policies that crowd out private business initiatives. The government should (a) map out, with respect to goods and services, the economic subsidies and protections that are currently operative; and (b) implement a plan to gradually eliminate laws and policies that have the unintended consequence of promoting unproductive entrepreneurship. While the pushback from incumbent firms against a comprehensive competition strategy is likely to be intensive, the alternative to the implementation of such a plan is economic stagnation—an outcome ultimately detrimental and unacceptable to all. • Encourage Entrepreneurship—Pakistan has many entrepreneurs. However, the state of competition in many Pakistani industries is such that too many entrepreneurs direct their energies toward rent-seeking rather than productive entrepreneurship. A key objective of a New Development Approach should be to create 108


Creating a Place for the Future an economic environment conducive to entrepreneurship in general, and specifically to the formation and development of both small-scale entrepreneurial ventures and innovative high-growth firms. • Minimize Transactions Costs—Entrepreneurship doesn’t happen without dealmaking in circumstances of uncertainty, which depends to a great extent on trust. While Pakistan is rich in talent and has ample capital resources (particularly when the economic assets of the Pakistani Diaspora are taken into consideration), it suffers from a significant trust deficit that not only undermines the relationship between citizens and government but also, and significantly, impedes the conduct of business by increasing the cost of business transactions. Rebuilding trust will take time. Consequently, the government should undertake to mitigate adverse consequences of the trust deficit by decreasing transaction costs in its dealings with citizens at the same time that it increases the transparency of government decisionmaking. In practical terms, this means seizing every available opportunity—in particular, opportunities created by the widespread availability of information and communications technologies—to improve the efficiency of government service delivery and to make government information easily available to citizens. By acting simultaneously to enhance competition, encourage entrepreneurship, and minimize transactions costs, the government can promote the business innovation necessary to provide essential goods and services to its citizens, encourage the development of domestic markets, and drive sustained economic growth. In doing so, it will achieve broad-based societal development and realize national potential in the long term. PREREQUISITE TO PROSPERITY Pakistan is a nation whose promise has yet to be fulfilled. Finding evidence of this is as inexpensive as a one-way ticket from Karachi to Istanbul, Seoul, or Bangkok. Turkey, South Korea, and Thailand were all roughly on a par with Pakistan until the 1970s. Pakistan has progressed substantially in the four decades since then, yet these three countries—and others similarly endowed—have surged even farther ahead in terms of human and economic development. Unfortunately, recent trends have not been any more favorable to Pakistan. In the past two years, as entrepreneurship and innovation have driven an upsurge in prosperity in many parts of the developing world, the Pakistani economy has been stuck in low gear. With turnover and external competitive threats suppressed by government action (and inaction), key industries serving the domestic market have failed to seize new market opportunities both inside and outside the country. Intensified flows of overseas direct assistance have deepened a reliance on government, rather than on markets, as a source of opportunity. Longstanding shortcomings in the country’s physical and educational infrastructure have remained far from a solution. The result is a society in which present interests have been protected to such an extent that the future has been obstructed. innovations / volume 7, number 2

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Philip Auerswald, Elmira Bayrasli, and Sara Shroff Strategies for National Transformation—The Turkish Example By 1980, Turkey’s state-planned economy had come to a halt. Inflation was in the triple digits, unemployment was rampant, and debt was through the roof. Turgut Ozal, a World Bank economist, took the reins of power and made radical changes that led to Turkey’s development and enabled entrepreneurial growth. They are seen as radical, which they were, but they were also simple. Ozal’s reforms were intended to bring legal order to what was being done on the black market. He didn’t have a grand scheme for turning the country into a second Sweden; he instead changed the rules so that everyone would have the incentive to participate in the formal economy. Export-led growth: Ozal’s signature reform was redirecting government support to those (businesses) that could export and generate badly needed foreign revenue. Tariff rules, exchange rates, and subsidies were all changed to promote exports. Among those who thrived especially well were makers of textiles and furniture, which were clustered mostly in industrial zones in the Anatolian heartland, far from Istanbul. By 1990, Turkish designers and engineers had started to create their own products rather than simply filling orders for foreign firms. Others started investing in factories and franchises in various communities. Capital: Ozal made it a priority to allow capital to move freely in and out of the country. One way he did that was to bring into circulation unused capital help from those opposed to interest-bearing banking. He also developed economic ties with wealthy Gulf states and encouraged them to invest in Turkey. Bureaucracy: Ozal cut through red tape. There were 35,000 categories of civil servants in Turkey in 1983; he reduced the number to 150. Bureaucrats were forced to come back to him five times before they had succeeded in simplifying

A recent “growth diagnostics” analysis of the Pakistani economy undertaken by a team at the Pakistan Institute of Development Economics and NUST confirms this assessment. This analysis finds “the failure of governance and that of institutions to be the binding constraint to growth” in Pakistan. Furthermore, “rent seeking in the shape of licenses, subsidies, and tariff protection has not allowed the development of a competitive environment which is essential for innovation to occur.”2 With these and similar findings in mind, this paper, which offers an assessment of the state of entrepreneurship and markets in Pakistan, is intended to inform government policy and planning. It is based on three tightly linked premises: • Entrepreneurial talent exists everywhere. The objective of policy is not to create entrepreneurs where they don’t exist but to ensure that those (many) individu-

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Creating a Place for the Future the country’s foreign currency regulations from 75 pages of instructions to 15. (Of course, this is not a realistic comparison to Pakistan, which is grappling with an insurgency problem. Cutting government positions seriously increases the risk of political destabilization. The point is that Ozal sought to change, above all, mentality and habit.) Talent: “The best people,” Ozal once said, “work as inspectors, the middling ones in the executive. The state trusts neither its own officials, nor its own citizens. Everybody is frightened of making a mistake or taking responsibility.” He approached Turkish governance in the same way Washington, D.C.’s school commissioner Michelle Rhee did—by cutting out the dead wood and replacing it with talented individuals who can deliver results. Communication: Ozal liked to visit countries and see what was new in stores and shopping malls. He worked to communicate his consumer hunger to his people. As a result, he made it a priority to bolster Turkey’s statistics office. He made statistics available on a large scale. This transparency and access boosted public confidence. Imports: Ozal lifted quotes on imports. Free trade, he believed, would force Turkish businesses to improve their products. The sight of fancy foreign goods on previously monotonous shop shelves would encourage the Turkish people to work harder to earn more money to buy them. Infrastructure: The biggest change Ozal made was to shift resources from supporting state industries to infrastructure projects. He spent huge amounts on new motorways, bridges, dams, and airports. He was famous for his BOT (Build, Operate and Transfer) effort, which called on foreign companies to undertake infrastructure projects at their own expense, turn a profit, and then hand operation over to the Turkish state.

