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INTRODUCTION: ABOUT THE CONFERENCE
The University Milano-Bicocca, Italy, proposed in 2010 a research on facilitating
elements of entrepreneurship in BRIC countries, joining in a research team the Institute
of Economics of the Federal University of Rio de Janeiro (IE/UFRJ), the Indian
Institute of Management Bangalore, Bangalore, India (IIMB), the Moscow International
Higher Business School, Moscow, Russia (MIRBIS) and the Fudan University,
Shanghai, China.
This team of researchers formed in 2011 the International Consortium for Innovation
and Entrepreneurship Research (ICIER). The Consortium aims to study the state of the
art in entrepreneurship and to analyze how entrepreneurial activities develop in BRIC
countries and Italy, identifying similarities and differences useful for entrepreneurial
strategies and public policies. The Consortium has as members professor Fabio Corno,
from Milano-Bicocca, professor Mathew Manimala from IIMB, professor Elena
Pereverzeva from MIRBIS, professor Jane Zhao form Fudan University and professor
Renata Lèbre La Rovere form IE/UFRJ. It obtained support from Fondazione Cariplo,
Italy for three years. In addition to the research on entrepreneurship in their countries,
ICIER members have been organizing international conferences on entrepreneurship.
The first was in Bangalore, India, organized by IIMB, with the theme “Entrepreneurship
and New Venture Creation”, between 8 and 10 December 2011. The second conference
was organized by MIRBIS in Moscow, during the Global Entrepreneurship Week, with
the theme “Entrepreneurship in Transitional Times.” The third conference was
organized by IE/UFRJ, in partnership with IBMEC, at Rio de Janeiro in 21 and 22
November 2013, during the Global Entrepreneurship Week. The theme of the Rio
conference will be “Policies of Support to Entrepreneurship”.
The papers that were presented tried to answer the questions proposed by the organizers
of the conference as follows:
 How does a Government (federal, state, local) can effectively support
entrepreneurs?
 What is the role of private equity, venture capital, angel investment and
crowdfunding for support of entrepreneurs?
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 How cultural context affects entrepreneurial decisions?
 What is the role of institutions that support entrepreneurship (business
incubators, junior enterprise programmes, technological parks) and develop
entrepreneurial capabilities?
 Is it possible to create new innovation environments? How?
 Are networks important for entrepreneurship development?
 How to promote entrepreneurial education?
 How to support entrepreneurship at the base of the pyramid?
 How the specific dynamics of the ICT sector frames entrepreneurial activity?
 Do ICT entrepreneurs need special types of support policies and entrepreneurial
capabilities?
After analyzing all papers, the organizing committee decided to group them in the
following themes:
Entrepreneurship in the BRIC countries; Policies to Support
Entrepreneurs; Social Entrepreneurship; Entrepreneurial Education; Entrepreneurship in
the ICT Sector; Incubators and Extension Activities and Innovation Environments.
These themes cover all the issues that were debated in the conference.
I would like to thank all the members of the scientific committee: Alex da Silva Alves
and Heliani Berlato (USP), Claudio d´Ipolitto (FGV-RJ), Carlos Bastian, Renata Brito
and Marco Sá Ribeiro (IBMEC), Lia Hasenclever, Julia Paranhos, Marina Szapiro and
Valeria Pero (IE/UFRJ), Samuel Façanha Câmara (UECE) and Thiago Renault
(UFRRJ).
Also, I would like to thank all the members of the organizing committee: Luiz Ozório
and Marcela Quintela (IBMEC), Leonardo Melo, Pedro Serpa and Ligia Inham (UFRJ),
and Antonio Botelho (IUPERJ)
Finally, I wish all participants a great conference!
Renata Lèbre La Rovere
Chair of the conference
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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ENTREPRENEURSHIP IN THE BRIC COUNTRIES AND
ITALY
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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ENTREPRENEURSHIP & NEW VENTURE CREATION IN
ITALY: KEY ISSUES & POLICY DIRECTIONS
Fabio Corno, Richa Lal, Stefano Colombo
Milano-Bicocca University, Dept. of Sociology, Via Bicocca degli Arcimboldi, 8 - Milan (Italy)
Abstract: This exploratory study examines the perceptions of Italian entrepreneurs about
their experiences with their own new venture creations in Italy. The study utilizes the
Ecosystem framework to examine the drivers of entrepreneurship. Our Ecosystem framework
stresses the fact that Entrepreneurship is pre-conditioned within the context of favorable
policies, financial and institutional support along with individual and personality traits of the
entrepreneurs. We used surveys across ICT and non-ICT entrepreneurs, followed by survey
with the Control Group. The findings suggest entrepreneurial spirit in Italy is high, and the
socio-cultural environment is perceived as encouraging entrepreneurship. The business
environment challenges confronting ICT and non-ICT entrepreneurs are related to government
policies and programs, access to finance, perceived need for support towards knowledge and
skill building and, finally, to exploring International markets. Theoretical and practical
implications are discussed along with directions for future research.
Keywords: Entrepreneurship, Italy, new venture creation, ICT, Non-ICT
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INTRODUCTION:
Italy has a diversified industrial economy. The great strength of its economy lays in its vibrant
small and medium firms, specializing both in high quality consumer goods and in high tech
design and engineering products.
Unfortunately, the global crisis has highlighted Italy’s long-standing weaknesses. Its economy
is currently suffering from a combination of intertwined difficulties that are fuelling each other:
a poor underlying growth rate, high public debt, and limited lending power of its financial
institutions
The average number of enterprises per thousand inhabitants is an important indicator of the
degree of diffusion of private initiatives It, however, is also an aspect of the fragmentation of
economic system: in Italy there are about 64 companies per thousand inhabitants, among the
highest value Europe, reflecting mainly a prevalence of small enterprises (ISTAT 2012).
The Italian economic system is characterized by the presence of a multitude of SME (95% of
Italian Companies have less than 10 employees), many founded in the period of the “Economic
Miracle”, when everything had to be rebuilt and many people had lost everything. Today this
system, characterized by the claim "Small is Beautiful", is facing many challenges: the
economic crisis, globalization, credit crunch, changes in the world trade and so on1. All this
requires a new class of entrepreneurs competent, able to meet customer’s needs, willing to
travel abroad, which will take over the family business or start your own.
For the same Italian SMEs need to be better assisted to fully unlock their potential of long term
sustainable growth and of more job creation. To achieve this goal, the Italian government is
taking several policy actions.
ENTREPRENEURSHIP DRIVES ECONOMIC GROWTH:
Entrepreneurship is a powerful driver of economic growth and job creation: it creates new
companies and jobs, opens up new markets, and nurtures new skills and capabilities.
An entrepreneur is someone who starts or accelerates a business — but entrepreneurs contribute
more than just to an economy. The economist Joseph Schumpeter saw the role of the
entrepreneur as central to capitalist development, by providing new products, new production
methods, new markets and new forms of organization, thereby acting as an agent of change.
Indeed, the entrepreneur is someone who drives forward several factors that together stimulate
economic growth — thereby helping to address governments’ fiscal challenges.
These factors include testing innovative technology, offering opportunities for young people,
alleviating poverty and making a positive impact on society. Another key factor — perhaps the
most critical one in today’s economic climate — is job creation.
Small and medium-sized enterprises (SMEs) with less than 250 employees represented, on
average, two-thirds of total employment in the OECD countries in 20072. And the European
Commission showed in its SME Performance Review3 that the number of jobs in SMEs had
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increased at an average annual rate of 1.9%, while the number of jobs in large enterprises
increased by only 0.8% between 2002 and 2008.
THE CRUCIAL ROLE OF POLICIES:
Entrepreneurship makes economies more competitive and innovative and is crucial in achieving
the objectives of several European sectorial policies. Government programs and public policies
are crucial means for building local and national entrepreneurial ecosystems.
Generally would-be entrepreneurs in Italy find themselves in a tough environment: education
does not offer the right foundation for an entrepreneurial career, difficult access to credits and
markets, difficulty in transferring businesses, the fear of punitive sanctions in case of failure,
and burdensome administrative procedures. The Annual Growth Survey 2013 of European
Commission has recently emphasized the need to improve the business environment to increase
the competitiveness of Italian economy.
There is strong political willingness to recognize the central role of SMEs in the Italian
economy. Italy being part of EU is signatory to the Small Business Act, based on which,
commits to working towards responsive public administration, cut bureaucracy and increase
clarity, less late payment of invoices, access to more help with finance, innovation and training,
lower VAT for services supplied locally, improve efficiency of labor market, and extend
support for internationalization.
Such measures can influence the entrepreneurial environment to create a high performance
entrepreneurial economy that fuels growth. This means providing the right platform for growth
through effective policies, regulation and incentives.
THEORETICAL MODEL:
The development of entrepreneurship in a particular milieu depends not on a single over-riding
factor but rather on a ‘constellation of factors’ at the individual, societal and national levels
(Tripathy, Business Communities of India – a Historical Perspective, 1984).
In order to understand the factors that support or hinder an entrepreneur, we have used the
Entrepreneurial Ecosystem framework model in our research, instrumental in gaining insight
into factors (individual, society, state) which enable growth performance among the
entrepreneurs in the knowledge intensive ICT as well as non-ICT sectors.
The term “entrepreneurial ecosystem” (EE) refers to a combination of factors that play a role in
the development of entrepreneurship.
In order to gain insight into the Entrepreneurial Ecosystem, we identified 6 main thematic
determinants of entrepreneurship described above in figure 1, which are affected by many
different policy areas that can facilitate and support the growth of an entrepreneur and thus
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influence entrepreneurial performance. Within each of the six main variables of this model,
several sub-variables are identified to elaborate on the overall framework.
Figure 1 – The Entrepreneurial Ecosystem
We have attempted to make the list exhaustive, in an attempt to cover the most important policy
areas. The elaboration and development of this Ecosystem framework can be considered as a
starting point, allowing additions and changes to occur over time as our knowledge on
entrepreneurship expands.
1) Individual Personality Traits: refers to the personal qualities of an individual predisposing him/her to entrepreneurial activity. The development of these traits could arise
from early socialization, parenting, socio-cultural norms, early education and familial care
etc, which are the components of the general environment.
2) Socio-cultural Context: refers to the social and cultural norms that influence individual’s
behavior and attitude towards entrepreneurship.
3) Government Policies and Programs: refers to the extent to which government policies as
reflected in tax or regulations are capable of facilitating new venture creation, and
presence of adequate government programs in assisting firms in their startups, survival
and growth
4) Access to Finance: refers to availability and affordability of various types of finance such
as bank loans, equity, venture capital, angel funding, subsidies and grants.
5) Access to Information, Opportunity for Knowledge and Skill-building: refers to the
availability of information on business opportunities and access to data required by
entrepreneurs for managing their business. Also includes availability of opportunities for
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acquiring knowledge and learning that helps them in developing relevant skills required
for managing their businesses.
6) Internationalization: refers to entry into the international market and meeting the
challenges of existing players. For this an entrepreneur should have access to knowledge
on international markets, procedures, have partners in the international markets for
exports, imports, foreign direct investment, international subcontracting and international
technical co-operation. They should also have access to appropriate training, and support
services.
While the entrepreneurial ecosystem framework is presented here in a linear fashion, it is
explicitly recognized that there are complex relationships among the different main variables
and their sub-variables. They tend to reinforce each other, and weakness in one area often has a
negative impact on other areas.
RESEARCH QUESTIONS:
The study is guided by the following three broad research questions:
‘What factors influence the support and development of ICT new venture creation in Italy?’
‘Are there any similarities & differences in the factors supporting new venture creation
between ICT and non-ICT entrepreneurs?
METHODOLOGY:
The study utilizes an exploratory, theory building approach (Strauss & Corbin, 1998;
Eisenhardt, 1989; Yin, 2003).
Primary data collection was done through survey method:



50 on-line questionnaires sent out to ICT entrepreneurs of small, medium and large scale
enterprises.
50 on-line questionnaires sent out to non-ICT entrepreneurs of small, medium and large
scale enterprises.
30 on-line questionnaires sent out to non-entrepreneurs, serving as Control Group
Survey
The “survey” data was collected from 50 ICT entrepreneurs across small and medium
enterprises (SMEs) in Italy. The selection of firms was based on the definition of ICT sector
developed by OECD and includes the ICT sector industries based on products and services
under these 4 branches- ICT manufacturing, ICT services, telecommunication and digital
media.
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A structural questionnaire composed mainly of closed-ended and rating questions was used as a
data collection instrument. The questionnaire was pretested in order to ensure that the survey
content and measurement scales were clear, valid, and appropriate. Based on the pretest
responses, some demographic items were modified.
The owner/founders of the firms were the target respondents of the survey to ensure the validity
of the data collected since the study is based on personal experiences of the entrepreneurs
affecting his/her growth potential.
We used the selective database of member ICT companies of Confindustria Monza-Brianza,
Innovhub, Milan Chamber of Commerce and Fondazione Distretto Green High Tech Monza
Brianza to send out the online questionnaire for the respondents to answer. Along with this,
Social media was also used to reach out to the entrepreneurs.
To maximize the response, personalized cover letters were sent, with promise of feedback and
confidentiality. In total, 400 ICT entrepreneurs across SMEs were randomly selected and
identified as meeting the selection criteria.
Questionnaire link was sent out to the entrepreneurs along with e-mail reminders and in some
cases also telephonic reminders. Finally, we received 50 questionnaires which were relevant for
the inclusion in the sample, resulting in a response rate of 12.23%.
SELECTION OF MICRO, SMALL AND MEDIUM ENTERPRISES FOR OUR
RESEARCH, WE ACCEPT THE DEFINITION OF MICRO, SMALL AND MEDIUM
ENTERPRISES – as stated by European Commission, Enterprise & Industry
Revised SME definition as from 1 January 2005Enterprise Category
Headcount
Turnover
Medium-sized
Small
Micro
< 250
< 50
< 10
≤ € 50 million
≤ € 10 million
≤ € 2 million
or
Balance Sheet Total
≤ € 43 million
≤ € 10 million
≤ € 2 million
In order to understand and validate the findings of ICT entrepreneurs, the same survey
questionnaire was then administered on non-ICT entrepreneurs. The “survey” data was
collected from 50 non-ICT entrepreneurs across small and medium enterprises (SMEs) in Italy.
RESEARCH FINDINGS:
Results of the findings are shared with respect to similarities & differences in the factors
supporting new venture creation between ICT and non-ICT entrepreneurs in Italy. These
findings are then co-related with the findings of the Control Group.
Survey Sample
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The “primary survey” data was collected from 50 ICT and 50 non-ICT entrepreneurs across
small and medium enterprises (SMEs) in Italy (described in detail in the section
METHODOLOGY)
Survey Findings
1. INDIVIDUAL AND PERSONALITY TRAITS
1.
2.
3.
Your ability to quickly recognize start-up opportunities
Your ability to take risk
Your ability to organize the resources required for start-up
The variable was aimed at understanding the individual and personality traits of the
entrepreneurs facilitating new venture creation as perceived by the ICT entrepreneurs-
Interpretation: For many years, researchers have studied the characteristics associated with
entrepreneurship in order to find out about the differences between entrepreneurs and nonentrepreneur.
Our findings from survey data for 50 ICT and 50 non-ICT SMEs reveal the following scenario1) Almost 80% of the respondents across ICT and non-ICT sectors consider they have the
ability to recognize the start-up opportunities
2) 60% of ICT and 68% of non-ICT consider they have the ability to organize the
resources for start-up
3) 68% of ICT and 52% of non-ICT perceive themselves as having the ability to take-risk
Most favourable factors - Ability to recognize start-up opportunity, ability to take risk and
ability to organize the resources for start-up
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Least favourable factors - No specific
Conclusions - To sum up the argument, findings reveal that entrepreneurs in Italy possess
individual and personality traits favoring entrepreneurship. There is no significant difference in
the perception of entrepreneurs across ICT and non-ICT sectors favoring entrepreneurship. The
findings are in line with recent reviews and evaluations of entrepreneurship personality research
suggesting that personality traits of entrepreneurs are important for entrepreneurship.
2. SOCIO-CULTURAL CONTEXT
4.
5.
6.
7.
8.
9.
10.
Presence of family-based entrepreneurship in your society
Culture of promoting venturing and risk-taking in the community
Culture of encouraging creativity and innovation
Entrepreneurship considered as a desirable career choice in your society
Opportunities for new venture creation
Entrepreneurial opportunities for your gender
Entrepreneurial opportunities for people in your age category
When we asked entrepreneurs across ICT and non-ICT sectors about the socio-cultural context
supporting entrepreneurship, the key findings were:
Interpretation - Cultural and social norms constitute an important determinant of
entrepreneurship (Shane, 1992, 1993; Davidsson, 1995; Hayton et al., 2002), indicating the
degree to which a society considers as desirable entrepreneurial behaviors, such as risk taking
and independent thinking.
Our findings from survey data for 50 ICT and 50 non-ICT SMEs reveal the following scenario:
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1) Almost 57% of the respondents across ICT and non-ICT sectors perceive the sociocultural environment as encouraging creativity and innovation;
2) 50% of ICT as against only 32% of non-ICT respondents perceive there exists
opportunity for new venture creation in the society;
3) 28% of the respondents across ICT and non-ICT sectors perceive culture in Italy
promoting new venture creation and risk taking;
4) Only 22% of ICT as compared to 48% of non-ICT respondents indicate the presence of
family-based entrepreneurship in the Italian society;
5) 28% of the respondents across ICT and non-ICT sectors consider becoming an
entrepreneur as a desirable career choice.
6) Most of the respondents remain non-committal about entrepreneurial opportunities for a
particular gender or for a particular age profile.
Most favourable factors - Culture encouraging creativity and innovation
Least favourable factors - Entrepreneurial opportunities for certain gender and people in
certain age categories
Conclusion - Findings reflect that in Italy - the 9th largest economy in the world, with 98% of
the firms being small and medium enterprises - the socio-cultural environment seems to
supporting entrepreneurship by encouraging creativity and innovation and to some extent risktaking. The role of the family is particularly strong in Italy as perceived by the entrepreneurs
from the non-ICT sectors. This also has an impact on entrepreneurs’ performance.
The same has been reinforced in the GEM 2008 Report for Italy. GEM experts highlight the
fact that becoming an entrepreneur in Italy is a desirable career choice, that there is a capacity
for entrepreneurship (in terms of skills and abilities) among the population, fostering
entrepreneurship, as well as support for innovation, both among consumers and among firms.
Policy recommendations
FOR GOVERNMENTS
3. STATE/GOVT.
POLICIES
PROGRAMS
Encourage innovation
andAND
highlight
the role of entrepreneurs in providing
innovative products
 Increase visibility and emphasize the role of entrepreneurship in creating new jobs
FOR BUSINESS ASSOCIATIONS


Improve communication around entrepreneurs' success stories
Promote the role of entrepreneurs in creating new jobs
FOR ENTREPRENEURS

Contribute to improvement of your country’s culture by promoting your own
success
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3. STATE/GOVERNMENT. POLICIES AND PROGRAMS
11.
12.
13.
14.
15.
Special government schemes & programs for start-ups
Favourableness of overall government policies
Favorableness of taxation system
Ease of obtaining permits and licenses (VAT code, … etc.)
Favourableness of physical, transportation and ICT Infrastructures
The variable was aimed at understanding the government policies and programs supporting new
venture creation as perceived by ICT and non-ICT entrepreneurs.
Interpretation - Doing business requires supportive government policies and programs in
particular, easy-to-obtain licenses and permits, better information, simplification of regulations,
favorableness of taxation system and lower degree of regulatory and administrative opacity.
Our findings from survey data for 50 ICT and 50 non-ICT SMEs reveal the following scenario:
1) Only 18% of the ICT respondents consider the physical and ICT infrastructure as
favourable for them;
2) 42% of ICT and 34% non-ICT respondents perceive overall government policies as not
favourable in supporting start-ups;
3) Only 10% of both ICT and non-ICT respondents consider the taxation system as not
burdensome for the start-ups;
4) Only 6% of ICT and 10% of non-ICT respondents perceive that the government is
investing by way of special programs and schemes to support start-ups;
5) Only 4% of ICT and 8% of non-ICT respondents perceive that it is easy to obtain licenses
and permits at the time of start-up. According to the World Bank Doing Business Survey
2013 in "Ease of Doing Business" Italy ranks 73 out of 185 economies.
Most favourable factors - Physical and ICT infrastructure
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Least favourable factors - Special government programs and schemes for start-ups, tax
system, ease of obtaining licences and permits
Conclusions: The government has reinforced commitment towards further interventions aimed
at rapidly simplifying and reducing time and costs involved to start up a business, as well as at
eliminating present digital divide. Administrative procedures for enterprise creation are
receiving substantial attention.
Policy wise, in 2010, Italy has taken a number of policy measures aimed at improving the
environment for SMEs and at reducing the administrative burden resulting from their
interaction with the administration: a unified electronic communication towards the PA when
starting up a business (“Comunica”, since 1 April 2010); a ‘certified statement of business startup’ which allows new entrepreneurs to start operating with the PA within 60 days following
registration (from August 2010); a new regulation introducing a one-stop procedure for
communicating with the PA (since September 2010); the adoption of a new regulation which
makes all administrative procedures, for example related to the registration of an enterprise and
to the request for extensions and facilitations, faster and easier (‘SUAP’, since September
2010).
(EU Enterprise & Industry SBA Fact Sheet Italy 2010-2011) In 2011, 30% of public tenders
were reserved for SMEs.
The public administration has also committed itself to rationalize purchasing procedures of
goods and services from SMEs, in order to facilitate their market access. Despite the
Government efforts in improving the scenario, most entrepreneurs still consider the current
reality far from satisfactory.
Policy recommendations
FOR GOVERNMENTS

Provide incentives for innovation to start-ups
 Keep regulatory obligations for entrepreneurs simple and clear
4. STATE/GOVT. POLICIES AND PROGRAMS
 Reduce or Eliminate red tape

Make single contact point service more user friendly for entrepreneurs in order to
receive comprehensive information on licenses, administrative procedures, finance
and public support. ‘

Reduce the fee for business start-ups

Reduce the time taken to register a new business to three days
FOR ENTREPRENEURS

Seek information regarding Govt. special schemes for start-ups

Report inefficiencies in the system
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4. ACCESS TO FINANCE
16.
17.
18.
19.
20.
Availability of Government subsidies
Availability of family/friends funds
Availability of Venture Capital Funds
Availability of funds from private individuals/Angel funds
Availability of bank loans
The variable was aimed at understanding the ease of access to finance as perceived by the ICT
and non-ICT entrepreneurs
Interpretation – In order to better understand the credit markets, we analyzed through our
sample the ease of access to different sources of financing as perceived by entrepreneurs in the
ICT and non-ICT sectors, our findings reveal the following scenario:
1) Government subsidies can play a very important role in the start-up phase for the young
technology based firms. Our findings reveal that 14% of the ICT and 4% of non-ICT
respondents perceive availability of government subsidies at the time of start-up, as
against 46% who feel that there are no government subsidies available for start-ups.
2) The personal savings of the founders and availability of financial support from family and
friends is an important consideration for both young technology based firms and non-ICT
firms. Our findings reveal that 28% of the ICT and 34% of non-ICT respondents consider
ease of access to funds from family and friends at the time of start-up.
3) Venture capital is an important source of funding for entrepreneurial firms, especially
young, technology based firms having high growth potential.
An important component of a successful entrepreneurial ecosystem consist of an array
of early stage investors (venture capitals and business angels) that provide seed and
first round equity investments. These investors use an extensive network of peers and
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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provide valuable knowledge and support about the market and the development of the
venture "smart money". These investments may also be spurred by fiscal incentives
Secondary data analysis from AIFI (Italian Private Equity and Venture Capital
Association reveals:
According to the Italian Private Equity and Venture Capital Association (AIFI) 2012
statistics Private Equity and Venture Capital funds active in Italy have made 277 new
investments, with a +8% respect to a very difficult 2011, but the amount of the
investment has decreased from 3.583 to 3.230 Euro (-9,8%).
Our survey data reveals that 28% of the ICT and 24% of the non-ICT respondents
perceive ease of availability of venture capital funds, as against an approximately
similar number who perceives venture capital funds are not available.
4) Within equity financing, business angels are an important source of financing,
especially for start-ups.
Recent evidence has shown that business angels play an important role especially in
the early-stage financing of entrepreneurial firms.
Our survey data reveals that only 24% of the ICT respondents perceive ease of availability of
funds from Angel investors as against only 14% of non-ICT respondents. Only 10% of ICT
respondents consider angel investor funds as non-available as against 30% of non-ICT .
5) 56% of ICT and 50& of non-ICT respondents state the possibility of availing bank
loans as very low to start the enterprise. Following the financial crisis, banks have
become less ready to approve companies’ loan applications. Only 8% ICT and 18%
non-ICT are optimistic about access to finance from the banks.
Most favourable factors - Availability of funds from family and friends, venture capital and
angel investors
Least favourable factors - Availability of bank loans and government subsidies
Conclusions - Access to finance has been exacerbated by the financial and economic crisis, as
SMEs and entrepreneurs have suffered the dual shock of: a drastic reduction in demand for
goods and services, and a tightening of credit terms, both of which are severely affecting their
cash flows.
As revealed by our findings, with lack of government subsidies and bank lending increasingly
risk averse, entrepreneurs especially from ICT sector are turning toward business angels,
venture capital (VC) and private equity funding. About one fourth of the high-tech ICT startups perceive that it is easy to have access to funding from private equity, i.e. venture capital
funds and angel investors as against only 14% of non-ICT who perceive as funding available
from Angel Investors.
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Presence of credit constraints from banks is very worrisome, due to the key role allegedly
played by SMEs in assuring innovation and growth in the economic system. Even though the
findings should be interpreted with caution due to the relatively small size of the sample,
nevertheless they provide an important insight into the existing financial scenario.
According to the Global Competitive Report 2012-2013 of World Economic Forum, Financial
markets in Italy are not sufficiently developed to provide needed finance for business
development (Italy ranked as 111th in the category availability of finance for SMEs). European
Commission’s SBA factsheet for 2010-2011 ranks Italy below the EU average in entrepreneurs
having access to venture capital funds and willingness of banks to provide loans.
The Report ‘Global Venture Capital and Private Equity Attractiveness Index 2011 drafted by
IESE Business School in association with Ernst & Young reveals that Italy ranks 32nd in the
world for attracting investments (due to risk aversion, labor market conditions, taxation system,
ineffective public interventions, etc). On the positive side, government is proactive on this.
Many policy measures have been taken lately to improve the situation in Italy.
According to a public consultation launched by the Commission in July 2012, access to finance
constitutes one of the most significant constraints on growth and entrepreneurship in Europe.
Policy Recommendations
FOR GOVERNMENTS

Governments need to reinforce measures that give financial institutions the
confidence to lend to SMEs, through Credit Guarantees

Stimulate VCs by creating improved environments for VC to flourish, and develop
schemes that directly incentivize VC investments:

Help business angels’ networks widen their scope
FOR ENTREPRENEURS

Open up to international markets as opportunities arise

Turn to alternative funding sources, such as corporate financing and microfinance,
to reasonably reduce risks
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5. ACCESS TO INFORMATION, OPPORTUNITY FOR
SKILL BUILDING
21.
22.
23.
24.
25.
26.
27.
28.
KNOWLEDGE
&
Encouragement of entrepreneurship by the education system
Availability of formal training for entrepreneurship
Start-up counselling & assistance at college/universities
Support from Industry associations for networking, information etc.
Incubators and/or Technology parks that offer one stop service for businesses
Assistance from universities/R&D institutions in transfer of R&D
Special programs to promote products and services of start-ups
Opportunities for public-private collaboration to facilitate market entry
The variable was aimed at understanding the availability of access to information, opportunity
for knowledge and skill building support as perceived by the ICT and non-ICT entrepreneurs.
Interpretation - Education is fundamental in the creation of new business. Knowledge, skills
and competencies have become more and more important for (successful) entrepreneurship,
given the increasingly knowledge intensive character of OECD economies. In order to better
understand the opportunity for knowledge and skill building available for ICT as well as nonICT entrepreneurs, our findings from survey data reveal the following scenario:
1) Only 14% of ICT as against 24% of non-ICT respondents perceive education system in
Italy encourages entrepreneurship as part of the curriculum taught in high school and
University.
2) Only 18% of ICT as against 28% of non-ICT respondents perceive that they receive
support from Industry associations for getting information, networking, training needs
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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3) 18% of ICT and 22% of non-ICT respondents perceive the support available from
Universities for research & development, which is especially very crucial for the ICT
sector. High-tech ICT start-ups need to invest themselves for R&D.
4) Only 6% of ICT and 14% of non-ICT respondents perceive that there are special
programs to promote products and services of the start-ups.
5) Only 16% of ICT and 22% of non-ICT respondents perceive that there is support
available from Incubators and technology parks for providing them with office space,
strategic and technical advisory services, and putting them into contact with investors,
partners and customers.
6) Only 6% of ICT and 18% of non-ICT respondents perceive that there is availability of
formal training for becoming an entrepreneur.
7) Only 12% of ICT as against 20% of non-ICT respondents perceive that there is start-up
counselling & assistance available at college/universities
8) Only 4% of ICT and 12% of non-ICT respondents perceive that there is opportunity for
public-private collaboration to facilitate market entry.
Most favourable factors - Support from industry associations and to some extend assistance
from University for R&D.
Least favourable factors - Availability of formal training on entrepreneurship, support from
Universities, incubators and technology parks.
Conclusions - Setting up a business calls for drive, creativity and persistence, whereas
developing a business gradually requires more managerial skills, such as efficiency,
effectiveness and reliability. Considering that both personality and management skills are key
elements for success, personal skills relevant to entrepreneurship should be taught from an early
stage and be maintained up to university level, where the focus can concentrate on building
management capacity. Development of scientific and entrepreneurship skills must be present in
the curriculum at educational institutions, especially if Italy wants entrepreneurs driven by
opportunity recognition, as opposed to necessity. Italy, being a EU member, is committed to
promoting the teaching of entrepreneurship in their education system. However, there is a need
of promoting these initiatives more systematically.
Italy being an innovation-driven economy (according to the GEM classification of countries),
successful SMEs entrepreneurship depends heavily on innovation and R&D. Young technology
based SMEs need increased support and collaboration for R&D and innovation from
Universities, technology parks, business incubators (OECD 2009, Science, Technology and
Industry Scoreboard).
Example of Leading Practice - Erasmus for Young Entrepreneurs is a project initiated by the
European Union. It aims to help new entrepreneurs to acquire relevant skills for managing an
SME by spending time in an enterprise in another European Union country. It contributes to
improving their know–how and fosters cross–border transfers of knowledge and experience
between entrepreneurs.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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Policy Recommendation
FOR GOVERNMENTS




Broaden the scope of university entrepreneurship education
Make curriculum to foster entrepreneurship as a career option from primary school
onward
Promote the recognition and validation of entrepreneurial learning in non-formal
learning environment.
Empower incubators — they are the most promising enablers
FOR BUSINESS ASSOCIATIONS




Develop methodologies and peer mentoring between entrepreneurs from Member
States
Encourage and support university-driven business creation (spin-offs etc.)
Boost entrepreneurial training
Encourage Corporate lead Incubators & Technology parks
FOR ENTREPRENEURS



Inspire students by telling your own success story
Engage in internship and experience sharing programs with BRIC countries
Undertake specific, dedicated business start-up training when moving from a
corporate role to entrepreneurship
6. INTERNATIONALIZATION OF SMEs
29. Attitude towards internationalization
30. Information and skills required for internationalization
31. Government agencies facilitating new firms entry into domestic & international
markets
32. Access to financial resources to tackle internationalization
33. Foreign language abilities in your company
The variable was aimed at understanding the support available for Internationalization to ICT
and non-ICT entrepreneurs.
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Interpretation - To reap the benefits of the Internal Market and to meet the challenge of fiercer
competition, entrepreneurs need to be encouraged to innovate and to Internationalize. For this,
they should have access to knowledge, relevant contacts, training and business support services
Our findings from survey data for 65 ICT SMEs reveal the following scenario1) 44% of ICT and 60% of non-ICT respondents claim to have a good working knowledge
of the English language.
2) 32 % of ICT and 48% of non-ICT respondents reflect a favorable attitude towards
Internationalization.
3) Only 14% of ICT respondents as against 28% of non-ICT respondents perceive that they
have adequate information and skills required for Internationalization. This reflects that
inadequate knowledge of foreign/over-seas markets remain a critical challenge to SMEs
even in the current era of extensive knowledge availability
4) Only 2% of ICT and 6% of non-ICT perceive the support from Government agencies
facilitating new firms entry into domestic & international markets
5) Only 8% of ICT as against 20% of non-ICT respondents perceive that it is possible to
access finance for internationalization
In light of the above findings, we held interviews with Chambers of Commerce, Business
Associations (like ASSINFORM, ASSINTEL), some leading Venture Capitals to understand
the role being played by these bodies in supporting Entrepreneurs in finding lead markets and
developing competency to Internationalize. As revealed, there is a lot of support being rendered
especially to high tech SMEs for Internationalization in terms of finding the lead markets,
networking opportunities through participation in international events & fairs, accessing
finance, finding the potential business partners and conducting training programs to equip the
knowledge and skill level of entrepreneurs.
Most favourable factors - Personal attitude towards internationalization and knowledge of
English language
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Least favourable factors - Support from government agencies facilitating new firm entry and
access to financial resources
Conclusions - SMEs encounter significant challenges in obtaining resources, foreign market
knowledge, over-seas contacts and business opportunities and achieving organizational viability
for developing foreign business (Zaheer 1995; Zaheer 2005; Crick 2007; Barnes 2006; Kneller
& Pisu 2007). According to the European Commission Small Business Act factsheet 2010, as
far as indicators measuring internationalization are concerned, Italian SMEs bear higher costs
more and it takes them longer to export and import goods than for the average EU SME.
Reflecting the widespread recognition of the importance of internationally-active SMEs in
subnational/regional, national and global economies, Italian government and business support
organizations are taking policy measures to support and enable SMEs in the internationalization
process.
Policy Recommendations
FOR GOVERNMENTS/BUSINESS ASSOCIATIONS

Developing SME networks — e.g., to provide expert advice and assistance to help
SMEs expand into export markets

Helping to identify key foreign contacts and to obtain advice and information from
established sources

Increasing skills and knowledge — e.g., through coaching programs, training and
consultancies

Reducing the risk and the cost of exporting
FOR ENTREPRENEURS

Reach Out to government support programs

Access information from Business Associations

Be open and aware about accessing International funds
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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CONTROL GROUP FINDINGS
The variable was aimed at understanding the perception of non-entrepreneurs on
Entrepreneurial Ecosystem Framework.
Interpretation:
Individual & Personality Traits- The findings are in line with those of ICT and non-ICT
entrepreneurs.
Socio-cultural environment – The findings highlight that the cultural in Italy supports
entrepreneurship, which is in line with the perception of ICT and non-ICT entrepreneurs.
Govt. Programs & Policies – the findings are the same on all variables except the ICT
infrastructure where 57% of the non-entrepreneurs perceive it as good as against only 18% of
ICT entrepreneurs.
Access to Finance – The findings reveal that for the access to finance entrepreneurs rely mainly
on family/friends and that there are VC and Private equity funds relatively more available. The
findings are in close proximity to those of the ICT and non-ICT entrepreneurs.
Opportunity for Knowledge & Skill Building - The findings are in line with those of ICT and
non-ICT entrepreneurs.
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Internationalization – The findings reveal that the entrepreneurs have a positive attitude towards
internationalization, but lack the other necessary support measures to do so. This validates the
perception of the entrepreneurs.
DISCUSSION & LIMITATIONS:
This paper reports the findings of a perception survey study on 50 entrepreneurs in the
knowledge intensive ICT sector and 50 entrepreneurs from non-ICT sectors in Italy with
respect to six framework conditions, based on the Ecosystem Model, which comprises of
several determinants which influence entrepreneurial performance. Within each of the six
framework conditions, several subcategories were identified to broaden the overall framework
and make it more explicit for analysis. The overall aim was to analyze the interaction between
the key factors which contribute to the success of Knowledge Intensive Entrepreneurs, with
particular reference to the ICT sector in Italy. The findings were then co-related with survey
data from non-ICT entrepreneurs to understand the similarities and differences perceived by the
2 categories with regard to the Entrepreneurial Ecosystem in Italy.
The key findings of this study reveal that broadly there is no significant difference in the
findings across ICT and non-ICT entrepreneurs with regard to the 6 main variables. Overall, the
entrepreneurial spirit in Italy is high, and the socio-cultural environment is perceived as
encouraging entrepreneurship.
The business environment challenges confronting both ICT and non-ICT entrepreneurs are
related to the government policies and programs, where entrepreneurs indicate administrative
formalities towards new venture creation as bureaucratic, time consuming and expensive. Tax
burden is felt as high. Access to finance is largely dependent on self-financing or using informal
sources of funding. Banks refrain from funding SMEs. Entrepreneurs are aware of the
possibilities connected with venture capital funding for SMEs in the knowledge intensive ICT
as well as non-ICT sectors, yet few of them have direct access. Non-ICT entrepreneurs
perceive Angel Investor funds as non-existent for them. Non-ICT Entrepreneurs reflect a more
positive attitude towards internationalization as compared to ICT, but both face practical
difficulties in having access to knowledge, relevant contacts, training, business support services
etc.
Last, the education system in Italy needs to stimulate the entrepreneurial mindsets amongst
young people and provide knowledge and skill building support to young entrepreneurs through
its universities, science parks and incubation centers.
The above findings are in line with recent studies by World Bank Ease of Doing Business
Report 2011, Global Competitiveness Report 2010-2011 World Economic Forum, OECD
Eurostat Entrepreneurship Indicators – performance for Italy or GEM Report 2008 for Italy.
Italy’s economy is driven by a vast resource of micro and small firms. The share of micro and
small firms in the overall number of firms is substantially higher in Italy than the EU average.
In the light of the current economic challenges confronting Italy, it needs to decisively tackle
the structural weaknesses and improve the business environment in order to promote and
support entrepreneurship. These reforms are essential for Italy to succeed in the immense
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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challenge of simultaneously putting public finances on a sounder track, reviving and
modernizing its economy, restoring competitiveness and finally promoting entrepreneurship.
Our findings have implications for both theory and practice.
 For researchers, the study provides empirical evidence on the determinants of
entrepreneurship. While our approach touches many of the bases that a detailed
measurement framework will need to incorporate, we acknowledge that establishing
such a framework is beyond the scope of a single report. Instead, it will require a
sustained, multi-year research process. Moreover the measurement framework is likely
to be dynamic, requiring adjustment over time to reflect new technologies and structural
changes to the business environment.
 For entrepreneurs, the findings not only provide an insight into various factors that
play a role in sustenance and growth of their ventures, but also what entrepreneurs can
do to seize opportunities presented by the environment in which they operate.
 For policy makers, it proposes a vision of co-existence and inter-dependence of factors
enabling and disabling entrepreneurship. Entrepreneurs and government both stand to
benefit from long-term enterprise growth if better coordinated support is offered.
Government should take a holistic approach, which fosters the strengthening of the
entire entrepreneurship environment. However, doing this first requires accurately
measuring the determinants of entrepreneurship, as well as understanding the impact of
a host of different factors on the level of entrepreneurship in a country. Our report is an
endeavor in this direction. The findings focused on Entrepreneurial Ecosystem framework
aim to provide insight to government to evaluate the effectiveness of existing measures,
identify leading practices, focus on the enablers that will make a difference and increase
the impact of their incentives.
The study does have limitations. The sample size is small and is not representative of all
regions across Italy. The sample has not been analyzed based on performance of ICT
entrepreneurs backed by services like having access to Venture capital funding or in incubation
as against those not backed by these services. The ecosystem model comprising of six
framework conditions is not exhaustive to cover all aspects of the entrepreneurial environment.
The study provides a macro view of the factors supporting ICT and non-ICT entrepreneurs,
without giving a micro account of specific sub-variables. These are all dimensions that can be
taken up in subsequent researches.
Despite the limitations, the study at this stage contributes to the understanding of the
determinants of entrepreneurship which support and harness the growth on knowledge intensive
ICT entrepreneurship in Italy. Comparison of the same with non-ICT entrepreneurs validate the
findings and highlight the need for creating an enabling environment for entrepreneurs by
putting them at the heart of business policy and practice, and revolutionizing the culture of
entrepreneurship.
It is time for action to enable Italy's entrepreneurs to be more adaptable, creative and to have
greater impact in globalized competition that is more demanding and more rapid than ever
before.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
26
ACKNOWLEDGEMENTS
The authors acknowledge the valuable support received from Confindustria (the
entrepreneurial association) Monza-Brianza, Innovhub, a special agency for innovation of the
Chambers of Commerce of Milan and Fondazione distretto green high tech Monza Brianza and
Studiocorno, a private organization for their thoughtful suggestions regarding the research and
support in data collection.
ENDNOTES
1. 2012 has been characterized by a very serious economic crisis: according to CERVED,
bankruptcies have reached the highest level since 2006 (over 12.000 companies, especially
SMEs), with an increase of 7,4% respect to 2010. According to Crivis D&B, the same trend
has characterized 2012- IQ, with 3.001 bankruptcies.
2. OECD (2011), Entrepreneurship at a glance 2011, OECD Publishing
3. European SMEs under Pressure: annual report on European Union small and medium-sized
Enterprises, 2009, European Commission
4 In 2011, the Italian early stage market has registered total investments equal to 71,2 million
Euro, of which 50 related to institutional investors and 21,2 to the business angels world,
Venture Capital Monitor, “Early Stage in Italia – Rapporto 2012”
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Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
29
ENTREPRENEURIAL ECOSYSTEM IN INDIA: TESTING THE
ACTOR-OBSERVER
BIAS
BY
COMPARING
THE
PERCEPTIONS
OF
ENTREPRENEURS
AND
NONENTREPRENEURS
Mathew J Manimala
Professor, Indian Institute of Management Bangalore, India
Princy Thomas
Project Associate, Indian Institute of Management Bangalore, India
P K Thomas
Project Consultant, Indian Institute of Management Bangalore, India
Abstract: An ecosystem is defined as an interacting system of living (active) and non-living
(passive) members of a community, moderated by its constituents acting according to prespecified norms and procedures, which are often different for each constituent. In an
entrepreneurial ecosystem (EE), the entrepreneurs are the actors and the Entrepreneurial
Framework Conditions (EFCs) are the facilitators and sometimes observers. However, these
roles can be seen as changing, depending on the context of analysis. For example, with respect
to the government support (which is an EFC), the actors are the government employees and the
others the observers or beneficiaries/victims. In a study of the entrepreneurial ecosystem in
India, which explored the perceptions of the actors and observers on the quality of various
constituents of the ecosystem, data were collected from 611 respondents, of whom 296 (100
ICT and 182 non-ICT, with 14 non-specified units) were entrepreneurs and 315 were nonentrepreneurs (the latter comprising subgroups of bankers, government employees, other
employed persons, and students). Analysis of the respondents’ rating of 78 variables
characteristic of the EE gave rise to 11 dimensions of the EE. Perceptions of the respondents’
subgroups on these dimensions were compared, and many of them (especially the difference
between entrepreneurs and non-entrepreneurs) were found to be statistically significant, which
offers strong support for the hypothesis of ‘actor-observer’ bias between them. Among the
several propositions generated by the study, the following may be specially mentioned: (1)
Entrepreneurial capability (EC) has a greater influence on new venture creation than the EFCs;
(2) While the government support can influence most other EFCs, it is unable to influence the
development of (EC) in the short run; (3) The most important influence on the development of
EC is the socio-cultural norms; (4) If governments are interested in developing EC among their
people, they should aim at changing the socio-cultural norms by giving them greater exposure
through education and training and by facilitating the movement of people within and outside
the country to promote inter-cultural interaction.
Keywords: Entrepreneurial ecosystem, Entrepreneurial framework conditions, Entrepreneurial
capability, Socio-cultural norms, Actor-observer bias.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
30
INTRODUCTION
Economic development of nations is a major concern shared alike by researchers and policymakers. While there is general agreement among researchers and policy-makers about the
positive association between entrepreneurship and economic development, their prescriptions
about the kind of business environment needed for promoting entrepreneurship have not all
been substantiated in practice. Since the business environment is constituted by a large and
diverse set of factors, there is a tendency among protagonists to emphasize the role of one or the
other, depending on the specific context of discussion. The debate is not only about the critical
factor in the environment but also on how to measure the favourableness or otherwise of an
identified factor. The actor-observer bias (Jones and Nisbett, 1971; Nisbett et al, 1973; Watson,
1982; Malle et al, 2007), which was originally proposed to explain the differential attributions
of the causes of behavior, could also be applicable to evaluating the context of one’s behavior.
The context of an entrepreneur’s actions is the business environment. A successful entrepreneur
is likely to attribute the success to his/her own actions and hence may downgrade the
favourableness of the environment. In the case of unsuccessful entrepreneurs, the attribution of
the failure is likely to be on the unfavourable factors in the environment, and hence they too
would rate the environment adversely. In general, therefore, one could say that entrepreneurs
(actors) would rate the environment less favourably than non-entrepreneurs (observers). If the
non-entrepreneurs are drawn from among those engaged in facilitating the business
environment (such as the government officials, bankers, trainers, consultants, etc), the
differences in perception are likely to be larger, as the latter would view themselves as actors
with respect to the business environment, which is being designed and/or facilitated by them.
They are, therefore, likely to rate the environmental factors more favourably than the
entrepreneurs. The objective of the study reported in this paper was to explore these differences
between actors (entrepreneurs) and observers (non-entrepreneurs) in their perception of the
business environment, which is commonly referred to as the ‘Entrepreneurial Ecosystem’
(Cohen, 2006; Isenberg, 2010).
DIMENSIONS OF THE ENTREPRENEURIAL ECOSYSTEM
It is logical to hypothesize that the most critical factor in the entrepreneurial ecosystem would
be the governance system, which would have a significant influence on all other factors. For
example, private entrepreneurship is unlikely to thrive under a socialistic system of governance
that restricts the economic freedom of the individuals. A general hypothesis based on the
association between the ‘Index of Economic Freedom’ for various countries and their respective
economic growth index is that entrepreneurship thrives where economic freedom exists
(Holmes and Schaefer, 1998). It would imply that the political, legal/judicial and cultural
institutions of the country should facilitate rule of law, protect life and property and limit
government spending and taxes rather than control citizens’ activities through centralized
planning and regulation (Reisch, 2001).
The non-interventionist policies of the government have been shown to be effective in
promoting entrepreneurship by the experiences of the differently administered portions of
divided nations such as the Germanys and the Koreas. This phenomenon was also
demonstrated in a study of South (Greek) and North (Turkish) Cyprus, the former having a
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
31
liberal and the latter a controlled regime (Dana and Dana, 2000). There are several other
studies which highlight the relationship between entrepreneurship and the type of governance
through the experiences of various countries such as Taiwan (Liu, 1998), Israel (Forbes 1998;
Dana 1999) Singapore (Lee 2002 a and b), Thailand (Mertens 2001), Russia (Paradis and de
Cervin 1998; Puffer et al 2001), Bangladesh (Mondal 2000) and Nicaragua (Pisani and Patrick
2002).
While it is important to recognize the overarching influence of the governance system of a
country on entrepreneurship, it should also be noted that this influence operates through the
various other dimensions of the environment. It is possible that different countries have had
different foci for their strategies for developing the business environment. The choice of the
strategic focus is determined partly by the stage of the country’s economic development and
partly by the ideologies being followed. Though these dimensions, collectively designated as
the “Entrepreneurial Framework Conditions (EFCs)” by the Global Entrepreneurship Monitor
researchers (GEM, 2013), are conceptually distinct from one another, they are likely to be intercorrelated and operating under the influence of one another. GEM (2013) maintains its position
from its early days (Reynolds et al, 2001) that there are nine dimensions for the EFC of a
country, which are listed below, along with a few research studies that have identified their
importance for entrepreneurship development.
 Government policy (Forbes, 1998; Schaefer and Holmes, 1998; Chanda, 1998; Paradis and
de Cervin, 1998; Stiglitz, 1999; Busenitz et al, 2000; Dana and Dana, 2000; Mondal, 2000;
Mertens, 2001; Puffer et al, 2001; Reisch, 2001; Lee, 2002a; Chang and Tsai, 2002; Dana,
2002; Chen, 2002; Michael and Pearce, 2009, Ghani et al, 2011; Jahanshahi et al, 2011;
Said et al, 2012; Williams and Nadin, 2012; Tende, 2013).
 Government programmes (Nafukho, 1998; Taub, 1998; Vodopivec, 1998; Owualah, 1999;
Haugh and Pardy, 1999; Chrisman et al, 2002; Lee, 2002b; Goel and Rishi, 2012;
Rasmussen and Gulbrandsen, 2012).
 Educational system (Manimala, 1997; McMullan and Gillin, 1998; Liu, 1998; Chan, 1999;
Melcher, 1998; Slon, 1998; Ballon, 1998; Berman, 1998; Leitch and Harrison, 1999;
Fletcher, 1999; Raffo et al, 2000; Mitra 2002; Wilhelm 2002; Mustar, 2009; Kostoglou,
2011; Bilic et al, 2011; Ghani et al, 2011; Nayyar and Mahmood, 2012; Oganisjana and
Koke, 2012).
 Financial support (Li, 1998 and 2002; Shane and Cable, 2002; Etzel 2002; Shane and Stuart
2002; George and Prabhu, 2000; Hellman and Puri, (2002); Zapalska et al., 2003; Denis,
2004; Klonowski, 2011).
 Research & Development transfer (Mitra and Formica, 1997; Triendl, 1998; Zahra and
Neubaum 1998; Triendl, 1999; Lehrer, 2000; Cooke 2001; Manimala, 2002; Heinrich,
2002; Azulay et al, 2002; Reger, 2002; Walter et al, 2002; Shane, 2002; Arokiasamy, 2012).
 Physical infrastructure (Freier, 1986; Johnstone, 1988; Daly, 2001; Reger et al, 2002; Kotey,
2006; Ghani et al, 2011; Linan et al, 2011; Grzyb and Trzepacz, 2012; Gani and Mainul
Ahsan, 2012; Audretsch and Aldridge, 2012).
 Commercial and professional infrastructure (Siedel, 2000; Adegbite, 2001; Keelan, 2002;
Thompson, 2010).
 Market openness and ease of entry (McDougall and Oviatt, 2000; Knight, 2000; Dana,
1999; Spicer et al, 2000; Zahra and Hansen, 2000; Khanna et al, 2005).
 Socio-cultural attitudes and norms (Dodd and Seaman, 1998; Henderson and Robertson,
1999; Dana and Dana, 2000; Puffer et al, 2001; Danis and Shipilov, 2002; Wilhelm, 2002;
Stephan and Uhlaner, 2010).
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
32
Although these nine EFCs have been consistently used as a basis for assessing the business
environment of a country by the multi-country expert team of GEM research project, there have
been several additions (eg: IPR laws and their implementation, Support for women’s ventures,
etc) to this list in different years and in different countries, depending on the specific contexts.
This would suggest that the list may be incomplete and point to the need for developing a more
comprehensive listing based on empirical data and analysis. One of the secondary objectives of
the present study, therefore, was to develop a more comprehensive list of EFCs based on
empirical data.
OBJECTIVES
As mentioned above, the major objective of the present study was to test the ‘actor-observer’
bias in the perceptions of the business environment by entrepreneurs (actors) and nonentrepreneurs (observers). As part of this process, there was a need to develop a comprehensive
list of the dimensions of the EFCs, which then became a secondary objective of the study.
Having identified the EFC dimensions and got them rated by a large sample of entrepreneurs
and non-entrepreneurs, it was interesting to figure out if there were statistically significant
differences among different types of entrepreneurs (ICT/Non-ICT), different types of support
groups (government officials, bankers, academics and consultants, etc), and different
demographic groups based on gender, age, educational qualifications occupation etc.
Identification of the sub-group differences, therefore, is the tertiary objective.
METHODOLOGY
Elements of the business environment were identified through literature survey and pilot
interviews with a few entrepreneurs and other experts. A judgmental screening of these items
led to the selection of 78 such elements, which were then used to construct a questionnaire. The
respondents were asked to rate these elements on a 5-point scale in terms their supportiveness
(1=Very Poor; 2=Poor; 3= Average; 4=Good; 5=Excellent) for the starting up and operation of
new ventures in the country. Additionally, there was a second part to the questionnaire on the
demographic characteristics of the respondent. This questionnaire was then administered to a
stratified sample of 800 respondents. 611 completed questionnaires were returned, which
represents a response rate of 76%. The Profile of the respondents is given in Table-1.
Table 1: Profile of the respondents
Category
Gender
Marital Status
Variables
Male
No. of Respondents
451
Female
157
No Response
3
Total
Single
611
347
Married
260
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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Category
Age*
No Response
Variables
No. of Respondents
4
Total
Less than 24
611
231
24-30
148
31-45
174
45 and Above
51
Not specified
7
Total
Entrepreneurial Entrepreneurs
Activity
Non-entrepreneurs
Sector
Occupational
Groups
611
296
315
Total
ICT
611
100
Non-ICT
182
Not specified
14
Total
ICT
296
100
Non-ICT
182
Academics, Consultants and other employed
persons
34
202
Students
31
Bank Employees
44
Government Employees
18
Not specified
611
Native Place
Total
Rural
164
Urban
269
Metropolitan
121
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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Category
No Response
Variables
No. of Respondents
57
Total
611
*Age categories are based on the life-cycle stages.
The data were analyzed using the following statistical techniques:




Exploratory factor-analysis to identify the dimensions of the EFCs.
Correlation analysis among the factors to identify the patterns of interconnectedness
among them.
Regression analysis for checking the association, if any, of: (1) Entrepreneurial
Capability with the EFCs; and (2) EFCs with Government Support.
ANOVA or t-test for identifying the significant differences in the perceptions of
different sub-groups, such as: ICT versus Non-ICT entrepreneurs, Entrepreneurs versus
Non-entrepreneurs, (which will be discussed in detail), and other demographic subgroups based on gender, age, native place, occupation, desire to become entrepreneurs,
etc. (which will be presented in summary).
DATA ANALYSIS AND FINDINGS: (A) DIMENSIONS OF THE
ENTREPRENEURIAL ECOSYSTEM
Exploratory factor analysis of the 78 variables in the questionnaire initially yielded 17 factors.
Since some of the conceptually unified factors (like Government Support) got split into several
sub-factors, it was felt necessary to limit the number of factors so that the factors obtained
would be conceptually clear and interpretable. The initial choice of the number was nine,
guided by the scheme of the GEM project. This was progressively increased to 11, as some
factors in the 9-factor solution had variables from conceptually distinct factors.
The final solution of 11 factors is not very different from that of the GEM project, as the
number of EFCs is only 10 because one of the factors – “Entrepreneurial Capabilities” – is not
an EFC, although it is a part of the Entrepreneurial Ecosystem. Besides, if we remove the
factor, “Facilitation of Women’s Entrepreneurship”, which could have got grouped under the
“Government Support”, as the items are mostly about the support from the government, the
factors identified by the present study and those by the GEM researchers are rather similar. A
major difference between the two schemes is that in the GEM factors, “Government Support” is
split into “Government Policies” and “Government Programs”. Another difference is that the
present study has an additional factor called “Access to Information”, the identification of
which may be treated as a specific contribution of this study.
The total variance explained by the 11 factors is about 47%, although the solution has utilized
all variables except one. The one variable that had to be discarded because of distributed
loading on several factors was on the “special facilitation for ex-service men’s ventures”. Even
though it had loadings on several factors, the maximum loading was on the factor that got
named as: “Facilitation of Women’s Entrepreneurship”. It seems that the real content of that
factor is not the facilitation of women’s entrepreneurship, but the facilitation of ventures by the
disadvantaged sections of the society. Like women in traditional societies, ex-service men also
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
35
operate under disadvantages, as they may not be acceptable to conventional recruiters and may
not have any skills or experience needed for venture-startup. Besides, they are late starters, and
will have all the disadvantages of that as well.
For historical reasons, India has many economically and socially disadvantaged communities
such as the scheduled castes, scheduled tribes, backward classes, religious and linguistic
minorities, etc., and hence there are several government schemes to help the self-employment
initiatives of such disadvantaged groups. Had these been included in the questionnaire, along
with the schemes relating to women, ex-service men, people with disabilities, etc., they would
all probably have grouped together to form a factor that is more broadly defined than the
current factor of “Facilitation of Women’s Entrepreneurship”. However, since the questionnaire
was designed by an international team, these locally specific schemes could not be included,
which has led to the missing of an opportunity to capture the “Social sensitivity of the
governance system” as a factor of the country’s EFC.
Though the total variance explained (47%) by the 11 factors is not high, it is only marginally
lower than the 52% of the 17-factor solution, implying that the additional factors were
contributing only about 1% each to the variance explained.The 11 dimensions of the
entrepreneurial ecosystem identified in the present study, along with the factor-loadings of the
variables involved and the Cronbach's alpha as well as the variances explained by the factors
are presented in Table-2, followed by brief descriptions of each factor.
Table-2: Dimensions of the Entrepreneurial Ecosystem identified through Factor Analysis
Variables
Factor
Loading
Cronbach’
s Alpha
Cumulative
Variance
Explained(%)
.739
23.52
0.907
28.39
FACTOR 1: Government Support
Favourableness of overall government policies
Support of new venture policies
Availability of special government schemes and
programs for start-ups
Support of export and import laws and policies
Ease of obtaining permits and licenses (Value Added
Tax code, etc)
Support for developing industrial clusters
Support of Intellectual Property Rights (IPR) policies
Government programs that facilitate networking
opportunities
Support of Foreign Direct Investment (FDI) policies
Availability of Single window system for start-up
formalities
Incentives for sustainable and environment friendly
business practices
Favourableness of the taxation system
Government policies against corruption
FACTOR 2: Education and Training Support
Education system promoting autonomy and creative
thinking
.692
.691
.582
.578
.576
.564
.549
.529
.519
.469
.330
.454
.400
.856
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
36
Variables
Factor
Loading
Encouragement of entrepreneurship by the general
education system
Encouragement of entrepreneurship at University level
education
Availability of start-up counselling &assistance at
college/universities
Entrepreneurship Education &Training programs in
Colleges and Universities/Special Institutions
Encouragement of entrepreneurship by the early
education system
Availability of formal training for entrepreneurship
Cronbach’
s Alpha
Cumulative
Variance
Explained(%)
0.83
32.7
0.886
35.3
.814
.808
.798
.744
.668
.535
FACTOR 3: Support for Internationalisation
Access to information and skills required for
internationalization
Government agencies facilitating new firms’ entry into
international markets
Support available for internationalization from Industry
Associations
Access to financial resources to tackle
internationalization issues
Government attitude towards internationalization
Ability to identify foreign markets/business
opportunities
Knowledge of foreign language required for
international operations
.695
.693
.690
.625
.582
.549
.383
FACTOR 4: Market Entry Facilitation
Availability of shared facilities for obtaining high-cost
equipment &technologies
R&D support from government
Affordability of the latest / world-class R&D technologies
Co-operation from dominant players in facilitating market
entry
Assistance from universities/R&D institutions for transfer
of R&D ideas for start-ups
Opportunities for public-private collaboration to facilitate
market entry
Ease of market entry
Government Support for market entry
Presence of corporates, universities and science parks
providing incubator services
Special programs to promote products and services of
start-ups
.759
.690
.660
.633
.531
.489
.455
.375
.323
.303
FACTOR 5: Facilitation for Women’s Entrepreneurship
Special schemes to help women entrepreneurs find
financial support to start firms
.810
Availability of special programs to assist women
.804
0.878
37.7
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
37
Variables
Factor
Loading
Cronbach’
s Alpha
Cumulative
Variance
Explained(%)
entrepreneurs start a new venture
Availability of training and educational programs to
enhance the skills of women entrepreneurs
Government initiatives to promote networking among
women entrepreneurs
Encouragement for women to start new business in your
society
.716
.689
.646
FACTOR 6: Physical Infrastructure Support
Availability of resources (such as water, electricity, raw
materials etc) for business uses
Quality of physical infrastructure (such as roads, airports,
harbours etc.)
Availability of affordable land for industrial use
Availability of physical, transportation and ICT
infrastructure
FACTOR 7: Professional and Technology Support
Availability of suppliers and contractors
Quality of IT infrastructure
Availability of affordable IT infrastructure services
Availability of affordable Hi-Speed internet services
Ease of obtaining phone and internet connections
Availability of skilled manpower
Availability of professional consultants (technologists,
lawyers, etc)
FACTOR 8: Entrepreneurial Capabilities
Your belief that you can successfully run a business
Your ability to manage a business
Your ability to take risk
Your ability to quickly recognize start-up opportunities
Your ability to organize the resources required for start-up
FACTOR r 9: Socio-Cultural Support
Cultural support from community in promoting venturing
and risk-taking
Cultural support in encouraging creativity and innovation
.926
.838
0.834
39.9
.791
.331
.428
.782
.702
.626
.583
.472
0.795
41.65
0.801
43.2
0.737
44.7
.398
.794
.736
.630
.627
.515
.731
.614
Society’s acceptance of entrepreneurship as a desirable
career choice
.556
Respect/ recognition given to successful entrepreneurs in
your society
.462
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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Variables
Equal entrepreneurial opportunities for young individuals
in your society
Family’s business background
Gender equality for entrepreneurial opportunities
Opportunities for new venture creation in your country
Celebration of entrepreneurial success (by media &the
public)
Tolerance to venture failure in your society
FACTOR 10: Funding Support
Availability of funds from Private individuals/Angel funds
Availability of Venture Capital Funds
Availability of bank loans
Availability of Government subsidies
Availability of funding support from family and friends
funds
FACTOR 11: Access to Information
Availability of information regarding business
opportunities
Availability of required information and assistance for
start-ups
Support from industry associations for networking,
information and access to resources
Presence of incubators and/or technology parks that offer
one stop services for businesses
Factor
Loading
Cronbach’
s Alpha
Cumulative
Variance
Explained(%)
0.727
45.69
0.776
46.9
.452
.380
.360
.350
.330
0.3
.666
.649
.539
.379
.370
.756
.698
.457
.311
1. Government Support (Factor mean score: 3.20 out of 5): This is the most comprehensive
factor explaining 23.52% of the variance. It covers almost every aspect to the political,
legal, governance, regulatory, taxation and other subsystems of the government, with a
specific focus on the new-venture specific policies and programs of the government. As
mentioned above, it may have an overarching influence on the other EFCs, which may get
reflected in its correlations with the other factors.
2. Education and Training Support (Factor mean score: 3.21 out of 5): This factor covers
the role of early education, general education and the university system as well as the
formal training for entrepreneurship for facilitating entrepreneurship and new venture
creation.
3. Support for Internationalization (Factor mean score: 3.35 out of 5): This factor is about
the facilitation of international market entry facilitation by government agencies, industry
associations and other agencies through the development of capability to identify
international markets and access the knowledge, skills and information required for
internationalisation.
4. Market Entry Facilitation (Factor mean score: 3.14 out of 5): This factor is about the
mechanisms to facilitate the nascent entrepreneurs’ entry into the market, such as: R&D
transfer and technology support, collaborative initiatives from dominant players,
universities, technology parks, governments, incubation centres, etc., which would help in
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
39
solving the technology, finance and market related problems of early-stage ventures and
make it easier for them to enter the market.
5. Facilitation of Women’s Entrepreneurship (Factor mean score: 3.48 out of 5): This factor
covers the support and facilitation given to women entrepreneurs by the government and the
society in the form of encouragement, financial assistance, training and other special
programs. As explained above, this factor could have got a broader definition (as: “Social
sensitivity of the governance system”), if the schemes for other disadvantaged sections of
the society were included in the questionnaire.
6. Physical Infrastructure Support (Factor mean score: 3.19 out of 5): The smooth operation
of trade and industry requires good quality physical infrastructure, such as affordable land,
water, electricity, raw materials, roads, rail links, airports, harbours, etc. for the physical
movement of people and goods and ICT infrastructure for online transactions and datatransfer, which are the contents of this factor.
7. Professional and Technology Support (Factor mean score: 3.87 out of 5):This factor is
about the availability of human and technology (IT) capabilities in the country, which
includes the providers of supplies, contract services, training, professional services (legal,
accounting, etc), consultancy and IT services.
8. Entrepreneurial Capability (Factor mean score: 3.91 out of 5): While all the other factors
are dimensions of EFCs, this one is about the capability among individuals to make use of
these EFCs and, in that sense, a major component of the entrepreneurial ecosystem. It
covers the skills, competencies and confidence of the individuals to start up and manage
new ventures, especially the ability to recognize opportunities, take calculated risks and
mobilize the resources to exploit those opportunities.
9. Socio-Cultural Support (Factor mean score: 3.55 out of 5): The social and cultural norms
that encourage and support individuals in the pursuit of entrepreneurial ventures are covered
under this factor. Specifically it is about the extent to which creativity, innovation and
entrepreneurship are encouraged in the society equally for all individuals and their
successes celebrated in the society, so that entrepreneurship is viewed as a desirable career
option, especially by the youngsters.
10. Funding Support (Factor mean score: 3.37 out of 5): Availability of funding support for
venture creation is the theme of this factor. Various funding sources like family and friends,
bank loans, venture capitalists, angel investors and government subsidies are grouped under
this factor.
11. Access to Information(Factor mean score: 3.39 out of 5): Availability of relevant
information regarding business opportunities and assistance for start-ups, support from
industry associations and networking forums for sharing the inputs and accessing
information, and the availability of business support services are covered under this factor.
It may be noted that all the factor mean scores are in the above average range of 3-4 out of 5.
However if one were to make a rating of these factors within the given range, the factors having
mean score less than 3.3 can be categorized as below average, those within 3.30 and 3.70 as the
average, and those above 3.70 are above average. Accordingly there are only two above
average factors namely Entrepreneurial Capability (3.91) and Professional and Technological
Support (3.87). The average factors are Socio-Cultural Support (3.55), Facilitation of Women’s
Entrepreneurship (3.48), Access to Information (3.39), Funding Support (3.37) and Support
for Internationalization (3.35). The below average factors are Education and Training (3.21),
Government Support (3.20), Physical Infrastructure (3.19) and Market Entry Facilitation (3.14).
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
40
The overall picture is that of entrepreneurially and professional competent people struggling to
build ventures amidst poor institutional support especially from the Government.
DATA ANALYSIS AND FINDINGS: (B) INTER-CORRELATION
AMONG THE DIMENSIONS OF THE ENTREPRENEURIAL
ECOSYSTEM
The matrix showing the correlation among the dimensions of the entrepreneurial ecosystem is
given in Table-3. As expected, Government Support is significantly correlated with all the
EFCs, but not with Entrepreneurial capability. One could therefore infer that the governance
system is the overarching influence on all other institutions in a country. However, Government
initiatives may not have a direct impact on the development of entrepreneurial capabilities.
Examining the significant correlations of Entrepreneurial Capability with Socio-Cultural
Support (.378), Professional and technology support (.165), Education and Training Support
(.158), Access to Information (.115) and Facilitation of Women’s Entrepreneurship (.103), it
could be inferred that the most dominant influence on the development of Entrepreneurial
Capability is the Socio-cultural support. The government can facilitate education & training,
Professional & technology support, etc. and thereby have an indirect influence on the
development of entrepreneurial capability.
Proposition-1: The Governance system of a country is the most dominant influence on the
Entrepreneurial Framework Conditions.
Proposition-2: Entrepreneurial Capability among the people of a country would largely depend
on the Socio-Cultural Norms prevailing in the country.
Proposition-3: The Governance system can have an indirect influence on the development of
Entrepreneurial Capability by influencing the EFCs like Socio-cultural norms, Education and
training, Access to Information etc.
The correlation matrix and the propositions generated from it would suggest a regression
analysis of: (a) EFCs on Government Support, (b) Entrepreneurial Capability on the EFCs. This
is to test the two hypotheses, namely: (1) The Governance system has an overarching influence
on the development of other EFCs; (2) Entrepreneurial Capability is independent of the EFCs
except for the Socio-Cultural support.
Table-3: Inter-Correlation Matrix for the Dimensions of Entrepreneurial Ecosystem
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
41
Factors
Gover Educat Suppo Market Facilit Physic Profes Entrep Socio- Fundin Acces
Mean Std.
rt for
Entry ation al
sional reneur Cultur g
s to
Deviati nment ion
Suppo and
Interna Facilit of
Infrastr and
ial
al
Suppo Inform
on
rt
Trainin tionali ation
g
sation
Suppo
rt
1 .508** .609** .666**
Wome
n's
Entrep
reneur
.500**
ucture Techn Capab Suppo rt
ation
Suppo ology ilities rt
rt
Suppo
rt
.500** .414**
.050 .405** .505** .506**
Government Support
3.20
0.67
Education and
Training Support
3.21
0.93
Support for
Internationalisation
3.35
0.71
1 .652** .484** .328** .483**
.072 .335** .407** .486**
3.14
0.72
1 .525** .395** .438**
.035 .393** .468** .646**
3.48
0.84
3.19
0.95
1 .294** .197** .196** .379** .347**
3.87
0.59
1 .166** .330** .335** .395**
3.91
0.67
1 .377** .186** .115**
3.55
0.52
1 .411** .396**
3.37
0.69
1 .428**
3.39
0.72
Market Entry
Facilitation
Facilitation of
Women's
Entrepreneurship
Physical
Infrastructure
Professional and
Technology Support
Entrepreneurial
Capabilities
Socio-Cultural
Support
Funding Support
Access to
Information
1 .392** .555** .434** .511** .210** .158** .324** .421** .475**
1 .320** .414** .103*
.393** .393** .399**
1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
DATA ANALYSIS AND FINDINGS: (C) REGRESSION OF EFCS ON
GOVERNMENT SUPPORT
The regression analysis of EFCs on Government Support (see Table 4) reveals the overriding
influence of the governance system on the other EFCs. All the Beta-Coefficients are highly
significant at p=0.000. The highest values are for Market Entry Facilitation and Support for
Internationalization, which are apparently more directly dependent on government policies and
actions. The lowest among the significant values are Socio-Cultural Support and Professional
and Technological Support. This may be because, even though governments can intervene in
the social systems and behaviors by making appropriate laws, it may take much longer for the
mindsets and attitudes to change. Similarly, while the governments can facilitate the
development of professionals and technologists in the community, the provision of such
services to businesses is more or less under the control of private individuals.
Table 4: Regression of EFCs on Government Support
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
42
Dependent Variable
Independent
Variable
Government
Support
- Education Support
and
Training
Support
Market
for
Entry
Internation Facilitation
alisation
Facilitation
of
Women's
Entrepren
eurship
Physical
Infrastruct
ure
Support
Professio Socional and
Cultural
Technolog Support
y Support
Funding
Support
Access to
Informatio
n
.946
1.275
0.849
1.466
0.912
2.7
2.533
1.692
1.65
Beta
.508***
.609***
.666***
0.5***
0.5***
0.366***
0.405***
0.505***
0.506***
t
Sig
14.54
18.98
22.013
0.000
11..231
0.000
10.95
0.000
14.443
0.000
14.496
0.000
R2
0.000
0.258
0.000
14.26
0.000
14.25
0.000
0.371
0.443
0.25
0.25
0.172
0.164
0.255
0.257
Adjusted R 2
0.257
0.37
0.442
0.25
0.25
0.17
0.163
0.254
0.255
Constant
DATA ANALYSIS AND FINDINGS: (D) REGRESSION OF ENTREPRENEURIAL
CAPABILITY ON EFCS
The regression of Entrepreneurial Capability on the EFCs has shown some interesting results
(see Table-5). There is support for the hypothesis that the Socio-Cultural Norms are the most
important influence on Entrepreneurial capability. Interestingly there is an additional support
from Physical Infrastructure. This may be because the availability of good quality infrastructure
would enhance the individual’s confidence about the ability of implementing the new venture.
It should also be noted that there are two negative influences namely Government Support and
Market Entry Facilitation. These factors represent the various schemes of the government and
other promotional agencies to provide support for the nascent venture. One of the inferences
from this finding is that the capable individual may not depend on these facilities or may not
utilize them. Conversely, if there is too much of support provided it may create a dependency
attitude among the individuals and thereby adversely affect their entrepreneurial capability.
Table-5: Regression of Entrepreneurial Capability on EFCs
Factor
Standardized
Coefficients
Beta
t
Sig.
(Constant)
Government Support
Education and Training Support
-.209***
.091
9.486
-3.734
1.854
.000
.000
.064
Support for Internationalization
Market Entry Facilitation
Facilitation of Women's Entrepreneurship
.027
-.192**
-.039
.511
-3.141
-.851
.609
.002
.395
Physical Infrastructure Support
.197***
4.345
.000
Professional and Technology Support
Socio-Cultural Support
Funding Support
Access to Information
R2
Adjusted R2
.102
.413***
.068
.004
2.308
9.656
1.500
.074
.021
.000
.134
.941
0.22
0.22
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
43
DATA ANALYSIS AND FINDINGS: (E) DIFFERENCES AMONG THE
SUB-GROUPS OF RESPONDENTS
As the demographic and other sub-groups of the respondents were large enough for separate
analysis, tests of difference (ANOVA) was conducted for identifying the differences in their
perceptions. In view of the number of large tables, the results are presented here in a summary
format without tables and figures:




As expected, the entrepreneur groups (both ICT and no-ICT) had low scores on all
items except on Entrepreneurial Capability. The ICT entrepreneurs seem to be an
aggrieved lot. They have the lowest scores on many items such as: Government
Support, Funding support, Socio-cultural facilitation, Professional and technical
support, Facilitation of internationalization, Access to information, Market entry
support, and Facilitation of Women’s Entrepreneurship. The non-ICT entrepreneurs are
not far behind, although they are not as unhappy about the business environment as
their ICT counterparts. The ratings obtained from the ICT group are rather surprising,
as the general perception is that ICT entrepreneurs are a pampered lot.
It may not be surprising to note that the lowest score on Entrepreneurial Capability was
for the government employees, followed by bank employees. The government
employees have also rated a few other items as the lowest, namely, Education and
training, Funding support, and Physical infrastructure. However, they have high scores
on several items such as: Government Support, Internationalization, Professional and
technical services, Access to information, Market Entry Facilitation, and Facilitation of
Women’s Entrepreneurship. Obviously, there seems to be a self-serving bias in their
responses, which may be treated as another evidence for the presence of actor-observer
bias, since in the matter of providing support, government is the actor and the others are
the observers.
Students seem to be the most optimistic group (followed by the bankers) – which
augurs well for the country, as some of them are likely to be the future entrepreneurs of
the country and would be funded by the bankers -- with high scores on several items
such as: Education and training, Government Support, Funding support, Access to
Iinformation, Market Entry Facilitation, Facilitation of Women’s Entrepreneurship, and
even the physical infrastructure. The last mentioned EFC of India has the distinction of
having been rated as poor in several studies including the GEM studies. Incidentally,
this is the lowest rated item in the present study for the bankers, who are otherwise
appreciative of most other EFCs.
The ‘gender-divide’ in the data seem to be in favour of women, as they have more
favourable perceptions on many EFCs, including three statistically significant ones,
namely: Education and Training Support (t=4.58, p=0.00); Facilitation of Women’s
Entrepreneurship-(t=2.92, p=0.00); and Government Support (t=1.76, p=0.08).
Apparently, the government schemes for educating girls and supporting women’s
careers and ventures are favourably being perceived by women. Among the very few
items where men have higher scores than women are: Entrepreneurial Capability
(t=1.59, p=0.11), and Professional and technical support (t=1.48, p=0.14). Though these
differences are not statistically significant at 90% confidence level, they are close to
that, being significant at 85% level. This finding would provide additional support for
the finding that Entrepreneurial Capability is not a function of the EFCs, with the
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
44


exception of the strong influence of the socio-cultural support, which will normally take
some time to have an impact. It can also be inferred that the favorable environment
cannot compensate for the lack of entrepreneurial capability. This may be why, in spite
of the perception of a more favourable environment for them, there are fewer
entrepreneurs among women.
With respect to the age-groups, the perceptual differences are significant for all factors
other than Entrepreneurial Capability, and Professional and Technical Support, with the
younger groups having higher scores on all the factors than the older groups.
Apparently, the older people are disillusioned about every other support than their own
capability and the professional and technical competencies of their colleagues. They
have probably learned from their experience that ‘self-help is the best help’.
A question put to the non-entrepreneurs if they would like to take up entrepreneurship
as a career option enabled us to classify this group into two: those who would become
entrepreneurs, and those who would not. The former had higher scores than the latter on
six dimensions, three of them at 99% confidence level (Entrepreneurial capability,
Funding Support, and Socio-cultural facilitation), and the remaining at 90%
(Facilitation of Women’s Entrepreneurship, support for internationalization, and
Education and Training Support). Apparently, the perception of such favourable factors
may have ignited in them the desire to become entrepreneurs. Alternatively, going by
the theory proposed above, the desire for entrepreneurship may be an outcome of the
Socio-cultural facilitation and the Entrepreneurial capability, which may have led them
to search for and find the favourble aspects of other EFCs.
DATA ANALYSIS AND FINDINGS: (F) DIFFERENCES BETWEEN ICT
AND NON-ICT ENTREPRENEURS
While the main focus of this paper is to assess the differences in perception of entrepreneurs
and Non-entrepreneurs about the EFCs, it was felt that there could be some differences between
ICT and non-ICT entrepreneurs. Since both these groups are of entrepreneurs, the number of
items on which they differ was expected to be fewer than those in the case of entrepreneurs and
non-entrepreneurs. The results of the t-tests are presented in Table-6.
As expected, the differences were limited - there were only three EFCs on which they
significantly differed: (1) Funding Support (t=-2.27, p=0.02); Physical Infrastructure (t=-2.03,
p=0.04); and (3) Education and Training (t=-2.05, p=0.04). On all these dimensions, ICT
entrepreneurs score lower than the non-ICT ones (see also the graphical representation of these
three differences in Figure-1). On the issue of funding support, it is often alleged that the
financial institutions have a traditional mindset and would lend only against collateral security.
ICT companies may not own physical assets, and their knowledge assets and software will not
be treated as ‘solid’ collaterals. Hence they may find it more difficult than others to get funding
support. On the ‘Education and Training Support’, they could face problems because the
technology is new and evolving fast, and therefore many educational and training institutions
may not be equipped with the latest knowledge in the field to produce ‘industry-ready’
graduates. On the Physical Infrastructure Support’, it is possible that the ICT may have higher
expectations, as their business is more sophisticated than the traditional ‘brick and mortar’
companies.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
45
Table 6: Test of difference (t-test) for the ICT and Non-ICT entrepreneurs’ perception
Factor
Government Support
Education and Training
Support
Support for
Internationalisation
Market Entry Facilitation
Facilitation of Women's
Entrepreneurship
Physical Infrastructure
Support
Professional and Technology
Support
Entrepreneurial Capabilities
Socio-Cultural Support
Funding Support
Access to Information
ICT Vs
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
Non-ICT
ICT
N
Mean
100
182
100
182
100
182
100
182
100
182
100
182
100
182
100
182
100
182
100
182
100
2.91
3.03
2.91
3.14
3.03
3.14
2.87
2.94
3.27
3.28
3.01
3.23
3.80
3.80
4.01
4.02
3.45
3.49
3.11
3.31
3.25
Std.
Deviation
0.68
0.66
0.86
0.92
0.65
0.70
0.72
0.68
0.79
0.86
0.87
0.86
0.58
0.59
0.62
0.55
0.49
0.54
0.78
0.66
0.67
Non-ICT
182
3.27
0.74
t
df
Sig.
-1.42
280
.157
-2.05
280
.041
-1.31
280
.192
-0.82
280
.411
-0.13
280
.896
-2.03
280
.043
-0.04
280
.971
-0.15
280
.877
-0.56
280
.575
-2.27
280
.024
-0.25
280
.806
Figure-1: Perceptual differences between ICT and Non-ICT entrepreneurs: Graphical
representation
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
46
DATA ANALYSIS AND FINDINGS: (H) DIFFERENCES BETWEEN
ENTREPRENEURS AND NON-ENTREPRENEURS
As may be seen from Table-7 (see also Figure-2), the perceptions of Entrepreneurs and Nonentrepreneurs differ significantly on all EFCs except the Physical Infrastructure Support.
However, on the non-EFC item (Entrepreneurial Capability), it was the entrepreneur group that
scored significantly higher. It may be noted that all the differences are highly significant (at
p=0.00). This analysis, therefore, provides strong support for the hypothesis of ‘actor-observer’
bias. Interestingly, with reference to the Physical Infrastructure, where there is no difference
between the two groups, as both of them are ‘actors’, in the sense that non-entrepreneurs also
use the physical infrastructure.
A further observation that would be specially relevant in this context is the fact that on all EFCs
the non-entrepreneurs (observers) have higher mean-scores than entrepreneurs (actors),
implying that the interaction with the EFCs may have brought their limitations into sharper
focus for the actors. As the EFCs in India are in general rated at the average level, it is possible
that they have many shortcomings, which would get highlighted in interaction. On the contrary,
if the EFCs were all maintained at the highest levels of quality, the perceptions could have been
reversed or at least would have been equal.
The only item on which entrepreneurs (actors) scored higher than non-entrepreneurs (observers)
is the Entrepreneurial Capability. This is expected because it is probably the confidence in
ones’ own abilities that made them venture out, and the successes would have reinforced that
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
47
confidence. There could also be the operation of the actor-observer bias in the traditional sense,
where the actors tend to attribute their successes to their own capabilities and blame the
environmental conditions for their failures.
Table-7: Test of difference (t-test) for the perceptions of Entrepreneurs and Nonentrepreneurs
Factor
Government Support
Education and Training
Support
Support for
Internationalisation
Market Entry
Facilitation
Facilitation of Women's
Entrepreneurship
Physical Infrastructure
Support
Professional and
Technology Support
Entrepreneurial
Capabilities
Socio-Cultural Support
Funding Support
Access to Information
Entrepreneur
Vs NonEntrepreneur
E
NE
E
N
Mean
Std.
Deviation
t
df
Sig
296
315
296
2.97
3.41
3.01
0.67
0.59
0.91
-8.61
609
.000
-5.11
609
.000
NE
E
NE
315
296
315
3.39
3.08
3.61
0.91
0.70
0.63
-9.81
609
.000
E
NE
E
296
315
296
2.89
3.38
3.26
0.71
0.64
0.84
-9.06
609
.000
-6.46
609
.000
NE
E
315
296
3.69
3.13
0.78
0.87
-1.33
609
.184
NE
E
315
296
3.24
3.79
1.01
0.59
-3.47
609
.001
NE
E
NE
315
296
315
3.95
4.00
3.83
0.58
0.59
0.73
3.17
609
.002
E
NE
E
NE
E
NE
296
315
296
315
296
315
3.47
3.62
3.22
3.51
3.23
3.54
0.54
0.49
0.72
0.64
0.74
0.66
-3.80
609
.000
-5.25
609
.000
-5.49
609
.000
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
48
Figure-2: Perceptual differences between Entrepreneurs and Non-entrepreneurs: Graphical
representation
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
49
SUMMARY AND CONCLUSION
Though the primary focus of this paper was on the empirical testing of the actor-observer bias
based on the differences in perception on EFCs between entrepreneurs and non-entrepreneurs,
we did explore a few other issues thrown up by the data collected as part of a larger research
project. The major findings of this study are briefly stated below:




While the dimensions of EFC identified by the present study more or less coincided
with the findings of other researchers like GEM, a specific contribution of this study is
the identification of “Access to Information” as a separate factor. There was also a
possibility of identifying another factor (Social sensitivity of the governance system)
combining a few other similar schemes of the government for the disadvantaged groups
with the items related to “Facilitation of Women’s Entrepreneurship”.
The overall ratings for the dimensions show a bias toward rating individual-based
dimensions (Entrepreneurial capability, and Professional and technical support) as high
and Government-based dimensions as low. This could be a representation of the actual
state of affairs, slightly distorted by a rating bias.
The governance system of a country has an overarching influence on the other EFCs.
Entrepreneurial Capability is influenced primarily by the socio-cultural factors in the
short run, and not by the other dimensions of the EFC. However, in the long run, the
institutions and programs created by the government can have an influence on the sociocultural norms and thereby influence the development of entrepreneurial capability. This
theoretical proposition may be graphically represented as follows:
Government
interventions
Long Term
Socio-Cultural
Norms
Short Term
Entrepreneurial
capability.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
50








