Paper presented to the First Soweto International Conference on Entrepreneurship and Small Business Development, 27-28 January 2010 PROMOTING LOCAL ECONOMIC DEVELOPMENT THROUGH ENTREPRENEURSHIP David Smallbone Professor of Small Business and Entrepreneurship Small Business Research Centre Kingston University, Kingston Hill Kingston-upon-Thames, KT2 7LB, UK (tel: +44(0)208 411 5218; Email: d.smallbone@kingston.ac.uk; Website: http://business.kingston.ac.uk/sbrc) 1. INTRODUCTION This paper is concerned with the role of entrepreneurship in local economic development and how this can be enabled (or constrained) by the policy environment. The aim is to contribute to debate concerning how South Africa s townships might be converted into economic powerhouses. While entrepreneurship results from the creativity, drive and enterprise of individuals, or groups of individuals, the policy environment in which they operate can enable and/or constrain the nature and extent of the entrepreneurship that occurs and its contribution to economic development. While some may view definitional issues as mainly an academic exercise, in the case of entrepreneurship the definition used has implications for the nature and extent of its contribution to local and national development. In practice, there is a wide range of definitions of entrepreneurship drawing on a long tradition of literature, in which entrepreneurs are ascribed different roles and characteristics by different theorists. These include the risk-bearing and uncertainty-reducing role, emphasised by Knight (1921), and the innovator role, emphasised by Schumpeter (1934). In their definition of entrepreneurship, Wennekers and Thurik (1999) emphasised the perception and creation of new economic opportunities by individuals or groups, combined with a willingness and ability to introduce ideas into the market, in the face of uncertainty and other obstacles. Defined in this way, not all new or existing small businesses would be considered entrepreneurial, since many small firms are conservatively managed, supplying so-called copycat products or services to the market. However, it is so-called Schumpeterian entrepreneurs that provide a motor/source of dynamism for the economy through the introduction of new products and processes and innovation, based on the 1
identification of new market opportunities. The key contribution of entrepreneurship to economic growth is the creation of 'newness', which includes new business start-up but also the transformation of inventions and ideas into economically viable entities. If entrepreneurship is to contribute to raising living standards in Soweto, it important that innovative enterprises are encouraged to develop, alongside other types of small business. In contrast with a narrowly defined emphasis on the creation of newness, entrepreneurship can be much more broadly defined to include all self-employed and small business owners, regardless of their behavioural characteristics. Such an approach may be justified on the basis that the creation of any businesses represents an entrepreneurial act, even if individuals subsequently manage their businesses conservatively. In addition, as Wennekers and Thurik (op cit) note, few business owners are pure Schumpeterian entrepreneurs or pure shopkeepers, but rather a combination of the two with their entrepreneurial orientation often varying over time. It is also easier to measure entrepreneurship based on a broad definition because publicly available databases tend not to incorporate the behavioural characteristics of businesseses, such as their innovative or growth performance. The rest of this paper uses a broad definition, unless otherwise stated, not least because small business ownership offers a route to social inclusion for Soweto s population, not just a potential economic driver. The rest of the paper is divided into three sections and a conclusion. The first section considers the relationship between entrepreneurship and economic development. The second section deals with social and community entrepreneurship, which appear to have particular potential application in Gauteng. The third section is concerned with local economic development policy. 2. ENTREPRENEURSHIP AND ECONOMIC DEVELOPMENT The interest of policy makers in entrepreneurship throughout the world has grown in recent years, as its contribution to economic growth and development has increasingly been recognised. Figure 1 describes the linkages between entrepreneurship and the performance of an economy. The diagram suggests how an entrepreneurial small and medium enterprises (SME) sector contributes to economic competitiveness and gross domestic product (GDP) growth through three main processes. Firstly, there is productive churn, which refers to the processes of business birth and death. Business churn is productive and contributes to productivity growth at the macro-level, if the productivity of new business births is higher than productivity in non-surviving enterprises. The second key process is competition between firms, which is viewed as a driver of productivity increases. In other words, the creation and growth of new and small firms is expected to drive productivity by acting as a competitive spur to other businesses, fostering improvements in quality and efficiency. The third is innovation, as firms seek to compete through the development of non-price based competitive advantages. Employment growth is presented as a consequence of competitive, productive business growth. The emphasis on the role of high-value-added, enterprising SMEs in contributing to economic growth applies at the local as well as the national level, although clearly not all SMEs share these characteristics. 2
