Why entrepreneurs (technopreneurs) is vital

Nice article to read. It may help your techno test ;-)

Why local entrepreneurs are vital

By Linda Lim

EVERY market economy needs entrepreneurs - the people who put together capital, skills, labour and land to create the products and services. In their 2007 book, Good Capitalism, Bad Capitalism And Economics of Growth and Prosperity, William Baumol, Robert Litan and Carl Schramm conclude that entrepreneurial capitalism is 'the only sustained path to economic prosperity'.

Developing economies like India and Vietnam boomed only after they instituted market reforms and unleashed the entrepreneurial energies of their populations. Silicon Valley and its counterparts worldwide show that even in mature economies, entrepreneurs are responsible for the vast majority of technological and market innovations and new wealth creation.

The innovative capacity of start-up entrepreneurial business is so superior to that of large corporate entities that in many industries, the latter must acquire the former to maintain growth and profitability. One reason the United States has long out-performed Europe and Japan in innovation and growth is its much more entrepreneur-friendly business system.

Historically, where states have substituted for indigenous private entrepreneurs state-owned enterprises (SOEs), these are eventually privatised. Foreign multinationals can also substitute for indigenous private entrepreneurs, but exclusive reliance on them deprives the host nation of wealth generated by its own businesses, and increases its vulnerability to external forces over which it has no control.

In Capitalism With Chinese Characteristics - rated one of the 10 best books of 2008 by The Economist - MIT management scholar Yasheng Huang shows that Shanghai's over-dependence on the state and on foreign MNCs has resulted in the under-performance of Shanghai's economy relative to that of other Chinese cities with more vibrant local entrepreneurial sectors. Investment, employment creation, company size, income, profit and patent generation are all much lower in Shanghai than in Zhejiang and Guangdong.

SOEs and MNCs 'crowd out' local private enterprise in product and factor markets, including by diverting potential entrepreneurial talent into the state or MNC bureaucracy. These offer the talented individual initially greater remuneration, status and security, but also prevent the development of more locally sustainable sources of growth.

For a small, resource-constrained yet highly developed economy like Singapore, attracting and retaining MNCs in sophisticated niches requires more costly 'investment incentives' (capital subsidies) and greater dependence on foreign talent: The narrower and more specialised the activity, the less likely are native Singaporeans to be found who possess the required skills.

In the post-crisis global economy, MNCs are consolidating manufacturing supply chains by producing in fewer places, mainly large markets. Meanwhile, declining political tolerance for 'tax havens', 'currency manipulation' and other industrial policies will make it more difficult to offer MNCs investment incentives. There is also a balance-of-payments risk, since profit outflows by MNCs in Singapore will at some point exceed the inflow of earnings on Singapore's foreign investments abroad.

Home-grown entrepreneurs are more likely to keep their capital at home, repatriate it from abroad, pay taxes, and maintain production and employment during economic downturns. Small local businesses also account for most employment creation. In the current crisis, from China to the United States, they are already innovating to survive in ways that larger state and multinational bureaucracies cannot anticipate or implement as quickly.

Home-grown entrepreneurs are more likely to create jobs for Singaporeans for each dollar invested. Their investments will be less capital- and foreign talent-dependent, and less volatile than those of global MNCs. They would be more likely to purchase inputs and services locally than globally, creating a market for other local entrepreneurs and developing the services sector, the main driver of growth and employment in mature economies. More local stock market listings will give Singaporeans more options for investment.

Entrepreneurship will also provide a channel of upward mobility for the majority of Singaporeans who do not have the higher education credentials and specialised skills demanded by MNCs. Role models of successful local entrepreneurs will help retain scarce local talent who might otherwise emigrate to advance within MNCs' global career ladders or start businesses elsewhere. Successful local entrepreneurs will also be more likely to provide philanthropy and leadership for civil society.

Size is no limitation. Local entrepreneurs in Denmark, Norway, Sweden, Switzerland, New Zealand and Hong Kong produced world-class companies, and local entrepreneurs flourish in many small developing countries.

With more home-grown entrepreneurs, Singaporeans would reap more of the benefits of what is produced in Singapore, through higher labour incomes, domestic consumption and domestic profits. Rising income inequality - aggravated by highly paid foreign talent at the top and abundant foreign labour depressing wages at the bottom - should also moderate.

MNCs, foreign capital and foreign talent have done a lot for Singapore. We need and should continue to welcome them. But openness to foreigners does not mean that we do not need home-grown entrepreneurs. We do.

The writer, a Singaporean, is professor of strategy at the Ross School of Business, University of Michigan.