In this model, ‘Socio-cultural norms’ become the mediating variable between
‘Government interventions’ and ‘Entrepreneurial capability’. However, this relationship
is unlikely to show up in the analysis of data collected in cross-sectional studies because
of the time-lag involved in creating the long term effect.
In fact the short-term relationship between ‘Government Support’ and ‘Entrepreneurial
capability’ is shown as negative in the regression analysis. This may be because people
with entrepreneurial capabilities would have high ‘self-efficacy’ feeling and therefore
may rely less on Government Support, although they may make use of these
appropriately under their own terms.
Contrary to the general impression that ICT entrepreneurs are a pampered lot, they seem
to be the least satisfied lot among the sub-groups, scoring the lowest on all EFCs. They,
however, score the highest on Entrepreneurial capability, along with their non-ICT
counterparts. For the EFCs, they have given significantly lower ratings than their nonICT counterparts on Funding support, Education and training, and Physical
infrastructure.
It is not surprising that entrepreneurs have the highest score on Entrepreneurial
capability; or is it surprising that government employees scored the least on this,
followed by bankers. Coincidentally, government employees have rated the Government
Support high, although it is one of the lowest rated dimensions in the overall rating.
There could probably be an actor-observer bias in this rating too, as it is seen in the
ratings of entrepreneurs and non-entrepreneurs.
Students seem to be the most optimistic group, as they have given high ratings to most
of the EFCs. Since they also have high ratings for their own entrepreneurial capabilities,
it augurs well for the future supply of entrepreneurs in the country.
The number of the students being large (202) in the present sample, their views would
have affected the perceptions of the young versus the old. Obviously, the youngsters
score higher on all dimensions (except for Entrepreneurial Capability and Professional
and technical support). It is possible that the older people’s views are tempered by their
experience and are more realistic. Alternatively, they could have been conditioned by
their experience in the past, when the conditions were probably poorer.
Between the two genders (Male: 451; Female: 157), it is the women who have more
favourable views on the EFCs. However, they rate their Entrepreneurial Capability
lower than men’s rating. Would this be a reason for the fact that there are fewer
entrepreneurs among women than among men, although they perceive the environment
to be more favourable? It is obvious that capability is more important than facilitation.
In other words, facilitation without capability will be ineffective.
Among the non-entrepreneurs, there was a sub-group who were interested in taking up
an entrepreneurial career. Their perceptions were higher than those of the other nonentrepreneurs on 6 dimensions including Entrepreneurial Capability. Logit regression
showed that the coefficient for Entrepreneurial Capability was the highest. Hence it
could be inferred that the primary reason for their entrepreneurial aspiration is their
capabilities, because of which they were exploring the facilitative factors in the
environment rather than being opportunistically guided by the environmental
facilitation.
Lastly, and most importantly, the test of difference in perceptions of entrepreneurs and
non-entrepreneurs showed that there were significant differences on all dimensions,
where the only dimension in which entrepreneurs scored higher is Entrepreneurial
Capability. Apparently the ‘actor-observer’ bias is in operation in the rating. The actors,
who are the successful entrepreneurs, feel that their capability is a greater contributor to
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
51
their success than the facilitation by the external agencies. This is in line with a general
theory of attribution that the successes are explained by internal attribution (one’s own
capabilities and actions) and failures are explained by the shortcomings of the external
environment.
ACKNOWLEDGEMENT
The authors gratefully acknowledge the funding support received from Fondazione Cariplo,
Italy, and the professional inputs received from the academic partners from Italy (Fabio Corno
of University of Milano–Bicocca) and the BRIC countries (Renata Lèbre La Rovere of UFRJ
Brazil, Elena Pereverzeva of MIRBIS Moscow, and Youzhen Zhao of Fudan University China)
for the research reported in this paper.
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ENTREPRENEURSHIP & NEW VENTURE CREATION:
KEY
ELEMENTS
OF
THE
ENTREPRENEURIAL
ECOSYSTEM FACILITATING THE GROWTH OF ICT
ENTREPRENEURS IN RUSSIA
Elena Pereverzeva, Alexey Khromov
Moscow International High Business School MIRBIS
34 Marksistkaya str., Moscow (Russia)
Abstract: This exploratory study examines the perceptions of Russian entrepreneurs about
their experiences with their own new venture creations in Russia. The study utilizes the
Ecosystem approach to examine the drivers of entrepreneurship. Integrating the theory from
economics, sociology, and psychology, we argue that both the individual personality traits and
the environment impact entrepreneurial activity. We used a mixed method approach with indepth interviews and surveys, followed by interviews with the Control Group.
Keywords: Entrepreneur, Russia, new venture creation, ICT
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60
BACKGROUND
The complexity of today’s global economic environment has made it more important than ever
before to recognize and encourage entrepreneurship as one of the prime movers of economic
growth. In light of the multiple challenges facing global economy, there is lot of interest among
policy makers and researchers to explore the factors that promote entrepreneurship and
innovation in a country, as well as the barriers that prevent innovative SMEs and
entrepreneurship from playing their full potential role.
There are many determinants driving entrepreneurship. Understanding the factors behind this
process has occupied the minds of economists for hundreds of years, engendering theories
ranging from Adam Smith’s focus on specialization and the division of labor to neoclassical
economists’ emphasis on investment in physical capital and infrastructure, and, more recently,
interest in other mechanisms such as education and training, technological progress,
macroeconomic stability, good governance, firm sophistication, and market efficiency, among
others.
In light of the changing world dynamics, a multi-country research group has been formed in
2009, comprising of management scholars from Italy, Brazil, Russia, India and China, aimed at
achieving two sets of goals:
.
To study the emergence of entrepreneurial ventures in each of these countries, as a
function of several elements in the ‘Entrepreneurial Ecosystem’, namely: the legalpolitical and economic ideologies, social and cultural norms, government policies and
programs, education and training systems, technology development, transfer &
absorption, availability of finance, and opportunities for cross-national interactions and
business relations.
.
To conduct a comparative analysis of the situations of the five countries, with specific
reference to the ICT industry, which is playing a relevant role in all of them
The underlying idea is that it is crucial for researchers and policy makers to understand the
quality of such elements in any economy, as well as their potential in supporting or inhibiting
new venture creation. It will also give an idea about the sustainability of the high levels of
entrepreneurial activities in the different contexts.
Whereas a number of individually relevant determinants of entrepreneurship are widely
explored (Parker, 2004; Grilo and Irigoyen, 2006), differences across Europe and the growing
BRIC countries have still not been compared. Of late the BRIC countries are observed to have
high levels of entrepreneurial activity, the sustainability of which can be assessed by studying
the quality of the entrepreneurial ecosystem. Of course, entrepreneurship determinants and
policies differ considerably among the 4 BRIC countries, owing to different socio-economic,
cultural & political scenario and the policy needs, but it is of utmost relevance today to
understand the underlying factors, using a reference country model to identify key elements of
the ecosystem (environment) that have encouraged and supported entrepreneurship. In this
reference, Russia (as one of BRIC) has its own distinctive features ut in spite of very high level
economics the enterpreneur activity is low. This study retains that, in Russia, every 23rd citizen
(4.3%) that is of working age is an early entrepreneur (meaning that his activity was funded less
than 3 years ago). According to these numbers, Russia is behind the rest of the BRIC countries,
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61
where every 8th resident opens his own business, and also behind other Eastern European
countries, where the number is every 11th.
In addition, the Russian Federation’s low entrepreneurial activity is affected by the fact that
many companies, having opened their business, never manage to overcome the first stage of
development.
The activity index of established entrepreneurs in the country equals 2.1%, and this represents
33% of the total number of entrepreneurs. In industrialized countries, on the other hand, the
number of established companies (i.e. functioning for more than 3.5 years) exceeds the number
of the newly created ones.
According to the authors of the study, the reason why the level of entrepreneurship is so low in
the Russian Federation is because of the structural economy and the population’s negative
outlook on opportunities to start their own business. Only 13% of Russians called the
conditions favorable.
The study’s experts therefore believe that a significant growth in the entrepreneurial sector in
Russia should not be expected in the near years. Only 3% of Russian respondents are planning
on opening a business in the next three years, while in other BRIC countries these figures go up
to 21%.
In light of our cross-cultural research on “Entrepreneurship & New Venture Creation”, this
paper aims to analyze the Entrepreneurial Ecosystem, supporting and harnessing the growth of
Knowledge Intensive ICT entrepreneurs in Russia. As the knowledge economy is maturing,
there is an urgent need to equip SMEs with the capabilities and skills to grow and prosper.
Unfortunately, even today early-stage businesses are constrained by a number of factors.
The paper is structured in five sections. After this brief introduction, review of the literature is
presented. Next, theoretical model is explained. Thereafter, the methodology of the research is
presented, followed by main findings. Finally, we end with a discussion of the study’s
limitation and implications for future research.
ENTREPRENEURSHIP AND THE ENVIRONMENT
The environment in which business is conducted plays a crucial role in fostering or weakening
entrepreneurial activities in terms of firm creation, firm expansion and implementation of
process, product and management innovation within a firm. Issues such as the fiscal
environment, labor market regulations, administrative complexities, intellectual property rights,
bankruptcy law, education and skill upgrading, etc. are understandably crucial in determining
the entrepreneurial dynamism of an economy.
The term “Environmental factor” refers to those environmental attributes that surround the
individual (Grundsten, 2004). Environment, in this sense, is encompassing of such factors as
infrastructure, cultural, economic, social and political environments. These environmental
forces have been found to be capable of either impeding or facilitating entrepreneurial activities
in any society. Gnyawali and Fogel (1994) define the entrepreneurial environment as “the
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62
overall economic, sociocultural and political factors that influence people’s willingness and
ability to undertake entrepreneurial activities”. According to Luthje and Franke (2003),
environmental factors can facilitate or impede entrepreneurial activity, and it plays an important
role in the formation of an individual’s intention to create new venture.” There has been an
array of perspectives put up to examine the connections between entrepreneurial activity and
the environment.
Entrepreneurship begins with first and foremost individual characteristics of entrepreneurs. For
example, psychologists have hypothesized about the psychological traits associated with
entrepreneurs, such as a personal need for achievement (McClellan, 1961), belief in the effect
of personal effort on outcome (McGhee and Crandall, 1968; Lao, 1970), attitudes towards risk,
and individual self-confidence (Liles, 1974). Personal characteristics of entrepreneurs is also a
major theme of a recent work of Lazear (2002), who concludes that individuals who become
entrepreneurs have a special ability to acquire general skills, which they then apply to their own
businesses.
ENTREPRENEURSHIP IN RUSSIA
Russia is the world’s largest country, a nuclear superpower with unsurpassed energy resources.
It also is a country which finds itself at the crossroads of possible development paths. Market
oriented mechanisms have been introduced but Soviet era laws remain on the books. Corruption
has become a way of life and freedom of the press has been gradually eliminated in early 2000s.
Within this backdrop, private entrepreneurship has emerged, albeit in a distorted way. To
understand Russia’s current situation, one needs to understand the dramatic developments that
have characterised its recent history.
As the heart of the Soviet empire, Russia had tremendous control of enormous amounts of
natural resources and human capital. Yet, twenty years ago, in the late1980s, it was a country
where entrepreneurship was marginal, the economy was stagnant and the ruling communist
hierarchy had no clear formula for solving the deepening crisis. Unfortunately the reforms
characterising Russia’s attempts at rebuilding statehood after the collapse of the Soviet Union
in the 1990s, first under M. Gorbachev and then Boris Y’eltsin were inconsistent and did not
foster macroeconomic stabilisation.
However, under the leadership of V. Putin (since 2000), macroeconomic stabilisation as well as
institutional stability has been achieved. In addition, unprecedented increase in the price and
demand for oil and gas resources has resulted in a rapid growth of Russia’s GDP. Russia now
has a large private sector, though not without its limitations. At first glance, ‘de jure’
regulations often seem reasonable, yet it is the selective and arbitrary manner by which they are
enforced that results in a lack of consistency or stability for firms (Aidis and Adachi 2007;
Aidis et al., 2008). In addition, the inadequacies of the Soviet system resulted in Russians
becoming accustomed to a corrupt and malfunctioning legal environment (Gel’man 2004).
Unfortunately, this negative legacy continues to characterise the business environment today.
As a result, large, politically connected enterprises dominate Russia’s business landscape.
Moreover, the lack of universal property rights is reflected by the uneven distribution of
income, and Russia is plagued by some of the most extreme social differences and pockets of
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63
dire poverty (Glaeser et al. 2003; Gerry and Nivorozhkin, 2008; Buccellato and Mickiewicz,
2008).
Overall, despite numerous policy announcements oriented towards entrepreneurial
development, entrepreneurs in Russia face a hostile business environment characterised by the
weak rule of law and widespread corruption. As formal structures in Russia fail, they are
complemented by informal networks, which form ‘intangible assets’ for certain well-connected
entrepreneurs that allow them to overcome environmental barriers (Aidis et al. 2008). However,
though some businesses learn to cope, the lack of a level playing field for businesses in general
seriously distorts the development of a thriving business environment. The crucial issue is not
the existence and number of small businesses, but rather the fact that most of them have either
no incentive to grow or are severely restricted in doing so given that if they are successful they
face a serious risk of expropriation or forced takeover by those better connected to the
intertwined economic and political structures of power.
KNOWLEDGE INTENSIVE ENTREPRENEURSHIP
The term “Knowledge Intensive Entrepreneur” lacks a very rigorous definition. It has been
coined because of the need to emphasize knowledge as the basis for technological innovation
and new firm development.
A variety of recent studies have shown that Knowledge Intensive Entrepreneurship has the
potential to contribute to economic development in several ways: as an important channel to
connect innovative ideas into economic opportunities, as a basis for competitiveness through
the revitalization of social and productive networks, as a source of new employment, and as a
way to increase productivity. These findings have led to the implementation of different types
of initiatives and policies designed to encourage entrepreneurship, including the introduction of
education and training programs, the promotion of consulting support for entrepreneurs and the
facilitation of access to finance.
For the purpose of the study, we have used the following working definition: “Knowledge
Intensive Entrepreneur is defined in dynamic terms as the entrepreneur of normally small and
medium sized enterprise (SME) that focus on the discovery, innovation or interpretation of
knowledge. Such individuals typically maintain a business focus while continuously
innovating.”
Our focus on Knowledge-intensive ICT entrepreneurship is based on our understanding of its
relevance: (i) as a major factor affecting innovation; (ii) as a core transformative mechanism for
translating knowledge into growth, (iii) as a stock of capital or factor of wealth generation
which can be used in the production of other goods; (iv) as important dynamic property of
different systems of innovation and institutional setting.
ICT MARKET DEVELOPMENT IN RUSSIA
In Russia‘s ICT market there are several market trends that are of great global market impact.
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64
According to the expert forecast, by the period of 2020- 2030 Russia will become the
knowledge-based economy. Besides natural resources, labor force and assets, knowledge
technology will become one of the main factor of industrial success. There will be the growth
of knowledge-based services. The human capital will play even more significant role in
manufacturing then before, and therefore, there will be an increase in investment in education
and training.
In the transition to the knowledge-based economy the usage of ICT will be doubled. Innovation
will become the main resource of economic growth and business competitiveness.
In the near future it is forecasted that centers of development and competence and
manufacturing will shift outward the developed countries. According to the experts, it is
expected that the share of the OECD countries will drop from 80% to 60% of the global ICT
sector. For instance, in 2011 the growth of the ICT market in the BRIC countries will slightly
exceed 13%. The volume in its market is close to €497.9 billion. On the contrary, there are
great prospects for China to become an ―IT-power with its government support of high
technology industry. The volume of the ICT market in China has reached €204 billion, with
growth in 2011 of 11%. In Russia, with the same growth of ICT market in 2011, it amounted to
only €57 billion.
By the period of 2015-2020 the increase in the ICT impact on social processes will at its zenith.
It is expected that the development of the Web can lead to de-socialization of the working
population. This will require the creation of new forms of psychological and social support for
citizens. It will also require the adoption of legislative and technical measures against
destructive forms of socialization (organized riots, ―twitter revolutions, totalitarian groups,
and so on).
During the period of 2015-2020 the experts forecast an acceleration of scientific and
technological revolution driven by active integration and the widespread use of Internet
networks that implement the new principles of the organization. The new type of networks will
provide flexibility and sustainability of network infrastructure in compliance with evolutionary
development of the network security with the development of technological and organizational
principles. This will reduce the cost of network infrastructure by automatic adjusting the
network settings for the user tasks. Network infrastructure and resources of different physical
nature will be transformed into a single system.
Pessimistic forecasts are associated with the following trends:
By the end of the period of 2020-2030 years such global trend as a significant increase in
negative impact of ICT on the environment will perform the largest effect in Russia. For
instance, the ICT sector is responsible for 2% of world carbon emissions and this figure will
double by 2020. According to the survey results of Harvard university scholar Alex WissnerGross, two Web searches in any browser generate about 20 milligrams of CO2 per second.
The disposal of E-waste is the fast growing problem. In 2020, old computer waste is predicted
to rise in China by 200-z400% and by 500% in India. Similarly, waste from discarded mobile
phones is forecasted to be astounding 7 times higher in China and 18 times higher in India in
comparison to 2007 [6].
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65
Increase in share of ICT of the total industrial production will enhance the value of creating
green IT-devices. Measures for improvement of the environmental performance include, for
instance, life cycle management of IT products, the use of data-centers‘ heat to heat the water,
and etc. The negative impact of the ICT sector on the environment will be decreased by
introduction of green ICT and a shift from the goods consumption to the consumption of
content.
This global ICT trend provides Russia with two options – either to focus on developing green
technologies or to keep developing less technologies.
One of the biggest problems is the global game for the highly qualified human resources.
Russia‘s goal is to keep the maximum number of Russian specialists in the ICT field and also to
attract foreign professionals. Number of highly qualified specialists in the field of ICT,
produced annually in Russia, hardly exceeds 2,000 graduates. The number of experts who can
implement a responsible job with high dedication is even less. Therefore, most of business
elites keep complaining on shortage of ICT staff.
Thus, all of the major global trends will have a significant impact on Russia as part of the
global community. Proper response to these trends by state and business elite needs will
strengthen the competitive position of Russia on the global ICT market.
THEORETICAL MODEL
The development of entrepreneurship in a particular milieu depends not on a single over-riding
factor but rather on a ‘constellation of factors’ at the individual, societal and national levels
(Tripathy, Business Communities of India – a Historical Perspective, 1984). These factors
could be ranked either as “General Environmental factors”- stemming from economic, political
and socio- cultural conditions prevailing in a region or “Task Environmental factors”- such as
financial assistance, infrastructural facilities, government policies, R&D Support and so on. The
General Environmental factors are formative in nature in the sense that they mold the
competencies, attitudes, and values of an individual. The Task Environmental factors on the
other hand are facilitative in nature, as they help an individual in channelizing his competencies
into a particular field, which in the present case is entrepreneurship and new venture creation
(Mathew J. Manimal).
In order to understand the factors that support or hinder an entrepreneur, we have used the
Entrepreneurial Ecosystem framework model in our research, instrumental in gaining insight
into factors (individual, society, state) which enable growth performance among the
entrepreneurs in the knowledge intensive ICT Sector.
An ecosystem refers to the complex of organisms and their environment interacting as a unit.
Organisms – human and otherwise – are affected by their environments. The systematic study
of environment is rooted in the biological science where the term “ecology” is most commonly
applied to the natural habitats of animals. “Human ecology” is a more recent term extending to
the domain of geographers and sociologists who are interested in the distribution of human
populations. From this perspective, an “ecosystem approach” to the study of human behavior
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66
posits a framework for reviewing the interaction that occurs between individuals and their
environment.
Thus, the term “entrepreneurial ecosystem” (EE) refers to a combination of factors that play a
role in the development of entrepreneurship.
Figure 1 – The Entrepreneurial Ecosystem 8
In order to gain insight into the Entrepreneurial Ecosystem, the research group evolved the
following six framework conditions that foster entrepreneurship, which have been found to be
applicable in Russia and the BRICs.
.
1) Individual Personality Traits: refers to the personal qualities of an individual predisposing him/her to entrepreneurial activity. The development of these traits could arise
from early socialization, parenting, socio-cultural norms, early education and familial
care etc, which are the components of the general environment.
.
2) Socio-cultural Context: refers to the social and cultural norms that influence
individual’s behavior and attitude towards entrepreneurship.
.
3) Government Policies and Programs: refers to the extent to which government
policies as reflected in tax or regulations are capable of facilitating new venture
creation, and presence of adequate government programs in assisting firms in their
startups, survival and growth
.
4) Access to Finance: refers to availability and affordability of various types of finance
such as bank loans, equity, venture capital, angel funding, subsidies and grants.
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67
.
5) Access to Information, Opportunity for Knowledge and Skill-building: refers to the
availability of information on business opportunities and access to data required by
entrepreneurs for managing their business. Also includes availability of opportunities
for acquiring knowledge and learning that helps them in developing relevant skills
required for managing their businesses.
.
6) Internationalization: refers to entry into the international market and meeting the
challenges of existing players. For this an entrepreneur should have access to knowledge
on international markets, procedures, have partners in the international markets for
exports, imports, foreign direct investment, international subcontracting and
international technical co-operation. They should also have access to appropriate
training, and support services.
The model on Figure 1 comprises the various determinants as mentioned above which can
facilitate and support the growth of an entrepreneur and thus influence entrepreneurial
performance. Within each of the six main variables of this model, several sub-variables are
identified to elaborate on the overall framework.
While the entrepreneurial ecosystem framework is presented here in a linear fashion, it is
explicitly recognized that there are complex relationships among the different main variables
and their sub- variables. They tend to reinforce each other, and weakness in one area often has a
negative impact on other areas.
RESEARCH QUESTIONS
The study is guided by the following three broad research questions:
‘What factors influence the support and development of ICT new venture creation in Rissia?’
METHODOLOGY
The study utilizes an exploratory, theory building approach (Strauss & Corbin, 1998;
Eisenhardt, 1989; Yin, 2003). A mixed method approach of data collection strengthens the
study by providing both quantitative and qualitative perspectives on the phenomena being
examined (Miles & Huberman, 1994).
Primary data collection was done through:



50 on-line questionnaires sent out to the ICT Entrepreneurs of small, medium and large
scale enterprises;
50 on-line questionnaires sent out to the non-ICT Entrepreneurs of small, medium and
large scale enterprises;
30 questionnaires sent out to control group.
Survey
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The “survey” data was collected from 50 ICT entrepreneurs and 50 entrepreneurs from other
economy sectors across small and medium enterprises (SMEs) in Russia. The selection of ICT
firms was based on the definition of ICT sector developed by OECD and includes the ICT
sector industries based on products and services under these 4 branches- ICT manufacturing,
ICT services, telecommunication and digital media.
A structural questionnaire composed mainly of closed-ended and rating questions was used as a
data collection instrument. The questionnaire was first developed in Russian as a common
methodological tool to be used across the 4 BRIC countries and Russia. Country specific
changes were incorporated to suit the cultural variations. The questionnaire was then translated
in Russian and was pretested in order to ensure that the survey content and measurement scales
were clear, valid, and appropriate. Based on the pretest responses, some demographic items
were modified. The owner/founders of the firms were the target respondents of the survey to
ensure the validity of the data collected since the study is based on personal experiences of the
entrepreneurs affecting his/her growth potential.
We used the selective database of member ICT companies of Moscow region to send out the
online questionnaire for the respondents to answer. Along with this, Social media was also used
to reach out to the entrepreneurs.
To maximize the response, personalized cover letters were sent, with promise of feedback and
confidentiality. In total, 400 ICT entrepreneurs across SMEs were randomly selected and
identified as meeting the selection criteria. Questionnaire link was sent out to the entrepreneurs
along with e- mail reminders and in some cases also telephonic reminders. Finally, we received
50 questionnaires which were relevant for the inclusion in the sample, resulting in a response
rate of 16.25%.
FOR THE SELECTION OF MICRO, SMALL AND MEDIUM ENTERPRISES FOR
OUR RESEARCH, WE ACCEPT THE DEFINITION OF MICRO, SMALL AND
MEDIUM ENTERPRISES – as stated by European Commission, Enterprise & Industry
Revised SME definition as from 1 January 2005Enterprises qualify as micro, small and medium-sized enterprises (SMEs) if they fulfill the
criteria laid down in the Recommendation which are summarized in the table below. In addition
to the staff headcount ceiling, an enterprise qualifies as an SME if it meets either the turnover
ceiling or the balance sheet ceiling, but not necessarily both.
RESEARCH FINDINGS
Results of the findings are shared corresponding to each variable. First the findings of the
interviews are presented, followed by findings of the survey questionnaire. These findings are
then co-related with the findings of the Control Group.
Interview Sample
The demographic details of the 50 entrepreneurs interviewed
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69
1. INDIVIDUAL AND PERSONALITY TRAITS
1.
2.
3.
Your ability to quickly recognize start-up opportunities
Your ability to take risk
Your ability to organize the resources required for start-up
The questions were focused at understanding the personality traits of the entrepreneurs
facilitating new venture creation as perceived by the ICT and Non-ICT entrepreneurs.
100%
90%
40%
80%
70%
52%
56%
62%
66%
74%
Good
60%
Average
50%
36%
40%
30%
32%
20%
10%
0%
Poor
26%
24%
8%
4%
ICT
2%
0%
NON ICT
Your ability to quickly recognize
start-up opportunities
14%
8%
ICT
36%
2%
0%
NON ICT
Your ability to take risk
22%
No opinion
16%
8%
ICT
8%
4%
NON ICT
Your ability to organize the
resources required for start-up
Interpretation: The above-mentioned abilities were revealed to be the most important to
characterise the differences between entrepreneurs and non-entrepreneurs.
Our findings from survey data for 50 ICT and 50 non-ICT SMEs reveal the following
differences:
4) Almost 75% of the respondents across non-ICT sector consider they have good ability to
recognize the start-up opportunities comparing to only 56% in ICT sector.
5) Ability to take risk for non-ICT respondents is also significantly higher. 62% of nonICT considered they have good and 36% have average ability to take risk, when for ICT
respondents these figures are 52% and 26% respectively.
6) 66% of non-ICT and only 40% of ICT perceive themselves as having the ability to
organize resources for start-up.
Most favourable factors - Ability to recognize start-up opportunity, ability to take risk and
ability to organize the resources for start-up
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70
Least favourable factors - No specific
Conclusions – In general the study approved that the entrepreneurs in Russia highly value
individual and personal traits. But the funding also revealed that the entrepreneurs in non-ICT
sector and more self-confident and perceive higher all three abilities. This also means that ICT
entrepreneurs have higher tendency to doubt their abilities and to be more accurate and wellplanned. To sum up the argument, the findings are in line with recent reviews and evaluations
of entrepreneurship personality research suggesting that personality traits of entrepreneurs are
important for entrepreneurship.
2. SOCIO-CULTURAL CONTEXTS (SUPPORTING/HINDERING)
4.
5.
6.
7.
8.
9.
10.
Presence of family-based entrepreneurship in your society
Culture of promoting venturing and risk-taking in the community
Culture of encouraging creativity and innovation
Entrepreneurship considered as a desirable career choice in your society
Opportunities for new venture creation
Entrepreneurial opportunities for your gender
Entrepreneurial opportunities for people in your age category
When we asked entrepreneurs across ICT and non-ICT sectors about the socio-cultural context
supporting entrepreneurship, the key findings were:
100%
90%
80%
40%
42%
54%
56%
70%
50%
50%
50%
60%
66%
40%
44%
50%
58%
58%
GOOD
60%
AVERAGE
50%
40%
POOR
38%
30%
30%
0%
4%
8%
0%
ICT
4%
NON ICT
Presence of family-based
entrepreneurship in your
society
10%
6%
ICT
NON ICT
Culture of promoting
venturing and risk-taking
in the community
34%
36%
26%
28%
18%
22%
30%
32%
32%
20%
10%
28%
34%
10%
10%
ICT
0%
6%
NON ICT
Culture of encouraging
creativity and innovation
8%
12%
ICT
10%
NON ICT
Entrepreneurship
considered as a desirable
career choice in your
society
4%
10%
ICT
6%
12%
8%
6%
NON ICT
Opportunities for new
venture creation
ICT
NO OPINION
20%
24%
18%
6%
42%
10%
NON ICT
Entrepreneurial
opportunities for your
gender
8%
14%
ICT
8%
10%
NON ICT
Entrepreneurial
opportunities for people
in your age category
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71
Interpretation: In knowledge-based growing economies individuals are faced with the
following decision: should they deploy their creative effort in some company or should they
leave to establish a new organizations. In this situation cultural and social norms play
significant role as they might encourage and strengthen entrepreneurial behavior of its
members.
Our findings from survey data for 50 ICT and 50 non-ICT SMEs reveal the following:
7) There is a significant gap in results for ICT and non-ICT respondents on social aspects;
but the general attitude is highly positive;
8) Only 40% of ICT respondents fell high presence of family-based entrepreneurship and
22% respond that this is poor. While in non-ICT sector 56% responded that they see good
presence of family-based businesses and only 4% - low. This can be explained by the
specific of ICT industry, which is young and doesn’t have time to build family-based
companies;
9) 66% of non-ICT as against only 50% of ICT respondents perceive their culture
encouraging creativity;
10) Non-ICT respondents also better fell opportunities for new venture creation 60% of
respondents comparing to 50% in ICT sector, but even 50% is high value;
11) 58% of the respondents across ICT evaluated as “good” entrepreneurial opportunities for
both their gender and their age category. Only 40% of non-ICT entrepreneurs stated the
same;
12) 50% of the respondents across ICT and non-ICT sectors consider becoming an
entrepreneur as a desirable career choice.
Most favourable factors - Culture encouraging creativity and innovation, opportunities for
new venture creation
Least favourable factors – none of the mentioned
Conclusion – Socio-cultural contexts in Russia are very supportive for entrepreneurs and new
venture creation. Family-based entrepreneurship is not so popular in Russia especially in
comparison to European countries because of different culture and political background,
nevertheless it was still positively evaluated by both groups. At the same time we have strong
encourage for creativity and innovations in Russian culture. Serious actions taken by the
government reflected with positive attitude of the respondents towards opportunities in the
society for new venture creation especially in Moscow region, where the research was hold.
Summarizing the argument socio-cultural contexts were positively evaluated by both ICT and
non-ICT respondents.
3. GOVERNMENT POLICIES AND PROCEDURES
11. Special government schemes & programs for start-ups
12. Favourableness of overall government policies
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72
13. Favorableness of taxation system
14. Ease of obtaining permits and licenses (VAT code, … etc.)
15. Favourableness of physical, transportation and ICT Infrastructures
This section was focused on understanding the government policies and programs supporting
new venture creation as perceived by ICT and non-ICT entrepreneurs.
100%
90%
80%
34%
28%
40%
44%
32%
38%
26%
34%
42%
48%
70%
AVERAGE
60%
50%
40%
34%
48%
20%
0%
40%
40%
36%
20%
16%
4%
44%
36%
18%
0%
ICT
16%
0%
NON ICT
Special government
schemes & programs for
start-ups
ICT
NON ICT
Favorableness of overall
government policies
22%
6%
ICT
16%
10%
NON ICT
Favorableness of
taxation system
POOR
36%
36%
22%
30%
10%
GOOD
26%
4%
ICT
14%
16%
18%
4%
NON ICT
Ease of obtaining
permits and licenses
(VAT code, … etc.)
ICT
22%
NO OPINION
16%
14%
NON ICT
Favorableness of
physical, transportation
and ICT Infrastructures
Interpretation - Doing business requires supportive government policies and programs in
particular, easy-to-obtain licenses and permits, better information, simplification of regulations,
favorableness of taxation system and lower degree of regulatory and administrative opacity.
The findings from our survey data for 50 ICT and 50 non-ICT SMEs reveal the following:
6) 48% of the ICT and 34% of non-ICT respondents estimated at the average level special
government programs for start-ups, and 34% and 28% respectively gave high evaluation
to the existing schemes;
7) Only 20% of the ICT respondents and 16% of non-ICT consider overall government
policies as unfavourable for them. 40% of ICT and 44% of non-ICT consider it as
favourable;
8) Taxation system was considered as less friendly in comparison to overall policies. Only
32% of ICT and 38% of non-ICT perceive it as favourable. And 22% of ICT respondents
estimated taxation system as burdensome for the start-ups;
9) 26% of ICT and 34% of non-ICT respondents perceive that it is easy to obtain licenses
and permits at the time of start-up; same 26% of ICT estimate that it’s not easy;
10) Physical, transportation and ICT infrastructure were considered as favourable by 42% of
ICT and 48% of non-ICT respondents.
Most favourable factors – Physical, transportation and ICT infrastructure
Least favourable factors – Ease of obtaining licences and permits
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73
Conclusions: Recently in Russia state registration of small businesses and entrepreneurs has
facilitated significantly. All over the country a simple and user-friendly “one window” format
was introduced, which became a lump sum for registration of a legal entity, getting an
individual taxation account and registration in statistics services. These actions led to
significant facilitation od registration procedure.
Another factor is stable economic situation so that an entrepreneur can forecast his/her revenues
and tax assignments for a few coming years. Moreover there are fiscal benefits available for the
first year of operations, which are perceived by entrepreneurs as small, and there is still a way
for government policies for further development. In the conclusion of the section we have to
note that general attitude of young entrepreneurs towards legislation and taxation procedures is
mostly positive or neutral.
4. ACCESS TO FINANCE
16.
17.
18.
19.
20.
Availability of Government subsidies
Availability of family/friends funds
Availability of Venture Capital Funds
Availability of funds from private individuals/Angel funds
Availability of bank loans
This section was focused on understanding the ease of access to finance as perceived by the
ICT and non-ICT entrepreneurs.
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74
100%
18%
90%
80%
36%
44%
50%
24%
50%
50%
26%
70%
40%
46%
46%
24%
60%
50%
26%
28%
50%
24%
20%
10%
28%
34%
40%
30%
GOOD
30%
12%
4%
12%
0%
ICT
NON ICT
Availability of
Government subsidies
ICT
6%
NON ICT
Availability of
family/friends funds
6%
ICT
6%
NON ICT
Availability of Venture
Capital Funds
24%
28%
10%
16%
18%
10%
46%
24%
12%
ICT
AVERAGE
POOR
20%
12%
NON ICT
Availability of funds
from private
individuals/Angel funds
14%
NO OPINION
24%
16%
ICT
6%
NON ICT
Availability of bank loans
Interpretation – Access to finance is indispensable for growth, but many entrepreneurs have
difficulties having access to finance. In order to better understand the credit markets, we
analyzed through our sample the ease of access to different sources of financing as perceived by
entrepreneurs in the ICT and non-ICT sectors, our findings reveal the following scenario:
6) Government subsidies can play a very important role in the start-up phase for the young
technology based firms. 36% of the ICT and 44% of non-ICT respondents perceive
availability of government subsidies at the time of start-up, as against 24% in ICT and
18% in non-ICT who feel that there are no government subsidies available for start-ups.
7) 50% of both groups stated that they have access to family or friends funds.
8) Only 18% of ICT and 24% of non-ICT entrepreneurs reflected that they have good
availability of venture capital funds. Most of the respondents (50% in ICT and 46% in
non-ICT) perceive venture capital as not available. Russian entrepreneurs in general miss
mechanisms of venture capital financing due to the fact that venture capital funds are
interested in large innovative projects and reluctantly finance small businesses in other
sectors (including IT);
9) Angel funds and private investors are considered as a good financial source for 50% of
ICT and 40% of non-ICT respondents. And only 10% of ICT and 20% of non-ICT startups perceive poor availability of angel funds;
10) 46% of both ICT and non-ICT respondents state that there is a good access to bank loans
to start the enterprise.
Most favourable factors - Availability of funds from family and friends and angel investors
Least favourable factors - Availability of venture capital funds
Conclusion: Despite of the fact that enterpreneurs participated in the survey stated that there is
high availability of different financial resources, it actually doesn’t mean that start-ups aim to
use them. According to the GEM National Report 2012 for Russia (the most recent available),
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75
early stage business is mostly constrained by the lack of financial resources for new
entrepreneurs. Most entrepreneurs rely on informal funding sources, like family or angel
investors.
5. OPPORTUNITY FOR KNOWLEDGE AND SKILL BUILDING
21.
22.
23.
24.
25.
26.
27.
28.
Encouragement of entrepreneurship by the education system
Availability of formal training for entrepreneurship
Start-up counselling & assistance at college/universities
Support from Industry associations for networking, information etc.
Incubators and/or Technology parks that offer one stop service for businesses
Assistance from universities/R&D institutions in transfer of R&D
Special programs to promote products and services of start-ups
Opportunities for public-private collaboration to facilitate market entry
This section was aimed at understanding the availability of access to information, opportunity
for knowledge and skill building support as perceived by the ICT and non-ICT entrepreneurs.
100%
90%
80%
38%
38%
30%
32%
38%
46%
44%
38%
34%
46%
36%
48%
48%
42%
36%
42%
70%
60%
22%
40%
40%
42%
24%
42%
18%
10%
26%
10%
36%
NON ICT
Encouragement of
entrepreneurship by
the education system
ICT
NON ICT
Availability of formal
training for
entrepreneurship
ICT
34%
26%
12%
8%
4%
ICT
20%
36%
34%
26%
32%
30%
AVERAGE
POOR
28%
24%
20%
10%
4%
0%
22%
10%
26%
30%
20%
GOOD
42%
50%
8%
NON ICT
Start-up counseling &
assistance at
college/universities
10%
ICT
16%
10%
NON ICT
Support from Industry
associations for
networking,
information etc.
16%
ICT
20%
10%
NON ICT
Incubators and/or
Technology parks that
offer one stop service
for businesses
14%
18%
12%
12%
12%
14%
ICT
NON ICT
Assistance from
universities/R&D
institutions in transfer
of R&D
ICT
NO OPINION
14%
18%
8%
NON ICT
Special programs to
promote products and
services of start-ups
22%
16%
6%
ICT
NON ICT
Opportunities for
public-private
collaboration to
facilitate market entry
Interpretation - Education and training contribute to encouraging entrepreneurship by
fostering the right mindset, awareness of career opportunities. It is essential in the creation of
new business. Our findings from survey data reveal the following:
9) 40% of ICT and 42% of non-ICT respondents perceive average encouragement of
entrepreneurship by the education system in Russia, while 38% of both ICT and non-ICT
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
76
10)
11)
12)
13)
14)
15)
16)
participants perceive it as good. This can be explained by the fact that recently in high
schools and universities there are options to study entrepreneurship courses and/or case
studies.
46% of ICT sector perceive that there are formal trainings for entrepreneurship and 24%
says that there is average availability, while in non-ICT sector 42% respondents perceive
average availability and only 30% perceive it as good.
Start-up assistance at colleges/universities were higher evaluated by non-ICT respondents
- 38% described it as good. While ICT representatives responded “good” only in 32% and
“poor” in 26%, that means that universities have to take more actions to assist for ICT
start-ups, for example attract R&D projects in this area.
Industry associations were evaluated as supportive for networking by 44% of ICT and
38% of non-ICT entrepreneurs.
One-stop services by business incubators or technological parks were perceived well by
46% of ICT and only 34% of non-ICT respondents. At the same time 28% of ICT sector
perceive it as poor, there was almost no average results in ICT.
48% of ICT sector also high valued assistance from universities in R&D transfers. In nonICT sphere this figure is only 36%, which is still high value for the economy.
48% of ICT and 42% of non-ICT respondents perceive that there are special programs to
promote products and services of the start-ups;
Opportunities in private/public collaboration are perceived as “good” by above 36% in
both groups and as “average” by also above other 30% in both groups that means that this
opportunities are observed and considered in the society.
Most favourable factors – All the factors were evaluated approximately in similar manner.
Most favourable for ICT respondents were R&D transfer and special programs to promote startups. Most favourable for non-ICT entrepreneurs were special programs to promote start-ups
and opportunities for private/public collaboration.
Least favourable factors – not revealed
Conclusion: To sum up the argument, setting up a business calls for drive, creativity and
persistence, whereas developing a business gradually requires more managerial skills, such as
efficiency, effectiveness and reliability. Considering that both personality and management
skills are key elements for success, personal skills relevant to entrepreneurship should be taught
from an early stage and be maintained up to university level, where the focus can concentrate
on building management capacity. Russia, after turn to market economy is now committed to
promoting the teaching of entrepreneurship in their education system.
6. INTERNATIONALIZATION
29. Attitude towards internationalization
30. Information and skills required for internationalization
31. Government agencies facilitating new firms entry into domestic & international
markets
32. Access to financial resources to tackle internationalization
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77
33. Foreign language abilities in your company
This section is aimed to estimate the support available for Internationalization to ICT and nonICT entrepreneurs.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
58%
52%
50%
38%
38%
54%
40%
44%
62%
56%
GOOD
AVERAGE
28%
2%
12%
ICT
32%
26%
34%
46%
22%
14%
14%
10%
2%
10%
6%
NON ICT
NON ICT
Attitude towards
Internationalization
ICT
12%
12%
ICT
Information & skills
required for
Internationalization
32%
NO OPINION
8%
24%
28%
16%
4%
NON ICT
Government agencies
facilitating new firms
entry into domestic &
international markets
ICT
POOR
26%
6%
22%
32%
6%
10%
8%
4%
NON ICT
Access to financial
resources to tackle
internationalization
ICT
NON ICT
Foreign language
abilities in your
company
Interpretation – In the present world being international entrepreneur means to gather higher
benefits and larger sources. In order to find their niche, compete and finally get success in the
international global market entrepreneurs need support, knowledge and innovations.
Our findings from survey data for 50 ICT SME and 50 non-ICT SMEs reveal the following:
6) 62% of ICT and 56% of non-ICT respondents state to have a good knowledge of foreign
language.
7) 58 % of ICT and 52% of non-ICT respondents reflect a favorable attitude towards
Internationalization.
8) 50% of ICT respondents as against only 38% of non-ICT respondents perceive that they
have skills and information required for Internationalization.
9) 54% ICT and only 38% of non-ICT perceive the support from Government agencies
facilitating new firms entry into domestic & international markets.
10) Only 44% of ICT and 40% of non-ICT respondents perceive that it is possible to access
finance for internationalization.
Most favourable factors
Internationalization.
–
Foreign
language
literacy,
positive
attitude
Least favourable factors – Access to financial resources.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
toward
78
Conclusion: In the global business scenario markets are becoming increasingly fast paced. This
requires greater skill to develop and manage innovation, which is a strategic tool to manage
competiveness at all levels. Combining innovation, quality and competiveness into a multidimensional set of objectives and tools is absolutely instrumental for companies to operate in
international markets. It is necessary to capitalize on innovation to improve products &
services, but in particular, to redefine the corporate “mission”, to integrate different sectors, to
identify innovative market niches, to develop partnership networks and to exchange experience
in a structured way. To reap the benefits of the Internal Market and to meet the challenge of
fiercer competition, entrepreneurs should be encouraged to innovate and to Internationalize.
In order to support the entrepreneurs in internationalization, there are local and regional
networks in Russia supported by government and industry to advice entrepreneurs and help
them develop new markets. There is focus on promotion of regional networks or clusters in
order to help entrepreneurs mutually share their experiences and knowledge.
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79
CONTROL GROUP FINDINGS
100%
90%
7% 10%
13%
3% 3%
17%
37%
43%
3%
13% 10%
17%
13% 10% 10% 10% 10%
10%
60%
37%
30% 20% 27%
30%
10%
17%
13% 13% 13%
7% 7%
53%
57% 57%
63%
37%
37%
37%
3%
10%
10%
7%
0% 3%
0%
0%
67%
40%
23%
17%
70%
47%
60%
63% 60% 60% 60%
63%
30%
30%
0%
50%
20%
10% 7% 13%
87%
60%
60% 47%
40%
57%
40%
47%
43%
20%
7% 7%
43%
53%
53%
40%47%
3% 3%
37%
53%
40%
0%
7%
37%
53% 57% 50%
50%
10%
13%
43%
43% 37%
60%
30%
3% 3%
23%
80%
70%
7% 7% 10%
23% 23% 20%
27%
20%
7% 23%
10%
10%
3%
0% 0% 0%
33%
33%
17%
43% 27% 23%
27%
13%
0%
7%
0%
7% 7% 10% 7%
3%
13% 10%
3%
10% 13%
In order to get the perception of non-entrepreneurs towards the entrepreneurial framework we
distributed questionnaires within our focus group.
Interpretation:
The first section - Individual & Personality Traits- revealed approximately the same results as
we met with those of ICT and non-ICT entrepreneurs.
In the second section - Socio-cultural environment – our survey findings were in line with most
of questions, but still there were some differences. For example, 30% of control group state that
there is poor family-based business, and only 23% says opposite, when real entrepreneurs (ICT
for 40% and non-ICT for 56%) feel better presence of family-based start-ups. Another
difference is that entrepreneurial career choice was overestimated by our control group in
comparison with real entrepreneurs.
In the third section – Government Programs & Policies – our control group turned out to be not
informed of special governmental programs for start up and general favorableness of its
policies. 37% of respondents stated that they have no opinion on the 2 important issues. But at
the same time other respondents, who had opinion, were significantly more optimistic about
state programs and policies in Russia (almost in 2 times in comparison with ICT and non-ICT
respondents).
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
20%
80
In the fourth section - Access to Finance – there were discrepancy again. The findings reveal
that for the access to finance entrepreneurs may rely for governmental subsidiaries, which
occurred to be the most favorable factor according to control group. Also contribution of
venture capital funds was overestimated. When actual entrepreneurs do not consider the funds,
people from other spheres perceive it very high.
Opportunity for Knowledge & Skill Building section was again overestimated by control group.
In the last section - Internationalization – the findings reveal that the control group is a little bit
more optimistic that Russian entrepreneurs, but generally answers were in line. There is high
attitude towards internationalization and around 60% of all respondents have foreign language
skills.
DISCUSSION AND CONCLUSION
This report is based on the result of survey aimed to establish relationship and reveal
differences in perception on starting business in Russia between ICT and non-ICT
entrepreneurs. The survey was based on Ecosystem Model with an emphasis on six
determinants that impact on entrepreneurial behavior. Each of the factors is essential for
successful entrepreneurs and during the survey 50 ICT and 50 non-ICT entrepreneurs were
surveyed in order to identify framework conditions established for star-ups in Russia.
This survey is very important because despite of the fact that Russian economy is driven
primarily by heavy industrial businesses, the development of small and medium-sized
enterprises is a priority for the further economic growth. In the last 3-5 years serious steps were
taken to facilitate business start-up and its development. Results of the survey shows that these
efforts do not go unnoticed.
The survey revealed that fundamental difference between ICT and non-ICT companies can not
be traced, despite of the efforts taken to establish special conditions for innovative and hightech projects by the Government and business associations such as, "Opora Rossii (Russia
Reliance)," "Business Russia".
Active support of high-tech enterprises by specific private entities, like business-accelerators
and private investment funds, is distinctive feature of the past 3 years. Due to this fact the
dynamics of the creation and development of ICT entrepreneurs significantly improved.
However, these funds usually are foreign companies or companies listed by Russian citizens
abroad, and that’s companies supported by these funds are often registered abroad as well.
That’s why this new start-ups cannot affect statistics inside Russia.
We hope that ICT entrepreneurs support and the conditions created in the country will reverse
the negative trends in the business development and this will be reflected in official statistics.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
81
REFERENCES
A.A. Kalinin , Illustrated head-notes to the long-term forecast of scientific and technological
development of information- communication technologies in Russia up to 2030‘, RIA-News,
Moscow, 2010 – Retrieved on January 15th, 2013 from hstrategy2020.rian.ru/load/366077780
O. Blinkova ICT in the BRIC countries‘, It-world.ru. Retrieved on January 17, 2013 from
http://www.it-world.ru/upload/iblock/759/22- 23.pdf
Renay San Miguel, Harvard Physicist Sets Record Straight on Internet Carbon Study‘, the
Technewsworld,
2009.
Retrieved
on
January
11th,
2013
on
http://www.technewsworld.com/story/65794.html
Report on research project Creating a network of branch technology research centers based on
the leading Russia‘s universities focusing on the priority direction Information-communication
systems‘ (the 3d stage of research project), St. Petersburg national research university of
information technology, St. Petersburg, Russia, 2012. – 296 p.
Report Recycling — from E-Waste to Resources‘, United Nations Environment Programme
environment for development / Solving the E-waste problem, Bonn, 2009. Retrieved on January
16th,
2013
on
http://www.unep.org/PDF/PressReleases/EWaste_publication_screen_FINALVERSION-sml.pdf
Report Smart 2020: Enabling the low carbon economy in the information age‘, the Climate
Group,
2008.
Retrieved
on
January
10th,
2013
on
http://www.smart2020.org/_assets/files/02_Smart2020Report.pdf
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
82
ENTREPRENEURSHIP AND VENTURE CREATION IN
BRAZIL: KEY POLICY ISSUES
Renata Lèbre La Rovere
Instituto de Economia, Universidade Federal do Rio de Janeiro, Brazil
Email:[email protected], [email protected]
Abstract: Recent research on entrepreneurship and venture creation suggests that there are
several elements that frame the entrepreneurial ecosystem which may influence the decision to
engage in entrepreneurial activities. The aim of this paper is to present the results on Brazil of a
research project whose main purpose is to identify the main elements of the entrepreneurial
ecosystem in the BRIC countries. We first made a survey among ICT entrepreneurs concerning
their perceptions on the relative importance of key elements of the entrepreneurial ecosystem,
that are: individual and personal characteristics; socio-cultural context; Government programs
and policies; access to finance; access to information, opportunities for knowledge and skill
building and exposure to global markets. We then made the same survey among non-ICT and
non-entrepreneurs, to assess the specificities of knowledge-intensive entrepreneurs such as
those in the ICT sector. We combined these quantitative surveys with a qualitative research
where we interviewed entrepreneurs and policy-makers engaged in entrepreneurial support.
Based on these results we propose some key policy issues to support entrepreneurship in Brazil.
Keywords: entrepreneurship, development, policies of support
Work- in -progress paper. Please contact the author before citing.
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83
INTRODUCTION
The importance of institutional and social factors for the success of enterprises is a subject that
has been discussed by several scholars. Some of them, like Casson (2008) highlight the
importance of individual capabilities of entrepreneurs. Most of these studies, however, assume
that the entrepreneur is a rational agent that will maximize gains obtained with allocation of
resources. A different path of research related to the rationale of entrepreneurs is proposed by
Saraswathy and Dew (2005); these authors propose that entrepreneurs, as agents with
procedural rationality1, set decision-making principles in a context of uncertainty, that leads
them to focus on their own capabilities and use them to reach satisficing objectives framed by
the business environment. Other authors like Julien (2007) suggest that institutions have an
important influence on the decisions of entrepreneurs, therefore it is important to consider the
milieu2 in order to understand how entrepreneurs act and position themselves in the market.
Working with the concept of entrepreneurial ecosystem – that encompasses all elements of the
milieu important to entrepreneurship - Manimala (2008a, 2008b), divides the main elements
conducting to entrepreneurship in six main groups, that are:
1.
2.
3.
4.
5.
6.
Individual and personal characteristics
Socio-cultural context
Government programs and policies
Access to finance
Access to information, opportunities for knowledge and skill building
Exposure to global markets
The objective of this paper is to present the results on Brazil of a research project that is
investigating how these elements are perceived by entrepreneurs and what are the main policy
implications of different perceptions. In fact, our research suggests that there is a cognitive
distance3 between Brazilian entrepreneurs and policy-makers that are involved with the support
to entrepreneurs. We will try to identify the key policy issues to deal with this cognitive
distance.
METHODOLOGY
The research started in 2010 and was conducted in several steps. The first was to apply a pilot
in-depth questionnaire with questions related to the six factors mentioned above to a group of
12 ICT enterprises. Of those, six enterprises were chosen between the 200 SMEs that had the
largest growth rates in Brazil between 2007 and 2009 and six were start-ups located in Rio de
Janeiro. ICT enterprises were chosen because, as they are in a knowledge-intensive sector, they
tend to have shorter cycles of innovation than traditional industries, therefore suffering a strong
competitive pressure.
Based on the in-depth questionnaires we devised an on-line questionnaire that was applied to
120 ICT enterprises that were contacted in large ICT conferences, by email and through social
networks. Entrepreneurs had to classify elements linked to each factor as very important,
medium importance, no importance or no opinion. In addition to the questions related to the six
factors mentioned above, we also asked entrepreneurs to mention the three most important
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
84
factors of success and the three most important factors of failure. After the process of validation
we got 76 valid questionnaires. A second round of validation further eliminated more 26
questionnaires, and this paper will present results of 50 questionnaires.
Results of these steps raised several interesting questions. We noted a strong bias of
entrepreneurs towards considering their own capabilities as the most important for success in
entrepreneurial activities. We also noted that elements that are considered in the literature as
important for entrepreneurs such as entrepreneurial education, incubator activities and start-up
programs were not deemed relevant. The questions that arose from this result were the
following:
1. Is the limited importance attributed to institutions a result of different perceptions of what is
important for entrepreneurship when we consider entrepreneurs and policy-makers?
2. Is the focus on individual capabilities a specific result for knowledge-intensive entrepreneurs
such as the ICT entrepreneurs?
In order to answer these questions, the next steps of the research were first, to make in-depth
interviews with institutions that may influence the decisions of ICT entrepreneurs and second,
to apply the same online questionnaire to a group of 50 non-ICT entrepreneurs. We also applied
the questionnaire to a control group of young non-entrepreneurs, to identify which of the
elements of the entrepreneurial ecosystem listed above are perceived as important by potential
entrepreneurs4.
As we already presented the results of the interviews with institutions elsewhere (La Rovere
and Melo, 2012), this paper will focus on the results of the online questionnaires, applied to
ICT and non-ICT entrepreneurs and the control group. It will also discuss key policy issues
related to these results.
RESULTS
ICT and Non-ICT Entrepreneurs
As mentioned before, the first question we raised was about how ICT entrepreneurs see
themselves in the milieu. We asked entrepreneurs to state whether their individual abilities were
important for success. The results revealed a strong perception among Brazilian entrepreneurs
that individual characteristics are the main factor that guarantees success (see graphs 1 and 2).
While taking risk is more important for non-ICT entrepreneurs, ability to organize the resources
for start-ups are more important for ICT entrepreneurs.
This result may be explained by difficulties reported by the group of in-depth interviewees
concerning organization of resources. According to this group, most entrepreneurs in the sector
had difficulties to select employees, get financial resources and establish networks. Therefore,
the entrepreneur ends up making decisions individually and in a daily basis and if he is
successful he tends to believe that this stems from his own capabilities.
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85
Graph 1: Importance of Individual and Personality Traits- ICT Entrepreneurs
Individual & Personality Traits
3 - Your ability to organize the
resources required for start-up
None
Medium
2 - Your ability to take risk
Strong
Other
1 - Your ability to quickly
recognize start-up opportunities
0
0,2
0,4
0,6
0,8
1
Graph 2: Importance of Individual and Personality Traits- Non-ICT Entrepreneurs
Individual & Personality Traits
3 - Your ability to organize the
resources required for start-up
None
Medium
2 - Your ability to take risk
Strong
Other
1 - Your ability to quickly
recognize start-up opportunities
0%
20% 40% 60% 80% 100%
When asked about the importance of the socio-cultural context, both ICT and non-ICT
entrepreneurs gave more importance to opportunities for new venture creation and culture for
encouraging innovation. However they reckoned that Brazil is not a country where
entrepreneurship is considered a good career choice; this result poses a challenge to policies to
support entrepreneurs (graphs 3 and 4).
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86
Graph 3: Importance of Socio-Cultural Context – ICT Entrepreneurs
Socio-cultural Context
10 - Entrepreneurial opportunities for
people in your age category
9 - Entrepreneurial opportunities for your
gender
8 Opportunities for new venture creation
None
7 - Entrepreneurship considered as a
desirable career choice in your society
6 - Culture of encouraging creativity and
innovation
5 - Culture of promoting venturing and
risk-taking in the community
4 - Presence of family-based
entrepreneurship in your society
Medium
Strong
Other
0
0,2
0,4
0,6
0,8
1
Graph 4: Importance of Socio-Cultural Context – non-ICT Entrepreneurs
Socio-cultural Context
10 - Entrepreneurial opportunities for
people in your age category
9 - Entrepreneurial opportunities for
your gender
8 Opportunities for new venture
creation
7 - Entrepreneurship considered as a
desirable career choice in your society
6 - Culture of encouraging creativity and
innovation
5 - Culture of promoting venturing and
risk-taking in the community
4 - Presence of family-based
entrepreneurship in your society
None
Medium
Strong
Other
0%
20% 40% 60% 80% 100%
While access to institutions such as Government agencies and banks could improve capabilities
of entrepreneurs, institutions are not considered important (see Graphs 5 and 6). Among the indepth interviews, most entrepreneurs said that Government policies were not important; to our
surprise, this was not mentioned only by very small entrepreneurs (which have limits to access
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
87
institutions due to size) but also from entrepreneurs from medium-sized companies.
Entrepreneurs seem to be very critical of the favorableness of Government policies.
Graph 5: Importance of Government Programs and Policies – ICT Entrepreneurs
State/Govt. Policies & Programs
15 - Favorableness of physical,
transportation and ICT…
14 - Ease of obtaining permits and
licenses (VAT code, … etc.)
None
13 - Favorableness of taxation
system
Medium
Strong
12 - Favorableness of overall
government policies
Other
11 - Special government schemes &
programs for start-ups
0
0,2
0,4
0,6
0,8
1
Graph 6: Importance of Government Programs and Policies – Non- ICT Entrepreneurs
State/Govt. Policies & Programs
15 - Favorableness of physical,
transportation and ICT…
14 - Ease of obtaining permits and
licenses (VAT code, … etc.)
None
13 - Favorableness of taxation
system
Medium
Strong
12 - Favorableness of overall
government policies
Other
11 - Special government schemes &
programs for start-ups
0%
20%
40%
60%
80% 100%
When it comes to access to finance, the in-depth interviews revealed that most entrepreneurs
from this group had used money from relatives and friends to start their businesses and just two
companies had access to private equity financing. This reliance in their own resources explains
why entrepreneurs do not view financial institutions as important, because companies try to
keep growing with their own resources or by partnerships with customers and suppliers. As a
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
88
result, they attribute a limited importance to access to bank loans and do not consider important
access to Government subsidies (see graphs 7 and 8).
Graph 7: Importance of Access to Finance- ICT Entrepreneurs
Access to Finance
20 - Availability of bank loans
19 - Availability of funds from
private individuals/Angel funds
None
18 - Availability of Venture
Capital Funds
Medium
Strong
17 - Availability of family/friends
funds
Other
16 - Availability of Government
subsidies
0
0,2
0,4
0,6
0,8
1
Graph 8: Importance of Access to Finance – Non-ICT Entrepreneurs
Access to Finance
20 - Availability of bank loans
19 - Availability of funds from
private individuals/Angel funds
None
18 - Availability of Venture
Capital Funds
Medium
Strong
17 - Availability of
family/friends funds
Other
16 - Availability of Government
subsidies
0%
20%
40%
60%
80% 100%
Concerning access to information for creating knowledge and skill building, results showed that
surprisingly, entrepreneurs do not reckon the importance of interaction with educational
institutions and with public agencies. The only training institutions considered relevant were
industry associations and incubators (see graphs 9 and 10).
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89
Graph 9: Importance of Access to Information – ICT entrepreneurs
Access to Information, opportunity for
knowledge & skill building
28 - Opportunities for public-private collaboration to
facilitate market entry
27 - Special programs to promote products and services
of start-ups
26 - Assistance from universities/R&D institutions in
transfer of R&D
None
25 - Incubators and/or Technology parks that offer one
stop service for businesses
Medium
24 - Support from Industry associations for networking,
information etc.
Strong
23 - Start-up counseling & assistance at
college/universities
Other
22 - Availability of formal training for entrepreneurship
21 - Encouragement of entrepreneurship by the
education system
0
0,2
0,4
0,6
0,8
1
Graph 10: Importance of Access to Information – Non-ICT entrepreneurs
Access to Information, opportunity for
knowledge & skill building
28 - Opportunities for public-private collaboration to
facilitate market entry
27 - Special programs to promote products and
services of start-ups
26 - Assistance from universities/R&D institutions in
transfer of R&D
None
25 - Incubators and/or Technology parks that offer one
stop service for businesses
Medium
24 - Support from Industry associations for
networking, information etc.
Strong
23 - Start-up counseling & assistance at
college/universities
Other
22 - Availability of formal training for entrepreneurship
21 - Encouragement of entrepreneurship by the
education system
0%
20%
40%
60%
80%
100%
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
90
Our results also show that Brazilian SMEs have a limited access to the external market. This
may be explained by the fact that in recent years the internal market in Brazil has been
expanding quickly, therefore SMEs do not feel stimulated to go to the external market (see
graphs 11 and 12).
Graph 11: Importance of Internationalization – ICT Entrepreneurs
Internationalization of SMEs
33 - Foreign language abilities in
your company
32 - Access to financial resources
to tackle internationalization
31 - Government agencies
facilitating new firms entry into…
30 - Information & skills required
for Internationalization
29 - Attitude towards
Internationalization
None
Medium
Strong
Other
0
0,2
0,4
0,6
0,8
1
Graph 12: Importance of Internationalization- Non-ICT Entrepreneurs
Internationalization of SMEs
33 - Foreign language abilities…
32 - Access to financial…
None
Medium
31 - Government agencies…
Strong
30 - Information & skills…
Other
29 - Attitude towards…
0%
20%
40%
60%
80%
100%
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
91
The Control Group
The control group showed interesting results. Similar to the group of entrepreneurs, people
from the control group attributed a great importance to individual traits. They also pointed
opportunities of new venture creation and culture favorable to innovation as the more important
elements of the socio-cultural context (see graphs 13 and 14). Like the entrepreneurs, they do
not consider that Brazilian society praises careers linked to entrepreneurship. However, the
perception on Government policies is remarkably different (see graph 15).
Graph 13: Importance of Individual and Personality Traits- Control Group
Individual & Personality Traits
3 - Your ability to organize the
resources required for start-up
None
Medium
2 - Your ability to take risk
Strong
Other
1 - Your ability to quickly
recognize start-up opportunities
0%
20% 40% 60% 80% 100%
Graph 14: Importance of Socio-Cultural Context – Control Group
Socio-cultural Context
10 - Entrepreneurial opportunities for
people in your age category
9 - Entrepreneurial opportunities for
your gender
8 Opportunities for new venture
creation
7 - Entrepreneurship considered as a
desirable career choice in your society
6 - Culture of encouraging creativity and
innovation
5 - Culture of promoting venturing and
risk-taking in the community
4 - Presence of family-based
entrepreneurship in your society
None
Medium
Strong
Other
0%
20% 40% 60% 80% 100%
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92
Graph 15: Importance of Government Programs and Policies – Control Group
State/Govt. Policies & Programs
15 - Favorableness of physical,
transportation and ICT Infrastructures
14 - Ease of obtaining permits and
licenses (VAT code, … etc.)
None
Medium
13 - Favorableness of taxation system
Strong
12 - Favorableness of overall
government policies
Other
11 - Special government schemes &
programs for start-ups
0%
20%
40%
60%
80%
100%
Concerning access to finance, the only element deemed relevant is access to bank loans, a result
similar to the result of the group of entrepreneurs (see graph 16).
Graph 16: Importance of Access to Finance – Control Group
Access to Finance
20 - Availability of bank loans
19 - Availability of funds from private
individuals/Angel funds
None
18 - Availability of Venture Capital
Funds
Medium
Strong
17 - Availability of family/friends funds
Other
16 - Availability of Government
subsidies
0%
20%
40%
60%
80%
100%
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93
Results concerning importance of access to information and internationalization were also
similar to the results of the group of entrepreneurs. The most important elements for promoting
entrepreneurship are support from industry associations and incubators. Internationalization is
not considered important for success of a business (see graphs 17 and 18).
Graph 17: Importance of Access to Information – Control Group
Access to Information, opportunity for
knowledge & skill building
28 - Opportunities for public-private collaboration to
facilitate market entry
27 - Special programs to promote products and
services of start-ups
26 - Assistance from universities/R&D institutions in
transfer of R&D
None
25 - Incubators and/or Technology parks that offer one
stop service for businesses
Medium
24 - Support from Industry associations for
networking, information etc.
Strong
23 - Start-up counseling & assistance at
college/universities
Other
22 - Availability of formal training for entrepreneurship
21 - Encouragement of entrepreneurship by the
education system
0%
20%
40%
60%
80%
100%
Graph 18: Importance of Internationalization – Control Group
Internationalization of SMEs
33 - Foreign language abilities in
your company
32 - Access to financial
resources to tackle…
None
31 - Government agencies
facilitating new firms entry…
Medium
Strong
30 - Information & skills
required for Internationalization
Other
29 - Attitude towards
Internationalization
0%
20% 40% 60% 80% 100%
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94
DISCUSSION:
The results show that there are few differences between ICT entrepreneurs and entrepreneurs
from other sectors. Both groups attribute a stronger importance to individual traits and rely on
their own resources. They recognize few elements of the socio-cultural environment that may
be important for their business and are skeptical about the possibilities of getting relevant
support from Government. They also do not attribute much importance to interaction with
universities and training institutions (excepting incubators) and do not seem much interested in
globalization. The control group confirmed all these results, with the exception of the
perception of Government policies. Whether this is related from the specificity of the control
group is a question that will be further investigated in the research.
The picture that emerges from the questionnaires may lead to the conclusion that policy-makers
in Brazil have not been attentive to the support of entrepreneurs. However, this is not the case.
On the contrary, Brazil has many programs to support entrepreneurship, at the federal, state and
local levels (La Rovere and Melo, 2012). When we had only the results from the ICT
entrepreneurs, some specialists suggested that this self-made man culture was typical of the
sector. Nevertheless the results of the non-ICT entrepreneurs show that this culture prevails also
among entrepreneurs from other sectors.
The interviews we made with policy-makers revealed that they believe this culture is related to
the very difficulties enterprises have to get support. For instance, as many programs of support
in Brazil focus on the concession of credit lines, policy-makers from credit institutions
indicated that entrepreneurs lack the necessary training to get appropriate lines of credit; they
also believe that it is the Government agency´s role to provide the necessary training so that
more entrepreneurs get credit and use this credit toward innovation. Policy-makers from
incubators, on the other hand, told us that the main difficulties entrepreneurs faced, in addition
to difficulties to get credit, were related to the formation of partnerships with other businesses
and to the low managerial capability.
However, this is not what entrepreneurs apparently expect from the Government. Rather, what
seems to emerge from the questionnaires results is that entrepreneurs would prefer to have a
friendlier environment to operate.
It is a well-known fact that in Brazil the cost of opening a business is higher than in other
countries. But this cost is not only related to high rates of interest: the bureaucracy involved in
getting credit is also discouraging. A recent study by Carvalho (2013) concluded that the
entrepreneurs that get credit lines approved by FINEP5 face several transaction costs and
among these the higher cost is the average time to get the credit line (more than four months).
There is, therefore, a cognitive distance between policy-makers and entrepreneurs concerning
how to promote entrepreneurship in Brazil. Policy-makers tend to reflect the realities of their
own institutions, enhancing the role of credit (when they are from development agencies) or of
networking (when they are from incubators), while entrepreneurs seem to act according to
Sarawasthy and Dew´s model: they focus on their own capabilities and on how those
capabilities may provide satisficing results by interaction with the environment. The key policy
issue, therefore, is not on providing more resources to entrepreneurs. Rather, it is to render the
business environment friendlier so that resources can be used more effectively. Other key
policy issue that appeared in the statements of all policy-makers is the importance to focus on
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
95
strategic learning. This may be provided by promoting entrepreneurial education in all levels,
from schools to universities.
We may therefore end this discussion by detailing some policy recommendations:
-
Development Agencies should try to minimize the transaction costs involved in support
lines
-
Industry Associations and Incubators, that were mentioned as important elements for
entrepreneurship by all groups, should increase their training activities in managerial
capabilities and promote joint actions with Development Agencies so that entrepreneurs
can use resources offered more effectively
-
Entrepreneurs should be more open to opportunities derived from interaction with
institutions and with the external market
-
Universities should promote entrepreneurial education across all levels of education
CONCLUSIONS AND LIMITATIONS OF THE STUDY
Although this research provided us with some clues on the main challenges faced by policies to
support entrepreneurs, many questions still have to be developed. Nevertheless the key policy
issues can be summarized in two lines of action - providing a friendlier business environment
and focusing on strategic learning – how to transform these lines of action in concrete policy
measures should be a subject of further studies. Also, as observed by Dennis Jr (2011), an
assessment of policy impediments and supports leads to a better understanding on the better
policy mix to promote entrepreneurship in given regions.
The main limitations of the study relate to the small size of the sample and to the concentration
of the sample on entrepreneurs and policy-makers of the south-east region of Brazil. We hope
to see studies such as these replicated in other regions to improve our understanding of the
challenges of policies to support entrepreneurship in Brazil.
ENDNOTES
1. See Simon, H. (1996) The Science of the Artificial. Boston:MIT Press
2. Milieu is here considered a grouping of economic, cultural, political and social elements. See
D. Maillat and J.-C. Perrin (eds.), Entreprises innovatrices et développement territorial.
Neuchâtel: GREMI and EDES
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
96
3. See Nooteboom (2009) A Cognitive Theory of the Firm: Learning, Governance and Dynamic
Capabilities. Cheltenham: Edward Elgar
4. The control group consisted of undergraduate students in the last year of Economics and
Management courses
5. FINEP is the financial arm of Brazil´s Ministry of Science and Technology. See
www.finep.gov.br
REFERENCES
Dennis Jr (2011) Entrepreneurship, Small Business and Public Policy Levers. Journal of Small
Business Management 49(2), pp.149-162
La Rovere, R.L; Melo, L (2012). Entrepreneurship in the ICT Sector in Brazil: Preliminary
Results. Proceedings of the 2 ICIER Conference – Entrepreneurship in Transitional
Times:Issues and Challenges, Moscow
Manimala, M. (2008a) Entrepreneurship Education in India: an assessment of SME training
needs against current practices. International Journal Entrepreneurship and Innovation
Management 6, p.624-647
Manimala, M. (2008b) Evolution of the Bangalore Cluster: a Stage Theory Based on
Crystal Growth Model Carayannis, E. G. and Formica, P. (eds) Knowledge matters:
technology, innovation and entrepreneurship in innovation networks and knowledge
clusters, Basingstoke (UK)/New York: Palgrave Macmillan, p. 4-128
Sarasvathy, S.D; Dew, N. (2005). New market creation through transformation. Journal of
Evolutionary Economics 15, 533-565
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
97
Entrepreneurship and New Venture Creation in China: A
comparison between ICT and Non-ICT industries
Youzhen Zhao
School of Management, Fudan University
November 2013
Abstract:
This report is to shed light on new venture creation issues in China, primarily focusing on the
comparison between ICT and Non-ICT sectors. Mainly adopting quantitative methods, this
research explores the factors which foster and hinder the process of Chinese new venture
creation in Information and Communication Technology domain and other industries.
Key words: Entrepreneur, Venture Creation, ICT, Non-ICT, China
Introduction
According to The Global Entrepreneurship Monitor1, the general expectations of venture creation
in China is increasing with the high growth rate of Chinese economy Nowadays the pressure of
global economic crisis and China’s economic transition calls for stronger entrepreneurship. In
2005, Chinese central government officially announced that it was critical to improve awareness
of entrepreneurship and venture creation skills for college graduates2 . Moreover, the cultural
context, oriental philosophy and the relatively short history of Chinese entrepreneurship in China
make "new venture creation in China" an increasingly interesting topic for scholars worldwide.
Information and Communications Technologies (ICT) industries serve as a basis for countries'
economic growth for its obvious spillover effect to other sectors and industries. A well 1
2
The Global Entrepreneurship Monitor 2011
Suggestions on induce and encourage college graduates employment July 2005,Central Government Office
1 98
established ICT industry enhances the overall infrastructure for a country's development3. This
study primarily explores the social environment for new venture creation, especially the
incentives and obstacles provided by government and private sectors. The scope of research is
confined within small and medium enterprises, including micro-enterprises. The aim of this
study is to uncover the complexity of Chinese venture creation, particularly the comparison
between ICT and Non-ICT sectors. By careful analysis of the first-hand information collected
from the entrepreneurs, this paper seeks to present a comprehensive perspective on Chinese new
venture creation today.
Research Methodology
Our last year’s report adopts mainly qualitative methodology, including 12 entrepreneur
interviews and 8 control group interviews in the ICT sector. The qualitative method is especially
usefully to form in-depth understanding of Chinese entrepreneurship and to portrait business
context for new venture creation. However, as we pointed out at the end of last year’s report, the
limitation of that study is insufficient qualified survey respondents.
To address this limitation, this year, while our research still focuses on the same 6 main parts,
namely, Individual Personality Traits, Socio-Culture Contexts, Government Programs and
Policies, Access to Finance, Access to Information and Opportunities for Knowledge and Skill
Building, Internationalization, we sought for survey data directly from more entrepreneurs.
In order to guarantee quality of data, this year we did not use online survey. Rather, we went to
entrepreneurs’ offices and asked them to fill in the survey face-to-face; or we used personal
network to communicate with entrepreneurs before sending emails to them in order to get full
support. We guarantee confidentiality of individual identity to relieve their concerns. Moreover,
we took another step further to access entrepreneurs both in ICT and Non-ICT sectors.
Altogether, we got 56 cases from entrepreneurs in ICT sector and 50 cases from Non-ICT
entrepreneurs. In the next part, we are going to present sample description and data analysis for
the overall situation as well as separate sectors.
Sample description
In this part, we will describe the distribution of venture creation years as well as age of
entrepreneurs when founding the new ventures. Most firms in our sample were established after
2007, especially during 2011 to 2012, as shown below.
3
The Global Competitiveness Report 2010-2011, World Economic Forum
2 99
In our sample, ICT companies’ average year of foundation is 2009.96 (around year 2010) while
non-ICT firms’ number is 2008.04 (around year 2008). T-test indicates significant difference
here, which to some extent mirrors the rapid growth of ICT sector in the recent years, especially
from 2011 and on.
3 100
The age when entrepreneurs created the new ventures varies from 20 to 45 years old, with the
average of 30. The following chart represents the age distribution when founding the firm, while
28 years old has the highest frequency. When comparing ICT and Non-ICT industries, we find
no significant difference in the average age of venture creation.
Data analysis
Based on the analysis of the survey data collected from the entrepreneurs, we have made
inference about entrepreneurial ecosystem in China. The research findings are reported under the
following 7 subsections: Individual Personality Traits; Socio-Culture Contexts; Government
Programs and Policies; Access to Finance; Access to Information and Opportunities for
Knowledge and Skill Building; Internationalization; Others. Moreover, we’re going to discuss
the most favorable and least favorable factors for new venture creation in China.
4 101
In our survey, “No opinion” was marked as “4” while “1” means poor, “2” means average, “3”
means good. In the following analysis, we treat “No opinion” (choosing 4) as missing value.
I.
1.
2.
3.
Individual Personality Traits Your ability to quickly recognize start-up opportunities
Your ability to take risk
Your ability to organize the resources required for start-up
Descriptive Statistics for all firms
N
Minimum
Maximum
Mean
Std. Deviation
Q1
102
1
3
2.43
.572
Q2
106
1
3
2.11
.652
Q3
104
1
3
2.29
.649
Valid N (listwise)
100
Group Statistics
ICT or not
Q1
Q2
Q3
N
Mean
Std. Deviation
Std. Error Mean
ICT industry
55
2.51
.540
.073
Non-ICT industry
47
2.34
.600
.088
ICT industry
56
2.20
.616
.082
Non-ICT industry
50
2.02
.685
.097
ICT industry
55
2.22
.686
.092
Non-ICT industry
49
2.37
.602
.086
The survey data show quite positive self-assessment by the entrepreneurs themselves, consistent
with our conclusion from interviews done last year. And T-test shows no significant difference
between ICT sector and Non-ICT sector. All of them are confident of their opportunity
recognizing, resource integrating and risk-taking abilities.
II.
Socio‐Culture Contexts 4.
5.
6.
7.
8.
9.
10.
Presence of family-based entrepreneurship in your society
Culture of promoting venturing and risk-taking in the community
Culture of encouraging creativity and innovation
Entrepreneurship considered as a desirable career choice in your society
Opportunities for new venture creation
Entrepreneurial opportunities for your gender
Entrepreneurial opportunities for people in your age category
5 102
Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
Q4
102
1
3
1.87
.829
Q5
102
1
3
1.71
.639
Q6
105
1
3
2.13
.708
Q7
104
1
3
1.93
.767
Q8
104
1
3
2.17
.743
Q9
100
1
3
2.25
.716
Q10
103
1
3
2.13
.788
Valid N (listwise)
88
Group Statistics
ICT or not
Q4
Q5
Q6
Q7
Q8
Q9
Q10
N
Mean
Std. Deviation
ICT industry
53
1.89
.824
.113
Non-ICT industry
49
1.86
.842
.120
ICT industry
54
1.83
.637
.087
Non-ICT industry
48
1.56
.616
.089
ICT industry
56
2.21
.756
.101
Non-ICT industry
49
2.04
.644
.092
ICT industry
55
1.91
.776
.105
Non-ICT industry
49
1.96
.763
.109
ICT industry
54
2.19
.729
.099
Non-ICT industry
50
2.16
.766
.108
ICT industry
53
2.30
.696
.096
Non-ICT industry
47
2.19
.741
.108
ICT industry
56
2.09
.793
.106
Non-ICT industry
47
2.17
.789
.115
Independent Samples Test
6 Std. Error Mean
103
Levene's Test for
Equality of
Variances
t-test for Equality of Means
95% Confidence
Interval of the
Mean
Difference
Sig. (2- Differen Std. Error
F
Q4
Equal variances assumed
.156
Sig.
.694
Equal variances not assumed
Q5
Equal variances assumed
1.094
.298
Equal variances not assumed
Q6
Equal variances assumed
6.557
.012
Equal variances not assumed
Q7
Equal variances assumed
Equal variances assumed
.202
.654
Equal variances assumed
.191
.663
.034
.855
Equal variances assumed
.058
.809
Equal variances not assumed
7 tailed)
ce
Difference
Lower
Upper
100
.858
.030
.165
-.298
.357
.180 99.006
.858
.030
.165
-.298
.357
100
.032
.271
.124
.024
.518
2.182 99.282
.031
.271
.124
.025
.517
1.256
.212
.173
.138
-.100
.447
.207
.173
.137
-.098
.444
.741
-.050
.151
-.350
.250
.741
-.050
.151
-.350
.250
.864
.025
.147
-.265
.316
.864
.025
.147
-.266
.316
98
.444
.110
.144
-.175
.396
.765 94.776
.446
.110
.144
-.176
.397
101
.606
-.081
.156
-.391
.229
-.517 98.076
.606
-.081
.156
-.391
.229
2.177
-.331
.172
.172
Equal variances not assumed
Q10
.180
-.332
Equal variances not assumed
Q9
df
1.269
Equal variances not assumed
Q8
t
.768
-.517
103
102.93
5
102
101.01
1
102
100.38
4
104
Regarding the social-cultural context, Chinese entrepreneurs do not evaluate very positively.
Among the 7 questions, only 4 get answers more than average level. The lowest one is related
with “Culture of promoting venturing and risk-taking in the community” (1.71 as the mean).
Interestingly enough, this is the only item under social-cultural context where we find significant
difference (p=0.032) between entrepreneurs in ICT (1.83 as the mean) and non-ICT sectors (1.56
as the mean). It seems risk-taking is more encouraged in the ICT community than others, though
unfavorable for both sectors. The relative favorable factors include entrepreneurial opportunities
(Q8, 9, 10) and culture of encouraging creativity and innovation (Q6). Another two unfavorable
factors are Q4 and Q7, meaning entrepreneurship is not a desirable career choice in China and
family-based entrepreneurship is still not very popular.
III.
11.
12.
13.
14.
15.
Government Programs and Policies Special government schemes & programs for start-ups
Favorableness of overall government policies
Favorableness of taxation system
Ease of obtaining permits and licenses (VAT code, … etc.)
Favorableness of physical, transportation and ICT Infrastructures
There are quite some official documents from central and local Chinese government that are
promoting new venture creation. For instance, from August 1, 2013, The Council of State has
decided to temporarily waive value-added tax and business tax for Small and Micro-firms whose
monthly sales do not exceed 20,000 Yuan. Haiding district of Beijing city tries to promote the
development of small and micro innovative firms by help registering companies, providing
entrepreneurial mentoring and policy training, facilitating the combination of investing resources
and fund-raising demands, etc. Chongqing city gives supporting funds ranging from 50,000 to
200,000 RMB to overseas educated Chongqing people to found ventures in key industries such
as electronic information, automobile and motorcycle, equipment manufacturing,
pharmaceuticals and chemicals, materials, energy, and consumer products manufacturing. In
2006, Shanghai Technology Entrepreneurship Foundation for Graduates was set up as a nonprofit foundation to promote venture creation among graduates4.
However, according to our survey, only the mean of answers to Q15 is above 2, indicating
favorable infrastructure in China, while all the other policies seem unfavorable, especially the
taxation system. As a whole, the government programs and policies are far from desirable in
entrepreneurs’ minds.
4
Shanghai Technology Entrepreneurship Foundation for Graduates website http://www.stefg.org/index.aspx
8 105
Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
Q11
103
1
3
1.85
.809
Q12
104
1
3
1.96
.775
Q13
104
1
3
1.63
.738
Q14
105
1
3
1.97
.700
Q15
104
1
3
2.35
.587
Valid N (listwise)
98
ICT entrepreneurs, compared with Non-ICT ones, deem government programs for start-ups (with
significant difference, p=0.024) and taxation (with significant difference, p=0.020) are more
favorable. This may be due to the growing governmental incubators and high-tech parks, more
accessible to ICT firms. The support of ICT start-ups is a part of the 12th five-year plan in China.
On the other hand, Non-ICT entrepreneurs’ evaluation for getting license and infrastructure is
higher than ICT ones, without significant difference though.
Group Statistics
ICT or not
Q11
Q12
Q13
Q14
Q15
N
Mean
Std. Deviation
ICT industry
56
2.02
.798
.107
Non-ICT industry
47
1.66
.788
.115
ICT industry
56
2.05
.773
.103
Non-ICT industry
48
1.85
.772
.111
ICT industry
54
1.80
.737
.100
Non-ICT industry
50
1.46
.706
.100
ICT industry
55
1.95
.731
.099
Non-ICT industry
50
2.00
.670
.095
ICT industry
55
2.27
.592
.080
Non-ICT industry
49
2.43
.577
.082
9 Std. Error Mean
106
Independent Samples Test
Levene's Test
for Equality of
Variances
t-test for Equality of Means
95%
Confidence
Interval of
the
Difference
F
Q11
Equal variances assumed
.706
ICT or not
Equal variances not assumed
Q11
ICT industry
Q12
Equal variances
assumed
Non-ICT
industry
Group Statistics
Sig.
t
df
.403
N
Equal variances
assumed
Q13
ICT industry
Equal variances
assumed
Non-ICT
industry
Equal variances assumed
Equal variances not assumed
IV.
16.
17.
18.
19.
20.
.157
.047
.670
Std. Deviation
Std. Error Mean
.024
.358
.157
.798
.107
.047
.669
.788 .199
.152 -.102
.115
.501
.773
.501
.772
.103
.152 -.102
.111
.737 .336
.142
.100
.055
.617
.706
.056
.617
.731
.100
.141
.099
102
1.80
.020
1.46
101.874
1.95
.019
103
2.00
.692
.670-.055
.137 -.327
.095
.218
2.27
102.991
2.43
.691
.592
-.055
.577
.080
.137 -.326
.082
.217
.868 54 2.373
50
2.377
55
.251 50 -.397
55
-.399
49
.508
.199
.336
-1.356
102
.178
-.156
.115 -.384
.072
-1.358
101.142
.177
-.156
.115 -.383
.072
Access to Finance Availability of Government subsidies
Availability of family/friends funds
Availability of Venture Capital Funds
Availability of funds from private individuals/Angel funds
Availability of bank loans
10 .358
.192
48
.441
.024
Lower Upper
2.05
99.627
1.85
Q15
ICT industry
Equal variances not assumed
Non-ICT industry
Q15
Difference
.192
1.313
1.334
Difference
102
1.66
Non-ICT industry
Equal variances not assumed
Q14
ICT industry
Q14
tailed)
.715 47 1.313
56
.028
Std. Error
Mean
98.322
2.02
56
.134
101
Mean
2.286
Q12
ICT industry
Equal variances not assumed
Non-ICT industry
Q13
2.284
Sig. (2-
107
Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
Q16
103
1
3
1.64
.726
Q17
102
1
3
2.03
.710
Q18
102
1
3
1.66
.682
Q19
102
1
3
1.82
.750
Q20
100
1
3
1.58
.727
Valid N (listwise)
95
Access to finance is a big difficulty for Chinese new ventures. The only item with its mean above
2 is “availability of family/friends funds”, while the lowest mean comes from “availability of
bank loans”. It is very difficult for Chinese SMEs, let alone new ventures, to get bank loans.
Government subsidy as well as Venture Capital is, more often than not, also not easy to get. The
availability of Angel Fund is a bit better than bank loans, VC or government subsidy, but still
lower than average. When starting new ventures, many entrepreneurs go to family members or
friends to borrow money. On one hand, they do not have other fund-raising choices; on the other
hand, Chinese culture attaches much importance to Guanxi, so family members and friends are
usually willing to give a hand.
Group Statistics
ICT or not
Q16
Q17
Q18
Q19
Q20
N
Mean
Std. Deviation
ICT industry
56
1.79
.680
.091
Non-ICT industry
47
1.47
.747
.109
ICT industry
54
2.11
.691
.094
Non-ICT industry
48
1.94
.727
.105
ICT industry
55
1.71
.685
.092
Non-ICT industry
47
1.60
.681
.099
ICT industry
55
1.89
.712
.096
Non-ICT industry
47
1.74
.793
.116
ICT industry
53
1.66
.732
.101
Non-ICT industry
47
1.49
.718
.105
11 Std. Error Mean
108
Basically, Non-ICT entrepreneurs find access to finance even more difficult than ICT
entrepreneurs, with lower evaluation on all these finance-related items. However, the only
significant difference (p=0.026) exists in the item of “availability of government subsidy”,
favoring ICT sectors. This means the government gives more support to ICT firms than NonICTs in terms of subsidy, which is consistent with Chinese government’s support of high-tech
industries.
Independent Samples Test
Levene's Test
for Equality of
Variances
t-test for Equality of Means
95% Confidence
Interval of the
Mean
Difference
Sig. (2- Differen Std. Error
F
Q16
Equal variances assumed
1.040
Sig.
t
.310
Equal variances not assumed
Q17
Equal variances assumed
.049
.824
Equal variances not assumed
Q18
Equal variances assumed
.060
.807
Equal variances not assumed
Q19
Equal variances assumed
3.242
.075
Equal variances not assumed
Q20
Equal variances assumed
.119
.731
Equal variances not assumed
12 2.257
df
tailed)
ce
Difference
Lower
Upper
101
.026
.318
.141
.038
.597
2.238 94.114
.028
.318
.142
.036
.599
1.236
100
.219
.174
.140
-.105
.452
1.232 97.241
.221
.174
.141
-.106
.453
100
.406
.113
.136
-.156
.383
.836 97.723
.405
.113
.136
-.156
.383
.981
100
.329
.146
.149
-.149
.442
.973 93.404
.333
.146
.150
-.152
.445
98
.242
.171
.145
-.118
.460
1.177 96.984
.242
.171
.145
-.117
.459
.835
1.176
109
V.
21.
22.
23.
24.
25.
26.
27.
28.
Access to Information and Opportunities for Knowledge and Skill Building Encouragement of entrepreneurship by the education system
Availability of formal training for entrepreneurship
Start-up counseling & assistance at college/universities
Support from Industry associations for networking, information etc.
Incubators and/or Technology parks that offer one stop service for businesses
Assistance from universities/R&D institutions in transfer of R&D
Special programs to promote products and services of start-ups
Opportunities for public-private collaboration to facilitate market entry
In China, the education system generally encourages entrepreneurship (2.43 as the mean) , and
Incubator & Technology parks seem favorable (2.09 as the mean) in serving new ventures, but
all the other items are regarded as unfavorable, especially in R&D transfer from universities and
research institutes to enterprises as well as public-private collaboration opportunities.
Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
Q21
99
1
3
2.43
.625
Q22
100
1
3
1.66
.714
Q23
96
1
3
1.66
.723
Q24
103
1
3
1.63
.700
Q25
99
1
3
2.09
.757
Q26
90
1
3
1.56
.672
Q27
96
1
3
1.64
.682
Q28
94
1
3
1.51
.715
Valid N (listwise)
78
Group Statistics
ICT or not
Q21
Q22
Q23
Q24
N
Mean
Std. Deviation
ICT industry
53
2.40
.631
.087
Non-ICT industry
46
2.48
.623
.092
ICT industry
53
1.79
.743
.102
Non-ICT industry
47
1.51
.655
.096
ICT industry
51
1.67
.683
.096
Non-ICT industry
45
1.64
.773
.115
ICT industry
56
1.88
.715
.096
Non-ICT industry
47
1.34
.562
.082
13 Std. Error Mean
110
Q25
Q26
Q27
Q28
ICT industry
53
2.34
.618
.085
Non-ICT industry
46
1.80
.806
.119
ICT industry
45
1.62
.614
.092
Non-ICT industry
45
1.49
.727
.108
ICT industry
52
1.81
.658
.091
Non-ICT industry
44
1.43
.661
.100
ICT industry
49
1.59
.762
.109
Non-ICT industry
45
1.42
.657
.098
The perceived situation from entrepreneurs in Non-ICT sector is basically worse than ICT firms,
with the only exception in evaluating “Encouragement of entrepreneurship by the education
system” (no significant difference).
Independent Samples Test
Levene's
Test for
Equality of
Variances
t-test for Equality of Means
95% Confidence
Interval of the
Std. Error
F
Q21
Equal variances assumed
.002
Sig.
Equal variances assumed
.366
Equal variances assumed
Equal variances not assumed
1.676
tailed)
Difference
e
Difference
Lower
Upper
.518
-.082
.126
-.333
.169
-.650
95.352
.518
-.082
.126
-.333
.169
.547 2.000
98
.048
.282
.141
.002
.561
2.015
97.998
.047
.282
.140
.004
.559
.150
94
.881
.022
.149
-.273
.317
.148
88.522
.882
.022
.150
-.275
.320
.199
14 Differenc
97
Equal variances not assumed
Q23
df
Mean
.961 -.649
Equal variances not assumed
Q22
t
Sig. (2-
111
Q24
Equal variances assumed
1.295
.258 4.157
101
.000
.535
.129
.279
.790
4.244
100.608
.000
.535
.126
.285
.784
.026 3.733
97
.000
.535
.143
.251
.820
3.664
83.796
.000
.535
.146
.245
.826
.940
88
.350
.133
.142
-.148
.415
.940
85.601
.350
.133
.142
-.149
.415
.577 2.783
94
.007
.376
.135
.108
.644
2.782
91.241
.007
.376
.135
.107
.644
.101 1.152
92
.252
.170
.147
-.123
.462
1.159
91.652
.250
.170
.146
-.121
.460
Equal variances not assumed
Q25
Equal variances assumed
5.107
Equal variances not assumed
Q26
Equal variances assumed
1.435
Equal variances not assumed
Q27
Equal variances assumed
.313
Equal variances not assumed
Q28
Equal variances assumed
Equal variances not assumed
2.739
.234
There are significant differences between ICT and Non-ICT entrepreneurs in their perception of
Questions 22 (p<0.05), Q24 (p<0.001), Q25 (p<0.001) and Q 27(p<0.01). Compared with NonICT industries, ICT sector enjoys significantly better entrepreneur training program, more
supportive industry association, easier access to incubator or high-tech parks, more special
programs to promote products and services of start-ups.
However, we need to notice that both ICT and non-ICT entrepreneurs find insufficient access to
information and knowledge though they think education system encourages venturing. Even for
ICT sector, except for access to incubators or high-tech parks being regarded as favorable, most
items are still much below average level in entrepreneurs’ eyes. This implies weak points of
Chinese entrepreneurial context.
VI.
29
30
31
32
33
Internationalization. Attitude towards internationalization
Information and skills required for internationalization
Government agencies facilitating new firms entry into domestic & international markets
Access to financial resources to tackle internationalization
Foreign language abilities in your company
15 112
Attitude towards internationalization is quite positive (mean is 2.23) and foreign language ability
is no longer a big constraint for internationalization. Thanks to the global economic integration,
the concept of internationalization is accepted by the majority of the entrepreneurs. However,
many entrepreneurs are very concerned about insufficient financial resources, government
agency’s limited facilitating role, and the lack of information and skills needed for
internationalization.
Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
Q29
92
1
3
2.23
.728
Q30
98
1
3
1.79
.763
Q31
94
1
3
1.53
.651
Q32
89
1
3
1.39
.615
Q33
103
1
3
2.09
.715
Valid N (listwise)
81
Group Statistics
ICT or not
Q29
Q30
Q31
Q32
Q33
N
Mean
Std. Deviation
Std. Error Mean
ICT industry
49
2.33
.689
.098
Non-ICT industry
43
2.12
.762
.116
ICT industry
51
1.92
.771
.108
Non-ICT industry
47
1.64
.735
.107
ICT industry
49
1.61
.640
.091
Non-ICT industry
45
1.44
.659
.098
ICT industry
46
1.54
.721
.106
Non-ICT industry
43
1.23
.427
.065
ICT industry
55
2.24
.637
.086
Non-ICT industry
48
1.92
.767
.111
Generally, entrepreneurs in ICT industries are more positive towards internationalization than
those in non-ICT sectors. Significant differences exist in firms’ access to financial resources for
internationalization and firms’ foreign language capability. This may because ICT industries, in
nature, are more international than local in today’s globalizing world.
16 113
Independent Samples Test
Levene's Test
for Equality of
Variances
t-test for Equality of Means
95% Confidence
Interval of the
Difference
Sig. (2-
F
Q29
Equal variances assumed
Sig.
.022
Equal variances not assumed
Q30
Equal variances assumed
.216
Equal variances not assumed
Q31
Equal variances assumed
.001
Equal variances not assumed
Q32
Equal variances assumed
22.18
3
Equal variances not assumed
Q33
Equal variances assumed
Equal variances not assumed
VII.
34.
1.104
t
.882 1.389
df
tailed)
Mean
Std. Error
Difference Difference
Lower
90
.168
.210
.151
-.090
.511
1.380 85.382
.171
.210
.152
-.093
.513
96
.066
.283
.152
-.019
.586
1.862 95.880
.066
.283
.152
-.019
.585
92
.214
.168
.134
-.098
.434
1.251 90.777
.214
.168
.134
-.099
.434
87
.016
.311
.127
.059
.563
2.493 73.977
.015
.311
.125
.062
.559
101
.023
.320
.138
.045
.594
2.281 91.698
.025
.320
.140
.041
.598
.643 1.859
.975 1.252
.000 2.452
.296 2.310
Others
Encouragement for women to start new business in your society
The mean to Q34 (1.93) is a bit lower than average (neutral) and ICT industry has no significant
17 Upper
114
difference from others. Women are not much encouraged to found their own firms, although we
do see an increasing number of women active in developing their own businesses these days in
China.
Descriptive Statistics
N
Minimum
Q34
94
Valid N (listwise)
94
Maximum
1
Mean
3
Std. Deviation
1.93
.676
Group Statistics
ICT or not
Q34
N
Mean
Std. Deviation
Std. Error Mean
ICT industry
50
1.96
.699
.099
Non-ICT industry
44
1.89
.655
.099
VIII. Most favorable and least favorable factors for new venture’s success
Although the questionnaire asks the respondent to select the most and least favorable factors for
entrepreneurial success from the above-mentioned items, quite some respondents still used their
own words to share insights, as if they were answering open questions, which makes the analysis
process more difficult and time consuming. However, this helps to yield some important factors
in the country’s entrepreneurial context beyond our questionnaire items. Therefore, we analyzed
all those answers and classify them into suitable items when appropriate, otherwise we just listed
them on separate tables, indicating the frequency mentioned. All of the answers were edited into
the following three tables.
Facilitating Hindering
Factors
Factors
1.
2.
3.
4.
5.
6.
7.
INDIVIDUAL AND PERSONALITY TRAITS
Your ability to quickly recognize start-up opportunities
Your ability to take risk
Your ability to organize the resources required for start-up
“Individual and personality traits” as a general factor
SOCIO-CULTURAL CONTEXT
Presence of family-based entrepreneurship in your society
Culture of promoting venturing and risk-taking in the community
Culture of encouraging creativity and innovation
Entrepreneurship considered as a desirable career choice in your society
18 25
9
24
6
7
7
5
0
5
5
6
1
6
8
3
0
115
8.
9.
10.
Opportunities for new venture creation
Entrepreneurial opportunities for your gender
Entrepreneurial opportunities for people in your age category
“Social-cultural context” as a general factor…
11.
12.
13.
14.
15.
STATE/GOVT. POLICIES AND PROGRAMS
Special government schemes & programs for start-ups
Favorableness of overall government policies
Favorableness of taxation system
Ease of obtaining permits and licenses (VAT code, … etc.)
Favorableness of physical, transportation and ICT Infrastructures
“Government policy “ as a general factor
16.
17.
18.
19.
20.
ACCESS TO FINANCE
Availability of Government subsidies
Availability of family/friends funds
Availability of Venture Capital Funds
Availability of funds from private individuals/Angel funds
Availability of bank loans
“Capital” as a general factor
21.
22.
23.
24.
25.
26.
27.
28.
ACCESS TO INFORMATION, OPPORTUNITY FOR KNOWLEDGE &
SKILL BUILDING
Encouragement of entrepreneurship by the education system
Availability of formal training for entrepreneurship
Start-up counseling & assistance at college/universities
Support from Industry associations for networking, information etc.
Incubators and/or Technology parks that offer one stop service for
businesses
Assistance from universities/R&D institutions in transfer of R&D
Special programs to promote products and services of start-ups
Opportunities for public-private collaboration to facilitate market entry
As a general factor
INTERNATIONALIZATION OF SMEs
29. Attitude towards internationalization
30. Information and skills required for internationalization
31. Government agencies facilitating new firms entry into domestic &
international markets
32. Access to financial resources to tackle internationalization
33. Foreign language abilities in your company
As a general factor
34.
OTHERS
Encouragement for women to start new business in your society
19 11
1
5
8
3
0
0
3
5
18
6
2
5
5
14
18
9
1
9 2
6
3
1
2
10
5
2
9
3
13
29
5
1
0
1
5
0
3
0
2
1
0
0
1
1
1
1
4
2
1
2
0
0
3
1
1
1
0
4
1
1
0
0
116
From the above table, the facilitating items for entrepreneurial success in China on our
questionnaire are: Individual and personality traits, mentioned 64 times by our respondents;
Access to finance, mentioned 24 times; Favorableness of overall government policies, mentioned
18 times; Opportunities for new venture creation (mentioned 11 times). If we take a further look
at the individual factors, the three most important success factors are “ability to quickly
recognize start-up opportunities” (mentioned 25 times), “ability to organize the resources
required for start-up” (mentioned 24 times”) and “overall government policies” (mentioned 18
times).
On the contrary, the hindering factors for entrepreneurial success in China on our questionnaire
are: taxation (mentioned 18 times), overall government policy (14 times) and bank loans (13
times). If we look at the general items, the number 1 obstacle for entrepreneurial success in
China is “Access to Finance”, mentioned 61 times altogether, and the No. 2 obstacle is
“State/Government policies and programs”, mentioned 56 times in all.
Other Facilitating Factors (beyond questionnaire) Time(s) mentioned
Founding partners’ selection and team building
14
Social network and resources
13
Patience and persistence
8
Support from family
5
Industry background and management experiences
5
Market environment
5
Technology
4
Innovative ideas and goal
4
Professional skills
4
Clients
3
Good projects
2
Business channel
2
Tax reduction
2
Luck
2
Information of business opportunity for venturing
2
20 117
Communication ability and problem solving for clients
1
Innovation
1
Direction of development
1
Family heritage
1
In-born talent for business
1
Open internet resources
1
Leadership
1
Understanding of the market
1
Business model
1
Industry selection
1
Survival ability
1
Geographical location
1
Besides those described in our questionnaire items, Chinese entrepreneurs also attach much
importance to facilitation factors such as “Founding partners’ selection and team building”
(mentioned 14 times) and Social network and resources(mentioned 13 times), though these never
appear in our questionnaire. This may imply the opportunity for further study in entrepreneurship
under Chinese context.
Other Hindering Factors (beyond questionnaire)
Lack of talents
Marketing cost
Partner selection and team building
Competition and malignant competition
Macro environment
Management capability and experience
Monopoly
Cost from government institutions and banks
Market information
Industry cycle
Busy with trivial things
Promotion
Product upgrading
16
7
6
6
5
4
2
2
2
2
2
1
1
21 Time(s) mentioned
118
Market capturing capability
Resources utilizing
Lack of resources
Market orientation of projects
Support from family
Customer development
Cost
Market nurturing time
Over-confidence
Regulatory limitation on SMEs and private firms
Personal capability
Technology
Inertia
Low innovation
Market expansion
attitude
Real estate price
Psychological pressure
Desire
Impatience
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Besides those described in our questionnaire items, Chinese entrepreneurs have pointed out other
hindering factors such as “Lack of talents” (mentioned 16 times) “marketing cost”(mentioned 7
times), “partner selection and team building”(mentioned 6 times), “Competition and malignant
competition” (mentioned 6 times). This reveals that in China, for new ventures to succeed, how
to attract and retain talents as well as management team building seem critical, among others .
Discussion
The report analyzes responses of 106 entrepreneurs related to new venture creation ecosystem in
China. Summary of data analysis is shown in the following table.
1.
2.
3.
4.
INDIVIDUAL AND PERSONALITY TRAITS
Your ability to quickly recognize start-up opportunities
Your ability to take risk
Your ability to organize the resources required for start-up
SOCIO-CULTURAL CONTEXT
Presence of family-based entrepreneurship in your society
22 Mean
Mean of
ICT
Mean of
Non-ICT
2..43
2.51
2.11
2.29
2.20
2.22
2.34
2.02
2.37
1.87
1.89
1.86
119
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
Culture of promoting venturing and risk-taking in the
community
Culture of encouraging creativity and innovation
Entrepreneurship considered as a desirable career choice in
your society
Opportunities for new venture creation
Entrepreneurial opportunities for your gender
Entrepreneurial opportunities for people in your age category
STATE/GOVT. POLICIES AND PROGRAMS
Special government schemes & programs for start-ups
Favorableness of overall government policies
Favorableness of taxation system
Ease of obtaining permits and licenses (VAT code, … etc.)
Favorableness of physical, transportation and ICT
Infrastructures
ACCESS TO FINANCE
Availability of Government subsidies
Availability of family/friends funds
Availability of Venture Capital Funds
Availability of funds from private individuals/Angel funds
Availability of bank loans
ACCESS TO INFORMATION, OPPORTUNITY FOR
KNOWLEDGE & SKILL BUILDING
Encouragement of entrepreneurship by the education system
Availability of formal training for entrepreneurship
Start-up counseling & assistance at college/universities
Support from Industry associations for networking, information
etc.
Incubators and/or Technology parks that offer one stop service
for businesses
Assistance from universities/R&D institutions in transfer of
R&D
Special programs to promote products and services of startups
Opportunities for public-private collaboration to facilitate
market entry
INTERNATIONALIZATION OF SMEs
Attitude towards internationalization
Information and skills required for internationalization
Government agencies facilitating new firms entry into domestic
& international markets
Access to financial resources to tackle internationalization
Foreign language abilities in your company
OTHERS
Encouragement for women to start new business in your
society
1.71
1.83*
1.56*
2.13
1.93
2.21
1.91
2.04
1.96
2.17
2.25
2.13
2.19
2.30
2.09
2.16
2.19
2.17
1.85
1.96
1.63
1.97
2.35
2.02*
2.05
1.80*
1.95
2.27
1.66*
1.85
1.46*
2.00
2.43
1.64
2.03
1.66
1.82
1.58
1.79*
2.11
1,71
1.89
1.66
1.47*
1.94
1.60
1.74
1.49
2.43
1.66
1.66
2.40
1.79*
1.67
1.88***
2.48
1.51*
1.64
1.34***
2.34***
1.80***
1.62
1.49
1.81**
1.43**
1.59
1.42
2.23
1.79
2.33
1.92
2.12
1.64
1.53
1.39
2.09
1.61
1.54*
2.24*
1.44
1.23*
1.92*
1.93
1.96
1.89
1.63
2.09
1.56
1.64
1.51
Note: * significant at 5% level; ** significant at 1% level; *** significant at 0.1% level
23 120
As to “Individual Personality Traits”, entrepreneurs have quite positive assessment of their own
capabilities in terms of recognizing the business opportunity, organizing resources, and taking
risks. And there is no significant difference between ICT and non-ICT sectors.
When it comes to “Socio-Culture Context”, Chinese entrepreneurs really appreciate
entrepreneurial opportunities and the culture of encouraging innovation. However, although there
are quite some family-businesses in China, parents usually wish the kids to find a stable job as
the career rather than starting their own businesses and taking all relevant risks. Entrepreneurs
from ICT and non-ICT sectors perceive “culture of promoting venturing and risk-taking in the
community” differently, but both below average. ICT industry is full of innovation and changes.
If you do not innovate, you will not survive. So ICT entrepreneurs are relatively more
accustomed to venturing and taking risks. Although the overall culture of risk-taking is not
favorable in China, ICT entrepreneurs found their environment more encouraging in terms of
risk-taking than others.
In terms of Government Policies and Programs, both sectors evaluate positively about
infrastructure and negatively about taxation system. For “Special government schemes &
programs for start-ups”, ICT entrepreneurs give more positive judgment than Non-ICT ones,
largely due to government’s support for high-tech firms. The support of ICT start-ups and SMEs
are also a part of the 12th five-year plan in China. In recent years, there are quite some favorable
policies to high-tech firms, which of course include ICT sector. Governmental incubators and
university-based technology parks have emerged quickly in recent years, to which ICT start-ups
usually get easier access.
The overall situation of “Access to Finance” is far from desirable. The only mean above average
is ICT entrepreneurs’ evaluation on “availability of family/friends funds”. It’s very hard for new
ventures to get bank loans, VC/ Angel funds or government subsidy. Even for ICT entrepreneurs,
they find it difficult to get government subsidy, though at a significantly better position than
peers in Non-ICT sectors.
As to “Access to Information and Opportunities for Knowledge and Skill Building”, both sectors
think positively on the encouragement of education system in China. In recent years, top
business schools in China, such as School of Management, Fudan University, have set up
courses in entrepreneurship and encouraged MBA students to organize clubs of entrepreneurs.
Also, ICT entrepreneurs positively evaluate “Incubators and/or Technology parks that offer one
stop service for businesses”. But for all other related factors, the mean is below 2 for both sectors.
Therefore, how to help entrepreneurs to access information and knowledge is another bottleneck.
For most factors here, ICT entrepreneurs think relatively more positively, most probably due to
government’s support for high-tech industries.
24 121
With China’s further integration into the world economy, Chinese entrepreneurs have quite
positive attitude towards internationalization. However, most of them still lack required
information, skills and financial resources to tap the international market. The Chinese
government agency’s role in facilitating internationalization is deemed limited. ICT
entrepreneurs are significantly more confident of foreign language abilities in the firm and access
to financial resources. ICT products and services themselves are very international in terms of
supply and demand, because there’s almost no trade barrier, which means competitors come
from the whole world. And ICT firms are more favored by Angels/VCs than firms in other
industries.
Conclusion
Chinese government, from central to local, has paid an increasing amount of attention to new
venture creation. Besides incubators and high-tech parks, some entrepreneurial funds are
available to micro and small-sized firms. Moreover, Small and Micro firms also enjoy more
favorable tax policy, lower rents and various kinds of entrepreneurial subsidy when certain
conditions are met.
From our survey data, we clearly see the positive self-assessment of entrepreneurs and abundant
entrepreneurial opportunities in China. However, the Chinese social-cultural environment still
does not favor entrepreneurial efforts though the government tries to encourage innovation.
Entrepreneurs highly evaluate the infrastructure, but are not satisfied with government policies
and special programs, especially those from Non-ICT sectors. Access to finance and overall
government policies & programs are so critical to entrepreneurial success that they are frequently
mentioned as both most important facilitating factors and hindering factors. How to improve
policies for new ventures and provide more sources of finance is still very serious constraint for
venturing. Entrepreneurs in China are badly in need of information, knowledge and skills. While
entrepreneurs appreciating the improving education system for entrepreneurship and those in
ICT sector enjoy one-stop service from incubators and high-tech parks, majority of entrepreneurs
are not satisfied with opportunities and services provided by the industry association,
government agency and research institutes in training as well as R&D transfer. Though
internationalization seems attractive to Chinese entrepreneurs, they are still pessimistic about the
necessary information, knowledge and skills for international expansion and do not think
government agencies have effectively facilitated this possibility.
Therefore, there’s still long way to go to build a desirable entrepreneurial society in China. For
the government, it need further simplify bureaucratic formalities, reduce taxes, develop more
fund-raising channels, set up more supporting projects for new ventures. For non-government
25 122
organizations such as industry associations, they need to provide better information, mentoring,
and consulting services. For universities and research institutions, they need to facilitate the
transfer of research findings to productive products in businesses as well as developing better
courses and training programs to serve potential and existing entrepreneurs. For mass media and
the whole society, they need to guide and support entrepreneurship by reporting success stories
of entrepreneurs, recognizing entrepreneurs’ contribution to the society, encouraging parents and
other family members to support, both mentally and financially, entrepreneurial efforts by their
children or relatives, and increasing talents’ willingness to work for new ventures. For
entrepreneurs themselves, they need keep on learning, be patient and persistent, build capabilities
and social networks, and grow business with the booming but competitive market. Only with
comprehensive efforts from various dimensions can China enjoy more desirable entrepreneurial
context in the future.
26 123
POLICIES TO SUPPORT ENTREPRENEURS
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
124
PUBLIC POLICY FOR FINANCING ENTREPRENEURSHIP
AND THE STATE DEVELOPMENT AGENCIES
Eduardo Duprat Ferreira de Mello
Institute of Economics - IE / UFRJ
[email protected]
Abstract: The recent credit policy of the government banks has created unprecedented
conditions to expand the access of micro and small enterprises (MSE) to funding. For this,
however, it is necessary that not only innovative lines are available, but also that there are
organizational structures that enable the effectiveness and monitoring of service to
entrepreneurs. The State Development Agencies (SDA) emerged in the country for a little over
a decade in addition to the role of development banks as strategic instruments for financing
fixed capital and working capital, mainly focusing on small businesses. The identification of
comprehensive and creative forms of subsidized credit to small businesses, and their
mechanisms of selection and control, becomes especially relevant, as it translates new
relationships between the public and private sectors. Let alone that it is increasingly valued the
transparency of information about public finances and the society claims for a public sector
more efficient and effective in their spending. The concern is not restricted to the amount of
debt and the quality of the expenses incurred by the government, but also focuses on lending
and targeting of development policies, its comprehensiveness, coherence and sustainability. The
aim of this paper is to examine the motivation for the creation of the SDA and the advances in
granting subsidized credit, including the provision of innovative products, the necessary
attention to the risks of financing, and the essential guidance to small borrowers, in
complementary activities to commercial (private) and public banks. The Theoretical Reference
checks the recent conceptions of economic development and the importance of credit to the
entrepreneurship. Based on the New Institutional Economics, it seeks to clarify the functional
aspect of the state in relation to the market in an attempt to facilitate the access of new entrants
and to increase the number of transactions at a low cost. It also seeks to understand how public
policies of development can reduce information asymmetries, the opportunism and contractual
risks, transaction costs and the difficulty of establishing credible commitments. The
methodology of analysis is composed of documentary research and field research. This last one
includes in-depth interviews with public managers and consultants and questionnaires with
small business owners, potential customers of credit lines. Both groups are treated by categories
of analysis, as substrate from a doctoral thesis being completed in PPED - IE / UFRJ.
Keywords: Credit, Entrepreneurship, Public policies for the economic development
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
125
INTRODUCTION
Whatever the guidelines are in the maze of economic development, they presuppose the
availability of resources and their sustainability. Without adequate tools, and if the aim is not
visible at every moment, there are great chances of failure.
The State Development Agencies (SDA), whose origin in Brazil took place about a decade ago,
are examples of these instruments. As bureaucratic apparatus of the state, they play specific
roles and integrate with other complementary systems that guarantee their support, and, on the
other hand, impose restrictions. They represent a strategy for the financing of fixed capital and
working capital, which involves costs and benefits associated with the development policies in
the states where they have their headquarters. These agencies came to complement the role of
Development Banks, with a greater focus on small and medium enterprises. It is expected that,
due to its own action in the states, and the proximity to the governments and localized
networks, the SDA generate innovative forms of credit, and results where federal developing
organizations would have difficulties to achieve, especially with respect to smaller enterprises.
The National Bank for Economic and Social Development- BNDES, the main development
institution in the country, coexists with an institutional ambiguity that has cost to it a notorious
critique of "only lending money to those who do not need"1. Indeed, it is difficult for this huge
organizational to meet a demand so vast and dispersed by the country, due both to operational
complexity and / or lack of strategic interest of the Bank. Therefore, when their managers
respond the popular saying, they use to recall that the acronym, today, ends with "S" (for
Social), but started with "B" (for Bank). The other major federal banks of financing - Caixa
Econômica and Bank of Brazil - also do not stand by less bureaucratic operations and easier
reach for entrepreneurs. Customers of cheaper credit frequently complain of wrong guidance
and misinformation from the managers, and long waits at branches.
It happens that, like many commercial banks, traditional public banks are increasingly
awakening to the importance of the small business segment, and opening new lines and easy
options to micro and small entrepreneurs. Like a bank, the SDA must take care of the risk
analysis on financing, which implies careful selection of borrowers. Although not characterized
as banking institutions, its operation is guided by the Basel Accord, which requires them to
meet the same requirements that apply to large banks.
Moreover, a significant portion of their portfolios must meet the guidelines of public policies
aimed at economic development. It is a strategic game amongst the capture by private interests,
subordination to government regulations or the often desirable (but complex) autonomy. In this
game, it is imperative that the SDA finance companies that are able not only to honor their
commitments, but also to generate multiplier effects and create innovative capacity, stimulating
job creation and making the economy of the respective regions more dynamic, in a sustainable
way.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
126
METHODOLOGY
To evaluate the logic of the SDA creation, and its effectiveness, the research includes literature
review and documentary, as well as interviews with more than 10 public managers directly
related to the subject, and more than 20 questionnaires with entrepreneurs from different
sectors, checking the following assumptions:
(1) Among the strategies to stimulate economic development, subsidized credit is an
essential tool for entrepreneurs;
(2) SDA centralize institutional environments where the entrepreneur - mostly the small
ones - seeking funding, finds more facilities and less transaction costs than in transactions with
other banks, commercial or public.
(3) the creation of the SDA represents an institutional innovation in supporting
entrepreneurship, being possible and desirable the improvement of the system (model).
THEORETICAL BACKGROUND
By developing tools for analysis of social transactions within and outside market situations, the
intellectual school that deepens with the most current view institutions in general and the
functional context of the State in relation to the market, in particular, is the New Institutional
Economics (NIE). In this analytical field, it is possible to overcome the traditional dichotomy
"State X Market", moving the analysis to the structure of incentives that produce rational
outcomes of collective viewpoint.(Melo, 1996).
At the same time NIE recognizes the supremacy of the market in socio-economic life of a
nation, it also makes clear the function of the State to correct its distortions, its social
inequitable effects, and prevent its collapse. North (1990, 1992) understands institutions as
durable systems, rooted in society, and that, to reduce uncertainty and avoid chaos, establish
conventions of restrictive character that set expectations and incentives for mutual interactions
between organizations and their members. Fiani (2011) argues that the key role of institutions
in development is explained by its ability to manage conflict and cooperation in such processes,
recognizing them as "incentive structures". In other words, the institutions define the gains that
can be obtained depending on the economic decisions made by individuals and organizations,
thus affecting the possibilities for economic development.
In a simplistic definition, institutions can be translated as the rules of the game. Regarding the
very evolution of the capitalist mode of production, we see that it arose and perfected, even
with its crises, in the path of a long institutional work. Since its genesis in the elimination of
absolutism in Europe, until today, the capitalist directive has mainstay in legal safety, that is,
the guarantee of property rights and enforcing contracts. Governments, in turn, must build
institutions that deal with the excesses of the system and ensure better distribution of the wealth
generated by the market.
The costs of using the market, to negotiate, formalize and ensure the terms of an agreement, or,
more broadly, the costs of organizing productive activity in the economy, are transaction costs.
Melo (1996) warns that the rules and the agreements should be imposed in place of simple
promises or intentions, just because there are asymmetries and opportunism, derived from the
fact that individuals or organizations have information that others do not hold (asset specifity).
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
127
Political and economic institutions that provide low cost transactions enable the factor “market
productive efficiency” to be the foundation of economic growth. As to public policies that
promote development, a functional aspect of the State regarding market takes place in an
attempt to facilitate the entry of new operators and increase the number of transactions at a low
cost, encouraging enterprises and activities and taking typical risks of the capitalist system.
THE PUBLIC POLICY TO FINANCE DEVELOPMENT
The purpose of public policy is to correct market failures and maximize social welfare, while
not deterring profits (rents) for private companies. As there is no promotion policy without
costs, state institutions and governance structures are needed to act to reduce the barriers and
costs in loan transactions. Bwigues and Sekkat (2009) argue that public sector support to
projects may represent an intermediate option between free market and state intervention and
planning. While market forces and private initiative remain as the driving force, governments
should establish strategies for the productive sphere beyond simply ensuring property rights,
enforce contracts and stabilize the economy.
The multiple and diffuse character of development, and its latest challenges, require constant
reassessment of the different understandings of the economic dynamics, and current
standards. Synthetically, development is the quality of growth, or, in the Schumpeterian
version, growth with structural change. A number of factors may be the driving forces of the
process, involving not only the historical and "classic” causes, as labor, innovation, education,
leadership and anchor investments, but also completely random situations, in which one
observes a particularly successful combination.
Hirschman (1961) believes that development is based not so much on a great confluence of
certain resources and factors of production, but to cause and mobilize, with developmental
purpose, resources and abilities that are hidden, scattered or misused. He classifies it as the
process of transformation of a type of economy in some other more evolved, and suggests that,
as there is no pre-established requirements for economic development, an embarrassment in a
certain period to the progress in a certain sector, can be useful in different circumstances. The
author also considers that the basic determinant of the development is the ability for investment,
which generates completive and simultaneous effects, and that investment means an essential
mechanism for channeling new energy for development.
The modern economic development had the industry as the foundation, though it is no longer
restricted to industrialization. From the 1990s on, a more systemic perception of development
for countries, territories and regions took place. Theories of economic development
incorporated, slowly, institutional elements that bring to their field of research the contribution
of other areas of knowledge. Contemporary discussions do not assume a single path, and
consider development as a result of social interactions that affect the maturation of institutions
and generate intermediate forms of coordination that will complement the actions of the State
and the market.
The latest views meet authors such as Amartya Sen (2010) that virtually discard the adoption of
historical models, and value more the libertarian and continuous aspect of development than the
classical approach of economic discipline, which leads to utilities, income and wealth. Sachs
(1986) states that the concept of development belongs more to the sphere of ethics than
economics, and it aims to release the human personality, of all men, in the sense of a process
and not a pre-requisite.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
128
In the same way, O`Neill (2012) suggests the adoption of new variables to measure the ability
of developing countries, such as the use of computers and internet, education, justice,
corruption levels, political stability and life expectancy.
As it applies to public policy of funding, although it is only a subset of policy planning and
economic development policies, it has always represented a decisive element for the
transformations in the productive fabric and the mitigation of regional imbalances. Therefore, it
should result from an accurate reading of environments, so that allocated resources can promote
the diffusion of business opportunities, and avoid concentration and predatory competition.
The SDA and the other agencies that complement the state action for promoting entrepreneurship as SEBRAE, the Federation of Industries, Networks Technology and state governments, as well as
federal agencies that standardize them - constitute what Fiani (2011) defines as Institutional
Arrangement. Different types of transaction require adequate institutional arrangements to promote
cooperation and discourage conflict. They represent governance structures that coordinate and
regulate transactions inside and outside of an economic system capable of ensuring the mutual
interests and possibilities of cooperation among the various agents, involving the governing
capability of the state and market structures.
THE CREDIT MARKET AND ITS INSTITUTIONS
For the economic system, credit plays a role almost as vital as the oxygen to organic living
beings. It multiplies the consumption and investment capacity in the economy by allowing the
breath necessary for the various components to fulfill their functions of production, marketing
and service. With respect to the productive sector, Carvalho (2003) highlights how, in the '30s,
Keynes had already observed that a businessman, deciding to make an investment, has to be
confident that he will be able to get the means of payment necessary to undertake the
acquisition of desired equipment and structure.
The credit market is part of the financial system that gathers possibilities of public and private,
national and international financing. It serves as leverage for most developed economies in the
world, and a subset of that market is driven to the consumer credit, involving personal loan,
payroll loans and housing, leasing etc.
The Brazilian productive sector's main actors for lending are foreign firms to affiliates in Brazil
and financial institutions, by their power to marshal resources, and the degree of specialization
in the process of lending and - most importantly - get the loans back.
The institutions that regulate the international financial system and establish prudential rules
were created over the nineteenth and twentieth centuries, in order to prevent crises or limit its
effects. Today, these rules are part of the so-called Basel Accords - now in its third edition coordinated by the Bank for International Settlements, based in that Swiss city.
Their standards are approved in each country and given the multiplicity of situations they are
not capable to prevent crises from happening. Even because agents are able to circumvent
financial constraints for expansion of their business, or due to maladjustment or to difficulties
detect risks by regulators. And if markets do not adequately fulfill their role in the investment,
failure ends up having to be fixed by the government.
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The National Financial System, as it is organized today, has its roots in banking reform
implemented in the country in the 1960s, through the Law 4.595/64, which brought a new
institutional order for the financial market, creating the National Monetary Council - CMN, as
manager of the country's monetary policy, and the Central Bank, executor of monetary policy
and issuing bank, responsible for enforcing the provisions that rule the functioning of the
system.
The BNDES plays a key role in the operation of the system, as an institution which holds the
largest and most important lines of financing for economic development2, considering the focus
on long-term financing. Currently under the Ministry of Development, Industry and Foreign
Trade, BNDES is included in the range of 5% of the institutions that the World Bank classifies
as "megabanks", with project portfolios in excess of US$ 100 billion, from a set of 90 other
Development Banks. It finances between 25% and 30% of the funds for the purchase of
machinery and industrial projects for the construction of infrastructure in Brazil, underscoring
its importance in the formation of fixed capital.
One of the main directions of industrial policy for the expansion of the Brazilian economy has
been the use of BNDES in lending to large corporate groups, and its interest in these
"champions", able to innovate and expand the export of commodities. The strategy to elect
"national champions" by sectors was inspired in the military governments that prioritize some
companies to be recipients of public funds, and thus would become strong to lead Brazilian
capitalism capacity to compete with other countries in the world. Such targeting was verified
until the notorious examples of support to Votorantim and to Villares steel poles, to Bardella
mechanic industries, and, more recently, to the JBS/Marfig frigorific, to Oi telecommunications
operator and to the companies of EBX group.
This pattern has been discontinued by the federal government, given that the Bank gets very
exposed to the results of these companies. A performance which often is motivated by issues
unrelated to the market, which may reflect the maxim that "governments are lousy at picking
winners, but the losers are great at picking governments". If in the past the Bank profited from
dividends from companies in which it participated, this trend has changed. The BNDESPar,
equity arm of the institution, which accounted for about 40% of the profit of the Bank, has not
contributed more than 3.7% in 2012.
This is consistent with a major brand of Dilma Rousseff government, which has been the
popularization of credit in Brazil, reducing real interest rates and the cost of bank charges. The
reduction of the Selic rate, which began in 2011, caused losses and generated criticism from
many financial market operators, who bet on the maintenance of interest rates. While that
crossed a convention market, it signaled – this time in a more effective and instrumental way for a new position in the financial system, starting the use of public banks to force competition
in the sector.
The public banks began to act as spikes-forward in this more comprehensive and easier credit
policy, with stimulus to the formalization of entrepreneurship. To illustrate the pressure from
the government in this regard, it is worth noting that lending by Caixa Econômica rose 42% in
2012 compared to 2011, well above the average for the rest of the market 3. In addition, 96% of
BNDES financing operations, and 47% of the funds disbursed by the Bank were destined for
micro, small and medium enterprises in the first two months of 20134.
Also, in the last decade, the BNDES has been improving and diversifying programs for
microcredit and financing for small businesses, especially with the BNDES Card, considered
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130
now the most effective instrument of popular credit, and with the Investment Support Program
(PSI) for dissemination of innovation in the country.
In turn, the Bank of Brazil launched in 2011 Microcredit Entrepreneur PJ, for the demands of
working capital and investment, a credit line with a limit up to R$ 15.000, placed in service
model of Oriented Productive Microcredit (MPO), which aims to provide educational legal
guidance and monitoring the borrowers, throughout the duration of the contract. And in the
following year ushered in the program called BOMPRATODOS, which includes financial
advisory service and conducting operations of working capital with the binding of the
Operations Guarantee Fund (FGO), with which customers can also access more attractive rates
and thus reduce the financial cost of the loans. The early-stage companies, particularly in the
technological sector, rely, increasingly, in finance via foreign venture capital.
Despite the expansion of credit in Brazil, total funding in relation to the size of the economy
(close to 50 % of GDP) is lower than in many other countries5, demonstrating that there is still
enough room for expanding. The key element in the process of lending is the risk. That, in
principle, is greater as the smaller is the size - and the possibility of offering guarantees – of the
borrowers. A crucial question that arises is whether the criteria for risk assessment and the
requirements for grant funding follow a similar logic to the whole set of requests.
Caouette (2000:100) details the criteria that involve credit analysis, and stresses that it is not
reasonable to use the same criteria for "Kellogg's" and "Joe's Bar". Quoting Brian Ranson,
senior vice president of Bank of Montreal, notes that "intense analysis will not say much about
the risk of a company AAA (high credit quality).(...) On the other hand, if one do not do credit
analysis with the Joe’s Bar, may have big disappointments. Therefore, we need a loan process
that is flexible, that we can adapt to the nature of the client". He also considers that the rigor
and analysis requirements vary among financial institutions, because there are different degrees
of investment in training its specialists and the development of their systems. Adding the
following remark:
It is proved that the classical analysis of credit has several serious flaws. For starters,
the maintenance of an expert system is extremely expensive.(...) The banks should, at
all times, have a large number of people training to become specialists. The banks
also tend to regard with suspicion experts from each other.(...) And there are also legal
reasons for conducting independent analysis. Redundancies and inefficiencies arising
contribute to serious cost problems at many banks. (Caouette, 2000:101).
In credit markets, information asymmetries may be visible in the case of insider information or
the difference in access to information for potential investors close to major centers and from
distant locations. And also according to the size of firms, where the largest generally hold better
conditions to access credit lines and to understand its requirements and scopes. Knowledge of
actual rates offered in the market is crucial for negotiating with financial institutions and to
evaluate the degree of positive or negative leverage that funding will create for the company.
These conditions constitute the incidence of transaction costs, requiring movements to obtain
information, hiring agents, spending on documentation, accounting records, institutional
contacts and legal advice, among other procedures that may be crucial to the success or failure
in the financing request.
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131
CHALLENGES
AND
ENTREPRENEURS
OPPORTUNITIES
FOR
SMALL
The definition of small companies according to the size of the companies is not entirely
accurate, and may vary according to countries and institutions. European firms are classified by
the number of people and total turnover or annual balance sheet, while Brazil adopts the
criterion of Annual Gross Operating Revenue. According to the classification of the BNDES,
gross revenues under R$ 2,4 million features microenterprises; between 2,4 and R$ 16 million
characterizes small companies, between 16 and R$ 300 million identifies the medium and,
above that, the big companies.
In Brazil, according to data from Sebrae, there were in 2012 about 6,1 million micro and small
enterprises in formal activity, with 2,8 million individual micro-entrepreneurs formalized,
comprising 14,7 million formal jobs.
Despite the expressiveness of this set, micro and small companies tend to be more
disadvantaged in bank credit, compared to large companies, and the lack of collateral is
identified by SME’s as the main reason for the denial of credit by banks. They usually pay the
most exorbitant prices for financial services, and are generally subjected to more draconian
contract terms. Many of these entrepreneurs fail to provide the required assurances and don’t
even realize the risks they face, and that’s why banks and financial institutions tend to be strict
with their requests for loans and financing.
An important recognition of the importance of these companies by the government was the
institution of the National Statutes of Micro and Small Businesses - Complementary Law No.
123 of December 14, 2006. Among other relevant points, it defined the concept of micro and
small business and established the "National Simple", whereby the payment of taxes may be
done in a simplified way. Through the law of individual micro entrepreneurs - MEI, the small
entrepreneurs now have pension coverage, right to maternity leave, CNPJ and access to credit.
Thus, large commercial banks such as Itaú, Bradesco and Santander increasingly see in micro
entrepreneur a new niche market, known as "middle market", with loans that typically range
from R$ 500 to R$ 14.000.
The lending of low value to small informal entrepreneurs and microenterprises without access
to traditional financial system - microcredit - deserves consideration apart, because it has a
specific character, to some extent revolutionary, and is of increasing importance as an
instrument of social policy and economic. Notwithstanding the criticisms that are placed on the
high risk involved in the operations, and on the lack of structure - or deterioration – of the labor
market, it is also growing the interest of public banks and even private banks to have it as a
strategic product in their portfolio.
In the logic of lending little to many, whose financial needs are very reduced, Muhammad
Yunus, a professor of economics laureate in 2006 with the Nobel Peace Prize, created in 1983
the so-called "bank for the poor" - Grameen Bank - in Bangladesh. Yunus (2007) realizes that
microcredit connects the economic engines of the portion of the population rejected by society.
As soon as many of these small motors turn into operation, the setting for great achievements is
established. The author also claims that conventional banks can have microcredit programs,
provided they have trained people, methodology and management structure to do the job.
Microcredit requires special attention to low-income micro entrepreneurs. This differential
treatment occurs by positioning the credit agents in the workplace of borrowers, aiming to
understand their real needs, prospects for the growth of the business and monitoring after the
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132
granting of credit, and the ways to have it settled. Moreover, in line with the social reality in
which the micro entrepreneur is inserted, popular productive credit features differentiated
guarantees. Guarantee can be taken individually, with the appointment of a surety or guarantor,
or in a collective way, through the joint debtor, which allows that in a group, the small
entrepreneur can be both client of credit and surety of other group members.
The range of popular productive credit in disadvantaged sections of the population strengthens,
therefore, in an economic context marked by great heterogeneity in the social structure. This
also explains why self-employment, which was once seen as an underemployment, began to set
up an opportunity to enter the market work.
FUNCTIONALITY OF THE STATE DEVELOPMENT AGENCIES
Public banks have been a key part of the financing model of industrialization in the post-war,
supporting the Target Plan (1956-61), the "economic miracle" (1968-73) and the Second
National Development Plan (1974-79). The decades of 1980/1990 experienced the large-scale
state development banks, which model, in most cases, failed to sustainability for the next
decade.
The creation of state development agencies aimed to serve multiple functions. SDA are not
regulators, but the strategies focused on economic and social development are particularly
interesting, because, once they are opened systems, interact with various external systems, as
the market, customers, consultants, politicians and resources transferring agents, among others.
It is from this configuration that results the essential elements for modeling the SDA according
to the strategies defined by its controller (state), and that will dictate the internal operating
structure at the level of physical infrastructure, technology, information flow and management
system (planning, execution and control).
These agencies had their origin in the Resolution of National Monetary Council No. 2.574 of
17/12/98, and later, in Resolution No. 2.828 of 30/03/2001. They are constituted as privately
held corporations, under the auspices of Law 6.404/76 and its consequences, including the
profit directive. They are part of the financial system, although not financial institutions, nor
falling in the genre "banks of any kind", as set out in art.1, supplementary Law No. 105/2001,
1st. issue. And, as public administration, they subject to the constitutional principles of morality,
legality, publicity and efficiency. They entered under the program to reduce the presence of the
public sector in bank activity, set up by the Federal Government through the Measure Act No.
1.514 of 08/07/96. From the edition of this Provisional Measure, the Brazilian states
achieved the ideal financing for redevelopment of its institutions, at this point, largely
weakened by a growing process of economic and financial deterioration.
In most cases, this process originated in the 80s, with the aggravating restrictions imposed by
successive economic plans, the reduction of interest rates and the end of monetary correction
costs incompatible with the activity, and unsuccessful credit management. The effects of this
crisis, which extended to the 1990s, were fundamental in the extinction of the state banks. The
only 'pure' - exclusive - development banks that remain are the Development Bank of Espirito
Santo (Bandes), the Development Bank of Minas Gerais (BDMG) and the Regional
Development Bank of Extremo Sul (BRDE).
But the Resolution No. 2.828 of National Monetary Council and the devices that provide
legality to development agencies imposed normative and limitations conditions that reflected
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133
the fear that in the future these institutions would fail due to the same mistakes made by
predecessor institutions.
The transformation of development banks in SDA agencies occurred in a period in which the
Brazilian economy experienced a downturn, with low average annual growth rate of GDP and
the need to ensure the success of the Real Plan. In that scenario, it was required for state
governments to adjust their accounts as a condition for renegotiation of the public debt
accumulated by then. To do so, state governments, for lack of a better alternative, chose to join
the monetary and fiscal balance policy of the federal government, in which a central element
was the imposition of competitiveness for sub-national financial systems.6
To no unity of federation was denied the right to continue having a bank, since that would
operate in market conditions, able to undergo the competitive rules, fighting for space with the
private sector. For these states, the adjustment funding was restricted to 50% of the required
amount, leaving the supplementary contribution to the controller.
To those states that effectively withdrew the banking activity, only one concession was
allowed: the creation of an organization, with special features and limited performance, with
more targets than the traditional financial intermediation toward granting credits for medium
and long term. Then, entered the SDA, that, in some states, appeared as something completely
new, without any link with previous institutions, like AFAP - Amapá, AFEAM – Amazonas,
Desenvolve Alagoas, GoiásFomento etc.. In other states, they succeeded institutions which
already operated in the market, like the cases in Bahia, Paraná, Rio Grande do Sul, Santa
Catarina and Rio de Janeiro.
Currently, all SDA are regulated by Resolution 3.757 of July 2009, which, only eight years
after Resolution 2.828/2001, broadened its spectrum of activity, with the permission to perform
a wider range of operations.
Ten years later, it is clear that the option offered by the federal government to state
units was backed by much more in the belief that these institutions, very limited, and
with unclear field of action, would not affect national monetary policy, than grounded
in the generous assumption that new agencies could, in fact, play an important role in
the financing of micro and small businesses. (PETITINGA, 2011:13)7.
So that, with variations in their fields, depending on state laws and characteristics, there are four
basic operations of development agencies: Grant of the medium and long-term fixed capital and
working capital; Fundraising for transfer; management of constitutional funds; Provision of
consultancy services.
The most important forbiddances for their actions relate to access to lines of financial assistance
from the Central Bank; access to Bank Reserves account at the Central Bank, raising funds
from the public, and hiring of interbank deposits, as much as depositor or as depositary.
The bonds of the Central Bank follow fundamentally resolutions of National Monetary Council,
aiming to monitor and minimize the risks that, according to definitions of the Basel Committee,
can be summarized in the following categories:
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Credit risks include the possibility of financial loss resulting from the inability of counterparts
to fulfill contracted clauses. It applies to loans, guarantees, acceptances and securities
investments.
Operational risks refer to the possibility of financial loss due to errors, fraud or failure to
perform.
Market risks involve the possibility of financial loss arising from movements in adverse
interest rates and market prices, affecting the positions of assets and liabilities held by the
institution.
Other risks, with lesser degree of influence over the affairs of the agency, but no less important,
also deserves continuous monitoring, such as: systemic risk, with respect to transactions in
other currencies, liquidity, which is related to the ability the institution has to repay its
commitments, and the image or reputation, referring to the agency's credibility in the market.
A private bank should consider whether certain segment to be fostered really bring profitability,
which defaults it might present, how much to spend to make the distribution of its products, if
the products are good or not. For the public bank, in addition to ensuring credit lines for the
lower classes, their products must include strategies that result in prospects for socio-economic
development. A major problem is to define which sectors or localities, financed in what
conditions, and with what intensity and sustainability, bring appropriate responses facing up
challenges and expectations of development.
For SDA, the goal is to combine, harmonically, the institutional mission of economic and social
development with the corporate sustainability of each project. Agencies can’t stop daring to
support innovative projects, carrying higher credit risk than traditional enterprises, which are
dominated technologically.
Normally, the flow of approval of a financing petition in SDA passes through the instances of
Framework, Risk Analysis, Operational Analysis, Legal Analysis and Release / Contracts.
Following the financial granting, there is one more instance, which is the Monitoring, or
"aftermarket". This monitoring should be done periodically with the Central Bank in relation to
the forecasts of productive capacity, and the results obtained.
It is up to the agencies to gather sufficiently qualified staff to develop ingenious funding
formulas, and of greater complexity, suitable for large projects, and also ensure that simplicity
and transparency mechanisms are clear for small borrowers. Another concern is that the
incentive itself, to certain sectors or regions, may exceed the desired limit, resulting in
imbalances in relation to other municipalities or competitors, who are not fostered.
Thus, three directions are considered fundamental regarding the functionality of the SDA as a
strategic tool for public sector action, namely:(a) Generate new jobs, (b) stimulate new
technologies and innovative processes, and (c) Avoid imbalances in sectors and regions.
DISCUSSION OF RESULTS: POSSIBILITIES OF IMPROVEMENTS IN
THE SYSTEM
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Although the SDA have very diverse clients, even for the different economic vocations of
federal units where they work, one of its features is the fact that they are integrated into the
National System of Development, in conjunction with the Bank of Brazil, BNDES, Caixa
Econômica, FINEP, SEBRAE, BNB, Banco da Amazônia, BANDES, BRDE, Banpará,
BADESC, BDMG and Bansicredi. They are also associated with the Brazilian Association of
Development Finance Institutions - ABDE.
This network allows that successful experiences of an agency can be applied or adapted to the
others, and that the common requests and solutions are routed with greater institutional
strength.
To the extent that the SDA reinforce capital with new investments, they can depend less from
the revenues of financial applications, and approach in a better way to their actual targets. They
come from different origins, but with the same institutional framework, and are able to offer a
set of credit lines with innovations and opportunities for entrepreneurship, covering trade,
industry, tourism sector, animal husbandry and horticulture, micro-franchises, pacified
communities and municipalities in management difficulties, among others.
On the other hand, several advances have yet to be reached so that they can fully exercise their
goals:
1) The operating structure in most of the SDA is still insufficient to achieve, as desirable, a
wide range of productive sectors and municipalities. It is essential that they will have greater
capillarity - Networks - to perform in a less reactive way and be more proactive in addressing
the needs of entrepreneurs. The promotion activity should not be limited to the disclosure of
what already exists, what is already known by the business. It is advisable the development of
more prospective studies on business opportunities, from the markets and their potentialities;
2) The potential clientele of most SDA still doesn’t have the knowledge of the agencies’ work
and the products offered. It takes that these agencies improve dissemination strategies, through
road shows, participation in fairs, agreements with other entities that have physical units afar,
and through web portals with constantly updated information;
3) The Central Bank has a regulation that may be considered excessively bureaucratic when
dealing with SDA, so they should have a special treatment. As institutions that work with their
own resources, as transferors of state or federal fund resources, their nature is quite different
from commercial banks and, in some ways, the very development banks, which have different
size.
4) As they are relatively new, many SDA still don’t have their own staff, sufficiently qualified
to care, analysis and monitoring of the projects. Note that opportunist behaviors can and should
be avoided when their technicians are properly trained to identify inconsistencies in proposals
and fraud, such as money laundering. On the other hand, the availability of operating manuals
of operations and the constant dissemination of standard procedures allow transparency and
tranquility for technicians to work without suffering political or personal interference.
5)There are requirements from the SDA that are incompatible for a micro or small enterprise to
fulfill, as the balance sheets of the companies, the last twelve billings, and even consolidation of
balance sheets, which no small business has. It is noteworthy that the legislation frees the
MPE’s to have all these records. It is recommended to the SDA to be more aggressive in
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136
lending, recognizing the reality of markets and adopting the “asked balance” and asked other
similar practices.
CONCLUSIONS
The current notion of development has become complex and multidimensional. It reflects the
expansion of freedom to human achievement, comprising the quality of individual and
collective choices, which depend not only on income (wealth), but also on factors such as
education and access to health services, among others. So too is the activity of development
support, which implies training, dissemination, reducing bureaucracy, management tracking etc.
However, there is no doubt that the availability of resources and access to credit are essential
foundations, in any circumstances, for the breadth of choice, and the fuel to launch and to carry
on an enterprise, a cooperative or local clusters. In turn, all of these choices, if properly
directed, can represent a very important tool for the action of public policies.
The SDA did not come to function as competitors to the major retail banks, but in order to fill a
niche opportunity for entrepreneurs who do not work in the areas of greatest interest to those
banks. In this sense, they are able to cover a market failure, which is actually an intrinsic
characteristic of the very credit market, i.e., private banks to be selective in funding, refusing
pleas of activities, sectors or regions based on risk or low return. The larger gap is noted in
serving entrepreneurs and small towns of the interior, that usually are less able, regarding to the
formal and bureaucratic instruments for access to credit.
As an institutional tool to support the development of micro and small enterprises, the SDA do
not act alone. An entire institutional apparatus should be complementary to impose guidelines,
limits and standards, but also to orientate and facilitate their spectrum of operations. So that,
from the national and international organizations that attempt to meet the Basel Agreements, to
independent consultants, through the partners and / or cooperation agreements, there is a
governance structure that is made up and moves toward the effectiveness of this development
policy.
The New Institutional Economics enables us to understand that the quality of performance of
the State in respect of contracts and specification of property rights is crucially determined by
the nature of the institutions that comprise it. In this sense, what is expected of the SDA as
structures of public governance, in partnership with other public and private organizations alike,
is the reduction in transaction costs, in information asymmetry and in opportunistic behaviors,
which justifies their creation and support in relation to the state development banks, which
preceded them.
It is a task that requires precision, operational density, institutional visibility, qualification and
experience, and so it is still early for a general evaluation of the results of the model, even
because the SDA do not constitute an organizational monolith. They were created with different
structures and levels of capital, work with different customers and offer appropriate products
for each region or locality. Besides it, they entered timidly, under a specific juncture, and, since
then, both the conditions of the Brazilian economy as the conventions that influence public
policies have been changing.
During this period, the Development Agencies gained institutional strength, gradually adapting
their features to the socio-economic conditions of the states where they operate, and although
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137
improvements are necessary in several functional aspects, SDA consolidated themselves as
agents of relevance to the Brazilian social and economic development.
Now they are part of the rules of the game, and, as such, it is recommended that they are
known, analyzed in more details in each state, improved and properly utilized.
ENDNOTES
1.
In 2009, loans by BNDES contemplated large enterprises with 9.7% of
operations, which, however, accounted for 83% of the funds granted. In 2010, the
MSMEs in loan had only $ 45.6 billion (27%) of the total disbursements of R$ 168.4
billion. In 2011, the percentage of MSMEs to percentage of in loans stood at 29.9%.(O
Globo, 28/02/10, 06/07/11 and 17/06/12).
The Bank's loan portfolio reached R$ 362 billion in 2010. (Source: BNDES, O
2.
Globo, 22/03/11, p. 22)
3.
Leitão, M. Sinal de Alerta. O Globo, 22/03/13, p.24.
Available in www.bndes.gov.br Visit on 25/03/2013.
4.
5.
Chile (90%), South Korea (101%), Germany (107%), China (131%), USA (202
%), according to Central Bank and World Bank data (2011). The percentage of loans in
Brazil achieved its record, over 50% of GDP, with the impetus given to credit in 2012
and 2013, helped by falling interest rates.
6.
See text “Fostering Agencies - Institutional, Legal and Operational
Environments" by Paulo Antonio Ribeito, adapted from his dissertation entitled "A
Conceptual Proposal for Measurement and Management of Economic Income of
Development Agency of the State of Bahia." Professional Master Course in
Administration at Federal University of Bahia, 2004.
7.
See the article "Ten years of development,"by Luiz Alberto Petitinga, President
of the |Development Agency of the State of Bahia, in Revista Rumos, No. 259, p. 13
(September / October 2011).
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Petitinga, L. A. (2011); Dez anos de fomento. Revista Rumos, nº 259, pg. 13. Set./Out.
Ribeiro, P.A. (2004), Agencias de Fomento – Ambientes Institucional, Legal e Operacional.
Curso de Mestrado Profissional em Administração da UFBA
Sachs, I. (1986); Espaços, tempos e estratégias do desenvolvimento. São Paulo: Vértice
Sen, A. (2010) Desenvolvimento como Liberdade. São Paulo: Companhia das Letras
Yunus, M. (2008) O Banqueiro dos Pobres. (1a Edição). São Paulo: Editora Ática
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CROWDFUNDING: CHALLENGES AND ALTERNATIVES TO
FINANCING THE INNOVATIVE ENTREPRENEURSHIP IN
BRAZIL
Marco Nascimento
Policy Analyst for the Department of Innovation, Ministry of Health, Brazil, and Masters Candidate at the
Graduate Program in Public Policy, Strategy, and Development, Institute of Economics, UFRJ.
[email protected]
Emanoel Querette
MSc. in Public Policies for Science, Technology and Innovation and Doctoral Candidate at the Graduate Program
in Public Policy, Strategy, and Development, Institute of Economics, UFRJ. [email protected]
Abstract: Innovative SMEs commonly face strong difficulties in accessing financing, due to
their high risk profile, market failures and to the risk aversion of traditional financial
institutions, particularly aggravated in the Brazilian context, where Venture Capital and
entrepreneurship funding are even scarcer. Equity Crowdfunding, a recent development of
collaborative funding, might prove an alternative for financing such innovative projects, but
still raises some concerns and regulatory issues. In this work we go through a brief review of
the usual constraints in innovation financing, the origins of crowdfunding and in what areas it
has been used so far, as a way of introducing a reflection on the impact this practice can bring
to innovative sectors, particularly in Brazil.
Keywords: Innovation, Entrepreneurship, Financing, Crowdfunding, Venture Crowdfunding
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INTRODUCTION
The occurrence of innovative enterprises is what drives technical progress and induces
economic development (Schumpeter, 1939). However, nascent enterprises show a series of
handicaps when compared to larger firms. For instance, they have less working capital and net
worth, which renders them more vulnerable to illiquidity; they have less experience with
regulatory traits or competitive intelligence, resulting in more difficulties in accessing markets.
The successful growth of a company, more than mere scaling, is a consequence of an
evolutionary process of survival in a hostile environment, which involves deep changes in
production and management structures, especially in the way the business is financed (Penrose,
1959). Schumpeter defines capitalism as that kind of private property economy in which
innovations are carried out by means of borrowed money (1939).
On top of all the above, innovative enterprises, nonetheless, face a series of difficulties when it
comes to the external financing. Usually, innovative start-ups need high initial investments with
fixed costs and intellectual capital matched with low initial capital, resulting in increased
demand for external financing. The high risk of production and long periods of negative returns
until profiting begins (break-even) aggravate the need for external funding in the medium run.
Innovative products also face uncertainty of demand as a consequence of the very innovative
aspect of the product, which complicates the risk assessment by the traditional money lender.
Information asymmetry and uncertainty result in market failure by adverse selection, so that
banks and financial institutions will refrain from lending as a strategy of maximizing profits;
because the risk is so high, interests to clear the market would be too high, excluding lower-risk
borrowers. There is also the threat of moral hazard: Entrepreneurs, as highly self-motivated
individuals with a special interest in their projects can be understood by banks as being more
concerned with their own goals than in pecuniary returns, which may compromise payment
flows.
As a consequence, start-ups frequently reach for venture capital by means of equity sharing or a
share of revenues. This kind of financing is frequently associated with a high level of
entrepreneurship and innovation (e.g. Silicon Valley). Venture capital benefits the innovative
nascent enterprise, not only because it offers risk tolerant financing, but because it usually
provides mentoring and counseling. Since the innovative enterprise is marked by uncertainty,
commonly made worse by the entrepreneur's lack of experience, the expertise of the capitalist
and their direct involvement in the management—financial, at least—are means by which the
investment risk can be reduced.
The rate of entrepreneurship in Brazil is high, most of it out of working necessity. On the other
hand, the supporting infrastructure to entrepreneurship is very fragile, with low levels of
venture capital and severe funding shortage. A recent option of financing which may prove to
be beneficial to the Brazilian context is the Venture Crowdfunding. The Crowdfunding model
of financing is a collaborative way of funding projects, mainly of a creative nature, and
supported by technological platforms through the internet. The transformation of the consumer
profile associated with new technological tools resulted in new ways of financing, among which
crowdfunding is notable as fast growing occurrence. According to crowdsourcing.org, in 2012,
$2.7 billion was raised from this model, mostly in the USA, to finance over a million projects.
The Internet works as a way for those seeking finance to reach people interested in financing
their projects, in an easier and much cheaper manner. Additionally, the increasingly safer
options of money transfer through the web contribute to the safety of transactions. As a reward
for their investment in the projects, Crowdfunders may receive from just acknowledgement and
gratitude to as much as a share in the equity. This latter model, called Venture Crowdfunding, is
particularly interesting when it comes to funding start-up firms. In this work we evaluate the
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potentialities of this new model of financing and ponder how it can contribute to mitigate the
bottlenecks of credit attaining by innovative enterprises in Brazil.
CHALLENGES TO| FINANCE INOVATIVE ENTERPRISES
Surveys show accessing finance as the main factor of success and competitive bottleneck for
the innovative enterprises. A large portion of policies encouraging start-up ventures turn to the
direct financing of production or support mechanisms to access funds and other forms of
financing. The difficulty in financing the innovative endeavor is a result of its own
characteristics, together with the profile of the financial sector in most countries. The
innovative firm is marked by high risks and uncertainty, and intangible value, therefore,
difficult economic evaluation, making hard to assess risk and appropriate cost of capital by
financial institutions. It suffers from uncertainty of demand, which increases the risk of
production. Usually micro or small companies have no collaterals with which to secure their
loans. Also, banks and financial entities are particularly risk averse and have difficulty
assessing the potential for receiving back these loans. If interests were enough to balance
demand and supply of capital and clear the loan market, they probably would be so high as to
scare off many borrowers with much lower risk profile. This market failure leads to restriction
of credit by lenders as a strategy of profit maximization. In addition, another potential cause of
market failure is moral hazard, marked by misaligned interests between the entrepreneur and
the financier. Furthermore, the lack of qualification of managers of start-ups in dealing with
banks and financial instruments further complicates access to resources.
Joseph Schumpeter, during the period that later became known as Schumpeter Mark I,
considered the entrepreneur as the driving force of economic development. Recently, this view
has been revisited in a time of seeking to understand which mechanisms lead an economy to
incorporate the process of technological innovation to the point of occurring in a cyclical selfreinforcing way. This search is due to the realization of the importance of the entrepreneur for
contemporary economies. "Entrepreneurship is the main factor of economic development of a
country," is the conclusion of the international consortium of universities Global
Entrepreneurship Monitor (GEM, 2012).
It is difficult to overstate the importance of micro and small enterprises in economic and social
reality of Brazil. Responsible for over 60 per cent of jobs in the country, SMEs generate 20 per
cent of GDP and account for 99 per cent of the 6 million companies working in Brazil (GEM,
2012). This range of the economy has been the object of attention in Brazil and other countries
due to its capacity in absorbing labor and resistance to adverse moments. Although SMEs have
high mortality rates in the early years, the industry as a whole only increases in importance for
reasons such as social capillarity, the role of gateway for young people to the labor market or
employment of workers above 40 years of age. The relative importance of these segments has
grown consistently and the growth of its turnover exceeds the average of the Brazilian
economy.
The encouraging features of the segment, however, do not guarantee a safe path to the small
entrepreneur. Common in many countries, the difficulties SMEs typically face are object of
studies by academics who understand the dichotomy between the strategic importance of this
range of the economy and the restraints inherent to it. A recurring finding in these studies as a
major obstacle to the establishment of companies is obtaining credit. It is important to give the
exact dimension of the relevance of the flow of credit in the Schumpeterian theoretical
framework. The very definition of capitalism, according to Schumpeter, derives from the
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condition of innovating through the support of other people's investment. In his words,
capitalism is a form of private property economy in which innovation takes place by means of
borrowed money (1939).
Addressing Brazil in particular, Neri and Giovanini (2003) claimed that the credit market is
more targeted to the consumer than to the producer, to short than to long term, and reaches
more high than low income borrowers. While this scenario has been systematically tackled in
the last decade, the 2012 report of the Global Entrepreneurship Monitor (GEM, 2012) shows
the lack of financial support as a problem for entrepreneurship according to about 60 per cent of
respondents. Reasons given by entrepreneurs were: lack of collaterals; lack of documentation;
service bureaucracy difficulties; negative bank records in suppliers credit reporting; short
history in the financial system; and failure to meet the required guarantees. Banks accused the
lack of reliable information on the operational and financial status of small business - which
complicates assessments of credit risk - and the legal restrictions that prevent the private credit
information centrals to provide positive information on credit applicants.
Among the criticisms aforementioned there are some of the most common market failures, such
as information asymmetry and moral hazard, as well as the perception of the institutional
environment. These conditions, although they may improve significantly, tend to reach a certain
threshold, by the very nature of how the process of credit assignment in Brazil is established.
Because Brazil lacks a developed culture of venture capital, credit to the entrepreneur ends up
being dependent on large banks and the State itself. The responsibility lies with the State
especially if an initiative is innovative, which generally involves greater uncertainty of return.
Therefore, even though the situation regarding the supply of credit in Brazil is apparently
improving, there is still plenty of room for other forms of enabling the achievement of projects
to those individuals who depend solely on money to make them happen and that, for one reason
or another, do not fit in what is usually required of them to get it.
DIGITAL
TECHNOLOGIES,
COLLABORATIVE FUNDING
USER
ENGAGEMENT
AND
Digital technologies, particularly the Internet, has caused an important transformation to the
role of consumers and producers, impacting in the forms of organization of production,
resources, types and sources of innovation, business models, marketing strategies and
distribution of businesses in particularly those mediated by technology. Consumers now come
to play a variety of new roles in unusual positions of the innovative value chain. Be as
intermediaries, suppliers of ideas and innovation, co-producers and financiers, these roles
mediated by technology have a potential of disruption to the industry structure and the
competitive environment. In a broader perspective, digital technologies turn obsolete the very
idea of a value chain in which products flow from businesses to consumers - the concept behind
terms like "upstream" and "downstream". In the digital economy, ideas, models, products and
services often follow the reverse direction, from consumers to producers, and laterally among
consumers.
The digitalization of tools gives users a more active role in the process of co-design and
distribution of production. Users are not only co-producers, but also play an active role in
selecting, editing, re-combining and referencing digital production. Noteworthy is the fact that
these new technologies are widely and freely available. The importance of user innovation is
also increasing (VonHippel, 2005). In the innovation literature, the role of informed and
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143
specialized users in inspiring the generation of innovations or improvements to innovative
products and services is highlighted. This new conception of the role of user in innovation
contemplates their active participation as a source of innovative ideas and practices, rather than
as mere requirements to be met.
Figure 1. Impacts of Digital Technologies on User Engagement
Source: Pinder and Collins, 2010.
As the importance of user innovation for the development of new goods and services is
recognized, an explosion of inputs from consumers occurs, particularly in new electronic media
(e.g., the developments of Web 2.0), along with more technological innovations, such as in
open source software. Also, user innovation has very clear impacts on sectors that generate
content, such as digital games and services.
Digital tools for collaboration reduce entry barriers and amplify the ability of collective
creation. Examples, such as Wikipedia - in which voluntary and collective production of
millions of users results in a body of knowledge in volume much higher than the capabilities of
any editorial body and with validity close to (or almost) the Encyclopedia Britannica - fill with
pride the enthusiasts of digital collaboration. It may be the case that the motivation for these
collaborative efforts and results shall be reduced as they mature tools, however the potential of
these tools are noteworthy in the digital economy.
The basic assumption of the open source movement is the democratization of the tools as well
as the knowledge needed to carry out creative projects and the creation of value, which were
previously only performed by organizations in closed regimes of intellectual property. While
this open mode of production threatens the traditional one, due to its open and uniform access
to the tools and knowledge, it can also lead to a mass mediocrity, which would broaden the gap
in quality between traditional and institutionalized creation and collective mass creation. In this
perspective, an alternative to innovative organizations is to prepare to seize , embrace and
incorporate the creative inputs of users openly instead of trying to compete against the millions
(or billions) of users producing creative content in the world , much less ignoring them.
Among these new roles that users occupy in the value chain is the role of financier. The
collaborative funding model mediated by platforms on the Internet, called Crowdfunding,
presents itself as an innovative practice productive financing. Collaborative efforts, including
collaborative financing, are not a novel thing, however. The computer science has witnessed the
occurrence of collaborative efforts from the ARPANET system, gestated by the U.S.
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Department of Defense, but the FLOSS (Free, Libre and Open Source Software) movement
gave the real dimension of the importance of these models of project development. In the wake
of collaborations between software developers, many other forms of collaborative enterprises
flourished. The low cost and nearly instantaneous sharing of information become collaborative
work much simpler. With the opening of the commercial Internet were the uninterrupted growth
enterprises with very diverse participants, attracted by the chance to participate in something
new (Benkler, 2002) . The Internet has become a fertile ground for the exchange of creative
work with the spread of online forums, chat rooms and other platforms for building networked
knowledge. Exchanging information in a specific topic or receiving expert help became
commonplace, often among people far apart each other, taking gratitude and sense of belonging
as currency.
This collaborative culture, generated among software developer and consolidated by the
Internet has surpassed the contexts that led to its emergence. Gradually, the realization that an
open process is advantageous for the project development has taken open approaches to the
offline reality. Open design, a variation of open source hardware (which in turn is a natural
extension of the open source / free software movement) (Lawton, 2010), consists of the open
development of a product in which the exchange of information with the external environment
is inseparable from the project. The term crowdsourcing, consecrated by Wired magazine
(2006), encompasses most of these practices based on open content and collaborative
networking, be it creating a computer program, a bike or a chain of real-time information about
a specific event. It is within this framework of thought that the practice of crowdfunding is
entailed.
From its beginning, the possibility of financing projects collectively attracted sectors related to
what has been agreed to call the "creative economy”. Basically, the project is inscribed on a
website (platform) where it becomes part of a list of ideas in search of funds, along with details
of the proposal and the minimum amount to be achieved by contributions, the threshold pledge
system. Stakeholders contribute to the amount they wish in exchange for gifts,
acknowledgements or publicity (see Figure 2). Very diverse projects, ranging from software,
movies, books, concerts, to technological gadgets and even charitable initiatives were funded
by these lines, with high rates of success.
There are at least four basic models of crowdfunding (as depicted in Figure 3): Donation
Crowdfunding, Reward Crowdfunding, Lending Crowdfunding and Equity Crowdfunding. The
main difference is in the type of reward the funders get in exchange for their contributions,
which can vary from simply recognition and praise, to some form of gift, to a share in the
project revenues or equity of the company. This latter model has been noted as an interesting
alternative to financing small innovative ventures, sideways with more common venture capital
investments.
Since 2010 some initiatives began to appear soughing to bring the logic of crowdfunding to
investment in new businesses, especially - but not exclusively - start-ups in the information
technology industry. In November 2011, the Rushmore group successfully raised the sum of
one million pounds sterling with the participation of 143 investors who have acquired 10 per
cent of the company's equity. It was the largest amount ever achieved by a crowdfunding
platform so far and, of note, in a venture with non-technologic profile: it is a chain of pubs and
clubs in London. Such model first won enthusiasts in other European countries, such as Holland
and Germany, and then it came to the United States. The first American attempts, however, had
to be cancelled for lack of legal framework. The collaborative funding with equity participation
made it imperative to the State to intervene.
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Figure 2. The Crowdfunding process
Source: Collins, Baeck, and Westlake (2012).
In January 2011, the White House launched the Startup America Initiative, with the main
objective of increasing the success rate of new ventures (start-ups). Its guidelines included:
unlocking access to capital; connecting experienced entrepreneurs and newcomers; reducing
government barriers to entrepreneurship; accelerating technological innovation; and exploring
new market opportunities in health, alternative energy and education. In this context Jumpstart
Our Business Act (JOBS Act) was designed, which included the possibility of collaborative
funding based on equity participation.
Figure 3. Types of Crowdfunding
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Source: Collins, Baeck, and Westlake (2012).
Although the main target of the JOBS Act was innovative funding models, its deployment will
interfere directly with old established sectors of the economic system, carefully regulated as to
delicately balance the powerful interests of investors. Each move towards further deregulation
of the financial sector shall be accompanied by suspicions that open a loophole for
opportunistic behaviour. This pessimism is rooted in several concrete examples among which
the most striking is perhaps the relationship between the emergence of the possibility of
executives buy shares of their own companies in order to value them, the consequent weakness
that this activity generated in the production and financial system that ultimately resulted in the
financial crisis of 2008 (Lazonick , 2008).
The crowdfunding model of collaborative financing has several advantages to small innovative
enterprises. The most striking difference to traditional financing is that the provider of the
funding is also the consumer. In the traditional funding model, firms can get no more than
money. Some types of venture financing (such as seed capital and venture capital) may provide
mentoring and consultation to the entrepreneur, but the market uncertainty of demand remains.
In the crowdfunding model, the very consumers of the production (be it goods or services) are
willing to compromise their own money to the project, therefore assuring the demand for that
product. Also, along with money, in the crowdfunding model, entrepreneurs also benefit from
insights, knowledge, suggestions and comments; the fundraising process may serve as a market
pre-test, resulting in improvements to the design even before launching. The process also builds
up a network/ community of engaged users, who might act as advocates for the product and
even distribute and publicize it in their own social networks. In this sense, the crowdfunding
model allows the production to shift from a mass production model to suit the personal
production trend.
In a greater perspective, because crowdfunding reduces the number of people and steps in the
process of financing, and because it is mainly automated and supported by Information
Technology and the Internet, it can significantly reduce the transaction costs, being a much
cheaper way of financing start-ups. The traditional model of financing involves the
entrepreneur going to a bank or financial institution and filing a bid for funding, which will be
assessed by several workers in the institution in order to determine the risk and prospect of that
project. Overall this process will demand a greater time and use of human and material
resources (considering paperwork) than in the crowdfunding model. When financing a project
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through crowdfunding, the risk and success estimation will be performed by each of the
individual funders, whom are usually experts in the field and possess a personal commitment to
the issue in stake; the automated process reduces the use of resources and time and the usual
clause of “all or nothing” ensures that only the fully successful pledges will be granted.
OPPORTUNITIES AND CHALLENGES OF CROWDFUNDING FOR INNOVATIVE
FINANCING
Carlota Perez, while addressing the matter of innovation cycles in the paper “Finance and
technical change”, sustains that innovation is bound to happen specially in some sort of
circumstances, usually when overall perception about a technical paradigm shifts abruptly,
leading to a reckless, urgency fueled financial behavior. If equity crowdfunding comes to be at
least a fragment of what most advocates believe it can be, it would mean a significant increase
in the number of ideas being proposed, which should mean a proportional increase in the
number of successful endeavors as well an equally larger number of failures. One can
understand that this widespread will to try— with enough money to back each attempt—is
what Perez was talking about as an adequate environment for innovations to thrive, perhaps
leading to a change in paradigm.
There are no definitive answers when the subject is the economy and it is up to the public
policymaker to choose a set of tradeoffs that seems satisfactory. Perhaps the proposed formula
does not reach the most appropriate trade off, but either way, there is always the underlying
question that there is a conflict between how easy it should be for one to be able to raise funds
for new businesses and the amount of restrictions created with the objective to prevent
opportunistic behavior.
Even though state intervention can be discussed as to how and to what extent it should occur, it
is hard to imagine that development model being consolidated without some contribution from
the state. This can be a complicating factor because crowdfunding is imbued with a certain
spirit of independence and absence of intermediaries.
There are enough components for a wide-ranging discussion, covering the perception of the
state by society and the possibility of accusing collaborative initiatives (or solidarity) of being
vehicles of a liberal bias, averse to the participation of the state, even though this may represent
a significant increase in efficiency of the transactions in question.
A country that has introduced crowdfunding—though in its original, non-equity sharing
version—as a public policy is New Zealand, where the government launched, in 2012, a
platform for collaborative financing of cultural projects called Boosted [ www.boosted.org.nz ].
The institution's website describes its operation as follows:
"BE A BOOSTED DONOR - Do you have the capacity to give $5? You're gold! Do
you have the capacity to give $500? You're gold too! Whether you are an individual, a
business, a group or an organisation, you'll be participating in the arts as contributor to
the creative process. In most cases, donors can claim a 33% tax credit. Give $100, get
$33 back. You may be interested in reading the fine print about tax and Boosted. You
can explore the projects listed on Boosted and be involved by making a donation.
BE A BOOSTED ADVOCATE - DO YOU GIVE ADVICE ON ARTS FUNDING?
If you do, you're well placed to help. You'll enable others to discover what Boosted has
to offer and you'll assist arts projects in creating successful crowdfunding campaigns. Of
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course, we'll give you all the tools you need to do this from Boosted Guidelines to
Boosted workshops for yourself and your arts community. Contact us for more
information. We'll even profile you or your organisation on our website in celebration
of your support as a Boosted Advocate.
BE A BOOSTED ADVISOR - DO YOU HAVE A GREAT SKILL YOU'D LIKE
TO LEND TO, OR TALK ABOUT WITH, THE BOOSTED COMMUNITY?
If so, our artists, our donors and our little team of Boosted staff will welcome your
contribution. Let us know how your can be involved. Perhaps you're a social media
guru, a techy genius, a tax specialist, a loan shark (kidding), an excellent educator, a
project developer, a fund-raiser, a communications/PR professional or a journalist, or
perhaps you're media savvy… as a Boosted Advisor it's your skills we'll appreciate and
your desire to empower others that we'll love."1
The site therefore offers a kind of reward that only the state can guarantee, through tax breaks,
without compromising the disinterested character of collaborations.
Critics estimate that the main problem with this mechanism is the difficulty of controlling the
kind of project approved in the platform. Depending on the orientation of the cultural policy in
effect this could be more or less severe. You can add to this potential barrier the possibility of
opportunism by project submitters, who could demand budgets including the portion guaranteed
by the government unreasonably. Other problems less predictable will probably arise, which
will require adaptability of the system while operational. But this will hardly invalidate the
effort.
From a strictly economic point of view there are some reasons why equity crowdfunding
deserves to be investigated. Small businesses often have difficulty accessing credit for lower
ability to offer collateral and the high risk usually associated with that scale of ventures. The
entrepreneur himself, as well as his friends and relatives are often the sources of funds that the
fledgling company has access (love money). This restricts the entrepreneur activity to the more
affluent classes, which have enough to invest a considerable sum on something without a
guaranteed return. It is therefore a social limitation of the entrepreneurial practice. Even in
countries where venture capital is more developed, typical investors of innovative businesses
are giving preference to more structured initiatives (BVCA, 2011). Furthermore, angels and
venture capitalists tend to seek opportunities for high risk and high return and will not usually
settle with the pulverized smaller return and low decision-making power that fits the
crowdfunding investor.
Information asymmetry is widely touted as another factor complicating the access to credit by
companies of lesser stature. Funding institutions indicate a prevalence of disorganization by the
new companies in relation to financial records and their ability to communicate them. This
information opacity decreases your chances of credit approval and amounts transferred by the
lack of mutual trust (Morais, 2006). The responsibility of checking the data of the applicant,
which is conventionally up to the institution being required to lend the money, is shared in the
case of crowdfunding by the number of participants willing to invest in the project. It is a direct
manifestation of the collaborative nature of the practice. Moreover, the interest of the
participants for the success of the enterprise drives them closer to the entrepreneur, contributing
with expertise or best practices, increasing the social relationship between them. It is also
common that investors will become the first generation of clients of the new service or product
being proposed, which adds another layer of commitment between investors and entrepreneurs.
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The type of equity crowdfunding is strictly dependent on the institutional environment of the
country in which one intends to use it. Indeed, it has been commom to the platforms arise
designed to soon have their services interrupted by the lack of a legal framework to understand
and regulate the activity adequately. The alternative so far has been the legal apparatus set up
by the company so that it conforms to existing legislation. This the case of the world equity
crowdfunding pioneer platform, Crowdcube, from the UK. EuSócio, a Brazilian initiative
associated with Crowdcube, followed the path of the British sister and has been fulfilling a
tortuous effort to fit in the gaps which the Brazilian Securities Commission (CVM) left to be
legally viable.
In a distinct dynamics, the U.S. government stopped all initiatives in the field of collaborative
funding with equity participation until the Securities and Exchange Commission concludes a
study at first 270 days, a period that was extended several times. More than 300 days after the
counting started, the Act was only partially approved, which is a good indication of the
complexity that exists behind the implementation of this act, even with broad support from both
American parties.
CONCLUDING REMARKS
The establishment of a technical-scientific paradigm is accompanied by deep social roots,
which is reflected not only in the productive logic, but infiltrates even the way of life. This
embedding brings a number of externalities that eventually lead to other innovations to conform
in order to be, from their beginning, compatible to the current paradigm. In these cases the
externalities act as inclusion factors. There is an abundance of novelties resulting from the
easiness of accommodating to a paradigm which is sufficiently new and, at the same time,
consolidated, and often leading to extraordinary profits. Products with conflicting technologies
end up on the sidelines, in which case the externalities act as mechanisms of exclusion. With
the progression of technological trajectory, this paradigm begins to be restricted and the release
of products based on the same assumptions becomes increasingly difficult, by the natural
depletion of the possibilities associated with that paradigm.
It is no exaggeration to say that currently Equity Crowdfunding raises more questions than
answers. The most recurring concern is the institutional environment, i.e., the regulatory
framework of the country that welcomes the practice. This form of crowdfunding, after all,
resembles an Initial Public Offering (IPO) on a reduced scale. Opening a company to public
investment might be accompanied by the surveillance and watch of regulatory bodies, starting
with the selection of investors based, among other criteria, on the personal assets of individuals.
Many experts claim that a financial market regulation to allow the participation of nonaccredited investors, as would be necessary to allow the equity crowdfunding, would mean
exposing the system opportunistic behaviour and other forms of counterfeit.
From the policy and strategy standpoint, crowdfunding may be interpreted as a neoliberal tool,
in that it represents a reduction of state participation in making available alternatives for
obtaining credit, which are conventionally understood as state responsibility. Part of this
reasoning has been already applied in relation to microfinance, for example, by South Korean
economist Ha-Joon Chang (Cf. Bateman and Chang, 2009). It is therefore legitimate to ask
whether there is a developmental approach to collaborative funding. If we understand that this
model can be an important tool in facilitating the path of Brazilian entrepreneur, it is also
necessary to consider the profile of firm likely to resort to this type of initiative. Despite having
a clear appeal to technology-based enterprises, nothing prevents the model from being used by
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other more conventional ones. One must remember that most of the Brazilian entrepreneurs do
so out of necessity, rather than on an innovative drive. Opportunities arising from the
implementation of crowdfunding in Brazil may include the establishment of hybrid models with
a broader social appeal, driving citizen engagement, and resulting in stimulating
entrepreneurship through the support of a community. And if the predicted age of mass
customisation and personal manufacturing come to be, crowdfunding may be an effective way
of financing the kind of micro-businesses and entrepreneurs that will drive such movement.
ENDNOTES
1 Cf. Boosted, http://www.boosted.org.nz
REFERENCES
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Lazonick, W. (2011, April). The Innovative Enterprise and the Developmental State: Toward an
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Morais, J. M. (2006). Empresas de pequeno porte e as condições de acesso ao crédito: falhas de
mercado, inadequações legais e condicionantes macroeconômicos. IPEA. Texto para discussão,
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Giovanini, F. D. S., & Neri, M. C. (2003). Empresários nanicos, garantias e acesso a crédito.
Revista de Economia Contemporânea, 9, 643-669
Penrose, E. (2009).The Theory of the Growth of the Firm. Oxford: Oxford University Press.
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Pinder M., Collins, H.J. (2010) How will developments within digital technologies affect the
creative industries? Toulon: EUROMED Management
Schumpeter, Joseph A (1939). Business Cycles:A Theoretical, Historical and Statistical
Analysis of the Capitalist Process.New York: McGraw Hill
Von Hippel, E. (2005) Democratizing Innovation . Cambridge (MA): MIT Press.
WIRED (2006).
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archive/14.06/crowds.html 2006
of
crowdsourcing,
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Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
152
THE CROWDFUNDING TOOL AS
RESOURCES FOR THE THIRD SECTOR
A
SOURCE
OF
João Linhares
Graduated in Business Administration - UFC
Master degree in Business Administration (in course) – UECE
Commercial Pilot
Commander of ALPA - Aircraft Laboratory for Atmospheric Research UECE
e-mail: [email protected]
Alexandre Lopes
Graduated in IT - UECE
MBA Business Management – FGV
MBA Project Management – UNIFOR
Master degree in Business Administration (in course) – UECE
Sales Director at Grupo Fortes
e-mail: [email protected]
Abstract: The third sector began to be studied in Brazil under a scientific point of view
around the 90s. Since then, there has been a series of studies on the subject. Although there
the theme has been researched, there is still a lack of conceptual contributions focused on the
specificities of these organizations, especially with regard to the difficulty of raising funds for
its financial sustainability. The objective of this paper is, based on a documental literature and
field research, to discuss the tool of collective financing, crowdfunding, as an alternative for
supporting non-governmental organizations through social media. The main results show that
there are still few projects adapted to this new way of fundraising by the entities of social
character, but projections suggest a rapid growth upon divulgation of this concept as a feasible
way of raising funds for these causes.
Keywords: Third Sector, Fundraising, Social Media, Crowdfunding
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153
INTRODUCTION
With the arising of the third sector, civil society began to move towards its emancipation as a
political subject and social actor. As seen by Salamon (2003), those entities forming this
segment are non-profitable organizations with a well defined social objective, which is to
promote benefits to society through their work. They normally depend on financial resources
coming from private and government donations as well as human resources resulting from
voluntary work.
As shown in the Research of the Institutional Architecture of Support to the Organizations of
the Civil Society in Brazil, presented by the Getulio Vargas Foundation under the scope of 3D –
Dialogs, Rights and Democracy (MENDONÇA et al., 2003) the sources of resources in the socalled civil society organizations (OSC) have been declining internationally since the world
crisis of 2008 and the investment through government resources has been increasing below the
Brazilian GDP between the years 2002 and 2010.
According to the same research, the non-governmental organizations (NGOs) are performing a
strategic role in transforming society, this sector being today formed by more than 300,000
organizations, moving resources that reach more than 5% of the Brazilian GDP and generating
employment for about five million people.
Actually the financial sustainability appears as one of the biggest challenges faced by these
organizations in the social economy and the third sector; as verified by Tenorio (2010), "these
organizations, because of the difficulty of fundraising, face problems that threaten their survival
in a short term, affecting the execution of their goals."
Many prospects in the use of social media in the third sector provide for the improvement and
innovation in the forms of fundraising by these organizations, mainly in expanding the scope of
the project to be financed. The success of this relationship will depend on the connection
established with the donors, as occurs with a commercial business. According to Trussel and
Parsons (2004), the factors that may affect the donations received by non-governmental entities
are the information about the efficiency in allocating resources, financial stability, reputation of
the organization and the information available on the organization's mission and situation of the
beneficiaries.
In this sense, crowdfunding or collective financing presents itself as an innovative strategy,
integrated into social networks, which makes it possible to reach a large audience, thus
facilitating the dissemination of information of interest to the donor in order to invest more
safely. This practice has gained momentum in recent years from specialized sites that have
become platforms for funding of projects as varied as possible. The question then arises: How is
crowdfunding being used by third sector organizations as an alternative to fundraising?
In Brazil crowdfunding is an essentially new phenomenon and there are few studies on its use
and its connections with non-profitable entities. The object of this paper is to discuss the
collective financing tool crowdfunding as an alternative for promoting non-governmental
organizations through social media. For constructing the work, three major stages should be
covered:
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154
introduce the concept of the third sector and its development as a strategic agent of
social transformation in Brazil;
highlight the importance of raising funds for the financial sustainability of nongovernmental organizations;
analyze the concept of social networks and their interaction with the third sector through
crowdfunding.
The methodology applied in the development of the work was based on bibliographical
research from various authors as: Tenorio, Landim, Fernandes, Cardoso, among other
representatives of the anthropological, sociological and economic fields. To supplement the
information, was also used documentary research from nonscientific documents such as reports
of associations, reports and information obtained from the Internet.
LITERATURE REVIEW
In the theoretical referential work it was tried to outline a conceptual framework to support the
development of this research from three highlighted topics: a brief history of the third sector in
Brazil, the importance of raising funds for the financial sustainability of the third sector
organizations and also the social networks and their connection with crowdfunding.
The Third Sector
In Brazil, the classical concept of the third sector is established by Fernandes (1994), who
defines it as "a set of private initiatives with a public sense, being divided between formal
entities that operate under the law and non-formal entities that are not registered in any legal
instances”; as reminds Cardoso (1997), the insertion of the third sector as a means of a
revolution in traditional social roles, changes the way of thinking and acting in social reality
through a new model of behavior in the civil society.
When speaking of the third sector in Brazil, one should remember initially the importance of
volunteering in the country's history, as a civic attitude of solidarity and social consciousness.
Religious congregations and confraternities emerged in the eighteenth century, under the
influence of the Catholic Church, resulting in the consolidation of the philanthropic movement
(LANDIM, 2002). Starting from public policies of assistance to the needy, in 1935 Brazil
established its own law, the law of public utility, aiming at the so-called social welfare and
regulating the government's collaboration with philanthropic institutions.
Already in the 70s, even under the influence of the dictatorial system, there was an increased
demand for the improvement of social issues and the first NGOs arrive in the country, promoted
by European organizations in order to promote projects in the third world. In the 80s NGOs
begin to stand out as a sociological reality in organizational and participatory experiences of the
civil society (FERNANDES, 1994). These organizations have a sort of co-responsibility with
the state to fill spaces that are not assisted by this state, characterizing an advancement of the
participation of civil society to solve public problems, thus helping to consolidate democracy
and citizenship in the country.
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155
Currently, according to research conducted by the Brazilian Institute of Geography and
Statistics (IBGE, 2012), the so-called private foundations and non-profit associations (FASFIL)
represent 5.2% of the total of public and private entities existing in the whole country,
employing 4.9% of Brazilian workers. The research demonstrates the value of these institutions
not only in acting in the social field but also within the Brazilian economy.
Thus, the third sector is considered as being formed by non-profit entities, usually dependent on
donations, composed by voluntary and professional work, with a well defined purpose which is
to promote benefits to society, helping in this way to consolidate democracy and citizenship in
the country.
The importance of fundraising for the financial sustainability of Third Sector
organizations
Non-governmental organizations (NGOs), in general, have a philanthropic identity, being
therefore non-profitable, but that does not mean they do not need financial resources. In
mercantile societies money is an end, while in these associations it is a means, "an instrument
for achieving the real goals of the entities" (Camargo, 2001).
So it is observed that NGOs are not maintained only with good intentions, but need a great
effort as fundraising and mobilization of resources for their survival. It is perceived a great
complexity for managing these organizations given their particular characteristic of not
obtaining profit. According to Fernandes (1994), these organizations "aim at the production of
public goods and services with dual qualifications: they do not generate profits and meet the
collective needs". Thus it is observed that there are costs and that resources are scarce, therefore
it is necessary to create strategies for opportunities, varying the forms and the sources for
collecting these resources.
Several entities, in view of the programs offered, seek partnership with the government in as
much as in practice these organizations are intended to reduce the state apparatus through the
“transformation of these public entities into social organizations and the transfer of public
functions to private institutions” (CAMPOS, 1999).
The State is both a direct and indirect source of funds for the organizations. It is direct due to
what is celebrated through contracts, partnership agreements, management agreements or grant
aid, contributions and grants. On the other hand the public authorities in an indirect way,
through the granting of benefits and incentives of tax order (immunities, exemptions and
incentives), promotes the activities of these institutions.
The use of this model via State worsens because there is a need for presentation of projects to
ensure the resource. At this point, there is a problem in the capacitation of people, as Falconer
(1999) states:
there is a virtual consensus among scholars and people involved in the daily activities of the
non-profit organizations that, in Brazil, the deficiency in the management of these
organizations is one of the biggest problems of the sector, and that the improvement of the
management - through learning and the application of techniques derived from the
management area - is a necessary way to achieve better results.
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156
With the emergence of the concept of social responsibility, private companies began to
establish partnerships with NGOs, in order to facilitate their social investments and to
demonstrate socially responsible actions towards society. This aspect is emphasized by Auler
(2001), stating that:
the notions of social responsibility were penetrating the market by consumer pressure.
Meanwhile, companies have found that the association of the image of social responsibility,
printed on their balance sheets or in campaigns of conservation and solidarity, result in a
very positive image.
All these sources of funding for social organizations presented here are accompanied by a
massive apparatus of difficulties, such as bureaucracy found in their cases, the delay in project
analysis and difficulty for the release of funds. So these entities are increasingly seeking
donations from individuals as a source of funding. This type of donation is an irreversible
transfer of money or property on behalf of the institution and may be favored or not by tax
incentives. It's the prospect of a new way of funding these grants that this article intends to
analyze.
Social networks and crowdfunding
The use of social networks is increasingly present in the daily lives of people and
organizations. Social media have changed the way of organizing demonstrations, disseminate
information and promote social projects. As Recuero (2011):
social networks have become the new media, upon which information circulates, is filtered,
passed on and connected to the conversation, which is debated, discussed and thus create
the possibility of new forms of social organization based on the interests of the collectivity.
The intense interaction between subjects favors the dissemination of social causes and the
engagement of people with no history of previous contacts among them. As noted by Hall
(2006):
cultural flows between nations, and global consumerism creates possibility of “shared
identities” such as `consumers' for the same goods, 'customers' for the same services,
`public` to the same messages and images among people who are far apart in space and
time.
It is also observed that small actions of users of these networks have mobilized many people,
among which one of the founders of Facebook, Chris Hughes, to develop a social network
completely dedicated to humanitarian causes. Named Jumo, it was released last November
and now has over 60,000 registered users. The initiative will open space for promotion and
financial support on everything that is related to the third sector.
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157
In Brazil, social networks are also a reality and can be well exploited in this regard. A research
published online in the site of IBOPE (IBOPE, 2013) indicates that there is today more than
53.5 million active users of the internet in the country. Of these, about 86% participate in some
network. From these data it is evident the potential integration of these media in terms of access
to the individual sources of funding.
According to D3 - Dialogue, Rights and Democracy of the FGV (Mendonça et al., 2003), a
survey based on data of the PQF - Household Budget Survey of IBGE from 2003 to 2009 and
preliminary data from the 2010 census, shows that in Brazil there are 17 million donors. This
means, 9% of its population. The average monthly amount donated would be R$ 21 for women
and R$ 31 for men, available resources totaling R$5.2 billion/year that could be spent on nongovernmental organizations.
Then comes the figure of crowdfunding which is nothing more than a collaborative funding that
is, in very Brazilian, terms, a virtual “kitty” that from social networks seeks for investors who
want to identify and collaborate with its project or its cause. Currently this type of
collaborative funding has revolutionized the digital world and more and more new websites
appear in order to make possible the projects presented.
The Crowdfunding sites make use of collaboration among its users, emerge from social
networks through associative bonds, where the bond interaction between its components is
"overcome by the desire to belong to a group formed by identification" (Recuero, 2011) In this
case, what keeps this community is the cohesive financial collaboration for the same goal.
In the United States the Kickstarter website, launched in 2009, collected in 2010 the amount
of $35 million from a group of 400 thousand internet users, benefiting a total of 14,000
projects. In Brazil, as observed in Table 1, the main websites of the country still have a
modest participation in terms of donors and amounts donated compared to Kickstarter. There
is then a wide gap in the use of this means of storage and an opportunity for non-governmental
organizations in adapting projects for this fundraising format.
METHODOLOGY
For the classification of this research we used the criteria described by Vergara (2009). Thus the
research can be classified as bibliographic, documentary and of qualitative nature. After reading
and analyzing literature found, the theoretical framework on the subject was built up; this initial
phase comprises an extensive study which "uses essentially the contributions of several authors
on a given subject" (Gil, 2008). Then began the document collection stage; we used secondary
sources such as NGO web pages and sites of collective financing. The following Brazilian sites
were analyzed: Catharsis, juntos.com.vc, Começaki, Let's and Impulse. This material was used
to cover the limitation of scientific papers on the subject.
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To finalize the process of collecting data for the study, it was also utilized the field research
through the systematic observation and the interview carried out. The systematic observation
occurred during the application of interviews, carried out by the researchers themselves with
representatives of 22 NGOs participating in a course for fundraising, for the third factor,
conducted by Dialogue Social Events in the city of São Paulo in July 2012.
The interviews carried out sought to know the strategies, or even their absence for NGOs
fundraising as one of these strategies from questions like:
which are the entity´s main sources for fundraising?
does your organization collect resources in a systematic way?
is there any innovative strategy in the fundraising process?
the organization has a specific professional for the fundraising sector?
the entity utilizes the social networks as a way of communication with the
society?
is crowdfunding already known by the institution?
While getting a sample with few subjects of investigation, it is worth noting the different
characteristics of these entities, such as: Institutes, Foundations and associations, representing
different regions of the country: Arco Verde (PE), Bauru (SP), Belo Horizonte (MG), Fortaleza
(CE), among others.
Finally systematization was obtained with the analysis of data interpretation, aiming at
organizing and synthesizing this information in a way so as to enable the supply of replies to
the problem proposed in the investigation. Based on data interpretation, it was tried to
determine the trends that could introduce a greater reflection on the utility of crowdfunding in
social projects.
The social networks, according to the crowdfunding sites, are becoming an efficient
communication channel for the non-profit organizations to raise awareness of its users and for
the support to their causes. Being free, easy to use and with an immense potential for
engagement, these digital media show a great receptivity to the social projects in the internet
and begin tentatively to be used as a source of financing through crowdfunding.
It is a constant opinion among the managers of the organizations researched that there is a
reduction of the sources of international financing to the NGOs being increasingly more
expensive and restricted with regard to public resources. Those entities that have already used
crowdfunding obtained, in the majority, good results and started to believe that this tool may
break this paradigm of dependence on these traditional sources of social financing starting from
a new channel of collecting resources, efficient in its essence, autonomous, free and nonbureaucratic.
The dynamic operation of crowdfunding starts with sending a project to a site that functions as
a platform of dissemination and collection. It is then created a specific page through which
visitors can learn and publicize the proposal, make their contributions, interact with the
project´s owner, besides checking the collection in real time. Some sites like Catharsis and Let's
make use of rewards which should be products, services or even symbolic benefits able to
create even more warmth and involvement with the cause submitted.
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Although crowdfunding is presented as a simple and practical option for NGOs, many
platforms surveyed make clear that it is a powerful tool but it needs a lot of dedication in
planning and dissemination of proposals. Not enough to cause positive impact that the project is
a success, but still needs to be relevant, viable and able to mobilize many people. This fact is
shown in Table 2, where 30% of projects do not reach their goals.
Another feature found in most of these financing platforms is that the amount to be collected is
published in advance. If at the deadline of the campaign, 100% or more of the requested value
is achieved, the project owner receives the money and delivers the rewards. Otherwise the
values are reversed to contributors and the rewards are not delivered. There are even proposals
that do not require rewards and do not return the money to the contributors if the goal is not
reached, all within the planning and the transparency under which the project is presented.
It is also observed that these campaigns, when planned by organizations of a social nature, go
beyond the collective financing, as is made clear in the site juntos.com.você, and may also
include non-financial applications, converting the collective enthusiasm generated by its
proposal in collaboration to other demands that the project presents such as volunteer service,
forwarding of materials, etc.
Many sites of collective financing are emerging in Brazil. In this article was analyzed, among
others, the Juntos.com.vc which is a virtual platform for mobilizing collective financial
donations coming from individuals for the organizations of the third sector. juntos.com.vc itself
is a non-profit organization that aims to encourage and stimulate the culture of donations in
Brazil and to give visibility of the organizations of this sector. The platform currently is
successful in about 52% of the proposals submitted. Table 3 shows some projects, that while
their values were not very high, all of them were able to achieve over 100% of the planned
target.
This whole collection was achieved through crowdfunding. In addition to the funds raised,
these entities now also enjoy many indirect benefits from the disclosure of their cause on social
media, bringing a level of visibility never before reached.
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160
FINAL CONSIDERATIONS
In the correlation established between the theoretical referential and the results of the field
research, it can be seen that with the increasing expansion of social projects and recognized
shortage of traditional sources of financing, profound changes are taking place in the
management of NGOs. The amateurism sustained only by idealism of their leaders, has been
left out and the management of these entities is changing substantially with the increasingly use
of instruments and procedures ever closer to the methods used by private companies. The
creation of new funding strategies and the professionalization of their management is a priority
in more than 50% of the organizations surveyed.
It is known that private companies have been using with great results social networks, which
reach a huge range of public, allowing the expansion of their business and strengthening their
brands. The same was not happening with NGOs as research shows (only 40% of organizations
systematically used social media, 30% knew about crowdfunding and only about 10% had used
this tool as a source of funding). However, there was a strong tendency to change, because
these entities have begun to realize that they were wasting time and opportunities, besides the
opportunity to financially strengthen their box, and institutionally their name and mission.
As can be seen, crowdfunding is still little explored by social organizations in Brazil, but at the
same time, it is not something that is light years away (all the organizations participating in the
research field showed great curiosity about the subject, showing interest in their use in the near
future), and then becoming in the short and medium term a revolution in the system of funding
for these institutions.
Thus, according to the results obtained by the NGOs that used this new tool fundraising and
good prospects found in collective financing platforms, crowdfunding appears as an alternative
way to finance third sector entities, from a new logic of production and realization, with means
and elements that form a new arrangement with important features such as the innovation that
this feature brings to society, the reduction of intermediates for the approval of projects, not
using public funds for the financial sustainability of NGOs, increased creative capacity of
people and organizations, besides the possibility of engagement, allowing dialogue and
exchange within the community.
As a perspective for future researches, it is suggested a more extensive and continuous
observation, both qualitatively and quantitatively of the platforms that serve as intermediate in
the collection of such resources, as well as of the beneficiary entities themselves starting from
the results reached.
BIBLIOGRAPHY
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A., & Reinach, S. (2003). Pesquisa arquitetura institucional de apoio às organizações da
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Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
162
FINANCING
INNOVATION
IN
BRAZIL:
ACHIEVEMENTS AND FUTURE CHALLENGES
RECENT
Daniel Silveira Barreto
Master Student in Economics and Finance from Ibmec-RJ; Production Engineer from Universidade Federal
Fluminense, Industrial Area Manager of Banco Nacional de Desenvolvimento Econômico Social – BNDES.
Address: Av. Chile, 100, Centro, Rio de Janeiro, RJ, Brasil. Phone: +55 (21) 9756-0195. Email:
[email protected].
Luiz de Magalhães Ozório
b
PhD in Economics Electricity Sector by IE/UFRJ; PhD in Finance from PUC-Rio; Master in Production
Engineering from Coppe/UFRJ; MBA in Finance; Ibmec-RJ Professor and business consultant. Address: Av.
Presidente Wilson, 118, Centro, Rio de Janeiro, RJ, Brasil. Phone: +55 (21) 9923-1747. Email:
[email protected].
Abstract: This article discusses some of the financing mechanisms for innovation created
recently by the Brazilian Government, in particular those with participation of BNDES and
FINEP. Brazil, despite having redirected its Science and Technology Policy in the late 90´s and
reformulated its funding mechanisms inspired in OECD countries, did not achieve satisfactory
results, as shown in this study. Investments in innovation are still shy, with little participation of
the private sector. In recent years, the Brazilian Government has been developing a series of
initiatives to broaden and make more effective its participation in financing innovation, as well
as stimulate private investment and the link between the players of its National Innovation
System. It may be observed that these initiatives seek to fill existing gaps and seem to consider
some successful characteristics of foreign mechanisms, seeking a greater alignment with the
interests of the market, greater focus on small and medium-sized companies, and the unification
of efforts among government agencies. Some improvements, however, still seem to be relevant,
not only in the financing mechanisms, but also when tackling larger country issues.
Keywords: BNDES, financing, FINEP, innovation, R&D.
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INTRODUCTION
The fierceness of competition and the reduction of the life-cycle of products put innovation in
the companies’ agenda. The increasing interactivity and recent technological advances boosted
this process even further.
In this way, the constant release of new products and implementation of efficient processes
became mandatory for firms maintain and conquer market, by obtaining competitive advantages
such as differentiation, cost reduction and increase in productivity. The knowledge shall be
regarded as a new factor of production, necessary for a country’s development.
According to OECD (1997), the innovation is being understood not only by the stage of
research and development (R&D), but for all the steps needed to introduce a new product,
service or process on the market. It covers scientific, technological, organisational, financial
and commercial activities.
The importance of the systemic vision of innovation arises from the 80’s, based on the neoschumpeterian ideas, and gradually came to be used as the basis for the formulation of public
policies.
The linear vision of innovation and the dichotomy of that or it was afforded by the advancement
of scientific development (science push) or by the pressures of demand (demand pull) was left
aside. In addition to the emphasis on scientific and technological institutions, the integration
and cooperation between the different actors (companies, academia, government agencies and
non-governmental organisations) are also valued. The interactive, simultaneous and cumulative
processes are paramount to the generation, acquisition and dissemination of knowledge
(LASTRES and CASSIOLATO, 2005).
In this way, it is necessary the existence of financing mechanisms to all stages of the innovative
process and players of the Innovation System (IS).
At the end of the 90’s, there was a major shift in the Brazilian Science and Technology Policy
(PCT). The Government actions approached the ones adopted by OECD countries, in particular
the Europeans’, and innovation was considered a priority. Since then, important initiatives have
been incorporated, such as the creation of sector funds, economic subvention regulations,
institutional changes and tax incentives.
However, despite the undeniable progress, innovation indicators show that Brazil is far behind
developed countries, in addition to been losing competitiveness compared to other emerging
markets. The country still underinvests in R&D and innovation, having low private sector
participation. There are few records of patents and a small amount of really innovative
companies, besides not having overcome the gap between academia and business.
Seeking to improve this situation, the Brazilian Government has been developing some new
actions directed to broaden and make more effective its participation in funding for innovation,
as well as stimulate private investment.
Besides this Introduction and the Conclusions, this paper has four other sections. Section 2
explains the objectives of the study. In section 3, it is presented a theoretical background about
innovation funding, considering the peculiarities of each step of the innovative process, besides
a historical overview of the Brazilian innovation policies and a brief global overview of the
investment scenario. The research methodology carried out is described in section 4. Finally,
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section 5 discusses the results, in which some of the recent actions of the Brazilian Government
directed to financing innovation are presented and compared to other countries’ initiatives,
pointing out challenges still to be faced.
OBJECTIVES
The main objective of this work is to analyse some of the financing mechanisms for innovation
created recently by the Brazilian Government, in particular those with participation of Brazilian
Development Bank (BNDES) and Brazilian Innovation Agency (FINEP), and compare them to
instruments from other countries. It proposed to identify how these initiatives intend to broaden
and make more effective the Government's participation in the financing to innovation, as well
as stimulate private investment. This study also intends to identify some challenges Brazil still
has to face.
THEORETICAL BACKGROUND
Public policies for science, technology and innovation in Brazil
According to Bagattolli (2008), the Brazilian PCT can be categorized into four generations.
The first would be the period beginning after World War II until the mid-60. The role of the
State had as main objective the development of science. Economic growth would result from an
efficient basic research, which would follow a linear trajectory, find a market application and
eventually result in the innovation and improvement of social conditions. It is therefore a
strategy of knowledge offer, in which it invested in human resources training and creation of
scientific and technological institutions. The CNPq (National Council for Scientific and
Technological Development) and Capes (Coordination for the Improvement of Higher
Education Personnel) were created during this period, as well as organisations related to R&D
in specific sectors, such as the CTA (Aeronautics Technical Centre) and the INPE (National
Institute for Space Research).
The second generation of Brazilian PCT appears in the identification of the lack of demand
from the business community to the science and technology (S&T) system, having the policy of
offer been shown to be insufficient. To complement it, other instruments are created with the
main focus on the promotion of University-Enterprise interaction, characterizing a “linking”
policy (Dagnino, Thomas & Davyt, 1996). In 1967, the Government founded the FINEP,
aiming to finance both the academia and R&D in companies. However, the main focus of the
institution at that time ended up being the funding to universities and research institutes, and
little was fostered in the business environment (Koeller, 2009).
From the beginning of the New Republic, in 1985, the PCT starts to be guided by the neoliberal
theories, in which companies innovate due to the exposure and competition with the
international market. The demand of the productive sector for the scientific-technological
environment would increase, being necessary to enhance the University-Enterprise interaction.
Public expenditures directed to innovation decreased, and the main role of the State became to
keep the economic stability. This third generation of Brazilian PCT extends until the end of the
first four-year term of President Fernando Henrique Cardoso (FHC). Bagattolli (2008)
concluded that, even after five decades of State planning in S&T, until then it was observed the
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maintenance of a reduced technological dynamics, despite notable advances in the development
of a scientific infrastructure.
At the end of the 90’s, at the beginning of the second four-year term of President FHC, there
has been a big change in the Brazilian PCT. The Government actions approached the ones
adopted by OECD countries, in particular Europeans. So innovation turned again to be
considered a priority and the importance of National Innovation Systems (NIS) was
highlighted. Public spending increased, with elevation of the budget of the Ministry of Science
and Technology (MCT) and their agencies, and the promotion of local companies’ innovation
activities was tried, through greater interaction with academia and the reduction of costs and
risks. The creation of sector funds stood out on that phase, aimed at encouraging cooperation
between academia and business segment for the investment in innovation. The main strategy of
the Federal Government was to create an environment favourable to innovation, clearing and
inducing innovation activities in the companies (Koeller, 2009).
The general guidelines of this new policy were not transformed with the change of Government
in 2003. The goals, targets and priorities were then explicit in the National Policy for Science,
Technology & Innovation, prepared by various ministries under the coordination of the
Ministry of Science, Technology and Innovation (MCTI). In the following year, in 2004, the
Industrial, Technological and Foreign Trade Policy (PITCE) was disclosed, which sought to
align the innovation policy to the industrial country agenda (Corder, 2006). In this step,
institutional changes and tax incentives were promoted, with great importance given to the “Lei
de Inovação” and “Lei do Bem”. Another initiative was the resumption of BNDES as inductor
to promote innovation.
With the launch of the Productive Development Policy (PDP) in 2008 and the “Brasil Maior
Plan” in 2011, the Brazilian Government focuses its industrial, technological, services and
foreign trade policy, stimulating innovation and national production in order to boost the
competitiveness of industry in the domestic and foreign markets.
Among the set of measures announced in the “Brasil Maior Plan” is the increase in resources
for innovation, tax relief for investments and exports, improvement of the innovation regulatory
framework, incentive to the growth of micro and small businesses, commercial defence
strengthening, creation of special regimes for value and technology adding in the productive
chains, and regulation of the law of government purchases to stimulate the production and
innovation in the country.
Koeller (2009) states that the innovation policy adopted by Brazil from 1995 to 2006, despite
having embedded in its theory the systemic vision of innovation, still does not incorporate this
vision, or incorporates in an incipient way. Another inadequacy pointed by the author is the
non-consideration of the context of underdevelopment of the country for the design and
implementation of its policy.
In fact, the importance of the NIS is highlighted by several authors.
According to Patel (1997), for the creation of public policies for innovation, it becomes very
important the understanding of country-specific characteristics that influence the innovative
process, such as the financial and educational systems, research institutes and factors related to
business competitiveness.
Pavitt and Patel (1999) state that even large corporations perform R&D at home and their
innovative activities are significantly influenced by their countries’ NIS.
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Freeman (1995) corroborates to it when he states that even with the increased
internationalisation of innovation activities, regional and national systems of innovation are still
essential, given the need for a collaborative and interactive environment for companies to
innovate.
Brief global overview of investments in innovation
The total investment in R&D in relation to GDP in Brazil is low if compared to developed
countries, besides it has been losing positions to some emerging markets.
U.S., Germany and Japan, countries with a tradition in technology generation, invest annually
around 3% of their respective GDPs. Other nations are increasing their spending in percentage
terms, as it is the case of South Korea and, most recently, China.
Table I: R&D investments 2000-2011 (as % of GDP)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Germany
Country
2.47
2.47
2.5
2.54
2.5
2.51
2.54
2.53
2.69
2.82
2.8
2.88
Brazil
1.02
1.04
0.98
0.96
0.9
0.97
1.01
1.1
1.11
1.17
1.16
1.21
C anada
1.91
2.09
2.04
2.04
2.07
2.04
2,00
1.96
1.92
1.94
1.85
1.74
0.9
0.95
1.07
1.13
1.23
1.32
1.39
1.4
1.47
1.7
1.76
1.84
1.85
2.06
2.1
2.05
2.13
2.19
2.16
2.36
2.64
2.2
2.05
2.23
2.3
2.47
2.4
2.49
2.68
2.79
3.01
3.21
3.36
3.56
3.74
4.03
Spain
0.91
0.92
0.99
1.05
1.06
1.12
1.2
1.27
1.35
1.39
1.39
1.33
USA
2.71
2.72
2.62
2.61
2.55
2.59
2.65
2.72
2.86
2.91
2.83
2.77
France
2.15
2.2
2.24
2.18
2.16
2.11
2.11
2.08
2.12
2.27
2.24
2.24
C hina
Singapore
South Korea
2011
India
0.81
0.84
0.81
0.8
0.79
0.84
0.88
0.87
0.88
-
-
-
Italy
1.04
1.08
1.12
1.1
1.09
1.09
1.13
1.17
1.21
1.26
1.26
1.25
Japan
3,00
3.07
3.12
3.14
3.13
3.31
3.41
3.46
3.47
3.36
3.25
3.39
Portugal
0.73
0.77
0.73
0.71
0.74
0.78
0.99
1.17
1.5
1.64
1.59
1.49
UK
1.82
1.79
1.8
1.75
1.69
1.72
1.74
1.77
1.78
1.84
1.8
1.77
Russia
1.05
1.18
1.25
1.29
1.15
1.07
1.07
1.12
1.04
1.25
1.13
1.09
Source: Ministry of Science, Technology and Innovation (MCTI)
In 2011, while Brazil spent US$ 27.6 billion in R&D, the U.S. performed US$ 415.2 billion,
China US$ 208.2 billion, Japan US$ 146.5 billion and Germany US$ 93.1 billion.
According to the World Intellectual Property Organization (WIPO), Brazil's participation in the
total amount of patent applications registered in the world was only 0.3%, in 2012. Among the
50 companies with largest amount of requests, no one is Brazilian. MCTI data indicate that
Brazil made 679 requests, overcoming, among the BRICs, only South Africa, with 318. China
made 13,273 requests, India 5,663 and Russia 888.
The Booz&Co (2012) examined the 1,000 publicly traded companies that had the greatest
expenses with R&D in 2011 in the world. The investment of Brazilian companies present in the
study grew from US$ 1.9 billion to US$ 3.7 billion, however, represented only 0.61% of total
expenses in the companies identified in the ranking. The best placed were Vale (81st position)
and Petrobras (92nd).
The study is also noteworthy because it has identified that the financial and innovative
performance of companies are more related to how the innovation strategy is performed –
which involves people, leadership and effectiveness – than to the amounts invested in R&D.
Apple appeared for the third time in a row as the most innovative company, having invested
only 2.2% of its net revenue in R&D. The most successful companies in innovation use well
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defined strategies, with strict controls and analysis throughout the process of creating ideas and
turning them into products. The results also show that SMEs are twice more effective in that
process, because their organisational issues are less complex and less bureaucratic.
Acemoglu (2013) ratifies the importance of SMEs when he shows in his study that in the
American market new firms are more innovative and productive, being responsible for most of
the sales growth, employment and spending on R&D. Therefore, the author argues that
industrial policies and subsidies should be focused on encouraging the development of these
firms, instead of older companies that, even with a history of innovation, tend to settle in over
time.
According to Pintec (2010), of 106.8 million Brazilian companies surveyed, only 38.6%
implemented some product and/or new or substantially improved process. If we consider only
the launch of new products in the domestic market, this percentage drops to 4.1% in the case of
industrial companies and 9.1% for service companies. Among the innovative industrial
companies, only 22.8% used at least one Brazilian Government support instrument. When
evaluating only large companies (over 500 employees), this percentage is higher (36.8%),
indicating to be the ones that can most access public resources.
Public and private investment in innovation
In Brazil it is verified that the leading role of private investment in R&D is low if compared to
other countries, representing just 0.55% of GDP.
Figure I - Private and government investments in R&D (as % of GDP)
1,00
South Korea (2011)
2,97
0,56
Japan (2011)
2,59
0,85
Germany (2010)
1,84
0,92
USA (2011)
0,40
China (2011)
0,57
UK (2011)
Government
1,36
0,67
Canada (2010)
1,66
Private
0,84
0,79
0,64
0,55
Brazil (2011)
Russia (2011)
0,30
0,00
0,50
0,73
1,00
1,50
2,00
2,50
3,00
3,50
Source: MCTI
This reduced participation can be explained in part by the current stage of development in
which Brazil is, indicating that the actions of the Government, either direct or indirectly, is
more essential.
According to Fonseca (2001), the higher the existence of a stable political, economic and legal
environment, the greater the incentive for investment in physical and human capital is in the
country, both from domestic and foreign companies, since they reduce the uncertainties in
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relation to the expected return. Brazil obtained recent macroeconomic advances as the fall in
inflation and interest rate reduction. However, there are recent uncertainties regarding the
maintenance of these achievements, as well as the country's capacity to implement the reforms
and investments needed in pursuit of growth sustainability.
Brazil, despite having a few universities and research centres of excellence, offers qualified
technical staff in insufficient number1, raising the cost of labour force. In addition, it has a poor
basic education system, further reducing the potential for new students to universities and
technical courses.
Furthermore, it is observed a low presence of researchers allocated in the business environment.
Besides representing less experts in the companies, it is an example of the lower link between
academia and corporations. According to MCTI, 73% of the Brazilian researchers work for the
Government, mainly in universities. This proportion is reversed in several countries. In the
U.S., Japan and South Korea, about 80% work in private companies.
Other inhibitor of private investment in innovation in Brazil seems to be its low trade openness.
According to the a survey of global trade trends by the International Chamber of Commerce,
Brazil is ranked as the 67th out of 75 countries for openness to trade, foreign direct investment
and infrastructure competitiveness. It is the lowest among the Group of 20. Trade openness
stimulates the competition and brings new ideas and technology for the companies (Fonseca,
2001).
In relation to OECD, it is interesting to note that, even in countries whose economic policies are
more averse to State intervention, measures that extend government support to R&D activities
have been adopted. Government expenditure in relation to GDP has been rising over the years
in some countries. In the US, it comes from 0.7% of GDP in 2000 through 0.92% in 2011, and
in Korea from 0.55% to 1.00%.
Guimarães (2006) points out as the main advantage of public financing for innovation activities
of companies the possibility of promoting public policies, inducing the R&D private effort to
areas considered priorities by the Government, in particular segments of the economy whose
private return is lower than the social, and investments are below the necessary.
According to Mazzucato (2013), the private entrepreneurship is not sufficient to ensure
innovation. Normally, it is the State that assumes the greatest risks and leverages the main
advances. The author mentions that 75% of the discoveries of new molecular entities approved
by the Food and Drug Administration between 1993 and 2004 were originated from research
financed by the U.S. Government, through the National Institutes of Health. Other examples
presented are the research of the search algorithm, which serves as the basis for Google, funded
by the U.S. National Science Foundation, as well as Apple, whose initial resources came from
grants.
The main mechanisms used by Governments to finance firms’ innovation activities are: nonreimbursable funding to universities, research centres and incubators, as well as directly to
companies; reimbursable financing on more favourable conditions; guarantees concession
assisting in obtaining bank loans; and equity participation, either directly or through venture
capital funds. Governments can still expand its interests through the granting of tax benefits that
reduce the tax burden levied on innovation activities. From 2000 to 2010, tax benefits
represented 55% of the amount of public financing for innovation in Brazil (Bastos, 2012).
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Another indirect form of incentive by Governments is through the sectorial regulation and the
public purchases, ensuring an initial demand for new products and processes developed, thus
mitigating commercial risks. This practice has been widely used over the past few decades, for
example, by the U.S., in particular in the sectors of Information and Communication
Technology, health and defence. Since 1933, the U.S. relies on the Buy American Act, which
regulated, for government purchases, the preference for products made in the country.
Recently, Brazil has been trying to expand the use of the State purchasing power. In the
pharmaceutical area, the Law 12.349/2010 provides for the preference, in public bidding, of
products developed and manufactured in the country. The goal is to promote and strengthen
healthcare companies that stand out in the development of innovation and technology in the
national territory. One of the mechanisms is the possibility of application of margins of
preferences of up to 25% for national products and services in relation to imported.
In the oil and gas sector, the Brazilian Government has used the high investments of Petrobras
as a way to leverage supply chain companies, through a policy of local content requirement in
bid rounds of the state-owned company.
In telecommunications, it is being tried to encourage national production chain through tax
relief conditioned to the purchase of equipment and components produced in the country, in
accordance with the Basic Productive Process (PPB)2 .
Characteristics of investments in innovation
According to Hall & Lerner (2009), investments in R&D have different characteristics from the
others. Most of the costs is related to payment of scientists, researchers and engineers,
generating an intangible asset that typically does not generate immediate profit. This tacit
knowledge is embedded in the human capital of the firm and may be lost in the event of
employee leave.
Another relevant aspect is the uncertainty associated with investments in innovation,
particularly at the beginning of a research programme or development project.
These peculiarities conduct to the requirement of higher rates of return for these projects and
give the investment a character of financial option, being difficult to evaluate it using traditional
statistical techniques.
This unpredictability of the return brings also other two problems: the asymmetric information
and moral hazard.
If the uncertainty is big for the entrepreneur himself, it is even greater for potential investors or
financiers, who will demand higher rates of return. The asymmetric information then cause a
difference between the cost of equity and debt required for such projects. The solution of this
problem does not seem simple, because firms avoid disclosing details of their ongoing
developments, fearful of imitation by competitors.
The moral hazard is due to the separation between ownership and management, common in the
structures of modern firms. Conflicts arise with the misalignment of interests of owners with
those of managers. These tend to prioritize activities that benefit them and that generate higher
profits in the short term, with consequent higher profit shares and bonuses. This behaviour
inhibits the decision for investments in R&D, due to their high risks and uncertain returns,
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typically in the long term. Shareholders, on the other hand, are also interested in the continuity
of the company.
Some academic studies show that companies which are intensive in R&D are less leveraged
than the others, and prioritize the use of own resources for investment in innovation.
In addition to the high cost of debt, another reason lies in the fact that investments in R&D
generate intangible assets, and these companies usually do not have physical assets sufficient to
offer as collateral for bank loans. Finally, for the payment of the debt, it is desirable that these
companies have a constant and predictable cash flow, which does not usually occur.
The empirical work of Hall (1992) and Himmelberg and Petersen (1994) show the importance
of a positive cash flow for investments in R&D, both in manufacturing firms as in small
technology companies, in the U.S.
In Brazil, according to Pintec (2010), 76% of the resources invested in R&D by companies
came from own resources, corroborated with the arguments presented. The remaining 24% are
third-party resources, being 19.4% from public sector and 4.6% from the private one.
Financing mechanisms for innovation
The financing mechanisms for innovation will be influenced by the phase in which the
company or the project is.
Figure II illustrates the typical cash flow throughout each of the financing stages presented. In
the seed and start-up phases the flow is negative, since the company does not obtain revenue
from the sales of the new business, but only investments and expenses incurred. In the
following stages, the flow tends to be positive. It is worth noting that despite the necessary
amount of resources is much higher in the last stages, the business risks are much smaller, and
traditional sources of funding can be obtained more easily (UNECE, 2009).
The founders, family or friends’ personal financial resources are important at the beginning of
life of innovative companies, but normally insufficient to cover all needs. Personal loans at
banks are not suitable, as there is a long time required for the company to begin to generate
cash. Finally, as already discussed, financing the new company via debt is practically
infeasible. As a result, the alternatives presented in the early stages are the non-reimbursable
financing and the search for foreign partners.
Non-reimbursable resources are normally granted by public bodies, in line with economic and
social objectives of a country. They are resources granted as non-repayable fund, often in the
form of “grants”, and used for the initial development of the concept and market research. As
there are usually strict criteria of selection of the initiatives to be benefited, this type of funding
can also be an important certification to the company subsequently seek private investors for its
business (Lerner, 1999).
In the case of entry of new partners, the risk becomes shared. Typical providers via equity
financing in the early stages are business angels (BAs) and the venture capital (VC) funds.
Figure II – Development Stages, Cash Flow and Sources of Finance
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Venture capital / Private equity funds
Source: United Nations Economic Commision for Europe (2009)
The BAs tend to be entrepreneurs with previous successful experiences. The amounts invested
are low, not exceeding US$ 500,000 in general. On VC funds, between US$ 1 million and 5
million are invested in each company, focusing on promising innovative or technology based
businesses. In a more mature phase, opportunities arise through the private equity (PE) funds,
which can contribute to restructuring, consolidation and/or business expansion. The amounts
invested are larger, typically above US$ 10 million per company.
Hall and Lerner (2009) highlight that one of the main benefits of the VC/PE funds for financing
the innovation is that they seek to minimise conflicts of interest that exist between investors and
directors of companies, reducing the asymmetric information. They try to address this issue by
performing a strict selection of the business to be invested, as well as making a constant
monitoring afterwards. In this way, aim to align the interests of the three parts: investors,
entrepreneurs and managers of the funds.
Finally, when the company is already established, traditional financing as bank loans and access
to capital markets become viable and attractive.
METHODOLOGY
To achieve the objectives proposed in this study, an exploratory research through
bibliographical survey and unstructured interviews was conducted.
Information available in publications such as books, thesis and articles of national and
international origin were sought in order to submit a review of relevant literature on the topic.
The main data on investment and financing mechanisms for innovation were collected in annual
reports, magazines and websites of major Government and private institutions, as well as
through interviews.
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In Brazil, this research had focused at BNDES and FINEP, since they are the institutions that
mainly finance innovation in the country, in addition to information of MCTI and the Ministry
of Development, Industry and Foreign Trade (MDIC).
Internationally, research in countries with tradition in technology generation, like the U.S., UK,
Germany, or that have recent visibility, like South Korea and Israel, were prioritised.
The most important interviews were conducted with executives from BNDES, being some of
them experts in innovation, belonging to different sectors of the institution: Planning Area,
responsible for the development of operational policies and financial instruments of the Bank;
Entrepreneur Capital Area, responsible, along with the Capital Markets Area, for BNDES
activity in shareholding through funds, debentures and direct participation; Industrial Area,
responsible for the financing of part of the Brazilian industry sectors.
Finally, it is worth noting that the present study did not focus on the governmental funding for
innovation through tax incentives, given that the main objective was to analyse the new funding
mechanisms that had the participation of BNDES and FINEP. However, the authors understand
the importance of tax benefits, and understand that the topic deserves specific studies for
improvement.
RESULTS AND DISCUSSION
In recent years, the Brazilian Government has been developing a series of initiatives to broaden
and make more effective their participation in financing innovation, as well as stimulate private
investment.
Some of these initiatives are presented below, in particular those with direct participation of
BNDES and FINEP, and it may be observed that they seek to fill existing gaps and seems to
consider some successful characteristics of foreign mechanisms.
Joint action between government agencies
The various instruments and Government incentives aimed at financing innovation in Brazil
indicate a need for greater coordination between the organs of Government, seeking to avoid
overlapping efforts and improve communication with the business community. According to
Pintec (2010), among companies that invest in innovation, a few access public resources.
FINEP points out that this fact may be due to the lack of knowledge of businessmen in relation
to the type of instrument best suits to meet their needs (Luna, Moreira and Gonçalves, 2008).
BNDES, according to interviews conducted for this study, corroborates with this vision, and
adds that some businessmen have the perception that it is very laborious and bureaucratic to
obtain public funding.
Imbued with this need, BNDES and FINEP sought a form of joint action through the BNDESFINEP Joint Plan to Support Industrial Technological Innovation of Sugar Energy and Sugar
chemical sectors – PAISS, released in 2011. The plan aimed to adopt a model of federal public
resources management for the technological development of the sectors mentioned, and
integrated financial instruments of support to innovation from BNDES and FINEP,
contemplating non-reimbursable and reimbursable resources and equity participation.
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In addition to avoid overlapping of public resources applications and create a single gateway to
businessmen, it was noticed that the coordinated efforts among Government, companies and
science and technological institutions (ICTs) around a central challenge leveraged cooperation
between companies and company-ICT. These relationships maximise the contact of firms with
no history of innovation projects with innovation and development institutions, attraction of
new players, acceleration of strategies, skill complementarities and eventually the creation of
new Brazilian companies.
In addition, the Plan makes the analysis of business plans, thereby changing the focus of
negotiation with the companies to give priority to the analysis of the strategy and, from it, to
define the most appropriate financial support instruments.
In 2012, BNDES and FINEP released INOVA PETRO, along the same lines of PAISS,
focusing on the development of Brazilian suppliers for the productive chain of the oil and
natural gas industry.
The success of PAISS and INOVA PETRO made the Federal Government launch in March
2013 the “Plano Inova Empresa” (Innovate Company Plan), expanding the scope and coverage
of previous plans. New strategic sectors were then considered: agriculture and cattle farming,
energy, health, aerospace and defence, technology information, and social and environmental
sustainability.
The following table summarises the BNDES-FINEP conjunction plans already released
and their current stages. It is noticed that the initial resources demand from the private sector
surpassed a lot the initial budget allocation.
Table
II:
BNDES-FINEP
Plano
conjunction
Inova
plans
Empresa
(Innovate
already
released
and
Public Tender
Total forecast
value (R$
billion)
Partnerships
PAISS
3
BNDES, Finep
Inova Petro
3
(in several
public
tenders)
R$ 10 bi
R$ 6 bi
R$ 3.1 bi
R$ 3.1 bi
38 companies
23 companies
16 companies
11 companies
62 projects
35 projects
25 projects
16 projects
R$ 850 mi
R$ 496 mi
R$ 354 mi
R$ 2.7 bi
3
127 companies
Medical Equipment
0.6
BNDES, Finep and 145 companies
MS
R$ 1.3 bi
74 companies
Biodrugs,
pharmacochemicals
and medicines
63 companies
26 companies
1.3
R$ 3.6 bi
R$ 3 bi
Inova Aerodefesa
2.9
Inova Agro
3
(in several
public
tenders)
Finep, MS and
CNPq
Plan)
stages
Public Tender Phases (August 19, 2013)
Companies
Submission of
Business Plan
Selection
Business Plan
Selection
39 companies
25 companies
25 companies
BNDES, Finep and 373 companies
ANEEL
R$ 12.3 bi
Inova Energia
Inova Saúde
BNDES, Finep and
Petrobras
Submission of
Interest
57 companies
Company
their
current
BNDES, Finep, MD 285 companies
and AEB
R$ 13 bi
R$ 9.8 bi
R$ 0.9 bi
69 companies
R$ 12.6 bi
until 29/aug/13
until 20/sep/13
until 05/sep/13
until 10/oct/13
370 companies
BNDES and Finep
Until 17/sep/13
R$ 5.7 bi
Note: Brazilian Electricity Regulatory Agency (ANEEL); Ministry of Health (MS); Ministry of Defense
(MS); Brazilian Space Agency (AEB); National Council for Scientific and Technological Development
(CNPq).
Source: Prepared by the authors bases on information of BNDES.
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174
Beyond the sectorial plans, the “Plano Inova Empresa” also contemplates transversal actions
such as investments in infrastructure for innovation. New instruments such as Embrapii and
Tecnova, to be detailed later in this article, are included in the Plan.
The Federal Government estimates that, in all, R$ 32.9 billion will be invested in innovation
projects, being R$ 28.5 billion directly from the Government (R$ 20.9 billion in credit, R$ 2.2
billion in variable income and R$ 5.4 billion in non-refundable, being R$ 1.2 billion via
economic subvention) and R$ 4.4 billion via partner institutions (R$ 2.5 billion of National
Petroleum, Natural Gas and Biofuels Agency (ANP), R$ 1.3 billion of Aneel and R$ 0.6 billion
of National Small Business Support Agency (Sebrae). This amount can still be raised with
National Telecommunications Agency's (Anatel) resources, R$ 3.54 billion, but still
conditioned to future regulation.
Increase of the governmental non-reimbursable resources
The main non-reimbursable fundings in Brazil are made by FINEP, through resources from the
National Fund for Scientific and Technological Development (FNDCT). Both cooperative
R&D projects between companies, universities and research institutions are covered, as well as
resources granted directly to companies through economic subvention.
BNDES, through the Technological Fund (FUNTEC), directs resources exclusively to
technological institutions or their supporting institutions, with companies as interveners, which
must invest at least 10% of the total investment of the project, as well as be committed to
facilitate the future marketing of the new product or process to be developed.
Figure
BNDES
III:
and
Disbursement
FINEP
of
–
non-reimbursable
2009-2012
resources
in
for
R$
innovation
millions
FINEP/FNDCT
2704
1780
–
1981
2058
23
40
41
100
2009
2010
2011
2012
BNDES - Funtec
Source: BNDES and FINEP (2013)
Seeking to raise non-reimbursable resources to innovation and increase the link between
academia and business, in 2012, MCTI, in partnership with the National Confederation of
Industry (CNI) and FINEP, created the Brazilian Research and Industrial Innovation Company
(Embrapii).
Embrapii aims to promote projects of cooperation between domestic companies and research
institutions to the development of new products and processes aligned to the interests of
industry, in particular projects in pre-competitive phase of the innovation process, in which the
risks are higher.
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175
The model seeks a greater institutional articulation between the public and private sectors and
foresees technical and economic risk sharing, being in line with the systemic concept of
approach to innovation. Part of investments will be made with government resources and part
by companies, in addition to the contribution of research institutions with the physical
infrastructure and human resources.
Embrapii was inspired by the experience of Brazilian Agricultural Research Corporation
(Embrapa), which researches are already consecrated including internationally. The main
difference is that the Embrapii will not possess an own research structure, but will use the
network of existing laboratories in the country.
The federal Government's contribution to Embrapii will be R$ 1 billion until 2014.
Another recent initiative of the Brazilian Government is Tecnova, launch by FINEP in 2012.
This programme will provide R$ 190 million in economic subvention resources directed to
technological innovation projects of micro and small companies (annual revenue up to R$ 3.6
million), through partners in the States of the Federation, besides R$ 19 million for support and
training. There will also be support of Sebrae, with supplementary resources of R$ 50 million.
Partners will be regional banks and funding agencies, and will be responsible for the
organisation and publication of public notice for companies’ selection in their respective States,
as well as for the approval and monitoring of projects.
The new initiatives seem to contemplate successful characteristics of the Government
programmes SBIR, from the U.S., and START, from Russia: decentralised actions; shared costs
between Government and industry; and focus on SMEs, minimizing the risk of crowding out.
Apple, Compaq and Intel are examples of companies considered in its origins by SBIR. Since
the beginning of the programme, 15,000 companies were benefited, with a total of US$ 21
billion in disbursements and 50,000 patents generated. Only in 2012, the SBIR provided US$
1.9 billion in financial support. The UNECE (2009) points out that one of the main factors of
success is the decentralization of the eligibility of projects to be considered, being this
responsibility divided between eleven federal agencies.
SBIR also has another important issue: a continuous evaluation of the effectiveness of its
resources’ application. Luna, Moreira and Gonçalves (2008) say that in the U.S. this monitoring
is done with large accuracy. The U.S Government controls not only the initial phases of the
project as well as the evolution of companies over time. Siegel (2003) concludes that this is one
of the main reasons for the success of SBIR. In Brazil, however, this practice is still incipient,
and should be implemented in its financial mechanisms.
Incentive for the creation and development of start-up companies
Seeking to promote the creation and development of start-ups as well making these companies
closer to potential business angels, MCTI launched in 2012 the Startup Brasil programme. Nine
private accelerator companies were chosen to house start-ups which will receive R$ 200,000
each in public funds, in addition to other support such as a collaborative space in Silicon
Valley, opened in August 2013. This environment will serve as a support for the new Brazilian
entrepreneurs to connect with investors and local companies.
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Startup Brasil total investment is on the order of US$ 40 million, aiming to boost 100 start-ups
per year until 2015. The accelerator companies will become partners of the investee companies.
This initiative resembles programmes recently launched by American and Chilean
Governments: the Startup America and Start-up Chile.
In an interview, one of BNDES managers argues that the advantage of Government support via
equity in relation to grants is that stimulates the complementation of the investment with the
private sector, primarily by start-up accelerators, and in following stages by business angels and
venture capital funds. In addition, the new companies may, from the beginning, receive
guidance from more experienced investors and management support. Jensen (1993) claims that
start-ups need a more active financial performance monitoring, normally made by the funds
through positions in Boards of Directors and financial departments. Another advantage is the
contact network of companies and investors to which the new firm is exposed, facilitating its
integration in the market.
In fact, Brazil needs to leverage the funding mechanisms to start-up companies and try to
stimulate private investment. Currently, the number of business angels in the country is around
just 6,300, while in the U.S. is 268,000. The start-up accelerators, mature concept in some
developed countries, appeared in Brazil only in 2011, and it is estimated that there are
approximately 30 institutions of this nature.
Business incubators, however, have existed for some time in Brazil. According to data of
National Association of Entities Promoting Innovative Enterprises (Anprotec), there are 384
active incubators in Brazilian territory, reaching around 2,600 companies.
At the end of 2011, Sebrae has launched a public tender worth R$ 28.2 million to support 160
business incubators, in order to promote improvements in the management and increase the
number of companies served. The programme seeks to meet a diagnosis made by the institution
in which it was revealed that management is one of the main difficulties of the Brazilian
incubators.
In a later step, when start-ups are slightly more mature, venture capital funds are an important
alternative to the development of these companies. This segment, however, still shows little
development in Brazil.
The assets under management of the VC/PE industry in the world in 2008 were about US$ 2.5
trillion, being US$ 350 billion (14%) associated with VC funds (ABDI, 2011). The largest
investments are quite concentrated in the U.S., but also in China, India and Japan. Considering
investments in relation to GDP, other countries also stand out as Israel and UK.
Some of the most successful examples of this industry are found in the U.S., whose first VC
fund was created in 1946, after the War. In the 90’s, Silicon Valley was the largest pole of
generation of scientific and technological innovations, and venture capitalists had already
provided successful companies like Google, Netscape, Apple and Intel.
European initiatives are more recent but already stand out, such as the European Investment
Fund (EIF), with EUR 6.9 billion invested through 435 funds, in addition to boost other EUR
38 billion of capital via other sources. Other examples are the European Recovery Programme
(ERP), in Germany, and the Russian Venture Company (RVC), both focused on SMEs and with
funding of US$ 1 billion each.
Founded in 1993 by the Government of Israel, the Yozma Programme also deserves attention.
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177
During the first three years of the programme, the fund (Yozma 1) constituted by the
Government for US$ 100 million, made investments in 10 private funds of VC, in addition to
direct equity participation in business startups. With this investment, the Government sought to
attract experienced international venture capitalists which, in turn, should invest about US$ 12
million and act in conjunction with local companies. Yozma 1 then would invest up to US$ 8
million in each fund, subject to a top limit for return on investment, attracting even more private
investors. In addition, the shareholders had a call option for Government shares for a period of
5 years.
Among the main achievements of Yozma is the fact that investments have been made in several
small funds, reaching a greater number of companies and consequently extending the
externalities, such as job creation and dissemination of learning in the VC processes. Another
advantage was the promotion of the relationship of local companies with international venture
capitalists. As companies grow, new investments become necessary, and contact with potential
global investors were fundamental. Most investee companies managed to make IPO, not only in
Israel but also in American and European stock exchange markets. Other companies were
acquired by strategic investors, including major international groups such as Johnson &
Johnson, Microsoft and Intel.
It is important to note, however, that there were other conjunctural factors that contributed to
Yozma to be victorious. Among them, the major investments of Israel Defence Forces for
decades, spurring R&D and ensuring government purchases. In addition, the country already
had skilled labour force at the time, as a result of compulsory military service that leveraged on
young people skills in exact sciences, as well as by the immigration character of the country,
which received, for example, skilled labour force from Russia for technology companies. In
recent years, Israel maintains one of the largest global investment rates in R&D and in VC
funds, as a percentage of GDP. In 2012, Tel Aviv was considered the second city in the world
with the best ecosystem of innovation and entrepreneurship, second only to the Silicon Valley3.
According to ABVCAP (2013), Brazil ended 2012 with US$ 40.7 billion of capital committed
to VC/PE funds, with US$ 25.8 billion already being invested. Of the total invested, only 3.5%
referred to VC funds.
Despite an increase of 33% in relation to the amount invested in December 2011, he is still
small compared to developed countries, even considering the proportionality of the respective
GDPs.
Figure III: VC & PE investments (as % of GDP)
2,50
2,00
2,06
1,81
1,50
1,05
1,00
1,02
0,78
0,86
0,50
0,04
0,22
0,10 0,18
0,00
Israel
UK
USA
2011
South Korea
Brazil
2012
Source: Emerging Markets Private Equity Association – EMPE (2013)
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
178
In 2012, seeking to help attending this repressed demand, BNDES Board approved the release
of Criatec Funds 2 and 3, as a continuation of its work in seed capital. As the same model of
Criatec 1, the Bank also seeks to contribute to reducing the existing barrier between the