Figure 1: Source: UK Small Business Service It is important to consider the role of entrepreneurship at the micro- as well as the macrolevel. There can be a variety of reasons why people start and run a business, which includes self-fulfilment and sources of satisfaction for individuals that go beyond monetary return. In this context, the Global Entrepreneurship Monitor (GEM) 1 distinguishes between necessitydriven and opportunity entrepreneurship. Survey respondents are asked whether they started their businesses to take advantage of a business opportunity or because you have no better choices for work (i.e. necessity). Not surprisingly, necessity entrepreneurship is more common in transitional and developing countries (and in disadvantaged communities). In South Africa, for example, the relative importance of opportunity vs necessity entrepreneurship has improved since 2002, although the improvement needs to be seen in the context of South Africa s low overall total entrepreneurial activity (TEA) rate 2 (Herrington et al., 2008). While in most transitional and developing countries few people start businesses in response to identified market opportunities, from a policy perspective one has to question the value of such a crude dichotomy when detailed case study evidence shows that in practice businesses are started for a variety of motives (Smallbone & Welter 2003; Rosa et al., 2006). New venture creation must be viewed as a process, with deep-seated antecedent influences and motivations as well as immediate triggers. Both may be influenced by a specific set of 1 The Global Entrepreneurship Monitor (GEM) is a research consortium, which in 2009 included 54 countries. GEM measures differences in the level of early stage entrepreneurial activity between countries (http://www.gemconsortium.org/). 2 TEA refers to total entrepreneurial activity and is a calculation used by GEM to measure the prevalence of nascent entrepreneurship and new firms in the adult population. 3
external conditions, as well as by personal circumstances. Overly simplistic classifications of individuals pay insufficient attention to the effect of their learning experience over time, which can contribute to changing their aspirations for their business over time, as they get better knowledge of their own capabilities and perhaps also as external conditions change. As a consequence, even if creating a new venture is primarily driven by necessity or opportunity, it is inappropriate to place entrepreneurs into static dichotomous categories, because of the need to incorporate a dynamic element. This is an important point from a policy perspective, since it has implications for the entrepreneurial capacity of an economy and what needs to be done to enhance it. Policy makers should seek to encourage innovation and higher valueadded activities, while avoiding using overly simplistic typologies as a basis for targeting resources. According to the South African government, local economic development (LED) is an approach which allows and encourages local people to work together to achieve sustainable economic growth and development, thereby bringing economic benefits and improved quality of life for all residents in a local area (http://www.thedplg.gov.za/subwebsites/led/). Essentially, LED is based on promoting approaches that respond to local needs and conditions. There is no single model of how to implement LED, or of what strategies and actions to adopt, as the efficiency and effectiveness of regional development is influenced by a range of institutions and processes. At the same time, the importance of local ownership of the development process is central to most LED approaches. According to the World Bank, the purpose of LED is to build up the economic capacity of a local area to improve its economic future and the quality of life for its residents. It is a process by which public, business and non-governmental sector partners work collectively to create better conditions for economic growth and employment generation (http://web.worldbank.org/). Local economic development focuses on enhancing competitiveness, increasing sustainable development and ensuring that development is socially inclusive. LED is about communities continually improving their investment climate and enabling the environment for business to enhance their competitiveness, retain jobs and improve incomes. This can involve a variety of approaches, including: Ensuring that the local investment climate is functional for local businesses; Supporting small and medium sized enterprises; Encouraging the formation of new enterprises; Attracting external investment (nationally and internationally); Investing in physical (hard) infrastructure; Investing in soft infrastructure (educational and workforce development, institutional support systems and regulatory issues); Supporting the growth of particular clusters of businesses; Targeting particular parts of the city for regeneration or growth (areas based initiatives); Supporting informal and newly emerging businesses; Targeting certain disadvantaged groups. (http://web.worldbank.org/). The promotion of LED through entrepreneurship depends on an enabling and effective public policy framework. In this regard, having analysed entrepreneurship policy measures in ten mature market economies, Stevenson and Lundstrom (2005) identified six areas of emphasis 4
that emphasise the variety of ways in which policy may encourage and facilitate entrepreneurship. These include: i. Promotion of an entrepreneurship culture and more favourable attitudes towards entrepreneurship; ii. Integration of entrepreneurship education in schools and at all levels of post-secondary education; iii. Reduction of barriers to entry and proactive measures to make it easier for enterprises to enter the market; iv. Provision of seed financing; v. Start-up business support, such as mentoring programmes, incubators aimed at increasing the number of new local businesses; vi. Tailored efforts to increase participation in business ownership from specific underrepresented groups, e.g. ethnic minorities, women, young people. While there is some overlap with SME policy, entrepreneurship policy places greater emphasis on new venture creation, rather than on existing businesses, as well as emphasis on the wider environment for entrepreneurship and the forces influencing the supply of and demand for entrepreneurs. Others have emphasised the variety of government policies and actions that can affect entrepreneurship, including: i. Macroeconomic policy; ii. The costs of legislative and regulatory compliance, which can fall disproportionately heavily on small and particularly new enterprises; iii. Taxation policies, which include both the total tax burden but also the cost of compliance that can be