als in the society who have a predisposition for entrepreneurship are adequately supported. • The outcomes for any given society depend significantly on whether potential entrepreneurs direct themselves to productive, unproductive, or destructive entrepreneurship. Not all entrepreneurship is positive. The same energy that goes into building a globally competitive company can, if social incentives and individual motivations are so aligned, go into chasing business advantage through government protections or organizing criminal activity. Support for productive entrepreneurship directs talent toward social development and away from both unproductive (rent-seeking) and destructive (criminal) entrepreneurship. • Small-scale entrepreneurs can play a vital role in providing needed goods and services. Entrepreneurs who work on a small scale—for example, operators of rural, craft-based enterprises or urban khokhas (kiosks) and rehris (carts)—are essential to the functioning of any dynamic economy. Government policy must


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Philip Auerswald, Elmira Bayrasli, and Sara Shroff enable small-scale entrepreneurs to establish, formalize, and grow their operations with minimal difficulty. • A subset of productive entrepreneurs—those who create high-growth firms—make a significant and critical contribution to development. Most entrepreneurs start small and stay that way. The small share of productive, opportunity entrepreneurs who create rapidly growing companies (sometimes called “gazelle” firms) play a particularly significant role in social development through job creation, industry revitalization, and philanthropic giving.3 As a result, ensuring that high-growth firms have the space to form (in both urban and rural areas) and the resources to develop is an important social priority. Putting Pakistan’s economy back in a position to reap the dividends of global growth in the 21st century will require nothing short of a fundamental shift in the discourse about the country’s development. Projects focused narrowly on the demands of the moment will be no more effective in reinvigorating Pakistan’s economy than will recipes from the past—from 1960s-style large infrastructure projects to 1990s-style liberalization. What is needed is a redirection from the hardware of development to the software; from external aid to internal enterprise; and from implementing projects to investing in people.4 Planning for the future in Pakistan will have succeeded not when donor organizations have disbursed funds or government agencies have expended their budgets, but when more people believe that they have a stake in a shared future that is as valuable as dividends derived from protecting the present. Such a belief, when translated to action, is an absolutely prerequisite to prosperity—for Pakistan, just as for any other country. Why Does Pakistan Need Innovation and Entrepreneurship? Today’s dynamic global economy is driven by innovation and entrepreneurship. Both high-growth, disruptive entrepreneurship and small-scale, opportunity entrepreneurship are vital to national development global competitiveness. Turkey, Brazil, and China are recent examples of countries that have consciously emphasized entrepreneurship and innovation as core elements of their growth and development strategies. This new economic order is an opportunity for Pakistan to realize its potential in the 21st century by enhancing competition, nurturing entrepreneurial talent, and building a high-trust, low-transactions-cost society. ENHANCING COMPETITION Markets are the part of the economy in which forces of demand and supply, and the resulting prices, determine the allocation of goods. The internal operations of government, the military, and large companies lie outside markets. Within those domains, resources are allocated by an administrative mechanism—for example, via the Public Sector Development Program—not by a market mechanism. For markets to serve the interests of the public, they must be accountable to consumer 112


Creating a Place for the Future demand and subject to competitive pressure, in particular from new firms entering the market. Ensuring that competition occurs in markets must be an urgent government priority because markets that function effectively can meet Pakistan’s critical need for economic opportunity and vital goods and services, such as reliable energy, accessible financial products, and affordable housing. Currently, markets in Pakistan are not adequately competitive and are not providing economic opportunity and vital goods and services efficiently. The primary reason for this is that entrenched business practices and government policies have stifled competition and innovation in relevant industries—notably banking, cement and construction, and power generation and transmission. With the notable exception of mobile communications (an industry we address in detail later in this paper), nearly every market in Pakistan is structured to disadvantage entrepreneurs and discourage innovation. Obstacles to competition act like a brake on progress throughout a society; until that brake is released, it should come as no surprise that outside aid causes increased friction rather than forward movement. The Competition Commission (2009b, 2010a, 2010b, 2010c), and Ghazanfar and Kazmi (2009) profile competition in five critical markets—the three just mentioned, as well as sugar, automobiles, and fertilizer.5 The Nature and Consequences of Market Distortions While the state of competition varies significantly among industries, certain generic distortions are present in most markets in Pakistan. Distortion 1. Excessive government engagement in the economy The Pakistani government needs to shift its role in the development process from hands-on engagement to a facilitator of private action. In response to inflows of donor funds sustained over decades, the very functions of government in Pakistan have evolved toward direct engagement in development and away from the essential magisterial functions of government, including maintenance of law and order, enforcement of property rights, and application of judicial procedures. This “bigpush” approach to development worked for a time (nearly 40 years), but it is not working today. As a consequence, the quality of governance in the country— notably, professional standards in the civil service—has declined. Rent-seeking and corruption have been reinforced. Distortion 2. Ubiquitous “rent-seeking” Business leaders have become conditioned to an environment in which the shortterm gains from seeking advantage from the government are systematically greater than longer-term gains from the identification and exploitation of genuine economic opportunity. As Haque (2007) observes:


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Philip Auerswald, Elmira Bayrasli, and Sara Shroff When wealth transfers can be achieved through government licenses, policies and directives, entrepreneurial efforts will be directed toward gaining such transfers. Economic agents will expend efforts toward attempting to influence government actions in their favor in order to accumulate wealth. Examples of such government provided wealth transfers are conferring of a monopoly through a license, obtaining resources at below the market prices (e.g., publicly provided land at cheaper rates than market to influential groups), protection from competition (e.g., restriction of number of players in a market) and the manipulation of government subsidies, tariffs and tax policies. In all such cases, the government directive or policy confers wealth on an individual often at the expense of the rest of society. (p. 5) In this way, government policies that encourage rent-seeking and short-term gain act as a reverse tax of sorts that is imposed by a favored group on the rest of society. Once in place, the favored group will be willing to expend real resources— including creative business practices that we have termed “unproductive entrepreneurship.” When the returns to rent-seeking are sufficiently large, potentially productive entrepreneurs will be drawn away from entrepreneurship and toward government patronage. Distortion 3. Inadequate incentives to innovate The most severely negative consequence for the economy of rent-seeking behavior is that it undermines the incumbent firm’s incentives to innovate and the willingness of investors to take risks. The banking industry in Pakistan offers a prime illustration of this phenomenon. Pakistan is the world’s least banked nation. Depending on the measures used, only between 4 percent and 15 percent of the population of Pakistan has access to financial services.6 At the same time, the Pakistani banking industry is among the region’s most stable and profitable as a result of spreads that are 2-3 times those sustainable in the U.S. and other advanced industrialized countries.7 Financial service innovation is possible, of course. Leading banking firms are undoubtedly capable of developing the new products that could lead to greater financial inclusion and overcome historical neglect of agricultural credit, small- and medium-enterprise (SME) financing, and housing finance in particular. However, as the Competition Commission noted in a 2009 report, The solution to the chronic problems of policy neglect and bank complacency…must be sought outside the banking industry. No amount of exhortation or incentives to commercial banks has worked in the past 60 years because…the opportunity costs of entering [the agricultural credit, SME financing, and housing finance] markets are clearly much too high [due to] the existence of “monopoly rents” in the shape of high spreads between deposit and lending rates accruing elsewhere in more lucrative

