Looking for Entrepreneurial Magic

Stephen DeAngelis

April 8, 2009

This is the fourth of five posts on The Economist‘s special report on entrepreneurship (the first three posts were entitled Entrepreneurs as Heroes, The Rise of Entrepreneurialism, and More on Global Entrepreneurialism). Throughout history people have searched for a magic formula, a magic elixir, or a magic potion to bring them untold riches. The trouble with real world “magic” is that it is based on illusion, diversion, and deception. The last thing the global economy needs right now are illusionary, diversionary, or deceptive solutions. Magic only really works in myth and legend. That is the basic message of the article in The Economist‘s special report on entrepreneurship that I want to discuss [“Magic formula,” 12 March 2009 print edition]. The article begins with the tale of King Midas, whose magic touch turned everything into gold. The problem, of course, is that you can’t eat gold, drink gold, or find lasting happiness if everything, including those you love, turn to gold if touched. The information age equivalent of gold, the article asserts, is silicon — and it calls the unquenchable search for success in the information age “siliconitis.” Often those most stricken with siliconitis are policymakers and government officials. The Shangra La they search for is a local silicon valley where riches beyond imagination flow from streams of data.

The problem, the article reminds us, is that trying to replicate a successful “silicon valley” without the intrinsic resources found in established silicon valleys is a fool’s task. “The most basic mistake politicians make in trying to foster entrepreneurship,” the article notes, “is to assume that there is only one model of a successful entrepreneurial cluster. There is no point in trying to create the next Silicon Valley without the Valley’s remarkable resources: two world-class universities, Stanford and Berkeley, and a big financial centre, San Francisco.” Local governments, it insists, should look for advantages they possess in abundance and then determine what kind of cluster is best-suited for the environment at hand. This advice is exactly what Michael Porter of Harvard University and the Monitor Group has been preaching for years. It’s also the kind of advice I give when discussing Development-in-a-Box™ with government and business leaders in emerging market countries.

My company, Enterra Solutions, and the Monitor Group have teamed on several occasions to discuss the creation of the right kinds of clusters with leaders of emerging market countries. The Economist‘s article notes that “Monitor identifies three other successful entrepreneurial ecologies.” The first ecology is called the anchor-firm model. The theory behind the model is that a cluster can be built around one or more “anchor firms,” normally large corporations or organizations, which, by their very size, will attract other companies or spawn spin-offs. This model can work in both the developed and developing worlds.

“The research triangle in North Carolina was a successful exponent of the anchor-firm model, recruiting big companies such as IBM, Alcatel and Union Carbide which then either spawned or attracted lots of smaller operators. Hindustan Unilever, a food and personal-care giant, is another, less self-conscious exponent. The firm employs 45,000 women across India to market its goods to 150m consumers in rural areas. These saleswomen not only earn an income, they also learn about products, prices and marketing, sending a ripple of entrepreneurship throughout rural India.”

The second model is the crisis model. As the name implies, this model comes into play when a region is hit by an economic crisis and policymakers search for a way to end the crisis. According the article, “this happened in the San Diego region in the 1990s when the end of the cold war threw hundreds of highly trained military scientists out of work. Local start-ups such as Qualcomm hoovered up the talent and put it to new uses.” One of the reasons that I have stressed the importance of entrepreneurialism during this current economic crisis is because opportunities will emerge around the globe that will mirror the opportunities that Qualcomm found in San Diego. With unemployment hitting double digits in many U.S. states, I suspect the crisis model will be fully tested over the coming months.

The third model is the local hero model. It doesn’t take much imagination to understand the underlying theory behind this model. The example in the article is Earl Bakken, who founded Medtronic in Minneapolis in 1949. As it turned out, “he was creating a local industry as well as a company. Having developed the world’s first heart pacemaker, Medtronic grew into the largest medical-technology company in the world, spawning huge numbers of smaller ones.” It’s easier to become a local hero in a developing company than in a developed one; but with the economy in turmoil and old businesses dying, I suspect that the developed world will see a number of local heroes emerge over the coming years as well.

The article goes on to assert that fostering an environment in which entrepreneurship blossoms is not as easy as it may sound. In fact, it indicates that the formula involves luck, culture, and policy. The example it provides for having luck is India. India’s Institutes of Technology, it claims, were established to churn out technocrats not entrepreneurs. As it turns out, the curricula happened to support exactly the kind of people required by the Indian IT industry — and the rest is history. Culture may play and even bigger role than luck.