affected by the frequency with which changes are made to the tax regime and the methods used for collection; iv. The influence of government on the development of market institutions, such as banks and other financial intermediaries, as well as business support and training organisations; v. The influence of the government on the value placed on enterprise and entrepreneurship in society, which in the long term is affected by factors such as the curriculum and methods of teaching in the education system at all levels, but also by the behaviour of politicians and officials in their dealings with private firms; vi. Direct intervention, designed to assist small businesses to overcome size-related disadvantages, which is often rationalised in mature market economies in terms of market failure (Smallbone & Welter, 2001). While not all of these are under the control of local policy makers, the behaviour of local institutions can be an important enabling or constraining factor for entrepreneurship development. 2.1 Entrepreneurship and local economic development There is a particular need to develop proactive local economic development strategies in disadvantaged communities, which are typically characterised by high unemployment, low disposable incomes combined with little individual wealth, low skills and formal educational levels, scarce financial resources and in many cases, a dependency culture. The population in such communities often suffer from social exclusion, which is said to occur when people or areas suffer from a combination of linked problems, such as unemployment, low skills, low 5
incomes, poor housing, high crime environments, bad health and family breakdown (UK Cabinet Office 2001). Social exclusion is about more than income. It is about prospects, networks and life chances. It is More harmful to the individual and more damaging to self esteem for society as a whole than material poverty (Tony Blair, 1997). At the same time, these communities often possess strong social capital, which refers to connections among individuals i.e. social networks and the norms of reciprocity and trustworthiness that arise from them (Putnam, 2000). As some ethnic minority communities in Europe and North America have demonstrated, social capital can be an important asset in community-based LED (e.g. Fadahunsi et al., 1998). In the case of Gauteng, previous research enables a profile of small, micro and medium enterprises to be described (Finnmark Trust, 2006). The picture that emerges is one where the majority of businesses are informal (65%), run from home (69%) and female-owned (62%). Most are involved in simple trading activity, with only 7 per cent said to add value. Not surprisingly perhaps, Gauteng businesses are reported to be predominantly necessity-driven and survival rates are a modest 30 per cent. Significantly, an entrepreneur s ethnicity appears to be a defining characteristic, since most informal and micro-businesses are black-owned, whereas established,formal and growing businesses are mainly owned by members of the white, Asian and coloured populations. In this context, entrepreneurship in the form of the development of new and small businesses can make a number of potential contributions to the development of local economies, which includes employment generation, raising disposable incomes, external income generation and the development of supply chains, as well as to innovation, to local service provision and finally to increased social inclusion. However, in all economies, the small business sector is a heterogeneous mix of businesses with varied growth orientation and performance. In a mature market context, a minority of growth-oriented firms create a majority of new jobs (Storey & Johnson 1987; Storey 1994) and many small firms show little dynamism in this respect (e.g. Gray 1998). Micro-level research evidence from transitional environments shows that once small firms have survived the first year or so (and high rates of non-survival among new firms is a phenomenon that is not confined to transitional countries), they are capable of generating employment, although their ability to do so is strongly influenced by external conditions. A thriving small business sector can also contribute to increasing the circular flow of income in a local economy, as well as to local service provision, including specialist retailing, restaurants and a variety of consumer services. Higher disposable incomes can result for dependents, as well as individual entrepreneurs and employees, who are typically recruited locally. Another economic role of SMEs in mature market economies is as a source of innovation, although much of this is incremental rather than more radical innovation. It must also be recognised that entrepreneurship has a social as well as an economic dimension, particularly where unemployed people become gainfully employed through self-employment, running their own businesses or working for others. It is important to note that not all small firms are directly serving the final consumer, since in many cases firms are supplying other businesses within a supply chain. While subcontracting and similar arrangements can be exploitative, some transitional economies, such as Estonia, demonstrate how subcontracting-type relationships can be used by small firms as a stepping stone towards more independent supplier status. Supply chain development is a potentially powerful policy tool for SMEs in developing and transitional economies. Relevant policy 6