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Creating a Place for the Future markets from which there is no competitive compulsion to diversify. (p. 20) The government’s direct engagement in financial markets has the effect of further distorting the environment for competition. In particular, the “success” of the National Savings Schemes has the unintended consequence of drawing capital away from the private sector.8 Although each industry has its own particular competitive dynamics, innovation is similarly hindered in many other sectors of the economy by the absence of competition and the “monopoly rents” that such an absence permits. Actions by Government That Affect the Attainment of a Level Playing Field Like entrepreneurs, not all market institutions are created equal. As a consequence, the mere existence of a market does not, in itself, indicate the presence of economic dynamism. In societies where the extensive involvement of the government distorts market signals, competition is dulled and markets stagnate. In the long term, societies with adaptable market institutions tend to edge out those with rigid market institutions.9 For this reason, improving the environment for competition is not a matter of policy aesthetics or whim—it is an absolutely essential element of adaptability and effective competition for Pakistan, as it is for any country in the 21st century. That said, while acting to ensure that markets are competitive sounds simple in theory, it is not so in practice. The key to competition policy, as described by the Competition Commission in its 2009 report on the state of competition in Pakistan, is the notion of a “level playing field” for market participants: A “level playing field” in the market is one in which companies (and countries, for example, in the realm of international trade) can compete fairly with each other in a rule-based environment because no one enjoys, or is given, any special advantages. All competition agencies regard the attainment of such a level playing field in individual sectors of the economy and, indeed, in the economy as a whole, as their primary responsibility. (p. 10) The Competition Commission details four mechanisms by which government actions impede the attainment of a level playing field: First, the overall duty structure on imports varies enormously between raw materials, intermediate inputs, and no clear rationale is discernable in terms of the objectives that are being pursued…The actual result of the high tariffs has been widespread abuse in the form of smuggling or informal imports. The government in the meantime has become dependent on the duties as a vital source of revenue and is reluctant to rationalize them… Second, in order to attract foreign direct investment (FDI), tax holidays and tax-free zones have been the modus operandi in Pakistan as elsewhere. But tax concessions for FDI, aside from leading to significant revenue losses, also lead to unevenness in the domestic playing field…


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Philip Auerswald, Elmira Bayrasli, and Sara Shroff Third, the government is often forced to subsidize the production and sale of staples in the household budgets, wheat flour and sugar being particularly apt cases in point in Pakistan today. However, the actual impact of subsidies on production and prices is often unpredictable and the situation is rendered even more complicated in an inflationary environment… Finally, public procurement procedures have a major impact on competition in the country. The prime examples are the Frontier Works Organization (FWO) and the National Logistics Cell (NLC), two entities dominant in road building and road haulage and indirectly controlled by the state. Over time, their dominance has tended to increase rather than diminish leaving only a small area of activity in their respective sectors where competition exists. (p. 13) To revitalize competition in Pakistan will require a determined and comprehensive effort to simplify and rationalize, inter alia, the duty structure on imports, the tax code, the government’s direct involvement in commodities markets, and the government’s approach to procurement. Competitive Cities as Drivers of Growth Competition is not only vital on the national level, it is also vital to the functioning of cities. Pakistan’s cities, like its markets, have not yet had the opportunity to develop in an organic manner. In Pakistan, as elsewhere in the world, cities are key drivers of growth. Innovative entrepreneurs live in cities, and development policy must meet innovative entrepreneurs where they live. This is not to say that rural entrepreneurs are not innovative or not vitally important to a New Development Approach for Pakistan. They are, most emphatically, as Pakistan remains a substantially agrarian society. However, experience over decades shows that (1) rural entrepreneurship thrives where there are urban markets for rural output, and (2) innovation thrives where populations are sizable and diverse. Cities are what will dominate Pakistan’s development. The most effective way to induce rural entrepreneurship and innovation is to improve conditions for entrepreneurship and innovation in markets generally, and in cities in particular. For the success of cities, investment is needed in “relational assets” and local collective goods. These include transportation, affordable housing, and other public infrastructure. But they also include building links between universities and science-based industries and strengthening relationships between firms and suppliers, including small businesses. Indeed, the entire range of creative capabilities in the arts, education, and the broad range of service industries must be tapped, thus paving the way for vibrant cities across Pakistan. ENCOURAGING ENTREPRENEURSHIP Economic growth is impossible without, and to a significant extent synonymous with, the creation and growth of business. Businesses are created and grow when they provide needed services and introduce innovations into the marketplace. 116


Creating a Place for the Future Successful firms return revenue into the economy through wages, procurement, capital investments, returns to investors, and the payment of taxes. When the state (and, potentially, foundations funded via philanthropic giving) provides the infrastructure required for business creation and growth to be an ongoing process, a virtuous cycle ensues.10 Supporting New and Rapidly Growing Companies Nearly 20 years ago, A. R. Kemal, then the joint director of the Pakistan Institute of Development Economics, published a paper titled, “Why Do Small Firms Fail to Graduate to Medium and Large Firms in Pakistan?” The question posed in his paper still holds. While small firms, in the aggregate, continue to grow in Pakistan, instances of small firms becoming midsize and large firms remain relatively rare. A sequence of studies over the past two decades has identified a consistent set of challenges that impede the growth of small firms. Foremost among these are the following: • Government regulation of trade (both internally and with respect to exports) in a manner unfavorable to small firms • Financial-sector business practices and government interventions that have failed to reach to small firms • Relative difficulty coping with high fixed costs of licensing requirements, the lack of clarity with regard to taxation, and the development of alternatives to poorly performing infrastructure (energy in particular) Additional impediments include cultural barriers, such as social sanctions in the face of failure, lack of peer experience to enable realistic assessment of risk, a paucity of mentors and entrepreneurial role models, and inadequate understanding of markets and global business practices.11 It is important to note that these obstacles do not prevent entrepreneurship; they inhibit it. Entrepreneurs never scale-up beyond a certain point. Without scale, entrepreneurship cannot contribute fully to a country’s growth, and thereby its development. It is only when an enterprise is expanding the number of jobs in a community, increasing its profits, and investing those profits that it contributes to GDP growth. Facilitating the Transition of Family Businesses to Business Families Globally, a natural path of development has led from family businesses with a tradition of moral reciprocity to the modern, professionally managed corporation. Where this transition has occurred it has been based upon faith in the legal and judicial system, including respect for contracts and property rights. In Pakistan this transition has come slowly. Mistrust of professional managers stems not only from inadequacy of the legal and judicial systems but also from the limited ability of existing institutional structures to prevent fraud, theft, and misuse of business information. This is where the government can a play a critical role in helping to nurture an environment of trust. In order for Pakistan’s family busiinnovations / volume 7, number 2