academy and the market.
The expectation is that each of the funds invests in at least 36 companies, pre-operating or not,
with annual revenue of up to R$ 10 million. Twenty-five per cent of the resources will be
allocated to companies with revenue of up to R$ 2.5 million. Support for each company can
reach up to R$ 6 million. The manager of Criatec 2 has been already selected and it is in the
final stages of due diligence. The fund should have R$ 170 million of committed capital and
start investing still in 2013. BNDES estimates that these resources will leverage approximately
R$ 5 billion in investments in the economy.
The manager of Criatec 3, that might have the same amount of committed capital, will be
selected in 2014 with investments planned for the beginning of 2015.
In 2012, BNDES also launched the Venture Capital Funds – “TIC” and “Transversal”. The first
has focus on innovative companies in the sector of Information and Communication
Technology, whilst the second is transversal, seeking to support sectors considered boosters of
innovation, such as: oil and gas, capital goods, renewable energy, nanotechnology,
pharmaceuticals, biotechnology, new materials, among others.
Incentives for the use of capital markets by SMEs
Jeng & Wells (2000) conclude that the volume of IPOs of a market has a high correlation with
the existing investment in VC/PE, especially in more mature stages of investment (later stage)
and when it comes to non-governmental investments. In fact, one of the main risks faced by
venture capitalists is to not have the return of their investment.
The Israel example illustrates this fact. In addition to the opening of capital in its own stock
exchange (TASE), there were incentives for companies also do IPO in American and European
stock exchanges. From 1992 to 2012, the number of companies listed on the TASE grew from
378 to 549, with 50 of them today being also listed in international stock exchanges.
It is important to point out that Jeng & Wells (2000) did not consider in their empirical study
the trade sales as exit of the VC/PE funds. Data from Preqin (2013) show that this is the most
recurrent exit of investments made in the world, both in VC funds as in PE. From 2008 to 2012,
trade sales accounted for 66%, while exits via IPO just 13%.
In Brazil, despite recent important drivers to boost the capital market, as the reduction of the
basic interest rate of the economy and the country investment grade, the amount of IPOs on the
main stock market (BM&FBOVESPA) is still small.
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179
Figure
1200
IV:
Number
of
–
IPOs
2008-2011
1057
1000
781
800
600
391
400
178
200
158
90
32
0
China
Europa
US
ME&A
India
Japan
Brazil
Source: Prepared by the authors bases on compiled information by BNDES
As a result, the number of listed companies is low, being the smallest among the emerging
countries. Despite having the 7th largest global GDP, Brazil was, in 2011, the 17th country in
number of listed companies, and its stock market was at 26th position. This scenario can be
explained by the fact that only large companies can access the capital market in the country.
Only 50% of the listed companies have revenues of less than US$ 500 million. The average
volume of offers in 2011 remained at approximately US$ 400 million, one of the largest in the
world.
The BOVESPA MAIS is the listing segment of BM&FBOVESPA to companies wishing to
enter the capital market gradually, seeking the gradual enlargement of its shareholder base.
Despite having been conceived to permit the access of a greater number of companies to the
Brazilian stock market, this segment has only six companies listed, only two of which have
already performed IPO.
Seeking to reverse this situation, BNDES has been active both institutionally and in its own
investment portfolio.
Together with ABDI, BM&FBOVESPA, CVM and FINEP, BNDES is part of a Working
Group that has been studying rules and practices of access markets in other countries. On a visit
to several countries, successful stories and relevant experiences were evaluated, in which small
and medium-sized companies were able to issue shares to finance the development of its
activities.
Based on the survey made, some initiatives were proposed, still under study, among which
stand out: cost reduction and simplification of the procedure of shares public offering; reduction
of maintenance costs of publicly-held companies; direct tax incentives to specific investors and
investment funds; investment limit elevation of private pension plans to the high-risk
companies; measures for investor education and the Brazilian businessmen; formatting of
specific vehicles for investments in SMEs.
BNDES has also been trying to bring more companies of its portfolio to market, developing
conditions for growth and good corporate governance practices in these companies, with a
focus on listing and IPO. Of the six companies listed on BOVESPA MAIS, five have
shareholding of BNDESPAR. Of these, two have already performed IPOs, being the most
recent in March 2013. According to the interviews, the intention of the Bank is to increase that
number in the next years.
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Another initiative under consideration by the institution is to assist the demand of future IPOs,
supporting public offerings on BOVESPA MAIS with firm guarantee subscription.
Greater attractiveness to reimbursable financing
Given the characteristics of investment in innovation, the granting of reimbursable fundings are
made basically by public bodies, which offer specific lines for companies’ innovation, with
more attractive conditions.
In Brazil, the dependence on the development agencies and Government banks are even greater,
since the private banks do not usually grant long-term financing. In this way, BNDES and
FINEP appear as the main financiers.
Both, to offer better financial conditions, possess financial burdens equalisation in part of their
operations, provided with governmental resources.
In 2008, the innovation lines from BNDES began to focus on the company’s strategy, instead of
isolated projects. Among existing mechanisms, the sectorial programmes are on focus, such as
Prosoft, Profarma and Proengenharia, and the cross line dedicated exclusively to innovation,
which covers the financing for all stages of innovative process, including the purchase of
domestic machinery and equipment registered at FINAME. There is also the possibility, on a
case-by-case study, of waiver of real guarantees and minimum rating to operate with the Bank.
In 2009, BNDES created the “Programa de Sustentação ao Investimento – PSI” (Investment
Support Programme), being innovation one of the focus (PSI – Innovation). The goal was to
stimulate companies to not postpone or cancel investments, as a result of the economic crisis
triggered on occasion. Part of BNDES existing innovation lines and programmes passed to have
better conditions due to PSI, currently with 3.5% of annual interest, with total time of up to 120
months, and loan of up to 90% of financeable investments. The demand for resources has been
growing every year. Disbursement in 2010 was R$ 136 million, having reached R$ 1,136
million in 2012. In 2010, FINEP also started to transfer BNDES resources relating to PSI, and
reimbursable resources disbursed by FINEP jumped from R$ 880 million in 2009 to R$ 1,765
million in 2012.
Another instrument that has been growing in number of operations and disbursement is the
BNDES Card, whose operation resembles the one from traditional credit cards. SMEs wishing
to invest in innovation can request the card to fund the hiring of services of applied research,
development and innovation. Each company has a pre-approved revolving credit, term of
amortization of 3 to 48 monthly instalments, fixed and equal, and interest of 0.86% per month.
In 2012, through this instrument R$ 9.5 billion have been disbursed, with 707,000 operations
performed and 206,000 companies attended in 4,689 different municipalities of the country.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
181
Figure
V:
Reimbursable
BNDES and FINEP – 2012 – in R$ millions
993
1765
resources
disbursement
for
Innovation
BNDES - Setorial
Programmes
BNDES - Innovation Line and
BNDES Card
823
FINEP
Note: Part of the funding of these disbursements came from PSI – Innovation.
Source: BNDES and FINEP (2013)
CONCLUSIONS
Governmental support has been shown to be important and effective in financing innovation in
several developed countries, both to reduce the cost of innovation activities and to mitigate the
risk associated with it. Successful funding initiatives are observed in non-reimbursable and
reimbursable support programmes, guarantees grant, equity participation, in particular through
venture capital funds. The demand created by the public purchases also proved to be an
effective indirect action of Governments to finance and leverage innovation in their national
industries in certain sectors, usually supported by specific regulations.
In Brazil, the prioritization of innovation agenda took a little longer to arrive. From the end of
the 90’s, the adoption of measures similar to the OECD countries was tried, and the country
today has stronger instruments, legal framework and public bodies in its IS. However, there is
still a low level of investment in R&D in the country, with little participation of the private
sector and a few innovative companies.
It was observed that the challenges to financing innovation are not limited to funding, but also
to correct mechanisms for every step of the innovative process and players involved,
understanding innovation in a systemic, collaborative and cumulative way.
Given that, the recent actions of the Brazilian Government has tried to broaden and make more
effective its participation in funding for innovation, as well as stimulate private investment and
the link between the players of its National Innovation System.
The initiatives analysed in this study, which appear to have been inspired by successful
international experiences, have three main characteristics: greater alignment with the interests
of the market; greater focus on SMEs, with new non-reimbursable instruments and actions to
stimulate the venture capital market; and the unification of efforts among government agencies,
by encouraging cooperation between companies and companies-ICTs.
The “Plano Inova Empresa”, with a high budget of R$ 32.9 billion for innovation projects,
foresees the articulated use of BNDES and FINEP financing instruments, in addition to the
involvement of other public bodies such as regulatory agencies, ministries and Sebrae. In this
way, a greater efficiency in the allocation of resources and quality of public spending is wanted,
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
182
in addition to facilitate communication with the business community. The analysis of jointed
business plans, and not isolated projects, shows appropriate and aims cooperation between
players and complementarity of competences.
Greater market orientation and focus on SMEs have been identified in Embrapii and Tecnova
non-reimbursable instruments, as well as in actions directed to venture capital.
The actions for the venture capital industry aim to encourage the creation and development of
start-ups, through Startup Brasil and the creation of new venture capital funds, such as Criatec 2
and 3. Despite recent advances in the latest years, investments in funds of VC/PE in Brazil still
are low and do not meet the necessary demand. Relevant experiences like that of Israel and U.S.
showed the importance of this industry to attract private investment for innovation and increase
the country’s competitiveness. The ideal model for Brazil, however, needs to consider the
country current stage of development and the peculiarities of its IS, as well as the present
opportunities of investment, as in the oil gas chain, energy and infrastructure in general.
A greater use of capital market by SMEs is also being sought, with initiatives in study ranging
from IPO process simplification and cost reduction to keep the company opened, to fiscal
incentives to increase demand and measures for educating investors and companies. The main
Brazilian stock exchange has few companies listed, most of them being larger companies. In
addition to being an alternative source for resources to companies, a developed capital market
increases the attractiveness of the VC/PE funds since investors see higher chances of exit.
The Government also has tried to facilitate the obtaining of reimbursable resources for
innovation by companies by granting better financial conditions, being the main example the
PSI Innovation and the BNDES card.
Some improvements, however, still seem to be important. Among them, the development of
tools to assess the effectiveness of the application of public resources, through monitoring the
early stages of the project supported and also of the subsequent evolution of the companies.
It is also necessary to improve the form of analysis of the innovation projects. The volatility of
future cash flow and high risk demand a special analysis for this type of investment. Traditional
financial projection techniques are no longer the most appropriate to reflect intangible assets,
future options of use of knowledge generated and, finally, perception of risk of the project.
Academic studies on this issue are still incipient and deserve to be expanded.
Funding through tax incentives was not the focus of this study, but it is noted that there is still
room to improve existing mechanisms, facilitating and enlarging the use of them by SMEs.
Despite the progress mentioned, a greater focus as a whole should be given to SMEs. They have
greater difficulty in obtaining funds, and they are the biggest generators of jobs and tend to be
the most productive and innovative companies.
Extrapolating the issue of funding mechanisms, it is important to emphasize the urgent need for
Brazil to make less bureaucratic the process of creating new companies and simplify the tax
structure so that innovative small businesses can grow. In addition, it is necessary to further
business training for the management of innovation. Studies have shown that the effectiveness
in turning good ideas into businesses is not related only to the amounts invested in R&D, but
also to how the innovation strategy is carried out by the company.
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183
The Brazilian innovation policy must indeed be at the heart of industrial policy, with a focus on
priority sectors and on the real needs of the private industry. The country needs to be able to
implement the reforms and investments needed, as well to promote a stable political, economic
and legal environment to boost the private investments in innovation, thus finally becoming a
competitive nation.
ENDNOTES
1.According to estimates of the Federal Council of Engineering, Architecture and Agronomy – Confea (2013),
while Brazil graduates about 40,000 engineers per year, Russia, India and China graduate 190,000; 220,000 and
650,000, respectively.
2.The Basic Productive Process (PPB) was defined by Law 8.387, of December 30, 1991, as being the minimum
set of operations in manufacturing establishment that characterizes the effective industrialization of a particular
product. The company that fulfil these minimum manufacturing steps receives in return tax benefits established by
law. The PPBs have to be approved by MCTI and MDIC.
3.Research conducted by the company Startup Genome, published in Exame Magazine of August 7, 2013. In this
ranking, the city of São Paulo (Brazil) appears in 13th place.
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SOCIAL ENTREPRENEURSHIP
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ENTREPRENEURSHIP IN ROCINHA: LEARNING
PROCESSES AND RECIPROCAL NETWORKS
Isabella Nunes Pereira *
Roberto Bartholo **
*PhD candidate at the Industrial Engineering Program at COPPE/UFRJ (Instituto Alberto Luiz Coimbra de PósGraduação e Pesquisa de Engenharia - Universidade Federal do Rio de Janeiro)
Ilha do Fundão, Cidade Universitária, Centro de Tecnologia, Bloco F - Sala 103, Rio de Janeiro, Brazil
Email: [email protected].
** Professor at the Industrial Engineering Program at COPPE/UFRJ (Instituto Alberto Luiz Coimbra de Pósgraduação e Pesquisa em Engenharia - Universidade Federal do Rio de Janeiro) where he coordinates the LTDS
(Laboratory of Technology and Social Development). Dr. at the Friedrich-Alexander Universitat ErlangenNurnberg (Germany).
Email: [email protected]
Abstract: The article explores entrepreneurship as a learning process. Its theoretical approach
relies on authors like Herbert Simon, Saras Saraswathy, Pierre-André Julien, and Hassan Zoual
e Larissa Lommitz. The theoretical framework is applied to an empirical study on the profile of
entrepreneurs in Rocinha, one of the largest favela in Rio de Janeiro. This empirical study was
developed on the basis of qualitative research in the form of semi-structured interviews via the
biographical method. We take each resulting account as a starting point to understand both
social reality and cultural identity. One key element identified in our analysis is the power of
networks, driven by a very strong influence of the social environment on entrepreneurial
activity. The research shows that individuals’ ability to undertake an entrepreneurial venture is
deeply subject to their dialogic relations with their social environment. This dialogicity is a
dynamic process of reciprocal learning. These findings may have important consequences for
public policies if they prove to be true in other cases beyond Rocinha. It would then be
reasonable to suggest that it is a fallacy to propose highly prescriptive frameworks of supposed
universal validity for the policies designed to support entrepreneurship in the “pacified” favelas
of Rio de Janeiro.
Keywords: entrepreneurship, public policies, reciprocal networks, Rocinha.
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INTRODUCTION
Entrepreneurship has never before been given the attention that it receives today. National
social and economic development policies are designed by taking into consideration the
contributions and impacts of policies that support entrepreneurship. Recognized as a driver of
economic dynamism, job creation and innovation (OECD, 2008), entrepreneurship is an
important aim of public policy. However, in practice these policies do not always achieve their
objectives. This stimulates dialogue between the public and private sectors and the academic
community.
In Brazil, a debate is gaining ground in the political agendas. The National Entrepreneurship
Policy (PNE) is embedded in the central guidelines of the government and the Bigger Brazil
Plan. Its role is to coordinate sensitization and mobilization campaigns and stimulate the
generation of an entrepreneurial environment. The management of this initiative involves a
series of institutional actors, including five Ministries1 (MDIC, MCT, MDS, MTE, MDA) and
the Micro and Small Business Support Service (SEBRAE), which sets the stage for various
conflicts of interest. It was not by mistake that in March 2013, the Federal Senate approved
Complementary Bill (PLC) number 112/2012, which created the Secretary of Micro and Small
Business, and granted it the status of a ministry. The recent changes in regulatory standards are
decisive evidence of the importance of this topic on the national stage.
Today the federal government and the institutions specialized in supporting entrepreneurs
maintain an expressive set of initiatives, programs, and projects aimed at supporting new
businesses, especially micro and small businesses. Stimulating entrepreneurship is seen as an
important tool for creating jobs and generating income, as an instrument for fighting urban
poverty (SAE, 2013). In this sense, initiatives that support entrepreneurial activity in lowincome areas are gaining prominence. Knowing the profile of this type of entrepreneur, his
characteristics, his behavior, habits, values, and aspirations are questions that should be
answered in order to advance the development of public policies, to understand this economic
phenomenon, and more importantly, its social significance.
Rocinha is a favela located in the South Zone of Rio de Janeiro, between the neighborhoods
with the highest per capita income in the city. The geographical location is favorable to the
abundant flow of commerce, especially services. Rocinha is the largest of the city’s 7632
favelas, and between 2000 and 2010, its population increased by 23%, a rate almost four times
the average growth of the city (7.9%). With nearly 6.529 commercial enterprises counted in the
Business Census of 20103, Rocinha is known for its entrepreneurial profile. Today, this activity
is undergoing a transformation that includes fast food chains and large retail stores in the
domestic appliance and computer businesses, such as Casas Bahia and Ricardo Eletro, as well
as concert halls, restaurants, gyms, dental clinics, and four large commercial banks. Recently
the community has received increased federal public investment flows geared toward
urbanization projects, such as the Growth Acceleration Program (PAC I e II)4 and the
unprecedented public security policy, the Pacifying Police Unit (UPP). These efforts have
stimulated greater exchange, principally among those who come from outside of the favela,
thereby reducing the negative stigma that resulted from decades of violence and drug
trafficking. On the one hand, this has contributed to the increased growth of local businesses,
yet on the other, it has triggered an immediate effect of gentrification5 which also has direct
implications for local entrepreneurs.
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A qualitative study investigating the profile of these local entrepreneurs was conducted in
Rocinha, and the results reveal a behavioral logic divergent from the behavior considered to be
entrepreneurial by the established institutional norms. This finding can have relevant
implications for public policies that often neglect that the establishment of local roots is a
critical element of success in the entrepreneurial process.
The objective of this article is to demonstrate the gap between the practice of entrepreneurship
in Rocinha, perceived through an analysis of entrepreneurs’ accounts, versus the traditional
entrepreneurial guidance prescribed by the involved institutional actors.
THEORETICAL BACKGROUND
Reassessment of homo economicus as a behavioral model
In the field of economics, the assumption that economic agents are rational, in every sense, has
been the fundamental argument for explaining human behavior. This idea that humans are
capable of rational thinking has become the base of many theories in diverse areas of
economics, especially the theories associated with the neoclassical school. The weakness of this
theoretical field, with regards to its capacity to interpret reality, has frequently led to resistance.
Principally, critics hone in on the fact that it falls short of reality. Milton Friedman (1953),
winner of the Nobel Prize of Economics in 1976, and a representative of the neoclassical
school, responds to these critiques by arguing that the lack of supposed realists matters less than
the power of forecasting with the models that use these assumptions, “because the alternative
would be almost an infinite number of considerations that would have to be incorporated into
the models of human behavior”.
In including uncertainty as an essential element in economic practice, Armen Alchian (1950),
corroborated by Tintner (1941a, 1941b), critiqued the concept of profit maximization or utility
as a guide for individual choices. Alchian, in his article “Uncertainty, Evolution and Economic
Theory”, published in the Journal of Political Economy in 1950, proposed to expand the
applicability of economic theory by incorporating two more realistic assumptions: i)
information is asymmetric and incomplete and ii) forecasts are unreliable.
Human behavior throughout the decision making process within organizations was the central
theme of Herbert A. Simon’s research. The author, by publishing his classic works,
Administrative Behavior, 1947 and The Sciences of the Artificial, 1969, demonstrated that the
understanding of rationality in human behavior is essential to developing a technical body of
work. Building on the idea that scarcity is a fundamental fact of human life (Simon, 1996, p.
25), Simon alerts that it is the job of rationality to better allocate scarce resources to meet a
certain objective, within the limits of inevitable conditions and restrictions. His thinking was
influenced by C. Barnard (1938) and J. Commons (1934), who postulate that individuals act to
change their environment (C. Barnard) and that they observe certain “bounding factors” when
the problem of the firm cannot by resolved by routines (J. Commons).
For Simon, the assumption of unlimited rationality is idealistic, mainly because he dedicates a
large part of his attention to the external branch of human thought, namely decisions that are
favorable to achieving the objectives of the adaptive system, such as profit maximization or
utility. In the words of the author: “Economic theory’s treatment of limits of rationality
imposed by the inner environment – by the characteristics of the physical symbol system –
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trends to be pragmatic and sometimes even opportunistic”. (Simon, 1996, p.23). And the idea
that rationality is limited appears to be Simon’s important contribution to economic theory;
what appears to be unlimited is our obsession with rationality.
In the model of limited rationality, which Simon defines as procedural, decisions are
satisfactory, but not great. For the author, the optimization of decisions is unrealistic, for they
are limited or influenced by the human limitations to access and cognitively process all of the
options. The concept of rationality proposed by Simon endorses an innovative way of
understanding the external uncertainties in decision-making models by verifying how cognitive
aspects can affect the behavior of the actors involved in the process. This political scientist’s
contribution to economic theory earned him the Nobel Prize of Economics in 1978.
Simon’s critiques of the postulate of maximized rationality are a decisive step towards the
establishment of a new paradigm. In the Simonian approach, decision making is first and
foremost a human activity, guided by the sense of value. In this process, subjectivity is always
present and acts as the driver of the decision. For Simon, it is impossible to neglect the
subjective factors and different cognitive styles of decision making. There is a relational system
between the elements of objective nature and the elements of subjective nature in decisionmaking processes, and what prevails is the influence of the decision makers’ values.
Upon demonstrating that it is evidently impossible for the individual to be aware of all the
available alternatives or all of their consequences (Simon, 1947, p.80), Simon affirms that
within the economic human’s understanding, it will not be possible to know the best alternative
behavior or strategy to be selected and implemented. In particular, his contributions in the field
of learning and cognitive systems influence the new conceptual dimensions for constructing
theories, introducing a way to consider and deal with human behavior and the interactions at the
root of all economic activity.
After more than 50 years dedicated to understanding human behavior, Simon, in his book
Reason in Human Affairs, 1983 explores the relationship between reason and emotion in
humans, using the intuitive method as a component of behavioral theory. The intuitive approach
highlights the processes of acquired knowledge through the “accumulation of experiences and
the recognition of situations in which these experiences are relevant and adequate” (Simon,
1983, p. 47).
Understanding entrepreneurship through the lens of procedural rationality
We saw that the homo economicus sticks to rationality in decision making, but in reality the
kind of rationality that economic actors employ is procedural, and as a result, depends on
interactions with the ecosystem. It is with this perspective that we conceptualize
entrepreneurship; or rather we will seek to uncover the decisions of entrepreneurs as if they
were enveloped in procedural rationality.
The literature on entrepreneurship proposes a few possible interpretations. Economic theory’s
definition frequently associates entrepreneurial capacity with starting businesses, improving the
formal economy, and consequently tax collection. As such, it is based on statistical models of
regression, and the process of starting a business, with regards to its development, is eliminated
(Audrestch, 2001; Acs, 2005). This appears to be the view shared by Louis Jacques Filion,
professor of entrepreneurship at HEC MONTREAL, the Montreal Business School, in his plan
to further entrepreneurship: “the idea of entrepreneurship, and more specifically the idea of
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starting a business, constitutes a key part of the development of society and the basis of its
wealth creation” (Filion, 2003). Another possible classification has a sociological bias and
posits a holistic theory (Bygrave e Hofer, 1991; Bull e Willard, 1993; Julien, 2010; Sarasvathy,
2013). This literature comprehends that entrepreneurs are important actors in development, but
takes into consideration that each entrepreneur will understand entrepreneurship differently and
that the conditions for exercising entrepreneurship will depend on the context.
Pierre-André Julien, emeritus professor at the Université du Québec à Trois-Rivières, in his
work titled “Entreprenéuriat Régional et Économie de la Connaissance” (2005), critiques the
narrow view of classic economic theory, declaring that it has “neglected the ecosystem as an
actor of development”. His original approach envisions entrepreneurship as going beyond the
dynamic between entrepreneurs and their businesses, considering, among many aspects, the
importance of milieu: a French expression that refers to the entrepreneur’s “environment of
residence and performance”, including the cultural, social, and economic characteristics of this
environment. According to this author, an ecosystem is the source of an entrepreneurial culture
(Julien, 2010, p. 159). He also demonstrates how the act of entrepreneurship is not isolated, but
is in fact a collective act whose networks, social capital, and flow of information and
knowledge play a principal role. In the words of Julien, we see how this dynamic plays out:
An ecosystem is the socioeconomic environment surrounding the entrepreneur and small business that
either facilitates or impedes the formation of commercial and non-commercial ties and distinguishes one
territory from another. The local entrepreneur is a member of this ecosystem by way of family,
friendships, and commercial ties. From it he takes models, ideas, resources, and information of all kinds,
which are free if we set aside the value of the time he took to obtain them, with the objective of creating
or developing a business. The endogenous entrepreneur and his organization do not exist outside of this
environment and the networks it contains. As a group of actors immersed in a region and that share a
culture, norms, and social conventions, the ecosystem can, if it is important enough, facilitate exchanges,
principally of information and opportunities, to stimulate the founding and development of businesses
(Julien, 2010, p.163).
This definition emphasized the fact that in order to understand the phenomenon of
entrepreneurship, it is necessary to consider the individual and his relationship with the
ecosystem at all times, not as just automatically responding to the environment, but also
learning from it and modifying it. In this approach, the ecosystem, the source of entrepreneurial
culture, is the key difference in the result, in part due to the importance of the social capital
acquired, thus demonstrating that entrepreneurship is a social phenomenon, which means that
the three actors (individual, enterprise, and ecosystem) do not move forward without one other.
This theoretical construct juxtaposes the theory of entrepreneurship based on the presupposition
of neoclassical rationality. If the ecosystem has an important role, then entrepreneurship does
not depend solely on personal characteristics as Filion asserts: “An entrepreneur is a person
who imagines, develops, and realizes their visions” (Filion, 1999). Entrepreneurship is not
talent-based, but learned through the dialogue of the individual with his context and with public
policies.
This critique of entrepreneurial theory based on the decision making of the rational human is
important, as it is still the predominant viewpoint, principally in business, where the objective is
developing and generating processes. An emblematic example is an indicator called the Global
Entrepreneurship Monitor (GEM), an international study conducted annually with the purpose
of measuring entrepreneurship. The classifications they make are based on entrepreneurial
potential, measured by the founding of new businesses. In a more expansive approach, the act
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of opening and closing businesses is not a sign of failure, but rather mistakes are considered a
part of the learning process. Successes only confirm something that is already known, while
mistakes present the possibility of learning something new.
Julien’s perspective is shared by Saras D. Sarasvathy5, university professor of entrepreneurship
at the Indian Institute of Management, Bangalore and associate professor at Darden Graduate
School of Business, University of Virginia. Saras Sarasvathy builds on the Simonian idea of
procedural rationality to develop her theory of effectuation. According to this theory,
entrepreneurs’ perceptions of their businesses will have a sort of life cycle starting with their
initial resources (Who am I? What do I know? Who do I know?). As entrepreneurs interact with
the ecosystem, they are reconciling the existing perceptions of their businesses. In this light, the
various adjustments entrepreneurs make throughout the process, especially in the initial stages,
are justified, and are considered a strategic learning process.
The work of Sarasvathy (2001a, 2001b) proposed a few ways to understand the practice of
entrepreneurship (Duarte et al, 2011, p. 11). The author studies the logic of entrepreneurs with a
history of success and evidence of the neologism effectuation. She affirms that entrepreneurial
expertise is largely based not on mere causation, but rather on the logic of effectuation. In this
manner, she demonstrates that the logic of entrepreneurial expertise makes an important
inversion: instead of asking: “given my pre-defined objective, what are the ecosystems I need to
mobilize to attain it?” the question would be “given the ecosystem that I can control, what are
the possible outcomes I can achieve?”
Fig 1: What makes entrepreneurs entrepreneurial? (Sarasvathy, 200, p.3). Prepared by the authors.
In her article from 2001a, Sarasvathy defines these concepts in the following way i) the process
of causation begins with the definition of a pre-defined goal and concentrates on the selection
of various resources capable of achieving that goal ii) the process of “effectuation” begins with
the set of basic resources that can be controlled and focuses on the generation of possible
outcomes with these resources.
In her research, Sarasvathy (2001b) sought to identify how experienced entrepreneurs and
MBA students reacted to a hypothetical problem of starting a business by responding to just
five questions. Sarasvathy selected 27 entrepreneurs that she considered experts. Her selection
criterion was to identify entrepreneurs that had taken a business from its original idea to an
initial public offering, and were still active in the management of the company. On the other
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hand, she interviewed 37 MBA students and asked them the same questions. The methodology
she employed to come to her conclusion consisted mainly of applying the Think Aloud
Protocols (Ericsson & Simon, 1993) methodology, seeking to identify the logic that the
interviewees used to start a new business. Specifically, the author seeks verbal excerpts from
the interviewees that could be attributed to the existence of the process of effectuation, contrary
to the process of causation. An analysis of her results reveals that 89% of entrepreneurs employ
effectuation reasoning and 81% of MBA students demonstrate preference for causation
reasoning.
The effectuation process could be translated as a set of principles that entrepreneurs use to
make decisions in an uncertain environment. The main principles of the two lines of thinking
can be compared in the Table 1.
Table 1
Categories of differentiation: Causation X Effectuation
Categories of
differentiation
Causation process
Effectuation process
Practice
start with goals
start with their means:
who I am,
what I know
whom I know.
Logical reasoning
predictive
control
Fianancial planning
focuses on expected return
emphasizes on affordable loss
Strategies
competitive analyses
strategic partnerships
Role of environment
exploitation of pre-existing
knowledge
stresses the leveraging of
contingencies
Source: Saraswathy, 2003. Prepared by the authors
In the article “Entrepreneurship as a Science of the Artificial”, Sarasvathy (2003) presents a
series of similarities between her theory of effectuation and the work of Simon (1996), which
affirms the existence of an internal environment in interface with a determined external
environment. In a previous article, “New market creation through transformation”, Sarasvathy
(2005) presents the cognitive model of effectuation for the creation of new markets, as a result
of entrepreneurs’ decision making processes within their companies. In this approach, the role
of relational networks gains prominence in the creation of new markets and products by
reducing uncertainty and increasing the set of initial resources.
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Fig 2: A
dynamic model of the effectual
network and the new market as an effectual focus Sarasvathy & Dew, 2005.
Prepared by the authors.
This model proposes a process that begins with initial resources, such as 1) the entrepreneur’s
characteristics, preferences, and skills (who I am?) 2) his education, training, experience (what I
know?) 3) his relational network (who I know?). From there, entrepreneurs begin to brainstorm
the possible results that can be achieved, moving directly to action without previous planning.
Plans are made and undone and initial resources are increased through action and interaction
with other people, taking into consideration eventualities to redefine objectives. Special
attention is given to earning recognition from the person with the largest commitment to the
business.
Considering the particular object of analysis of this study, in the attempt to transpose the
theoretical model of Sarasvathy to the informal reality of low-income regions, we were led to
seek assistance from the research of Larissa Lommitz. A pioneer in observing the complex
interactions between people and groups at different levels of the power structure, the author
demonstrates that reciprocal networks and their patron-client ties play an important role in these
abandoned spaces, “to connect their members to the formal system of exchange and create an
informal system of social security for their survival” (Lommitz, 2009, p.37). In the words of
the author:
“The family is the main base of a network of solidarity, given that it represents the
individual’s social group from which many other relationships emanate. Friendship in all of
its forms is another source of connections. We understand that both family ties and
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friendships require different levels of closeness, and that in certain cases these networks
overlap, for example when certain family members are united because they feel ties of
personal friendship” (Lommitz, 2009, p.9)
However, in procedural rationality, entrepreneurs’ perceptions of their own ventures and the
learning curve of opening a business will always be influenced by context, making it
impractical to prescribe universal instruments capable of increasing the potential success of
start-ups. In other words, all entrepreneurship is contextual and “localized”. This neologism
was coined by Hassan Zaoul, Morrocan economist and thinker. He brings important
contributions to the entrepreneurial obstinacy driven by the singular models that have been
transported to the countries of the southern hemisphere. “This exploration makes us discover
the great diversity of the ‘situated’ entrepreneur’s motives and his capacity to fuse various
cultures and norms without having to deny his place of belonging” (Zaoual, 2006, p.224).
Complexity is a notable characteristic of any organization. In this sense, dynamic
entrepreneurial projects seen as learning processes almost always change previously designed
plans. The individuals that face the current changes and challenges should be apt to adapt
quickly. This adaption can take place in various forms, and one of them is by the capacity to
learn constantly, as the logic of effectuation suggests. To discover how to be an entrepreneur is
to experiment, know oneself, and make mistakes. We can take a risk and say that selfknowledge is associated with entrepreneurial success.
METHODOLOGY
Designed to support studies on working conditions and income, and in particular, research
related to urban poverty in Brazil, a study on the Informal Urban Economy (ENCIF), conducted
by the Brazilian Institute of Geography and Statistics (IBGE) seeks to capture the dimensions of
the informal sector of the Brazilian economy, identifying the owners of informal businesses –
both self-employed workers and employers with up to five employees. The results of this work
shape the main basis for studying informal micro-entrepreneurs, as it raises details about the
organizational and operational characteristics of their ventures. However, two limitations must
be considered: (a) the last publication is from 2003, and as such does not reflect the relevant
recent changes in the Brazilian economy, and (b) there is not data availability for the specific
area of Rocinha.
Considering these limitations, in this study we opted to use two distinct sources: (a) the
database of the Demographic Censuses of 2000 and 2010 and (b) the empirical results obtained
through a qualitative survey directed towards entrepreneurs and residents between 2012 and
2013. In utilizing the data from the Census, one is faced with the limitations of economic
research, since it does not emphasize topics pertinent to entrepreneurial activity such as the
motives and whys behind the launch of the venture. Nevertheless, it is appropriate to attempt to
work with the Censuses data, as the access to this database allows one to paint a portrait of
socioeconomic conditions, to the extent that (i) it captures the ample spectrum of entrepreneurs,
both formal and informal, in a more recent setting, and (ii) it has territorial scope that allows the
analysis to be applied to Rocinha, the neighborhood focus of this work. The study considers
entrepreneurs to be a group of the population – self-employed workers and employers – who
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self-defined as such when asked about their occupation, in the month of execution of the study,
July 2010.
As Nicolaci-da-Costa (2013) and Goldenberg (2004) suggested, the adaptation of a method will
depend on one’s research objectives. For a study that seeks to understand the profile of
entrepreneurs in Rocinha, along with the behavior and perceptions that they have of their own
living conditions, the qualitative approach seemed the most adequate for this purpose. Having
chosen this approach, we adopted the biographical method, as described by Goldenberg (2008),
based on the ideas of the Italian sociologist Franco Ferrarotti. The biographical method
considers the interviewee an interpreter of the world he/she lives in, whose narrative is used as
a starting point to understand his/her social reality and cultural identity (Ferrarotti apud
Goldenberg, 2008, p. 36). The data was collected in semi-structured interviews with local
entrepreneurs in Rocinha.
Case description
The study was conducted in Rocinha, a favela located in the South Zone of Rio de Janeiro,
known for its entrepreneurial profile. According to the 2010 Census, between 2000 and 2010 its
population increased by 23%, a rate almost four times the average growth of the city (7.9%).
Over the last decade, changes took place that altered the make-up of the community,
highlighting new habits and new lifestyles, and supposedly, the strong presence of a ‘new
middle class’.
The size, geographical location, and history of this site are factors favorable to the abundant
flow of information, especially services, between residents of Rocinha and the city’s highestincome neighborhoods. These factors appear to be decisive in the process of building
interactive networks.
Although the slum space is known by its informality, the majority of the working population in
Rocinha, age 15 and above, is formally or informally employed. Of the 33.809 persons
employed, 87% are employees, reaching 29.698 individuals. The entrepreneurs make up the
remaining 12.2%, where 12% correspond to self-employed workers and just 0.2% correspond
to employers. This employment distribution is depicted by Table 2.
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Table 2
Distribuction of persons 15 years old and more by status in employment in main work
Rocinha
Character
Employed
TOTAL
Entrepreneurs
87,8
12,2
GENDER
male
female
52,4
47,6
65,1
34,9
AGE GROUPS
15 a 17 years old
18 ou 19 years old
20 a 29 years old
30 a 39 years old
40 a 49years old
50 a 59 years old
60 years old or more
1,5
3,8
34,7
29,3
17,7
9,4
3,5
1,5
1,8
16,5
28,3
22,5
19,4
9,9
LEVEL OF EDUCATION
Without instruction/Incomplete school
Complete school/Incomplete high school
Complete high school/Incomplete college/university
Complete college/university
49,7
26,4
21,3
2,1
51,6
28,8
19,6
Source: Department of Research, Demographic Census 2010
The majority of entrepreneurs in Rocinha are men (65.1%), mostly between 30 and 49 years
old, and 51.6% either have no formal instruction or have not completed high school. This
percentage is also high among employees (49.7%), yet in this category the gender distribution is
more equal, as 52.4% are men and 47.6% are women, and 64.0% are between 20 and 39 years
old, a younger age range than the entrepreneurs.
Although the employee percentage in Rocinha are high (87,8%) it does not ensures higher
incomes. Due to labour market barriers, employment can mainly be found at low income jobs.
Table 3 shows that the average income of employees at Rocinha (R$ 783,51) is below the
entrepreneurs average income, be it self-employed (R$ 923,51), be it entrepreneurs with up to 5
employees (R$ 1.677,62) or with 6 or more employees (R$ 5.500,00). This behaviour can also
be noticed throughout Brazil and Rio de Janeiro. For the sake of clarity, whenever we mention
Rio de Janeiro in this work we mean the metropolitan region of the Rio de Janeiro city (RMRJ).
Table 3
Value of the average monthly income selected by region -2010 (R$)
Status in employment
Brazil
Average
Employee
Self-employment
Employer up to 5 employees
Employer more than 6 employees
1.350,61
1.232,26
1.375,30
3.748,59
7.843,97
Rio de Janeiro
2.093,66
1.911,93
2.194,85
4.846,64
10.189,42
Rocinha
802,30
783,51
923,78
1.677,62
5.500,00
Source: IBGE/ Department of Research, Demographic Census 2010
Data handling
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198
To write this article, seven in-depth interviews were selected from an expansive group of
testimonies. An approach like the one we seek here requires the formation of a unique
methodology, which is not limited to the mere collection and tabulation of data. The idea was
not just to interview, but to obtain information about their behavior and habits with regards to
the problems they face to start a business, through the narrative accounts of their lives. As
Goldenberg suggests (2008, p. 43), “the biographical method can increase the subjective view
of the examined institutional processes, as real people experiment with these processes and
raise questions about the ample experience”.
In the formation, execution, and analysis of the interviews, we adopted the procedures proposed
by Ana Maria Nicolaci-da-Costa (2007), as synthesized in the Method of Explaining
Underlying Discourse (MEDS). In this method, the script for the interviews is previously
structured and well-detailed, but very flexible in its application (with caution, however, to cover
the same set of topics with all of the interviewees). The questions are not read, but inserted
naturally into the conversation in a way that bears any kind of response, and then interspersed
with new clarification questions (Nicolaci-da-Costa 2007, p.68).
Among the valuable aspects of MEDS, we highlight the principle of free association, or “that
which is important to someone with respect to a specific theme or subject inevitably arises in
their spontaneous discussion of it” (Nicolaci-da-Costa, 2007, p: 67), in addition to influencing
their non-verbal communication.
The selection of the sample was intentional, following the procedure known as snowballing,
when one interviewee recommends another and so forth. The basic requirement for inclusion in
the sample was the fact that the interviewee is a resident and runs a business in Rocinha. The
field work took place between October 2012 and March 2013, through face-to-face interviews.
All of the interviews were fully transcribed, preserving their subjective and informal aspects
such as hesitations, long pauses, emotions, grammatical errors, and curse words. In this spoken
material, we seek to find significant references to the main assumptions that guide our study,
such as reciprocal networks within a specific context. We also observe the themes that emerge
most consistently in the accounts of the interviewees, related or unrelated to reciprocal
networks, such as family, previous work experience, access to credit, and perspectives.
RESULTS
The results are part of the basis for a doctoral dissertation in progress The analysis of the results
of the behavior of entrepreneurs from Rocinha reveals the preference for a type of rationality
different from what is normally recognized as “business”, but quite similar to the theory
developed by Saras Sarasvathy, defined as “effectual reasoning”. Family and friendship are
universal categories, but every culture redefines what they understand to be a family unit and
what rights and obligations they can expect from their members. The same applies to the
category of friendship. And, as Larissa Lommitz teaches us: “Based on these implicit cultural
rules, the individual will weave his network of solidarity and trust” (Lommitz, 2009, p.19).
Family
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199
The interviews always started with the question, “Who are you?” The answers always referred
to family history, revealing the influence of these experiences on their way of life, traditions,
behavior, and values. Basic family needs are the main drivers for entrepreneurship placing
financial growth not in a priority position. This characteristic reinforces the research performed
by Banerjee and Duflo (2011).
“One of my dreams now, I talk to my son sometimes. I let him a these (at ease), you know? I talk to him that, if he
wanted, we could buy a shed and build a company for him to make money. And I know that this field (candy
wholesale vendor) makes real money. It is one of the best, because everyone likes candies, children, teens and
adults. Now it is easy, there is the Internet. We can make contact with a large company, like Nestlé, that gives a
10% discount when you buy a whole trucky. What is already a huge thing. I would not like to get too involved
because I want now to enjoy life, travel with my wife. Therefore, in order to make it happen, only if it is also his
dream”. (I6, 2013)
“Well!! My family is a veeeeery traditional family. And what do I mean by traditional? My parents were people
that had a typical childhood for who is of African descent or black. My mother was born on farmland, that is to
say, the whole family lived on a farm and worked during the harvest. And at night they gathered by the light of
torches, they didn’t have electricity. It was torch, lantern, fire and they danced maculelê all night long. Ah gives
me the chills!! The women clapping. It was a real land of slave quarters, so much that to this day we have these big
pestles, made of wood, you know? From my dad I inherited musicality” (I1,2013)
Demonstrating growing up in diverse family situations
“My father is known by everyone here in Rocinha. Crazy tricolor fan, he always wears the Fluminense jersey. The
greatest kick. And I am from a very common generation here in Rocinha: carioca, son of Northeastern parents, and
there are a lot around here. My parents did not give me a lot of support to keep studying, to have a better life. My
biggest motivation was to know how to fend for myself and have my own income. It was a matter of working right
away and having your own income. And that is what happened. I studied and worked.” (I2, 2012)
“ I was born in Rocinha to a carioca father, a public servant and a mother from Minas Gerais, a real estate broker
in Rocinha. I went through life hearing that I had to study and take the public service test to have stability. My
parents always gave me plenty of support. I am a street rat and I grew up there. I finished high school and spent
some time hanging out. Just beach, beach, and surfing. I thought: “let’s take a break from studying, let’s enjoy
life”. So I only wanted to go to the beach, all day every day. Two years passed, until the moment I thought: “I need
to make money”. So I was thinking about where I would make money? It doesn’t work to just go to the beach
broke and come back even more broke. So I decided to become a moto-taxi driver. Why? Because it was a way for
me to be free, keep going to the beach and work on my own time, right? I became a moto-taxi driver, stayed for a
while and then I said: I can’t stand this life. I started to think about going back to school” (I3, 2012)
“I’ll start with my parents, right? My mother is from Sergipe, my father is carioca, I was born in Praça XV, grew
up on Street 4 in Rocinha, on Pernambuco alley, one of the most complicated parts of the community. Since I was
little I always liked to draw, but when I was a 13 – 14 year old teenager, I identified with graffiti. My mother was
both a mother and a father because I only saw my father 2 times. The first time I was 2 years old and the second I
was 5. I was raised by just my mother. I am the youngest of two older siblings. And so what happens? My mother,
for her if you didn’t have formal work you were a vagabond. My family was always very judgmental of the
practice of graffiti, I almost understand, because society itself is prejudiced against graffiti art. Little by little
graffiti gained its ground. We understand. We come from a community, from a kind of scarce culture” (I4, 2012)
The strong influence of a Northeastern soul
“I was born in Feira de Santana. My father was a baker, my mother worked in a tobacco factory and when they
divorced I was still young. We were 12 kids. Our childhood was not very good, haha. Mommy worked to
practically raise us all alone, right? Because my father had other women, he has other children, I have many
siblings on my dad’s side. My mother was an alcoholic, since I was a baby in her arms. My dad didn’t drink, but he
wasn’t present. But even so, with her drinking a lot, she was Mom, she was always Mom, the kind that has all of
her children and guides them. We were always attached to her like this, totally attached to Mommy, with all the
flaws she had we were always attached to her” (I5, 2013)
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200
“Starting my story. I was born in Ceará in a city called monsignor Tabosa, to a very humble family. I never went to
school, my mother taught me the letters of the alphabet and I put some together. My father already had a talent, he
was a salesman. What they called a travelling salesman. Dad put a load on a donkey, in a few wooden boxes, put
his product inside and went selling in the backcountry. We were 12 children. He brought home those products,
some candies. I remember that he explained to us that he couldn’t give them to us, because if he did there wouldn’t
be any left. All for him to buy food for the house, which was beans, rice, yucca flour, panela, the food from there.
And he couldn’t. We could just smell the rest of the big box. And so I developed the interest to become a merchant
too” (I6, 2013)
“I am from Rio Grande do Norte, an inlander, from the true backcountry. I carried a hoe, came from a rural area,
where you had to dig to drink water, take care of animals, plant, burn cactus, since I was really little. We were 13
siblings, everyone in the country. I was the oldest, my dad did not have a son older than me, and I was his right
hand since I was really little, I did not leave his feet. I remember a lot from the early 40s, the drought, us escaping
in a yoke, I was a lot like a boy. In 1945 when the rain came back I remember planting more my dad, taking
advantage of the moment and asking him: dad how long is this rain is going to last? The Northeasterner, in the
Northeast, he teaches his son to seek survival at an early age, one brother helps another. But this practice here in
the big city is different. This Northeastern soul is not as present. The Northeasterner comes to Rio de Janeiro to
make money and work with one or another who doesn’t make money. The Northeasterner has the soul of a
survivor, and here that means making money. The son learned to read and write he said: you know how to read?
You know how to write? Ok, that’s really good, it’s over, go work” (I7, 2012)
Past experiences
In all cases, these experiences represent a very important period of learning from networks
woven outside of Rocinha, but that in some way, taught them the way back.
“And at the same time that I started journalism, I did a few photography courses, I was dating a girl whose uncle
was a professional photographer, he even has a studio. And she introduced me to him. It was like a ton of
information about photography, I loved it because he didn’t just photograph photojournalism, but he had that
studio, prepared the people, lighting. And what was most fun was that he was a little afraid to call me because he
was really an artist. So he tested me a little, right? But he ended up realizing that I messed up because of the model
there, what I really wanted to do was take pictures. It was then that he started to show me a lot about photography.
He became a reference for me. I was in my early twenties and I loved to be in the middle of photography. Then
came a little frustration because I wasn’t able to buy the equipment because it was very expensive, and I wasn’t
able to photograph where I lived because the drug trafficking was so present here in Rocinha that to this day there
are places where it is written that you cannot photograph, and I couldn’t do this, I wanted to do something here
related to journalism because I was learning so many cool things” (I2, 2012)
There is a strong presence of mutual aid between members of the same social standing,
provided without any remuneration. However, the person who grants the favor is always aware
of the future benefits he could gain.
“ When I was 17 I worked in construction and I didn’t like it, but it was what there was for an uneducated guy.
Until a cousin, you know I owe him a lot, to this day. He got me a job at SERASA and it was there that I learned
everything, truly everything, I stayed for 10 years, from 18 to 28, until they fired my cousin. I was upset and didn’t
go to work for 3 days thinking that that could happen to me too. After that I started the first internet café in
Rocinha and I made a lot of money” (I8, 2013)
On the other hand, observe the set of relationships with unequal exchanges, where loyalty is the
base of support.
“In this family’s home closeness was important. They were like my people, you know? They were good people,
really good people, rich and good. It was important because of this. They were rich people that could afford things.
What I saw in their house, is what I see now, things like a gigantic television on every wall of the house. And now
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you see that everywhere. I was 18 years old. But I felt the closeness. Everything I said she understood. She said:
anything you need you are going to tell me. So it was an exchange. I worked hard, I did my best, you know?
Because I recognized that they liked me, it wasn’t fake. I gave my all to be able to have what I wanted too, an
exchange. I said, you help me with everything and I help you too”. This was always clear. And it was in that house
that I was able to bring all of my people” (I 5,2013)
And the best advice generally came from a contact made outside of Rocinha, therefore from
formal spaces.
“I arrived there and started to arrange the products at the counter. He (the boss) called me and said you have talent,
just from the way you arrange the products I see that you have a talent for sales. So he told me: if you leave here
don’t go work as an employee, put a little stand on the street and you’ll get there” (I 6, 2013)
“I learned from my former boss that you need to have total quality control. In my business here, from the start, I
use everything quality. People do not worry a lot about the quality of the product. This makes a very big
difference, really big indeed” (I 5, 2013)
Credit
The answers to this question show a strong aversion to indebtedness and personal networks
substituting the role of formal institutions.
“I never saved anything, never made any plans to save money. I always wanted to live my day-to-day, you know? I
never had these plans. To this day I think like this. I was saving money for key-money here, that you have to give
after 3 years. Now I have them. I just don’t want to owe anybody anything. You know? I don’t like to be in debt.
This was also something that my former boss taught me. Don’t go into debt” (I 5, 2013)
“We even thought about getting a loan at the bank, we tried, but it didn’t work, you had to have a guarantor these
things, the interest was very high. One day a guy arrived and I said: I’m going to make a proposal. I looked at my
products, I have a lot of practice with this and I made an estimate. Dude, I have 13 to 14 thousand in product. I
already had a studio that I had bought and was renting. I thought: I sell the studio, I sell this product. If he gives me
30 days I give him a deposit of 40 thousand, the store cost 80 thousand. I get about 20 thousand with the product
and studio. I borrow 20 thousand with the interest of my friends here in Rocinha, at 5%. I take the store and rent it
for 1 thousand Reais, I’m 1 thousand short and I figure it out. I said: no, I am going to try, sometimes we have to
take risks. I closed the deal. I worked, started to sell, started to sell, I controlled. When there were 5 days left I was
10,000 short of the 40,000. So I borrowed from my friends, one lent me 2,000, another 3,000, another 5,000. When
the day came I was there honoring my word” (I 6, 2013)
“It was like walking on a rope, if you took a wrong step it was over, you know? After that, everything up front, no
debt. I worked on my finances. At that time Viva Crédito was already in Rocinha and they looked for me and I
said: I prefer to have just 2 packages of rice that are mine than many more and be in debt” (I 6, 2013)
Perspectives
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Even though the changes in the region are evident, the discourse of all the interviewees
demonstrates a history of little trust in the actions of public authority in general.
“I am sure that many will have a similar opinion, but the basic question for you to understand my generation a little
is: would you have a family here? Would you have a child here? Would you keep your family here? I think the
majority would say no. We understand the history of the government here. Rocinha has a history of 40 years with
no help from anybody. The footbridge was built by residents and now the government constructs something here
and there, puts down their flag and say we take care of it, we brought order. What is up with that? It is just like a
family that separates. The father leaves the son there with the mother and comes back after 25 years. The son is
already raised and the father says: look my son now I’m going to teach you how to live. The boy is at university,
working, educated, and the dad comes now to say he’s going to teach him something? Same as the government.
Rocinha is structured the way it was structured, don’t come say anything. My father is an electrician and he built a
4 story house. This is the reality of the whole generation before ours. Rocinha grew this way. Now they accelerated
Rocinha too much it is not growing naturally, this is horrible because it will lose its identity. Rocinha will lose its
identity. I don’t know, sinister” (I 2,2012)
“In my opinion, I am even scared to say. I think that the government has to get involved but still owes a lot of
things, mainly security. Things changed for the worse. Today we don’t have much security in Rocinha, this is the
reality. Before (the UPP) I had free security, it was normal in Rocinha, now, if we have a problem there is nobody
we can complain to. My neighbor fired a guy and he is having problems. Drug trafficking is bad, I know it’s bad,
but it turns out that in the community, you do right and you don’t have any problems. Just now I had a house
broken into and I don’t know how I’m going to deal with it. Before there was somebody to talk to. Now I’m
scared. There is this disadvantage today” (I 6, 2013)
DISCUSSION
As verified through an analysis of the results, two important conclusions deserve to be
reiterated and discussed here: 1) there is a gap between the traditional proposals of stimulating
entrepreneurship and the entrepreneurial practices observed in the microcosm of Rocinha. 2)
notwithstanding, there is a specific theory that is in agreement with the results obtained.
While traditional instructions promote the importance of predictive logic that highly values
sticking to a plan, a well-structured business plan, analysis of return of investment, analysis of
market potential, niche, and trends like strategies to reduce barriers and increase business
opportunities, entrepreneurial practices observed in Rocinha show exactly the opposite. For
these entrepreneurs, future is not faced in a predictive manner. They don’t strive for optimal
solutions. They seek a better control over the risks of their present lives, through satisfactory
decisions supported by relational networks, facing eventualities not as a detour from the “right”
path, but as part of their business process.
Risk is part of life. However, for entrepreneurs lying within a context of poverty and
vulnerabilities, it is a central factor of their entrepreneurial activities motivated by their survival
needs and family support. Failing on their business may be an invitation for facing yet larger
risks coming from criminality, violence or drug dealing.
Growing does not seem to be the major goal of their investments. Neither does earning credit
for future growth. Survival logics talks to them louder than the market one. Low literacy is
always identified on the literature and by government actions as a barrier for success on the
entrepreneurial activity. Here either, empirical evidences from our research do not seem to
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reinforce this concept. The relationship with reciprocal networks seems to be the most critical
success factor for entrepreneurship in Rocinha. Going beyond credit availability and technical
management skills, this relationship with "localized" reciprocal networks comes out as the most
powerful explaining variable on enterprises success.
Revisiting the theory that served as a foundation for observing the phenomenon of
entrepreneurship in Rocinha, it becomes clear that the utilitarian model based on principles of
homo economicus does not offer realistic explanations. On the contrary, proposals that
introduce an innovative logic of reasoning are worth considering. If entrepreneurial activities in
fact have a projectual dynamic comparable to learning processes, as described by Sarasvathy,
and confirmed in this empirical study, it could be fallacious to attempt to impose a formula of
“best practices” for success in entrepreneurship.
This picture becomes even more critical if we consider that this model is still very prominent in
the programs proposed by the funding agencies and business incubators. The formation of
public policies to stimulate local entrepreneurship must be fundamentally based on listening
rather than prescription.
These findings may have important consequences for public policies if they prove to be more
effective in other cases beyond Rocinha. It would then be reasonable to suggest that it is a
fallacy to propose highly prescriptive frameworks of supposed universal validity for the policies
designed to support entrepreneurship in the “pacified” favelas of Rio de Janeiro.
ENDNOTES
1. MDIC – Ministry of Development, Industry, and International Trade (Desenvolvimento, Indústria e
Comércio Exterior), MCT Science and Technology (Ciência e Tecnologia), MTE – Work and
Employment (Trabalho e Emprego), MDS – Social Development and Fight Against Hunger
(Desenvolvimento Social e Combate à Fome), MDA – Agrarian Development (Desenvolvimento
Agrário)
2. IBGE – Demografic Census 2010 Rio de Janeiro State Government, accessible at
http://www.egprio.rj.gov.br/Conteudo.asp?ident=285
3. Rocinha will receive R$ 1.6 bi of the PAC 2 with the PAC 1 still unfinished
4. Price appreciation in the real estate market began before the installation of UPPs. According to the
study UPP² e a economia da Rocinha e do Alemão: do choque de ordem ao de progresso, published in
November by the Fundação Getulio Vargas (FGV), in Rocinha, in 2011, the price per square meter
increased 31.5%, even before the arrival of the UPP. In São Conrado, from 2008 to 2011, the increase
was 137%, jumping from the R$ 4 thousand range to R$ 9.6 thousand. (Zap Imóveis)
5..Saras Sarasvathy was advised by Herbert Simon e Lester Lave for her doctoral dissertation,
“Information Systems and Entrepreneurship”, defended at Carnegie Mellon University (according to the
author’s résumé available at http://faculty.darden.virginia.edu/SarasvathyS/documents/dec09_cv.pdf),
accessed on 15 Jul 2013.
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204
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Econometrica, v. 9, p.298- 304,
______ (1941b) .The Pure Theory of Production under Technological Risk and Uncertainty.
ibid., p. 305-11
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206
Entrepreneurship in emerging economies – Leveraging Institutional
Constraints.
Manas Puri
PhD Scholar in Management, University of Rome ‘Tor Vergata’,Rome, Italy.
[email protected]
Ernesto Tavoletti
Assistant Professor, University of Macerata,
Italy
[email protected]
Abstract:The role of entrepreneurship as an agent of economic growth has also drawn
considerable attention in the literature on strategy and emerging economies. A distinctive
feature of emerging economies is the evolving nature of its institutions that support efficient
market functioning. They are characterized by a dynamic transition in governance, policies and
institutions. Due to the long-term nature of such institutional transformations, various ‘voids’
appear in short term, hampering entrepreneurial activity. Additionally, such inefficiencies
within the institutional system give rise to negative externalities like inefficient governance and
implementation on the behalf of the local governments and institutions. Traditionally an
uncertain institutional environment in emerging economies has been argued to impede
opportunities for entrepreneurship due to increased risk and complexity. In many cases where
the institutions are weak, large, resource rich business groups fill in these voids by encouraging
self-regulation together with other mechanisms of trust in order to help markets to function.
However, what has been unclear is how resource poor entrepreneurs who do not have a large
resource base mitigate the challenges posed by weak institutional environment. The present
study focuses on how entrepreneurs in emerging economies exploit institutional voids and
develop business models and products. Additionally we investigate if all types of institutional
voids can potentially become opportunities for entrepreneurs or is there a distinction between
the types of institutional voids in itself. Hence, it is worth examining the role of institutional
voids as opportunities for entrepreneurs. We follow an inductive, multiple case research design.
Multiple case studies, as opposed to a single case study, allow replication of logic in that it
facilitates in generalizing a particular theoretical proposition. We examine the process of
spotting institutional voids and turning them into a business opportunity. The research setting is
the energy industry in India. Proposed case studies include two enterprises operating in
renewable energy industry in India. In doing business predominantly in rural areas, they offer a
perfect setting to study and develop and understanding of how entrepreneurs leverage
institutional voids to build business that build value for the community at large. The paper
endeavors to link the literature on Institutional voids and entrepreneurship and propose a
framework explaining how institutional voids represent entrepreneurial opportunities.
Keywords: Institutional Voids, Emerging Economies, BoP, Entrepreneurship
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207
INTRODUCTION
Entrepreneurship has been identified to play a strong role in the economic development of
nations. As emerging economies, especially Brazil, Russia, India and China (BRIC economies)
take centre stage in the global economy, understanding the entrepreneurial environment in these
countries becomes exceedingly important (Bruton, Ahlstrom, & Obloj, 2008). Additionally, the
fact that a large proportion of the world’s population lives in the emerging countries in Asia,
Africa and Latin America, understanding the entrepreneurial environment and encouraging
entrepreneurship itself can go a long way in ensuring the socio-economic development of a
millions of people. Nevertheless, the research on, and hence, our understanding of
entrepreneurship in emerging economies remains limited (Kiss, Danis, & Cavusgil, 2012). Even
when the studies on emerging economies are done, they have been criticized of merely applying
notion developed for developed economies directly to developing economy without considering
the socio-economic, cultural and institutional differences between the two (Bruton et al., 2008;
Kiss et al., 2012). This is especially troublesome since differences in resource endowments1 and
institutional environments in emerging economies warrant strategies that are different from the
developed economy counterpart, and hence, simply applying theoretical frameworks grounded
in developed country environment could lead to skewed results that do not correctly reflect
reality. Hence, there is a need to develop studies, which look at entrepreneurship in emerging
economies from a standalone perspective, perhaps initially by unlearning some of the notions
that may seem obvious in a developed country but may not really hold true in developing
countries.
In this paper, we draw on the recent work on institutionalism and entrepreneurship in emerging
economies. While there has been a keen interest in strategies of MNC and established local
firms in emerging economies, little research has been done on strategies of local entrepreneurs
in emerging markets (Tracey & Phillips, 2011). We in this study connect the entrepreneurship
literature to institutional theory and in doing so, we investigate how resource poor entrepreneurs
identify and leverage on institutional uncertainty to build value offerings. Also, factors and
partnerships are explored that help entrepreneurs succeed in institutionally constrained
environments.
The rest of the paper is organized as follows. The next section describes the methodology of
research and data collection following which a detailed data analysis. The last two sections
discuss the results and points out the limitations of the research respectively.
OBJECTIVES
The literature on entrepreneurship has evolved rapidly over the last 15 years. Consequently, the
role of entrepreneurship as an agent of economic growth has also drawn considerable attention
in the literature on strategy and emerging economies. A distinctive feature of emerging
economies is the evolving nature of its institutions that support efficient market functioning
(Meyer, 2001). They are characterized by a dynamic transition in governance, policies and
institutions. Due to the long-term nature of such institutional transformations, various ‘voids’
appear in short term, hampering entrepreneurial activity (Tracey & Phillips, 2011).
Traditionally such institutional inefficiencies have been referred to as institutional voids(
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208
Khanna & Palepu, 1997; Webb, Tihanyi, Ireland & Sirmon, 2009; Mair, Marti, & Ventresca,
2012a; Mair & Marti, 2009; Puffer, McCarthy, & Boisot, 2010) within the literature.
However, we refer to them as institutional constraints as in most developing nations,
institutions do exist in some form, though with varying degree of efficiencies, and hence, true
institutional voids do not exist (J Mair, Martí, & Ganly, 2007). Additionally, such inefficiencies
within the institutional system give rise to negative externalities like inefficient governance and
implementation on the behalf of the local governments and institutions.
Traditionally an uncertain institutional environment in emerging economies has been argued to
impede opportunities for entrepreneurship due to increased risk and complexity (Aidis, 2005).
In the recent scholarship however, the focus has shifted to understand if such institutional
constraints can actually spur entrepreneurial activity in emerging economies (Tracey & Phillips,
2011). In many cases where the institutions are weak, large, resource rich business groups fill in
these voids by encouraging self-regulation together with other mechanisms of trust in order to
help markets to function (Khanna & Palepu, 1997; J Mair et al., 2012a; Johanna Mair & Marti,
2009). However, what has been unclear is how resource poor entrepreneurs who do not have a
large resource base, mitigate the challenges posed by weak institutional environment. Therefore
we investigate the following question. How do entrepreneurs spot opportunities in institutional
constraints? Additionally, we also investigate the nature of institutional constraints and
examine if all institutional constraints represent entrepreneurial opportunity? Evidently the
literature lacks any empirical study that links the theoretical progress in the field of
Entrepreneurship and Institutional Voids as entrepreneurial opportunity and even when it does,
it is at a macro level which does not take into account the micro-processes that go into spotting
institutional voids, leveraging the informal institutions for venture creation. Additionally, while
scholars have studied how large resource rich conglomerates or affiliated business groups deal
with institutional voids, little attention is paid to develop an understanding of how resource
poor organizations navigate around institutional inefficiencies.
As a response to this gap within the literature, this paper presents an empirical inductive study
at an explicative platform to expand the understanding of how institutional constraints act as
opportunities for entrepreneurs. The objective of the present paper is to investigate empirically
the relatively unexplored side of institutional voids: their role as business opportunities at the
bottom of the pyramid (hereafter referred to as BoP). The BoP is especially relevant here since
most of the institution constrains are in fact faced by the rural and urban poor in emerging
economies who constitute a large BoP population. In fact, despite the fact that institutional
voids may be not efficient at a macro-economic level or produce social exclusion, they may be
especially profitable for some entrepreneurs (Webb et al. 2009, 2010).
The present study focuses on how entrepreneurs in emerging economies exploit institutional
voids and develop business models and products that perform on three fronts:
a. Fulfill an institutional constraint or a void caused by poor governance;
b. Is a for-profit effort;
c. Brings benefit by providing basic products or services where there are missing;
In order to conduct this investigation we have chosen the Indian energy industry as our research
setting and laboratory. We have chosen India, as it is one of the most significant emerging
economies in the world, with a large BoP. We have chosen the energy sector, as it is a very
relevant sector in any national economy.
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THEORETICAL BACKGROUND
In order examine these questions and not to fall in to the trap of applying established notion
about entrepreneurship in developed economies to developing economies, it is worth going
back to the initial work on entrepreneurship, which in essence, was adapted to the developed
economy environment by scholars.
In the seminal work by Schumpeter (1950), he identified entrepreneurship as a process of
creating new products, business models and also new markets that disrupt the existing ones in a
way that creates value and wealth. Along similar lines Kirzner (1973) further elaborated that
idea by defining entrepreneurship as a process of identifying opportunities embedded in
disequilibrium and inefficiency thereby bringing the systems back to equilibrium (Hill &
Mudambi, 2010). Both these definitions, in effect, identify disequilibrium and inefficiency as
the main driver of entrepreneurship. Successful entrepreneurs identify opportunities within
disequilibrium and then build around them to develop value propositions that are unique and
transform the system towards equilibrium. This paper argues that in transition economies where
institutions are evolving and hence, are often inefficient, they represent opportunities to
proactive entrepreneurs for value creation. Nonetheless, despite the recognition that institutional
constraints are widespread in emerging economies, the understanding of its role in
entrepreneurial activity has been rather limited.
There is agreement that state action and rules are the main source of market institutions (North,
1990), such as property rights and the effective economic freedom of individuals (Campbell &
Lindberg, 1990). There is also evidence that weak or absent market institutions reinforce
existing social inequalities in emerging markets as traditional local institutional arrangements,
such as religious beliefs, traditions, customs and local regulations, tend to limit access to market
activity (Crow, 2001). On the other side it can be argued convincingly that even standard
western market institutions can produce inequality and exclusion (Mair, Martì & Ventresca,
2012).
The literature on institutional voids has mainly focused on how institutional voids inhibit
smooth business strategy formulation by making interactions expensive and difficult (Aidis
2005; Fogel et al. 2006; Luthans and Ibrayeva 2006; Manolova et al. 2008). As a response to
this observation, some scholars focused on investigating how businesses navigate through and
deal with institutional uncertainty in emerging economies. However, most scholars (Carney,
Shapiro, & Tang, 2009; Chu, 2004; Gaur & Delios, 2006; Ma, Yao, & Xi, 2006) do this by
studying large conglomerate or group affiliated corporations, which either surpass, substitute or
replace institutional voids by leveraging their vast resource base. Indeed a search on EBSCO
(“institutional voids” in Author supplied abstract OR “institutional voids” in Author supplied
keywords) returned 41 studies out of which 18 directly studied institutional voids. Out of these
18, 5 studies directly studied large group affiliated corporation or conglomerates and how they
deal with institutional voids. Another 4 were published as Harvard Business School cases or in
Harvard Business Review and 1 on European Business Forum that dealt with the practitioner’s
aspect of spotting institutional void, but fall short of treating them as opportunities for new
business development and also do not discuss how small resource poor firms can leverage
institutional voids. Further, 4 studies directly link entrepreneurship to institutional voids out of
which, 2 studies examine an NGO in Bangladesh as an institutional entrepreneur. 2 other
discussed the discourse on market development and the role of innovation in product and
delivery systems amidst institutional voids. The last 2 papers discuss the future of Asian
business in uncertain institutional context and develop framework on institutional theory of the
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firm. In fact, institutional voids are always analysed as obstacles to economic development or
“drivers of market exclusion” (Mair, Martì & Ventresca, 2012), but while we share the view
that institutions are essential for market building, market efficiency and social inclusion, we
also make the case that their missing can provide business opportunities to some entrepreneurs,
as well. These opportunities can be especially significant for entrepreneurs serving the bottom
of the pyramid (Prahalad, 2005) and can be beneficial for the their customers facing a situation
of institutional voids.
To this end, the most relevant study on the subject is done my Mair, Marti and Ventrisca (2012)
who investigate, through a case study, the process of market development in and around
institutional voids. They focus on the socio-economic, political as well as religious aspects to
‘..expose voids as analytical spaces and illustrate how they result from conflict and
contradiction among institutional bits and pieces from local political, community, and religious
spheres’(J Mair et al., 2012a). Their theoretical point of departure is the new institutional
economics and agency theory. The authors base their work on the past research focusing on
large conglomerates in emerging economies to contend that large business groups substitute
missing institutions to ensure market function in the event of market failures caused by
institutional voids (Khanna & Palepu, 1997). They further study an NGO (BRAC) in
Bangladesh and focusing on two market institutions, property rights and autonomy, develop
new insight into how organizations work through these voids to build inclusive markets. They
propose that institutional voids can serve as problem sensing tool, which could then be used to
understand and address bottlenecks that hinder market development. Additionally, a key finding
of the study, which we take forward in this paper, is that idea that in places with low level of
institutionalism, markets should be developed along with rather than on top of existing local
institutions (J Mair, Marti, & Ventresca, 2012b). By extension, we suggest that it becomes
imperative to take into account the local socio-economic, cultural as well as infrastructural
constraints when developing value proposition for the local community rather than trying to
simulate similar institutions present in other places. Improvising and building new institutions
that conform to the local needs positively affects the entrepreneur’s ability to leverage
institutional constraints to develop viable value proposition. However, the study falls short on
one account. It studies an NGO whose motive of existence differs significantly with that of forprofit, private enterprise. However, it conforms perfectly to the idea of institutional
entrepreneurship. An institutional entrepreneur is an actor that intentionally mobilizes resources
to replace an existing institution and by extension, build new once where they are missing
(Dacin, Dacin, & Matear, 2010). However, Tracy and Phillips (2011) also note that
‘Institutional entrepreneurship in emerging markets is likely to involve a different set of skills
than those associated with institutional entrepreneurship in established markets due to the fact
that much of the institutional landscape in emerging markets is made up of organizational fields
which are relatively weakly institutionalized’.
They further theorize about the strategies for venture creation in uncertain institutional contexts.
They develop a typology of 3 institutional strategies for entrepreneurs in developing
economies- Institutional Brokering, Institutional Spanning and Bridging institutional distances.
For the concerns of this paper, we focus on institutional spanning which is central to developing
entrepreneurial initiatives in institutional, governance and infrastructural constraints. Tracy and
Phillips (2011) define institutional spanning as the process of ‘solving a given institutional
problem to become the standard taken-for-granted solution’. A classic example of such an
initiative is the Grameen bank, which identified the lack of any form of mechanism that would
allow for the rural poor in Bangladesh to access capital. As a result, Grameen bank provided an
alternative banking system through which groups of people can borrow capital. A key idea to be
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211
noted here is the fact that alternative institutions like the Grameen bank depend on informal
institutions like trust and community support in order to legitimize themselves. This can be
linked to the Scott (1991) work where he proposed that among other things, institutional
building and its legitimization depend on the cultural-cognitive aspect of the actors involved
(Scott, 1991). Hence, the way in which an institutional spanner interprets the socio-economic
and cultural underpinnings of the environment where the institutional is being spanned becomes
central. This may translate into identifying and then working with (instead of over) informal
institutions to develop alternative institutions. Bjerregaard and Lauring (2012) also point out to
the importance of informal institutions but also contend that while they do provide alternative
institutions where formal institutions do not exist, they also potentially ‘hamper market activity
by sanctioning norm-deviating behavior and are thus something that some actors may change’
(Bjerregaard & Lauring, 2012). Such sanctioning may stem from religious (see for example
Mair & Marti, 2009), cultural or otherwise based on tradition. Hence, in some cases traditional
informal institutions can actually prohibit equitable market building by giving preference to
some actor while discriminating against others. In the study by Mair & Marti (2012) the authors
bring out this point when they discuss about unfavorable laws governing property rights in
Bangladesh due to long standing informal norms which excluded women from indulging in
market activity and by denying property rights to them. However, not all informal institutions
are such. Keeping the discussion on informal institutions, Teagarden and Schotter (2013)
discuss the role of favor in emerging markets. Favor are a medium of exchange for social
capital (Teagarden & Schotter, 2012). The authors follow the classification by Khanna and
Palepu (2005) in which institutional voids are regarded as the absence of specialized
intermediaries, regulatory systems, and contract- enforcing mechanisms in emerging
markets…” (Khanna, Palepu, & Sinha, 2005; Khanna & Palepu, 1997). They further propose
that when formal institutional voids exist (in this case, lack of effective regulatory mechanism,
exchange mechanism), the need for informal reciprocity norm increases and hence, the use of
favor to interact socially within the business environment and to develop relationships also
increases. However, such informal institution is based on several factors. Trust between the
actors and their reputations being the foremost. In turn, trust and reputation stem from the
duration for which the actors have known each other. Additionally, the probability for the return
of favor increases if social and geographical mobility is limited (Teagarden & Schotter, 2012).
It is evident from the above discussion that identification of formal institutional constraints as
well as identifying which informal institution has replaced the institutional voids becomes
important for an institutional spanner. Indeed, while identifying institutional voids could be
easy and relatively straight forward by its virtue of missing, informal institutions that replaces
them may become extremely difficult since they are often based on societal, religious, political
or cultural norms. Additionally, as was the case with favor, informal institutions contain, within
themselves other factors which make them work (as was the case with favor which are built on
trust, reputation and geographical and social immobility) To this end, it becomes extremely
important for an institutional spanner to identify the informal institutions as well as what is
contained in them in order to leverage them for value creation. At this point, standing on the
work of Mair, Marti and Ventresca (2012) we stress that that value proposition and venture
creation should be done along with rather than on top of existing, often complex informal local
institutions.
On a related but slightly different note, Webb et al. (2009) focus on the impact of institutional
voids on entrepreneurship in markets at the BoP and highlight how institutional incongruence
and weak enforcement of formal institutions facilitate entrepreneurial activity, by reducing
uncertainty (Webb et al., 2010). Other researchers have investigated the positive role of
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212
partnerships between for profit corporations and local social entrepreneurs and NGOs in order
to reach the BoP and implement BoP business models (Seelos & Mair, 2007:49).
METHODOLOGY
The paper follows an inductive, multiple case study research design (Eisenhardt & Graebner,
2007). Case studies allow analysis of existing logic as well as test the existing theoretical
propositions. Additionally, a multiple case study allows replication logic in that it facilitates in
generalizing a particular theoretical proposition. Multiple cases are discrete experiments that
serve as replications, contrasts, and extensions to the emerging theory (Yin, 1994). Theory
building and development is a two-staged process: the descriptive stage and the normative stage
(Carlile & Christensen, 2004; Christensen, 2006). We seek to extend the current theory and
create new insight by studying entrepreneurship in environments with weak institutional setting.
We examine the microprocess of spotting institutional voids and turning them into a business
opportunity.
Research Setting
The research setting is energy industry in India. Even after 65 years of being independent, India
has a chronic shortage of electricity. We chose the electricity sector for two main reasons. First
of all because of the huge impact that it has on the BoP population. Millions of people in India,
especially in the rural areas are still not linked to the electric grid. This energy poverty adds to
the economic poverty of the rural population who form the greatest proportion of the BoP
population in developing economies. Lack of access of energy and electricity further limits the
socio economic development of the BoP in addition to limiting business opportunity for the
BoP in rural areas.
Secondly, the electricity industry has been an experiment laboratory both for business models
and technology by entrepreneurs. With the easing of restrictions on power generation in India
some entrepreneurs have managed to establish energy production companies that provide
villages with decentralized energy at an extremely affordable price.
The case studies include two such enterprises operating in renewable energy industry in India.
In doing business predominantly in rural areas where various institutional voids exists, they
offer a perfect setting to study and develop and understand of how entrepreneurs leverage
institutional voids to build business that build value for the community at large. The two case
studies are as follows:
a. Husk Power System
b. SELCO India Pvt. Ltd
Data Collection
The evolution of both these companies has been well documented. The study depends on
secondary data that already exist. Published interviews and company documentation form the
bases of data analysis. The fact that both these entrepreneurs have been extremely successful
spurred various studies to be done on various aspects of their operations by several international
organizations like the United Nations development program (UNDP). Also, since the
companies under study stand at the nexus of business and rural development, they have been
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213
covered by both business press as well as development oriented publications. This allowed a
wider frame to analyze the cases. Especially about the various kinds of institutions they had to
interact with in order to do business. Under this light, the business press mainly focused on the
traditional formal institutions required to do business while the development-oriented studies
provided an extensive insight into the informal institutions (e.g the socio-economic, political
and religious institutions and local customs) that were dealt with by the companies. Given that
both the firms have a rich documented history, diverse data sources such as press releases,
websites, business press articles, annual reports, and other company documents were studied.
We began data collection by gathering extensive archival data from both internal and external
resources. The internal resources included press releases and reports. The external sources
included media articles about each firm, analyst reports books and other articles about
competitors and the respective Industries. The data were then studied and examined
individually and a longitudinal history of each firm was mapped, including important
milestones, both strategic and operational. Particular attention was paid to the various
institutional interfaces, formal and informal, that the firms had to develop in order to legitimize
their operations.
Name
SELCO India
Pvt. Ltd.2
Husk Power
System 3
Industry
Main Capability
Solar Energy
Provider
Linking financial institutions to the poor.
Date
Established
1995
Customized, context dependent lighting
systems
Forming linkages with the community
2007
Waste to
Energy,
Electricity
provider
Incorporating local people in production
and distribution of Electricity
DATA ANALYSIS
Spotting Institutional Constraints
Starting from Schumpeter (1950), and Kirzner (1973), the cases were analysed keeping in mind
the importance of disequilibrium and inefficiency as potential pointers towards an
entrepreneurial opportunity. Under this light, a complex social-economic system together with
an inefficient political and transactional system would potentially offer opportunities to
entrepreneurs to establish ventures.
Entrepreneurs who spot opportunities embedded in institutional uncertainty and governance
inefficiencies often do so by challenging conventional wisdom about both, the consumer and
the business environment. Both SELCO and HPS were established with such differing notion
about the poor as underserved consumer and the electricity industry in India. For instance the
very base on which SELCO was established was counter- intuitive to most businesses at the
time of its establishment in 1995. As Harish Hande expressed in an interview
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214
‘We set up SELCO to bust three myths – the poor people cannot afford technology,
the poor people cannot maintain technology and it is not possible to run a
commercial venture that fulfils a social objective’ (Mukherji, 2010)
While institutional constraints are rampant in developing countries, they do not immediately
strike as business opportunities, but rather as business hurdles. The formal institutional and
governance inefficiency, like the lack of information exchange and dissimilation mechanisms,
lack of physical infrastructure and electricity etc. along with complex informal institutions
including strong cultural and religious habits and beliefs makes rural India a complex system to
do business in; so much so that most villages in India have been untouched by its on-going
economic transformation. The aforementioned complex system has prevented large and small
business to expand into the rural areas4 due the lack of physical infrastructure, Institutional
constraints, and complex societal institutions and norms. Additionally, the incidence of extreme
poverty and low buying power prevents most businesses to enter this sphere of society as they
think it to be unprofitable. This not only limits regional economic development but also
prevents rural poor to move up the economic ladder by limiting business exposure and hence,
preventing them to become small-scale entrepreneurs themselves.
Lack of access to dependable electricity in the rural parts of India is one such constraint, which
results from a combination of institutional constraints, governance inefficiency as well as
infrastructural limitations. The state of Bihar for instance is one of the poorest states in India
with 80 to 90 per cent of its villages without access to energy. Many of villages are so remote
that the government has declared them unreachable with the conventional electrical grid,
consigning millions of people to darkness and poverty (Dichter, Katz, Koh, & Karamchandani,
2013). While most business would, and historically have, stayed away from Bihar as a potential
profitable market, Gyanesh Pandey, Ratnesh Yadav, and Manoj Sinha saw opportunity in these
institutional constraints and established Husk Power System (HPS), a decentralized energy
productions and distribution company which produces electricity from rice husks at village
level.
However, not all institutional constraints can possibly become business opportunities. Certain
institutional uncertainties are restrictive and sanctioning, which limits the potential possibility
for private businesses to leverage them. For example, slow or inefficient judicial system is an
institutional inefficiency where private companies can hardly intervene to make it more
efficient. Political instability in a country is another such institutional constraint, which does not
pose as a potential opportunity to businesses. We term such institutional constraints as Absolute
Institutional constraints (AIC). A key characteristic of AIC is the fact that they often do not
interface with the market, and hence, are not appealing to private businesses as they do not offer
any market opportunity. However, they do, in various ways, affect the way markets function
and are regulated and hence they do have an impact on private business indirectly. For instance,
slow judicial system or political instability can severely limit market operations, make business
unprofitable or worse even, eradicate the market completely. In that context the concept was
used to justify the existence of large conglomerates in emerging markets while the mantras of
core competences and focus were dominant in western countries. Conglomerates were a
corporate strategy to manage the missing of institutional dimensions in emerging markets.
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215
However, these constraints can act as inputs to the business model development and may guide
operational strategy. For example, how to design an organization that reduces the number of
contracts to be enforced, in a country where the judiciary system is not effective?
On the other hand, we refer to institutional constraints, which offer business opportunity as
relative institutional constraints. These are the ones that offer business opportunities to
entrepreneurs. In the following section we present our analysis of how successful institutional
entrepreneurs work with formal and informal institutions to build ventures that are financially
sustainable as well as beneficial for the rural consumers.
Working with formal and informal institutions
Understanding the local context
As was the case with SELCO, the major business opportunity arose from the lack of state and
national government’s capability to connect the many rural villages in India to the national
electricity grid. However, while SELCO identified this opportunity that stemmed from an
inefficient and resource constrained formal institution, it realized that there was an extreme lack
of business supporting institutions at village level. Most importantly, SELCO devised
customized solar energy systems, which were deemed to be too expensive, and technology
intensive for the rural population. Additionally, the missing financing institutional support to
the company as well as to the customer limited business opportunity in rural areas since either
financial institution were missing in rural areas or, where they were present, they did not lend
money to the poor for solar technology. Harish Handy expressed in an interview 5
“..Like anything else which costs multiple times your annual income, financing
is needed to afford it. Many of the financial institutions were not aware of the
technology and did not know if the technology made sense.”
During the course of its operations SELCO understood that the product as such was not the
center of the business, but rather, understanding the local needs, customs and traditional
occupations in a rural setting. Consequently, connecting the banks to the rural population
became central to their operations. In this sense, SELCO was transforming itself into a
combination of an institutional spanner and a institutional brokers (Tracey & Phillips, 2011). It
was performing the task of an institutional broker by connecting the rural financial institutions
to the rural poor who needed the financing to purchase solar lighting systems. At this same time
it was acting as a quasi-spanner by becoming a preferred, taken for granted solution for getting
financing from the banks for the rural poor. We refer to it as a quasi-spanner because SELCO
itself was not proving the financing but rather, facilitating and playing the role of a trust worthy
partner for both the banks and the rural poor. Additionally while most business standardize the
product to sell to as many people as possible at the lowest cost possible, they often miss out
understanding the needs of the customer and rather end up targeting the wants. However, at the
BoP, the need of the consumer becomes more important than the want. As Harish Hande
explain in an interview:
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216
“It is important to clearly differentiate between a want and a need. You can
scale by standardization for a want. For a need, you have to customize based
on the context, which takes time.4
This presents an added challenge for entrepreneurs doing business in environments with low
level of formal institutionalism. Due to lack of market research and other such business
intermediaries, getting access to information essentially means actually spending time in the
market with the consumers. Harish Hande expressed in an interview
“I lived for two years without access to electricity to understand what the
customer really wants and what he/ she goes through. Selco is not a product
company. What we do is assess the real need of the customer and hence address
it with the right product..” 5
“Solutions like solar energy become affordable only when they are served by
assessing the right need. Our teams understand the clients needs very well
because often they eat meals together!” 6
Proposition 1:Being locally embedded in the consumer’s cultural and social sphere
positively effects the acceptability and usage of the product /service.
Legitimizing the proto-institutions through partnerships with formal institutions
It has been pointed out in the literature that entrepreneurial efforts often lead to “protoinstitutions,” new practices, rules, and technologies that transcend a particular collaborative
relationship and may become new institutions if they diffuse sufficiently (Lawrence, Hardy &
Phillips, 2002: 281). While SELCO did manage to build initial partnership with banks, it
needed to legitimatize itself as a proto-institution at the rural level. To do this, it started
expanding its relations with large financial institutions and trying to convince them to finance
solar lighting systems to the poor who did not have any collateral for to offer against the loans.
SELCO convinces banks to lend money to the poor for solar lighting systems, which at the time
was not considered as a financeable product. As Harish Hande pointed out7
“They had apprehension that solar lighting could be linked to income
generation in the same way as other products, which they had been financing.”
“…in late 1996, Malaprabha Grameen Bank was the first one to start financing.
They elected to finance 100 systems, probably because they were getting fed up
with me more than anything else. I took the letter which stated they would
finance 100 systems to other banks, and asked them why they were not doing the
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217
same. After that, banks opened up. That was our biggest code to crack, since
our entire model is based on banks providing the financing.”
In another interview Harish explained how difficult it was is to convince the banks to provide
financing solution to rural customers for solar technology. Also at time, SELCO itself had to
provide the bank with the guarantee amount on behalf of the rural consumer.
“Selco has created a sustainable model, working closely with regional banks
and lending institutions, devising propositions for the low income customers at
the BoP. Initially it was difficult, but overtime the banks understood that if they
create supporting ecosystems for the families today, their future generations
will in all probability continue to bank with them. We also had to keep a
guarantee amount with the bank initially, which overtime has evolved into a
sustainable model, making it easier for people to have access to funds and
schemes.” 8
While, partnerships with regional rural banks like the Malaprabha Grameen Bank (Grameen
Bank in Hindi literally translates into Rural Bank) helped SELCO to legitimize itself in the
villages, for both the customers and the rural banks it realized that in order to become the
preferred institution of choice for the customers and establish itself as a alternative institution,
one which can provide electricity to the rural consumer but also help them get financing to buy
the product. As Harish Hande expressed
“If major banks get involved with financing energy services it would mean that
the rest of the world would look at us differently” 9
Following this belief, SELCO formed partnership with several rural banks, most notably the
SEWA Bank. SELCO forged partnerships with various organizations and institutions in rural
Karnataka. Most notably, it formed a partnership with SEWA Bank and became its technology
partner. SEWA bank was established in 1974 as a offshoot of SEWA (Self Employed
Women’s Association) to provide financial services to its members. SEWA Bank initiated
Project Urja for its 300,000 members to have access to reliable and affordable sources of
energy. It estimated that chronic shortage of cooking fuel, reliable lighting and electric power
were the key reasons why the underprivileged were unable to break the vicious cycle of
illiteracy, and unemployment and poverty and they chose SELCO to provide it with
technological solutions to address the energy needs of their members. This helped SELCO to
transform itself from a solar lighting company to an Energy solutions company. SELCO
diversified into other areas of energy services and established an Innovation department and
incubations Laboratory that develops innovative solutions for rural population to enhance
productivity.
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218
Proposition 2 – Though many formal, business supporting institutions are generally
missing in BoP/Rural market place, identifying and leveraging the ones that do exists
positively effects the business operations by giving them legitimacy and a sense of
dependability
Engaging with the community and informal institutions
On the other side, the socio-economic and cultural norms that govern the local rural areas also
gives rise to several implications business operation. Understanding the local socio-economic
norms, which determine their behaviour become essential in order to design products and
services that would be acceptable to them not only economically but also socially. Informal
institutions can be identified as unwritten rules, norms, attitude, traditions and morals prevalent
in societies. Such informal institutions can prevent smooth functioning of processes that are
essential to business functioning, like hiring human resources. In both our case studies, we
realized that hiring human resources posed the biggest problem for entrepreneurs operating in
rural parts of the country. Both SELCO and HPS recruit local people at village as business
representatives. This helps them to keep in touch with the local customs and behavioural norms,
electricity needs and challenges based on which they develop their solutions. Consequently
they work with informal local institutions to understand the specific need and them build
inclusive local institutions to run and maintain the electricity infrastructure.
Through our analysis we also suggest that parallel to developing partnerships with formal
institutions, forming partnerships with local informal institutions also positively affects the firm
in to span institutional constraints. In India, local informal institutions govern the day-to-day
activity of the village. This can in the form of Local Panchayats (village level governing body
comprising of several elderly people of the village). The panchayat practices immense power
over the village and how individual behave and also act as grievance addressing body.
Successful institutional entrepreneurs work with these informal institutions to legitimize its
operations and establish new process, practices, norms and proto-institutions to develop
successful produces and services. HPS does it by working with panchayats in rural India
As an HPS executive explained:
“First, we seek out the elders, the panchayat and sit with them and talk. If they
buy into our value proposition, we train operators and materials handlers; we
set up an electricity council in each village, which is responsible for
administering the payments. We are all about simplicity and speed. We’re
learning faster and now, our central staff has less and less involvement for each
installation” 10
Additionally, the lack of proper accessible labor market in rural areas in India restricts proper
recruitment and training of human resources. However, in order to truly understand the local
context and needs, it becomes imperative to remain embedded into the local socio-economic
context. Both the studied cases did this by recruiting locally available human resources, even
though by large MNC standards they were unskilled. In both the cases they spanned the
institutional constraint of a non-existent formal labor market in rural India decentralizing their
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219
recruitment and by establishing training centers as proto institutions for human resource
development at the village level. In both the studied cases, the recruitment and training of the
staff is done at the village level and no transfers to other places are done. Chip Ransler of Husk
Power Systems explained.
“My business partners, Manoj, Ratnesh and Gyanesh, all come from villages
and small towns in Bihar. Our process is all-local; we have hired only 1 person
(besides me) who is non-local.” 11
In addition to this, local occupations, and energy needs follow a social pattern. During the
analysis, we leant that understanding the exact energy needs, which depend on occupation and
usage. Hence, a case by case analysis of financial as well as energy need is done prior to
developing a solar lighting or electricity supply solution for the village. This involves
calculating the direct costs as well as indirect benefits from increased business hours from due
to availability of lighting and electricity. As Ratnesh Yadav of HPS explained
“On an average every household spends at a minimum Rs.150-200/month ($3$4.50 which can constitute as much as 30% of their monthly income) just to
light a kerosene lamp for 2 hours. We charge Rs.80 ($1.70) for two 15 watts
CFL's/month and mobile charging is free. These villages had cell phones even
before they had electricity and they had to go to a near by town to recharge
their battery @ Rs.5/recharge ~ ($0.11)
“We hire local village people, give them training and they are the ones who
operate and manage these plants. Right now we have about 60 plants, spread
across 270 villages, directly impacting 200 thousands lives.” 12
SELCO as well conducts a needs vs. cost vs. benefits analyses for each customer prior to
designing its lighting solutions. Harish Hande of SELCO explained
“Like many other companies, we are not a product company. But our strength is
that we assess the need and hence create solutions which are the real
requirements of the customer. We don’t satisfy wants or desires. It’s the right
assessment that creates the most optimized solution.”13
The selling process starts with an understanding of how much money can the customer pay as
loan instalment every month as opposed to the cost of the system. A SELCO technician
explains the customer the cost of the system as well as the benefits. All expenditures are taken
into account including the money spent monthly on kerosene that most households procure for
lighting purposes in rural India. Additional income from increased hours of work that the
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220
lighting system can provide is also taken in to account to calculate the payable monthly
installment. Once this is done, the lighting system is developed according to the needs of the
customer and bank financing through partner banks is arranged. In addition to its house
lightening systems, SELCO designs lighting systems form specific communities. It doesn’t
have standardized solar lighting product but designs them on a case-to-case basis. It targets
groups of rural workers engaged in a particular economic activity as prospective customers. For
instance, SELCO designed solar caps for the flower picker community in Karnataka, which
pluck flowers from midnight till 3 a.m. in the morning. Before that the flower picker would
balance a kerosene lamp on one hand and pluck the flower with the other thus reducing their
efficiency and hence in turn their income. With solar headlamps, they were able to pluck double
the quantity of flowers in the same time. This exemplifies the how much the company is rooted
into the local context in addition to understanding the tradition occupation which are normally
passed on from once generation to the other in the rural India. Harish Hande explained.
“For example we noticed how jasmine flowers are collected in Tamil Nadu. It’s
collected between 3 and 5 in the morning by 7 and 8 year old girls. How? Do
you know why those girls have long hair? Not because of beauty. It’s so that
they can balance a kerosene light. Would you allow your 5 year old daughter or
cousin or niece to go out at 1’o clock in the night balancing a kerosene light to
pluck flowers? That is the situation of our country. So we designed a head lamp,
a solar powered head lamp for these families. That’s the value that we look at
rather than just looking at solar.” 14
In addition to providing solutions to specific context dependent local problems relating to
energy needs, SELCO would also appoint an entrepreneur who would rent out the solar lamps
to the midwives and flower pickers on a daily or an hourly basis, ensuring higher usage of the
lamps and greater income generation. Such a strategy helps filling up institutional constraints
and develop inclusive market place by positioning itself as an alternative institution. We found
similar strategies pursued by HPS that, though operates in a different business, acts as a protoinstitutions where important institutions which provide electricity and employment are missing.
The business model of HPS is dependent on its engagement with the rural community. HPS
developed an innovative biomass gasification technology capable of generating electricity from
biomass on a micro scale efficiently. The company is present in 250 villages and employs
around 350 people. It generates electricity through small-scale systems and sells at an
affordable price to the base of the pyramid customer. Most of HPS customers earn 2$ a day or
less.
Apart from providing electricity HPS provides substantial economic benefits for farmers and
local businesses in the entire value chain. Increased lighting has also indirectly helped the
community by increasing the business hours in the market area, reducing thefts, improving
health conditions and encouraging new business developments like computer shops and photo
studios. Moreover, lighting has increased the possible number of study hours, as children are
now able to study after dark.
In addition to this, HPS initiative has provided employment opportunities to thousands of rural
women by giving them training and raw material to manufacture incense sticks (using rice husk
char which is left after the burning of rice husks). More than 1200 women have been trained (at
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221
2 plant sites) for manufacturing incense sticks. This enables household to earn upto Rs. 1000
per month and save Rs. 150 on kerosene costs while paying only Rs. 80 for electricity.
Discarded husks (which used to go waste before HPS) are procured at an average cost of 1 Rs.
per Kg provided additional income/savings to farmers. Each HPS system consists of a 30–50
kilowatt (kW) power plant that runs entirely on rice husks, generating electricity through
biomass gasification, and a simple distribution micro-grid connecting subscribers directly to the
plant. Low cost pre-paid meters have been installed that can efficiently regulate the flow of
low-watt electricity and reduce electricity theft to less than 5 per cent.
Systems are sited only in locations where rice husks are plentiful. HPS plants offer competitive
prices for husks year-round, approximately $0.02–0.03 per kilogram, and farmers have an
incentive to supply them in order to ensure that electricity remains available in their villages.
The typical plant can serve two to four villages—approximately 500 households within a radius
of 1.5 kilometers, depending on size and population.
A typical rural household pays a base rate of $2.20 per month, which includes 40W of
electricity for 6–8 hours every evening, enough to power two (CFL) bulbs and recharge a cell
phone. For the business subscribers who use more electricity (60-70W) pay an average of $4–
4.50 per month. HPS’ service compares favorably to the cost of alternatives such as candles,
kerosene lamps, and LED lanterns, which serve only lighting needs.
Proposition 3: Engaging with community and identifying the local informal institutions
and augmenting them with proposed products and services positively affects the
entrepreneurial initiative by helping develop value offerings that are successfully
customized for the BoP consumers.
RESULTS & DISCUSSION
In emerging markets the “community and societal sphere” (community norms of behaviour),
the “political sphere” (local powers corruption, access to formal and informal justice) and the
“religious sphere” have a deep impact on property rights, especially among woman, and tend to
limit opportunities for both entrepreneurs and consumers (Mair et al., 2012). Limitations to
property rights and institutional voids regarding property rights can be especially harmful for
entrepreneurship.
Economic freedom is another essential institution of market economies (North, 1990) and is
affected by the “community and societal sphere” (community norms of behaviour), the
“political sphere” (civil laws) and the “religious sphere” so that speaking of a plurality of
sometime conflicting institutions is more appropriate than speaking of “institutional voids” .
Mair et al. (2012) identify two broad repertoires of interventions to address the indeterminacy
of the two key market institutions of private properties and economic freedom (they call it
‘autonomy’, with special reference to women and their overall independence): 1) activities that
redefine market architecture; 2) activities that legitimate new actors.
Institutional voids make markets inefficient and so favour conglomerates (Khanna & Palepu,
1997) and business groups (Khanna & Yafeh, 2007; Carney et al., 2009), and make market
based organizational structures, such as franchising, less successful (Kistruck et. al., 2011). The
case of franchising is a revelatory one. The absence of a viable labour market produces the
effect that individuals, who would like to be employees, resort to franchising as a substitute of
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employment, while they are in no way proactive or entrepreneurial, so that the franchising
model is underperforming in respect to developed markets. The absence of an effective contract
enforcement mechanism makes it difficult to sue a franchisee that is not respecting the contract.
According to this framework, the development of institutional and market infrastructures in
emerging markets is conducive to entry by unaffiliated, freestanding firms (Carney et al., 2009).
The idea that under high institutional uncertainty investors prefer low commitment but flexible
modes that enable later commitment increases is supported by recent research on the
internationalization process of MNE; it also highlights how institutional voids increase up-front
information search and adaptation costs that reduce the likelihood of early post-entry
adjustments (Santangelo & Meyer, 2011)
Through the analysis of the cases, we tried to identify the various institutional interfaces on
which SELCO and HPS had to function. Once this was done we tried to map where business
opportunity lies amidst the various institutional spheres15 Our analysis suggests that relative
institutional voids are a part of formal institutions that fail to perform or are inefficient.
However, due to the fact that they are normally imbedded in strong local socio-economic and
cultural and often religious context makes them difficult to leverage. Such informal institutions
are often built on social and hierarchical layers. Additionally, the inefficiency of capital, labor
and product market makes it difficult to gather data about consumer preferences, recruitment of
human resources as well as organize modern financial support for the company as well as for
the consumer. In additions to this, gaining the trust of the local population also becomes
important in order to legitimize operations and initiatives. In this paper we explore how can
entrepreneurs spot institutional constraints and turn them into opportunities.
Through our analysis, we suggest that institutional opportunities in institutionally constrained
environment are embedded within the formal institutions where they are inefficient or absent.
However, these opportunities are also intertwined with local informal institutions, culture and
habits and hence the entrepreneurial opportunity arising from institutional uncertainty stands at
the cusp of relative institutional voids formal institutions and informal institutions. Indeed, not
all such opportunities are available to all the actors. As in any business environment, a match
between the core competency of the actor and the opportunity is essential. In the studies cases,
such a match was the initial thrust. In the case of SELCO, it was an innovative use of solar
technology coupled with innovative financial service that enables it to transform an institutional
constraint into a business opportunity. For HPS, years of R&D that developed a new
gasification technology for electricity production helped them develop a business model based
of decentralized power plants which worked in close cooperating with the local community.
Hence, relative institutional voids present themselves as entrepreneurial opportunities, which in
fact are embedded within formal institutions, which are inefficient, or non-performing.
However, they are also overlapped with informal institutions, which may have developed in the
absence of formal institutions. Depending on the country or the region, these informal
institutions can be very strong depending on the local traditions, culture, religious practices and
the stratification of society. Hence, while identifying the opportunity may seem easy and
straightforward, developing an intimate knowledge of informal institutions could be complex,
but may affect positively the firm’s ability to operate in an environment crowded with informal
institutions which are often unwritten yet understood by the locals.
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Figure 1: Cusp of opportunities
Informal institutional therefore occupies a key role in supporting business activity in rural areas.
Nevertheless, bridging the institutional divide between the formal and the informal institutions
could be a complimentary strategy positively effecting and enabling the business environment.
As in the case of SELCO which successfully brokered as well as spanned the lack of financial
institutions in rural areas, at the same time connecting groups of rural customers to rural banks
as depicted in the figure below.
Financial
Institutions
(Rural Banks)
Formal Institutions
SELCO
Needs of the
consumers,
Traditional
occupations,
Role of women,
local, H uman
resources,
Village speci c informal institutions
Figure 2: SELCO Model
Where as in HPS, the key idea was of connecting with the rural population and the local
informal institutions (like the panchayats). HPS excelled in forming relationship and recruiting
and training the locals to develop, run and maintain the power plants. This helped them in
keeping the costs down as well as becoming locally embedded in order to be agile in both its
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224
operation and its understanding of the local environment. Additionally, HPS displayed an
exemplary practice of bricolage where a waste product (rice husk) was used to produce
electricity, a function that was initially not expected from rice husks.
LIMITATIONS AND FUTURE RESEARCH
The study aims to further build on the understanding of the role of institutional voids in
business engagement in developing economies. The authors present a model which could help
companies identify business opportunism in institutionally constrained environments and help
develop business models for such business endeavours. Given the fact that the study was based
on secondary data the authors suggest further research on the topic based on primary data which
would lend further clarity to the process of venture creation in institutionally constrained
environments.
ENDNOTES
1. .g., availability of high stocks of human capital and low stocks of financial capital, which is
arguably to that of, developed economies. (See- Kiss et al., 2012)
2. http://www.youtube.com/watch?v=HGTO2Nm5lng
3.http://www.youtube.com/watch?v=d0XcoeqVoaI
4.With notable exception to various multination and domestic FMCG companies which are
usually resource rich and hence can invest in establishing distribution channels
5.http://www.sramanamitra.com/2007/05/12/social-entrepreneur-harish-hande-part-3/
6.http://social.yourstory.in/2009/09/tc-i-changemakers-a-conversation-with-dr-harish-hande-ofselco/
7.http://blog.ennovent.com/2010/02/optimizing-energy-solutions-for-bop-selco-solar/
8.http://www.sramanamitra.com/2007/05/12/social-entrepreneur-harish-hande-part-3/
9.http://blog.ennovent.com/2010/02/optimizing-energy-solutions-for-bop-selco-solar/
10.http://www.sramanamitra.com/2007/05/13/social-entrepreneur-harish-hande-part-4/
11.http://www.nextbillion.net/blogpost.aspx?blogid=1241
12.http://www.nextbillion.net/blogpost.aspx?blogid=1241
13.http://sierraclub.typepad.com/compass/2011/01/powering-india-with-rice-husks-aninterview-with-ratnesh-yadav-from-husk-power-systems.html
14.http://blog.ennovent.com/2010/02/optimizing-energy-solutions-for-bop-selco-solar/
http://www.scholarsavenue.org/2013/02/interview-with-dr-harish-hande/
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15.We follow the terminology of (J Mair et al., 2012a) to express distinct institutional interfaces
that determine socio-economic exchange.
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SOCIAL ENTREPRENEURSHIP: CONCEPTS, PRACTICES
WAITING FOR DEFINITIONS FROM A SOCIOLOGICAL AND
ECONOMIC ANALYSIS
Analice Araújo
Instituto de Economia, Federal University of Rio de Janeiro
Abstract: The perception and demand that traditional businesses for profit should engage in
socially responsible practices already occupying space in academic discussions, as well as the
practices of the business world for over two decades. Despite this growth, some controversies
have been found on its main concepts. The aim of this paper is to make a literature review on
the concepts and implications of social entrepreneurship proposed by authors in major national
and international research centers in order to assess the main guidelines and statements of
genuine social business.
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INTRODUCTION
The perception and demand that traditional businesses for profit should engage in socially
responsible practices already occupying space in academic discussions, as well as the practices
of the business world for over two decades. Social enterprises set up as organizations and with
established administrative functions have evolved rapidly, but only in the last fifteen years (
Defourny and Nyssens, 2010); These companies reflect new thinking and acting, so
enterprising, and have as a common element particularity beaded by leading theorists who
study: its product offerings and services must necessarily be directed to the good of society
(Defourny & Nyssens, 2006; Cohen, 2011; Dees, 1998, Lewis, 2006). Incorporating
management processes differentiated in this new format, social innovators implement business
plans to serve their social mission, fiber and fuel in this kind of enterprise. As experiments and
practices of innovation, competitiveness and development can bring with distinctive
peculiarities and virtuous way, as the social and cultural elements are strengthened. From the
analysis presented here, we identify their peculiarities, which a creativity and entrepreneurial
initiative depends on a complex pattern of institutional relations which intervenes in the process
and result in sustainable economic and social transformations.
Despite this exponential growth, some controversies have been found on its main concepts. An
example of these conflicts is the growing number of businesses that have emerged targeted to
occupy a space that grows alarmingly in recent years: the business oriented to the "bottom of
the pyramid". We believe that while these businesses are not necessarily in social business, and
often they are not, they have been widely praised for their role in promoting inclusiveness and
catalyzing social gains.
Therefore, with the concepts related to social entrepreneurship, we present theoretical and
analytical discussion, addressing its causes and origins. Our understanding of fundamental
social relations is enabled by the use of theoretical bias of Economic Sociology, which
highlights the buildings and social relations that underlie economic phenomena.
OBJECTIVES AND METHODOLOGY
The aim of this paper is therefore to make a thorough literature review on the concepts and
implications of social entrepreneurship proposed by authors in major national and international
research centers in order to assess the main guidelines and statements of genuine social
business.
The establishment of limits and concepts will help us to distinguish social entrepreneurship
from social service provision and social activism for instance. What we can see is that this kind
of social service will often adapt one another's strategies and develop hybrid models. It's our
hope that the results we achieve will help to clarify the distinctive value that each approach
brings to society and lead ultimately to a better understanding and more informed decision
making among hose committed to advancing positive social change and development of the
society.
This article, through an exploratory research in the literature on social enterprise and social
entrepreneurship, uses the theoretical bias of Economic Sociology necessary to analyze the role
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230
of social relations in the process. To understand the modes of articulation and organization of
the activities of social enterprises in the world, it is necessary to use a theoretical bias that
incorporates social aspects in their evaluations and interpretations of economic relations,
because thinking about the phenomena of associative thinking is present in the bases of the
foundations of solidarity and alliance in contemporary societies.
THEORETICAL FRAMEWORK
A globalized society and its limits to social and local development: an
approach heterodox
Starting from an unorthodox proposal evaluation, which favors social interactions, economic
and cultural aspects of society, we will try to capture some of the changes and impacts that
explain the background of the catalyst influences the development of social entrepreneurs.
Understanding the changes operated in reality and innovations that emerge in an attempt to
manage the reality implies dealing with analysis tools more precise and more stringent than
those that common sense offers. Therefore, this article intends to understand and analyze the
role of social relations in the process.
The differences and particularities of economic development and the causes of uneven
development in the various regions and territories worldwide have been best explained by
systemic theories, intersecting economic, historical, social and cultural rights which deny the
market and / or the State as sole development promoters. Institutional economics has this merit
and has been accepted to explain the dynamic pair, and will be here privileged as a chain of
economic sociology. Discrediting of orthodox economics beliefs in the power of markets as an
explanatory factor of the development, the aid of lenses from more heterodox economics, allow
us to recognize that a policy development requires a more complex understanding of systems,
institutions that combine economic, social, cultural and political whose interactions change over
time (Boyer, 2001).
The global transformations have occurred in the economic activities, work processes,
employment, global geopolitical tensions in national and international cultural and social
requiring new uses of technology, access to information, in the forms of organization of social
groups, in role of the state, in short, in all changes across the fabric of the contemporary world.
This new development carries with it many new ills and unrest expressed in social inequalities,
precariousness, social and environmental risks, unknown diseases, worsening vulnerabilities,
increasing violence and escalation of intolerance.
These imbalances open cracks in society and therefore these weaknesses before new practices
are required. New risks and new forms of social issues become insufficient (but not
unnecessary) by traditional practices. Their movements and actions ask for more specific
solutions, more targeted and more accurate. And these new formats require a greater diversity
of actors involved and therefore new concepts.
Another effect of neoliberal policies was the disconnecting between the demands of global
macro from micro local realities. The expansion of process of urbanization and the economic
and cultural globalization, show awareness for approaching problems and interrelated global
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231
and local spheres. These are realities that are expressed on the global, national, regional and
local scales and articulate issues relating to employment and unemployment, environmental
degradation and preservation, production and consumption, export and import, to domination
and resistance politics, difference and cultural identity, equality and inequality, the rights and
duties of citizens which are intertwined in planetary space.
Giddens (1991 and 1999) and Ianni (1994) analyze this process in a globalized world, and show
that there is an "intensification of worldwide social relations which link distant localities in
such a way that local happenings are shaped by events occurring many miles away and viceversa" (Giddens, 1991). In addition, there is a standardization of management processes,
highlighted by Castells (1999) where capital and companies tend to organize under the
principles of flexibility, competitiveness, innovation, horizontal, networked organization,
decentralization, computer technologies and precarious forms of work. The swift within the
range of social changes indicates an increase in the time-space detachment in advanced
societies. This has led to a growing alienation and uprooting of individuals and society with
respect to the nature and social issues (Giddens, 1991).
It is from this social construction of interactivity (or lack thereof) of men with their
environmental problems, that new solutions converge and actors act pro-actively to improve the
social welfare. Companies in this context have begun in recent decades to engage in activities
that traditionally were considered government activities, such as public health, education, social
security and protection of human rights, acting where failed the performances of governments.
We can see that since 2000, more than 5,000 commercial enterprises signed the UN Global
Compact, which can be understood as a kind of self-regulation that emerged from the
regulatory void arising from globalization, global governance in terms of resolving social
problems in society (Scherer and Palazzo, 2011; Margolis and Wals, 2003; Hart, 2005; Porter,
2006). Some authors, however, have criticized these social actions because they think they do
not correspond to the economic role of business in society, as traditionally expected
(Henderson, 2001; Friedman, 1976) .
Some authors who have been analyzing the issue of corporate behavior socially committed,
from the standpoint of business, conclude that they go beyond the fulfillment of the
expectations of "stakeholders" (Carroll ,1991 and Whetton and Mackey, 2002). Besides the fact
that these actions find multiple opinions on its legitimacy to conquer the real and sustainable
well-being of society, the actions of some companies may be confined solely to a marketing and
self-promotion activity in attempt to make a risk management business with its stakeholders, an
important feature that is not much discussed. This feature is of critical importance to understand
the institutional dynamics of the contemporary world, their political implications (Cheibub and
Locke, 2002) and their cultural and impacts on the social capital of communities.
Why there is still a gap in terms of global governance, i.e., as the process of defining and
implementing global rules and provide global public goods, social responsibility is a process of
multilateral and polycentric governments, international institutions, civil society groups,
companies, foundations and institutes that contribute to knowledge and resources.
Unlike national governance with the monopoly on the use of coercive force institutional
(standards, laws and regulations especially in the environmental area) to direct or control the
actions of private actors in the country, global governance is based on contributions, voluntary
standards ,certifications and enforcement mechanisms weak or even absent (Scherer and
Palazzo, 2011: 900).
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Associated with increased social demands, the consolidation of democratic governments in
Latin America and the dissemination of the values of citizenship and the right of the citizen,
that legitimate social demands, led civil society to organize itself to ensure accessibility to those
goods and services. This organization formed the so-called Third Sector. In Latin America, the
concept of the third sector is closely linked to a double negation: non-profit and nongovernmental. What is observed is that the common point of these different literatures is that
the Third Sector appears or grows according to the absence and / or reduction of state shares
(Maimon, 2006).
Landin1 points out that to assume that the rise of the third sector in Brazil and in the world
justifies the increased organization of civil society associations and the process of
disengagement of the state, either directly or philanthropically, is a mistake. And he says the
new associative field is relevant, exactly, for its contribution to the social and civic
mobilization, being essential to the construction of new democratic and participatory design,
combining direct and representative democracy.
This creates a new field of opportunities associated with this latent demand and a new way of
organizing and structuring the offer represented by the third sector and its relationship with the
public sector - private, the new social business, social actions of companies, new social
technologies, social economy, and many other concepts, constituting the new practices required
by new times.
This all entails designing and defining new concepts, such as social entrepreneurship, social
business, social inclusive business, social innovation, social technology, etc. If the new times
demand new practices, new practices require new investments in the plane of reflection. In this
scenario, this is the role of the academy and that is the purpose of this article, which, through an
exploratory attempt, tries to summarize some of the concepts of the main authors who coined,
organized and are reflecting on the new format of the business that thrive today, worldwide.
Social Business: concepts, evolution and key considerations
In the wake of rising inequality or the impossibility of solving all the demands of society by
governments or private companies, either for lack of public funds or by private disinterest in
their potential profitability, social businesses come with two simultaneous functions: to be
businesses that provide and ensure financial sustainability and create social value. Comini
(2011) and Granados et.al. (2011) reinforce this view, noting that although there was an
increase in the number of papers on social entrepreneurship between 1991 and 2004, annual
production articles on social entrepreneurship are still at a very low level.
These types of companies have been called social enterprises, inclusive business and corporate
business, among others. However, what appeared to be dichotomous and paradoxical - business
and social gain -has been one of the most dynamic activities, helping to reduce social problems
with elements of traditional businesses, such as efficiency and financial gains through market
mechanisms.
However, its distinctive character raises doubts as to the definitions, scope, modus operandi,
internal organizational settings and their interaction with supply chains. Comini (2012)
recognizes these difficulties and stresses that there is no uniformity in defining the social nature
of these projects, as well as to evaluate their innovativeness, since they have different formats
and positions as to their goals and interests.
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It is worth mentioning here that the very decision to "how social" is an investment in a product
or a service, depends on the vision, the perception and the values of cultural groups, individuals
or companies, and therefore is not an even decision. Social priorities are not seen the same way
by all people and decisions on resource use often are subject to criticism and different
perceptions. It is possible that these limits and priorities are never defined in a society, since
public policy priorities and government policies are often inconsistent and impossible to define.
So, on the heels of controversies and disputes, several authors, national and international, have
been trying to define what a social business is. Among them, we highlight some of them in the
following paragraphs.
Young (2008), making an analysis of perceptions of the concept of social business, concludes
that the term means for some authors the development of a trade or business for profit
organizations, while for others, it refers to the development of initiatives with corporate
objectives by companies; for others stills, it relates to understanding how the supply and
delivery of public services organizations is defined. In Europe, for example, there is the
perception that social enterprises are natural and some of its countries have specific legislation
for this type of company (Kerlin, 2006 apud Liawatall, 2012).
Apparently, so many of the elements necessary to facilitate the growth and development of
social enterprises are finding conditions of “social embeddedness”, popular support and finance
private (or public) in order to mobilize and stimulate social innovations and their companies.
Despite this scenario, social entrepreneurs face significant obstacles to create viable solutions,
such as better coordination mechanisms of entrepreneurship, for example. In the item below, we
present the main concepts related to social entrepreneurship, as well as some of its limitations
diffusion in society, from the viewpoint of Sociological Economics.
What we see, therefore, is that some social entrepreneurs are developing sophisticated financial
models and business plans and building coherent business models with their value chain, and
therefore obtaining financial returns. This reality is present mainly in the U.S. market. It is in
the U.S. social business guidelines to occupy and develop public services and social
technologies with administrative functions geared towards profitability. These social
entrepreneurs are identified as a segment of a value chain of high social impact positive
business that build sustainable (and profitable) businesses in this chain. The advantage and
difference from the traditional business is the ability to create a company culture embracing
social objectives at the core of its value proposition.
Comini (2011) points out that social business also reflect a new configuration of civil society
organizations seeking to offer services in different formats and seeking alternatives to
traditional forms of fundraising in order to become more independent and financially
sustainable. Hybrid models of social business arise around the world, combining intrinsically
business methods to market and generate social value, sometimes combined with partner
organizations in the third sector with the public and private sectors.
In terms of gains and organizational settings and arrangements, we can highlight the connection
between agents and actors who act separately in traditional businesses, such as civil society
organizations, companies of various sizes, governments and funding agencies. Comini (2012)
highlights the perspectives of different regions in the world, especially among the elements
differentiating the motivations, the organizational structure adopted and the ultimate goals, all
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these targeted and conditioned by the social, political and economic country in which they
operate.
Table 1 - Social Enterprise Prospects in North American, European and Developing
Countries
Definition
Social
Enterprise
American
European and Canadian Perspective Perspective of Developing countries
Perspective
social Are called social enterprise, ie, Confused with the term Business Social
of Called
enterprise or social "organizations with the explicit aim to inclusive or Business Bottom of the Pyramid.
business,
benefit the community, initiated by a The social or inclusive business has strong
entrepreneurial
group of citizens, in which the material concern for poverty reduction initiatives and are
action includes any interest of capital investors is subject to necessarily have a positive social impact,
market that has limits" 1
effective and, above all, long-term.
social impact with
their trading action. - Organizations seeking social and -Organizations or projects that generate social
Can take different economic goals with entrepreneurial change through market activities (SEKN, apud
legal
forms, spirit and have the primary purpose other Comini, 2011:10)
corporations,
than profit maximization (OECD, 1999)
corporations, limited
companies
and
-It's business with social objectives
nonprofit
primordial, in which the revenue
organizations.
generated is reinvested primarily for the
purposes of business or in the
community, rather than being allocated
to the need to maximize profit for
shareholders and owners.
Motivation will Generate revenue for Provide public services to a lowest cost Provide goods and services to the population in
nonprofits
and serve as an opportunity to work the Bottom of the Pyramid
of Origin
unemployed
the
form of
non-governmental
Organizational -They may have an Organizations with a social purpose, Takes
organizational
with the allocation of property rights and organizations (NGOs), private for profit
Structure
relationship
with power to control other stakeholders other organizations or businesses engaged in activities
for-profit companies than investors, coupled to a model of of the public sector, producing products and
with their social open and participatory governance.
services of significant figures.
arm.
- They take a format of property social
Business-hybrid,
(social ownership), ie autonomous
which has profit organizations with governance and
targets its founders, ownership structure based on direct
but
with
social participation of stakeholder groups.
objectives.
-Nonprofit
organizations
that
develop commercial
activities as support,
but it have a social
purpose.
- The organizational
fluidity
and
confounds
associated
with
social
enterprise
social
entrepreneurship
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Source: Compiled by author from COMINI (2012) and LEVESQUE and MENDELL (1999)
Comini (2011) points out that when analyzing these different definitions and typologies in the
social business literature it is possible to trace a possible evolution of these businesses, some are
closer to the market and others that are positioned and has predominance with the social logic.
Using a natural evolution concept proposed by Austin (2002), he presents a framework where
the continuum of social businesses that grows through alliances and present innovations departs
from financial (funding or resource management) then go to administrative management or
governance.
Table 2 - Continuum of Social Businesses
Main Objective
Greater
Emphasis
on Increased Emphasis on Social
Market
Access to a large market
Poverty reduction
(Botton of pyramid)
Any goods and services to Goods and services for basic needs (education,
Offer
the base of the pyramid
health, housing, food and credit) or that incorporate
the environmental dimension
Generation of social value is Generation of social value is core business
Intentionality
an important, but not central
Indirect contribution to Direct contribution to poverty reduction
Impact
poverty reduction
Low-income sector is not the Predominantly low-income sector
Customers
only target audience
Predominantly Consumer
Predominantly Producer / Supplier / benefit
Low-income sector
Relevant factor
Factor is not so relevant
Scalability
There is no priority
Economically excluded or marginalized segments
Workers
Private
Companies
Civil Society Organizations
Legal Format
There are instances of There are institutional mechanisms for collective
Community
participation
involvement in decision participation
making
Not a priority
Total priority
Accountability
Distribution of dividends
Profit is fully invested in the venture
Distribution of profit
Profitability calculated as Profitability calculated not exclude cross-subsidies
Economic value
revenue minus costs
and tax benefits / donations.
Tangible indicators (supply Intangible indicators (citizenship, self-esteem,
Social value
of goods and access to social capital)
income
Source: COMINI (2011:12)
This evolution presented in the table above covers what we see today on the business “ bottom
of the pyramid” directly tending to a latent demand of classes excluded from traditional
markets, such as microcredit, for example. We have the example of the pioneering experience
developed by Yunus in Blangladesh, called the "Banker of the Poor People" which shows that
development is possible providing credit to thousands who are in poverty, enhancing training
programs, and entrepreneurial education to foster new business.
Social Entrepreneurship, social networks, identities, social capital and
socioeconomic development through an assessment of Economic Sociology
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A legitimate definition of the phenomenon of social entrepreneurship is not yet consensus
among theorists. Freire (2001) apud Godói-de-Sousa et al. (2011) emphasizes that the great
interest in this subject in recent years, makes a field of knowledge without sharp edges or
internal regions, making necessary a precise definition of this phenomenon. What can be seen,
however, is that the complexity of the term and its manifestations hampers the establishment of
divisions and boundaries.
Minuzzi et al. (2005), for example, give an outline that is comprehensive and somewhat
limiting, indicating that social entrepreneurship has been understood as a multidimensional
process, engaging social variables (social mobility, culture, society), economic variables (
market incentives, public policies, venture capital) and psychological variables.
Melo Neto and Froes (2002), for example, assessing the progress of social entrepreneur’s
manifestations, its various types and forms of representation, highlight four streams of study
and development of entrepreneurship, namely:
(1) how to promote technological entrepreneurship;
(2) management and entrepreneurship;
(3) entrepreneurship as a strategy for integrated and sustainable local development (DLIS) and;
(4) Entrepreneurship as a strategy for development of small and medium enterprises (SMEs).
The authors point out, though, that the goal is no longer the business per se, but it is, rather, the
social business in civil society that has its main focus and partnership involving community,
government and private sector as fundamental strategies of choice.
Although based on the concepts of business management areas, entrepreneurship brings a
conjunction of important and differentiated social and economic events, as we saw earlier.
Seelos and Mair (2005), realizing this particularity, point out that social entrepreneurship
appears to occupy a bundle of opportunities to improve the systems of production and
distribution facilities, creating new solutions or approaches in order to address basic human
needs. The entrepreneurship in this way helps to solve social and environmental problems by
exploiting opportunities inherent market failures and thus will help move the global economic
system towards sustainability (Dean; McMullen, 2007).
To give meaning to typologies of social entrepreneurship and classify its manifestations in the
economy, is neither the main nor the only purpose of this article. We believe that despite the
fact that this topic is relevant and still subject to discussions, the main contribution here is to
highight their socioeconomic dynamism and contribute to a conceptual-theoretical evaluation of
the concept. Using the theoretical framework of the New Economic Sociology (NSE), which
draws on the contributions of sociology at the expense of rationality of economic utilitarianism,
we suppose that social relations and not merely the maximization of individual interest, are the
dynamic forces of a given market. This school believes that even in non-market relationships
there is a market influence in the way which social structures historical processes and the
organization of production occur.
To realize their difference and make sense of its manifestations in society, we draw on the
contributions of Mauss, a French anthropologist who lived in 1872-1950 and gave fundamental
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237
contributions to sociology. He systematized the theory of giving, rescued as an interpretative
model of great relevance to thinking about the foundations of solidarity and alliance in the
contemporary societies. One of his central contributions to sociology was to demonstrate that
the value of things cannot be greater than the value of the relationship and that symbolism is
fundamental to social life.
For Mauss, motivations are complex and the interactions between people and groups, who run
through several paths, form alliances. The exchange system can also be based on the gift (and
the triple obligation to give, receive and reciprocate) and not only on rational and utilitarian
decisions. Caillé and Graeber (2002) cited by Martins (2005), claim Mauss stood out with a
major contribution to understand the value of the association for modern society. He, along with
Durkheim, are exponents of the French school of sociology, and a major source of theoretical
inspiration for understanding the emergence and role of civil society also in the contemporary
world, which can expand beyond the realm of influences and the state itself and the market,
being the fruit of a grassroots movement endogenous and dynamic.
To use a sociological approach to markets therefore involves considering individuals in
aggregate, influenced by the behavior of others and realizing that there are economic and noneconomic motives. With this view, an important author who also contributed to the economic
sociology and adds to our analysis of entrepreneurship was Granovetter. For this author, the
economic action is social action in that it is driven by motivations that are not reduced to mere
interest, and may include a process of recognition of status, power or sociability. Additionally,
his argument that the choices of an individual may be related to the choices of others, print the
notion of relationships and networks of trust.
Still to this author, the third central thesis of Mark Granovetter (1973 to 1979.1985, 2000, 2003
and 2005 apud Bittencourt, 2005) is that economic institutions are social constructions and as
such should be analyzed; the trajectory of these institutions in the market economy is embedded
in the social fabric and embedded in social networks.
Entrepreneurial action realizes the strength of this movement of social entrepreneurship as a
catalyst for development, requires identifying social entrepreneurs from a sociocultural and
economic context of a globalized world, with new combinations of time and space. Hall (2000)
identified some phenomena angular this context, which make up the skyline driver of social
entrepreneurship, namely:
"A) hybridization of cultures coexisting with social movements claim that the
site;
b) emergence of a plurality of identities built on markers of plural identities
consist of race, ethnicity, gender, social class, culture, language and other
determinants, in dynamic interaction;
c) the need to understand the entrepreneurial action as a cultural fact, a source of
contact between different visions of society and different proposed solutions to
key issues and peripheral, and
d) the need to recognize the values embedded in cultural symbols, guided by
thoughts, attitudes, behaviors and practices of meaning for the entrepreneur that
is manifested in the social order regionalized (Hall 2000, apud Grisi, 2008).
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Note that this fits well with the analysis of Castells (1999) who says that despite the
overwhelming passage on economic relations, globalization does not neutralize some cultural
expressions and identities of the companies represented in the form of reactive movements who
stand in defense of different causes such as feminism and environmentalism, for example.
Castells (1999) defines identity as "the process of constructing meaning based on a cultural
attribute, or a set of inter-related cultural attributes, which take precedence over other sources of
meaning". Identities are therefore sources of meaning for social actors, originated and
constructed by those in a process of individuation.
For Wainwright (1998), 2 movements are putting in place a new understanding of the process of
knowledge through socialization. Only through the view of knowledge as a social product,
distributed, democratized and socialized forms transformable, social change is made possible.
Opposing positivist legacy, social movements emphasize other forms of knowledge, as the
everyday, individual skills and social, not generally recognized public policy.
This local knowledge, social identity and local resources are sources and constituents of a
fundamental concept in our analysis, the social capital. The roots of the concept of social capital
back to the work of Durkheim and Marx (Carroll and Stanfield, 2003 ). North (1990) , another
author who focuses immaterial writings on informal and formal institutions, Fukuyama (1995)
with his work on the role of trust in economy, and Evans (1995) with his writings on the nature
of state-society relations are other intellectual predecessors of the concept. The contemporary
use of the term is, however, most often attributed to Bourdieu (1986) , Coleman (1988) and
Putnam (1993 , 2000).
Social capital is also defined in a number of different ways, but in general, it refers to the
networks of social relations characterized by norms of trust and reciprocity that can improve the
efficiency of society by facilitating coordinated actions (Lehtonen, 2004). This concept,
however, has been defined from a broader point of view. Lehtonen shows the narrowest concept
of social capital is associated with Putnam (1993), who views it as social networks and
associated norms that have an effect on the productivity of the community. A broader definition
is given by Coleman (1988) , who describes social capital as "a variety of different entities,
with two elements in common: They all consist of some aspect of social structure, and they
facilitate certain actions of actors-whether personal or corporate actors-within the structure " .
The most important of all is this definition that meets the sociological conception of economy,
since not only includes the largely informal and often local relationships, but also the more
formalized institutions such as the government, the political regime, the rule of law, the court
system, and civil and political liberties (Lehtonen, 2004:207).
According to Bueno (2004), a focus on institutional economics, relates the concept of social
capital, cooperation, efficiency and local development, as can be seen below:
“The concept of social capital is concerned, therefore, with “the structure of
incentives and sanctions to individual behavior, defined by a pre-existing formal
and informal rules, organized behaviors and organizations that promote trust and
cooperation between people. It comprises in the first place the social network
that a typical individual has, thus involving, social behaviors relatively stable
over time and therefore reliable. But it also includes a dimension of collective
good, in the sense that if a certain critical number of individuals belonging to
these networks, the community as a whole will benefit as it emerges a general
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environment of trust and confidence, which encourages cooperation between
people and, as we have seen, improves the economic efficiency of the
community”
The pattern of connections and relationships, both vertical and horizontal and cross-built, settles
the bonds of trust between individuals and encourage greater participation in civic life and thus
strengthens collective action with significant social and economic gains 3.
Putnam (1995) emphasizes this relationship, stating that social capital is able to weave networks
and norms that facilitate cooperative action. What we can infer, therefore, is that human capital,
knowledge and information stored, health and work potential, capital goods, infrastructure and
natural capital, are also forms of capital, which generate flows, benefits and define the wealth of
a society (Constanza and Daly, 1992).
In terms of analysis of the importance of social entrepreneurship, the object of this article,
social capital expressed in their networks of relationships and accumulated knowledge of
networks of relationships and knowledge, serve as a "stock" of cooperative solutions,
generating interpersonal trust. It can be represented, therefore, as a "stock"4 of both tacit and
explicit knowledge, making use of the categorization of Polanyi, as knowledge of a social
collectivity, as a kind of "intellectual property" of the human capital of the community,
represented by knowledge acquired skills and abilities that enable people to act in new ways,
developing new technologies, submitted to allocative efficiency (North, 1990), where
cooperative behavior is encouraged in search of innovative solutions (Fukuyama, 1995; Jacobs,
1965; Putnam , 1993)
Analyzing the issue of social networks in the contemporary world regarding their dynamic
elements and identity, Castells (1999), perceives three processes in the network society:
- Legitimizing identities, promoted by dominant social institutions, reinforcing an attitude of
submission of the subject;
-Resistance identity, set to actors in less favorable social conditions, showing resistance to the
dominant project, but still failing to offer positive ways of identity construction;
-Identity design, in which the actors, based on cultural materials available, build new identities,
redefine your social site and seek changes in the social structure.
Environmental imbalances and inequalities therefore strengthen and bring out a social identity,
which seek to address and respond to these problems. And the entrepreneurial action, it seems,
is framed in the third identity process indicated above by Castells. Needs, opportunities, social
capital and social networks are the motivation and resources to build new identities. The
exponential growth of social entrepreneurship consolidated and strengthened links between
individuals, strengthened the associations and social capital.
Associated with this process of organization, Dowbor (2006) recognizes an institutional
collaborative process, which he calls economic collaboration, as opposed to the economics of
competition. Its special features include:
- The growth in importance of intellectual capital and social capital, since the activities
in organizations are technologically more complex and interactive;
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-The knowledge economy as a factor of competitiveness, which requires a sharing and
management process more democratic;
- Connectivity as a drive of collaborative activities through partnerships and actors from
various sectors, such as companies, governments and NGOs;
- Urbanization as a trend, erecting cities and their surroundings as territorial units of
economic accumulation, more or less dynamic and productive, depending on their levels of
collaborative articulation;
- Primacy of social policies with social health, housing, education, etc., used as
corrective measures inequality and concentration of wealth.
Dowbor (op cit) concludes that these particular elements involve intense collaborative
processes, are not driven by profits and have, as a vital element, the formation of social capital
and participatory decision-making processes.
What is possible to note in citing these authors is to present new visions of development,
integrating the economic, social, environmental and ethical issues that are somehow
interconnected. Apparently, given the purpose and circumstances of the business previously
presented, the potential strength of social entrepreneurship as a source of genuine innovation
and social development is corroborated and strengthened.
In this context, development takes place as a means of rescue, recovery, or even renovation of
social structures such as associations, cooperatives, municipal representatives, state and nongovernmental organizations whose action accrues to the benefit mainly of local problems. The
local development projects guided by the culture, the nature and the ethical and ideological
locations acquire greater economic efficiency, thus becoming distinctive skills and capabilities.
What is noticeable, especially, is the sustainable nature of these projects, and initiatives for
social technologies that develop from an indigenous movement, establishing solid and lasting
foundations for local development that can substantiate the competitive advantage of the
dynamic resource for development.
By its character of unifying values and strengthening the social capital of individuals and
communities, it should be borne in mind that the Social Entrepreneurship, in its various forms,
should be perceived as a multidimensional phenomenon, inclusive of the cultural, ecological
and political development. The fundamental character and legacy of this development should be
the promotion of quality of life, human development, working with responses to the needs of
social transformation and sustainable development.
Schumpeter, the Austrian economist who coined fundamental definitions about innovation, is
also important to analyze social innovation, especially because it plays a key role in this process
of social entrepreneurship. It includes different angles of innovation, technological innovation,
organizational, institutional and social, as well as the place and role of institutions and their
impact on economic and social development. The economist, however, did not state that social
innovation would have a prominent place in the development of industrialized societies in the
late twentieth century. This is why the thought of Schumpeter should be complemented by
recent theoretical developments relevant to the understanding of innovation and social
entrepreneurship.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
241
Taking advantage of market failures or creating business for the good of the community with
new concepts and new forms of organization, social entrepreneurs can be seen as innovators
according to the classifications outlined by Schumpeter. As pointed by Defourny and Mertens
(2008), social entrepreneurship develops innovations that can take on five classifications of
Schumpeter's typology:
1. the development of new activities (fair trade for instance) or enhancement of existing
activities ( services to the elderly or people with no access to social services );
2. innovation in organizational methods (involving stakeholders such as workers in the
management );
3. changes in the factors of production (eg changing the logical of volunteer work and
making it more pragmatical, and including paid work, in social enterprises, making it
more professional);
4. creation of new markets (introducing, in some situations of competition with capitalist
enterprises, services to government, for example);
5. creation of new forms of companies (capturing funds of different resources, with for
example, crowdfunding).
There is, above all, a perception that social entrepreneurs differ from traditional business in
several issues, for example, the creation of wealth, which reverts to the generation /
consolidation of a social mission. The Economist (2010) points out, however, that many social
entrepreneurs are operating in the same markets of traditional businesses with differences only
in nuances, and often with a comparative advantage, and not always have financial
disadvantage, as they use new forms of financing (with better rates) and enter the institutional
environment of traditional businesses.
The Economist in 2010, analyzing the rapidly developing social entrepreneurship and the
diffusion of their practices in the world, devoted an article on the evaluation of this
phenomenon. They conclude that social entrepreneurs pursue a professional career doing good
for society and the difference has been increasingly attractive to people, bringing them
compensation from a personal, social and financial point of view. Some social entrepreneurs
have been supported or catalyzed by organizations created to assist in some stages of their
development, such as Ashoka, the Skoll Foundation and the Avina Foundation, among others.
Social entrepreneurs also congregate innovative particularities, applying their personal desire
and their individual talents to put into practice and bring value innovation to society. However,
these businesses differ in terms of purpose, since profit is not their mission, but the social gain,
strengthening the social capital of the community, and printing recognition, meaning and
integration into society.
Notwithstanding the personal requirements, these entrepreneurs realize the presence and need
for an institutional apparatus that enable and catalyze the process. In the U.S., for example, in
2009, Philadelphia became the first U.S. city to create a tax credit for sustainable business
joining ten other states that have created laws that support social enterprises. At the federal
level was created the JOBS (Jumpstart Our Business Startups) Act with the task of facilitating
the development of tools that support social enterprises, formalizing mainly the activity
crowdfunding. The crowdfunding is a way of raising funds "online" in small amounts, coming
from a large number of investors, called "philanthrocapitalists".
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
242
The other support that has strengthened this niche business has been the "mainstream" financial
banking institutions, such as JP Morgan, which released a line of credit for investments with
potential financial and social returns in 2010. According to the Commission at that time, it is
estimated that the growth potential is $ 500 billion over the next 10 years (JP Morgan Global
Research 2010 apud Freireich and Fulton, 2009).
CONCLUSIONS
By using economic sociology to analyze social entrepreneurship we presented the politicalcultural approaches to this new industry or initiatives that should be taken into account to make
sense of the motivations and strategic understanding of their motivations and / or dynamics.
What we can see or what we would like to stress is that there is a political vacuum of
government resources to this sector that encourages social enterprises to develop, having a
meaning and providing identities and strengthening the social capital of the territory. Social
entrepreneurship aims to create new relationships as a way to bring social value or reduce
conflicts through various social solutions. By creating new hierarchies, new types of business,
new governance within and between firms and other new agreements and negotiation tactics
and cooperation and new organizational designs social entrepreneurs develop new technologies
and bring social innovation. The economic sociology emphasizes the interaction between these
organizations and their environment, realizing the new institutional rules.
Thus, what we see is that these new initiatives have an economic significance that is socially
constructed, being multidimensional motivated by social values, cooperation and interests that
also vary according to the social and historical context. A key question, however, is how to
innovate beyond these new initiatives, how they can be widespread and institutionalized, and
under what conditions institutional requirements able to create new orders and new horizons to
promote social development, according to the precept of DiMaggio and Powell (Dees,1988) .
Social entrepreneurs, working in local communities, work with traditional activities and
functions of the Schumpeterian entrepreneur: they identify talent, form partnerships and
leverage local social action programs (Grisi, 2008). With its products, services and social
mission, they add social value in communities, engaging in processes of innovation, adaptation
and continuous learning, empowering change and community development and becoming an
agent of social change (DEES 1998)
In the conclusions of Economic Sociology, entrepreneurship can constitute a new form of
development that depends on the articulation and contribution through various actors and
spheres of power as civil society, government and institutions, public and private policies,
improved printing, gain and social value. We must realize, however, that the solutions are
territorial and localized, because they reflect an identity of individuals and social groups
inserted in them. Adopting the concepts of Pierre Bourdieu, these areas may play different
interests, localized processes through cooperation. The values of cooperation, reciprocity and
trust are the main vectors of association and linkage between the actors.
The sustainable territorial development therefore should be a social construct, with individuals
using their resources and features through a productive organization, linking, therefore, social
and environmental systems.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
243
Initiatives and policy development should meet the needs of local communities, allied to their
expectations to their cultural, social and historical realities. We believe that this article does not
yet exhausts the subject but it may have contributed to combine an analysis of economic growth
and contemporary social entrepreneurship with a theoretical unorthodox bias, as it has elements
that are fundamental to the observation of development options.
ENDNOTES
1
Leilah Landim in lecture notes in Discipline Panoramas and Prospects of the Third Sector in
Social Responsibility WELL er Third Sector, 2006.
2
Wainwright, H. "A Response to Neoliberalism: Arguments for a new left"; 1998. The author
discusses the conditions of formation of a new left thinking to face the challenges resulting
from the predominance of conservative thought, underlying the triumphant capitalism in our
end of the century. Exploring the links between knowledge and development of alternatives to
the left, assessing for this purpose the actual trajectories of social movements and political
parties, mainly European.
3
Elianor Ostrom, winner of the Nobel Prize in Economics in 2009, was another author who so
brilliantly analyzed the efficiency of governance and administration of the collective commons.
A study by Ostrom (1997) shows that, of 108 irrigation systems in Nepal surveyed, those
governed by the users showed better results in terms of efficiency and increasing agricultural
productivity than those managed by the government. According to Bueno (2004) the main
reason for this was the comparative efficiency of putting the administration in the hands of
users, historically constituted to deal with the problems of everyday life, thus preserving capital,
and producing less disruption in social relations between producers.
4
Although we use here the term "stock", we emphasize the strong dynamic component, as
social technologies evolve dynamically from the search for solutions pair collective needs.
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ENTREPRENEURIAL EDUCATION
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
249
A STUDY ON ENTREPRENEURIAL SUPPORT
ENVIRONMENT IN EDUCATIONAL (TECHNICAL)
INSTITUTIONS
Dr Savitha G Lakkol
Associate Professor, JSSCMS, SJCE, JSS Technical institution Campus, Mysore
[email protected], Phone No: 91+9886029562
Dr Nalina K B
Assistant Professor, JSSCMS, SJCE,JSS Technical institution Campus,Mysore
,[email protected], Phone No: 91+9900190579
Aruna Adarsh, Research Scholar at VTU
Assistant Professor ,JSSCMS, SJCE,JSS Technical institution Campus. Mysore
[email protected]
Phone No: 91+9900269766
Abstract: The educational institutions play a key role in creating future entrepreneurs. They
impart necessary skills to the students and enhance the chances of their employability. The
developing economies need to nurture entrepreneurship and manage the students to pursue
entrepreneurship as a career choice. The Knowledge Commission Report on entrepreneurship
(2008) has rightly identified the effective nexus between education, innovation and
entrepreneurship initiative.
The premiere institutes in India such as IITs and IISC’s have already taken steps to nurture
entrepreneurship and have a proven success record. The similar initiatives are taken up by other
educational institutions. The success factors and the conditions, contributing to the
entrepreneurship needs to be identified. The proposed study attempts to explore the
entrepreneurial initiative support environment extended by the technical educational
institutions. The study is carried out in two phases.
In the first phase an interview of Entrepreneurship-Cell (E-cell) coordinators was carried out to
explore the institutional initiative to nurture entrepreneurship amongst technical graduates;
identifies the profiles of the plans, business viability of the plans and success rate. In the second
phase a survey of E-cell members was carried out to identify the factors influencing
entrepreneurship as a career choice.
The study was carried out in those technical educational institutions in the city of Mysore
having their own entrepreneurship cell/incubation centre. The study brought out the functioning
of E-Cell, the challenges faced and the initiatives taken. The survey data indicated that both
personal strength and support environment affect the student’s choice for entrepreneurship as a
career choice.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
250
Keywords: Entrepreneurship education, Support environment, Entrepreneurship Cell,
Incubation Centre
INTRODUCTION
Entrepreneurship has accelerated the growth of economies and pace of industrialization in
developed countries. Entrepreneurship also contributes income, jobs, Research and
Development and innovation (Van Praag and Versloot, 2007). India as a developing economy
and dominated by agriculture sector has realized the prominence of Entrepreneurship eco
system to boost the economic growth.
The role of education, in particular, has long been recognized as the cornerstone of
entrepreneurship. Of late, the field of higher learning has witnessed the burgeoning of training
programs, business seminars and business networking opportunities, institutional incubators, Bplan writing support and other end-to-end solutions for getting the start ups off the ground.
These attempts were triggered by the policy initiative.
POLICY INITIATIVES TO ENCOURAGE ENTREPRENEURSHIP
The Policy initiatives in India to create Entrepreneurship eco system started with policies
supporting Small and Medium Sectors in 1956 (Industrial Policy Resolution 1956). In 1960s
and 1970s Entrepreneurship education was initiated in the form of training programs, under the
aegis of state and Central Governments and by Financial Institutions funded by the
Government. In 1980s the entrepreneurship education was focused on creating selfemployment ventures to make individuals self -employed.
The 1980s witnessed the entry of entrepreneurship education into technology and Management
Institutions, majorly the premier institutions such as IIMs and IITs. In the post reform period
the growth of Indian economy created multiple opportunities for both jobs and
entrepreneurship. The emergence of Information Communication Technology and the available
skilled resources in India has opened up the new entrepreneurial avenues. The Government of
India has initiated the establishment of Science and Technology Entrepreneurship Parks
(STEP), Incubation Centers at few reputed Technical Institutions. The country as a whole saw a
growing interest in entrepreneurship during 1990s fuelled by growth factors such as global
success of Indian firms, large market, and opportunities in different sectors etc (Knowledge
Commission Report).
Along with premier institutions the next decade saw a major change as the education regulatory
bodies such as AICTE and UGC have also identified the need to create entrepreneurship cell
across various technical institutions in India. The current dimension of Entrepreneurship
education in Technical Institutions has taken the form of:
1.
2.
3.
4.
5.
6.
7.
Entrepreneurship Cell
Training and Diploma Programs
Courses on Entrepreneurship
Research and Consulting projects
Incubation, Networking and mentoring facilities
Conferences, seminars and workshops
Journals, newsletters and publication
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
251
Along with government initiatives the private participation has also been witnessed since 2003
with the establishment of National Entrepreneurship Network (NEN). NEN is a non-profit
organization with a mission to create and support high growth entrepreneurs driving job
creation and economic growth in India.
Considering all these developments the present study attempts to explore the entrepreneurial
initiative support environment extended by the technical educational institutions. Various
studies have identified the growth of Incubation, nexus with universities and Institutions and
entrepreneurship education. The same is summarized in the following review.
STUDIES ON TECHNOLOGY BUSINESS INCUBATORS (TBIs) AND
UNIVERSITIES
The early studies on incubation were mostly descriptive explaining the concept of incubation,
its functions (Allen, 1985; Allen and Levine, 1986; Smilor and Gill, 1986). The studies
suggested the infrastructure facilities at a cost lower than the markets rates to support
entrepreneurship in tech business. Allen and Bazan (1990) extend the idea of TBI and
suggestthe intellectual and consulting resources availability in addition to the physical
infrastructure. These resources help entrepreneurs in developing business and marketing plans,
building management teams, obtaining funds, and provide access to professional and
administrative services (Von Zedtwitz and Grimaldi, 2006). The success of TBI facility is
largely associated with their interaction with Universities and technical institutions by the later
studies. Several research findings confirm the positive impacts of university linkages for
technology-based ventures. TBI have been found to increase the survival rate of new ventures,
promote higher growth than in off-incubator firms, and accelerate time-to-market and
likelihood of successful innovations. These extensions are mainly observed in the developed
markets.
O’Neal (2005) highlights the success factors that facilitate TBI to develop new ventures,
emphasises the role of external funding sources, access to funding, university resources,
community/local government economic development agencies, and other entrepreneurial
support organizations. Links with universities are underlined in the literature as a decisive
factor for success.
Technology Parks And Universities
Colombo and Delmastro (2002) show that ventures in science parks in Italy that are linked to
universities demonstrate higher growth rates than their off-park counterparts. The main
advantages observed here are the R&D facilities and the establishment of collaborative
arrangements, especially with universities.
The similar study carried out by Ferguson and Olofsson (2004) at Swedish science parks linked
to universities and compared with their off-park ventures shows that the on-park ventures have
significantly higher survival rates than their off-park counterparts.
Rothaermel and Thursby (2005) also confirm the success of strong ties which will reduce the
likelihood of firm failure but retard graduation from the incubator. McAdam and McAdam
(2008) prove that university linkages are useful in terms of facilitating and developing networks
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
252
with third parties and providing access to research and technology, particularly to
biotechnology and information technology.
Entrepreneurship Education
Many have considered entrepreneurship education as a growing strategy in socio economic and
political circles (Fontela & Guzmán, 2003) (Liñán, 2004). The nexus between education and
entrepreneurship is considered as a quintessential approach to growth oriented economy.
Entrepreneurship education prevailed predominantly in science and technology education in the
early stages. (Blackman & Thompson, 1987; Ashmore 1990) Growth of manufacturing sector
bestowed tremendous opportunities for entrepreneurship. As the economies developed the
service sector growth also promised varied opportunities. Today even in services sector the
technology has overpowered the service delivery and customer interface.
Joaquin and Linan (2005) identified the different perspective of entrepreneurial education in
America and Europe. US emphasised on training needs and Europe on building entrepreneurial
personality. The objective of entrepreneur education is to create enterprise both in US and
Europe. In its most general application, it would include the development of knowledge,
capacities, attitudes and personal qualities identified with entrepreneurship. Anis ur Rehaman,
Dr. Yasir Aeafat Elahi. (2012) focused on the evolution of Entrepreneurship Education in India
and discuss the role of Entrepreneurship in Indian Economy. The study oriented on B – Schools
and their role in increasing the knowledge base, by identifying the opportunities and
overcoming the barriers. The above studies have clearly indicated the growing needs of
entrepreneurship education and positive eco system in universities and Institutions. The review
identifies that no conclusive study focussing on the E-Cell and student expectation from E-Cell
has not been carried out. The present study bridges this gap.
STUDY OBJECTIVES, DESIGN AND METHODOLOGY
The study was conducted to explore the entrepreneurial support initiatives extended by the
technical education institutions in two phases. In the first phase an exploratory interview was
carried out in four technical institutions situated in the Mysore city, to identify the institutional
initiative to nurture entrepreneurship amongst the technical graduates through E-Cell. The
interview focused on the profile of the plans, role of teachers and students, business viability of
the plans and success rate.
In the second phase the ‘student members of the cell’ were asked to identify the factors
influencing the entrepreneurship as a career choice and support expectations of graduates from
E-Cell. The student related data is collected through a survey and a questionnaire consisting of
thirty eight questions was used. The items of the survey instrument finalised based on the
review and interaction with E-cell coordinators. The interview outcome is presented
descriptively.
The questionnaire focused on four variables, first part of the questionnaire focused on course
strength leading to entrepreneurship choice containing eight questions. The second part
contained five questions and focused on economic factors. Third part focused on intrinsic
capabilities to innovate, lead and take risk, which contained fifteen questions. The last part
included ten questions and focused on students expectations from the Institute. A convenient
sample size (101) was considered to collect data. The factor analysis is carried out to extract
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
253
the principal components based on factor scores and identify the common variables using a
‘principal factors extraction’.
INTERVIEW OUTCOME
The interview of the E-cell coordinators revealed that the overall objectives of the cell is to
1. Conduct entrepreneurship awareness programmes for students to enable them to
consider entrepreneurship as a career option
2. Identify and select promising students to undergo more intensive, ‘entrepreneurship
Development Programmes’, and ‘Certificate Courses’, in promising business areas
3. Provide interested candidates with information of procedural formalities, finance,
infrastructure, marketing etc
Profile of the Colleges
Out of the four colleges considered second, third and fourth college are autonomous institutions
enjoying the autonomy in framing curriculum and evaluation of students. These are the colleges
who have celebrated their golden jubilee too. The fourth college has incubation facility but did
not have specific E-cell. Out of the eight engineering colleges in this region only four of them
have E-cell and out of four only two of them are found actively engaging in their activities.
The profile of the cell is as follows
Table 1: Student Enrolment and E-Cell Activity
Institute Year of Annual
Inception intake
First
Second
Third
Four
Of E-cell
2010
2005
2008
NA
four50
700
800
700
Average
Active
Number
of
enrolment to E- participation in E- students
cell
cell activities
proposing viable
business projects
250 (55%)
50-60
8-10 p.a
250 (35%)
50-60
10-20 p.a
400 (50%)
50-60
5-6 p.a
NA
NA
NA
The students are normally briefed about the E-cell and its activities during the orientation
programme while inducting the students to the first semester of the engineering course.
Normally on an average 35% to 55% of the students enrol themselves to the cell paying a
nominal fee. Though the membership initially is good the active participation by the students in
the E-cell activities is low (ranges from 7% to 20% of the enrolled number to the cell) in spite
of the membership on paper for the four year course is nearly 1000 at any given point of time.
The first college is found very active in promoting E-cell activities through a separate website,
social media group and a news letter.
Faculty Involvement
The E-cells are coordinated by a faculty member and assisted by one or two. The coordinators
expressed that these initiatives are guided by the university guidelines and now assisted by the
NEN. Department of Science and Technology (DST) is also funding five most innovative
projects which are identified and evaluated by an independent committee. It is observed that in
the first and second college the product/service ideas are carried out with a committed effort,
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
254
attempts are made to guide, monitor and provide funding assistance to develop prototypes and
validate them.
Table 2: Faculty Involvement
Institute
Faculty
involvement
Faculty training
Coordination
with E-cell
First
Representatives
of key
departments are
actively engaged
Coordinator
+Few faculties
High
Second
Partly engaged
on a project
basis
Third
Low
Fourth
Low
Coordinator
Coordinator
+Few faculties
No interaction
NA
Not directly
NA
The coordinators have undergone the entrepreneurship training offered by either NEN, DST
funded workshops etc. Except in the first college (It comprises the faculty representatives from
various departments of the college and found vibrant in their support) the faculty involvement
in encouraging entrepreneurship is found to be very low. Voluntary engagements of the faculty
members other than the designated coordinators are absent. All the coordinators have expressed
clearly that the coordinating activity is an additional responsibility without compromising their
regular academic expectations. The responsibility is not incentivised monetarily. Lack of
industry interaction and consultancy has resulted in lack of interest in guiding the students.
Moreover it is observed that the faculties are also not equipped with necessary skills.
Courses/training and Workshops
All the institutes are offering a course on entrepreneurship in later semesters which may guide
them to think of entrepreneurship as a career choice. Unfortunately these courses are offered by
the faculties of the respective discipline without adequate prior training. The coordinators
observe that the course has been reduced to a passing requirement for obtaining degree and
defeated in its spirits. The training programs and workshops are also facilitated by the E-cell
with the help of NEN in first and second Institute.
Table 3: Courses- training and workshops
Institute
Entrepreneurship
as a paper
Student Training
Workshops
First
Yes
Second
Yes
Third
Yes
Fourth
Yes
Through NEN
Yes
Through NEN
Yes
No
No
No
No
How the idea is taken forward
The ideas are normally taken forward with the help of NEN. Monitoring, prototyping,
incubating and testing business viability is hand held by the E-cell and NEN. In most of the
cases out of 60 to 70 active members about 10% of them come up with innovative ideas and
express entrepreneurial interest. The students normally showcase their projects in college level
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255
exhibitions/competitions and then inter collegiate competitions organised by NEN (E-Week).
After this stage the projects are not pursued further on a business scale. Only in case of the first
college four projects are currently taken up as a business venture and other coordinators have
concluded that the ideas will remain as projects. In the second college the number of proposed
innovative ideas are more in number which were explained to the interviewer as ‘impressive
and need of the hour ideas’.
Table 4: The Coordinators’ Remarks on Future Plans of E-Cell, Profile of Ideas and
Business Viability
College
Future plans
Profile of the ideas
First
To create entrepreneurship hub More from mechanical
in the region to connect all and Electronics discipline
students
from
various
disciplines
Second Working on incubation facility Mechanical,
IT,
renewable
energy,
electrical and electronics
Third
To develop more faculty Mostly mechanical
resource internally
Fourth Proposing an E-Cell
Nil
Business viability
Yes, many projects
have
business
scalability
Possible
with
continued research
on the proposed idea
No, not up to the
mark
Nil
SURVEY RESULTS
Survey data was analysed using appropriate statistical tools. The sample adequacy and
reliability of the instrument was estimated to carry out further statistical analysis.
Student Profiles
The respondents were drawn from almost in equal numbers from all the institutes considered.
Respondents profile is explained in the following tables.
Table 5: Gender of the Respondents
Gender of the student
Male
Female
Total
Number Percentage
72
71%
29
29%
101
100
Table 6 : Respondents’ Branch in Engineering
Branch
Mechanical
Number
29
Percentage
29%
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256
Computer Science
Information Science
Electronics and Electrical
Civil
Industrial Production
Total
23
12
18
7
12
101
22.7%
11.8%
17.8%
6.9%
11.8%
100
Family Background and Support
The respondents belonged to varied family background. Considering parents’ occupation
background is categorised into Government Service, Business, Teaching, Agriculture and
others. ‘Others’ included lawyers, doctors, private sector employees (managers, supervisors and
technicians). The results indicate that the parents having business background are supportive for
considering entrepreneurship as a career choice. Parents from agriculture background and
teaching respectively are not considered as ‘supportive’ by their wards.
Table 7: Family Background and Support
Family Background
Government service
Count
Family support
Family support
Yes
No
23
9
71.9%
28.1%
Business
Count
Family support
20
87.0%
Total
32
3
13.0%
23
Teaching
Count
Family support
4
66.7%
2
33.3%
Agriculturist
Count
Family support
8
61.5%
5
38.5%
6
13
Others
Count
Family support
23
85.2%
4
14.8%
27
Total
Count
Family support
78
77.2%
23
22.8%
101
Table 8: Reliability statistics
Variables
Course Strength
Cronbach's
Alpha
.717
N of Items
8
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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Economic Factors
.706
5
Capabilities to Innovate, Lead and Take Risk
.839
15
Student Expectations from the Institute
.741
21
Reliability statistics is well above the acceptable level. The questionnaire is fairly good to
explore what is intended to be studied.
Sample Adequacy and Reliability Statistic
Table 9: KMO and Bartlett's Test result
KMO Measure of Sampling Adequacy.
Bartlett's Test of Sphericity
Approx. Chi-Square
Df
Sig.
.720
1701.460
703
.000
The sample adequacy which is indicated by the KMO measure (0.72) is high indicating the
proportion of variance in observed variable (entrepreneurship as a career choice), that might be
caused by underlying factors.
Factor Analysis Results:
The factor analysis using a ‘principal factors extraction’ uncovered eleven latent factors that
describe relationships between variables. These factors are explained below.
Table 10: Total Variance Explained
Component
Initial Eigenvalues
% of Variance
Cumulative %
20.883
20.883
9.647
30.529
7.426
37.955
5.476
43.432
4.646
48.077
3.928
52.006
3.629
55.634
3.500
59.134
3.179
62.312
3.101
65.413
2.966
68.379
2.572
70.951
1
2
3
4
5
6
7
8
9
10
11
12
Total
7.935
3.666
2.822
2.081
1.765
1.493
1.379
1.330
1.208
1.178
1.127
.977
13
.936
2.463
73.414
14
.810
2.131
75.545
15
.799
2.103
77.648
16
.736
1.936
79.584
17
.719
1.892
81.477
Extraction Sums of Squared Loadings
Total
% of Variance
Cumulative %
7.935
20.883
20.883
3.666
9.647
30.529
2.822
7.426
37.955
2.081
5.476
43.432
1.765
4.646
48.077
1.493
3.928
52.006
1.379
3.629
55.634
1.330
3.500
59.134
1.208
3.179
62.312
1.178
3.101
65.413
1.127
2.966
68.379
The factor analysis result extracted 11 factors explaining 68.37% of variance in the observed
variable. The following tables summarises the 11 factors extracted.
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Table 11 : Rotated Component Matrix – Factor 1-4
No
Items
1
1
Adapting to demanding situations quickly
0.77
2
0.761
4
Observing the market changes to understand
an opportunity
Understand the market trends and foresee
future business possibilities
Engage a group in creative works
5
Work with teams effectively
0.576
6
10
Need for assistance from the institute to
identify funding options
Continuous guidance to wet the business idea
from the industry counterparts
Need for training programs to fine tune our
entrepreneurial capabilities
Even in difficult circumstances focusing on
goal
Consider challenges as opportunities
11
Confidence to pursue a business project
0.683
12
0.677
14
Initial hiccups in any task will not break
confidence
Confidence to achieve anything due to
capabilities
Knowledge to pursue business plan
15
Need for R&D assistance from our faculties
0.7
16
Continuous support and guidance from
faculties
The course need to be redesigned to equip the
students to pursue Entrepreneurship
courses to update with the technology trends
0.675
3
7
8
9
13
17
18
2
3
4
0.752
0.658
0.653
0.589
0.577
0.782
0.692
0.58
0.556
0.601
0.503
The above four factors are renamed as adaptability, assistance requirement, confidence and
academic support. The following table presents the factor 5-8.
Table 12 : Factor 5-8
No
Items
Need for Entrepreneurship workshops to
19 motivate
20 Need for training in preparation of Business
5
6
7
8
0.773
0.725
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Plan
21 current knowledge to learn new technologies
0.789
22 Understand and use latest technology systems
Able to connect to the current developments
23 in technology
Applying existing knowledge to generate
24 new ideas , products or processes
0.619
0.391
0.766
25 Creating original works individually
0.526
26 Ability to own and solve problems
Course curriculum gives confidence to take
27 up independent projects
Current courses are in line with current
28 technology trends
The Course aids in solving complex systems
29 and issues
0.398
0.697
0.647
0.517
The above factors are renamed as training needs, updated skills, innovativeness and course
inputs
Table 13: Factor 9-11
No
Items
Bad Economic conditions and entrepreneurship
30 to create jobs
31 Bad job market and entrepreneurship as a career
The loan commitments on education makes job
32 as a primary choice over entrepreneurship
Investment is a constraint to pursue
33 entrepreneurship
9
10
11
0.755
0.735
0.488
0.435
34 High uncertainty of business success
0.841
35 Job and economic security
0.667
36 Luck and business success
0.836
37 Risk in entrepreneurship is high
Consistency in pursuing an idea till it reaches a
38 logical end
0.727
39 Working under stress
0.574
0.474
The above factors are renamed as market forces, uncertainty factors and stress tolerance. The
above are explained in detail.
Adaptability:
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The first factor that is identified which influences entrepreneurship as a career choice is
adaptability which is explained by the 5 items such as ability to understand the demand
changes, market changes, absorb and implement it effectively.
Assistance Requirement
The second factor that is extracted is assistance required by the students to consider
entrepreneurship as a career choice is explained by 3 elements funding assistance, guidance and
training requirements.
Confidence
Confidence of the student is identified as a third factor influencing entrepreneurship as a career
choice which is explained by 6 items. It includes goal orientation, accepting challenge,
confidence in idea, capabilities and knowledge.
Academic Support
The students are expecting more support and inputs from their faculties and their course. Four
items identified above are renamed as Academic and Research Support (fourth factor). Students
expect research assistance and guidance from faculties. They expect upgrading of the course
Training Needs
Training Needs is the fifth factor identified, represented by two items such as need for
motivating workshops and to prepare business plans.
Updated Skills
Keeping pace with technology changes influences the entrepreneurship as a career choice. The
sixth factor identified is explained by three items.
Innovativeness
Ability to generate new idea, original works and finding solution are renamed as innovativeness
and identified as the seventh factor.
Course Inputs
Course curriculum, coverage and course inputs to solve problems are regrouped under Course
Inputs and identified as eighth factor.
Market factors
The ninth factor represents ‘Monetary and economic conditions’, which influence
entrepreneurship as a career choice. Both market and individual conditions are represented by
this factor.
Uncertainty Factors
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The students associate high risk with the entrepreneurship represented in four items such as
high uncertainty of business, job security, luck factor etc. These four items are renamed as
‘Uncertainty factors’.
Stress Tolerance
The 11th factor is renamed as ‘Stress tolerance’ considering the two items
CONCLUSION
To conclude the outcome from the interview, considering the stated objectives of the cell, there
is a gap in its achievement. The coordinators have clearly indicated that they have not been able
to convert the ideas into business ideas due to limited resources, lack of interest on the part of
students to pursue entrepreneurship and students mindset that the ‘education is for job’. The
overall training and orientation of the course is also towards campus placements and in the
process entrepreneurship is underplayed. They have also expressed the system of education and
training methods are exam oriented. Lack of research hampered innovation and excellence
which calls for a systematic change coupled with attitude changes. Amongst the institutes
observed it may be concluded that the vibrancy of the cell depends on the E-Cell coordinator
and faculty involvement. In most of the cases it is coordinated by a very small group of faculty
(2 or 3) and responsibility lies on one. E-Cell activities are perceived as an intrusion in the
regular academic activity. Institutions engaged in entrepreneurial education feel that there is no
support from the top management. Entrepreneurial education is closely linked to the amount of
resources available and may be a natural barrier.
At present the E-Cell activities are restricted for preparing an innovative student project as a
prerequisite to course completion. Conceiving an innovative idea happens at the later semesters
of the course. The focus remains short lived and the prototype designed will not be market
ready. Most of the works need continued research on the prototype. Based on the 5 points
mentioned above if the orientation starts early in their course through training, workshops and
introducing entrepreneurship course in early semesters (as they are offered in the later
semesters now) may help in channelize the attention towards entrepreneurship. This may spark
interest early in their course. It will also initiate conceiving an idea and research early in their
course.
Survey data clearly points out that the present course needs to be strengthened to equip the
students better. Major factors emerged may be regrouped into two as personal strengths and
supportive environment. Personal strength includes adaptability, confidence, updated skills, and
innovativeness and stress tolerance. Supportive environment includes factors such as assistance
from E-cell, academic support, training needs, course inputs, market factors and uncertainty
factors.
Lack of research and consultancy from the faculty side also widens the gap between what is
being taught and what is practiced. Students have expectations of research support and guidance
from their faculties. Though the E-Cell exists in the institutes the spirit of entrepreneurship is
not nurtured by the courses taught. The students require more focussed training programs, skill
development courses and workshops to channelize their interest. The monetary aspects also
play a crucial role in choosing entrepreneurship as a career choice. The uncertainty of venture
success is also a deterrent.
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262
Entrepreneurship is a field that has to fight for its reputation. The lack of academic credibility
surrounding entrepreneurship can also make it difficult for entrepreneurship activities to be
accepted by people and especially non- business class. This belief is supported by the response
regarding the family support for entrepreneurship.
The students expectation from the institutes can be summarized into five main points; 1)
Strengthening the courses in such a way that they evoke exploratory thinking amongst students
2) Active involvement of faculty 3) Supportive training and workshops 4) Interaction with
industry experts 5) Encouraging ecosystem for launching the ideas and funding
Education Institution is an ideal setting to promote entrepreneurship as there is a right blend of
‘student’s enthusiasm’, ‘research experience of faculty’, and ‘scope to build on available
infrastructure’. Thus it is a ‘model place to nurture entrpreneurship’ which needs a serious
focus.
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265
ENTREPRENEURIAL ATTITUDE IN THE TOURISM
ACTIVITY: A CHALLENGE FOR HIGHER EDUCATION
Carla Conti de Freitas
Universidade Estadual de Goiás/
Universidade Federal do Rio de Janeiro
[email protected]
Abstract: The tourism activity in Goiás/Brazil especially in a region called Region of Gold
takes elements from its historical, cultural and ecological features and has shown significant
growth. From a research in this region, it was observed that there is an appreciation of local
culture and knowledge and also a concern to generate knowledge that brings opportunities for
improving social and environmental conditions. Therefore, from the description of two
curricular activities and the analysis of interviews with university actors and local entrepreneurs
we aim to present the opportunities for innovation in the sector highlighting the role of the
higher education institution in developing entrepreneurial attitudes and policies to encourage
innovation. For this, we considered the evolutionary studies highlighting the importance of the
creation and dissemination of knowledge in innovation generation and studies on learning
region (Rutten; Boekema, 2007; Boekema, 2000) considering the importance of the social
capital. In summary, this study hopes to contribute to discussions about the importance of
capacity building and enhancement of social capital as an incentive for innovation elements that
should be considered in the elaboration of public policies for this sector.
Keywords: entrepreneurial attitude, higher education, knowledge, tourism sector
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
266
INTRODUCTION
Innovation in the tourism sector is a challenge for business, researchers, policy makers and also
for higher education. It brings to today’s discussions some questions such as ‘how is the
entrepreneur attitude built?’ and ‘where could this attitude be built?’ In this scenario we
consider that higher education institutions have played an important role in developing
entrepreneurial attitudes that encourage innovation. From this, we aim to present in this paper
the opportunities for innovation in the tourism sector highlighting the role of the higher
education institution in a touristic region in Goiás/Brazil.
The chosen region is called Region of Gold and it is one of the nine touristic regions in this
state. This name is due to its history and it brings relevant facts of the state culture and habits.
Tourism in this region is basically related to its history, culture, costumes and by its nature
resources but it is not the main economic activity in those cities of this region. This region first
economic activity is agribusiness and stones extraction. Therefore, we believe the tourism
sector is growing and it may become an important economic activity helping in the sustainable
economic development of this state.
From an academic research in this region, it was observed that there is an appreciation of local
culture and knowledge and also a concern to generate knowledge that brings opportunities for
improving social and environmental conditions. Therefore, from the description of two
curricular activities proposed by the curriculum of the tourism course at the university and from
the analysis of interviews with professors from the university and local entrepreneurs we aim to
achieve the objective of this study as established before. For this, we considered the
evolutionary studies highlighting the importance of the creation and dissemination of
knowledge in innovation generation and studies on learning region (Rutten; Boekema, 2007;
Boekema, 2000) considering the importance of the social capital as described in the next
section.
THEORETICAL REVIEW
Evolutionary or neo-Schumpeterian studies consider businesses as organisms in an environment
that can be compared to the nature environment. Its development is explained by the
mechanism of generation of variety, selection and replication of those who are more capable
(Nooteboom, 2006). Thus, knowledge is an important key for companies as it allows it to
generate variety through inventions which contribute to the adequacy of the company to the
environment through the development of innovations and establish competitive advantage
through innovation diffusion. The neo-Schumpeterian view of the entrepreneurial development
considers the aspects related to investment in social capital (Putnam, 2001) and highlights “the
learning processes and how different manifestations of the culture are appropriated and used by
different societies and economies in order to incorporate them to their innovative activities”
(Cassiolato, 2010, p. 6). Since innovation constitutes part of the movement of knowledge
creation in the company, depends on the existing knowledge and encourages learning
(Lundvall, 2007), it can be understood as a technical and social process and as an interaction
between firms and context.
To the tourism sector, the evolutionary view of the firm leads to the hypothesis that a
qualification for innovation of companies in this sector involves the absorption and generation
of knowledge about the region. It means that the companies need to develop skills that enable
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them not only to understand the region, in order to present to their customers, but also to
mobilize the social capital needed to take advantage of the resources of the region.
Lohmann and Panosso Neto (2008) believe the tourism sector can be understood from two
points. The first point is related to knowledge created in an academic context, it means, in the
university and the second is related to knowledge created in companies in public sector or other
social groups. In this sense, it is important to consider the need of give value and motivate
knowledge creation because innovation occurs from interaction and dissemination of this
knowledge. Innovation comes from the individuals’ experiences and local knowledge and it
motivates new practices in the organizational process, in the creation of new products or in the
solution to social and environmental problems. The development of innovations calls attention
to the local specificity, it highlights the local competitive advantages and it also depends on the
development of the workers capacity.
In order to develop this study, we also consider the concepts of learning regions highlighting
the learning in the region as “the knowledge creation between actors within a region while
accounting for the characteristics of that region, its actors, and the relationship between them”
(Rutten & Boekema, 2007, p. 276). These authors believe the learning region studies include
many theories which focus is in the learning process once the economy nature has changed
from a work and capital based economy to a knowledge based one. As pointed out by
Schumpeter knowledge became an important resource and learning an important process. He
considered the use of a new knowledge or a different use for an existent knowledge important
to innovation that leads to an economic development.
Innovation is considered important once it is part of the movement of knowledge creation in the
firm and it depends on the existing knowledge. As Florida (2007) points out, regions are the key
to knowledge creation and learning because they collect and take knowledge and ideas and they
give the needed conditions to motivate them. Thus, a region is considered a learning region if it
promotes the collaboration and coordination among the local actors and builds networks where
learning happens. The concept of learning region includes product, process, regional context
and social capital (Rutten & Boekema, 2007). The social capital may explain the regional
differences related to the innovation networks performance as pointed out by Lorezen (2007)
because it is important to the constitution of a learning region and depends on the social
relationships among the actors who allow cooperation and communication among institutions
(Putnam, 2001).
METHODOLOGY
This paper presents part of a research about knowledge creation and dissemination in the
tourism sector. For this, we described and analyzed the curriculum of a tourism course from a
university in the Region of Gold and we interviewed local entrepreneurs. The Region of Gold is
one of the nine touristic regions in the state of Goiás/Brazil. These touristic regions were
defined taking into consideration the touristic features of each one. The Region of Gold is
composed by six cities and two of them are considered in this research.
The Region of Gold is composed by six cities: Goiás, Pirenópolis, Jaraguá, Corumbá,
Cocalzinho, Abadiânia – and the touristic activities are related to historical and cultural tourism
and ecotourism. Two cities from this region were considered in this research –Cidade de Goiás
and Pirenópolis. The main economic activity of Cidade de Goiás is agribusiness and the main
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economic activity of Pirenópolis is stone extraction, a stone which is known as quartzite and it
is used in construction.
To analyze the data collected in the interviews we considered the method of content analysis
which is appropriated to qualitative studies like this one. We also used a specific computer
program to qualitative analysis called webQDA that helped us in the data organization. The
documents related to the interviews – audios and transcriptions – were transferred to webQDA.
From the description and analyze presented here we discuss the opportunities for innovation in
the tourism sector highlighting the role of the higher education institution in developing
entrepreneurial attitudes and in contributing to policies to encourage innovation.
So, the data considered here are from two sources: we analyzed some documents from the
university as the curriculum of the tourism course and we also interviewed five professors from
the university. Two curricular activities were considered: the final course paper and the
supervised training in local companies. The first refers to a writing paper students should
present to the university about a local situation oriented by a professor. This activity is part of
the curriculum of the tourism course in Pirenópolis but not in Goiás. The last refers to the
activities students develop in a local company and it is supervised by university professors and
by the company manager in both cities considered in this research.
Besides, we interviewed local entrepreneurs. The interviews with the local entrepreneurs were
done in order to understand how the local companies see the university actions and if they
believe the university capacity improves the opportunities for innovation in this sector. Four
local hotel managers were interviewed and their answers are analyzed in the following section.
FINDINGS AND INTERPRETATION
The capacity of the works of tourism sector may contribute to knowledge creation and
innovation in the sector. Here, we considered the university as a place where the workers’
capacity happens and as it was said before, we analyzed two activities from the curriculum and
interviewed five important actors from the university and four from local companies. The
questions from the interview were related to capacity, innovation and knowledge once it can
build a stock of social capital in the region (Rutten; Boekema, 2007, p. 113).
In the Region of Gold, the relationship between the local culture and knowledge is important
because the touristic activity occurs mainly from the local history and culture. The tourism
sector takes into consideration local values and believes in local people knowledge. For this,
there is a constant concern in how to create knowledge in the university so that it brings better
social and environmental conditions related to the tourism sector.
Since we considered the universities of two cities in the Region of Gold, the examples we have
described are not the same for both cities. But we want to discuss the importance of those
practices to the region development. It is important to highlight that the definition of these nine
touristic regions was motivated by their touristic activities and not by political features. It is
important to the conception of learning region because it takes into account the regional
features, people relationship and local knowledge which may improve the learning in the
region.
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The university final course paper: an opportunity to find out the needs of the region
The knowledge created from the local needs can be represented by the final course paper
written by students of the tourism course and it is the opportunity to discuss and present
possible solutions to local problems. Two examples were presented by a university professor
who was interviewed for this research.
The first example is related to cattle raising in an environmental preservation area. This activity
is common in this region mainly because agribusiness is the main economic activity of this
region. From the experiences in different curriculum subjects in the university, students of the
tourism course could evaluate the cattle raising practice in an environmental preservation area.
According to the interviewed professor, students proposed a change in the economic activity of
an area from the knowledge about how this activity was dangerous to the local. After doing the
research to their final paper for the tourism course, “they stopped of the practice of cattle
raising and started an ecotourism business in the same area”.
The second example is related to the first economic activity of one city from this region which
is stone extraction. This activity brings an environmental problem. From both the created and
disseminated knowledge at the university and the local needs, some students developed,
according to the professor, the use of a “machine that turns small pieces of stones in sand, it
means that they will take away the visual pollution made by the big mountain of stones and also
inhibited the damage cause to the rivers”.
These two examples help us to understand how important the relationship between university
and local needs is and how it promotes knowledge creation and dissemination. This kind of
relationship can motivate another important one to the tourism sector – the interaction between
the university and public sector once it can motivate the discussion of the public politics and
actions that improve the sector in this region.
As the students take into account the needs of the region to decide the theme of their final
paper, they bring about the problems of the region and they choose the one they want to
investigate. It is an opportunity to integrate the university teaching and research activities and to
motivate students to associate the knowledge from different subjects and experiences and to
present a solution to the problem they found. In this sense, the final course paper can be
understood as an opportunity to build an innovative capacity.
The supervised training: an opportunity to face the local needs
The second activity is related to the students’ experience at local entrepreneurs in the
supervised training. This activity makes the interaction between the university and the local
business stronger and the students can exchange knowledge and experience by trust and
friendship. In this region, universities believe that there is no problem related to the supervised
training once the local business is interested in university students. A professor explained that
they do not have students enough to all local business that want to become a supervised training
place because they want these students in their business.
The managers say that they learn about their business by the interaction with the students and
professors and it motivates them to also go to the university. On the other hand, students can
experience how the company works and how they can contribute to its routine considering what
they have learnt in the university.
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In this region, most of the managers are receptive to the students but some of them are interest
in people to work for a period of time only and in a low cost. Nevertheless, according to the
interviewed professors and managers, many students become employed when they finish the
course. They believe that the region absorbs and values the workers who graduate in the local
universities.
In this sense, in the Region of Gold, the relationship between the university and companies
encourages the inclusion of professional in the local companies because the community
recognizes and appreciates the professional trained in the region. The managers said that the
entrepreneurs of the tourism sector did not allow employees to go to university, but currently,
this perception has changed and they motivate employees to build capacity because they believe
that this training makes a difference in their performance.
Managers also recognize that there is an appreciation of the professional who leaves the
university and the region absorbs them. They also agree that there are important activities
undertaken by the university that allow the relationship between universities and tourism sector.
This relationship expands the condition of the professional training as the supervised training.
In this Region of Gold, there is no difficulty in creating training opportunities because local
businesses are interested in students from universities. Both companies and universities agree
that actors of the companies also seek higher education after offering their business as a place
for supervised training. It highlights the importance of the relationship between universities and
companies that recognize the role of tourism courses in the creation and dissemination of
knowledge.
As we can see, both activities – the final course paper and the supervised training – are
important to the building of the region knowledge and the learning opportunities that helps in
the improvement of the social capital. The relationship between universities and local business
may help to solve problems improving the innovation capacity and workers’ entrepreneur
capacity. In the local managers’ opinion, there is a professional training but there is not enough
interaction between university and local business or experience exchanges. Although there are
innovative experiences, innovation seems to be timid in the local business and in the university
because it is necessary to consider the importance of formal relationship between these two
institutions once the relationship with the university may improve the innovation process. It
may happen because the university offers qualified human capital and also contributes to the
social inclusion by job opportunities. The relationship between institutions is important to
innovation in the sector because it promotes the transfer of information and knowledge by
developing a collaboration capacity which is needed to the activities of the sector.
From the analysis of the information obtained in the interviews with the main actors of the
companies about the relationship between the university and companies in the sector, it is
shown that professional training can contribute to innovation in the tourism sector. For the
central actors, training in higher education is important and desirable. The managers of local
business consider that this training contributes to the professional qualification of the sector.
It is important to highlight that in these analyzes we were aware of the different experiences
both cities in this region have and we considered the features of the region.
CONCLUSION
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This study about knowledge creation in the tourism sector in Goiás/Brazil takes into
consideration the regional learning which is important to the development of the sector. When
the tourism business considers the social capital of a region they acquire the competences
needed to improve their products and services. The tourism business in Goiás/Brazil is engaged
in the learning process and they promote situations in which workers can give their opinion and
contribute in solving problems. So, the capacity of the tourism business helps to the
development their competencies. The consequence is that it promotes the sector activities and
the value of the social capital. In this sense in the Region on of Gold the interaction between the
university, local business and public sector is becoming more intense.
In the Region of Gold, the interaction between universities, local business and the government
are strong in one city and not that much in the other one once we considered two cities from
this region. The relationship between these elements may contribute to the value of the social
capital and promote the activities of this sector.
Nevertheless, this region also needs to improve the social capital because there is an important
difference between these two cities which is related to the interaction and cooperation between
the actors from this sector and it makes difficult the knowledge creation and dissemination in
the region and consequently the improvement of local business and people.
In this sense, the improvement of the social capital by education, interaction and cooperation
between those actors from different institutions in both cities may bring the opportunity to
exchange their experiences and consequently create and disseminate knowledge in the region.
These three elements – education, interaction and cooperation – help in developing skills and
abilities which motivate an entrepreneurial attitude in the tourism activity.
Since we considered the entrepreneurial attitude in the tourism activity a challenge for higher
education, as in the title of this paper, we have called attention to the role of the university and
also to its ability to promote interaction and cooperation with local actors. In this sense, higher
education is believed to be an important aspect to be improved in order to motivate innovation.
For this, it is necessary an intensive review on higher education public policies and also in its
curriculum to decide whether its role is to promote conditions to innovation or not. In terms of
curriculum, for example, we believe that if we consider the actual economic and social contexts
a curriculum analyzes is urgent because although the curriculum suggests some disciplines
related to entrepreneurship or human resource, the pedagogical practice does not walk this
way. We mean that the actors from the university does not seem to be worried about the local
needs when they decide the contents and the activities except for some cases as presented
before in this paper.
The effort in order to create or promote interaction and cooperation between the institutions are
important but, it is not enough to change or improve the local culture and practice which may
build an innovative practice in the studied region. In this sense, we would think about two
suggestions. The first one is to improve the value of the social capital considering the local
knowledge and capacity highlighting trust and friendship which are common to people in this
region. It is possible by the improvement of social capital by capacity and by the strength of the
university role as entrepreneur.
The second suggestion is to establish a different practice of the curriculum motivating, for
example, a transdisciplinary practice. The curriculum as it is organized does not help in the
development of an innovative capacity because all contents are studied as separated topics and
they do not take into consideration the local interests and needs. We realized that those
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analyzed activities may help in the innovative capacity development because they motivate an
interaction between different subjects of the curriculum and the local interests and needs. It
means that an interdisciplinary practice and so far a transdisciplinary one helps students’
interaction with the local and motivate their learning and consequently the learning of the
region and the capacity of the region in create and disseminate its knowledge.
In summary, this study hopes to contribute to discussions about the importance of capacity
building and enhancement of social capital as an incentive for innovation elements that should
be considered in the elaboration of public policies for this sector.
REFERENCES
Boekema, F.; Morgan, K.; Bakkers, S.; Rulten, R. (2000) Knowledge, innovation and economic
growth: the theory and practice of learning region. Edward Elgar Publishing: USA
Cassiolato, J. E; Gadelha, C. A. G. [et al] (2010) Perspectivas do investimento na economia do
conhecimento. Rio de Janeiro: Synergia: UFRJ, IE; Campinas: UNICAMP, IE
Florida, R. (2007) Toward the learning region. In: R. Rutten; Boekema F. The learning region:
foundations, state of the art, future Cheltenham, UK: Edward Elgar Publishing, p. 58-70.
Lohmann, G.; Panosso Neto (2008), A. Teoria do turismo: conceitos, modelos e sistemas. São
Paulo: Aleph
Lundvall, B. (2007) Higher Education, Innovation and Economic Development. World Bank’s
Regional Bank Conference on Development Economics. Beijing, January
Nooteboom, B. (2006) Organization, Evolution, Cognition and Dinamic Capabilities.
www.bartnooteboom.nl. 2006.
Putnam, R. D. Social Capital: measurement and consequences. Isuma: Canadian Journal of
Policy Research 2, 2001, p. 41-51.
Rutten, R; Boekema, F (2007). The learning region: foundations, state of the art, future. Edward
Elgar Publishing: Cheltenham, UK.
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ENTREPRENEURSHIP IN THE ICT SECTOR
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274
ICT ADOPTION AND ENTREPRENEURSHIP IN BRAZILIAN
ENTERPRISES
Luiza Affonso Ferreira Mesquita1
Center for Studies on Information and Communication Technologies (CETIC.br) and the Brazilian Network
Information Center (NIC.br). Email [email protected]
Alexandre Barbosa2
Center for Studies on Information and Communication technologies (CETIC.br) and the Brazilian Network
Information Center (NIC.br). Email [email protected]
Fabio Senne3
Center for Studies on Information and Communication technologies (CETIC.br) and the Brazilian Network
Information Center (NIC.br). Email [email protected]
Abstract: A country must create the necessary conditions for the development of industries and
businesses through governmental, institutional and economic incentives that foster entrepreneurial
innovation as well as a competitive business environment. Regardless of the segment and scope of
business activities, the use of new information and communication technologies (ICT) has become
one of the most critical aspects in determining economic development in an information economy.
Recently, organizations such as the World Bank, Eurostat, OECD and the Global Entrepreneurship
Monitor have started collecting internationally comparable indicators on entrepreneurial activities
around the world so as to understand the role of entrepreneurship in national economic
development. Despite their different data collection methodologies, these organizations consider
that ICT plays a major role in defining the institutional environment affecting entrepreneurship.
The Global Entrepreneurship Monitor (GEM), for instance, has defined a conceptual model to
explore the widely accepted correlation between entrepreneurship and economic growth. This
model tries to explain the creation of an environment conducive to promoting innovation and
entrepreneurial activities. It takes into account different factors such as education, government
policies and programs to encourage entrepreneurship, R&D initiatives, macroeconomic
environment, job creation and technical innovation. As for the “Framework for Addressing and
Measuring Entrepreneurship” model proposed by OECD, R&D and technologies are also
considered key determinants for entrepreneurship.
This paper looks at how Brazilian companies use ICTs. The analysis relies on the dataset produced
by the ICT Enterprise Survey, conducted annually since 2005 by the Brazilian Internet Steering
Committee (CGI.br) through the Brazilian Network Information Center (NIC.br). This nationwide
survey investigates the ICT usage of formally established Brazilian companies with 10 employees
or more.
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275
The survey considers aspects such as the introduction of software and type of software used in the
organization, the reasons for and impacts of software deployment, and the presence of packages
such as Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM)
systems. Furthermore, the survey also measures important aspects related to the difficulties in
hiring IT experts and the outsourcing of ICT-related functions.
The survey design relies on a probability sample of 6,000 Brazilian companies operating in
selected ISIC 4.04 market segments. The methodology is aligned with the framework set forth in
the manual published by the United Nations Conference on Trade and Development (Unctad), thus
ensuring international comparability of the results.
The paper aims to evaluate the implications of the survey data in the context of the debate on
innovation and entrepreneurship focusing on the role of software applications in the organizational
environment. Overall, the results show that although Brazilian enterprises have improved their ICT
infrastructure, there are still many opportunities for a more strategic use of ICT, which is critical to
the uptake of an entrepreneurial environment.
Keywords: Enterprises, entrepreneurial environment, innovation, software.
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276
INTRODUCTION
Since the Industrial Revolution, technology has brought significant changes to societies around the
globe – simultaneously in the cultural, political and economic spheres – due to mechanization, the
development of mass production and the speed and spread of mass media. Such transformations
occurred in a context where new information and communication technologies were multiplying
and leading to innovations that would impact competitiveness in a globalized world economy.
The emergence of these digital technologies is at the center of a new informational economy, in
which the productivity and competitiveness of units of agents fundamentally depend on their
capacity to generate, process, and apply efficiently knowledge-based information (Castells, 2000).
Thus, wealth generation and sustainable economic development has become increasing challenging
for organizations and countries in the information age.
It is also well established that technological change is directly linked with the innovation process
(Acs and Audretsch, 2005). In this context, by enhancing productivity and internal management,
new information and communication technologies (ICT) can help in the development of innovative
economic environments that may in turn impact a country’s economy. This perception is supported
by the UNCTAD, which highlights the effective impacts of ICT on business sector development:
“(...) enterprises must be able to make the best use possible of ICTs, as they
positively affect productivity in both large and small enterprises. Different
kinds of ICTs help enterprises to manage their resources more efficiently,
access the information needed for better business decision-making, reduce
transaction costs, and enhance their ability to bring products and services to
customers” (Unctad, 2011, p. xiii).
Additionally, Tigre (2006) underscores the role of ICT at the organizational level. By increasing
company productivity as well that of the entire country, ICT boost economic development. New
ICT can play a key role, as they can lower transaction costs, help firms obtain information about
new market opportunities, improve their communication along the value chain, and broaden ways
in which products and services are provided to customers (Unctad, 2011).
Since ICT play a key role in entrepreneurship and as an innovation enabler, this paper focuses on
the empirical analysis of how Brazilian companies use ICT in their processes. It will begin by
addressing how literature frames the relation between ICT, entrepreneurship and innovation.
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ENTREPRENEURSHIP AND ICT
Many authors have demonstrated the existence of a strong relation between innovation and
economic development, both theoretically an empirically (Simpeh, 2011; Lindholm, and
Stevenson, 2007). Several studies have also shown how innovation heightens competitiveness,
which consequently contributes to economic performance (Wong et al., 2005).
Schumpeter (1985) set the modern grounds for the study of how economic development brought
about by innovation emerges due to and through entrepreneurial action. According to
Schumpeterian theories, capitalism constitutes “an evolutionary system that is developed through
successive waves of technological revolution” (Ferreira et al., 2008, p. 40) in which innovation
plays a crucial role. Thereafter, profit and sustainable growth is imposed as a condition to the
emergence and sustainability of businesses within the globalized capitalist economic system, which
is, in turn, guided by a high degree of competitiveness between organizations.
In recent years, the related concept of entrepreneurship has gained attention, and the immediate
association with innovation has been discussed by authors who argue that entrepreneurship is
considered to be an important mechanism for economic development through employment,
innovation and welfare effects (Acs, Desai and Hessels, 2008).
Although this idea was put forward with the early work of Schumpeter, which established the
“entrepreneur as innovator” concept, identifying this as a key figure in driving economic
development (Wong et al., 2005), it is only later, in the mid-90s, that the role of entrepreneurship in
economic growth was recognized. At that time, policymakers in many countries and international
organizations began explicitly recognizing “the importance of entrepreneurship and making general
statements about their commitment to increasing entrepreneurship” (Ahmad and Hoffmann, 2008).
Developed and developing countries began to identify the tangible benefits of entrepreneurship for
both government and the business sector. Despite the growing popularity of the concept in the
policymaking arena, the absence of a uniquely accepted definition of entrepreneurship has hindered
the identification of indicators and metrics for measuring the development of entrepreneurial
environments, an issue addressed by the Organization for Economic Cooperation and
Development:
“In the absence of definitions that capture the essence of entrepreneurship
therefore, and entrepreneurship indicators that are internationally
comparable, policy makers are left somewhat rudderless when it comes to
developing policies, particularly when they relate to learning from
international best-practice” (Ahmad and Hoffmann, 2008, p. 2)
For the purposes of this paper, the term entrepreneurship is seen as “the phenomenon associated
with entrepreneurial activity,” 4 (Ahmad and Hoffmann, 2008, p. 4) which in turn is defined as “the
enterprising human action in pursuit of the generation of value, through the creation or expansion
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278
of economic activity, by identifying and exploiting new products, processes or markets” (Ahmad
and Hoffmann, 2008, p. 4).
Regardless of its definition, it is undeniable that a country’s entrepreneurial performance depends
on a “myriad of underlying factors coupled with the personal attributes of entrepreneurs” (Ahmad
and Hoffmann, 2008, p. 15).
“Many words and phrases are used in the literature to describe the factors
affecting entrepreneurship […]. But the differences between these various
studies are often largely semantic; most agree for example that
entrepreneurs and entrepreneurship are created by a combination of three
factors: opportunities, skilled people and resources” (Ahmad and
Hoffmann, 2008, p. 15).
In addition to a country’s level of economic development, technological resources are also crucial
determinants of entrepreneurship, as those important factors that matter to entrepreneurs and
entrepreneurship in order to create the conditions to their activities and reflect access to capital,
R&D and technology (Ahmad and Hoffmann, 2008, p. 15).
In this sense, ICT in general, and the Internet in particular has emerged as one of the most
important technological resources, representing a platform for innovation as well as for enabling
economic transformations. Internet and web applications have not only transformed business
models, but have also intensified entrepreneurial activities, leading to radical innovations in the
design and delivery of goods and services.
Internet has also enabled the rapid advancement of other digital technologies that are deeply
changing business models, e.g., mobile technology, social networks, big data, and cloud
computing, which will undoubtedly allow companies to generate value. However, Internet access is
not enough. The Global Competitiveness Report (GEM, 2012) states that “technological readiness”
is an efficiency enhancer (GEM, 2012, p. 340). Technology is not only crucial for
entrepreneurship, but also for the establishment of an environment that, guided by “a high-growth
oriented approach will create jobs and, in tandem, grow economies” (GEM, 2012, p. 10). For the
benefits arising from the use of ICT to occur, the ideal conditions for their use in different areas
must be present.
This is therefore the main idea behind the paper’s data analysis, which seeks to reveal how
Brazilian enterprises use ICT. The access to, and adoption and strategic use of these resources are
the most relevant issues under study, which seeks to provide an overview of the penetration of ICT
in the corporate sector and, consequently, of the development of an entrepreneurial environment.
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ICT IN BRAZILIAN ENTERPRISES: METHODOLOGICAL ASPECTS
This article relies on the dataset from the 2012 ICT Enterprise Survey, which has been conducted
annually since 2005 by the Center for Studies on Information and Communication Technologies
(CETIC.br), a division of the Brazilian Network Information Center (NIC.br). This survey aims to
generate core indicators and statistics on the use and appropriation of information and
communication technologies in Brazilian companies with 10 employees or more. This nationwide
survey addresses the following topics: general information on ICT systems, Internet usage, Egovernment, E-commerce, ICT skills, and software adoption in Brazilian enterprises. This article
aims to establish a relationship between ICT adoption as a basic resource for promoting
entrepreneurship and innovation.
The 2012 ICT Enterprise Survey, as in all previous editions, was designed to maintain international
comparability. As such, it used the methodological standards proposed in Unctad’s (2009) manual,
prepared in partnership with the Organization for Economic Cooperation and Development
(OECD), the Statistical Office of the European Commission (Eurostat) and the Partnership on
Measuring ICT for Development. This coalition, which is comprised of various international
organizations, seeks to harmonize core indicators in ICT surveys.
The survey sample was selected from the Central Registry of Enterprises (Cadastro Central de
Empresas – Cempre) of the Brazilian Institute of Geography and Statistics (IBGE),5 which
aggregates registry and economic information from the IBGE annual surveys and from the
Ministry of Labor’s Annual List on Social Information (Relação Anual de Informações Sociais –
Rais) (CGI, 2013).
The Cempre 2010 database, the last registry released by the IBGE, is composed of approximately
5.1 million active enterprises and other formal organizations established in the country. The
National Classification of Economic Activities (Classificação Nacional das Atividades
Econômicas – CNAE) is a basic framework used to categorize registered Brazilian enterprises
according to their economic activities and has been officially adopted by the National Statistics
System and by the federal agencies that manage administrative registries. The economic activities
classification adopted in this survey is the CNAE version 2.0 which is derived from the
International Standard Industrial Classification of All Economic Activities (ISIC 4.0), administered
by the United Nations Statistics Division. The choice of CNAE sections as well as enterprises size
followed the recommendations proposed in Unctad (2009).
The ISIC 4.0 does not distinguish types of ownership, legal nature, size of business, mode of
operation or legality of activity. Its hierarchical structure has the following levels of detail:
sections, divisions, groups, classes and sub-classes. For the ICT Enterprise Survey, the section
level is used to classify enterprises.
The 2012 ICT Enterprise survey comprises all active Brazilian enterprises with 10 or more
employees who are registered with the Cempre in 2010 and operate in the relevant ISIC 4.0 market
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
280
segments to maintain international comparability. The enterprises surveyed operate in the
following segments:











Manufacturing;
Construction;
Wholesale and retail trade; repair of motor vehicles and motorcycles;
Transportation and storage;
Accommodation and food service activities;
Information and communication;
Real estate activities;
Professional, scientific and technical activities;
Administrative and support service activities;
Arts, entertainment and recreation;
Other service activities.
The survey sample was designed using the stratified sampling technique, which aims to improve
estimate precision guaranteeing inclusion of subpopulations of interest. Stratification occurred in
two steps. The first step covered the definition of natural strata by correlating the variables:
geographic region (Center-West, Northeast, North, Southeast and South) and the ISIC 4.0 activity
segments (C, F, G, H, I, J, L+M+N, R+S). Thus, 40 nonzero natural strata were formed.
From each natural stratum were defined the final strata, which considered the division of natural
strata by enterprise size. The size ranges considered were 10 to 49 employees, for small
enterprises; 50 to 249, for medium enterprises; and 250 or more employees, for large enterprises.
Micro enterprises, those with 1 to 9 employees, are not part of the survey scope (CGI, 2013).
With the stratification variables defined, the strata insured that all regions, markets and sizes were
represented in the sample and permitted analyses for the areas defined by these three variables
individually.
Each enterprise in the sample was allocated a basic sample weight obtained by dividing the
population size by the sample size in the corresponding final stratum. These weights were adjusted
to incorporate all the concurrent treatment corrections for the data collection situations identified in
the sample control phase. All calculations necessary for estimating the totals of the variables of
interest were produced independently within each final expansion stratum. The values obtained in
each final expansion stratum were aggregated according to the area for which the estimate was
intended.
Data collection was carried out between the months of November 2012 and March 2013. Computer
Assisted Telephone Interviews (CATI) were conducted in each enterprise, where the person in
charge of information technology, computer network management or similar areas was
interviewed. In large enterprises (with 250 or more employees), a second respondent was
interviewed, preferably the accounting or finance manager. If one of these professionals was not
available, the next option was the person in charge of administrative, legal or government relations,
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
281
who responded only to questions about e-commerce, e-government and activities carried out on the
Internet.
ICT IN BRAZILIAN ENTERPRISES: DATA ANALYSIS
With its focus on the role of software applications in the organizational environment as enabler for
innovation and entrepreneurship, this section discuss the key findings from the ICT Enterprise
Survey. Overall, the results show that although Brazilian enterprises have improved their ICT
infrastructure, there are still many opportunities for a more strategic use of these technologies,
which is deemed critical to the uptake of an entrepreneurial environment.
Indicators on ICT infrastructure present in Brazilian companies reveal that access to basic ICT,
such as computers and the Internet, is nearly universal (98% of companies have a computer and
97% of them have access to the Internet), placing Brazil very close to results obtained in developed
countries.
The greatest growth in the percentage of enterprises with Internet access was seen in small
enterprises, which went from 90% in 2007 to 97% in 2012. Medium and large enterprises, in turn,
maintained universal Internet access, from which one can infer that practically all enterprises with
computers have Internet access. Hence, as of 2012, even small enterprises had quasi-universal
access.
Furthermore, the survey also shows that access to high performance Internet connections is
constantly growing. Most Brazilian enterprises have Digital Subscriber Line (DSL) connections
(65%), followed by cable connections (49%). Less used connection types were dial-up and
satellite, both present in only 7% of enterprises. Although DSL connections in enterprises remain
the most common, cable connections showed the highest increase, from 18% in 2007 to 49% in
2012. The presence of 3G modems has also grown in importance in recent years, present in 40% of
enterprises in 2012, probably due to increasing mobility.
The good performance of an ICT infrastructure, however, is not enough to ensure that businesses
will benefit from its use. This is exposed in the indicator measuring the activities carried out over
the Internet, for example, which reveals how Brazilian companies adopt technologies for their
internal organization and for interacting with government authorities.
Basic activities, such as sending e-mails and using e-government services are routine for most
Brazilian enterprises. When considering the results over the years, it is clear that no significant
changes in activities conducted over the Internet were observed. The main activity remains sending
and receiving e-mails, done in 98% of enterprises with Internet access. Searching for information
on products or services was the second most common activity (91%).
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282
Some strategic activities to determine ICT’s impact on enterprises were observed with lower
frequency in the survey. Approximately half of Brazilian enterprises carry out activities related to
e-commerce on the Internet: 51% of them offer client services, such as product price lists and sales
support via e-mail. Recruiting of internal or external staff (35%), staff training (31%) and VoIP
calls/videoconferencing over the Internet (23%) remain the least common activities.
The indicators on enterprises’ web presence are also quite useful for investigating how businesses
incorporate the virtual environment in their customer relations strategies for sales and marketing.
Internet presence may vary from having a website that gives location and contact information to
advanced systems for product customization, sales and support.
According to the 2012 ICT Enterprise Survey, 55% of Brazilian enterprises with 10 or more
employees had websites. Hence, there has been a growth of nine percentage points since 2007. As
observed in previous years, enterprise size is closely related to Internet presence. Among small
enterprises, 48% have websites or Internet pages; 74% of medium enterprises are present on the
web via homepages; and 87% of large enterprises have a website.
Enterprises with websites offer more resources for information consultation than for transactions,
such as shopping carts and online payment methods. This scenario is made clear by the low
proportion of enterprises with online sales: 16% of the total of companies Internet access.
Following the trend of previous surveys, enterprises’ main web offering remains institutional
information (92%). This is followed by product catalogues (62%), and to a lesser degree, websites
with ordering, reservation or shopping cart systems (only 21%).
With regards to social networking, despite its growing use in the general population,6 it is still
relatively low in enterprises: 36% of those interviewed stated that they had a social networking
account or profile. This may be due to corporations’ reluctance to join online social networks, as
they introduce new and more immediate interaction dynamics with consumers.
In small enterprises, the percentage is lower: 33% have social networking profiles, while medium
and large establishments have 43% and 50%, respectively. No significant variation was observed in
relation to the enterprise’s geographical region.
The activities carried out by enterprises on social networking sites are very similar to those done on
their websites: posting of news about the enterprise (78%) and institutional content (72%). The use
of social networks to disseminate institutional content and news is greater in large enterprises (79%
post institutional content, 85% post news about their business, and 80% post news on subjects
related to their area).
Among the activities involving greater interaction with the public, the most common was
answering comments and questions (74%). Fifty-eight percent of the enterprises interviewed stated
that they used social networking sites to launch products or services. This percentage increases to
62% for large enterprises and 65% for medium enterprises. In addition, 53% of Brazilian
enterprises with their own social networking profile offer sales of products or services.
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Strategic use of ICT
The effective appropriation of new ICT by enterprises can positively affect innovation in the
private sector. It is a key element for improving productivity, management, competitiveness and
financial returns. The analysis of the motives behind an enterprise’s decision to invest in software,
e-commerce or information technology training may show the primary barriers to ICT
appropriation in the corporate setting.
The introduction and improvement of software use constitutes one of the most important factors in
consolidating a more innovative uptake of ICT in enterprises. UNCTAD, through its Information
Economy Report, points out that software has become one of the pillars of the information society
and that, especially among developing countries, its potential is underused (UNCTAD, 2012).
Based on the results from the 2012 ICT Enterprise Survey, a third of Brazilian enterprises
introduced new software or made a significant improvement to existing software during the 12
months that preceded the survey (33%), which is very close to that observed in 2011. The
introduction of new software is directly related to the enterprise size: for small enterprises the
percentage is 25%, for medium enterprises it is 42% and for large enterprises it is 57%.
With regards to market segments, companies in the information and communication sector stand
out with 54% of them introducing new software in the 12 months prior to the survey. Whereas the
construction and accommodation and food services sectors had smaller numbers, respectively 24%
and 21%.
A significant portion of the new software introduced by the survey respondents involved integrated
management systems such as Enterprise Resource Planning (ERP). This indicates that enterprises
are concerned with improving management processes and activities. ERP and Customer
Relationship Management software packages are used by 31% and 25% of the Brazilian enterprises
with 10 or more employees, respectively. For both types of packages, incidence of its use is
directly related to enterprise size. Another notable type of software introduced included programs
for basic computer and Internet use such as software packages for editing text, images and
spreadsheets as well as antivirus programs.
Most Brazilian enterprises use licensed software (88%), with this percentage rising to 97% for
large enterprises. Ninety-four percent of the enterprises in the real estate; professional, scientific
and technical activities; administrative and support service activities segment declared that they
used licensed software. Eighty-six percent of the enterprises in the wholesale and retail trade and
repair of motor vehicles segment claimed that they used licensed software. The use of customized
software, which is developed ad hoc, is at 43%. Medium and large enterprises make a larger use of
this type of software, 48% and 56%, respectively. Only 41% of small enterprises acquire
customized software.
Software that has been developed in-house represents the lowest proportion among those surveyed:
18% in 2012. Again, large enterprises stand out with 35% of their software developed in-house. In
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
284
addition to requiring more technology, the structure of large enterprises provides more resources
and know-how for innovating and developing software internally. Customized software developed
in-house is primarily used to meet enterprise-specific needs and suggests a more strategic
appropriation and use of ICT.
For the enterprises that developed their own software, the type of collaboration, when the
development was carried out with another entity, was investigated. The results show that the
majority of partnerships were between private enterprises. While more than half of the enterprises
with 10 or more employees developed their software in partnership with private enterprises (55%),
only 7% did so with universities or research centers. Partnerships with governmental agencies were
realized by only 4% of the enterprises. This indicator showed no correlation according to size.
Enterprises that had introduced new or improved software in the last 12 months were asked the
main reason that led them to do so. The most common reason given was to improve internal
processes/procedures (35% of enterprises), which was lower than the proportion in 2011 (44%).
The second most reported reason was to increase productivity/efficiency, which remained at 22%,
as seen in 2011. For 19% of the enterprises, the main reason for introducing new software was to
comply with legal requirements such as adopting electronic employee time card, electronic invoice
or computerized accounting records.
The survey also investigated the impacts that the new software had on the enterprise. For 93% of
respondents, the initiative had improved company processes, indicating that the most evident
impact of these technologies is related to internal processes. In second place came the production
of better information for decision making, which was mentioned by 88% of the enterprises.
Another impact was a perceived improvement on integration between the enterprise’s internal areas
(87%), followed by improved productivity (81%). For 88% of large enterprises, improved
productivity was perceived as the main impact – 10 percentage points over that of small
enterprises.
Skilled Human Resources
Parallel to the discussion on ICT use in the context of the devices and resources they offer
enterprises, the 2012 ICT Enterprise Survey also looked at the presence of qualified professionals
for technology maintenance and development. Enterprises’ tendency to hire IT specialists, directly
or indirectly, suggests the importance of innovation and strategic use of ICT by enterprises.
Of the enterprises that needed to hire such professionals, 30% were successful and only 7% were
unsuccessful. International data from the Eurostat 2012 Survey shows that 22% of enterprises in
the European Community that use computers hired IT specialists. The eight percentage point
difference suggests an increase in activity in the sector in the country, as indicated by various
studies on the theme. According to the Brazilian Institute of Geography and Statistics’ (IBGE)
data, between 2010 and 2011 the information services sector had a high rate of growth when
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285
compared to other sectors of the economy, contributing to the positive performance of the Gross
National Product (GNP).7
This scenario changes according to size. Sixty-five percent of small enterprises did not need to hire
IT specialists; 57% of medium enterprises had no need for IT specialists; and for large enterprises,
the proportion dropped to 44%. It is these large enterprises that were most successful in hiring IT
professionals: while the national average is 30%, in large enterprises the proportion rises to 51%.
Enterprises in the information and communication sector had the greatest success in hiring IT
specialists, with 50% of them declaring a need for and success in hiring. Contrarily, in the
construction sector, only 26% claimed to have succeeded in hiring. Most of the enterprises in this
sector (70%), declared that they did no need to hire IT specialists.
For enterprises that had attempted to hire IT specialists, with or without success, the survey
examined the obstacles they had encountered. Of the total, 69% of the enterprises cited one or more
difficulties. The most common difficulty was a lack of IT-specific qualifications (skills and/or
training) among candidates, mentioned by 49% of the enterprises. This same factor was the most
reported by medium and large enterprises, at 53% and 60%, respectively. Among large enterprises,
the main difficulty encountered in 2012 involved a shortage of IT specialists (reported by 63%).
Another problem reported by almost half of the respondents was a lack of professional experience
in IT (47%). High salary expectations/high remuneration costs for IT specialists were reported as
the lesser of the difficulties by 41% of Brazilian enterprises.
There is a growing demand for qualified IT professionals in almost all developing countries.
Studies have shown that this extremely dynamic sector, with its proliferation of new devices every
year, has brought about an increase in demand for highly qualified and versatile professionals, who
are able to handle sectorial innovations and new strategies.8 A 2012 study by the Observatory of
the Association for the Promotion of Brazilian Software Excellence (Softex) reported that the level
of education of professionals in the Brazilian software and related services industry (IBSS) has
been rising since 2003. The participation of professionals with up to a secondary level completed
dropped almost 10 percentage points, while that for an incomplete tertiary level saw the second
greatest growth rate (25.4%), reaching 22% in 2009. The proportion of graduates was nonexistent
in 2009 (0.6%) (SOFTEX, 2012). Despite these numbers, the field still suffers from a scarcity of
professionals.9
CONCLUSION
IT investments are one of the main drivers for economic growth in the recent years (Castells and
Cardoso, 2005). Thus, analyse the access and usage of ICT by enterprises might turn out how
prepared is a country to maintain an environment conducive to entrepreneurship. Since it is an
increasingly strategic resource to the business sector, the abscence of intensive and diversified use
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
286
of ICT and skilled people able to operate in this area can represent a major constrain to the wider
dissemination of a culture of entrepreneurship.
ICT infrastructures are widespread in Brazilian companies with 10 or more employees, with 97%
having Internet access and an ever-increasing number of high-speed connections such as DSL, not
to mention the growth of connections that allow greater mobility, e.g., 3G modem connections.
There are however variations in the level of adoption of these technologies that are not related to
differences between regions, size and market segment. The high performance of companies that
use ICT is related mostly to their capacity to appropriate these tools.
In this regard, ICT are widely used for communication activities in Brazilian companies. However,
diversified use strategies seem absent, not to mention the very low percentage of enterprises that
develop their own software. The latter issue has been addressed with great concern by Unctad that
considers that software development enables a set of uses that can contribute to the improvement of
the private sector and to consolidate a more innovative incorporation of ICT in enterprises (Unctad,
2012).
As the Brazilian scenario of access and dissemination of ICT infrastructures in the business
environment is positive, it is important to look at what kind of use could bring real improvements
or changes that could influence the country’s competitive power on national and international
markets.
It is also important to underscore that Brazil has achieved international prominence in issues
related to ICT, and particularly to the Internet. According to private companies, the country is the
third largest user of social networks,10 and is ranked eighth among countries with Country code
Top Level Domains (.br).11 This high performance, however, is not quite as prevalent in the
Brazilian business sector.
According to the World Economic Bank’s 2013 Global Competitiveness Report, Brazil fell eight
points, from the 48th to the 56th position, in its international competitiveness ranking. The country
lost points in virtually all the areas on which the measurement is based, including and especially in
those related to innovation and sophistication of the business environment (WEF, 2013).
Brazil’s economy is deemed to be transitioning from an efficiency-driven economy, which is based
on “developing more efficient production processes and increasing product quality” to an
innovation-driven economy, within which “companies must compete by producing new and
different goods through new technologies and/or the most sophisticated production processes or
business models” (WEF, 2012). According to the report, this will only be possible in a competitive
and sustainable environment that will ensure a process of economic and social development that
can generate real economic growth and increased wealth.
In the same way, the human resources profile in enterprises is still insufficient, with a small
percentage of companies hiring IT specialists and most of them outsourcing their ICT services.
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287
The analysis of ICT use in Brazilian enterprises should be made based on this perspective. Access
to an ICT infrastructure does not guarantee that businesses will enjoy the benefits offered by these
new technologies. It is not enough for an enterprise to make basic use of tools such as computers
and the Internet if they do not incorporate more strategic uses of ICT for the organization as a
whole.
Encouraging innovation through specific public policies are important efforts to be made. These
initiatives can promote the qualitative use of ICT among enterprises through investments in
capacity building, for instance. Moreover, such endeavors could help to establish a dynamic
business environment that could impact entrepreneurial initiatives.
At this point, while a direct effect between the adoption of ICT and subsequent expansion of
entrepreneurship cannot yet been established, studies evaluating levels of ICT participation by
enterprises will help to better inform future entrepreneurial activity. In this regard, studies such as
those conducted by ICT Enterprises will play a crucial role in shaping the entrepreneurship agenda.
ENDNOTES
1. Holds a Post-Graduate Diploma in Theories and Practices of Communication from Casper
Libero, a Bachelor’s Degree in Foreign Affairs from the Armando Alvares Penteado Foundation.
2. Holds a Ph.D. in Business Administration from Getulio Vargas Foundation, a Master’s Degree
in Business Administration from Bradford University, a Master’s Degree in Computer Science
from the Federal University of Minas Gerais, and a Bachelor of Science Degree in Electrical
Engineering from Catholic University. Postdoctoral research at HEC Montreal in Canada.
3. Holds a Master’s Degree in Communication from University of Brasília (UnB), a Bachelor’s in
Social Sciences from São Paulo University.
4. The definition adopted in this paper to explain this phenomenon is based on the OECD
Entrepreneurship Indicators Steering Group which recognizes that there could be other possibilities
to explain the concept, depending on the object of analysis. “Its focus is deliberately to target
business related entrepreneurship, and, so, explicitly ignores social entrepreneurship. That is not to
undermine the importance of social entrepreneurship, merely to say that the definition sets out to
capture a particular aspect of entrepreneurship related specifically to businesses, since the interests
of the OECD and the bodies that have been participating and supporting the OECD in this work are
in this domain”. (Ahmad and Hoffmann, 2008). This choice was guided by the need to explain a
specific topic.
5. IBGE’s Cempre provided consolidation and updating of enterprise and other formally
established organization information, recorded in the National Registry of Legal Entities (CNPJ) of
the Secretariat of Revenue and its respective local units that responded to the IBGE economic
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
288
surveys and/or submitted the Rais declaration to the Ministry of Labor. The IBGE annually
provides a general panorama of the active formal organizations in the country, highlighting
information on the legal status, employed persons and economic activities.
6. .According to the results of the 2012 ICT Household Survey, the percentage of Internet users
who participated in relationship sites in 2012 was 73% (including both urban and rural areas).
7. In 2011 and 2012, the sector had growth indices of 4.6% and 2.9%, respectively. Available at:
http://saladeimprensa.ibge.gov.br/noticias?view=noticia&id=1&
idnoticia=2093&
busca=1&t=2011-pib-cresce-2-7-totaliza-r-4-143-trilhoes/
and
<http://saladeimprensa.ibge.gov.br/noticias?view=noticia&id
=1&idnoticia=2329&busca=1&t=2012-pib-cresce-0-9-totaliza-r-4-403-trilhoes>. Accessed on July
4, 2013.
8.This is one of the conclusions raised by the IDC consulting firm for Latin American countries.
Available
at:
<https://www.netacad.com/documents/300010/35445969/Networking+Skills+Gap+Latin+America
_WP _English/1445ab22-b222-4b32-82b0-5ab92f4e4a71>. Accessed on July 3, 2013
9..Available at: <http://info.abril.com.br/noticias/carreira/2013/07/profissionais-de-ti-tem-maiorchance-de-emprego-avalia-ipea.shtml>. Accessed on July 3, 2013.
10. Available at http://www.estadao.com.br/noticias/impresso,brasileiro-e-3-maior-usuario-derede-social,713503,0.htm Accessed on August 20, 2013.
11.Country code Top Level Domain – ccTLD – is the suffix used to identify an Internet domain
that belongs to a country or territory. The attribution of these codes is administrated by the Internet
Assigned Numbers Authority (IANA), which is operated by the Internet Corporation for Assigned
Names and Numbers (ICANN). Generally, the first two letters recognized by the International
Organization for Standardization (ISO) are used as the country code.
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POSITIONING RESEARCH ON e-ENTREPRENEURSHIP IN
EMERGING ECONOMIES: A STUDY OF LATIN AMERICAN
DIGITAL VENTURES
Gerardo Quinones
Manchester Business School, University of Manchester, Centre for Development Informatics
Brian Nicholson
Manchester Business School, University of Manchester, Centre for Development Informatics
Richard Heeks
University of Manchester,Centre for Development Informatics
Correspondence concerning this article should be addressed to [email protected]
Abstract :This paper looks at literature relevant to e-Entrepreneurship studies in order to position
the need for further empirically grounded research with a focus on emerging markets(1) in general
and in Latin-America in particular. Adoption of e-Commerce to launch new e-Businesses, both by
SMEs and established companies, has captured the interest of academics since the dot-com era, but
it was not until the early 2000s that the term “e-Entrepreneurship” was coined. Since then, the term
has been used to describe the creation of different e-Businesses, by both start-ups and established
companies; thus, in this paper, the concept of Digital Venture (DV) as a specific unit of study of eEntrepreneurship is suggested. DVs are defined as start-ups born on the internet to sell only digital
products/services exclusively online. The emergence of this new breed of enterprises is opening
doors for entrepreneurs to enter new markets with an explosive potential for growth, as cases like
Google, Facebook, Twitter, Instagram, and others have shown. For this reason, private investors
and governmental agencies alike are supporting e-Entrepreneurs through Digital Incubators.
However, there are still very limited examples of success outside of the United States and Europe.
The literature reveals that the “life cycle” and ecosystems of these DVs have been well studied in
those regions; however, little has been done in the context of emerging economies. It is shown how
academic literature supporting studies of e-Entrepreneurship can be grouped into six categories:
Business Models, Digital Economy, Entrepreneurship, Innovation, Information and
Communication Technologies (ICT), and e-Entrepreneurship. Some relevant theoretical
frameworks (and whether they can be applied to DVs) are explored. The paper concludes that the
literature on e-Entrepreneurship has an important gap when looked in the context of emerging
economies points to some open questions that could guide future research.
Keywords: emerging economies, digital ventures, e-Business, e-Entrepreneurship, Latin America.
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INTRODUCTION
In capitalist economies entrepreneurs have played a central role in the creation and distribution of
wealth (Cantillon, 1755; Marshall, 1890; Joseph Alois Schumpeter, 1934). Joseph Alois
Schumpeter (1934), one of the seminal scholars in entrepreneurship, defines entrepreneurs as:
“those who carry out innovation with the goal of creating wealth.” Though the same Joseph Alois
Schumpeter (1939) refers to the activities of the entrepreneur as “enterprise”, and not as
“entrepreneurship”, it is the latter term that academics eventually used to refer to entrepreneurial
activity (Gartner, 1990).
Innovation and technological advances have always been closely linked to entrepreneurship
(Bhupatiraju, Nomaler, Triulzi, & Verspagen, 2012; Utterback, 1971); nevertheless, the emergence
of the internet and the proliferation of personal computers brought a new wave of studies on the
impact Information and Communication Technologies (ICTs) had on new businesses. ICTs were
initially studied as enablers and mechanisms to capture new markets, rather than as an environment
within which new markets are created (Acs & Audretsch, 1990; Barnes, Hinton, & Mieczkowska,
2004; Fichman, 1999). During the last part of 1990s and first part of 2000s academics debated
about whether ICTs should be considered a top-line predictor variable for the creation of value, or
a bottom-line moderator variable (Hamilton & Asundi, 2008; Hitt & Brynjolfsson, 1996; Oliner &
Sichel, 2000). However, as the internet matured, and infrastructure development allowed a larger
number of people to be connected, a multitude of ventures were developed to capture a new
potential for creating wealth during what was known as the “dot com” era (Zhu, Kraemer, & Xu,
2006). A handful of academics tracked the growing trend of new companies being “born in the
internet” (Lockett & Brown, 2000), but it was not until the last decade that the terms “eEntrepreneurship” (Matlay, 2004) and “Digital Entrepreneurship” were used in reference to a new
discipline (Hull, Hung, Hair, & Perotti, 2007).
In the last ten years, the explosion of wireless data networks and the ubiquitous presence of smartphones (Berman, 2012), has accelerated the number of new businesses born on the internet and
created to sell digital products/services exclusively online (Barnes et al., 2004; Lockett & Brown,
2000; Taylor & Murphy, 2004; Wall, Jagdev, & Browne, 2007). Hence, several studies have
emerged with the purpose of understanding the life-cycle of these new breed of start-ups, which we
will call Digital Ventures (DVs) (Asghari & Gedeon, 2010; Kollmann, 2006; Matlay & Westhead,
2005).
As e-commerce adoption increases among small and large enterprises, and new companies move
their services online, the number of economic transactions executed digitally, the so called Digital
Economy, is expected to continue growing exponentially to the point of reaching US $4.2 trillion
in 2015 (Dean et al., 2012). Such growth is even more interesting in the light of flattening
projections for the rest of the global economy (UN, 2013). For this reason, private investors and
governmental agencies across the globe are supporting e-Entrepreneurs through grants, Digital
Incubators (Facet, 2011), and programs such as United States’ Start-up America, United
Kingdom’s Tech City, Start-up Chile, and Brazil Startup, to mention some. However, though
efforts in other regions are starting to pay off, almost all of the examples of DVs that have grown to
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become successful large enterprises (more than $100M in revenue) are still concentrated in the
United States, Europe and Israel (Herrmann, Marmer, Dogrultan, & Holtschke, 2012). Since the
fastest growth in consumers entering the Digital Economy is expected to come from emerging
markets (Nottebohm, Manyika, & Chui, 2012), there will be an important transfer of value from
emerging to mature economies, unless DVs in emerging countries are able to successfully grow
and compete in the Digital Economy to capture and retain this value in their own countries.
OBJECTIVES
In a reflection of what research was needed to increase our understanding of e-Entrepreneurship,
Matlay (2004) offered several recommendations to academics interested in advancing this field.
One of them was the need for more empirical analysis with an international focus on new eBusiness development by SMEs. His recommendation has become even more relevant for
emerging countries which aspire to capture the economic opportunities resulting from the growth
in the Digital Economy.
Latin America as a case study of emerging markets in general has been chosen to be the objective
of this study. The region has proven to be able to generate several examples of successful large
corporations in the physical economy that are either publicly trading in the global stock markets or
have been subject of multi-million, or billion dollar joint ventures and acquisitions (Moreno, 2013).
Moreover, Latin American countries are very interested in supporting technology-based
entrepreneurship as evidenced by the several programs that have been lunched in the region (e.g.
Brazil Startup, Start-up Chile, and Innpulsa Colombia). These institutional efforts have also been
followed, or anticipated in some cases, by private investors funding both incubators and
accelerators. However, there are not yet enough success stories of Latin American DVs
(tecnolatinas.com), as those that we can find in the traditional economy, to prove that the
governmental and private investments are paying off. Thus, it is necessary to understand what is
preventing the growth of Latin American DVs. For these reasons, the objective of this paper is to
do a literature review on the evolution of academic studies around e-Entrepreneurship in order to
identify whether existing theoretical frameworks can explain the lifecycle of Latin American DVs
and their barriers for growth; and to justify the need for future research on e-Entrepreneurship to
address current knowledge gaps in the context of emerging economies in general and of Latin
America specifically.
METHOD
DVs are at the intersection of a variety of academic disciplines, a situation that provides a very rich
environment of perspectives and possible angles for research. To begin the literature search, the
following major academic areas (given their close interrelationship) were considered (Bhupatiraju
et al., 2012): Entrepreneurship, Innovation, and Information Technologies. Within them, subtopics
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related to Small and Medium Enterprises (SMEs) were focused on. Having a particular focus on
SMEs seemed relevant because DVs, by virtue of being in the early stages of development, are
mostly micro and small enterprises.
The terms “e-Business models”, “e-Commerce”, and “ICT adoption” were inductively selected
based on a presupposed relationship with DVs. Moreover, similar terms that have been previously
used to refer to a business with an e-Business model were included in the search: digital enterprise,
internet based enterprise, digital entrepreneurship, and technology-based enterprise. Additionally,
since ICTs are the raw materials of DVs, it seemed appropriate to incorporate into the literature
search some keywords related to SME adoption of the latest technologies. In the May 2013 issue of
the Technology and Innovation McKinsey Quarterly, an influential report on the business world,
Bughin, Chui, and Manyika (2013) mention some of the ICTs that are impacting business. Among
them are: Web 2.0 (Social Networks, Wikis, Podcasts, mash-ups), the Cloud (technology as a
service), M2M (the internet of things), mobile apps, and Big Data. Hence these keywords were also
included in conjunction with the terms e-Business and SMEs.
The following searches were executed:
1. (e-Business OR e-Commerce OR e-Business model) AND small medium enterprise.
2. (e-Business OR e-Commerce OR e-Business model) AND small medium enterprise AND
(web 2.0 OR M2M OR cloud computing OR big data OR mobile apps).
3. ICT AND (innovation OR entrepreneurship) AND small medium enterprise.
4. Digital enterprise OR internet based enterprise OR digital entrepreneurship OR e-Business
model OR technology based enterprise.
A second round of four searches was done adding the keywords “emerging economies”, or “Latin
America” to each of the above
In addition to Google Scholar, the following databases were consulted: ProQuest, Business Source
Premier, and Emerald. No filter was applied with respect to the year of publication. This was done
in order to try to identify not only the newest resources, but also those that could be considered
seminal within the different fields of study. A total of 250 documents, including journals,
conference proceedings, professional publications, and e-books were downloaded for further
review. The third search results included papers in journals with higher rankings, probably because
the topics were relevant to more mature journals with a broader audience. The first, second, and
fourth searches results included several journals which specialize in SMEs from a business, ecommerce, or technology perspective.
After looking at the abstracts and skimming through the documents, 122 were chosen to be further
analysed based on the following criteria: i) documents were related to a theoretical framework of a
wider academic discipline from which more specialized papers have drawn, ii) documents were
relevant to the use, and adoption of ICTs in new businesses, iii) documents focused on internetbased businesses, iv) papers were accessible and available in electronic format to be coded and
analysed with a software tool (NVivo).
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RESULTS
By analysing the abstracts, the main themes were codified and then grouped into seven categories.
Table 1 shows the categories and number of documents in each of them. Therefore, the results are
presented in seven sections corresponding to each category. Although, the main themes were
naturally expected to be closely correlated with the keywords used in the search, the grouping into
categories already represents a primary level of synthesis of all the topics identified in the search.
Table 1 – Categories and number of resources
Category
Business models
Digital Economy
e-Entrepreneurship
Entrepreneurship
ICTs
Innovation
TOTAL
# of resources
12
11
19
22
35
23
122
Furthermore, grouping the literature into categories allowed for the mapping of reference
relationships among them, as shown in Figure 1. To facilitate the mapping of relationships among
categories, the ICT category grouped literature containing topics related to the Cloud, Web 2.0, Big
Data, Mobile Apps and M2M. After studying the Literature of Entrepreneurship, a subcategory
specialized to Incubators was created because it seemed particularly relevant to the phenomenon of
DVs as it is discussed later on. Additionally, a second level of classification was created to identify
literature that was not in one of the categories, but rather at the intersection of two of them:
literature that referred both to ICT and Innovation resulted in a subcategory of Innovation in ICT;
literature that referred both to Innovation and Business models was grouped in a subcategory of
Innovation in business models; and, finally, a subcategory of Innovation of e-Business models was
created as a subcategory of both “Innovation in business models” and “e-Business models”
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Figure 1 – Literature thematic categories around e-Entrepreneurship and their referential
relationships
Digital Economy
For the purpose of this study, DVs are defined as newly created enterprises that only produce
digital products/services and are born, trade, and operate exclusively online. Therefore, their
immediate economic context is not necessarily subject to the constraints of the physical, or
traditional, economy (Gopal, Ramesh, & Whinston, 2003). In a purely digital context, concepts
such as marginal contribution and network effects have a greater impact; for this reason, economic
activity must be measured differently (Brynjolfsson & Kahin, 2000). Hence, the term “Digital
Economy”, first introduced by Tapscott (1996), has been widely used by practitioners and
academics alike to encompass an economic ecosystem with its own set of attributes: knowledge,
digitization, virtualization, molecularization, internetworking, disintermediation, convergence,
innovation, presumption, immediacy, globalization, and discordance (Tapscott, 1996).
Of course, at the centre of the Digital Economy is the digital enterprise, or e-Business described by
Barr (2001) as a “qualitatively different entity” living in a different environment. In the literature,
both e-Commerce and e-Business are terms commonly used interchangeably to refer to a business
transaction that is executed electronically (Wall et al., 2007). Therefore, a digital enterprise, or a
digital business could also be defined as an enterprise executing e-Commerce transactions. In this
paper, to avoid confusion, the term e-Commerce will be used in reference to a business transaction
and the term e-Business to the business or enterprise executing said transaction.
Much of the focus of academic papers in e-Business in the 1990s and early 2000s was actually on
how e-Commerce could offer existing enterprises an alternative to a traditional way of doing
business and allowed them to transform themselves into digital enterprises (Barr, 2001; Fillis,
Johansson, & Wagner, 2004; Gopal et al., 2003; Tapscott, 1996; Zimmerman, 2000). However,
some of the literature also acknowledged the existence of a new category of digital enterprise, that
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297
which has remained purely digital since its inception (Barnes et al., 2004; Lockett & Brown, 2000;
Taylor & Murphy, 2004; Wall et al., 2007). This situation made the term “digital business” or “eBusiness” a wider one, encompassing both traditional businesses that implemented an alternative eBusiness strategy (e.g. Nike Online, Wal-Mart online), and enterprises with e-Business operations
only (e.g. Google, Facebook).
Since the uptake of e-Commerce in late 1990s researchers have recognized the opportunity that ecommerce opened for SMEs to enter new markets and to level the playing field with their larger
counterparts (Fariselli, Oughton, Picory, & Sugden, 1999). However, contrary to what was
originally anticipated, SME e-commerce adoption seemed to occur at a slower pace (Fillis et al.,
2004; Taylor & Murphy, 2004). Therefore, several studies seeking to better understand ICT and ecommerce adoptions barriers in SMEs emerged. As shown in Table 2, the literature specializing in
the adoption of e-commerce by SMEs is abundant. This literature can be divided into two periods:
2002-2006 and 2007-2012. During the former, the authors seemed more interested in
understanding the barriers and critical success factors (CSF) for SMEs to adopt e-Commerce;
during the latter, attention shifted towards understanding how SMEs were using e-Commerce, what
applications have already been implemented with a certain level of success, and what opportunities
still remained for SMEs to further leverage e-Commerce. These studies are relevant to the study of
DVs, because they provide an initial framework to understand possible barriers for entrepreneurs to
use ICTs as a vehicle for new e-Business creation.
Table 2 – SMEs and e-Commerce by focus on Barriers, Critical Success Factors, Adoption, and
Application
Literature
(Al-Weshah & Al-Zubi,
2012)
(Hanafizadeh, Behboudi,
Ahadi, & Fatemeh Ghaderi,
2012)
(Ghobakhloo,
AriasAranda, & Benitez-Amado,
2011)
(Li, Troutt, Brandyberry, &
Wang, 2011)
(Woon Kian, Shafaghi, &
Boon Leing, 2011)
(Wymer & Regan, 2011)
(Zakaria & Janom, 2011)
Topic
Focus
e-Business enablers and barriers in
Barriers/CSF/Adoption/Application
SMEs
Internet marketing adoption and SMEs
Adoption/Application
Adoption of e-commerce applications
Adoption/Application
in SMEs
Factors for the Adoption of Online
Direct Sales among SMEs
B2B
Critical
Success
Factors
framework for SMEs
Factors in adoption of e-Business and
e-Commerce by SMEs
Readiness of Inter-organizational eCommerce on SMEs
(Alzougool & Kurnia,
SMEs e-Commerce Adoption
2010)
(Awa, Nwibere, & Inyang, Uptake of e-Commerce by SMEs
Adoption/Application
Barriers/CSF
Adoption/Application
Adoption/Application
Adoption/Application
Adoption/Application
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298
2010)
(Wielicki & Arendt, 2010)
(Mohamad & Ismail, 2009)
(Chitura, Mupemhi, Dube,
& Bolongkikit, 2008)
(Hamilton & Asundi, 2008)
(Chong & Pervan, 2007)
(Elia, Louis, & Élisabeth,
2007)
(Kartiwi & MacGregor,
2007)
(Stockdale & Standing,
2006)
(Fernando
Alonso
&
Fitzgerald, 2005)
(Fillis & Wagner, 2005)
(Gengatharen & Standing,
2005)
(Heeks, Duncombe, Kintu,
Nakangu, & Abraham,
2005)
(Kaynak, Tatoglu, & Kula,
2005)
(E. E. Grandon & Pearson,
2004)
(Houghton & Winklhofer,
2004)
(Jennex,
Amoroso,
&
Adelakun, 2004)
(MacGregor, 2004)
(Simon, 2004)
(Simpson & Docherty,
2004)
(Stockdale & Standing,
2004)
(Taylor & Murphy, 2004)
(E. Grandon & Pearson,
2003)
(Matlay & Addis, 2003)
ICT Implementation Barriers in SMEs
e-Commerce Adoption in SME
Barriers to e-Commerce Adoption in
SMEs
Technology usage and innovation
effect on SMEs
Factors influencing deployment of eCommerce for SMEs
Barriers/CSF
Adoption/Application
B2B e-commerce initiatives in SMEs
Adoption/Application
e-Commerce
SMEs
Adoption Barriers
in
SME e-commerce adoption initiatives
Barriers/CSF
Adoption/Application
Barriers/CSF/Adoption/Application
Barriers/CSF
Barriers/CSF/Adoption/Application
A multidimensional framework for
Barriers/CSF/Adoption/Application
SME e-Business
e-Business Development in SMEs
Barriers/CSF
Success factors for e-marketplaces for Barriers/CSF
SMEs
Barriers/CSF
e-Commerce for SME Development
Factors affecting adoption
Commerce by SMEs
of
e- Barriers/CSF
e-Commerce adoption of SMEs
Effect of website and e-Commerce
adoption on SMEs
e-Commerce Infrastructure Success
Factors for SMEs
Strategic Alliances in e-Commerce in
SMEs
Critical Success Factors for electronic
services in SMEs
e-Commerce adoption in SMEs
Benefits and barriers of e-marketplace
in SMEs
SMEs and e-Business
Strategic value and adoption of eCommerce in SMEs
Adoption of ICT and e-commerce in
SMEs
(Daniel, Wilson, & Myers,
Adoption of e-commerce by SMEs
2002)
(Fariselli et al., 1999)
e-Commerce in SMEs
Barriers/CSF
Adoption/Application
Barriers/CSF
Adoption/Application
Barriers/CSF
Barriers/CSF
Barriers/CSF
Barriers/CSF
Adoption/Application
Barriers/CSF
Barriers/CSF
Barriers/CSF/Adoption/Application
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Some papers have studied readiness, success factors, and potential benefits of e-commerce
adoption in Latin America. Those concentrated on readiness referred primarily to an environmental
context, including infrastructure, laws, government support, education, culture, and competitive
forces, among others. As show in Table 3, the literature indicated different levels of focus in Latin
America with country, regional, and emerging markets perspectives. Papers with a regional
approach did comparisons among Latin American countries, while those focused in emerging
economies compared Latin American countries with other emerging markets. In general, the
authors seem to agree on some common Barriers/CSFs shared between mature and emerging
markets and also on the fact that there are significant differences (e.g. infrastructure plays a more
important role as a barrier in emerging markets); however, Barriers/CSF among emerging markets
seem to be fairly consistent. Thus, it is anticipated that such differences and similarities exist when
looking at DVs from a mature or emerging markets perspective respectively.
Table 3 – Literature with different levels of focus on Latin America
Latin American countries
(Knight, 2011) focus on Brazil
Latin America region
Emerging markets in general
(Rohm, Kashyap, Brashear, & (Simon, 2004)
Milne, 2004)
(Travica, 2002) focus on Costa
(Martinez & Williams, 2010)
Rica
(Gutierrez, 2004)
(Jobs, 2012)
(Martha, 2004) focus on Mexico
(Montealegre, 2001)
(E. Grandon & Pearson, 2003)
focus in Chile
In general the literature agrees on the positive potential that a higher SME e-Commerce adoption
rate could have for the economy overall (Boateng, Heeks, Molla, & Hinson, 2008; Hinson,
Boateng, & Olav Jull, 2008; Martha, 2004). Though this is generally true for ICT adoption
(Middleton & Byus, 2011), studies have found mixed results on the intensity of the impact for
SMEs in emerging markets (Foley & Ram, 2002; Kenny, 2003; Rangaswamy & Nair, 2012; Zahir,
2008). Some authors include recommendations to be implemented by governments, Nongovernmental Organizations (NGOs), or the private sector to improve SMEs’ ICT and eCommerce adoption (Kenny, 2003; Knight, 2011; Ngwenyama & Morawczynski, 2009).
Nevertheless, there are very few studies with a longitudinal approach that would validate whether
such recommendations indeed offer the expected results (Hitt & Brynjolfsson, 1996; Nair,
Kuppusamy, & Davison, 2005). In fact, most of the papers reviewed in this category followed a
qualitative methodology; thus, it seems that not enough quantitative and empirical research has
been done to measure the actual economic effect of e-Commerce adoption in emerging economies
and what strategies or initiatives may have the largest impact. Hence, there is still a need for
research that helps identify what policies could be more relevant to support the development of
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DVs. Nonetheless, it seems that one would be justified in believing that DVs have a positive socioeconomic impact in emerging markets. Though, as discussed above, the way to measure ICT socioeconomic impact in general seems to be still a topic for research, for DVs in particular, measuring
socio-economic impact could be done more easily through the venture’s own financial indicators.
Business Models
The term “business model” is used in the literature in different ways by associating to it more or
less scope. For example, on one hand Timmers (1998) defines a business model as follows: “ [i)]
An architecture for the product, service and information flows, including a description of the
various business actors and their roles; and [ii)] A description of the potential benefits for the
various business actors; and [iii)] A description of the sources of revenues.” Timmers (1998)
intentionally leaves out any marketing activities; he later points out that, in order to have a clearer
picture of the way an enterprise will realize its business mission, it is critical to talk not about a
business model, but a marketing model, which is defined as: “A business model; and the marketing
strategy of the business actor under consideration.” On the other hand Sako (2012) states that “a
business model articulates the customer value proposition; it identifies a market segment; it
specifies the revenue generation mechanisms; it describes the positioning within the value network
or ecosystem; and it also elaborates on competitive strategy by which the firm gains and holds
advantage over rivals.” Therefore, Sako (2012) gives a larger set of attributes to the term than
Timmers (1998).
Furthermore, some authors point out that a company may have a different business model when
applied to a purely digital context (e-Business model), than when applied to a traditional brick-andmortar context (Berman, 2012; Weill & Woerner, 2013). Therefore, Osterwalder, Lagha, and
Pigneur (2002) and Osterwalder and Pigneur (2002) present a framework to explain the elements of
an e-Business model with a deep level of detail on the conceptualization of terms, components, and
relationships among them. Building from them, as well as other authors in the field, Pateli and
Giaglis (2003) build “a framework that further decomposes the research area of Business Models
into specific research sub-domains”, which they define as: definitions, components, taxonomies,
representations, change methodologies, and evaluation models. Wall et al. (2007) do a
comprehensive review and classification of e-Business models that expands the classification
offered by Timmers (1998) and Rappa (2003). Actually, both Sako (2012) and Doganova and
Eyquem-Renault (2009) agree that the business model in itself can be a source of innovation.
Doganova and Eyquem-Renault (2009) also provide a comprehensive account of the different ways
business models have been defined and the way they have been used by technology entrepreneurs.
According to Doganova and Eyquem-Renault (2009), business models are market devices that
allow entrepreneurs to interact with different stakeholders by communicating the venture value
creation logic and the respective plan to market the venture’s innovation.
The variety of definitions in the literature makes it difficult to compare the actual function of
business models in DVs. Nonetheless, there are two notable coincidences: none of the authors
regard business models as mechanisms to track actual performance, and all of authors agree on the
facts that business models are either a mechanism of communication with the market, or an
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expression of the value-creation process and introduction of innovations into the market and that
business models offer relevant insight on the way an e-Business expects to operate.
Particularly influential to e-Entrepreneurship is the work of Osterwalder et al. (2002) on e-Business
Models. From this original work, the concept of Business Model Canvas was developed and
introduced in the book “Business Model Generation” (Osterwalder & Pigneur, 2010). Practitioners
have applied this concept to dynamically create e-Business Models during the entrepreneurial
process (Blank & Dorf, 2012). Moreover, recent developments in Lean and Agile Software
development have been coupled to the Business Model Canvas in order to foster short cycles of
software development, quickly test related services with customers, and incrementally readjust a
venture’s e-Business Model in order to reduce risk during the early stages of the venture’s lifecycle
(Blank, 2013; Breuer, 2013). It is anticipated that successful DVs be familiar with this concepts
and how they play a role in finding and addressing barriers for growth. However, there does not
seem to yet be much empirically grounded research in this regard.
Entrepreneurship
Bhupatiraju et al. (2012) researched the relationship between Innovation, Entrepreneurship, and
Technology Scientific studies, showing that Entrepreneurship as an academic discipline was born
in close connection to the study of Innovation. The authors present the following chain of
references as the seminal literature in both Entrepreneurship and Innovation studies:
(Cantillon, 1755) -> (Marshall, 1890)-> (Joseph Alois
Schumpeter, 1939) -> (Rogers, 1962)
Schumpeter, 1934) -> (Joseph Alois
For the early authors (Cantillon, 1755; Marshall, 1890), entrepreneurship implied taking risks with
the purpose of creating a business. It was not until some years after that the entrepreneur was
conceived as one who undertakes the innovation process with the purpose of creating business
value (Joseph Alois Schumpeter, 1934). A later study by Gartner (1990) shows that the majority of
interviewees did indeed associate the concept of innovation with entrepreneurship. However,
Gartner also concludes that there is still much ambiguity about who we are referring to when we
talk about an entrepreneur. As it has been shown, the term “Entrepreneurship” has evolved in
different ways; for that reason, some authors state that there is no consensus on the definition of the
term (Morris, Kuratko, Schindehutte, & Spivack, 2012; Shailer, 1994). For example, Shailer (1994)
points out that the creation of a company by a small business owner has been recently referred to as
an entrepreneurial activity, even though this activity does not necessarily involve innovation.
Recent Entrepreneurship literature is abundant, covering a broad spectrum of areas. Nonetheless, it
seems that recent Entrepreneurship studies in the context of technology adoption converge on the
assumption that innovation is indeed part of technology-based entrepreneurial activity. In order to
have an overview of where modern research stands in regards to the relationship between
Entrepreneurship, Innovation and ICT, a sample of papers which were thought to be relevant to
DVs, was selected from a search including the keywords entrepreneurship, innovation, technology,
and ICT. Table 6 summarizes their findings and focus.
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Table 4 – Sample of literature with focus on Entrepreneurship, Innovation, and ICT
Literature
(McDaniel, 2000)
(Miller
2000)
&
Garnsey,
(Klepper, 2001)
(Morris, Kuratko, &
Schindehutte, 2001)
(Hindle
2004)
&
Yencken,
(Doganova & EyquemRenault, 2009)
(Martinez & Williams,
2010)
(Chandra & Leenders,
2012)
(Soriano
2013)
&
Huarng,
Findings
Entrepreneurship definition is linked to innovation as a function of
technology change/development. The entrepreneur is different from a
small business owner, or capitalist.
Place the entrepreneur as the unit of analysis within a technology diffusion
framework to better understand technology advances.
Propose an evolutionarily based theory to explain the creation of employee
high-tech start-ups.
Presents a comprehensive theory of entrepreneurship through the
integration of different frameworks.
Propose that entrepreneur’s culture and knowledge derived from research
are the keys to technological innovation and the creation of New
Technology Based Firms (NTBFs).
Suggest that business models are market devices that allow entrepreneurs
to communicate with stakeholders, thus enabling the economic network
necessary for technology innovation.
Explore institutional policies and entrepreneurial activity in the adoption of
e-commerce. Concludes that institutions are a strong driver, while
entrepreneurship is a weak one.
Through a study of user innovation and entrepreneurship in a virtual
context, the authors justify proposition that link their findings to real world
entrepreneurial theories.
Summary of 2012 Global Innovation and Knowledge Academy conference
papers. ICT innovations are considered essential instruments of knowledge
based entrepreneurship.
Of special interest is the work of Morris et al. (2001) since the proposed framework of frameworks
(Figure 2) provides a detailed theoretical model explaining the lifecycle of ventures and providing
factors that influence the entrepreneurship process. The model is both broad and deep, covering a
multitude of perspectives grouped in six variables: the organizational context, the environment, the
business concept, the resources, the entrepreneur, and the entrepreneurial process. Morris et al.
(2001) appear to be grounded in literature rather than empirical evidence. Moreover, the literature
that Morris et al. (2001) draw from to build their framework is based on studies within a developed
economies context. Therefore, future research should be done with a deductive approach in order to
empirically test the authors’ propositions validity and their applicability to entrepreneurship in
emerging economies.
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Figure 2 –(Morris et al., 2001) framework of frameworks
A relevant subcategory of Entrepreneurship studies was identified with a focus in the role that
incubators play in the creation, development, and growth of technology ventures. Though
incubators follow different models depending on whether they are funded by private or public
funds or whether they are based on mature or emerging markets (Carayannis & von Zedtwitz,
2005; Facet, 2011), it became evident that, to better understand the phenomenon of DVs,
incubators must be included as an element of research. Incubator-oriented literature usually refers
to the entrepreneur as a new small business owner in the early process of business creation.
Carayannis and von Zedtwitz (2005) provide the following definition: “incubators are in the
business of facilitating entrepreneurs and early-stage start-up companies; and compete with
consulting firms, real-estate agents, and other companies for the most interesting and valuable
start-ups. Incubators differentiate themselves through their particular competitive scope, strategic
objective, and service package.” According to their focus and strategic objectives, the authors refer
to five archetypes of incubation (Figure 3): Regional business incubators, University incubators,
Independent commercial incubators, Company-internal incubators, and Virtual incubators.
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Figure 3 – Carayannis and von Zedtwitz (2005) Five Archetypes of Incubation
Incubators must distribute a limited amount of funds among a large number of applicant
entrepreneurs (Carayannis & von Zedtwitz, 2005; Facet, 2011; Thewarapperuma, 2013); therefore,
they have developed sophisticated approaches to decide how to select the best prospects. The level
of innovativeness in new ventures, whether technological or business-model based, is regarded as a
determinant variable that reduces risk and increases the potential of returns (McDaniel, 2000). For
this reason, innovation weighs heavily in the process of capital allocation (Carayannis & von
Zedtwitz, 2005). Doganova and Eyquem-Renault (2009) state that possibly one of the
entrepreneur’s most important objectives in using business models is to reduce the risk perception
of venture capitalists, or, in this case, incubator managers, who need to decide how to allocate their
resources. Facet (2011) suggests that a key element of an incubator support is directed towards the
creation of a business model based on innovation differentiation. Hence, it could be expected that
incubated DVs show more innovation-based differentiation, from either a technology or a business
model perspective, than their non-incubated counterparts.
Within ICT and Entrepreneurship contexts, the literature also looks at technology clusters as a unit
of study. For example, La Rovere (2003) proposed that, assisted by ICTs, SMEs in Brazil could be
organized in local productive systems to better face the challenges of globalization. Oakey (2007)
looked at the effect that policy assistance has had in what he defines as high-technology small
firms (HTSFs), and he concludes that policy assistance oriented in the development of clusters of
HTSFs has a limited effect in improved R&D collaboration between different firms, given the
confidentiality that R&D in high technology entails. However, Oakey (2007) recognizes that some
potential benefits for HTSFs may arise from these clusters in other areas than R&D, very similar to
those offered by Incubators, such as shared real estate, marketing, legal, and other business
functions.
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Information and Communication Technologies
ICTs may be considered the raw materials of DVs, the structure over which these are built.
Technology has been closely linked to academic research with innovation and entrepreneurship for
many years. As Bhupatiraju et al. (2012) point out,
“In the 1960s and 1970s, innovation [INN] and science and technology studies [STS]…
overlapped to a considerable degree… This is evident from our citation network analysis,
which shows that, in the 1960s and 1970s, the main paths in the [citation] networks (i.e., the
citation chains that correspond to the strongest knowledge flows) consisted of documents
coming from both STS and INN. The interpretation of this finding is that STS and INN
used to cite each other quite frequently, and that a logical and consistent back and forth
flow of ideas can be seen from a chain of documents that contains both STS and INN
publications.”
Bhupatiraju et al. (2012) also explain that literature in technology evolved by itself as a cumulative
knowledge discipline with a more positivistic approach. Nonetheless, since the early 2000s several
papers revived the attention on the relationship between technology, innovation and
entrepreneurship (Doganova & Eyquem-Renault, 2009; Groen, Oakey, & Cook, 2008; Hamilton &
Asundi, 2008; Hindle & Yencken, 2004; Miller & Garnsey, 2000). The use of the term
“Technology Based Firms” by some of these authors (Groen et al., 2008; Hindle & Yencken, 2004)
exemplifies the renewed interested in these interdisciplinary dependencies.
Undoubtedly, the internet and e-Commerce were the technologies that enabled the emergence of
DVs. Studies on e-Commerce have already been covered within the Digital Economy category;
however, beyond e-Commerce, other ICTs were explicitly included in the literature search with the
purpose of understanding how much research had been done about their effect on the creation of
new e-Business models in SMEs. The search revealed the existence of relevant literature,
especially that involving Cloud and Web 2.0.
The National Institute of Standards and Technology (NIST) definition of Cloud Computing is: “a
model for enabling convenient, on-demand network access to a shared pool of configurable
computing resources (e.g., networks, servers, storage, applications, and services) that can be
rapidly provisioned and released with minimal management effort or service provider interaction “
(Jansen & Grance, 2011). The NIST also identifies the following three service models:



Software as a Service (SaaS): “allows users to run a variety of software applications on the
Internet without having possession or managing applications (e.g., Salesforce.com, Gmail,
Microsoft Online)” (Alali & Yeh, 2012).
Platform as a Service (PasS): “provides a computing platform to support building of web
applications and services completely residing on the Internet (e.g., Google Apps,
Force.com, 3Tera AppLogic)“ (Alali & Yeh, 2012).
Infrastructure as a Service (IaaS): ”allows the use of computer hardware and system
software, including operating systems and communication networks in which the cloud
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provider is responsible for hardware installation, system configuration, and maintenance
(e.g., Amazon EC2, Citrix Cloud Center)” (Alali & Yeh, 2012).
Ten Cloud Computing related studies were analysed. Table 5 summarizes the findings of these
studies. In conclusion, research suggests that SMEs are potentially a beneficiary of Cloud services,
but that SMEs have slowly adopted them. Only one paper touched on the relationship between
Cloud Computing and DVs; however, the focus of this research was not on this relationship per se
but on the business model of a case study.
Table 5 – Summary of literature on Cloud Computing and its findings
Literature
(Wieland, 2007)
(Clark, 2009)
(Bajenaru, 2010)
(Han, 2011)
(Jansen & Grance,
2011)
(Kushida, Murray, &
Zysman, 2011)
(Ojala & Tyrvainen,
2011)
(Bolloju & Murugesan,
2012)
(Alali & Yeh, 2012)
(Lacity,
Reynolds,
Khan, & Willcocks,
2013)
Summary of topic and/or main findings
Analysed factors for which adoption of IaaS in SMEs has been slow in US
and Europe. Concludes with a positive outlook for future SME adoption of
Cloud services.
SMEs would benefit from Cloud services. Several examples of Cloud
applications that have potential to benefit SMEs are provided. Low current
adoption rates are implied.
SaaS benefits for SMEs may overcome the risks Cloud Computing implies,
but support is necessary for SMEs to adopt SaaS at a larger scale given the
technical and business challenges such adoption may imply. Low current
adoption rates of Cloud Computing are recognized.
Examples are provided to present a Total Cost of Ownership (TCO)
methodology useful to analyse the financial benefits of Cloud services.
Provides a framework to define Cloud Computing services and guidelines
for security and privacy.
Describe the Cloud provider’s ecosystem and presents several public policy
issues that may affect the development of Cloud services.
Provides a case study of a DV that provides Cloud gaming services.
Explains in detail how Cloud computing enabled the business model for this
DV.
SMEs could benefit from adopting PaaS in order to compete with larger
firms and leverage Cloud-based services for B2B integration. Low current
adoption rates are recognized.
Conduct a risk analysis of providing cloud services. Concludes that even
“large companies in the historically high-risk information technology
industries provide Cloud Computing.”
Presents evidence that firm size “was not significantly related to Cloud
adoption, Cloud drivers, Cloud barriers (i.e. security concerns)”. Concludes
that SMEs are the ones benefiting the most from Cloud services by levelling
the playing field in terms of access to IT infrastructure.
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Web 2.0 offered a promise to reinvigorate the internet as an enabler of new business models
(O'reilly, 2007). Barnes et al. (2012) explains that Web 2.0 can be better understood as a “range of
internet-based applications. Web 2.0 encompasses heterogeneity of applications including social
networking, wikis, blogs, podcasts, instant messaging, discussion forums, audio and video
conferencing, group diaries and address books, hosted virtual offices, collaborative whiteboards
and presentation systems.” Table 6 provides a summary of the five papers analysed in this
subcategory and notes variance in approach and focus.
Table 6 – Summary of literature on Web 2.0 and its findings
Literature
(Barnes et al., 2012)
(Lee, Dewester,
Park, 2008)
&
(Lim, Trimi, & Lee,
2010)
(Brynjolfsson & Hee
Oh, 2012)
(Wirtz, Schilke,
Ullrich, 2010)
&
Summary of topic and/or main findings
Studied the way SMEs use Web 2.0 and concludes that: “Benefits from the
use of Web 2.0 are categorized as lifestyle benefits, internal operational
efficiency, enhanced capability, external communications and enhanced
service offerings.”
Study of the potential benefits of Web 2.0 for both the creation of online or
digital businesses, and the e-Business expansion for existing SMEs.
Study of the propensity to use Web 2.0 based on the entrepreneurial
orientation (defined by the authors as the willingness to take risks)
concluding that those individuals with higher EO show a higher Web 2.0
adoption rates.
Provides a valuable framework to analyse the economic logic of DVs based
on Web 2.0 business models apparently presented as free to
producers/consumers.
The authors propose a four factors model tested through interviews with
Web 2.0 entrepreneurs in the United States and Germany.
On one hand, Barnes et al. (2012) studied the way SMEs use Web 2.0 and concluded that:
“Benefits from the use of Web 2.0 are categorized as lifestyle benefits, internal operational
efficiency, enhanced capability, external communications and enhanced service offerings.”
However, he does not specifically discuss the relationship between Web 2.0 and DVs. On the other
hand, Lee et al. (2008) focus their study in the potential benefits of Web 2.0 for both the creation of
online or digital businesses, and the e-Business expansion for existing SMEs. By leveraging “the
three properties of Web 2.0—openness, participation, and collaboration”, the authors present some
models and guidelines for SMEs to enter new markets, or to extend their market share. With a very
different focus, Lim et al. (2010) studied the propensity to use Web 2.0 based on the
entrepreneurial orientation (defined by the authors as the willingness to take risks), concluding that
those individuals with higher EO show higher Web 2.0 adoption rates. From this study, it could be
inferred that, presented with the appropriate tools, entrepreneurs could more easily leverage Web
2.0 technologies. Finally, Brynjolfsson and Hee Oh (2012) discuss the challenges to measure the
economic value for some Web 2.0 services that are apparently presented as free to
producers/consumers. Wirtz et al. (2010) propose a four-factors model (Figure 4), built through
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308
interviews with Web 2.0 entrepreneurs in US and Germany. The empirical evidence presented in
Wirtz et al. (2010) does not seem broad enough to be conclusive, given the small number of
interviews performed and its limited explanation of the survey and statistical analysis. However,
this study provides a conceptual framework that could be helpful as a starting point to study
possible factors that influence the lifecycle of DVs with a Web 2.0 based business model.
Figure 4 – The Web 2.0 four-factors model (Wirtz et al., 2010)
Innovation
As discussed earlier, Innovation as a field of study evolved parallel to the study of
Entrepreneurship. Actually, both terms are closely interlinked in most of the definitions in the
literature. Drucker (2002) offered a definition of Innovation that seems to capture the essence of
such relationship in an elegant and simple manner: “Innovation is the specific function of
entrepreneurship, whether in an existing business, a public service institution, or a new venture
started by a lone individual in the family kitchen. It is the means by which the entrepreneur either
creates new wealth-producing resources or endows existing resources with enhanced potential for
creating wealth.” Following the seminal studies on Innovation from Bhupatiraju et al. (2012),
Figure 5 presents an extended timeline of selected authors relevant to Technology Innovation:
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309
Figure 5 – Literature timeline on Technology Innovation
Early authors (Cantillon, 1755; Marshall, 1890) regarded innovation as technology change that
provided a creative solution to a particular need, resulting in the creation of wealth and economic
growth. It was Joseph Alois Schumpeter (1934) who clearly spelled the difference and relationship
between invention, innovation, and entrepreneurship. For him, an invention implies the making of
something new that has the potential to generate economic value, innovation was the process of
actually using an invention with a business purpose, and an entrepreneur was the person who
actually carries out innovations through the enterprise. Since Schumpeter, authors have associated
innovation with the process of taking an invention from its conception into production and market
introduction. Rogers (1962) took the innovation concept a step further by offering a Diffusion of
Innovations framework that today is still a reference for researchers in Innovation in a wide
spectrum of disciplines (Maertens & Barrett, 2013; Rahman, Hasan, & Floyd, 2013; Zhu et al.,
2006). Rogers (1962) proposed that there is a defined process, named diffusion, through which
people learns about, and decides whether to adopt innovations. Rogers (1962) identifies the
following characteristics of innovation that influence its rate of adoption: relative advantage,
compatibility, complexity, trialability, and observability. Diffusion Theory has been the bedrock
for subsequent theoretical frameworks that can be useful in explaining the growth stages of DVs.
Later on, Utterback (1971) suggested a three-step process of technical innovation: idea generation,
problem solving, and implementation, possibly followed by diffusion. He also introduced a
Theoretical Framework of Technology Innovation as a function of three factors: (1) characteristics
of the firm’s environment, (2) internal characteristics of the firm itself, and (3) flows between the
firm and its environment. Kamien and Schwartz (1982) proposed a Theory of Market Structure and
Innovation in which innovation was also considered a function of the firm’s market context.
Similarly, Tornatzky and Fleischer (1990) presented an innovation empirical contextual framework
called Technology Organization Environment (TOE) that is composed of three constructs: the
external environmental context, the technological context, and the organizational context. Acs and
Audretsch (1990) refocused previous innovation research towards small firms and strengthened the
interconnection between Innovation and SME Entrepreneurship studies. Fichman (1999) focused
on ICT diffusion and assimilation theories, and provided a framework to classify their key
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310
constructs. All of these authors seemed to have taken for granted the very beginning of the
innovation process, probably considering it a result of a random generation of an idea or an
invention. However, Drucker (2002) introduced the concept that innovation should not be
understood as the result of a “flash of inspiration”, as he called it, but as a process “to be managed
as other corporate functions.” Drucker (2002) looked for the sources of innovation and proposed
the following seven: unexpected occurrences, incongruities, process needs, industry and market
changes, demographic changes in perception, and new knowledge. He concluded that a systematic
process of innovation relies on a continuous analysis of these sources of innovation and must be
adjusted to each business context.
Furthermore, Innovation literature makes reference to a variety of taxonomies, or theoretical
typologies of technological innovations. Joseph Alois Schumpeter (1934) pioneers the concepts of
incremental and radical innovation; the latter creates new markets through the destruction of others,
while the former offers economic advantages through enhancements to a particular technology.
Though other typologies were developed, most of the authors seemed to have adopted a version of
these two categories until Christensen (1997) introduced the concept of disruptive innovations. He
referred to a sort of innovation that does not entail improved performance, but the displacement of
more advanced and complex technology by a more simplified version. Latzer (2009) looks at the
most common innovation taxonomies, and from his work, Table 7 has been adapted.
Table 7 – Differences between incremental, radical and disruptive innovations adapted from
(Latzer, 2009)
Radical Innovations
 Discontinuous
(with
or
without
predecessor;
substantial,
nonlinear improvement)
 Based on new technology
 Leads to new dominant
design
 Can lead to paradigm shift
 Involves great uncertainty
 Entire
new
set
of
performance features
 Need for re-education, new
organization and skills
 Attributed to chance, not to
necessity;
might
be
influenced by R&D policy
 Driven by technology push
(important in early phase of
technology)
 To achieve economic longterm goals
Incremental Innovations
 Continuous
(linear
improvement in the value
received by customers)
 Based on old technology
 Dominant design unchanged
 Does not lead to paradigm
shift
 Involves low uncertainty
 Feature improvements
 Existing organization and
qualifications are sufficient
 Result of rational response,
of necessity
 Driven by market pull
(important in late phase of
technology)
 To achieve economic shortterm goals
Disruptive Innovations
 Inferior
performance,
cheaper, fast improving
 Leading customer rejection
 Performance overshooting of
established technology
 Lower profits until a new
business model is found
 Emerging market success (in
isolated niches)
 Intersecting trajectories lead
to
invasion
of
the
incumbent’s market;
 First-mover advantages
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Moreover, Innovation studies in emerging markets are plentiful, and some of them focus on Latin
America. For the last five years, there has been a rise in research around how innovation targeting
the “bottom of the pyramid” may incorporate this segment of the population into the Digital
Economy with the dual purpose of expanding the market and alleviating socio-economic pressures
(Boateng et al., 2008; Foster & Heeks, 2013; Nair et al., 2005; Rangaswamy & Nair, 2012). For
example, Foster and Heeks (2013) explain how the Systems of Innovation (SoI) and Technology
Diffusion frameworks can be used to study new forms of innovation in emerging markets through
the conceptualization of what they define as Inclusive Innovation (Figure 6). According to Foster
and Heeks (2013) SoI has been successfully used by several authors to model factors affecting
innovation in emerging economies. It could be argued that SoI frameworks draw some parallels to
the framework of frameworks proposed by Morris et al. (2001), in the sense that both model the
macro relationships among the different elements of the system that are in themselves looked at
through their own sub-framework.
Figure 6 – Example of SoI conceptualization (OECD, 1999, p. 23) in Foster and Heeks (2013)
Furthermore, since technology diffusion in emerging economies is highly dependent on achieving
low prices that are accessible to low-income consumers, some studies are focused on how policy
can facilitate through subsidies the adoption of new technologies (Hilbert, 2010). It is generally
accepted that subsidizing technology and ICT innovation has a positive productivity effect in the
economy (Crespi & Zuñiga, 2012; Daude, 2010; Lastres & Cassiolato, 2003); however, there are
many challenges to developing and implementing effective policies in Latin America that
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recurrently appear in the literature. Table 8 summarizes some of these challenges and findings. In
any case, the literature reveals that existing innovation theoretical frameworks have been
successfully used in and adapted to both emerging economies and Latin American contexts.
Table 8 – Technology innovation in Latin America; frameworks, challenges, recommendations
Author
Frameworks
(Lastres &  SoI.
Cassiolato,  Technology
2000)
Diffusion.