actions include making public procurement contracts more accessible to SMEs, actively promoting the development of backward linkages from inward investing firms, together with business support initiatives designed to broker supply chain relationships and help build the capacity of SMEs to supply throughout the supply chain. The potential benefits of foreign direct investment (FDI) in contributing to the development of the local SME sector, and particularly medium-sized companies, can also be illustrated with reference to Singapore, which has been presented as one of the success stories of encouraging inward investment FDI as a means of developing SMEs. This has been achieved by encouraging the development of partnerships and linkages between inward investors and local SMEs (UNCTAD, 1998). FDI has also made a significant contribution to the development of the 'high tech' cluster in Banglalore, although in this case, its role was secondary, because of the initial clustering of research centres. In policy terms, the Banglalore case illustrates the role of government in contributing to the attraction of the city as a destination for inward investment. 3. SOCIAL AND COMMUNITY-BASED ENTREPRENEURSHIP It can be argued that social enterprise has a particular role to play in disadvantaged communities where the level of private entrepreneurship is low and its development potential is negatively affected by resource deficiencies, a low skills base and a lack of role models, which can all affect the confidence and motivation to act for many people. In this context, certain types of social enterprise development have an important potential role in local development. The subsequent discussion focuses on those types of social enterprise that would seem to have the most direct relevance to the regeneration of deprived communities in Gauteng, rather than describing social entrepreneurship more generally. In the UK, social enterprise is viewed by policy makers as one of the ways of fostering social inclusion through the development of enterprising communities and localities. Social enterprise has also been promoted in European policies over the last decade. A social economy unit was set up in the early 1990s by DG XXIII of the European Commission (EC), which, more recently, has officially recognised a consultative committee on cooperatives, mutual societies, associations and foundations, which are described as social economy enterprises. In addition, the EC s Green Paper on entrepreneurship includes social economy enterprises, or non-profit-driven enterprises among the applications of entrepreneurship referred to (Commission of the European Communities, 2003:6). It also refers to the role of entrepreneurship in the efficient delivery of health, education and welfare services (p 8), with social economy enterprises encouraging the participation of stakeholders in the delivery of such services. Such an approach can supplement public resources and extend the range of services offered to consumers. There is no universally accepted definition of social enterprise, which means they are sometimes defined in different ways by different organisations for different purposes. However, the current definition of social enterprises used by the UK government states that a social enterprise is: a business with primarily social objectives, whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profits for shareholders (DTI, 2002). The major objectives of social enterprise are to provide goods and services which neither the market nor the public sector is willing or able to provide, to develop skills, create 7
employment and foster pathways to integration for socially excluded people (DETR, 2000). By using community-based enterprises and basing development on local skills, disadvantaged people are able to overcome their poverty through employment, while at the same time providing goods and services that their communities lack. Pearce (1993), who is a longstanding practitioner in the community enterprise movement in the UK, has provided an alternative summary of the contribution of social enterprises, emphasising what social enterprises are good at, which includes: Creating and managing workspace; Running training programmes targeted at the local population; Running job creation schemes geared at getting the long-term unemployed back to work and acquiring some skills; Offering local services, often on contract to the public sector, which can be done by relatively unskilled and formerly unemployed local people; Running local commercial services which the private sector cannot make pay; Providing care services where quality of care should be as or more important than the profit margin provision of recreational facilities; Running local heritage/tourist centres; Providing specialist services to other community enterprises and community organisations; Providing social housing; Providing low-cost personal and business loans through credit unions. To summarise, social enterprises can potentially contribute to local development by filling gaps in service delivery, improving the employability of residents, giving people experience of enterprise that may encourage some to start their own businesses, as well as contributing to the development of social capital through the community co-operation they encourage, in terms of interpersonal networks and collective engagement (Putnam, 1993). Figure 2 demonstrates the direct and indirect effects of social enterprise activity on local economies. In addition to the direct effects of jobs and service provision, indirect effects include the multiplier effects of expenditure on materials and supplies, together with the benefits in terms of social capital described above. Figure 2Impact of social enterprises 8
The contribution of social enterprises to local service provision and employment may be illustrated with reference to a long-established London-based social enterprise called Hackney Community Transport. Hackney Community Transport was founded in 1982 by a number of local community groups in the London Borough of Hackney, one of the poorest local authority areas in the country, with the aim of providing affordable community transport services for the use of local voluntary organisations, charities and community groups. In 2010, the firm is one of the UK's best known social enterprises delivering a series of innovative public and community transport and training services. The new millennium has seen a substantial growth in the number of transport and training services operated by the enterprise, with operations now extending outside of London, through the provision of bus services in West Yorkshire. Community transport services have expanded through a merger with Lambeth and Southwark Community Transport and the expansion of existing services. Training services continue to raise employability levels in London, underlining the relevance of the social enterprise business model to the provision of public transport and training services. A second example refers to the community business model, which is a long-established urban regeneration tool in Scotland (Macarthur,1986). In the 1980s a number of community businesses in Scotland were focused on renovating some of the worst housing estates in the country. These typically provided construction skills training for locally recruited staff with contracts for renovating apartment blocks and improving the local environment being delivered by a community business rather than a large corporate. Another relevant form of social enterprise from the UK experience is development trusts, which are community-owned and community-led organisations, based on self-help. Development trusts trade for social purposes and use the ownership of buildings and land to 9