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Philip Auerswald, Elmira Bayrasli, and Sara Shroff nesses to capture national and international growth in their sectors, they must transition into business families that are focused on growth through leadership development, succession planning, operational effectiveness, management, and transition of ownership. Large professionally managed businesses, particularly in high-trust societies such as the U.S., Japan, and Germany, emerged due to a host of technological, financial, and market factors, but also because of an evolution in corporate management. U.S. corporations such as Du Pont, Eastman Kodak, Sears Roebuck, Tyson, Pitney-Bowes, and Kellogg all started out as small family businesses in the 19th century. Today they are large conglomerates and strong brands that rely heavily on professional management; current generations of the founding families are often majority stockholders with little exposure to business operations. Many low-trust societies, such as China and Italy, went through a period of strong political centralization, as did Pakistan. In the absence of high trust, a society has three options for building large-scale organizations, each of which is amply in evidence in Pakistan: Evolutionary growth of family businesses with only family members in decision-making positions • Formation and subsidization of state-owned and state-managed enterprises • Foreign direct investment or joint ventures with large foreign partners In general, the challenges faced by family businesses vary according to the size of the company and its level of development, and in Pakistan this is no different. The good news is that some large family owned and operated companies in Pakistan do have global operations. These companies have made the transition from family business to business or corporate families. They have professionalized their management, developed professional boards, diversified their ownership, and issued shares in the stock market. Ironically, many professionally owned and managed companies seek to promote family-type values in their businesses in order to engender the commitment and trust that are hallmarks of family companies. They do this so the essence of family businesses and the social capital they have built are not lost. So, as family businesses decline, businesses seek to replicate the strong social ties that bind families. The real issue, then, is not the preponderance of family businesses themselves, but rather how effectively family businesses manage and adapt to change. For family businesses to transition into becoming professionally managed business families, they may continue to have a say in the vision of the business but also to capture creativity and entrepreneurial spirit within the spheres of their businesses through a focus on professional management driven by efficiency and growth. Encouraging Rural Entrepreneurship Agriculture accounts for 25 percent of GDP in Pakistan. That figure alone, however, underestimates the opportunity for rural entrepreneurship; non-agricultural entrepreneurship in rural areas generates substantial income and employment 118


Creating a Place for the Future within non-farming communities. Policies and strategies to support rural entrepreneurship must therefore focus as much on non-farming communities as on small farmers. Rural entrepreneurship already contributes to increased economic opportunities, workforce development, income generation, and food security in rural areas of Pakistan, but there is still a critical need for training and assistance to both enhance the skills of small entrepreneurs and improve their connections to market opportunities—throughout Pakistan, but notably in Balochistan and North-West Frontier Province. The long-run solution for sustainable agricultural development is competitive agriculture. Entrepreneurship in rural areas can benefit from public-private partnerships among governments, NGOs, universities, and the private sector to build capacity and the entrepreneurship ecosystem in rural Pakistan. A number of research universities in Pakistan are producing technologies that have significant potential to boost rural entrepreneurship. However, due to the inadequate development of the institutional infrastructure to support the transition from invention to marketready innovation, the market potential of many of those university-generated concepts remains underdeveloped. Creating Space for Urban Micro-Enterprise The urban population in Pakistan is likely to increase threefold over the next 25 years to 130 million. In 2030, the urban population in Pakistan will constitute 50 percent of the total population, making it among the largest urban centers in the world. The urban development in Pakistan is likely to pose new challenges in governance, development of micro-enterprises, and urban service delivery; these challenges must be addressed to allow urbanization to fuel growth. While urbanization does pose challenges, it will also create new opportunities for growth and prosperity. The emergence of a middle class will create a domestic market for goods and services and provide a skilled workforce that can become the engine of growth. This dividend can only be leveraged if government creates a “formal” and “affordable” space for urban micro-enterprise to prosper. Supporting micro- and small business is most effective where the legal and regulatory environment provides both security and opportunity while creating an effective balance of incentives and disincentives. A policy and legal environment that lowers the costs of establishing and operating a business, including simplified registration and licensing procedures, appropriate rules and regulations, and reasonable and fair taxation, will help new entrepreneurs to get a start in the formal economy and existing informal businesses to enter the formal sector. Furthermore, the security that formality provides will facilitate access to formal markets, favorable credit terms, legal protection, contract enforcement, foreign exchange, and local and international markets. A coherent legal, judicial, and financial framework for securing property rights and utilization of productive capital through sale, lease, or use as collateral should be a high priority.


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Philip Auerswald, Elmira Bayrasli, and Sara Shroff MINIMIZING TRANSACTIONS COSTS Entrepreneurship doesn’t happen without deal-making in circumstances of uncertainty, which depends to a great extent on trust. While Pakistan is rich in talent and has ample capital resources (particularly when the economic assets of the Pakistani Diaspora are taken into consideration),12 it suffers from a significant trust deficit that not only undermines the relationship between citizens and government but also, and significantly, impedes the conduct of business by increasing the cost of business transactions. Building trust takes time. Consequently, the government should undertake to mitigate adverse consequences of the trust deficit by decreasing transaction costs in its dealings with citizens and increasing the transparency of government decisionmaking. In practical terms, this means seizing every available opportunity—in particular, opportunities created by the widespread availability of information and communications technologies—to make government information easily available to citizens and to improve the efficiency of government service delivery. The economic structure of an economy, and its competitive potential, is determined not only by the nature of competition in core industries and the latitude that exists for entrepreneurial entry: underlying both entrepreneurship and competition is the need for trust. As Frank Fukuyama has observed: Although there are other factors accounting for firm size, including tax policy, antitrust, and other forms of regulatory law, there is a relationship between high-trust societies with plentiful social capital—Germany, Japan, and the United States—and the ability to create large, private business organizations. These three societies were the first—both on an absolute time scale and relative to their own development histories—to develop large, modern, professionally managed hierarchical corporation…In [low-trust] societies the reluctance of nonkin to trust one another delayed, and in some cases prevented the emergence of modern, professionally managed corporations. If a low-trust, familistic society wants to have large-scale businesses, the state must step in to help create them through subsidies, guidance, or even outright ownership. The result will be a saddle-shaped distribution of enterprises, with a large number of relatively small family firms at one end of the scale, a small number of large state-owned enterprises at the other, and relatively little in between.13 It is clear from the foregoing that Pakistan conforms to the profile of a lowtrust society. Furthermore, as Fukuyama’s analysis further indicates, the low level of trust in Pakistan is as much the cause as it is the result of the country’s economic stasis. To be sure, government actions that intervene in favor of powerful incumbents undermine trust within the society but, as Fukuyama notes, such interventions may, at the outset, themselves be induced by low levels of trust within the society. Low levels of trust translate into the high cost of business transactions.