“David Landes, an influential economic historian, has argued that ‘if we learn anything from the history of economic development, it is that culture makes almost all the difference.’ You can build as many incubators as you like, but if only 3% of the population want to be entrepreneurs, as in Finland, you will have trouble creating an entrepreneurial economy.”

When luck and culture play only a small role, policy must play a larger role. The article points to the economic policies that turned China around in a remarkably short period of time. Now, according to Monitor, China is the third most entrepreneurial country in the world — behind only the United States and India. The right policies can, in fact, change culture. As a proof of concept, the article notes the impact the World Bank’s Doing Business Index has had on countries across the globe. The World Bank subscribes to the adage “what gets measured gets done.” Startling reforms have taken place since the first Index was published in 2003. The 2008 report states, “Comparisons among cities within a country are even stronger drivers of reform.”

The Economist says that countries looking for a magic formula for fostering entrepreneurship should start with list of things measured by the Doing Business Index in order “to achieve things like transparency, convenience and rule of law.” It continues, “they should emulate two qualities of some of the world’s most successful entrepreneurial clusters.” Those qualities are “a vibrant higher education system” and “openness to outsiders.”

“Business is increasingly dependent upon knowledge, particularly technical knowledge. Some 85% of all the high-growth businesses created in America in the past 20 years were launched by college graduates. University research departments have helped to drive innovation in everything from design to entertainment. … Emigrés have always been more entrepreneurial than their stay-at-home cousins: the three most entrepreneurial spaces in modern history have been the ones inhabited by the Jewish, Chinese and Indian diasporas. In today’s knowledge economy educated émigrés are at the cutting edge of innovation. They create more firms than regular folk; they circulate ideas, money and skills; they fill skills gaps; and they mix and match knowledge from different parts of the world.”

Despite the fact that one of the cluster models mentioned earlier is the local hero model. The article insists that “today’s smart entrepreneurs start global. They search for materials, talent and opportunities the world over and define their competitive environment globally rather than locally.” I am strong advocate of looking for opportunities in emerging market countries. It’s a strategy I both preach and follow. In pursuing emerging market opportunities, I look for the best local available talent to help ensure success. It’s a win-win situation.

“Daniel Isenberg, of HBS, points out that today’s entrepreneurs are pioneering a new business model. In the old days globalisation was incremental. Companies first established themselves in their local markets and then expanded abroad slowly, starting in their own regions. Now a number of them span the globe right from the beginning.”

The Economist reaffirms what it mentions elsewhere in its special report, entrepreneurs are found around the globe from the U.S. to Brazil to Denmark to Israel to India to Singapore to New Zealand to China. In addition, “successful entrepreneurs are also forming some surprising cross-border collaborations. Shai Agassi, an Israeli-American businessman based in Palo Alto, California, is promising to upend the car industry by going electric, in alliance with politicians, entrepreneurs and companies in Israel, Denmark, Japan and France. Israel and Denmark are both building networks of recharging stations. Danish entrepreneurs are working on technology that will prolong the life of batteries. Renault and Nissan are building electric cars.” At a time when the auto industry around the world is collapsing, a replacement framework may just be in the works.

Despite all the talk about global reach and transcontinental partnerships, the article concludes that geography still plays an important role. One of the things that I see happening, both as a result of last year’s spike in oil prices and this year’s economic recession, is the rise of regionalization within globalization’s larger framework. As the article puts it:

“It would be a mistake to conclude from all this that entrepreneurship is killing distance entirely. Many of today’s start-ups have to grapple with logistical problems that used to be the preserve of large companies. Entrepreneurs need to travel the world to check on far-flung operations, organise globe-girdling supply chains and comply with a plethora of legal and regulatory systems. Talk to any budding entrepreneur and you soon discover, too, that local cultures matter. The more globalised the world becomes, the more people look for comparative advantages that cannot easily be bought or replicated; and the more far-flung their business operations, the more entrepreneurs rely on bonds of trust with their fellow businessmen.”

As I noted at the beginning of this post, magic really only works in myth and legend. In the real world, luck, culture and policy all play an important role. I believe, however, that one can improve one’s luck when it comes to entrepreneurial success by ensuring that a sound business plan undergirds one’s dreams. The world doesn’t need another bubble to burst. It needs jobs. Successful entrepreneurs create jobs. Really successful entrepreneurs create entire industries.