(Daude,
2010)

Development
Accounting.
Technology
Diffusion.
Challenges
 Information/Knowledge
Economy
challenging
traditional economies of
emerging markets.
 How
can
emerging
markets take advantage
of new ICT paradigms?
 Foster local and national
innovation and learning
policies to incorporate
developing
economies
into
the
Learning
Economy.



(Hilbert,
2010)

Income
Distribution
and
Technology
Diffusion

Findings
 The global knowledge economy
imposes
new
competitive
dynamics
for
SMEs
in
emerging economies.
 Government has a key role in:
 Transforming
productive
clusters in dynamic and
innovative systems.”
 Creating
macroeconomic
conditions to promote the
development of new productive
systems.
Latin American countries 
growing slower than
other
emerging
economies.
Barriers to innovation
and technology adoption.
Latin
American
innovation is low-tech in 
general.
Low Total factor productivity
(TFP) (the efficiency with
which factors of production are
combined in the economy) as
the main reason for slower
growth than other emerging
economies.
Low technology diffusion is
due
to weak regulatory
frameworks and institutions.
Absorption capacity – in
particular human capital – also
plays a non-negligible role, as
do other framework conditions
like the availability of finance.
Digital divide among 
mature and emerging
markets result in lower
innovation
and 
productivity.
Neither the real price reduction
of ICT, nor demand subsidy can
be a solution by itself.
The challenge has to be faced
with
a
sophisticated
combination of both options in
close
public–private
cooperation.
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313
(Crespi & 
Zuñiga,
2012)
CDM

Structural
Recursive
Model
of
Innovation and 
Productivity
Lack of significance of 
innovation
for
productivity in Latin
America.
In many Latin American
economies,
firms’
innovations
consist 
basically of incremental
changes with little or no
impact on international 
markets, and are mostly
based on imitation and
technology transfer








Firms that have foreign
ownership (greater than 10% of
capital)
show
a
higher
propensity
to
invest
in
innovation in some countries,
but not in others
Firms that have patents have a
higher propensity to invest in
innovation activities
Firms that received public
financing for innovation invest
significantly more than those
who did not.
Absence or weak development
of innovation networks.
The results of the three
variables concerning “sources
of information” differ markedly
across countries.
Greater innovation effort per
employee leads to a higher
probability of having at least
one
process
or
product
innovation.
Company size matters for
technological
innovation.
Larger firms tend to innovate
more frequently, and this effect
may be due to the development
of economies of scale and scope
in the production of knowledge.
There is a positive impact of
technological innovation on
productivity.
Size is not related to
productivity.
The impact of innovation is far
beyond
those
reported
previously
for
firms
in
industrialized countries.
Determinants of innovation are
not the same across Latin
American countries.
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e-Entrepreneurship
As the Digital Economy developed, a new breed of companies operating solely in the internet was
born. At the early stages, academics studied the phenomenon under a variety of terms: internetbased businesses, internet ventures, internet start-ups, and e-Businesses, among others. During the
second half of 1990s and early 2000s the rapid success of companies like Netscape, Amazon,
Google, and eBay triggered a wave of studies focused on the particular challenges and
opportunities of operating a business solely in the internet (Afuah & Tucci, 2000; David Barnes
Matthew & Mieczkowska, 2004; Pateli & Giaglis, 2003; Souitaris & Cohen, 2003; Timmers,
1998). However, Matlay (2004) was one of the first authors to use the term “e-Entrepreneurship”
specifically in reference to SMEs created to trade exclusively in the internet. Other terms, such as
Internet Entrepreneurship (Batjargal, 2005), and Digital Entrepreneurship (Hull et al., 2007) have
been used with a similar meaning. However, it seems that e-Entrepreneurship has been more
widely used in recent literature than the others. Nonetheless, the definitions of e-Entrepreneurship
vary and do not seem to refer to DVs only, since in some cases they also include SMEs that
produce physical products that are traded both offline and online.
As a new discipline, e-Entrepreneurship is still in the process of developing theoretical frameworks
that are, in most cases, based on those of the surrounding disciplines as shown in Figure 1.
However, since the appearance of works from Afuah and Tucci (2000), Matlay and Westhead
(2005), Gundry and Kickul (2006) and Kollmann (2006), among others, researchers have been
building up. Table 9 offers a summary of the areas of contribution of each of the papers analysed.
Table 9 – Summary of Research contribution on e-Entrepreneurship
Area
Research
Position
 (Waesche, 2003) – Explores different frameworks from many disciplines around
current
and
internet entrepreneurship, which is identified as the incursion of any company in
future research
e-Business. Though the studies are within a European context, many of the
propositions could be generalized to other contexts. Given the broad spectrum of
topics and angles covered, it is not easily to identify from this book a unified
framework to study the phenomenon of Internet Entrepreneurship.
 (Matlay, 2004) – Positions e-Entrepreneurship as a concept linked to SMEs
operating online. e-Entrepreneurship is defined as ”the act of establishing new
companies specifically in the Net Economy“. Provides an account of gaps in the
literature and positions the need for future research.
 (Sinkovics & Bell, 2005) – In their introduction to a themed on international
entrepreneurship and the internet, the term e-Entrepreneurship seems to be used
as an equivalent to “SMEs with a successful online presence.”
 (Asghari & Gedeon, 2010) – Define e-Entrepreneurship as “the entrepreneurial
process used to create an e-Business”. Furthermore, they introduce the concept
of Completely Digital Entrepreneurship (CDE) “where IT and the internet not
only affect the e-Business, but also the entrepreneurial process of creating the eBusiness as well as the way these e-Businesses are managed using Virtual
Teams. “
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Typology




Theoretical
framework





(Timmers, 1998) – A widely cited reference for early e-Business models
classification proposes the following typology depending on the degree of
innovation and extent of function integration: e-shop, e-procurement, e-auction,
e-mall, 3rd party marketplace, virtual communities, value chain service
provider, value chain integrator, collaboration platforms, and information
brokers.
(Matlay, 2004) – Proposes a typology of models of internet trading: Business-tobusiness (B2B), Business-to-consumer (B2C), Business-to-government (B2G),
Business-to-portal (B2P), and Business-to-affiliate B2A.
(Lumpkin & Dess, 2004) – Classify e-Business models with the following
categories: commission-based, advertising-based, markup-based, productionbased, referral-based, subscription-based, and fee-for-service-based.
(Hull et al., 2007) – Provides a definition of Digital Entrepreneurship as “a
subcategory of entrepreneurship in which some or all of what would be physical
in a traditional organization has been digitized.” He offers a typology of Digital
Entrepreneurship of three categories based on the degree of digitalization: mild,
moderate and extreme. The type is a function of level of digitalization in six
areas: marketing, sales, product/service, stakeholder management, operations.
(Afuah & Tucci, 2000) – The book presents a framework to analyse internetbased business models with a value-creation centric approach. The framework
presents business model components such as: customer value, scope, price,
revenue sources, connected activities, implementation, capabilities, and
sustainability. Potential challenges to implementing the business model are not
discussed in detail, and it considers the framework to be applicable to all
companies regardless of being an SME venture or a well-established firm.
(Lumpkin & Dess, 2004) – Propose a model to analyse how companies can
create value based on four internet-based activities: product evaluation, service
related problem solving, transaction, and search. Authors offer several examples
to illustrate how both internet-based and traditional companies using the internet
have successfully added value using these four internet-based activities.
(Kollmann, 2006) – Defines e-Entrepreneurship as “the act of establishing new
companies specifically in the Net Economy.” Propose several frameworks to
explain the e-Entrepreneurship process: The Shell Model of the Net Economy,
The electronic value chain in the Net Economy, The electronic creation of value
and Building blocks and phases of development for companies in the Net
Economy. His study is based on his own experience and on the literature.
(Gundry & Kickul, 2006) – The authors present e-Entrepreneurship as
“collapsing boundaries between firms, suppliers, customers, and competitors;
new and expanding markets with increasing competition; and flexible
approaches to delivering differentiated business” in the context of the Net
Economy. Authors “test an integrative model of e-entrepreneurship, a model
that incorporates technology and both internally-focused (employees and team
members) and externally-focused (product/market innovation) processes.”
(Asghari & Gedeon, 2010) – Propose a framework to study Completely Digital
Entrepreneurship (CDE) based on (Kollmann, 2006) and incorporating concepts
of Virtual teams and e-Entrepreneurship. CDE “not only develops digital
products, and sells them through a digital channel (e-Business), but… also
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
316
incorporates Virtual Teams.” The authors expand Matlay’s and Kolleman’s
contributions by linking them to other literature and propose the following
advantages of CDE: transaction-costs reduction, increased agility, instant
internationalization, and customer integration into the business processes.
Authors also find that CDE has some difficulties such as: protecting intellectual
property, creating strong corporate culture, employee retention, and loss of faceto-face interaction among virtual team members. Findings presented in this
paper seemed to be based on induction from the literature, and no evidence is
provided to support the CDE framework.
Empirical
research







(Souitaris & Cohen, 2003) – Based on a survey of 406 UK internet ventures
(including dotcoms and internet divisions of established companies) the authors
test the validity of the impact in internet-trading ventures’ performance of 21
internet-specific strategies. The authors find that there is no statistically
significant evidence to differentiate the performance of different internetstrategies, concluding that internet business may be managed just like any other
business.
(Batjargal, 2005) – Research is based on a statistical analysis of a 12-month
longitudinal survey of 94 Internet Ventures applying Social Networks Theory to
analyse firm survivability. No formal definition of internet Venture is provided,
but for the sample of companies it is inferred that refers not specifically to DVs
but to “Internet related firms (Internet service providers, Internet content
providers, e-commerce, network technology, software).” The author concludes
that entrepreneur’s experience and social networks have an effect on firm
survivability.
(Matlay & Westhead, 2005) – The authors, redefine e-Entrepreneurship as SME
ventures for which “all of their economic transactions take place online, via the
Internet.” The role and practice of Virtual Teams of e-Entrepreneurs in Europe
is studied through 15 case studies in the hospitality industry. Authors found
empirically grounded advantages and disadvantages of the use of Virtual Teams
in e-Entrepreneurship.
(Arenius, Sasi, & Gabrielsson, 2005) – Longitudinal case study of a Finnish
“knowledge intensive venture”. The case study provides evidence that the
internet enables rapid internationalization for small knowledge based ventures.
(Gundry & Kickul, 2006) – The study included 131 e-commerce ventures
“conducting multiple transactions on the web”. It was not clear whether the
internet-based entrepreneurs interviewed were internet-only or if traditional
companies with an e-Business branch were included. Through a structural
equation modelling approach, authors tested relationships between use of ICT
and internal management practices, innovation, organizational effectiveness, and
growth.
(Lasch, Le Roy, & Yami, 2007) – The authors measure the impact of human
capital and organizational start-up setting for 220 French ICT services start-ups
that survived a three-year post-creation threshold. There was no specific focus
on DVs in this study.
(Matlay & Martin, 2009) – A case study based longitudinal research of
collaborative strategies among 24 European e-Entrepreneurs. In this study eEntrepreneurship is used as a synonym of SME e-Business creation or
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
317
development. Research is focused on Culinary Tourism Virtual Team, so its
findings may be limited to this sector. The authors conclude that:
o “Collaborative strategies adopted by these e-Entrepreneurs have resulted
in the rapid adoption of ICTs and e-Business processes.”
o “Virtual team members have achieved early successes in niche market
expansion and consolidation in domestic markets as well as overall
internationalization of their e-Businesses.”
o “Consistently higher per capita turnover and profit levels have been
recorded in each of the e-Businesses in this virtual team… that can be
directly attributed to team wide collaborative strategies.”
Drivers/
Impact





(Souitaris & Cohen, 2003) –The authors find that there is no statistical
significant evidence to differentiate the performance of different internetstrategies, concluding that internet business may be managed just like any other
business. Moreover, they suggest that New Venture Performance (NVP) may be
a better model to explain performance of internet-trading ventures.
(Mahmood & Cheng Ming, 2005) – Use a model derived from Morris et al.
(2001) to explain e-Entrepreneurship as a process of value creation. The authors
define e-Entrepreneurship as the entrepreneur’s application of ICT “to create
value from the entire value chain of business processes”. Hence it is not
specifically targeted to DVs. The authors explore drivers that facilitate eEntrepreneurship with a focus on emerging economies in the Asia-Pacific,
concluding that e-commerce readiness is the most important one.
(Kollmann, 2006) – Proposes the following success factors of establishing a
company in the Net Economy: management, product processes, finances, and
market access/network.
(Gundry & Kickul, 2006) – The authors found the following drivers of eEntrepreneurship:
o Information technology is significantly related to internal management
practices, continuous product/service improvements and improving
business processes while computer technology is related to continuous
product/service improvements
o Internal management practices are associated with incorporating
additional
marketing
strategies,
continuous
product/service
improvements and entrepreneurial growth.
o The innovations of incorporating additional marketing strategies and
improving business processes are linked to the organizational
effectiveness (creating worth)
o Improving business processes is related to the other two dimensions of
organizational effectiveness (enhancing value and insulating a firm from
competition).
o All areas of organizational effectiveness are associated with
entrepreneurial growth.
(Lasch et al., 2007) – The researchers use regression model in a database with
information from up to five years of information in ICT based start-ups and
conclude that “human capital and working experience have no significant
impact on the success of young ICT firms” and that “critical growth factors are
mostly financing and customer related variables (firm size and capital at start-
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
318