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Creating a Place for the Future A key element of the New Development Approach, then, is to implement strategies that minimize transactions costs and build trust by focusing on the interaction between the government and the citizens of Pakistan along three dimensions: • Information—Timely, consistent, and easily accessible information is critical to building trust. Where citizens can access information about laws and government processes—including hours of operation and the documentation required to complete a process—trust increases. Where the media provides accurate reporting with verified sources, trust is increased. The Pakistani government has put some of its processes online. The 2008 Securities and Exchange Commission’s e-Services are an example. E-Services have enabled online company registration, which has resulted in an increase in the number of companies registered in Pakistan. • Transparency—The ease with which citizens can access information is as critical as the accuracy of the information itself. Trust is increased whenever a citizen can easily identify operative laws, rules, and procedures, and otherwise access information vital to business and personal functioning in society. • Connections—Networks are well known to be critical to an entrepreneur’s success. People trust one another when they interact with and know one another. Bringing people together is another way to enhance trust. Societies in which officials seek votes, reach out to the community, and hold town hall meetings have an increased level of trust. The government can increase the connectivity of the society by making the most of its potential role as a neutral convener. ACCOMPLISHING THE TRANSITION TO AN ENTREPRENEURIAL ECONOMY Little, if anything, in this report is new. Indeed, some of the analyses and proposed initiatives are over two decades old. This prompts one to ask why a new round of initiatives to enable firm growth would be likely to succeed when previous efforts have not been successful. There are at least three reasons: 1. Previous initiatives to support entrepreneurs were sporadic and contradicted by other aspects of economic policy. The opportunity exists today for the government to deploy a coherent and consistent entrepreneurship-led growth strategy. 2. Competitive and demographic challenges facing Pakistan have only intensified in the past two decades, making support for entrepreneurship and innovation an even more urgent national priority now than before. This increases the likelihood that interests that otherwise might be opposed to market reform might align in favor of policies to support entrepreneurs. 3. Perhaps most significantly, the dramatic diffusion of information and communications technologies and other distributed technologies creates new pathways to address longstanding disadvantages to entrepreneurship and innovation.


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Philip Auerswald, Elmira Bayrasli, and Sara Shroff Accomplishing the transition to an entrepreneurial and innovative economy will require directly addressing fundamental and longstanding issues, but at the same time it will require making the most of particular opportunities inherent in the historical moment. This section focuses on four such opportunities: • Acting assertively to capture the “demographic dividend” • Engaging Diaspora talents and resources • Accelerating the mobile revolution • Supporting the deployment of distributed energy technologies Acting Assertively to Capture the “Demographic Dividend” Pakistan’s population has tripled in less than 5- years, and it will increase by an additional 85 million by 2030. Half of Pakistan’s citizens are under age twenty; twothirds have yet to reach their 30th birthday. To meet the needs of its growing population, Pakistan’s economy must grow by 6 percent each year; that means it must add 36 million new jobs in the next ten years. The education and social systems do not encourage or facilitate entrepreneurship as a preferred career option among the youth. High-growth, opportunity entrepreneurship is excessively restricted to those belonging to existing business families or by students at premier business schools. As a result, the economy witnesses the creation of too few new enterprises; those that are created are disproportionately in traditional areas of business, creating congestion in a few markets while other markets are dramatically underserved. Yet, with the proper institutional context in place, experience elsewhere (as well as from the Pakistani Diaspora) suggests that that the entrepreneurial capabilities of the Pakistani people remain a significant and untapped resource for development. If this entrepreneurial potential can be unleashed by providing a level playing field, information, awareness, and support in establishing enterprises, Pakistan can witness fast-paced growth as new enterprises create new employment opportunities, thereby improving the distribution of wealth and exploiting the opportunities offered by international markets. There is a need to promote entrepreneurship actively (1) by implementing curricular enhancements pertaining to entrepreneurship (for example, modeled after Jordan’s successful Injaz al-Arab program); (2) by creating awareness among youth; and, more importantly, (3) by providing effective support mechanisms, including access to capital, mentoring, and skill-building, to those who want to establish new enterprises. The ultimate objective of entrepreneurship education policies should be to facilitate the creation of an entrepreneurial culture, which in turn will help potential entrepreneurs to identify and pursue opportunities. Government policies on entrepreneurship education are critical to ensure that entrepreneurship is embedded in the formal education system and offered through partnerships with the private sector, with the informal community, and with apprentice training programs in rural areas.14

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Creating a Place for the Future Pakistan currently is experiencing an unprecedented “demographic dividend” as the working-age population bulges and the dependency ratio declines. This shift is as much an opportunity as it is a challenge. The demographic dividend available to Pakistan and its implications for the country mainly reflect three key issues: labor supply, savings, and human capital. For economic benefits to materialize, there is a need for policies dealing with education, public health, and those that promote labor market flexibility and provide incentives for investment and savings. In contrast, if appropriate policies are not formulated, the demographic dividend might in fact be a cost that leads to unemployment and puts an unbearable strain on education, health, and old age security.15 If young Pakistanis can be properly educated and successfully absorbed into the labor force, the country’s demographic dividend could boost social well-being and spark economic growth.16 Engaging Diaspora Talents and Resources The Pakistani Diaspora community could be an invaluable resource for the national development of Pakistan. Their contributions to economic development could be substantial through platforms of the knowledge economy and via knowledge networks if leveraged strategically and diligently. The Pakistani Diaspora is significant, numbering roughly ten million people around the world. Formal remittances to Pakistan were $8 billion in 2008. This was nearly same level as foreign direct investment, which was only $500 million per year in the 1990s and more than $8 billion in 2008—an increase by a factor of 16 for Pakistan, compared to a factor of 10 increase for emerging markets as a whole.17 The “brain gain” from this group could indirectly improve overall governance in aspects of social, economic, and political life by further activating the entrepreneurial space. Clear examples of this include the following: • Lahore University of Management Sciences (LUMS) and the Organization of Pakistani Entrepreneurs (OPEN) signed a memorandum of understanding for cooperation to establish the OPEN Centre @ LUMS for Innovation and Entrepreneurship on July 29, 2010, for a period of five years. The center aims to create an entrepreneurship network that sustains entrepreneurs and promotes the creation of new ventures to foster economic growth in Pakistan. • The Indus Entrepreneurs (TiE) has three chapters in Pakistan: Karachi, Lahore, and Islamabad. It provides a platform for business plan competitions, networking forums, start-ups, mentorships, entrepreneurial summits, and much more. All these local chapters are operated by well-known Pakistani entrepreneurs. Done on a larger scale, this could also pave the way for direct links between entrepreneurs in Pakistan and entrepreneurs of Pakistani origin that would enable them to invest in high-impact entrepreneurial ventures. The Pakistani government should seek to encourage such exchanges by improving the business environment and offering incentives, as has been demonstrated successfully in South Korea, India, and China. innovations / volume 7, number 2