bring about long-term social, economic and environmental benefits in their communities, which have often experienced the worst economic decline. They are independent, but work with the public sector, private businesses and community groups (http://www.dta.org.uk/). Development trusts are engaged in the economic, environmental and social regeneration of a defined geographical area, by setting up and running an inclusive mix of services or facilities which respond to the needs of a community. Projects undertaken include property development, managed workspace, community businesses, arts programmes, sports and leisure facilities, retail and market space, town centre management, building restoration, environmental improvement, community transport, education work, employment training, information services, community development, social provision, health centres, countryside management, horticulture and agriculture, tourism and cultural industries, and so on. As independent organisations, development trusts seek to avoid over-reliance on a single funder, and also aim to reduce dependence on grant aid in the long term. To do so, they may create an income-earning asset base, and build up trading operations or contract income. One recognises that in poor communities there is often a social deficit and contributions from public or charitable funds may continue to be necessary. Most importantly, development trusts are driven by and accountable to their community in various ways. Some have boards elected by a ballot of all those in the area, others have a membership base from which elections can be made. Others have a structure in which community groups, the local authority, local businesses and others are represented. Others derive their community legitimacy not only through constitutional arrangements but also from day-to-day practice by involving local people in their work. 4. POLICIES TO PROMOTE ENTREPRENEURSHIP IN LOCAL ECONOMIC DEVELOPMENT 4.1 Designing policy support A variety of types of policy intervention, summarised below, are available to policy makers at local level who are interested in promoting entrepreneurship and small business development. A number of key principles need to be kept in mind in designing the portfolio of measures and programmes to support entrepreneurship within a local economy. These include: (i) (ii) (iii) Since entrepreneurship results from the creative actions of individuals (and groups of individuals) rather than from state actions per se, the aim should be to create an enabling environment to facilitate private entrepreneurship. Policy interventions are justified where the market (such as for finance, information, training or premises) can be shown to be failing or operating imperfectly, as far as new and small firms are concerned. In a transition context, there is often a need for public policy to take on a market-building role. Since one of the aims is to use entrepreneurship to promote LED, policy interventions should seek to promote value added, since this is a route to stimulating economic development through external income generation and to higher disposable incomes for entrepreneurs and their dependents. 10
(iv) The aim should be to promote and support entrepreneurs throughout the entrepreneurial process. This includes raising the profile of entrepreneurship as a career option among the population to encourage nascent entrepreneurship, providing support at the pre-start-up stage, as well as for start-ups and for established small businesses. A key point to recognise is that the support needs of small businesses vary at different stages of the entrepreneurial process and of business development. 4.2 Types of policy support Specific types of support include: Support for new business start-ups: this can range from the provision of basic information to intensive support such as mentoring, coaching or business incubators. Access to specialised support for existing businesses: once businesses become established, their support needs typically become more specialised than during the start-up phase. As a result, co-operation is needed on the supply side of the support system in order to ensure businesses can find the help they need through an efficient system of referral between support providers. Training for start-ups and existing business owners: The lower propensity of small firms to engage in formal management training, compared with larger enterprises, is well established. There are various reasons for this, which include low effective demand because of the direct monetary cost and/or the opportunity costs of time spent away from the firm. On the supply side, the training provided may be inappropriate to the perceived needs of firms. Provision of loan and seed finance: Access to finance is one of the most frequently cited problems facing those setting up and running businesses. The purpose of subsidised finance and grant provision is to seek to address gaps in the market, allowing start-ups in particular to access finance when mainstream banks and investors are unable to meet their needs. Another potential target group is young, rapidly growing businesses, which may also be collateral-constrained because of their rapidly growing demands for finance. Promotion of entrepreneurial role models and business networks: the active promotion of role models and the use of awards and competitions to promote entrepreneurship as a career option are particularly important in regions and localities where entrepreneurship is weakly developed and there is little culture of enterprise. Entrepreneurship education and entrepreneurship programmes for young people: although the effects may take some time to become evident, secondary and tertiary education have a critical role to play in encouraging young people to consider entrepreneurship as a career option. Supplier diversity programmes: supplier diversity refers to widening and diversifying the supply base of large corporates and public sector bodies. Supplier 11