up, customer structure, regional market orientation, etc.)”
(Matlay & Martin, 2009) – Findings indicate that collaboration strategies among
virtual teams of e-Entrepreneurs substantially improve the survivability and
profitability of new SME e-Businesses.
Only seven papers were empirically grounded: four of them followed a longitudinal approach, four
of them were based on surveys of 100 samples or more, and three of them followed case studies.
Those studies that followed a quantitative methodology based on surveys included in the sample
both companies that mixed traditional businesses with an e-Business branch and DVs; so, no
definitive conclusion may be derived for the sub-segment of DVs that took part in these studies. Of
the studies following a case study approach, none seem to have clearly focused on DVs only.
Matlay and Westhead (2005) and Matlay and Martin (2009) mentioned that the companies studied
were e-Businesses, but given that they were related to the tourism industry, it is not clear if the
sample was related to SMEs solely operating in the internet, or if it also included traditional SMEs
who also had an e-Business strategy.
In relation to e-Entrepreneurship in emerging economies, Batjargal (2005) studied Internet
entrepreneurship in China, but the sample of companies included a wide range of Internet-related
companies and was not focused on DVs. Furthermore, his research, though enlightening, was
narrowly focused on the effect of social networks on the survivability of internet based ventures.
Similarly, Mahmood and Cheng Ming (2005) position their research in the context of Asia Pacific
economies, which has a blend of both mature and emerging markets; though informed by the
literature and public statistics, their research lacks empirical grounding. Other studies were done
within a European or North American perspective.
Table 8 shows that the field of e-Entrepreneurship has been developing with a peak of papers
making specific reference to e-Entrepreneurship, or its synonyms, in the period of 2004-2006 and
has continued to evolve in the recent years. Actually, as a result of the growing interest in the field,
in 2010 the International Journal of e-Entrepreneurship and Innovation was created (2).
Notwithstanding the work already done until today, several gaps remain in the literature around
DVs, or, as Asghari and Gedeon (2010) called it, Completely Digital Entrepreneurship. Hence, it is
clear that more empirically grounded research is needed to narrow the field of e-Entrepreneurship
to DVs, and to validate whether the existing frameworks can apply to the context of emerging
economies. The lack of e-Entrepreneurship studies in Latin-America is particularly noticeable.
Though there is research on e-Commerce adoption, technology innovation, and technology
incubators in the region, it seems that the emergence of DVs in this part of the world so far has
received very little attention by the academic community.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
319
CONCLUSION
The review shows how studies in Entrepreneurship, Innovation, Business Models, Digital
Economy, and ICT contribute to our understanding of the recently created field of eEntrepreneurship. Innovation and Entrepreneurship studies appear to be closely interlinked, and,
though they have continued to evolve for several decades, they seem to converge in a handful of
theoretical frameworks (e.g. Technology Diffusion, SoI, and Entrepreneurship Framework of
Frameworks) that have become the bedrock of contemporary researchers. It was also shown that
Digital Economy and ICT studies are particularly relevant because of their focus on how small
enterprises leverage ICTs to create new businesses, and how the socio-economic context may
influence the generation and survivability of e-Business.
Nevertheless, this literature review has identified a lapse in the literature around eEntrepreneurship on DVs in emerging markets, and moreover in Latin America. Research on SME
e-Commerce adoption has shown that the constructs for mature and emerging economies vary, so it
can be expected that existing e-Entrepreneurship theoretical constructs should also be adapted
when applied to emerging economies. Though the available theoretical frameworks should inform
and support any future research, the lack of a commonly accepted theory of e-Entrepreneurship
leaves enough room open for the creation of new frameworks to consider the inclusion of emerging
economies. In order to do so, it seems that an empirical approach would be better suited to ground
such new frameworks and cover existing gaps.
Finally, the two following questions are proposed for exploration in future research:
1. Can the current frameworks on e-Entrepreneurship explain the lifecycle of DVs in the context
of emerging economies, and specifically of Latin-America? The literature does not seem to
provide enough explanation for why successful DVs are concentrated in the US and Europe.
Moreover, the Technology Frontier model proposed by Caselli and Coleman (2006), and the
low adoption and diffusion rates of ICTs found by researchers suggest that DVs in emerging
markets might behave in a different way. Given the lapse in the literature of empirically based
research on e-Entrepreneurship in emerging markets it is anticipated that the existing
theoretical frameworks must be adapted or expanded to better understand e-Entrepreneurship in
this specific context.
2. What are the barriers for growth that DVs face in Latin America and how are DVs facing
them? It seems that DVs in emerging markets face challenges particular to these regions that
prevent them from growing at the same rate and scale as their counter parts in developed
markets. Arenius et al. (2005) point out that when SMEs implement an e-Business presence,
they automatically enter into a global marketplace; however, there is a paucity in research on
whether this potential has indeed been exploited by DVs created in emerging markets, or if
their business models are more commonly built, at least initially, with a local or national focus.
As discussed herein, incubators may be an excellent source of case studies of DVs in the
region. Furthermore, in order to build a comprehensive framework for e-Entrepreneurship in
Latin America, the role of the incubators in DVs’ survivability must be understood and
performance of both incubated and non-incubated DVs should be compared.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
320
ENDNOTES
1. The terms “emerging economies”, “emerging countries”, or “developing economies” are used
interchangeably and refer to the list of countries named as such by the International Monetary Fund
(IMF, 2013).
2. As per the time of this literature review, the author has not yet gained full access to the
International Journal of E-Entrepreneurship and Innovation. However, from publicly accessible
abstracts, it seems that the gaps in the literature discussed herein remain uncovered.
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333
The Impact of Conflicting Institutional Logics on the adoption and
non-adoption of ICT tools within Handicraft Production: A Case of
Mexico
John Dobson
Seton Hill University
Abstract: Neo-liberalism is currently the dominant economic model for international
development. The aim of this interpretivist research is to recognise the challenges faced by
indigenous entrepreneurs at the Bottom of the Pyramid (BOP) when engaging in trade based on
neo-liberal market based principles and identify policies that may support these entrepreneurs.
This explanatory research will apply three (Family, State, and Markets) of Friedland and Alford’s
(1991) five orders of institutional logics to the handicraft sector, in Mexico. Comparing the neoliberal market logic against the historically embedded logic within these communities will enhance
our understanding of the challenges faced by entrepreneurs in realizing the potential benefits of
ICT adoption and use. A qualitative survey instrument was developed and used in longitudinal data
collection. Phase one, conducted in 2011, involved 29 in-depth interviews with artisans. Phase
two, conducted in 2012, involved 24 in-depth interviews with artisans. The interviews were
digitally recorded. The qualitative data analysis was a multi-step process. The transcripts were
read and re-read. The data was placed into one of 3 institutional logics; Family, State, and Market.
The data was compared using a neo-liberal and historically contingent lens to explain observed
behavior. Entrepreneurs face unique challenges when attempting to integrate into the neo-liberal
world. The neo-liberal assumption is that success is based on individual effort and entrepreneurial
zest. However, for most of the 20th century, indigenous communities operated with different
institutional logics that emerged from a unique historical experience. This research found
differences in institutional logics plays a significant role in artisan entrepreneurial behavior. The
result is that they approach the adoption and use of ICT tools from a different world-view.
Initiatives aimed at furthering the economic, social or political development of these communities
needs to consider how conflicting logics are influencing behavior. The results suggest that
indigenous entrepreneurs operate with institutional logics that are vastly different from the neoliberal worldview. The universalistic neo-liberal approach does not work at the BOP. What is
required is customized solutions on adoption and use of ICT tools based on the context of the
community. Research conducted on entrepreneurship at the BOP considered the role that
institutional logics are playing on adoption and non-adoption of ICT tools.
Keywords: Entrepreneurship, Handicrafts, ICT4D, Institutional Logics, Bottom of Pyramid
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INTRODUCTION
The adoption of Information and Communication Technologies (ICT) tools is driving economic
growth in many parts of the world. The UN and other international agencies are targeting ICT
adoption as key to accelerating development (The World Summit on the Information Society,
2007). Entrepreneurs are viewed as the necessary agents of change required for adopting ICT
tools. After more than 25 years of ICT for Development (ICT4D) investments the supporting
evidence is still limited (Donner, 2009). Calling into question the reliance on positivist assumptions
on diffusion of innovations (Rogers, 1963), neo-liberal logics (Clarke, 2004), and the inevitability
of ICT tools to overcome development failure (Andrade & Urquhart, 2012). Some researchers have
found that the presence of lower quality institutions in developing countries partially explains
differing outcomes of economic development (Avgerou, 2010). This research uses the concept of
conflicting institutional logics on to explain behaviour by entrepreneurs within the Taxco
Handicraft sector in Mexico. In this paper, the focus is on increasing the conceptual understanding
of the relationship between historically embedded and neo-liberal logics on adoption and nonadoption of ICT tools in handicraft sectors. Specifically, seeking to answer the following questions.
1. What is the impact of competing institutional logics on adoption behaviour?
2. How do informants interact with these competing logics?
THEORETICAL FRAMEWORK
Alford and Friedland (1985) introduced the concept of institutional logics to describe the
contradiction in beliefs and practices that were inherent in western institutions. Their contribution
included the realisation that research into the inter-relationship between these institutions was
greatly enhanced through the consideration of context. Friedland and Alford (1991) identified five
core institutions within society: family, religion, state, democracy, and market. The logic of
religion and democracy are not addressed in this research. Each institution has a central logic that
provides symbols, rituals, and accepted norms that provide a sense of self (Thornton & Ocasio,
2008).
These logics not only constrain behaviour by structuring norms, but also provide
opportunities to utilise these rules for their own advantage (Friedland & Alford, 1991). Institutional
logics are simply the way in which a social unit operates (Thornton & Ocasio, 2008). Hayes and
Westrup (2012) believe that researchers should consider the process through which context is
represented. This research furthers this objective by categorizing the observed context into the
three institutional logics. The use of this theoretical framework provides a tool to interpret
observed behaviour of the sector, while allowing the research to consider cognitive and socially
constructed rules (Thornton & Ocasio, 2008).
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LITERATURE REVIEW
The adoption of ICT tools has been extensively researched. The most commonly used approaches
are based on Rogers (1962) seminal work on the diffusion of innovations. These approaches are
premised that adoption is predictable, sequential, and desirable. The model has been tested
numerous times, in various settings and is now widely accepted (Midgley & Dowling, 1993),
becoming the foundation for how the adoption of an innovation is researched (Orr, 2003).
However, the assumption of inevitable adoption is being challenged. A growing body of
researchers have identified weaknesses when applying the Rogerian model to ICT for development
(ICT4D) initiatives. Researchers have found that the diffusion process is deeply socially embedded
within local institutional forces (Powell, 2007). Therefore, one of the reasons for the high failure
of ICT4D projects is the mismatch between the externally funded project and local context (Heeks,
2008). Resulting in the realisation that to more fully understand the process researchers need to
consider the role of context (Walsham, 2013), which Hayes and Westrup (2012) define as a
dynamic concept produced out of processes of connection and disconnection. Context is the
setting or circumstance in which behaviour occurs, but also affects how we interpret the world
around us. The implication of this definition is that successful research is based on the
customisation of initiatives and the researchers ability to appropriately interpret the data. The
purpose of research is not only to further our theoretical understanding, but also to deal to practical
issues of socio-economic development (Avgerou, 2010).
METHODOLOGY
The research conducted qualitative analysis to explain the adoption of ICT tools in the sector. The
explanatory case study adopted a longitudinal approach with two phases of interviews. The
sampling strategy used was judgement purpose sampling, with all the informants selected already
acquiring ICT tools. The Micro and Small Enterprises (MSE) were each given a preliminary
questionnaire to ensure that they met the prerequisites of access to ICT tools.
The first phase, was conducted with 29 Artisans of MSE in January of 2011. The informants were
asked semi-structured questions that elicited their beliefs about the sector and how it functions.
The survey instruments consisted of 40 questions around 6 main topics, which covered MSE
structure, strategy, rivalry, products, operations, and biographical information. The researcher then
collected observational data for a period of 2-3 hours. Further informal conversations provide
insights into how the sector operates and informant perception of ICT tools. These conversations
provided valuable insights into the informant beliefs, which would have been left unanswered, had
the interview stopped after the questionnaire. Two government officials were interviewed to
explore the role of the state. A representative of FONART, which is the National Foundation for
the Promotion of Artisanal Products and the local director of La Hacienda, the federal department
in charge of business regulations and standards were interviewed.
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336
The second phase, built on the knowledge gained from the first phase to improve the survey
instrument. The number of questions was reduced from 40 to 36. Some of the questions were
revised to permit more active informant participation in explaining how they believe the sector
functions. Allowing for more in-depth exploration of the relationship informants have with
customers and suppliers, the role of the state, firm structure and rivalry, and the perception and use
of ICT tools. The interviews were conducted with 24 different artisans, during June/July 2012. The
interviews were semi-structured using an initial questionnaire, followed by observations of
informant behaviour through a ‘typical’ working day, and concluding with follow-up questions.
Follow-up questions were asked if the researcher observed behaviour that needed clarification or
further discussion.
The interview data was recorded, and a professional service was used to translate and transcribe the
data. To ensure confidentiality, all informants were assigned a contact key. The data analysis
process involved listening to the recordings whilst reading the transcripts. The data was coded into
the Friedland and Alford (1991) three orders of institutional logics: Family, the State, and the
Market.
The research used four tactics identified by Yin (2003) for successful case study research. Firstly,
construct validity was achieved by developing an operational set of measures (Eisenhardt, 1989).
This was established through the creation of a survey instrument that permits the researchers to
identify the influence of institutional logics on sectoral behaviour. The methodology followed
Yin’s (2003) tactics to establish a ‘chain of evidence’ to justify research findings. Firstly,
establishing construct validity also requires multiple sources, which was achieved through the use
of 53 informants, who were interviewed in two different phases. Secondly, the explanatory
research required internal validity (Bruque & Moyano, 2007). The research findings are based on
observations and interview data. The goal was to analyse the data to compare the neo-liberal and
historically embedded institutions to identify patterns of behaviour and beliefs, allowing for a
consistent explanation for observed behaviour amongst the informants. Thirdly, external validity is
achieved by using theory (Yin, 2003). This was achieved in this study through the use of
institutional logics to guide the research design. The case study focused on eliciting responses to
behavioural norms within the sector and interpreting how this was impacting on the adoption of
ICT tools.
It should be remembered that case study research is inherently difficult to generalise from one case
to another (Yin, 2003). The adoption of the semi-structure interviews was successful in acquiring a
high level of informant participation in total 53 informants participated. Only one artisan
approached refused to participate, this willingness of participants helped ensure internal validity
(Bruque & Moyano, 2007), provided construct validity (Eisenhardt, 1989). The purpose of field
research is to be there and observe, ask questions that are sometimes insightful but other times
senseless (Fetterman, 1998). The goal to collect sufficient stories, personal histories from multiple
sources and at various times helps triangulate the phenomena (Yin, 2003).
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337
CASE DESCRIPTION
The case description in the narrow sense of the term is the Taxco Silver Market Sector. Yet, how
the concept of institutional logics is being presented in this paper requires a review of the
historically contingent logics against the current neo-liberal market based logics. Allowing a more
complete examination of how the conflicting institutional logics are impacting behaviour. The
section will first present some background on the Taxco Handicraft sector and then explore the
historically embedded logics that provide structure and meaning for this community.
Taxco is the principal silver jewellery-manufacturing centre in Mexico. Taxco is a remote village
high in the Sierra Madre mountain range, southwest of Mexico City. Handicraft production in
Mexico typically dates back to the colonial era. This sector is relatively young, beginning in the
1930s (Stromberg-Pellizi, 1993), when an American named William Spratling arrived and set up
the first silver workshop, hiring and training locals to make silver jewellery. Within a few years
there were thousands of artisans working in the sector (Stromberg-Pellizi, 1993). Currently there
are over 2,000 MSEs in the sector (Dobson, 2010). A casual examination of the sector will find
most MSEs using ICT tools.
The paper will explore the development of historically embedded logics by presenting the logics of
the Revolutionary phase. These logics dominated society from 1910, but began to unravel in the
1980’s. What emerged was neo-liberal worldview with vastly different logics. Some sectors of
Mexican society have fared well, while others most notable indigenous run MSE have not.
Research has identified the socio-economic divide that is emerging in Mexico (Mexico's
Mezzogiorno, 2006). The paper will explain how the handicraft sector, typically run by indigenous
peoples, is struggling to reconcile two competing logics. Understanding this conflict is essential to
successfully to bring artisanal production into a globalised world.
Revolutionary Era (1910-1986)
The Mexican Revolution was driven by what Tocqueville (1955) describe as the revolution of
rising expectations. Profirio Diaz assumed control of Mexico in 1876 and remained in power until
1911 (Beezley & Meyer, 2010). He implemented a series of structural reforms consistent with
economic liberalism of the time. The country experienced dramatic economic development, but
Diaz maintained strong political and social control. The industrialisation process produced a newly
enriched elite, which sought a more open political system to compliment their economic wealth.
Francisco Madero, the father of the Mexican Revolution, was a banker, who had been imprisoned
for his political beliefs. The narrow political goals of the nouveau riche were soon drowned out by
the clamour of the claims of other elements of society. The indigenous rose to demand freedom
from peonage (serfdom). Their cause of ‘Tierra y Libertad’ translated as ‘land and freedom’ was
represented Zapata. Mexico was engulfed in a revolution that lasted a decade and alliances shifted
between the various warring factions (Beezley & Meyer, 2010). The decade long chaos began to
subside as the human economic cost continued to mount. The warring factions slowly began to
make peace and find accommodations that ended the war. It took a decade to coalesce, emerging
with a presidency that became a series of rotating dictatorships (Riding, 1985). Initially, amongst
the victorious generals but later presidents would emerge from the technocratic class. Each
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
338
president would serve a six year term, not be able to run for re-election, and able to appoint his
successor. What emerged was a planned economy with greater power concentrated in the
presidency, the capital and amongst bureaucrats (Beezley & Meyer, 2010). Laissez-faire
capitalism of the previous era was replaced with highly controlled industrialisation through
programs of import substitution industrialisation. The indigenous peoples were not part of the
modernization programme. The revolutionary government responded to demands of ‘land and
liberty’ by returning to them vast tracks of land in remote regions. The purpose was to allow them
to return to their ancestral lands after 400 years on forced service to first colonial masters. The
government created ‘ejidos’ or communally owned land that was intended to support subsistence
farming and protect the purity of indigenous communities from the ill of modernisation (Riding,
1985). The result was that indigenous peoples were excluded for economic, social and political
participation in 70 years of socio-economic development. In the absence of a developmental state,
‘Caciquismo’ or local power brokers emerged in rural communities, with the ability to allocate
social, political, economic rewards (Villarreal, 2002). These communities were isolated while the
rest of society experience unprecedented economic developed.
Neo-liberal
Mexico was on the cusp of transition into a rich and developed country. However, heavy
borrowing, low-productivity and the economic crisis of the 1970 and 1980’s brought to an end the
era of state led development. The economic restructuring was necessitated by Mexico’s default in
1982 on its national debt. President De La Madrid, from 1982-1988, began a series of political and
economic reforms that would eventually transform Mexico from the Revolutionary era to the
current neo-liberal era. The previous presidents had grown so corrupt that the political system
lacked legitimacy (Beezley & Meyer, 2010). He instituted electoral reform, which culminated in
2000 with a free and fair election in modern Mexican history. The government negotiated
admission into the General Admission of Trade and Tariffs, which forced Mexico to lower trade
barriers and embrace neo-liberal market-based principles. The emergence of neo-liberal practices
signalled a change in focus for indigenous communities. Neo-liberal market principles are based
on property rights, which is at odds with the ‘ejido’ system of communal property. The government
abandoned economic and political support for these communities. Laws were changed that
reverted ‘ejidos’ into private holdings. This meant that these ancestral lands could now be sold to
private interests. Market mechanism and not government subsidies will determine the fate of
indigenous. After 70 years of communal existence policies assume that indigenous communities
have normative beliefs that are compatible with market systems and the individuals within these
communities have the cognitive ability to become entrepreneurs responsible for their own success.
Table 1, outlines the key concepts of political, economic and social assumptions of each era and the
impact on indigenous communities.
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339
Era
Revolution
Time
19101986
Political
Rotating
Dictatorship
Economic
Import
Substitution
Industrialisation
Social
Socialist
Neoliberal
1986present
Transition to
democracy
Market
Economy
Equality
Impact on Indigenous
‘Ejido’ or communal
subsistence farming, political
marginalisation and social
isolation
Removal of subsidies,
privatisation of land, and
incorporation into economic
system as entrepreneurs
Table 1: Comparison of the Revolutionary and neo-Liberal Era in Mexico
RESEARCH FINDINGS
This section will discuss the findings from the data analysis. The findings are categorized
according to the 3 institutional logics that Friedland and Alford (1991) identified as the core of
society. The researcher attempted to place the logics into discrete orders, but found many of the
findings intersected multiple logics and these logics have overlapping influences. The logics are
presented in the following order. First the revolution era and neo-liberal logics are introduced.
Followed by a discussion of the findings and the impact of these competing logics on sectoral
behaviour.
Family
The family is not typically considered part of the economic system (Thornton P. , 2002). When
applying Thornton’s model, to the context of Mexico we are able to identify deeply embedded
beliefs that are influencing current behaviour. For example, in colonial era Mexico, society was
structured to give substantial power to the Catholic Church and the Spanish crown (Riding, 1986).
Mexican society served the crown and most economic activities we designed around export
oriented activities (Riding, 1986). Immigration of families was discouraged since this would force
the colony to divert resources from export to the provision of public goods for residents. The logic
of one-institution placing restrictions on individual behaviour required the family institution to
adapt to the new reality. The logic on not allowing families to migrate served the crown needs, in
that fewer resources were required to build and maintain public good in the new world, allowing
more of the wealth to be sent to Spain. This had an unintended impact on the logic of the family.
Spanish men living in Mexico without their wives would often take Indian mistresses. This
behaviour resulted in the birth of ‘La Raza’ or the Mexican people, but continues to have
devastating impact on Mexican society (Riding, 1986). This behaviour developed into a deeply
embedded institution that continues to this day in which ‘machismo’ and gendered roles continue
to dominate Mexican Society (Macias-Gonzalez & Rubenstein, 2012). Deeply rooted in Mexican
culture is the belief that women are inferior (Riding, 1985), while others note that maintaining
hieracrhies of power based on gender remains a feature of Mexican society (Macias-Gonzalez &
Rubenstein, 2012).
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The discussions about the business use of ICT tools consistently became discussions about their
daughters’ use of these tools. This gendered assignment of ICT tools to female family members
reflects the status attributed to them by the (almost exclusively male) entrepreneurs. The logics of
‘machismo’ have assigned ICT adoption to women. A conflict exists in the market-based
assumptions, which significantly rely on ICT tools to overcome development failure. Assigning
the adoption of ICT tools to daughters (rather than sons) signals the limited perceived value of ICT
tools to the business, and impedes diffusion. Resulting is a marginalisation of ICT tools and
limiting the potential gains for their adoption and use.
State
The economic crisis of the late 1970’s and early 1980’s resulted in many countries abandoning
state led development in favour of market-based solution (Gore, 2000). What emerged was a new
set of logics of how policy makers viewed the role of the state. The state re-treated from
Keynesian models of social development (Hall, 2011). Neo-liberal logics are hostile to the concept
of an active a progressive state (Clarke, 2004). The new role of the state was to allow the free
market to effectively and efficiently allocate resources. Acting as a ‘night watchman’ that simply
ensured no one violates the natural mechanisms of capitalism. Institutional theorists that have
noted that impartial contract enforcement and adjudication of disputes is a key to well functioning
markets and economic development (North, 1997). The state becomes the facilitator of economic
development, which is accomplished through the creation of enterprise zones or helping create new
markets (Clarke, 2004). The role of the state is to create the opportunity of entrepreneurs.
When exploring the role of the state in the Taxco Silver Handicraft Market, we find that the
government is pursuing policies that appear based on these neo-liberal logics. Local government
officials interviewed are pursuing policies aimed at sectoral development such as the provision of
ICT training programmes. The objective is to provide equal opportunities to all MSE in the sector
to learn how to use ICT tools to improve organisational performance. The role of the state is then
to stand back and let the ‘invisible hand’ take over. It is anticipated that ideas would spread
according to accepted models of diffusion (Rogers, 1962). However, only 2 of the 53 informants
participated in the training programmes. One of the reasons for the low participation rate is that the
sector functions with low levels of trust (Aguilar, 1984). Further complicating neo-liberal
assumptions about the diffusion of innovations is that MSE are reluctant to share ideas with other
MSE, because ‘egoism’ is considered a social ill (Aguilar, 1984). These two institutional norms are
impacting the ability to use ICT tools to improve sectoral performance. The state logic under a neoliberal world-view operates with assumptions the role of the state is simply to provide universal
training of ICT tools and the market will determine the best way to use these ICT tools and the
information will be diffused throughout the sector resulting in the adoption of ICT tools. However,
this is not how business is conducted. Low levels of trust and the beliefs’ about ‘egoism’ result is
state led ICT4D initiatives have failed to become adopted.
Market
The ‘Ejido’ system, which was established after the revolution created large indigenous
communities of subsistence farming. The logic of subsistence farming is families farm a small plot
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341
of land, within the ‘ejido’. These families had other communal responsibilities such as assisting in
collective projects, such as maintenance work on communal water source, and collective public
works. In traditional subsistence farming, as children grow up they acquire their own plot of land
and the cycle continues. Ensuring low yield farming practices. The system does not support the
establishment of economies of scale or necessitate the creation of specialised labour. The findings
indicate that these MSE exhibit some of the behaviour seen in subsistence farming.
Firstly, informants spoke of the need to help establish their children in their own handicraft
business. Allowing them to have a future in the industry. In one interview the parents had bought
their son an expensive piece of machinery. When asked why it was not made part of the parents
business, the informant stated that it was done for the son’s betterment. There was also a comment
that his fate was now in his hands and no longer the responsibility of the parents. This is at odds
with the neo-liberal view of how the market functions. Successful firms grow through the creation
of specialised labour and the adoption of ICT tools. It appears that even after 25 years since the
introduction of market based solutions to help solve the under-development of these communities
these communities still rely on historically embedded solutions.
This may be explained in the structure of the handicraft market in Mexico, which dates back to preHispanic times. The system was radically altered during the colonial era of Spanish rule, when the
emphasis shifted toward an export-oriented system, with production drawing on forced indigenous
labour (Beals, 1975). There continues to be a widely held belief that international trade has had a
detrimental impact. As a result, the market system is still viewed as part of the historical continuity
of unfair trade (Kahl, 1986).
Secondly, the handicraft market functions with vastly different assumption from market based
principles. The market in a neo-liberal world-view assumes that the market will ultimately succeed
in effectively and efficiently allocating resources. Within Mexican society handicrafts are not
purchased based on utility maximising decision. This difference is significant. Individuals buy not
because they want the product, but because they feel pity for the indigenous. Society has made
indigenous peoples the defenders of purity in an ever-increasing modern world. The market
produces ‘authentic’ handicrafts, which very few Mexicans would ever place in their homes.
Mexico functions with low levels of trust (Riding 1986), more recent research has extended our
understanding of how trust functions in Mexico. Casson and Guista (2004) found that there is distrust of outsiders and that trust exists within groups. This research supports those findings. Trust
appears to reside within groups of MSE within the sector, but not to the entire sector. There is
limited inter-organisational monitoring to find the best price, quality, or best practices. All
informants were confident that their supplier was the best, and while aware of other buying
options, appeared to never explore alternative suppliers. The informants have the ability to use their
cell-phone or email to compare prices with competing suppliers, yet it appears that very few do.
The technology could also be used to lower the transaction costs with existing buyers. Currently,
informants travel to a supplier’s MSE to place the order and spend time visiting. The supplier
gives them a date of when the order will be ready. The informant could use a cell-phone to place
the order and the supplier could call when the order was ready. Neither chooses to use the
technology that they currently possess to improve the efficiency of the transaction. The above
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342
outlined buying process was observed while conducting the interviews. The observed inefficiency
in the market exchange, must serve another purpose. It appears that the buying behaviour is used
for trust building within this network.
The impact of the market logic is that readily available ICT tools are not incorporated into
processes that would increase market efficiency. Observational data, confirmed the ability to use
modern ICT tools yet market institutions are resisting adoption.
Table 2 outlines the conflict between the neo-liberal view of the potential benefits of adopting ICT
tools and against the historically embedded logic. Firstly, there is a belief that ICT tools can and
will reduce the costs of conducting business, yet the gendered assignment of these tools results in
the low adoption. Secondly, the state is creating and delivering ICT training programs assuming
that diffusion of ICT tools will occur as news of the benefits spread amongst the MSEs in the
sector. Yet ‘low trust’ and beliefs about ‘egoism’ within the sector are limiting the sharing of
ideas. Finally, there is an overriding assumption that MSE want to improve operational efficiency
of the sector. ICT tools are viewed as key to improve market function. However, the perceived
market inefficiencies serve an important purpose within the sector.
Neo-liberal Institutional
logics towards ICT tools
Reduce Transaction Costs
Adoption and Diffusion
Efficiency Maximisation
Institutional Logic that
is in conflict with neoliberal assumptions
Family
State
Market
Historically Embedded
Logics towards ICT tools
Gendered role for ICT tools
Low Trust and egoism
Social support network
Table 2: Neo-liberal market assumptions towards ICT tools and the conflict with Historically
embedded institutional logics of Family, State, and Market
CONCLUSION
This research sought to explain ‘The impact of conflicting institutions logics play on the adoption
of ICT tools within the handicraft sector’. The research used introduced the historically embedded
logic and compared it against the assumption found in neo-liberal market logic. Permitting a
partial explanation of how many of the assumptions found in ICT4D projects fail not because of
technical issues but because the neo-liberal market-based logics which form the basis of many
these projects are at odds with deeply held beliefs about the family, state, and the market.
Supporting the notion that historically embedded institutions are influencing the adoption and nonadoption of ICT tools in the Taxco Handicraft sector. ICT4D to be successful at the BOP it must
realise that institutional logics function vastly differently and projects should strive to find
solutions that are based on the institutional logics of those sectors. Using an ethnographic approach
with a longitudinal strategy allowed the researcher multiple observation points for data collection.
The adoption of ICT tools in ICT4D settings does not often follow the Rogerian model for
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
343
diffusion of innovations. The novelty of this study is the use of institutional logics to explain
observed behaviour. Informants are relying historically contingent solutions when making decision
about the introduction of new ICT tools. The informants are not behaving as neo-liberal policies
assume and are unable to realise the opportunities presented by ICT tools because the institutional
logics are at odds with the market-based opportunities.
The implications of these findings are that ‘Rogerian models’ of diffusion of innovation is not
compatible to the existing institutional logics within many sectors at the BOP. ICT4D must alter
its deterministic world-view and adjust projects based on local context. Future ICT4D projects
should focus on finding mechanisms to address the conflicting institutional logics as a tactic to
increase the success rate of ICT4D.
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INCUBATORS AND EXTENSION ACTIVITIES
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
347
DEVELOPMENT,
INDUSTRIAL
ENTREPRENEURIAL
ACTIVITY AND
EXTENSION
Heitor Soares Mendes
IE-UFRJ, Brazil, [email protected]
Lia Hasenclever
IE-UFRJ, Brazil, [email protected]
Address: Campus da Praia Vermelha – Av. Pasteur, nr. 250, andar térreo
Urca – ZIP Code 22290-240
Rio de Janeiro, RJ – Brazil
Abstract: Most part of the Brazilian industrial structure is composed of micro, small and
medium-size enterprises (MPME). The economic literature presents several difficulties as to
the adequate economic performance of such companies and to their contribution to economic
development. On the other hand, entrepreneurship depends not only on the voluntary attitude
of entrepreneurs, but also on an adequate institutional environment capable of responding to
their actions. Industrial extension can be an important tool not only to help MPMEs to have
access to the knowledge acquired but also to generate other innovations resulting from
unexplored technological opportunities. This article analyzes the contribution offered by
industrial extension programs for the economic development to support the entrepreneurial
capacity of industrial MPMEs. The methodology utilized will be the study of literature that
analyzes the impact of entrepreneurship on economic development, as well as the one that
analyzes the role of industrial extension programs for the improvement of the entrepreneurial
capacity of MPMEs. One starts from the conceptual analysis and empirical evidence on the
difficulties of Brazilian MPMEs; then, one seeks to identify the potential of industrial
extension activities over the entrepreneurial capacity of MPMEs, based on a review of the
Brazilian programs of industrial extension adopted. The results of analysis point out to a
possible positive impact of extension activities on economic development, based on the
effective utilization of this support tool to the MPMEsto enable them to pursue technological
innovation, a present requirement for the competitiveness of the markets where they operate;
these extension activities, since they relate to the institutional system in which they are
inserted nationally, are not replicable, representing an instrument dependent on the industrial
policy model adopted by each country. Also, critical elements are pointed out for analysis,
envisaging the creation of new capabilityprograms for MPMEs through extension activities.
Keywords: development, entrepreneurship, industrial extension, innovation,public policies.
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348
INTRODUCTION
The discussion concerning development issues had a new incentive after the Consensus of
Washington. In this new scenario, the role played by States and institutions in this process is
again being focused, in the pursue of a new ‘design’ of development strategies for emergent
and developing countries, based on the critical analyses of development processes of more
developed countries (EVANS, 2004, 2010; CHANG, 2009).
Starting in the 1980’s, in the developed countries there was a broader understanding of the
central role played by the innovation variable as a key-element for both entrepreneurial and
national States’ competitiveness. In 1980, the OECD innovation policy document, Technical
change and economic policy, links empirical results1 to the innovation policies proposals,
emphasizing the role of new technologies to overcome economic crises. The innovation
systems ideas (Dosi et al., 1988), discussed academically, are found in the OECD policies
documents (1992), with the introduction of concepts on: the formation of cooperation
networks, strategic partnerships, spillovers, as well as the importance given to tacit
knowledge. And, also, the introduction of the national system of innovation concept,
considering the role of innovation as themost important strategic development component
(Cassiolato and Lastres, 2005). In the developing countries, this movement occurred only at
the end of the 1990’s, as will be discussed later.
This approach, known as neo-schumpeterian, emphasizes the relation issue of economic
agents, focusing on the appropriation of knowledge through interactive learning (learning by
interacting), both within the industry and in its external relations (Lundvall, 1988) as forms of
innovation capability. In fact, industrial economics literature emphasizes the cooperation
theme between industries and, presently, one can observe that there is a convergence to focus
analytically the competitive behavior of industries through intra and inter entrepreneurial
relations and with the other innovation system institutions.
In this context, the network structure concept has become relevant, given its “capacity to
gather the growing sophistication of interindustrial relations which characterizes the
contemporaneous economic dynamics” (Brito, 2002, p.346), constituting itself as a reference
framework applied to cooperation relations phenomena between agents and the coordinating
action. In this sense, the role of industrial extension can be mentioned, acting in the
entrepreneurial capacity, focusing on the micro, small and medium size enterprises (MPMEs),
as a form of support in the strengthening of its capabilities and the maintenance of these
industrial enterprises’ competitiveness. Industrial extension can represent an important tool
not only to assist MPMEs in seeking knowledge, but also to generate other innovations
resulting from unexplored technological opportunities.
Thus, the objective of this article is to analyze the contribution offered by industrial extension
programs to support the strengthening of entrepreneurial capability of industrial MPMEs, and
to generate a positive impact on economic development. As a specific focus, it analyzes the
propositons of Acs et al.(2005), Hernández et al. (2008) and Hernández&Dewick (2011)
which show the importance of enterprises networking to encourage the diffusion of
knowledge. Based on these authors’ findings, one intends to analyze whetherextension
programs indicate a possibleway to technological diffusion in the MPMEs, confirming that
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
349
these enterprises in Brazil lack the minimum capabilities to pursue a technological catchingup
to secure a competitive space in the present environment.
The article is divided into four sections, besides this introduction and the conclusion. In the
second section, the Brazilian MPMEs environment is analyzed, through representation
indicators on the characteristics and difficulties faced by this group of enterprises. The third
section covers the potential impact of industrial extension programs for the capacity of
industrial MPMEs, based on the perspective of theoretical and empirical studies developed by
Acs et al. (2005) and Hernández & Dewick (2011). These authors discuss how the
entrepreneurial capacity of more developed companies as opposed to the less developed ones
can benefit the latter, through a knowledge spillover. The fourth section presents and analyzes
Brazilian industrial extension programs.
INDUSTRIAL MPMEs:characteristics, difficulties and power to overcome
Brazilian entrepreneurial structure is mainly composed of MPMEs. In 20092, this group of
enterprises represented 99.6% of a total of 4.8 million establishments. Of these, 88.1% were
entrepreneurial entities, of which 8.6% were industrial enterprises. The industrial enterprises
employed 7.5 million hired workers (19% of total), whoreceived annual salaries
corresponding to R$ 154 billions, occupying the second place, both in personnel hired and
salary volume paid (IBGE, 2011).
In 2009, in accordance with the annual industrial research (PIA), the 299 thousand industrial
enterprises were responsible for a total revenue of R$1.91 trillions, with a net sales income of
R$ 1.54 trillions. The gross value of industrial production (VBP) reached R$1.53 trillions, but
the value added was of less than R$ 680 billions. The participation of micro and small size
enterprises in these amounts was of approximately 10%, smaller than the medium size
enterprises (14% of the Gross income and 12% of the value added). Such result shows the
small representative role of MPMEs in the creation of value for the Brazilian economy, as
compared to large enterprises, responsible for the generation of more than 75% of all these
economic indicators (La Rovere et al., 2012).
As far as exports are concerned, in 2010, out of the 19,275 firms that exported, contributing
with a trade surplus of US$ 20.2 billions, the number of Brazilian exporting MPMEs was of
15,831, representing 72.2% of the total exporting firms3. However, as opposed to the value
exported,this participation was of only 5.1%, indicating that in Brazil the participation of the
MPMEs in terms of value exported is not expressive yet.
In the industrial sector, MPMEs are significant only in terms of the absolute number of
companies and jobs: more than 295 thousand companies (98% of the total of sector),
employing 4 million people (51.6% of the total of sector).
Based on PINTEC4 (IBGE, 2008) data, one can observe that small and medium size
enterprises represent the majority of companies researched (96.4%), but in qualitative terms,
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from the standpoint of the innovating activities, one sees that large enterprises are relatively
more innovating (60%) than the small and medium size ones (38%). (La Rovere et al., 2012).
In terms of the social-economic impacts represented by mortality, in this case concerning only
micro and small size enterprises, a study of the ServiçoBrasileiro de Apoio às Micro e
Pequenas Empresas (SEBRAE) points out the loss of occupation for 2.4 million people with
the extinction of 772,679 enterprises, after up to four years of creation. This study informs
also that there is a loss of R$ 19.8 billions in the economic activity investments, generated
from the companies that were shut down, with up to 4 years of creation, considering the years
of 2000 and 2002 (MDIC, 2007).
Based on these indicators, the difficulties faced by the MPMEs to obtain satisfactory
economic results become clear, whether due to their production scale (size), their participation
in exports, or due to their innovative activities. Joseph Schumpeter called the attention to the
importance of entrepreneurship and innovation for development, however, we have observed
that most part of MPMEs, in Brazil, are not entrepreneurial, in theScuhmpeter’s sense, but
practice it basically due to necessity 5.
In 2002, 55% of the new enterprises endeavored in entrepreneurial activities were necessitybased firms (GEM 2002). Throughout the years, we have been observing a slow evolution in
this scenario. After 2007, the rate of opportunity-based entrepreneurs in the initial phase (total
early-stage entrepreneurial activity - TEA) was higher than the rate of necessity-based
entrepreneurs6. However, even with the rate of initial opportunity-based entrepreneurs as a
percentage of TEA reaching 69.2% (GEM, 2012), Brazil is still far from attaining the results
of countries with an economy stimulated by innovation, being still classified in the group of
countries with an efficiency-driven economy. And, even in this group of countries, it is still
distant from other countries, like Mexico and Chile, which reached a TEA percentage of,
respectively, 85.2% and 82.2%.
Even if Schumpeter’s (1911, 1942) focus has been placed on the entrepreneur, and the
enterprise, respectivley, this author does not analyze the relation of companies and the
possibility of an innovation spillover of large enterprises and opportunity-based
entrepreneurial activities for the MPMEs. This article will consider below the studies of Acs
et al. (2005) and Hernández &Dewick (2011) to verify to what extent the MPMES are
capable of overcoming their problems.
Acs et al. (2005), based on some of these assumptions and with the objective of building a
bridge beweeenentrepreneuship and literature in respect of economic opportunities, proposed
the use of a new entrepreneurship theory: the “Knowledge Spillover Theory of
Entrepeneurship” – KSTE, devised over Schumpeter’s initial study, in which he recognized
the importance to have the entrepreneur exploring opportunities, but did not focus his
attention on the origins of these opportunities, which is the object of the authors’ research on
this new theory. According to the KSTE approach, “the creation of new knowledge expands
the technological opportunity set. Therefore, entrepreneurial activity does not involve simply
the arbitrage of opportunities, but the exploitation of new ideas not appropriated by incumbent
firms” (Acs et al., 2005, p. 23).
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This theoretical model also suggests that the stock of knowledge produces a knowledge
spillover and that there is a strong relationship between spillover and entrepreneurial activity.
They also affirm Acs et al. (2005) that if the firms established decided to hold all R&D
results, there would be no knowledge spillover; and that the fact that there is a positive
relationship between R&D investments and entrepreneurship indicates that at least a part of
this investment spillover fell on new participants, which is already an explanation for the
origin of businesses opportunities.
Hernández et al. (2008), Hernández &Dewick (2011), on their turn, discuss the need ofan
institutional change – not only based on trade and labor contracts, but also on the generation
of organizational capabilities for the construction of coherent, trustworthy and inclusion– to
integrate necessity-based enterprises – in the opportunity-based enterprise networks. They
propose that the latent and emergent entrepreneurial strength existing in the small and
medium size enterprises can be utilized through a social entrepreneurship by the generation of
capabilities networking.
The analysis of Hernández et al.(2008) is based on an apparent contradiction. As already
seen, Latin America is one of the regions of the globe with the highest existing
entrepreneurial activity, but, unlike developed countries, the productivity of enterprises in the
region is very low. The GEM study (2007) states that this occurs since necessity-based
enterprises are still very numerous. This seems to be a characteristic of developing countries,
since approximately 10% of the companies established in the developed countries are
necessity-based companies, while this rate is of 40% in the case of Latin America.
So, the problem is to understand why and how the enterprises emerge and how they can better
integrate in a dual economy context, where advanced enterprises connected to world markets
and a mass of manufacturers struggling to survive with low resources coexist. Hernández et
al.(2008) research seeks an exact answer to this question.
With this purpose, the authors develop a model based on the theory of weak and strong ties
(Granovetter, 1973; Powell and Grodal, 2005) and on the problem of exploitation and
exploration of knowledge (Nooteboom, 2002). Theirwork is funded on the study about the
function and role played by each type of enterprise (necessity/opportunity) in a developing
society which seeks a technological catch up for more complex activities and a higher value
added by transferring knowledge and its dissemination.
In the model adopted7 there are organization structures conformed to a style: the first one is
the structure of a necessity-based enterprise considered as a ‘parochial’ network with a strong
complexity in its relations and family and ethnic ties, operating with high levels of
cooperation; the second structure is represented by opportunity-based enterprises, constituted
by a person who left another enterprise, who will associate or hire people known in the
economic environment, within the communities of specialists networks, of learning,
innovation and socialization, generating an enterprise with a greatercomplexity in its
relations and weaker family ties, in Granovetter’s (1973) sense. The model explains the
dynamics through which both types of enterprises have complementary needs to generate a
creative encounter through the creation of interfirm collaboration for the learning and
dissemination of information and the generation of knowledge.
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352
One of the results of model simulation suggests that each enterprise, both necessity or
opportunity-based, play an important role, especially in the case of developing countries, in
the maintenance of a pattern or in the country’s catching up.The opportunity-based enterprises
contribute to reduce the ‘cognitive myopia’, since they are capable of a better information
absorption, resulting from external technologies, representing key-institutions in the process
of technological accumulation. As to the necessity-based enterprises, they are more effective
in exercising the basic function of intraorganizational learning, dissemination of tacit
knowledge and in the control of competitive-opportunist behavior and in fostering
cooperation within the company, as key-institutions in the technology assimilation process. It
becomes clear that there is not an ‘optimal’ enterprise, but that each one holds relative
advantages in accordance with context and time. These structures are complementary. Figure
1, proposed by Hernández &Dewick(2011),represent this complementary scenario. The
authors also present the strong relationshipbweeen technological accumulation and
assimilation.
Figure 1–Dynamics or Interface between Opportunity and Necessity-Based Firms
Source: Hernández &Dewick (2011, p. 230)
For Hernández et al. (2008), the opportunity-based enterprises are particularly important in
the innovation accumulation phase, where the investment directed to human capacity,
physical capital and innovation is dominant (physical technologies), while necessity-based
enterprises comply with the role of linking manufacturers and users, and to have as usual
practice the use of technologies as innovations enter the dissemination phase (social
technologies). Therefore, physical technologies would be more associated with the
accumulation phase while the technological assimilation phase is more associated with
organization and financial innovations.
This possibility of MPMEs taking advantage of knowledge spillover with such specificities,
however, does not occur automatically, requiring a concrete action on the part of the State
through support mechanisms and the coordination of efforts, envisaging the capacity of
MPMEs, so that the less entrepreneurial companies are capable of absorbing new knowledge
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353
and information to enable them to pursue their technological catching up. This is the content
of the next section.
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354
INDUSTRIAL EXTENSION: international experience and the Brazilian
case
The difficulties faced by Brazilian MPMEs, pointed out in section two, are shared by other
countries, not only by those with an economic condition similar to Brazil, but were also
present in the now developed countries, such as the United States and Japan. According to
Madeira (2009), several studies on the American model analyze the path of the extension
activity applied to industrial enterprises (Rogers et al., 1976; Shapira, 1990; Combes, 1992)8,
with actions which started at the end of the XIX century, but were given more national
relevance after the creation of the National Institute of Standards and Technology (NIST), in
1988, through which the government seeked to coordinate extension activities with the
creation of the Manufacturing Extension Partnership (MEP), in 1989, to promote the
capabilities and dissemination of new technologies for small and medium size enterprises
(PMEs), especially the access to new production and management technologies, difficulties
regarding innovation, improvement of productive processes performance, productivity and
quality (NAPA, 2003; Madeira, 2009).
An important aspect of these programs, particularly useful in the Brazilian case, is that one
can improve the behavior of the PMEs by transferring simpler technologies, such as basic
management aspects, production technologies already mature, available in the market, but
new to the PMEs (Madeira, 2009), as pointed out by Acs et al. (2005) and Hernández
&Dewick (2011).
A similar action occurred with the Japanese extension system, that now seeks to comply with
the demand for new technologies, especially more complex technologies envisaging
technology-based PMEs. In fact, according to Shapira (1996), the second phase of the
Japanese extension model and the indicators of its positive impact over PMEs
competitiveness, would have contributed to make the model a main reference for the
expansion of the North-American extension system in the 1990’s, when that country had to
face a lack of competitiveness as opposed to the Japanese companies.
Based on the comparative analysis developed by Madeira (2009), concerning North-American
and Japanese industrial extension systems, it becomes clear that the programs, in general, are
focusing on the PMEs, with a view on technological capacity, kowledge dissemination and
information, and a more recent emphasis on technological innovation, after the 1990’s.
Another aspect to mention is the large number of companies’ networks formed by the action
of extension programs, to solve problems, for the interaction between groups and other
cooperation initiatives. In the North-American case, in the MEP context, from 150 to 200
networks have been formed and, in the Japanese case, 2,500 networks have been created.
Another inference generated by Madeira’s (2009) study is that the extension systems indicate
a model that is not replicated, dependent on each country’s institutional system, on its
construction process of national industrial policies.
In the Brazilian case, extension started with experiences in agriculture, in the 1930’s, and had
a national impulse only after 1975, with the organization of public extension companies,
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355
linked to the Ministry of Agriculture. As to industrial extension, it is believed that this was
inspired by the agriculture experience, in the mid-1980’s with the creation of the first
industrial policy initiatives, such as the Basic Industrial Technology Program, of 1985, and
the Brazilian Program of Quality and Productivity, in 1986 9.
The main programs with industrial extension characteristics at a special and national
continuing level are: the Exporting Industrial Extension Project - ProjetoExtensão Industrial
Exportadora – PEIEX; the Technological Consultation Program of SEBRAE -Programa
SEBRAE de ConsultoriaTecnológica – SEBRAETEC; the Program of Mobile Units –
Programa de Unidades Móveis –PRUMO; the Program of Support to Exports - Programa de
Apoio à Exportação – PROGEX; and the Program Innovate to Compete InovarparaCompetir. These are broad programs, from the standpoint of performance areas and
forms of intervention. As to the institutional role, three of them are directly linked to the
Federal Government Ministries (PROGEX and PRUMO, to the Ministry of Science,
Technology and Innovation – MCTI; and PEIEX, to the Ministry of Development, Industry
and Foreign Trade – MDIC); two are institutions of the “S”10 System: the SEBRAETEC is
coordinated by SEBRAE; the “Innovate to Compete” is coordinated by the National Service
of Industrial Learning –Serviço Nacional de Aprendizagem Industrial (SENAI).
Out of these, in order to evidence some key-points mentioned in section two concerning
MPMEs’ difficulties – innovation and exportation -, SEBRAETEC and, in more detail,
PEIEX will be presented.
SEBRAETEC is coordinated at a national level by SEBRAE, with actions distributed
throughout the country. Originally, its objective was to make available the universities and
research institutions’ knowledge through short-term duration services rendered to the MPEs
(Oliveira, 1997). It has been modified to render long-term services so as to better comply with
the larger investment demands, including the purchase of equipment and large scale and
technological projects. After 2001, it started to be entirely managed by SEBRAE, offering
services also to trade, agriculture and industrial, agriculture and cattle breeding sectors. It was
structured into four activity areas: technological support, business support; technological
modernization; and technological innovation (Magalhães, 2004).
In 2003, SEBRAETEC starts to focus on collective actions to support the companies’
productive groups, adjusting its line of activity to the new guidelines concerning industrial
public policies for the organization of the so-called local productive arrangements (APL) or
local production systems (SLP), indicating the recognition about enterprise networking
importance for the compliance of its objectives as discussed above. After that, a new logic is
formed regarding SEBRAETEC services, with a central role addressed to the collective
diagnosis. The evaluation of this program is periodically carried out, but only by SEBRAE,
through the preparation of a performance report and satisfaction researches gathered from the
companies served and by third party companies for the assessment of the program’s impact,
but the results are not made available for public information.
A study analyzing the efficiency of SEBRAETEC services in the State of Minas Gerais
(Magalhães, 2004) has identified positive results, such as the increase in productivity,
improvement of processes and products quality, reduction of waste and sales increase. But,
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according to Madeira (2009), the scarcity of evidences on the impact of this nationwide
program, makes one doubtful on its broader efficiency, also considering that it is a program
which has been historically based on frequent alterations, due more to the Brazilian industrial
policy institutional changes than to a virtuous continuing improvement process of the
extension services rendered to the MPMEs. Another aspect to point out is the focus placed on
partnerships between institutions and enterprises and not between enterprises.
PEIEX, another nationwide extension program coordinated by the MDIC since 2005, is a
fostering and qualification program involved in the solution of managerial-technical and
technological problems of small size companies located in the SLPs. Its methodology is
composed of three main phases: diagnosis, implementation of services and project assessment
by the entrepreneurs served. It is one of the structural projects of the “APL Program”, within
the framework of the Brazilian industrial policy,with the objective of increasing the
competitiveness level in the APLs.
As to this program – PEIEX –, Madeira (2009) carried out an empirical study with the local
production system of Franca, an industrial cluster of shoe manufacturers, located in the State
of S. Paulo, then considered as the second largest footwear production center in Brazil. Its
choice is due to the fact that in this SLP there is a predominanceof MPEs (of a total of 760
companies, 552 were micro-size, 130 were small-size, 65 were medium-size and 13 were
large-size enterprises). The purpose of the research was to understand how the extension
actions and the SLP interact and influence the productive improvement of the MPEs located
in the industrial clusters.
The results of research indicate that there are different impacts by the PEIEX, according to the
companies’ characteristics. As far as “size” is concerned, the effects were more significant in
the micro-size enterprises, involving a larger number of services rendered in the different
areas that were mutually related. Madeira (2009) also considers that the reduced size
facilitated the identification of problems, leading to a more precise diagnosis with the
execution of more concentrated services and a greater possibility of achieving positive results.
As to the “state of development”, another variable of this matrix, the PEIEX has generated
more expressive results in the less advanced companies, in which management techniques
were less mature as opposed to other companies, which was regarded as being due to the
characteristics of program, its objectives and implementation model, with a main emphasis on
the simpler rendering of services, aiming at a larger number of companies in a shorter time of
execution. Besides, it has been observed, based on interviews held with the extensionpeople
involved, that the services offered were ‘semi-standard’, based on ready teaching materials,
informative CDs, teaching publications and computer spreadsheets.
This standard feature generates negative consequences, having in mind the unique
characteristic involved in the amount of resources held by each company (Penrose, 2006),
with different needs, and that many times received the same standard services. This fact
“compromises one of the most important theoretical principles on the definition of industrial
extension programs, which is the need to adapt to each company’s requirements, in
accordance with its specific characteristics” (Madeira, 2009, p. 188).
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The author concludes that: 1- the impact of program is directly influenced by the interference
methods utilized; 2- intensive and more extended services permit to utilize more adequately
the method which tends to produce a longer duration and more significant effect for the
enterprises; 3- programs with less intensive characteristics, and shorter duration, tend to
produce a more peripheral impact on the companies’ development, requiring
complementation by other programs.
As analyzed by Madeira (2009), even if interinstitutional coordination is foreseen, the support
policies to the SLPs present articulation difficulties between local and federal agents. But, in
the PEIEX case, there has been a greater concern with the insertion context of companies.
In a broader form, in respect of the Brazilian industrial extension programs, Madeira (2009)
identifies that their non-continuity represents one of the negative points of extension
programs, which places them far from North-American and Japanese international
experiences, where the programs are permanent and funded on a firm institutional framework,
lasting for years, serving as a basic element for the development of the national productive
structure. In those countries, the main success factor was exactly the continuity and stability
of the extension programs throughout the years (Shapira, 1990). And there has not been yet a
clear pattern associated with the development of institutional coordination mechanisms, as
verified from the North-American and Japanese extension experiences, and Brazil lacks
coordination to define the characteristics and general guidelines of the extension programs.
Besides, the fact that the programs are not continuous has endangered the generation of
results due to the lack of continued improvement on the scope of services offered, which had
a direct impact on the evolution of local producers’ knowledge base (Fauré and Hasenclever,
2005).
The restriction of scope regarding services rendered is also pointed out as one of the
program’s deficiencies for limiting the reach of projects due to the different profiles of the
beneficiaries. Another difficulty is that the programs offer similar services, with a double
offer , which shows the lack of articulation among the existing extension alternatives.
RECENT EVOLUTIONS OF THE INDUSTRIAL EXTENSION SYSTEM
This section presents the evolution of Brazilian industrial extension programs after Madeira’s
(2009) research. In 2007, to offer a better view and understanding on the micro and smallsize enterprises segment situation, the Committee on Technology and Innovation, of the
Permanent Forum of Micro and Small Size Enterprises, in the context of the MDIC, prepared
a document to provide “a better knowledge on the main characteristics of this segment of
companies and the facts which influence their technological development and capacity of
innovation” (MDIC, 2007, p. 7). This document was structured into five questions: the
characteristics of MPEs; the capacity to obtain financial resources; the factors that make it
difficult to reach technological development and innovation; the construction of a favorable
environment and the support institutions.
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In this document (MDIC, 2007), 50% of the factors pointed out as main difficulties are
connected to questions in which the role played by industrial extension programs is relevant,
in the sense of qualifying the MPEs to enable the absorption of new technologies, as well as
assisting them in terms of organizational structure capable of creating conditions for a longer
duration in the management of new knowledge, keeping a continued learning dynamics as
part of the organizational culture11.
In the same year of 2007, by Decree 6.259 of November 20, 2007, the Brazilian Technology
System (SIBRATEC) was created. Operated by the Financing Agency of Studies and Projects
(FINEP), it aimed at complying with the objectives contained in the Action Plan for Science,
Technology and Innovation for the National Development (PACTI 2007-2010) and the
priorities of the Productive Development Policy (PDP). The structure of SIBRATEC is
illustrated by Figure 2. Its objective is to support technological development of Brazilian
companies, acting like an articulation and approximation instrument of the scientific and
technological community with the enterprises, offering conditions to improvetheir innovation
rates, thus contributing to increase the added value of sales, productivity and competitiveness
in the internal and external markets (MDIC, 2013).
Figure 2 – MDIC: SIBRATEC Structure
Source: Ministry of Development, Industry and Foreign Trade – MDIC
SIBRATEC is organized in the form of three types of networks named as components:
Innovation Centers, Technological Services and Technological Extension, as suggested by the
authors Acs et al. (2005), Hernández et al. (2008) and Hernández & Dewick (2011)
mentioned in section two.
The “Innovation Centers” Thematic Networks are formed by development units or groups
which are part of the technological research institutes, research centers or universities, with
experience in interacting with the enterprises. Their objective is to generate and transform
scientific and technological knowledge intoproducts, processes and prototypes with
commercial feasibility to promote radical or growing innovations.
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The SIBRATEC Thematic Networks of “Technological Services” are formed by accredited
laboratories and entities or laboratory quality management, to support the infrastructure of
calibration services, trials and analysis and conformity evaluation, both mandatory and
voluntary, the qualification of human resources, the improvement of laboratory quality
management, proficiency analysis programs, as well as activities of normalization and
technical regulation to meet the needs for the companies’ market access.
The State ‘Technological Extension’ Networks gather specialized entities in technological
extension acting in the region, through the organization of an institutional arrangement,
formed by local entities of technical, managerial andfinancial support, in which the S&T State
Secretariat or the State entity responsible participate, as well as representative entities of the
economic sectors, Regional DevelopmentBank, Foundation for the Support of Research
(FAP), SEBRAE, IEL and R&D Institutions. Their objective is to foster technological
extension to solve small obstacles to technological management, the adaptation of products
and processes and to improve production management of MPMEs.
This represents a new approach to the problem of companies’ qualification to increase
competitiveness, which already contemplates, in its institutional character, the network
approach, a concept that can offer a better analytic capacity to the goverment system of
productive support, in association with the other economic agents involved, in the sense of
overcoming the flaws pointed out by Madeira (2009) in the previous section about
SEBRAETEC and PEIEX Programs. However, a difference observed, and already mentioned
in the previous section, is that these networks are formed between institutions and companies
and not between companies, as in the American and Japanese programs.
CONCLUSION
Development is closely related to entrepreneurship and innovation, but this depends on the
companies’ capacity which, in the case of the MPMEs is very restricted, bothin terms of
capacity to innovate and to export. Thus, it is observed that the contribution for the
development of this type of company strongly depends on industrial extension programs for
qualification.
The analysis conducted on the Brazilian programs has shown that they went from an
individualized to a collective type of service, through networking formation. In this sense, the
lessons pointed out by Acset al. (2005), Hernández et al. (2008) and Hernández &Dewick
(2011) to take advantage of knowledge spillover seems to have been considered. However,
some characteristics of Programs and the Brazilian industrial structure seem to have hindered
the performance of industral extension programs in achieving better results.
Considering the concrete operational situation of companies’ networks, one can mention three
potential impacts involved in the consolidation of arrangements.The first one is direct,
associated with the technical-productive cooperation existing in the network, linked to the
gain of operational efficiency originated from technical saving actions and to the reduction of
production and business costs. This is associated with work division and to the specialization
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360
pattern of agents, and there is still gain associated with the increase of productive flexibility,
allowing a greater response speed of the productive system to market changes. In this aspect,
it seems that industrial extension programs still leave much to be desired since they do not
emphasize the relations beween enterprises, but between enterprises and institutions.
The second impact concerning networks interorganizational coordination concerns the
capacity of these structures to face the environment’s lack of stability, being related to the size
of network agents and to the degree of centralization of internal relations in terms of their
design. This impact is related with the transactions regime and the contract basis regulating
this structure, their incentive mechanisms, control and level of mutual trust. In the article, it
can be observed that there is low efficiency in the interorganizational coordination process,
due to the internal network characteristics and the degre of centralization of the authority flow
in coordinating the respective arrangements. Besides, the fact that most part of the programs
are standardized shows a low network flexibility to conform, funded on environment
stimulations, adapting to changes in the network members functions based on the
adjustmentstructure alterations.
The third impact is related to the technological cooperation in the companies’ networks,
reinforcing their competitiveness by strengthening their innovative capacity, encouraged by
the creation and circulation of knowledge and information in a collective learning process,
involving each agent’s incorporation of learning to a social pool of knowledge – commercial,
technological, managerial etc. – generated by the network. The absence of major innovations
in large companies and a weak scientific and technological infrastructure make this virtuous
process of companies’ qualification difficult through knowledge spillover.
As discussed in this article, interaction between enterprises results in the consolidation of
collective coordination mechanisms concerning decisions. Such result is not natural, given the
multiple and specific role played by the actors involved, which evidences the importance of
extension program in this respect. Here the liaison between industrial extension programs of
government agencies and of the several institutional partnerships becomes clear, as its
application utilizing technological networks, as well as their specific role in collective
coordination, especially when dealing with MPME networks, which is the focus of these
extension programs. However, many improvements still need to be carried out so that these
extension programs may reach their objectives.
ENDNOTES
1. Research conducted by Chris Freeman – project SAPPHO –, in the university of Sussex
and Yale InnovationSurvey were the fundamental milestones for the development of a theory
of innovation.
2.Source: Cadastro Central de Empresas 2009 (IBGE, 2011).
3.Data on exports consolidated (MDIC, 2011).
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4.The Research on Technological Innovation – PINTEC – has the purpose of providing
information for the construction of activity indicators of technological innovation of Brazilian
enterprises.
5.Necessity-driven Entrepreneurs initiate an autonomous endeavor to generate income for
themselves and their families, due to the lack of better work options. Opportunity-driven
Entrepreneurs are those who start a new business by choice, even having job and income
alternatives, or yet, to maintain or increase their income or for the desire of being
independent. See GEM (2012).
6.In this article, the terminology has been adopted in accordance with the studies of
Hernández et al. (2008) and Hernández & Dewick (2011): necessity- and opportunity-based
equivalent to the terminology adopted by the GEM: necessity- and opportunity-driven (motivated).
7.It is not intended to develop a model analysis, but to utilize the results as a structuring
element for the central discussion of article. The model that they developed is based on
Lotka’s and Volterra’s (predator-prey) adapted. The model is explained in chapter two by
Hernández et al. (2008).
8.Madeira (2009) offers an extended revision of the North-American and Japanese industrial
extension models.
9.The presentation of national programs, throughout the section, is based on Madeira’s (2009)
dissertation, with the specific references, where relevant, in the section text.
10.Term defining the set of organizations of corporative entities involved in professional
training, social assistance, consultation, research and technical assistance which, besides
having their name beginning with the letter “S”, have common roots and similar
organizational characteristics, supported by the companies’ social contributions.Further
details can be obtained on the page of
Brazil Federal Senate:
<http://www12.senado.gov.br/noticias/glossario-legislativo/sistema-s>. Access on Sept.10,
2013.
11.Among the factors pointed out are: low support to the establishment of a state research
center or institution; lack of managerial structure; lack of definition about the MPEs
technological problems requiring solution; lack of technology-based innovation culture; lack
of physical infrastructure and qualified human resources; lack of knowledge of
entrepreneurial and technological managing processses; lack of support to consultation
services in innovation, rationalization, technology and management; lack of qualification for
the innovating management.
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365
SOCIAL
INCLUSION
FROM
INNOVATION:
HOW
UNIVERSITY
INCUBATORS
CAN
FURTHERANCE
ECONOMIC DEVELOPMENT IN BRAZIL FROM THE
ENTREPRENEURSHIP MECHANISM
Ana Bossler
LL.B and has studied a MSc on International Relations at the University of Buenos Aires. She has
complementary studies on Economics (3 years of the BSc in Economics+ MSc Orientation on International
Economics) and in Math (PhD). E-mail: [email protected]
Anand Mann
Anand Mann. Mr. Mann has 8+ years of experience in leading strategic and business development. He kickstarted a Trade Club to foster relations between Latin America and his native India. He holds a MBA from the
IAE. E-mail: [email protected]
Débora de Andrade Rodrigues.
MSc in International Relations at University of Buenos Aires. She had been Director of studies, plans and
projects of the NEEMARI (UCB). E-mail: [email protected]
Priscila Lima Pereira.
LL.B and also has studied a MSc on International Relations with emphasis on International Law. E-mail:
[email protected] Affiliation: Chair Arturo Jauretche at the Faculty of Economics- University of
Buenos Aires.
Abstract: The emergence of an information society demands an economics structure that
favor innovation, giving prominence to the universities that must have a proactive role in the
knowledge use within the entrepreneurship mechanism. From a triple helix perspective, the
interactions among enterprise, government and universities become strategic to facilitate the
spillover of knowledge, reducing transaction costs, in structures such the universities
incubators. In Brazil the entrepreneurship and innovation are essential to diversify the agro
exporter model that anchored the growth in the 2000s and now shows restraint, including the
poorest sectors through consumption in the economy, key variable to the country keep the
growth rhythm in the next decades. As the highest cost to enter the Brazilian market is the set
of bureaucratic measures known as “Custo Brasil”, we propose the university incubators as
the strategic asset capable of transforming the national economic structure in an affirmative
approach while include sectors through the consumption of innovative products in a new
equilibrium price within the endogenous incubator environment, where a meta-innovation
system that focus on management has emerged, aligning social goals to favor new businesses.
Given the macroeconomics scene, the existing policies to furtherance education and research
and the strong relation between innovation and economic development, the university
incubators become social inclusion tools in a model with easy diffusion.
Keywords: economics, development, entrepreneurship, inclusion and innovation.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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SOCIAL INCLUSION FROM INNOVATION: THE ENTREPRENEUR
MECHANISM.
The emergence of an information society demands an economics structure that favor
innovation, giving prominence to the universities that must have a proactive role in the
knowledge use within the entrepreneurship mechanism. From the creative accumulation1
Mark II- (Bergek et al, 2013), the university incubators are facilitators of the knowledge
spillover, reducing entering costs of a new product in the market. Given the strong correlation
between economic development and entrepreneurship (Audretsch, 2007)2 these institutions
are essential in the strategy of growing and positioning of the economies in a more
competitive global context.
In Brazil, one of the emerging countries that will lead the world economics in the next
decades3 the innovation and the entrepreneurship are need to expand the social advances
conquered since the start of income transfer policies in the 1990s. The investment in research
and development (R+D) is essential to diversify the commodities exports model that anchored
the growth in the past decade and show its restraint since the financial crisis of 20084.
For that reason, to keep the growth in the next decades, Brazil faces a challenge: include the
poorest sectors in the economy through consumption as diversify the commodities exports
model, as the world demands shrinks in a financial crisis that has been of long run. This
challenge can be solved through the furtherance of entrepreneurship in innovation, because in
a country where 39% of population belongs to the class “d”, with its income compounded by
services without qualification (e.g. babysitters, chauffeurs, cookers), from a model that took
32 million people out of poverty5 and that still needs to include 42 million, innovation
becomes strategic to make available, through new technologies, products in a different
equilibrium price, making, the university incubators, consequently, social inclusion tools.
To boost consumption through the development of new technologies, transforming the
economic structure, the entrepreneurship mechanism becomes essential to deliver new
products in faster times. As the economics growth correlates with the number of startups in a
geographic space, Brazil needs to facilitate the spillover of the knowledge, integrating the
chain between development and commercialization, accelerating, therefore, the speed of
innovation.
As the most important obstacle to start a business in Brazil is the set of bureaucratic measures
known as “Custo Brasil”, enterprises face numerous restraints to operate in the legality in the
country. This reflex in extra transactional costs to companies acting locally.
Accordingly to the Doing Business Index, there are need 13 procedures to start a business in
Brazil, against average 9 in Latin America and just 5 in the OECD members. Also, it takes
almost 10 more times to open a company inside the legal framework in the country than the
OECD average (119 days against 12). From all the Index indicators, the most critical to doing
business in Brazil are Starting a Business (121th), Dealing with Construction Permits (131th)
and Paying Taxes (156th), from what can be deduced that a incubator that facilitates this
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
368
processes and stages, can accelerate innovation as protects this new business of the
bureaucratic costs, increasing the chances to become mature enterprises.
We present a model that proposes university incubators as social inclusion tools in Brazil
from innovation technologies that facilitate the knowledge spillover through the
entrepreneurship mechanism, generating new businesses, in the OECD perspective that social
policies must transcend its role of safety nets and must engage with broad public policy issues
of distribution, protection, production and reproduction. In this sense, it is recommended to
push social policies into mainstream development efforts by transforming them in a “strategic
asset” for other transformative policies that are able to affect the development process as a
whole. (OECD, 2011).
Therefore, the university incubators in Brazil becomes this strategic asset to transform the
economics, able to reorganize the structure production from an affirmative approach that
direct public/private investments,
using existent economic capabilities to stimulate
innovation to expand the consumption, as a way to include the marginalized sectors of the
Brazilian society and boost economic development. Although there is vast literature that
correlates innovation, entrepreneurship and social inclusion, we use the meta-innovation as a
methodology capable to make the social policies transcend the safety net (purely
redistributive policies) and transform the economics, aligning social goals in an incubator
environment (strategic asset) that favor the creation of new business (entrepreneur
mechanism), framework that emerged in Brazil post Military government (Etkowitz, 2005).
Also, innovation and entrepreneurship are taken as synonym, as the entrepreneur is the source
of all economic change and capitalism can only be understood in terms of conditions that give
rise to entrepreneurship. The innovator is identified as entrepreneur because all disrupting
economics change is innovation. In this sense, we distinguish invention- the discovery of new
technical knowledge and its practical application to industry- from innovation- the
introduction of new technical methods, products, sources of supply and forms of industrial
organization. (Schumpeter, 2000).
As creative reconstruction through innovation is the mirror image of the creative destruction
from technological obsolescence, the focus of innovation has shifted from large firms and its
investments in R+D to clusters and high tech start-ups. Innovation is divided in National
Systems of Innovation (NSI) and triple helix models. The NSI focus on existing firms as the
innovation engine, being other organizations the support structure. The triple helix focuses the
interaction among enterprises, universities and public sector and in the creation of hybrid
organizations such as the incubators to support and furtherance start up business.(Etkowitz,
2005).
Furthermore, the demand in the economy works as a catalyst to entrepreneurship, from the
search from innovation. The country growth from the 2000s, and, mostly since 2008 was
sustained by the consumption of the classes “c” and “d”. Therefore, the transformation of the
production structure from the innovation is need to keep the growth rhythm, and this is clear
when its analyzed the evolution of the investments in R+D in the past decade: it increased in
average 145% between 1998 and 2008, and, in 20126, Brazil was one of the only countries
that invested the minimum of 1% recommended by OECD in the sector, value that reached
1,25% of the GDP in 20117 The policies of college expansion also play strategic role in the
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
369
promotion of innovation from the university incubators model: the attendance of college grew
from 15% in the 1990s to 25% in 2010, generating a supply of qualified labor that need to be
allocated in the market.
THE META-INNOVATION: ALIGN SOCIAL GOALS TO PROFIT
FROM THE ENTREPRENEURSHIP ETHOS.
The necessity to adapt technologies to the local culture and local needs, developing products
designed to the Brazilian market and to promote the entrepreneurship so the more qualified
labor that enters the market yearly through education expansion programs can create jobs
instead of looking for them has given an unique configuration to the university incubation
environment in Brazil: it was created from initiatives between enterprise, university and
government, answering the local needs, what reflects in incubators that acts in areas as design,
culture and social incubators., beyond the high technology that predominates worldwide and
that is created from centered policies from the government. Focusing in social incubators, the
Brazilian model transfer knowledge created in universities to the peripheries, a social
inclusion tool, as aggregates value at the economy.
This dynamics, known as “meta-innovation”, comprises multiple sources of initiative: topdown, bottom-up and lateral, arising as an incubator movement in the transition from the large
scale technology projects of the former military regime to the social incubators in the 2000s.
In Brazil, the incubator was reconfigured from its original high-tech focus to a broader set of
purposes by University-Industry-Governments actors, aligning business and social goals.
(Etkowitz, 2005).
In this context, within the triple helix8 Brazil has innovated in the business incubators
concept9, working in an environment of ideas generation, promoting products and services
that makes the difference in the competitiveness and growth of companies (Etzkowitz, 2002)
because it adapts the technology to the local needs10. This convergence of strategies has
proved successful in the past in the promotion of different industries as the Brazilian
architecture: the open spaces style, which is most known for the work of Oscar Niemeyer´s,
was created as a form to adapt the mainstream architecture to Brazilian spaces, coordinating
government to finance, universities to create technology to build and the private sector to
promote. In the same path, the national fashion industry also profited from this convergence,
when the search for a national identity stimulated the creation of an own industry, connected
to the Brazilian architecture aesthetics, putting together arts and local demand.
The aim of contemporary university incubators in Brazil is to improve the business
environment at macro level from the promotion of the micro level (Chandra, 2007). In 2010
Brazil occupied the 4th position in the world in the index of university incubators and
technological parks in number of business11.
Therefore, Brazil has invested in university incubators as a way to increase the partnership
enterprise-school-government, coordinating the chain between product development and
marketing and supporting the fixed costs of the new companies as protects them in its initial
stages as a strategy to furtherance entrepreneurship from innovation. The evidence is in the
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
370
numbers: the university incubators have multiplied in the last 10 years, from 170 to 420,
generating 6300 start ups and creating 33 000 jobs posts12.
This strategy uses the local entrepreneurship ethos: Brazil is the third country in entrepreneurs
in the world, only behind China and the United States13. This ethos correlate with economic
development, as in 2010, 2 in 3 entrepreneurs opened its business for opportunity, assessing
the maturity of the local market.
As public policies strategies, the pyramid of the population structure in Brazil also acts as an
incentive to invest in university incubators: the young comprises almost 60% of the
population14, and they also represent the range that is more entrepreneur, being responsible
for 56,9%15 of all new business. In a country that has as long run policy the expansion of the
university education (it increased almost 100% the college attendance in 1 decade) these
institutions , when educate to entrepreneurship, creates a constant input of new projects,
because business management is considered a way to educate the entrepreneur talent, building
the capacities to innovate. Therefore, the incubator is the logics step in this series, giving
conditions to put into practice the knowledge through a structure that facilitates the
development of new businesses. (Chandra, 2007). The incubators are the result of this
premise, that the entrepreneurship can be organized as an educational process, from formal
and informal aspects. (Eztkowitz, 2002).
Regarding the university incubators, the numbers put clear the importance of the universities
in the national policies: the number of journals has increased (20,1% between 2005 - 2007),
the number of researchers increased faster than the another G20 members between 2000 and
2010 and the government invests a higher percentage of its GNI (5.1% in 2011) in education
that the other G20 members16.
It is noteworthy that the sectors who most increased college attendance in Brazil were the
classes “c” and “d”17 and the experience in poor communities, knowing for experience their
needs in consumption, can stimulate the generation of new ideas and consequently the
income.
Beyond that, the entrepreneurship in Brazil has been a symbol of social ascension. The class
“c“18 is the one that is most entrepreneur- represents 55,2% 19 of the total- and its social
inclusion has impulse the consumption in the past 2 decades in the country. In this sense, the
incentives to the function of the university incubator are already present in the economics,
with no need to build specific institutions that furtherance it. The ethos to entrepreneur in
addition with college expansion policies and a consumer market that can be increased through
innovation are key incentives to transform the Brazilian economics from innovation,
including society sectors.
These incentives can be maximized for a curriculum that teaches entrepreneurship and
business management in the universities. In an integrated way the students learn about
entrepreneurship and develop a business plan. This business plan can become an incubated
project inside the university, what makes these incubators proactive in the prospection of new
entrepreneurs.
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371
The aligning of public policies with university research to supply/include marginalized
sectors of the economics through consumption receives empirical evidence in the case of
Uruguay (Sutz and Tomasini, 2012), where coordinated policies to solve endogenous
economics problems emerged, in a concept where the knowledge must be created/applied
within the community it was generated. When market is considered, there are need to supply
products in prices the poorest can afford, as the case of the cooperatives of residues recycling
in Montevideo. The plastic had no market value because the intermediates had the monopoly
of the condensate plastic machine. The market price of this machine was unaffordable even to
cooperatives. The UDELAR- public university- from this starting point researched all the
recycling chain to aggregate value and deliver products that could boost their production, as
the plastic, usually discarded, would be of main use for these cooperatives. (Sutz and
Tomasini, 2012). In Brazil, where this meta-innovation system is existent since the beginning
of the incubation movement and where there is a national policy to favor innovation and
education and to lift out of the poverty sectors of the economy, the alignment of the social
goals to the entrepreneurship mechanism is already in practice. The university incubators
work as institutions that reduce transaction costs, enabling market structures, when it reduces
the asymmetric information towards technology and creates the incentives to answer local
demands in production, spilling over knowledge from the center to the peripheries.
ECONOMIC DEVELOPMENT FROM SOCIAL INCLUSION.
The expansion of the university education20 allows the delivery of services of higher
aggregate value with potential to have a new configuration, what coincides with the structural
change that Brazil looks for, because innovate and entrepreneur is strategic to keep the social
advances given the of restraints the agro exports model faces, and, mainly, in the integration
of the new college graduates in the labor force, young that are qualified to perform in a
society different from the production equilibrium that predominates in the country today.
The incentives to this transformation are given, as the country long term policies of expanding
college access creates specialized labor that needs to be included in the market, the emergence
of an endogenous incubator environment that focus in management and in social business
rather than high technology predominant worldwide is of easy spread due the costs and
number of existing colleges in the country, and the consumption market is available to be
supplied of new products. As to a market be viable, there are need institutions that reduce
transactional costs, and as the “Custo Brasil” is the biggest restraint to start a business locally,
the University Incubators also work as one of these institutions, furthering entrepreneurship
through innovation, within the endogenous model.21
This strategy is facilitated by the endogenous model of incubation that includes the social
incubators and the not purely technological as design and fashion22. Therefore, simple
structures, that put focus on shared spaces, in networking between university and enterprise
and in the knowhow of these institutions in the business management becomes prominent,
being of easy diffusion.
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An university curriculum that emphasizes the management and the entrepreneurship and
stimulates the opening of new business generates positive impacts to the social incubator
model, because it generates constant input of new companies, accelerating the innovation
speed in the Brazilian economics, as the faster is the technological transfer, the higher is the
number of resulting companies.
When it is aggregated the need to include the poorest sectors in the consumption, the
university incubators become strategic, as the development of new technologies that can
satisfy this new demand becomes essential to keep the rhythm of growing.
For that reason, the partnership university-government-enterprise, because it increases the
incentives to launch start ups, following an endogenous model, that includes the social
incubators, is essential to the knowledge spillover in the Brazilian economics, reducing the
entering costs in the market, most relevant variable to open a business in the country,
channeling energy of a young population that has an own dynamics: the access to information
regarding demand for new products. The empiric evidence on the link between social
inclusion and innovation through knowledge produced on universities is clear: the higher the
engagement of a university to its local community, the highest the development level of it.
(Fetters et al, 2010).
Furthermore, the impact of these initiatives, that also aims to solve specific problems of the
Brazilian economy, generates positives externalities in the macro level.
The investment in the short run, from the public and private sectors in R+D from the
university incubators signals the success of the model and aggregates predictability to the
technological development in the country, at the time its stabilizes the labor market to the
young: only in hardware, that is not the predominant model in Brazil, in the information
technology area, Intel will invest US$ 152 million between 2013 y 2018 to software
development in partnership with 7 universities, among them Universidade de Brasília,
Universidade de São Paulo and the Universidade de Campinas. The government will also
inject US$ 254 million23 what summed to the US$ 102 million of Microsoft to build a
research Center in Rio de Janeiro between entre 2013-2017 and the US$ 508 million of Cisco
in the same period (Shreeharsha, 2013).
These investments are potentiated by the energy sector, in which only Petrobras will invest
US$ 4.5 billion in the next 5 years to develop an innovative chain from the suppliers. The
investment will be directed to Cenpes, the research Center of the company that is located at
the Universidade Federal de Rio de Janeiro. This attracted foreign companies that operates in
the energy sector as Schlumberger, FMC Technologies, GE, Halliburton, Cameron, and Baker
Hughes, that see Brazil as a positive destination to investments and recognizing the quality of
the national universities have signed partnerships in intellectual property with the Brazilian oil
company (Marlin, 2013).
Considered that the number of new business derivate of technology is determined by the
innovation speed, the university incubators are the essential column in the twist to the society
of information, reducing entering costs, solving endogenous problems of demand, as cheaper
technology, giving conditions to the incubated companies to specialize, becoming a tool of
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373
social inclusion from the need to integrate both a new labor force and to expand consumption
in the poorest sectors in Brazil (Apex, 2013). Identifying innovation to entrepreneurship
(Schumpeter, 2000) put emphasis on the transformation of the economy to boost economic
development in Brazil, where academics research groups act as quasi-firms (Etkowitz, 2005).
ENDNOTES
1.This theory assumes that the new knowledge created on the laboratories of the big
companies and in the universities that is not commercially used generates entrepreneur
opportunities, thereafter the entrepreneurship is the endogenous answer to the investment that
was not fully appropriated by the established companies.
2.Higher levels of economics growth are the result of higher entrepreneur activity, once the
entrepreneurship serves as mechanism to facility the spill over and the commercialization of
the knowledge. This hypothesis received empirical support: there were analyzed 327 counties
in Germany, where it was found that the higher economics activity correlates to higher
number of new companies .
3. In 2001, Jim O´Neill, the head of Global Research in Goldman Sachs created the acronym
BRIC to refer to the Brazil, Russia, India and China, economies had thought that would lead
the economics growth in the next 50 years.
4 Source: IBGE, 2012.
5 Source: European Union, 2011.
6 Source: Global Entrepreneurship Monitor, 2013
7 The social incubators have as their aim the empower of communities capacitating
entrepreneurs and generating enterprises that uses social technology. The incubators of culture
and design are focusing the creation of enterprises to make possible the transformation of
ideas into business from its economic viability.
8 The triple helix is made up from the government, the university and the enterprise, being the
interrelation among them essential in a society based on knowledge. In Brazil, the triple helix
became a movement to generate incubators in an university context. (Almeida, 2005).
9 Main objectives of the Brazilian incubators: promote the economic development, the job
creation and facilitate the trade on technology. (Lalkaka y Schaffer,1999).
10 As an example we have an incubated project in the Genesis Institute at PUC-RJ that
developed a software to control buses in the city of Rio de Janeiro.
11 Source:University Incubators Index, 2012.
12 Source: ANPROTEC, 2011.
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374
13 Source: Global Entrepreneurship Monitor, 2012.
14 Although the Brazilian government classifies as young the age range among 18-24 years
old, to university benefits and the age range among 18-29 years old to specific subsidies and
incentives to entrepreneur in the Small and Medium Enterprises projects, the majority of the
aggregated data regards the population among 18-35 years old.
15 Source: Brazilian Government, 2013.
16 Source: OECD, 2013.
17 Class “a”: income superior to 20 minimum national wages, class “b”: 10 to 20 minimum
wages class “c”: 4 to 10 minimum wages class “d”: 2 to 4 minimum wages class “e”: up to 2
minimum wages. Source: IBGE, 2013.
18 Source: Global Entrepreneurship Monitor, 2012.
19 Source: IBGE, 2013.
20 In 2012 the average payment a graduate received was R$ 1500,00 compared to the average
of R$ 1792,62 to non college graduates (IBGE, 2012) and, despite the full employment levels
of the past years, the age range of 18-24 represented 35% of the unemployed, what creates
incentives to the young population to entrepreneur.
21 Within the DWBS (1997) model, that compares content of production factors among
graduates and non college graduates.
22From music to fashion, the creative economics has been always the Brazilian vocation.
23 Its not computed the monetary offer of the Development Banks.
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Almeida, M. (2005). The evolution of the incubator movement in Brazil. International Journal
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ApexBrasil. (2013). Brazil over the world: innovative, sustainable, competitive. Available in:
http://www2.apexbrasil.com.br/en/invest-in-brazil/why-invest-in-brazil/science-andtechnology.
Associação Nacional de Entidades Promotoras de Empreendimentos
ANPROTEC. (2013). Notícias. Available in: www.anprotec.org.br. .
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TECHNOLOGY BASED START-UPS IN A BRAZILIAN
UNIVERSITY: A LONGITUDINAL CASE STUDY OF
RESOURCE DEVELOPMENT AND ALLOCATION
Thiago Renault
Federal Rural University of Rio de Janeiro – UFRRJ
[email protected]
José Manoel Carvalho de Mello
Fluminense Federal University - UFF
Marcus Vinicius Fonseca
Federal University of Rio de Janeiro - UFRJ
Sérgio Yates
Catholic University of Rio de Janeiro - PUC-Rio
Abstract: In this paper, we look at the process of development and the allocation of
resources at five technology-based start-ups coordinated by the Engineering Post-Graduate &
Research Institute at the Federal University of Rio de Janeiro (COPPE/UFRJ). Our analysis
was based on a series of longitudinal case studies prepared over a period of six years (2006 –
2012). We developed the conceptual framework from a Resource-Based View and the
business models adopted by those start-up companies. The main conclusions point to patterns
observed in the process of development and allocation of resources at the five companies and
the relation between the available resources and the business model adopted by the
companies.
Keywords: Academic entrepreneurship; technology based start-ups; business model;
resource-based view
This paper was originally presented at the 2013 Triple Helix Conference, London, UK
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
378
INTRODUCTION
The technology transfer process from academia to the business environment is very complex
and follows a systemic profile, with the participation of multiple actors (Bozeman, 2000). The
creation of enterprises in the academic environment has become an important feature of the
technology transfer process (DiGregorio & Shane, 2003; Wright et al. 2008).
An approach that is widely used in studies of the setting up and development of technology
based start-ups is the Resource Based View (Brush et al. 2001). The works based on this
approach focus their analysis on resources, identified in the creation and development of
technology based start-ups, that give them a competitive advantage. In these studies, the
authors emphasize the differences in available resources in the process of setting up and
developing a new venture (Shane & Stuart, 2002). Other authors focus their work specifically
on the analysis of financial resources (Hellman & Puri, 2000), organizational and
technological resources (Bower, 2003; Heirman & Clarysse, 2004; Landry, 2006) and even
broader views that consider the social, technological, financial and human resources (Druilhe
& Garnsey, 2004).
The authors that pursue this conceptual approach define resources very broadly,
encompassing all tangible and intangible assets and skills linked to the firms in a "semipermanent" way. As a result of this approach, there are a number of different classifications of
resources that can emerge from analysis of the different realities. Lichtenstein & Brush (2001)
compared the gap in adequate resources to the growth of emerging ventures. In the context of
the growth of small businesses, these authors defined the following resources: financial,
systems and organizational structures, managerial competence, ability of human resources,
technology, physical resources, leadership, organizational culture and informal systems. In a
paper on the propensity of Canadian researchers to create new ventures, Landry et al. (2006)
also used the resource-based view as a backdrop and set out a conceptual categorization
model with six resources applied to the company creation process: financial, intellectual
property, knowledge, organizational, social and individual background. In another study,
Brush et al. (2001) categorized the resources present in the start-up process into six types:
technological, human, social, financial, physical and organizational.
From these resources, researchers create new companies in order to commercially exploit the
results of their research activities. One of the biggest challenges faced in this process is the
definition of a feasible business model, enabling the company's expansion and enhancing its
profitability. Chesbourgh & Rosenbloom (2002) define a business model as the orchestrating
of value proposition, market segmentation, positioning in the value chain, and cost of
infrastructure to produce and offer products and services. The business model is formed from
the allocation of the different technological, human, organizational, financial and social
capital resources available, in order to generate and capture value in specific market segments.
Bower (2003) was one of the first authors to refer explicitly to the business model of
technology based start-ups, highlighting the intellectual property assets as an important source
of competitive advantage in the emergent phase of new technology such as biotechnology.
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379
According to Mustar et al. (2006), studies focusing on the business model perspective can be
divided into three groups: (i) those that categorize start-ups by the activities performed; (ii) by
the way technology and knowledge is converted into economic value; (iii) by the way growth
is directed.
The authors that categorize start-ups by the activities performed use the following taxonomy:
service oriented firms, product oriented firms, and intellectual asset oriented firms. The
service oriented firms offer consulting and R&D services, the product oriented firms seek
scaleability for a product with a clear value potential. The intellectual asset oriented firms try
to reach the market through different channels, normally incorporating their technology in
products and services of other companies.
A second group of studies look at how technology and knowledge are converted into
commercial value. Mustar et al. (2006) identifies four different models for this process:
business infrastructure or technology platform, product companies, companies in transition
(from product to technology platform), and prospectors. Business infrastructure or technology
platform (Heirman & Clarysse, 2004; Druilhe & Garnsey, 2004) use a strategy of seeking
venture capitalists in the early stages. Heirman & Clarysse (2004) show that business
infrastructure has negative cash flows in the early stages, when resources are spent on
developing the final technology platform, at the expense of marketing and sales. Aggarwal &
Bayus (2000) estimated an average of 14 years for the commercialization of new technology
platforms, a long time horizon compared to that of most venture capital firms.
Heirman & Clarysse (2004) identified a third group: start-ups that in their early stages are
focused on one specific product or service and over time identify new market demands and
are able to diversify their portfolio. These companies are considered ventures in transition,
created to exploit one specific product or service and, with increased market penetration,
migrating to the infrastructure/technology platform business model. Prospector companies
were identified in the work of Druilhe & Garnsney (2004). These are companies that in their
early years seek to blend prior entrepreneurial knowledge with the knowledge acquired in the
market from exploiting new business models. These authors adopt a dynamic view, seeking to
explain how the business model evolves as the entrepreneurs enhance their knowledge of the
resources and opportunities available. The authors identified a significant number of start-ups
that were born without a clear idea of how to create value from the resources available, and so
spent most of their activities in search of applications that could meet market demands.
The third group categorizes technology-based companies by their growth orientation. In
contrast to the success stories described by Saxenian (1996), Autio & Lumme (1998)
concluded that, in Finland, technology based companies did not show significant growth.
Other studies, such as Wtterwulghe (1998), show that French and Belgian technology based
companies are mostly formed by a single entrepreneur, without any clear business strategy.
There is a lack of studies that analyse the business model adopted by innovative start-ups,
from the perspective of the resource-based view (Mustar et al. 2006). Our paper aims to
address this lack, by analyzing five technology based start-ups in longitudinal case-studies.
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
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METHODOLOGY AND DATA COLLECTION
The approach taken to data collection for this study has been qualitative. A longitudinal casestudy was chosen for analyzing the evolution of five technology based start-ups coordinated
by the Engineering Post-Graduate & Research Institute at the Federal University of Rio de
Janeiro (COPPE/UFRJ). These startups were supported by the business incubator and were
set up by students in master's and doctorate programs, professors and researchers at COPPE
and at laboratories located in the vicinity.
The research questions addressed in the analysis were: In which context were these
companies created? What are the characteristics of the technology based start-ups created at
COPPE/UFRJ? What kinds of resources were mobilized in the creation and development of
these companies? How did they generate and allocate these resources? What business models
were adopted?
Case selection and research procedures
We decided to analyze these five specific companies because they were all created under the
same conditions, in similar business environments. All of the start-ups were connected to
academic research projects carried out at COPPE.
We started the data collection in 2006, interviewing two of the business incubator staff, the
head and the operational manager. In this phase, we analyzed the background of the business
incubator, the operational model and each of the 46 companies supported since it began its
activities. We realized that in the 1990s companies were created under completely different
conditions to those in the mid-2000s. These differences were related to the Brazilian business
and public policy environment and also to the capabilities developed by the business
incubator to support the creation of innovative companies. In order to perform a homogeneous
analysis we decided to select the five most recently created companies (at that time, in 2006)
and follow them over a six year period, until 2012.
Our research was based on document analysis and multiple interviews and informal
conversations with the founders of the companies. We started with data collection from
secondary sources such as the websites of these companies and obtained additional
information from the business incubator website and other specialized media. After this, we
gained access to the business plan that each of these companies presented in the business
incubator selection process. We also analyzed their fund raising proposals, so we could
identify the critical resources that needed to be acquired. We organized the primary data
collection on an annual basis, considering qualitative data on resource development,
allocation and the business model adopted by these companies.
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381
In order to illustrate the context of the case studies, we present a brief description of
COPPE/UFRJ that focuses mainly on its research environment, its track record of interaction
with the business sector and the infrastructure in place to support technology transfer and the
creation of innovative companies.
Theoretical framework
The conceptual model proposed for this paper covers analysis of the start-ups from two
distinct viewpoints, the first being with respect to the resources present in the process of
setting up and developing the company during the period under analysis, while the second is
with respect to the business models adopted by these companies in order to participate in the
market. These two viewpoints were both analyzed in relation to the companies during the six
years of the study.
Addressing the literature on the resource-based view, we decided to use a resource taxonomy
based in the work of Brush et al. (2001). Figure 1 illustrates the proposed model.
Technology resources
Human resources
Organizational resources
TBSU
Financial resources
Social capital resources
Physical resources
Figure 1 - Resources present in the process involving technology based start-ups
Source: Authors' adaptation, based on Landry et al. (2006) and Brush et al. (2001)
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382
The technological resources category refers to the basic skills and technologies specific to
each company. The technology based start-ups show differences in their degree of innovation
and technological scope and the nature and intensity of their R&D activities and positioning
in the product development cycle. Human resources are analyzed based on the attributes of
the founding team and their collaborators, in both technical and managerial terms. These
resources are usually measured in terms of the size of the founding team, the background of
the entrepreneurs and technical and managerial experience. The organizational resources
category refers to possession or access to facilities and distribution networks, support,
customer base, strategic suppliers, and management system, among other factors.
Financial resources relate to the amount and nature of the funding required for the setting up
and development of the new venture. The social capital resources are defined by Brush et al.
(2001) as the inter-relations between the entrepreneurs, the new venture and the environment
in which they are inserted. Physical resources refer to the facilities where the business is
located. These resources may be own or derived from public or private sources.
With regard to the business models, we chose to use a taxonomy based on the activities
performed by the companies. The taxonomy presented by Mustar et al. (2006) covers: service
oriented firms, product oriented firms and intellectual asset oriented firms. The service
oriented firms offer consulting and R&D services, the product oriented firms seek scaleability
for a product with clear value potential. The intellectual asset oriented firms try to reach the
market through different channels, normally incorporating their technology in products and
services of other companies. Figure 2, below, shows the three business models and the way
they overlap.
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383
PRODUCT
SERVICE
TECHNOLOGY
ASSET
Figure 2 – Business models adopted by technology based start-ups
During the development of a start-up, more than one business model may be used
simultaneously. Hence, Figure 2 shows areas of overlapping where business models emerge
in which products are offered along with services, products and services are offered through
technological assets, or even business models that offer all three. In our study we evaluated
the evolution of the companies’ business models, while trying to understand how the available
resources affected the business model adopted.
TECHNOLOGY BASED ACADEMIC START-UPS: THE CASE OF
COPPE/UFRJ
The Engineering Post-Graduate & Research Institute (COPPE) is the largest academic unit of
the Federal University of Rio de Janeiro (UFRJ). The UFRJ is the biggest federal university in
the country, with 28 teaching units, offering 145 courses to 33,300 undergraduate students. It
has around 3,800 professors, of whom approximately 2,200 have doctorate degrees. Scientific
activities are part of the routine of the university, with 85 graduate programs offering 85 MSc
and 74 PhD courses. These research activities lead to the awarding of 1,500 MSc and 720
PhD degrees a year (UFRJ, 2011). The UFRJ campus also hosts research centers such as
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384
CENPES, belonging to the state-owned oil and gas company Petrobras, CEPEL, owned by the
national electricity company Eletrobrás, and CETEM, which conducts mineral research.
COPPE offers 12 engineering graduate programs: biomedical, civil, chemical, electrical,
computer, metallurgy/materials, nuclear, mechanical, transport, production, energy planning
and oceanic. All 12 graduate programs have a high rating in the national ranking published by
the Ministry of Education (CAPES, 2012). In addition, the university has the largest
infrastructure for engineering teaching and research in Latin America, with some 2,800
graduate students (1,600 MSc and 1,200 PhD) and 350 employees (325 full-time researchers)
working in 116 research laboratories. In 2010, 176 PhD and 344 MSc students received
degrees from COPPE. Since it was founded, in 1963, COPPE has awarded degrees in
engineering to some 12,000 MSc and PhD students (COPPE, 2012).
This academic unit (COPPE), has a foundation called COPPETEC that currently manages
approximately 600 projects involving total revenues of about US$ 250 million (Coppetec,
2011). Instruments such as the business incubator, the technology transfer office and the
technology park were developed gradually during the 1990s and 2000s. The institutional and
organizational changes that occurred mainly over the last 15 years brought COPPE/UFRJ
closer to the concept of an entrepreneurial university conceived by European and North
American authors (Clark, 1998; Ropke, 1998; Etzkowitz, 2002; Tornatzky et al., 2002).
The COPPE Business Incubator was founded in 1994 and, since that time, has supported the
creation of over 50 companies providing innovative products and services with high
technological content. The incubator has 1,900 m2 of floor space, with a capacity for 24
incubation modules each using 30 m2. There are 20 companies under incubation. The
operational model used in the incubation process involves the provision of physical
infrastructure and consulting services in the marketing, financial, accounting, law and design
fields. The UFRJ technology transfer office was set up after the business incubator. In 2001,
the Intellectual Property and Technology Transfer Division - DPITT was created at the UFRJ,
and in 2007 this was replaced by the UFRJ Innovation Agency. The agency currently has a
portfolio of around 270 patents, of which eight are licensed (UFRJ, 2012).
Implementation of a technology park at the university began in 2003 and it came into
operation in 2008, following investment of approximately US$ 50 million. The area covers
about 350,000 m2 and 50% of this is already urbanized. The Rio Technology Park is home to
twenty companies that together employ about 200 technicians and researchers (Guedes,
2010). Between 2008 and 2012, several companies announced investments in the technology
park; a list that includes Petrobras, Schlumberger, Halliburton, FMC Technologies, Siemens,
BG Group, and General Electric, among others. The interest of these companies in the
technology park is related to the discovery of new oil reserves in deep waters off the coast of
Brazil. There is no technology available to pump this oil and a series of technological
challenges has emerged from this market scenario. Petrobras alone has announced an
investment of US$ 250 billion over the coming decade.
Technology based academic start-ups at COPPE / UFRJ: five longitudinal
case studies
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Since its establishment, in 1994, the COPPE business incubator has supported 50 start-ups. In
the interviews conducted with the business incubator manager, it was possible to identify that
23 of these companies were created as a result of research projects carried out in academic
units at UFRJ. As mentioned in the methodology section, we decided to select five companies
that started the incubation process in the years 2004 and 2005. In 2006, when we began the
research, the five companies were in their early stage. From 2006 until 2012, several
interviews and informal conversations were conducted with the founders of the five
companies.
We organized the data description in three different layers. In the first one we present the
background of the company creation process, highlighting the academic activity that triggers
the opportunity for setting up the venture. We also present the business concept and
information about market segments and intellectual property. In the second layer, we present
a description of the resource base of each company and its evolution over the maturation of
the business. And in the third layer we present an analysis of the business model adopted by
the company over time.
Alpha
The company, Alpha was set up in 2004 as a consultancy to the polymers segment. The idea
arose as a result of the work of two PhD students and a professor at the Macromolecules
Institute (IMA/UFRJ). At the time, these entrepreneurs noticed that there was a recurrent need
by companies for consulting services regarding polymers and that there was no specific
supplier of such services. So the IMA researchers organized themselves to cater to this niche
market, which mainly involved those researchers in the research group led by the professor
who helped to set up the company. There was no specific research that led to the development
of a product. These were highly specialized technical services, delivered as the need arose to a
variety of regular clients.
The research activities of this group were quite intensive. Between 1991 and 2003 they
handled some 15 research projects funded by the CNPq, FINEP, FAPERJ and private
companies. During this period, the professor and the two PhD students acquired important
technical expertise in the polymers segment, which turned out to be the primary resource for
the creation of the company.
The company's early years were devoted exclusively to the provision of consulting services
and R&D activities for the polymers segment. From its fourth year, the company began to
develop products, manufacture them and market them. The products offered are developed
from polymers, as special pastes and adhesives with applications in the construction,
electrical, oil and industrial sectors. The company owns the patents on its technology. Among
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386
its main customers are construction material retailers, oil and gas companies, and the
shipbuilding, electrical and plastics industries.
In 2008, Alpha had a turnover of between R$ 240,000 and R$ 500,000. It has five employees,
two of whom have PhDs, while three are graduates. The company has undergone corporate
restructuring and the professor and one of the PhD students involved in founding the
enterprise are no longer owners of the business.
Alpha invests about 10% of its turnover in R&D. During its life it has received funding from a
number of development agencies, such as FAPERJ, and has been awarded two projects, for
ANEEL (National Electricity Sector Regulatory Agency) and the CNPq (National Council for
Scientific & Technological Development). In 2009, the company received an investment, in
the form of venture capital, from the Criatec fund, whose main shareholder is the BNDES
(Brazilian Development Bank).
Resources present in the creation and development of the company
(i) Technological resources: The main technological resource available for the creation and
development of the company was the expertise in the field of consulting about polymers that
had been accumulated by the company's owners during their academic careers.
(ii) Human resources: Part of the knowledge used in the consulting provided has a strong tacit
element that, to a certain extent, means the human resources involved in the company's
activities are central to the business model adopted. Being linked to a research laboratory and
the academic activities of the owners, the company from the very beginning had easy access
to human resources focused on the technical side. On the other hand, the company has
difficulty in hiring human resources for commercial and management roles.
(iii) Organizational resources: This was one of the greatest difficulties encountered by the
company. Alfa started out with the focus on consulting services and then gradually shifted the
focus of its business model in order to try and develop scaleable products. In this process, the
entrepreneur who is currently heading the business found great difficulty in building sales
channels, production facilities, a distribution network and other activities that are very
different from those that had been carried out in the research laboratory before the company
was founded.
(iv) Financial resources: In the beginning, when the company was still focused exclusively on
consulting services in the field of polymers, there was no need for heavy investment. But
from the moment it was decided to transform the business into a product maker, there was a
need for additional and sizeable investment. Initially, the company obtained resources from
grants. This made it possible to develop its current products. But as the company came to the
point of placing these products on the market, it was hard to find resources to expand the
Proceedings of the 3rd ICIER Conference- Policies to Support Entrepreneurship, Rio de Janeiro, November 2013
387
production structure, marketing and management. The entrepreneur chose to resort to venture
capital funding.
(v) Capital resources: As the background of the owners is highly academic, it has been hard to
relate to companies like Petrobras. The entrepreneur sought partnerships with established
companies, which could help in the sales process.
The business model adopted by the company
Initially, the company adopted a business model focused on providing consulting services.
Over time, one of the entrepreneurs became interested in the possibility of developing
polymer based products, produce them and market them. Two of the founding partners
withdrew from the partnership. In the third year, the remaining owner began to focus his
efforts on product development. This was successful, through hand crafted production, and he
decided to seek funding in the form of risk capital, to set up a production line and invest in
management and marketing.
The entrepreneur believes that, in the initial phase, the research and development was crucial
to the company, but that now it is necessary to focus the efforts on developing the business,
seeking new customers and new sources of revenue.
Beta
Company profile
The company, Beta was founded in 2004 by three Power Electronics Laboratory (Elepot)
doctoral students in the COPPE/UFRJ Electrical Engineering Graduate Program. These
students participated in R&D projects on behalf of companies in the Brazilian electricity
generation, transmission and distribution market. During their Ph.D. work, they participated
in an electricity sector concession holder R&D project for the development of a device to
convert single-phase power into three-phase power. This converter can be used in rural areas,
where the network is single phase and there is a need for occasional use of three-phase power.
Through this R&D project, the entrepreneurs acquired technical expertise in the field of
power electronics, which enabled them to put together a wide range of services in the
following areas: (a) Electricity Transmission: development of optimization studies and
preparation of basic and executive projects; (b) Renewable Energy: development of electrical
studies, projects and innovative proposals that enable the use of clean energy; (c) Electricity
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388
Quality: performing diagnostics, working on the electricity grid and reducing electricity bills;
(d) Operation of Industrial Power Systems: performing
assessments, calculations and simulations of electricity flows, short circuits, and temporary
electromagnetic and electromechanical occurrences.
Among Beta's customers are major companies in the electricity and engineering sectors, such
as: Light, Ampla, ONS (Operator of the National Grid), and Quentech, among others. The
first product worked on by the company, the single phase to three phase power converter, has
a joint patent shared by the university, researchers and the electricity company Ampla. This
patented equipment has not been sold in the market due to disagreements over the process of
licensing the intellectual property.
In 2008, the company had a turnover of between R$ 500,000 and R$ 1 million, had 20
employees, three of whom have PhDs, while six are engineers and the others are interns and
administrative assistants.
About 30% of the annual turnover is invested in R&D. Beta has had financial support through
a variety of government instruments, such as tenders by FAPERJ, FINEP, the CNPq and
ANEEL. The company has never received investment in the form of venture capital, although
it has participated in events at which it was presented to investors.
Resources present in the creation and development of the company
(i) Technological resources: At the time the company was founded, two technological
resources were essential. On the one hand, the technology for converting single phase power
into three-phase power, which gave rise to an innovative device. The ownership is shared
between the university lab, the power company that engaged the R&D project, and one of the
owners of Beta. The commercial exploitation of this technology has not been successful. On
the other hand, the creation and development of the company were strongly related to the
expertise of its owners in the power electronics and electricity transmission field.
(ii) Human resources: Right from the start, the available human resources were highly
qualified. The three partners all had PhDs and a strong background of participation in R&D
and specialist consultancies.
(iii) Organizational resources: This has been considered a critical factor in Beta's business,
since, as a provider of consulting services and R&D, it finds it hard to scale up its activities.
The entrepreneurs wanted to increase their productivity in projects through management
mechanisms. On the other hand, there is still interest in furthering the development and sale of
new products. But in this case, the lack of organizational resources is even more notable.
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(iv) Financial resources: Since the company operated as a service provider, there was no need
for large investments. The entrepreneurs set up the company using their own resources and, as
things developed, received funding from development agencies such as FAPERJ, the CNPq
and FINEP.
(v) Capital resources: The entrepreneurs have an academic background, but always had
contact with companies through research projects and consulting work performed at the
university laboratory. This social network is still a very important feature of Beta’s business
model.
The business model adopted by the company
In the early phase, the company's business model was focused on the marketing of innovative
equipment whose patent is jointly owned by the university, the researchers and the company
that engaged the research and development project. The business model focused on selling
this product has not been successful. There was a gap in terms of market application,
technical support, distribution, and other aspects. Moreover, there were conflicts in the
process of transferring the patent to Beta. The entrepreneurs made a strategic change of
direction and started providing R&D and consulting services to companies in the sector.
Even today, the entrepreneurs have the view that the development and sale of products can be
very profitable and enable the company to grow. On the other hand, they have not yet found a
business model that is compatible with their present abilities, allowing them entry into the
production and marketing of products. The entrepreneurs have sought to operate as a
technology platform, putting their technology into the products and services of other, larger,
organizations that have the organizational resources that are lacking at Beta.
Gamma
Company profile
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The company, Gamma was founded in 2005 by three professors and two Membrane
Separation Process Laboratory PhD students on the Chemical Engineering Program (PEQ).
The idea of commercially exploiting the results of the laboratory’s research activities lies in
the work of the group over the last three decades. Since the mid-1980s the group has been
studying membrane separation processes. This line of research advanced during the 1990s, to
the point of generating a commercially viable application in the 2000s. Throughout this time,
around 30 projects were carried out, with financing from FINEP, the CNPq, FAPERJ,
domestic and international foundations and companies.
From the year 2000, there was a growing concern in society over the sustainable use of water.
The entrepreneurs saw an opportunity to commercially exploit the technology they had
developed. At that time, a partnership was begun with a company selling household water
filters, in a project funded by the CNPq. To begin with, the idea was to develop a technology
that could serve this water purification market. The filters used by the company were
imported and there was interest in replacing the imports. Through this project, the three
professors and two PhD students noted that it was possible to enter the market as a supplier of
microporous membranes to the filter manufacturers, and decided to set up the company,
Gamma.
Later, with the maturing of the company’s business model, the entrepreneurs realized that the
market for water reutilization at large companies represented a more profitable niche. So, they
decided to review the strategy they had adopted and started to reposition themselves as an
effluent treatment and water reutilization business.
Currently, the company produces membranes for microfiltration and ultrafiltration in specific
applications, including the production and assembly of micro filtration modules and systems.
The systems are offered in along with training and technical assistance. Gamma’s leading
customers are companies that require a considerable amount of water in their production
processes and/or are located in areas where water is expensive, as well as condominiums,
shopping malls and service stations, and include Petrobras, Dupont, Schweitzer Mauduit,
Votorantim Papel e Celulose.
Gamma has not yet submitted any patent applications for its processes and technologies. An
application has been written, but doubts exist as to whether it would be appropriate to lodge a
patent application. The entrepreneur has argued that the patent application reveals details that
would enable experts to copy the process, taking advantage of certain modifications.
In 2008, Gamma had a turnover of between R$ 1 million and R$ 2.4 million. The company
has 13 employees, of whom four have PhDs and two are graduates, and there are also six
interns and a technician.
Ever since it was founded, the company has had financial support from government agencies
for its R&D activities. This support has included tendered grants from FINEP and FAPERJ,
scholarships from the CNPq, and tenders for joint IST-company projects from FINEP and
FAPERJ. To date, the company has not received any investment in the form of venture
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capital, although it has been sounded out several times and has even entered into negotiations
that did not come to fruition.
Resources present in the creation and development of the company
(i) Technological resources: The technology for the production of microfiltration systems is
the company's main technological resource, developed over more than 20 years of research.
This technology involves wide ranging expertise relating to a variety of processes, such as
microfiltration, nanofiltration (technology that has not been fully mastered by the company),
and pervaporation, among others. The company has not filed a patent application because it
fears the publication of such document could reveal details that would make the product
replicable.
(ii) Human resources: The company’s human resources are highly qualified. There are three
professors with a long history of research and development, plus two young PhDs, one of
whom received an award for his doctoral thesis. Being linked to the university gives Gamma
an advantage in accessing and training human resources.
(iii) Organizational resources: This seems to be the biggest difficulty now facing the
company. They need to expand production and develop more efficient sales channels and
support in order to overcome those major hindrances to growth. The company has graduated
from the incubator and is installed in the Technology Park that was recently established at the
UFRJ.
(iv) Financial resources: During the process of creating and developing Gamma, the company
received several funding contributions from public development agencies to carry out R&D.
It has also benefited through tendering for grants from FINEP and FAPERJ and received
scholarships from the CNPq, as well as participating in joint IST-company projects at the lab
where it originated. The financing profile has led the company to further enhance its R&D,
but does not support the commercial and managerial activities necessary for the development
of the business.
(v) Capital resources: Three of the owners are professors with extensive experience and many
of their former students now work in companies throughout Brazil. They help with sales,
since they are familiar with the membrane technology and know about the possible
applications. Gamma's relationship with Petrobras, the organization in Brazil that has the
greatest demand for technology solutions, is already consolidated and involves providing
consulting and R&D services. The company has a very close relationship with the UFRJ and
is the only graduated company so far to have set up in the technology park.
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The business model adopted by the company
When the company Gamma was first created, the business model pursued by the
entrepreneurs was to be a product company, focused on the production of microporous
membranes that were to be sold to companies that manufactured household water filters. Over
time, the entrepreneurs noted that the market for effluent treatment and water reutilization for
industry was more profitable. Thus began a strategic repositioning to start producing
microfiltration systems, not just the membranes. These microfiltration systems have
applications in diverse markets. Until now, the entrepreneurs have not specialized in a
specific niche.
Delta
Company profile
The company, Delta was founded in 2005 by a researcher and a professor at the Vibration
Control Laboratory in the Civil Engineering Program. The latter coordinates a group that
performs intensive academic research and consequently earns a research productivity grant
that is the maximum awarded by the CNPq (National Council for Scientific and
Technological Development).
While still at the Structures Laboratory, three research projects carried out between 2003 and
2005 showed a market opportunity for setting up a business. These were: (a) the installation
of electromechanical devices for vibration control on the Rio-Niterói bridge; (b) at the
Maracanã football stadium; (c) on electricity transmission towers. In all three cases, there
were complex vibration problems that were mitigated by the solutions presented by the
researchers. Out of this experience, an opportunity was identified to set up a company to
make commercial use of solutions to vibration problems using electromechanical devices.
This led to the creation of Delta.
Its main technical expertise is its team’s ability to come up with solutions to complex
vibration problems in large structures by using electromechanical devices.
Delta’s work focuses primarily on providing services that include engineering consulting for
major works, construction and the industrial segment focused on solving vibration problems
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in structures and equipment. Among its clients are major companies like Concer, Odebrecht,
Andrade Gutierrez, Tecnosolo, Engevix, Technipp and Queiroz Galvão.
Delta has no registered patents, but has been formally recognized by CREA (Regional
Council for Engineering and Agronomy), through its chief researcher, for the development of
the anti-vibration system for the Rio - Niterói bridge.
Its turnover in 2008 was between R$ 240,000 and R$ 500,000. The company has six
employees, three of whom are PhDs, while two are interns and one is an administrative
assistant.
About 40% of the annual turnover is invested in R&D. Ever since it was founded, the
company has received financial support from FINEP for the development of one of its
projects. At no time have the entrepreneurs received funding in the form of venture capital.
Resources present in the creation and development of the company
(i) Technological resources: The main technological resource available to the company is the
expertise acquired by the entrepreneurs in their research and consulting activities, solving
complex vibration problems in large structures by developing and implementing
electromechanical devices. The company has no registered patents.
(ii) Human resources: The human resources are key to the business model adopted by the
company. The services provided are highly specialized and knowledge intensive.
(iii) Organizational resources: As a provider of consulting and R&D services, the
organizational resources are not considered to represent a bottleneck in the Delta business
model. The company’s team usually goes to the client to perform its work. The biggest
challenge is getting across the tacit knowledge when training new human resources. The fact
that only the owners of the company have mastered the knowledge required to provide these
services represents a hindrance to their growth.
(iv) Financial resources: As a service provider, the company’s creation and development has
not required major investment. The routine of the entrepreneurs is very similar to what it was
in the research laboratory prior to the founding of the company. They received an investment
from FINEP to purchase some components used in research and development related to the
services provided by the company.
(v) Capital resources: The entrepreneurs have a long track record of providing consulting
services, on behalf of the research laboratory where they worked, to companies and
government agencies. The professor who ran the research lab retired, and most of the contacts
established during his academic career were incorporated into Delta’s portfolio.
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The business model adopted by the company
Since its inception, the company has been providing highly specialized services related to
solving vibration problems in complex structures. It later broadened its focus and began to
analyze problems in complex structures for the construction industry. Its main clients are
large engineering companies such as Odebrecht, Andrade Gutierrez, Queiroz Galvão, and
Technipp, among others. Delta has strategic partnerships with suppliers of sensors, which are
used in the technological solutions developed by the company.
The equipment to solve vibration problems on electricity transmission towers is the only one,
among all those developed by the company, that can be replicated as a product. Electricity
transmission towers are standardized and a vibration problem due to wind is quite common.
So far, the company has been unable to sell this product.
Kappa
Company profile
The company, Kappa operates in the software segment based on the recognition of image and
sound patterns. It was founded in 2004 by a professor coordinating a research group, a
master’s student at the UFRJ Electronic Computing Center (NCE), and three undergraduate
students. The group led by this professor has been conducting research into the recognition of
image patterns for recognizing texts, which is known as Optical Character Recognition (OCR)
technology. The research group was approached by the local State Traffic Department
(DETRAN/RJ) to develop a solution for automating the process of registering vehicle license
plates from images.
So they developed a system that, using video cameras, is able to register vehicle license plates
and connect this information with databases, thereby making it possible to identify vehicles
with irregularities and automate part of the annual vehicle licensing process. At the end of the
project, the researchers realized that they had in their hands a technology that could have a
variety of market applications. They decided to set up the company and participate in the
incubation process. The entrepreneurs went on to develop applications to control access to
parking lots, condominiums, shopping malls and even supplying the DETRANs of other
states.
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The main resource that enabled the company to be created was the team formed around the
aforementioned research project. What is more, during the course of the project, a software
code was developed that is now at the heart of the company's pattern recognition products
based on letters and numbers (OCR).
Kappa offers the following products and services:
1) System to control vehicle and pedestrian access in condominiums.
2) System to manage rotation system parking.
3) System of vehicle recognition for the cross-referencing of data such as tax payments or
theft, among other uses. This system on major access roads or in inspection vehicles.
4) Biometry (control of access to the workplace and restricted areas);
5) Solutions for vehicle inspection bodies, in partnership with a predetermined company.
The services provided by the company also include R&D projects to order and technical
consulting services, within the context of signal processing and pattern recognition.
Moreover, the company also sells its technology to third parties. The heart of the system,
developed for the recognition of license plates, is sold to companies interested in linking it to
their own products and services.
The software code that allows the recognition of vehicle license plates is registered in the
company’s name. And Kappa has two other patent applications under review at the INPI.
Their clients include Infraero, 55 vehicle inspection agencies and a number of condominiums,
shopping malls and parking lots.
In 2008, the company reported a turnover of between R$ 240,000 and R$ 500,000. There are
12 employees, one of whom has a PhD, while two have master's degrees, eight are graduates
or undergraduates and one is a technician.
In 2008, the company invested approximately 60% of its revenue in R&D. Since it was
founded, Kappa has received several funding contributions from public development agencies
in support of its R&D activities. This funding was in relation to five research and
development projects financed by FAPERJ. Until now, the company has not received any
funding in the form of venture capital, although it has been sounded out by some investors.
Resources present in the creation and development of the company
(i) Technological resources: In the process of creation and development of the company, the
main technological resource used was the software code developed over the course of the
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DETRAN project. This system is capable of recognizing license plates from an image and
integrating this information with other databases. Technology is registered with the INPI and
is owned by Kappa.
(ii) Human resources: Kappa has highly skilled human resources. The professor who is one of
the owners has had a long career in academia and the armed forces, which facilitates the
recruitment and training of human resources with expertise in software and security.
(iii) Organizational resources: This was the biggest bottleneck faced by the company in the
early days, when the company wanted to position itself as a product (access control systems)
supplier. Kappa had difficulty in effectively organizing the processes of installation and
support of its technological solutions, since the prospective clients are quite geographically
dispersed.
(iv) Financial resources: Since it was founded, the company has had several contributions to
its funding from public agencies, especially FAPERJ. These resources have helped the
company to develop innovative solutions. However, the company lacks investment in the
commercial, management and support areas.
(v) Capital resources: The background of the entrepreneurs is mostly academic. The professor
who is one of the owners is a former military man and has a wide network of contacts in the
security field. This network helps the company to get introductions, in the market, and with
technological solutions in this area.
The business model adopted by the company
The business model adopted by Kappa initially envisaged a role as a supplier of monitoring
systems and access control for vehicles in parking lots, shopping malls and vehicle inspection
bodies. However, in the first year of operation, the entrepreneurs found it hard to sustain this
position, mainly due to the lack of infrastructure for the services of installation and systems
support.
With the maturing of the business model, the entrepreneurs decided to focus their activities on
establishing partnerships with established companies that were already active in the market
and could incorporate the systems developed by Kappa in their products and services. With
this new positioning, Kappa was able to gradually increase its sales.
Currently, the company sells products, provides services and serves as a technology platform
in situations where it sells its license plate recognition software to other developers interested
in incorporating this technology in the products and services they are developing.
Kappa has acted as a bridge between the research carried out in the academic sphere and
companies operating in the demanding market for new technology.
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ANALYSIS AND CONCLUSIONS
The proposed conceptual model has proved very useful to our analysis. The combined use of
the resource-based view with the perspective of the business model adopted by the companies
has revealed nuances that had not been explored in earlier works found in leading specialized
publications.
With regard to the background, the five cases proved to be quite homogeneous. In two cases,
Alpha and Delta, the opportunity to create the business came from the technological services
that were provided to companies by the laboratory. In the other three cases, the companies
arose from research projects developed at the academic laboratories where the companies
originated. The projects carried out at the laboratories relied mainly on public funds. In three
cases, Gamma, Delta and Kappa, there was no direct involvement by the professors in
creating the company.
In the five cases studied, one could see that the companies were created using technological,
human and physical resources inherited from the parent organization. Furthermore, they also
inherited capital resources that are mostly related to the academic environment. The
companies then sought to broaden out from this initial resource base, obtaining additional
financial resources and developing their organizational resources to permit the structured
growth of the business.
The organizational resources relating to efficient and scaleable production methods,
certification, the distribution network and technical assistance proved to be the most difficult
to develop at the companies studied. The analysis over the six-year period showed that the
companies are very concerned about obtaining the financial resources that will enable them to
develop the other resources. The main source of funding for these companies is the
government, in the form of grants (research grants). None of the companies obtained
resources through borrowing and only one of them received an injection of venture capital.
Analysis of the successive fundraising projects drawn up by these companies showed that
these projects were focused on technological development and not on placing technology in
the market. Accordingly, the profile of the financial resources obtained by the companies
merely reinforced the resources that were already available in their original academic
environment: technological resources and human ones with a technical focus. This brings us
back to the business model adopted by the companies studied. In all five cases, the companies
found it easy to adopt a business model similar to the one adopted at their original research
laboratories: a business model aimed at providing customized services dedicated to research
and development on demand.
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It was possible to observe a pattern in the evolution of the business models adopted by the
companies. First, in all of them there were constant adjustments to make the operations more
profitable and scaleable. Over the six years of the study, four of the five companies underwent
structural change in their business models. These processes of change are similar to those of
companies using a prospector strategy, as described by Druilhe & Garsney (2004), and
companies that are in transition, described by Hairman & Clarysse (2004).
The companies Beta, Gamma and Kappa started their operations with the clear intention of
adopting a business model centered on product, but in none of the three cases did the strategy
prove to be feasible. Although the companies Alpha and Delta did not start their operations
with this focus, at some point in their development they tried, futilely, to adopt a business
model focused exclusively on supplying a product. Our analysis of the five companies
showed that they sought hybrid business models focused above all on providing services.
Figure 3, below, shows the evolutionary dynamic of the five companies’ business models.
Figure 3 – Evolution of the business models of the companies studied
PRODUCT
Gamma
Beta
Kappa
Alpha
Delta
SERVICE
TECHNOLOGY
ASSET
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There was a clear notion among the companies studied that the business model focused on a
product is the most scaleable, and they therefore tried to migrate to this business model. On
the other hand, the companies stated that the business model focused on a product involves
much greater investment and building a quite different resource base to that required for
business models focused on services or technology assets. The business model focused on
technology assets is also scaleable, with companies incorporating its technologies in the
products and services of third parties. The intellectual property rights over the technology are
critical to this business model. None of the five companies studied showed confidence in the
ability of the patent system to protect their technologies.
Our analysis sought to find relationships between the resources present in the process of
creation and development of the enterprises studied and the business models adopted during
their development. In the five cases studied, the entrepreneurs were fully aware that it is very
difficult for a business to grow when it is focused on providing customized services. These
services are not scaleable, because they involve highly specialized human resources that are
not readily available in the market.
In the five cases studied, the entrepreneurs were clearly interested in growth and there was the
notion that growth entailed adopting a business model focused on scaleable products.
However, none of the five companies was successful in adopting a business model focused on
a product.
Analysis of the five cases studied showed that the resource base required for the adoption of a
business model centered on the supplying of a product is quite different from that required for
the provision of specialized services. For the business model focused on providing specialized
services, the necessary resource base is very similar to that found in academia, with highly
qualified human resources and cutting-edge technology. In contrast, the resources necessary
for adopting a product focused bu