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Philip Auerswald, Elmira Bayrasli, and Sara Shroff There are signs that Diaspora entrepreneurship of this kind might be growing, albeit in different shapes and forms. The key Diaspora-driven entrepreneurship showcases a safer way to enter a new market like Pakistan and minimizes risks for foreign companies seeking to operate there. It ties a lot of the reputation and network capital of these Diaspora founders to the venture capital of U.S. investors, thus considerably enhancing the chances of success. One model of Diaspora entrepreneurship is the “straddling expatriate,” who lives in the United States or Europe (the developed “market”) but operates a company whose development hub is in a developing country—in this case, Pakistan. The second model of Diaspora entrepreneurship is the “returning expatriate” who, after spending several years abroad, has now returned to his native country—at least partially—and now helps to develop a foundation for innovation and employment in his native country. Accelerating the Mobile Revolution Pakistan represents a growth market for mobile communications and applications that can provide a significant impetus for the development of an enterprise economy. The widespread use of mobile phones creates a particular opportunity in the financial services industry to increase competition and thus extend financial inclusion through branchless banking. Through the Branchless Banking regulation issued by the State Bank of Pakistan in March 2008 and the Branchless Banking guidelines issued by the Pakistan Telecom Authority in June 2008, the government has set the stage for the widespread deployment of branchless banking services. However, in part for the reasons outlined at the outset—excessive monopoly rents derived from core lines of business—as well as the fragmented (and highly competitive) nature of the Pakistani mobile phone industry, branchless banking services have been slow to develop in Pakistan. To date, only one consumer offering exists—Telenor’s “easypaisa”—and that service has limited functionality and reach when compared to mobile-enabled branchless banking services elsewhere in the world. Accelerating the deployment of branchless banking could be a key driver of competition in the financial services industry, and potentially also a facilitator of entrepreneurship in Pakistan.18 The government of Pakistan can act in other ways to accelerate the beneficial impact of the mobile revolution, potentially including: • Accelerating the adoption of leading mobile services, such as mobile payments • Developing shared standards for data exchange, facilitating interoperability (including via “cloud computing”) • Encouraging flexible regulation that does not impede innovations that could transform the delivery of essential products and services to the poor • Easing the process by which remittances can be transferred via mobile phones • Actively supporting the development and deployment of open-source, interoperable mobile applications (in particular SMS) in a range of areas, including health

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Creating a Place for the Future and financial services, through direct funding, prizes, and the facilitation of advance-usage commitments • Nurturing entrepreneurship in the development of mobile applications among youth with programming skills Supporting the Deployment of Distributed Energy Technologies Two-way metering, dynamic pricing, and other market-based policy initiatives can open the door to market entry by a variety of new ventures in electric power generation and transmission. Distributed solar-, wind-, and hydropower are all well adapted to different parts of Pakistan. With the right government policies in place to support their exploitation, each has the potential to positively disrupt the electric power industry in Pakistan—which today is needlessly dependent on oil, an inefficient and volatile energy source for electric power generation. Consider, for example, hydropower. Hydroelectric generation is one of the oldest forms of electricity production, but in the 20th century, hydroelectric development focused on ever-increasing generation capacity. Large, capital-intensive hydro efforts, such as the Hoover Dam and Tennessee Valley Authority in the U.S., led to similar projects throughout the world, such as the Aswan Dam in Egypt. More recently, however, research and entrepreneurial activity have spurred renewed interest in smaller hydroelectric generation facilities, especially for international development. The term “micro-hydro” commonly refers to facilities with generation capacities generally less than 100 kW, which do not significantly alter local environmental conditions or river flows.19 One relatively new subset of microhydro is pico-hydro, which includes very small systems that generate less than 5 kW of capacity. These concepts are especially relevant for communities in rural and developing areas as a way to generate cost-effective, low-impact electricity.20 Pakistan is ideally situated geographically for implementing micro-hydro facilities. Micro-hydro generates electricity by diverting upstream river water through a side chute to a set of turbines downstream. Micro-hydro facilities operate in “low-head” environments, where the difference between the upstream intake and downstream outlet is at least 30 meters. Depending on energy usage, infrastructure, and geographical distribution, a micro-hydro facility can provide electricity for about 100 households. Chattha, Khan, and Haque (2009) estimated the total potential hydro resources of Pakistan to be 41 GW, with 1290 MW suited to microhydro development. They estimate that the “off grid micro-hydro systems are very essential for the consumers living in the remote areas of Pakistan and may be installed on canals and water falls which are abundant in the remote areas.” Indeed, development programs in Pakistan and neighboring Afghanistan have broadened rural access to electricity through innovative micro-hydro systems. They not only built the facilities, they also developed the community-based governance mechanisms that regulate output and pricing.21


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Philip Auerswald, Elmira Bayrasli, and Sara Shroff Given the favorable geographical characteristics in Pakistan for micro-hydro, an equally favorable environment for entrepreneurship could induce the development of a regional entrepreneurial cluster related to micro-hydro installation. Novel micro-hydro designs could also integrate other services needed by rural populations, such as drinking-water filtration, making Pakistan an entrepreneurial laboratory within the hydroelectricity sector. To enable the entry of new firms into distributed solar-, wind-, and hydropower generation and transmission, the government of Pakistan should • fully implement two-way metering and dynamic pricing in energy markets; • institute lower-bounds for regulatory oversight in energy markets and otherwise lower barriers to meso-scale energy generation. CONCLUSION Conventional wisdom holds that a country can transition from a 20th-century industrial economy to a 21st-century entrepreneurial economy only after its political institutions have fully matured. That is backwards: a country’s political institutions mature only as its economy produces broad-based opportunities on a sustainable basis. Similarly, internal security and political stability are not prerequisites for, but the consequence of, broad-based social development that is driven by competition and entrepreneurship and supported by increasing levels of social trust. Actions taken in the name of near-term stability that undermine competition and economic dynamism not only make a country less prosperous—they also make it less secure and less stable. In any country—Pakistan is no exception—the real cost of an excessive preoccupation with the “hardware” of both national security and development is that it draws attention and resources away from the “software”—competition, entrepreneurship, and trust. Indeed, crises of any type have the same effect: they divert resources from the future and toward the present. International perceptions to the contrary, Pakistan is a no more violent or dangerous place than many other countries in the vicinity. India (Naxalite rebels, Hundi extremists, sectarian violence), Sri Lanka (Tamil Tigers), and Turkey (Kurdish nationalists) are all places where indigenous and imported terrorists have been active; that fact has not prevented those countries from developing rapidly. Taking the comparison farther afield, gang and politically related deaths in Mexico during the past three years have been nearly four times more numerous than in Pakistan. The difference is that Pakistan’s security challenges have an international profile, and thus they attract greater attention than would otherwise be the case. As a consequence of diverse pressures, then, the demands of the present have been so great for the past 20 years in Pakistan that the future has persistently been put on hold. Now the time has run out on that approach. Yes, there will be new exigencies of the moment. The impetus will be great to revert to familiar modes of argumentation and action: crisis, assistance, projects. What is needed, however, is a decisive break with the past. What is needed is a New Development Approach 126