diversity programmes represent an attempt to increase the range of suppliers by opening up procurement to small firms. Based on experience in the USA and Europe, the most effective supplier diversity programmes involve co-operation between purchasing officers and business support intermediaries, who can act as brokers through meet-the-buyer events, capacity builders, e.g. through quality assurance programmes, and as promoters of co-operation between small firms (Ram & Smallbone 2003b). Major public events, such as the World Cup or the Olympic Games (Smallbone et al., 2009) represent an enormous potential opportunity for public bodies to promote procurement as a tool of LED. In developing countries, limited personal and family savings and an absence of financial innovation can severely limit the growth prospects of even the most promising start-ups. As a consequence, interventions designed to increase the supply of finance can be crucial, ranging from microcredits to larger loans for growth-oriented businesses. 4.3 Effective delivery of business support Experience the world over is that the effectiveness of well-designed measures and programmes crucially depends on how effectively these are delivered. In this respect, the role of the state is a strategic and co-ordinating one, rather than to be responsible for the actual delivery of business support. In this regard, the UK s Business Link model has a number of relevant features. Business Link is the English business support service, making up a network that covers the entire country. Business Link provides free business advice and support services, which are available online and through local advisers. Online access to information is provided through a single national portal (www.businesslink.gov.uk/). This contains a self-help tool for new business start-ups and SMEs to access information, with links to all relevant ministries and departments. By entering a postcode into the national Business Link portal, enquirers may find out about the specific help available within their region and request a call from the local Business Link. While information is freely available to enquirers, more intensive support from business advisers is available through their local Business Link. In practice, Business Link is a service brand, based on a contract which describes the services that government wishes to see delivered under the brand. The current Business Link service offer focuses on the nationally agreed Information, Diagnosis and Brokerage (IDB) model. The information aspect provides non-competitive access to all information that is relevant to any business on the basis of need, thereby demonstrating a single gateway approach to business support. Diagnosis examines customer needs as a precursor to Business Link brokering external expertise to provide the actual services. Brokerage is an attempt to move away from a one-size-fits-all approach. In a brokerage model, the role of the business adviser is to assess needs and direct the client to those sources of advice best able to fulfil that need. The IDB model changed the role of the business adviser within Business Link. Previously Business Link offered a range of services including specialist advice and the delivery of some schemes, which some businesses found confusing. Under the IDB model, Business Link is no longer involved in delivery. Differences have emerged in Business Link particularly over the extent to which the brokered relationship is managed. As clients move from information to brokerage they shift from being lightly assisted to intensively assisted. 12
Various criticisms have been made of the Business Link system at different stages of its development. However, adjustments have been made to remove some of the causes of concern, which demonstrate a degree of policy learning. Nevertheless, they are important potential learning points for countries interested in learning from the Business Link model. Firstly, low penetration levels that characterised certain target groups in the past, including women (Bennett 2008) and members of ethnic minorities (Ram & Smallbone, 2003a) have led to these groups now being part of the targets and reporting process, which means that Business Link operators (BLOs) need to take steps to ensure these are met. Secondly, prior to the introduction of the IDB model, referral to non-public agents was limited (Bennett 2006). This led to the criticism that public money may be crowding out market-based provision of business advice. Thirdly, earlier targets for raising fee income from clients proved unrealistic, contributing to a distortion of both client and adviser behaviour. This aspect has now been modified by providing core services free of charge. Fourthly, the difficulty of recruiting sufficient high quality advisers reduced the effectiveness of the public system in the early days. It also contributed to considerable variation in performance between BLOs. Developing an effective business support system in a developing country context presents additional challenges because of the typically low level of both the demand for and supply of business development services (BDS). As a result there tends to be an initial emphasis on public policy initiatives, often involving foreign donors, with some form of subsidy typically essential if support is to be made available to more than an elite group of medium-sized firms. Recent experience in China led to the conclusion that while some financial contribution from all clients receiving BDS may be desirable, there is a case for offering a degree of subsidy for some types of BDS targeted at specific types of firm. An example is a subsidised consultancy scheme, targeted at small enterprises with a desire and potential to grow, particularly those that are seeking to develop non-local markets (Smallbone et al., 2008). Other issues identified included a need for quality control over advisers and consultants, a need for proactive marketing of BDS to SMEs and a need for training local consultants. 