How governments can redesign support for entrepreneurs after COVID-19

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Johan Bjurman Bergman, Consultant, World Bank and Atlantic Council & Daniel Dart, Founder, CEO, and Managing Partner, of Dart Capital & Co.

• In developing economies, stimulating growth through entrepreneurship will be crucial to address rising unemployment caused by the COVID-19 pandemic;
• A forthcoming study suggests governments in these markets can redesign their policies aimed at stimulating entrepreneurship, starting with identifying the needs of local entrepreneurs;
• Governments can act as “connectors, evaluators and interlocutors” to support local entrepreneurs.

In the wake of COVID-19, most governments face unprecedented unemployment. This is particularly challenging in developing economies, which lack robust social safety nets and where unemployment and poverty were pronounced before the pandemic. This situation can potentially hasten ‘brain drain’ and increase the appeal of joining extremist groups.

Since small firms create the majority of jobs in developing economies, stimulating growth through entrepreneurship is crucial to address these issues. Even before COVID-19, however, few developing nations were successful in this.

Between May and August 2020, we undertook a study to explore ways to address these government shortcomings. It examined interventions to stimulate entrepreneurship in frontier and emerging markets with the concept of “entrepreneurial communities” at the centre (an expansion of Brad Feld’s thinking on startup communities in the US). Frontier markets are more established than LDCs (least developed countries) but not as established as emerging markets, possibly because of their smaller size or greater investment risk.

The results suggest that governments have an immediate opportunity to use the reset post-COVID-19 to course-correct their entrepreneurship development efforts and design policy that stimulates activity from the bottom up. To do so, they must begin by identifying the needs of local entrepreneurs. https://data.worldbank.org/share/widget?indicators=SL.UEM.TOTL.ZS

Using those insights, states should develop support efforts and goals aligned with available resources and capacity. Finally, by using their unique position to rally international support, while keeping the ear to the ground at home, governments can promote sustainable economic development without stifling innovation.

Three areas of focus in redesigning entrepreneurship support

Our study pinpoints a dilemma that is particularly pronounced in developing markets. On the one hand, sustainable economic growth and job creation requires a strong entrepreneurial community; on the other, there are no guidelines for creating these communities of learning and experimentation in a developing market context. Under pressure to show results to leaders and donors in resource-constrained environments, officials tasked with entrepreneurship promotion may be compelled to adopt successful enterprise models and interventions from abroad. While results may show improvements in top-line growth metrics, sustainable, pro-poor job creation may be elusive.

Our study particularly cautions against measuring entrepreneurial activity solely using donor-defined metrics as they may not correctly reflect local needs and realities. While recognizing the benefit of working with donors, respondents urged frontier market officials to define entrepreneurship in ways that fit local communities’ complex needs rather than modelling local initiatives on one-dimensional metrics and external demands. This implies carefully selecting and applying global insights based on local needs, obstacles and capacity for implementation.

Transitioning from externally designed interventions to locally adapted ones is challenging and building both domestic and international consensus may be necessary. To increase the chances of success in this initial phase, our study recommends that officials looking to support entrepreneurship for sustainable development should focus on three areas:

1. Critically analyse what types of entrepreneurship best fit the local context

This involves identifying local constraints for growth, including political factors, and what activities maximize the local comparative advantage. Take stock of the resources the government can dedicate to entrepreneurial development, including the legal, financial and labour market reforms that could be enacted. The result of such an analysis should be an in-depth understanding of the local entrepreneurial landscape and its prospects of contributing to distributed growth.

2. Prioritize interventions that improve entrepreneurs’ access to talent, markets and capital

These three areas are binding constraints on growth in developing markets. Interventions that address them should be informed by the insights from step one. To build credibility, officials should prioritize the achievement of realistic goals rather than risk failure through overly ambitious targets.

3. Create clear expectations with the entrepreneurial community

A realistic and measurable plan with a clear timeline created in collaboration with entrepreneurs can become a centrepiece for a closer relationship between the government and entrepreneurial communities, provided it gives both parties incentives for adherence. Any government engagement must involve a long-term commitment to create stability for the entrepreneurial community to grow. Our study recommends devising a plan with three distinct time horizons.

Government roles in implementing interventions

To implement their locally adapted strategy, government authorities in frontier markets should use their unique position to serve local entrepreneurs in three ways:

Connector: Frontier markets tend to be less integrated with global markets than their emerging or industrialized peers. As such, government officials should use their international exposure to connect local entrepreneurial communities to international systems. To do so, officials should identify the needs of local entrepreneurs which cannot be met locally and match these with international partners. Officials should strive to make support from international partners “win-win” with each party on an equal footing.

Evaluator: It is essential that governments continuously assess and tweak their interventions. To learn and improve, governments must heed both failures and successes. This can prove challenging in countries where discussing failure is taboo. Entrepreneurship promotion in such locations should challenge these norms by showing citizens that failure is a necessary part of success.

Interlocutor: Governments must maintain a continuous dialogue with their entrepreneurial communities through recurring meetings with community leaders and public events. Governments can build a mutually beneficial partnership with entrepreneurial communities by showing them that they are as invested in facilitating their success as they are in addressing other policy challenges.

Towards a post-COVID partnership between governments and entrepreneurs

A government’s role is not to build a system and they cannot shape entrepreneurial communities overnight. However, in the face of a post-COVID-19 recession and record unemployment, authorities in frontier markets must renew their commitment to stimulating entrepreneurial activity. They should do so by building their capacity to design, implement and monitor policies tailored to the needs of local entrepreneurs and the availability of resources. https://www.youtube.com/embed/eebjNXUTNUQ?enablejsapi=1&wmode=transparent

Officials should be empowered to develop policy that improves SMEs’ access to markets, talent and finance. Governments should also step in to act as patient, long-term local partners for entrepreneurial communities when the private sector is unwilling or unable. To drive long-term growth, states should simultaneously tackle corruption, remove market-distorting interventions and invest in a reliable electricity supply.

By partnering with entrepreneurial systems, governments can enlist driven and innovative citizens to achieve sustainable growth that creates jobs. As the world emerges from the pandemic, the potential rewards for governments that succeed have never been greater.

About the study

Between May and July 2020, in the middle of the COVID-19 pandemic, our team of entrepreneurs, policymakers, and economists interviewed over 40 experts with experience in building entrepreneurial communities, venture capital. They included SME authorities, and entrepreneurs from Palestine, Jordan, Israel, the GCC, sub-Saharan Africa, and North Africa. This work was complemented by a literature review of studies on entrepreneurship support.

The study, Leading without Controlling: Initial Access Points for Development of Entrepreneurial Communities in Frontier Markets, is currently under publication.