Creating a Place for the Future that creates new modes of argumentation and action: competition, entrepreneurship, and trust. In short, for Pakistan to be a place of the future, it must create a place for the future. ANNEX. THE PROCESS OF DEVELOPMENT Decades of quantitative, macro-level studies of development offer little, if any, evidence to support the claim that official development assistance—foreign aid—can accelerate development on a national scale. If anything, historical evidence suggests that aid has a corrosive effect on governance and distorts the evolution of markets. Countries heavily dependent on development assistance characteristically suffer from an “aid curse” that is functionally comparable to the “resource curse,” which is known to undermine the development of countries dependent on revenues from natural resources. In both settings, a similar irony is at work: greater revenue and diminished accountability to citizens in the short term lead to slower development in the long term.22 Fundamentals To be sure, the realities of research in development economics are such that even the most able scholars have difficulty establishing with confidence proof that any approach to accelerating development has been “successful” in one place or another. Yet while academics and policymakers are still searching for the best approaches to accelerate development, the process of development itself is actually fairly well understood. Ample historical evidence supports the following general assertions about the manner in which development occurs: • Development is an ongoing process of social change—subject to regular disruption—that involves institutions, culture, and technology. • While societies can advance for a short while through incremental adjustments to the status quo, long-term development requires entrepreneurship and innovation. • Entrepreneurs and innovators exist in all societies, but not all societies are equally welcoming of the disruptive changes they provoke. • Individual entrepreneurs and innovators thus face three options: seek economic rents within the status quo; challenge the status quo through disruptive innovation; leave the society altogether to seek an environment more welcoming of creativity.23 • When too large a fraction of potential innovators and entrepreneurs choose either to seek rents within the context of the status quo or to leave the society altogether, development slows or comes to a halt. What this means is that creating a place for the future in any country means creating a space for entrepreneurship and innovation—and, in particular, encouraging the subset of potential entrepreneurs and innovators who choose neither to conform nor to depart, but rather to stay and build something new. innovations / volume 7, number 2

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Philip Auerswald, Elmira Bayrasli, and Sara Shroff Entrepreneurship is present in all societies but manifests itself differently depending on the context.24 While there is little evidence that government action can affect the overall supply of entrepreneurs in a given economy, there is strong evidence that it can influence the manner in which entrepreneurs—or entrepreneurially inclined individuals—direct their abilities. As William Baumol has noted, “Policy can influence the allocation of entrepreneurs more effectively than it can influence its supply.”25 Strategies that support development at a national scale thus must consider not only the quality of the business climate in general, but also, and importantly, the way government actions affect the relative returns to entrepreneurship of different types.26 The challenge in designing and implementing policies to support entrepreneurship is that such policies are effective only if they shift existing incentives in a direction that leads to preferred social outcomes. In work spanning two decades, Baumol has explained that the objective of policies that support entrepreneurship is less to create entrepreneurial talent than it is to affect the allocation of that talent among productive, unproductive, and destructive options: How an entrepreneur acts at any given time and place depends heavily on the “rules of the game”—an economy’s laws and regulations—that happen to prevail… An economy’s laws and regulations—not the total supply of entrepreneurs or the nature of their objectives—undergo significant changes from one period to another and, in doing so, help to dictate the allocation of entrepreneurial resources.27 This observation has important empirical implications. For example, while microfinance has, over the past three decades, proven to be an effective tool to allow people to gain control over their own income, it has not unleashed the innovation and capital flow required to help to stimulate growth. Indeed, microloans only rarely fuel the creation and growth of entrepreneurial ventures.28 Though there is no doubt that the availability of finance does facilitate entrepreneurship, contrary to popular belief, financing is not the primary obstacle to entrepreneurship: the primary obstacle is action (or inaction) by government that has the unintended consequence of directing entrepreneurial talent—whether in rural areas or at the heart of major cities—from productive activities to unproductive or destructive activities. As seen in the West and increasingly in emerging markets, such growth comes from high-growth businesses such as Walmart, Microsoft, and Infosys, which have created millions of jobs and generated billions in revenues.29 A county’s success in supporting such “Schumpeterian entrepreneurship” is reflected directly in the number of new but rapidly growing companies it produces. In Pakistan, firms with fewer than ten employees employ nearly 80 percent of the non-agricultural workforce but contribute only 30 percent of GDP—figures that have remained largely unchanged for the past two decades.30 In contrast, small firms in developed countries typically are less dominant in terms of employment, but they contribute a greater share of GDP; small and growing firms also contribute to economic growth to an extent disproportionate with their size.31

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Creating a Place for the Future Furthermore, today as in the past, there is no viable bridge linking small and large firms. Small family businesses are essentially precluded from growing into large groups; large corporations rarely invest in, or develop, small enterprises. Even buyer-supplier relationships with subcontractors—key to the functioning of large firms in advanced industrialized countries—in most industries are either poorly developed or absent. The economic environment lacks—in addition to trust—an ecosystem that connects the various levels of the private sector: large corporations, innovative high-growth firms, and micro-enterprises. The challenge is how to bring all of those into an ecosystem where they’re working and reinforcing one another. Implications for Economic Strategy A strategic imperative for Pakistan, as for governments around the world, is in the design and implementation of policies and programs that encourage entrepreneurship in general, and the creation of high-growth firms in particular—rewarding rather than penalizing entrepreneurs who are successful in providing new and innovative goods and services. Contrary to widespread belief, a national economic strategy emphasizing development led by entrepreneurship is not the same as a strategy emphasizing either support for small- and medium-enterprises (SMEs) or improvements in the “business climate.” While all new and rapidly growing firms fall, at first, into the category of SMEs, it is important to note that implementing strategies to accelerate entrepreneurship is not the same as building institutions to support SMEs. SMEs are small, but they are not necessarily new or growing. Schumpeterian ventures are new and innovative, but when successful they do not remain small or midsize for long. Indeed, programs to support SMEs, if improperly conceived and implemented, may actually undermine entrepreneurship if they diminish incentives for entrepreneurial innovation and growth-directed strategies—for example, by creating a program of subsidies not available to firms that grow beyond a certain size. Support for entrepreneurship and innovation is similarly often confused with generic strengthening of the “business climate.” What is the nature of the difference? The business climate pertains to all firms—both incumbents and new entrants. Some elements of the business climate (for example, the time required to register a new business or the difficulty of obtaining business licenses) are relevant to entrepreneurship. However, others (for example, the stability of the financial sector) may actually imply the concentration of market power. Given that development depends on the decisions made by entrepreneurs to allocate their talent to productive activities rather than unproductive (rent-seeking) or destructive ones, effective development planning begins with consideration of two key questions: • What actions does government take (or fail to take) that affect the incentives of entrepreneurs? innovations / volume 7, number 2