4.4 Promoting innovation One of the results of previous research on Gauteng businesses is the very low level of innovation and value added (Finnmark Trust, 2006). This is important because the differentiation of a product or service affects the price that can be charged and the added value that is generated. It is important to stress that innovation is a much wider concept than technological innovation. According to Porter (1990) innovation includes better methods or ways of doing things, manifested in product changes, process changes, organisational changes, new approaches to marketing and/or new forms of distribution, as well as technological developments. An approach to innovation which emphasises the commercialisation of ideas and methods that are new to the firm inevitably means that much innovation in practice can appear rather mundane and incremental rather than radical, depending upon an accumulation of small insights rather than on major breakthroughs. Since the number of firms which are likely to be truly innovative in a technological sense is small, this emphasis on a broadly defined concept of innovation makes it relevant to the majority of SMEs and not just to high-technology companies. Increasing the innovative performance of SMEs is currently a high priority for entrepreneurship policy in the former socialist states of Central and Eastern Europe that are 13
not member states of the European Union, where much of the initial development of SMEs during the transformation period in the early 1990s focused on services, subcontracting and low value-added activities. Changing this orientation requires a major effort, since it is widely recognised that the innovative performance of SMEs depends only partly on the attitudes and strategies of entrepreneurs. It is also affected by the effectiveness of the regional and national innovation systems, which include public research institutions, technology transfer organisations, the educational system, the legal and institutional framework and public policy, as well as enterprises (Fritch & Lukas, 1999). As a consequence, there are various attempts in the new member states of the European Union to build a market-oriented innovation system in which the role of universities is central. A good practice example is the SPINNO programme in Estonia, which began in 2001. The specific objective of SPINNO is to create an entrepreneurial environment in research and development (R&D) and applied higher education (HE) institutions in the fields of engineering and technology, to develop the potential for co-operation with enterprises, in order to increase the benefits from R&D activities. Key activities include the facilitation of knowledge transfer, developing entrepreneurial and business skills within HE institutions, the provision of technology transfer services and encouraging co-operation with local and foreign partners for the acquisition and exchange of information and technology. SPINNO is part of a measure to promote R&D activities and innovation in the Estonian National Development Plan for the implementation of EU Structural Funds. Eligible costs for funding include staff salary costs, up to 15 per cent of overhead costs, services purchased e.g. consultation, advertising, surveys, training costs and travel costs. The maximum financial assistance available is approximately 1 million per application, up to 65 per cent of eligible costs. Support for projects may last for up to three years. An interim review of the SPINNO programme, undertaken in 2003, concluded that none of the three projects supported at the time would have started without SPINNO funding, thereby demonstrating the supplementary nature of the intervention (Segal, Quince & Wicksteed, 2003). While the fact that its interim nature limits the ability to identify the influence of the SPINNO programme, the report contributed to its continuous improvement and may therefore be considered as an example of good policy practice. 4.5 Business Incubation Business incubation is a distinctive type of business support that is particularly applicable in disadvantaged areas or communities where there is little tradition of entrepreneurship and what there is tends of be of the low-value-added sort. Incubation is different from other types of start-up support in that it provides a comprehensive, hands-on business support environment. Since it is a resource-intensive support activity, most incubation has to be selective. The purpose is not to provide support indefinitely, so most incubation support is provided for a limited period, after which client businesses are encouraged to move on. The term business incubator is often used to describe the physical facility through which business incubation is delivered, but virtual incubators also exist, particularly in remote rural environments, such as the Scottish Highlands. A good example of a country that has made a significant commitment to business incubators is South Korea, as a key element in its support for new business start-ups. Support for the operation of business incubators in universities and institutes is seen as part of infrastructural provision for start-ups, which can also access venture and start-up funds. This is complemented by a national education programme in universities targeting would-be 14
entrepreneurs or new starters, which is designed to improve their management capabilities and raise the start-up success rate. The Korean government also provides financial support and training for entrepreneur clubs at universities to inspire entrepreneurship. The Korean approach reflects the wider international experience, which is that successful incubators are those where the emphasis is on incubation as a process. While many university-based incubators focus on technology-based entrepreneurship, the principle of incubation is much more widely applicable. Examples from London include an incubator focusing on supporting disadvantaged young people entering entrepreneurship and a cluster-based incubator focusing on the creative industries. 4.6 Community-based business support One of the challenges facing business support agencies in disadvantaged communities is penetration, because of the low levels of trust in formal institutions, which is often found in these cases. In this context, a model of community-based business support developed in London has a number of positive features, focusing on delivering business support to asylum seekers, newly arrived migrants and members of other difficult-to-reach groups (Blackburn et al., 2008). Key features include recruiting business advisers from within the communities they will serve; providing training for business advisers leading to external accreditation based on nationally recognised standards for business advisers; business advisers delivering business advice through community organisations, most of which were not business orientated; and forming a professional body (i.e. Association of Community-based Business Advisers) to promote the model, represent the interests of members and win new contracts. The case demonstrates how a community-embedded approach can act as a vehicle for engendering economic engagement by disadvantaged groups. Although operating in a mature market economy, the target groups for the community-based business adviser approach have proved very difficult to reach by mainstream agencies. While the details of the approach would need adapting to local conditions, the essential principles are potentially transferable into other social contexts. 5. CONCLUSIONS Entrepreneurship is rapidly becoming a global phenomenon with the potential to empower individuals and communities within an enabling local development framework, to increase economic and social inclusion as well as contributing to economic development. At the same time, the role of policy is a key influence on how much of this potential is fulfilled. Resources are needed to help to kickstart the process and to provide an institutional framework within which productive entrepreneurship can thrive. In this context, it is important to adopt a broadly based view of what constitutes relevant policies, since a range of government policies and actions can affect the entrepreneurship that occurs, as well as the extent to which the businesses that are established are able to grow. Regulation is one of the best examples of this in so far as it can affect the ease or difficulty of new business start-up. There is also a need to improve join-up policies in order to maximise their impact. A good example is policy to promote FDI and SME policy, where there is potential synergy to strengthen the indigenous SME sector in a situation of resource scarcity (Smallbone, 2009). Although the topic is not a new one and the experience in some countries in the past has not been encouraging, a number of recent trends suggest there may be greater scope for 15
developing such linkages in the future. These include the emergence of new sources of FDI in developing and emerging economies themselves (Svetlicic & Rojec, 2003); increasing signs of SMEs internationalising their operations rather than simply exporting from their domestic base, as well as a continued increase in outsourcing by MNEs. While such trends undoubtedly present challenges to SMEs in transitional and developing countries, they also present supply opportunities, which policy support can help firms to identify and exploit. In most countries, it is a minority of SMEs that make a disproportionate contribution to economic development and employment generation. However, in some transitional and developing countries, there is evidence of a missing middle, which refers to the lack of a core of medium-sized, growth-oriented SMEs, between large firms on the one hand, and microenterprises and small firms operating mainly in the informal sector, on the other. Policies to encourage SME-FDI linkages may be one way of addressing this problem, thereby strengthening the economic structure and contributing to poverty alleviation, by increasing the multiplier effects of any endogenously stimulated growth through the economy. Such an approach focuses on strengthening capacity throughout the supply chain and is compatible with measures designed to widen access to public procurement contracts. Whatever policy approach to SME development is adopted, it should be based on systematically generated evidence, which the community itself is centrally involved in generating. It should also be based on partnership between the public and private sectors to provide the necessary investment and institutional frame, together with community engagement on which sustainable local economic development depends. As experience in the transition economies demonstrates, institutional capacity building needs to be central to the process, on the side of the formal institutions as well as the formal and informal institutions which are part of the local community, REFERENCES Bennett R. 2006. Government and Small Business in Carter S. & Jones Evans D. (eds) `Enterprise and Small Business: Principles, Practice and Policy, Second Edition, Addison Wesley, 49-75 Bennett R. 2008. SME policy support in Britain since the 1990s: what have we learnt? Environment and Planning C: Government and Policy, 26, 375-397 Blackburn R., Smallbone D., Kitching J, Bednell T. & Pardo A. 2008. Community-based Business Advice: Evidence, Practice and Sustainability, paper presented at the 31st ISBE National Research and Policy Conference, Belfast. Commission of the European Communities 2003. Green Paper: Entrepreneurship in Europe, CECs, Brussels, 21/1/03, COM 2003. 27 final. DETR 2000. Local Quality of Life Counts, Department of Environment, Transport and the Regions, http://ww.detr.gov.uk/environment/sustainable/localind/appendix/append.html DTI 2002. Social Enterprise: a Strategy for Success, Department of Trade and Industry, http://www.dti.gov.uk/ Fadahunsi, A, Smallbone, D. & Supri, S 2000. Networking and ethnic minority enterprise development: Insights from a North London study, Journal of Small Business and Enterprise Development, 7, 3, 228-240. Finnmark Trust 2006. Finnscape Small Business Survey Report: Gauteng 2006, report prepared for the Finnmark trust and the Gauteng Enterprise Propeller by African Response. 16