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Philip Auerswald, Elmira Bayrasli, and Sara Shroff • How can government adjust its actions to increase the allocation of entrepreneurial talent to productive activities? These two questions suggests a domain of inquiry that spans almost every dimension of government activity at the federal, provincial, and local level—from fiscal and monetary policy, to land use and urban planning, to legal protections and antitrust policies. Effective action must connect this broad domain of inquiry to specific areas of work. Acknowledgments This study was prepared for the Planning Commission by Tagore LLC under contract with the Competitiveness Support Fund, a joint venture of USAID and the Pakistan Ministry of Finance. Khalid Mirza, former chair of the Competition Commission, acted as senior adviser to the study team. A full list of those consulted in the preparation of the study appears at the end of the report. The paper draws analysis and insights from Haque (2007, 2010), Planning Commission (2010a, 2010b), and Competition Commission (2009a), in addition to other works cited in the text. The authors thank the following people who offered input into this study: Pakistan Islamabad 1. Mosharraf Zaidi, Advisor and Writer 2. Tariq Shafi Chack, Additional Secretary, Ministry of Industries and Production, Government of Pakistan Karachi 3. Firoz Shroff, Chairman, SASI Group of Companies 4. Muddassar M. Malik, Co-Founder, CEO &Executive Vice Chairman, BMA Capital 5. Sabeen Mahmud, President, The Indus Entrepreneurs (TiE) Group, Karachi Chapter and CEO of Peace Niche 6. Saqib Shirazi, CEO, Atlas Honda Limited 7. Shakir Husain, CEO, Creative Chaos 8. Shamoon Sultan, CEO, Khaadi 9. Sono Khangarani, CEO, Thardeep Rural Development Program (TRDP) 10. Zafar Siddiqui, Director, IBA Centre for Entrepreneurial Development Lahore 11. Dr. Ahmad Jan Durrani, Vice-Chancellor, Lahore University of Management Sciences 12. Anwar Khan, CEO, Small and Medium Enterprise Development Authority (SMEDA) 13. Fahd Bangash, CEO, Amaana 14. Dr. Ghazanfer Ali, Professsor, Lahore School of Economics, Banking Expert 130


Creating a Place for the Future 15. Monis Rahman, CEO, Naseeb Networks 16. Seema Aziz, CEO, Bareeze 17. Shahad Khawaja, Senior Advisor, Competitiveness Support Fund, Former Secretary, Ministry of Industries & Production, Government of Pakistan 18. Syed Babar Ali, CEO, Packages Limited and Chairman, Lahore University of Management Sciences United States and United Kingdom 1. Asim Khwaja, Associate Professor of Public Policy, Kennedy School of Government, Harvard University 2. Awais Khan, CEO, American Pakistan Foundation 3. Kashif Zafar, Managing Director, Barclays Bank 4. Molly Kinder, Center for Global Development 5. Peter Mandeville, Associate Professor of Government & Islamic Studies, George Mason University 6. Eric Manes, World Bank 7. Rabia Nusrat, British Asian Trust Endnotes 1. See Competition Commission (2009a). 2. Qayyum et al. (2008). 3. See Schumpeter (1911, 1942) and Auerswald and Acs (2009). 4. Haque (2010) and Planning Commission (2010a). 5. All are available at the website of the Competition Commission of Pakistan. Available at http://www.cc.gov.pk. 6. Competition Commission (2009a), Ghazanfar and Kazmi (2009). 7. Ibid. 8. In 2009 and 2010, respectively, the NSS attracted Rs224 billion and Rs267 billion, in contrast with Rs87 billion in 2008. 9. The paradigmatic example of this phenomenon was the collapse of the Soviet Union, which followed directly from the antipathy toward innovation and inherent informational challenges inherent to central planning. Olson (2000). 10. Auerswald and Acs (2009). 12. See, e.g., Qayyum et al. (2008), Legatum (2010), and Competition Commission (2009a, 2009b, 2010a, 2010b, 2010c) 12. Qayyuem (2008). 13. Fukuyama (1995, p. 30). 14. Volkmann et al. (2009). 15. Nayab (2008). Pakistan Institute of Development Economics, Islamabad. The Pakistan Development Review, 2008, vol. 47, issue 1, pages 1-26. 16. Bloom and Freeman, 1986. 17. Ref. Legatum (2010). 18. CGAP (2010). 19. See Moreire and Poole (1993). 20. See University of Nottingham (n.d.); The Ashden Awards for Sustainable Energy (2010). 21. See Aga Khan Rural Support Program (2004); DAI (2010). 22. Easterly (2002), Quadir (2009). 23. These three options (taken in reverse order) are analogous to the fundamental political options articulated by Albert Hirshman (1970) long ago: exit, voice, and loyalty. As Hirschman (1958, p.


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Philip Auerswald, Elmira Bayrasli, and Sara Shroff 5) noted, “Development depends not so much on finding optimal combinations for given resources and factors of production as on calling forth and enlisting for development purposes resources and abilities that are hidden, scattered, or poorly utilized.” 24. Baumol (1990). Productive entrepreneurship corresponds to the creation and expansion of new firms; unproductive entrepreneurship corresponds to rent-seeking activities; destructive entrepreneurship corresponds to trafficking in illicit goods. All these forms of entrepreneurship create economic activity. However, institutions advances and societies progress only when the returns to productive entrepreneurship exceed those to unproductive and destructive entrepreneurship. Within the category of “productive entrepreneurship,” it is possible to differentiate further between “opportunity entrepreneurship” and “necessity entrepreneurship.” 25. Baumol (1990, p. 893). 26. Auerswald (2008). 27. Baumol (2010, p. 153). 28. Microfinance institutions (MFIs) today provide services to over 150 million clients across the globe, with wide variation in models used and outcomes achieved. Assessments of micro-lending have tended to focus on high repayment rates rather than on promoting borrower welfare. See, e.g., Banerjee et al. (2009), and Zinman and Karlan (2009). 29. In low-income countries, the contributions to economic output and employment made by formally registered small and midsized enterprises (SMEs) are less than one-third those made by their counterparts in high-income countries. This disparity is evidence of impediments that exist in poor places to the development of high-growth enterprises. 30. Data available from the Statistics Division, Government of Pakistan. Available at http://www.statpak.gov.pk/. See also Asian Development Bank (2005) and Rauf (1994). 31. Stangler (2010).

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