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Managing Innovation and Restructuring for Jobs and Prosperity

King Saud University, Riyadh, September 2012 Thomas Andersson


The world over, developed, emerging and developing economies experience a crisis of how to generate new jobs and to find a way forward toward enabling a sustainable economic recovery. Grappling with an environment of financial turbulence and genuine uncertainty regarding the next stage of the cycle, however, economies are grappling with long term structural issues. These are not new but that have been with us for at least a couple of decades. At this point, however, they are taking on a new sense of urgency. Large established companies are of paramount importance for international trade and investment and they are also responsible for the build of research and development (R&D) in those economies that invest extensively in new knowledge creation. These firms also display high productivity rates and the profits they generate are followed with keen interest in financial markets. At the same time, these firms are subjected to fierce competition and, in order to maintain their positions, they are steadily hunting for new sources of rationalisation, including shedding of workers so as to make those who stay on increasingly efficient. Whereas the largescale industrial sector thus ceased to serve as a source of new jobs many years ago, this trend has intensified in recent years and spread to the service sector, following the acceleration of technical progress and accompanying needs of restricting at high speed ((Brynjolfsson and McAfee , 2011; Andersson, 2012). Likewise, the public sector cannot lead any sustainable expansion of new jobs, as its operations generally need to be financed through tax revenue and there is a tendency to crowd out private sector opportunities for enterprise development and jobs. Against this backdrop, new business start-ups and growth in small- and medium-sized enterprises1 offers the main alternative. In the vast majority of countries, SMEs account for a growing share of employment. In many regions they act as the only remaining viable channel for building a sustainable dynamic economy as big business internationalises and becomes more footloose across many activities. They are up against dire challenges, however. Unemployment numbers are on the rise in many countries, with particularly youth unemployment reaching dramatic levels. Spain leads the pack in this respect, with youth unemployment estimated at 50 percent. A number of other countries spanning South Europe, the Middle East, North Africa and
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The OECD defines SMEs as having less than 250 employees, whereas micro firms have less than 10 and small firms less than 50.

Latin America, are now recording unemployment levels above 20 percent. In South Asia and Africa it is hard for anyone to afford to be unemployed and the statistics get shaky, but underemployment of the work force, notably of the young, is a widespread phenomenon. Further, whereas life in a young or a small company typically remains less secure than that in a big established firm, large companies not only experience finite life cycles as well but the tendency today is for those cycles to grow shorter. Career prospects in a large company are crucially shaped by the values and priorities of superiors, as well as require constant consideration to peer pressure. The sense of security in a big firm is thus, in part, illusory. The same applies to work in the public sector, and even more so once that too is subjected to scrutiny and evaluation of its results, which inevitably need to happen. Those concerned with the sharpening jobs challenge needs to shift attention to self-employment and job creation in the private sector, including conditions for start-ups and expansion of SMEs. Entrepreneurship does not only promote employment and serve as an engine for economic growth; it also offers new dynamic employment perspectives. A change in attitudes and perceptions of new options for professional life, such as greater appreciation of self-employment and private sector employment, is crucially important also when it comes to building a sustainable knowledge economy. Yet, on the whole, SMEs are more vulnerable than large enterprises. They fall prey to liquidity problems more easily, partly because they have weaker bargaining power than large firms, and may in fact be totally at their mercy in jurisdictional systems that lack orderly dispute resolution mechanisms. They invest less in R&D, and their processes for competency upgrading may be problematic. With regard to information and communications technology (ICT), the dominant position of incumbent vendors coupled with a lack of technical skills may drive up costs and result in sub-standard support services for SMEs. Likewise, SMEs may not be able to afford the time and effort to identify educational or training programmes relevant to their requirements, though there are generally few providers that meet their special needs. What we refer to as SMEs are a markedly heterogeneous group of firms. For instance, just like the individuals entrepreneurs who start a business are driven by varying objectives, the options and behaviours of SMEs will vary too. One can distinguish between necessity-based survival businesses; lifestyle businesses, scalable start-ups, buyable start-ups and social entrepreneur ventures to name a few. The Global Entrepreneurship Monitor (GEM, 2012) report notes that systematic differences emanate from the entrepreneurs level of education (whether he or she starts from scratch or from a university or established business platform), age, gender and access to mentorship, financial resources and supportive business networks. There is further a difference between start-ups that depend heavily on the credentials and capabilities of the founding entrepreneur, and a large community of more mature SMEs that are more about business-as-usual. Differences exist between technology-based and service-based SMEs, between those that are internationalising and those with a primarily local orientation, and so on. A limited proportion of SMEs can be characterised as high-tech, while an even smaller fraction of start-ups (not synonymous with the high-tech category) can be referred to as gazelles who actually achieved rapid growth.

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Compared to large firms, however, many SMEs harness distinct benefits. They tend to enjoy relatively low overheads, have less costs embedded in existing activities, be less constrained by multiple stakeholder interests and, therefore, they are often more flexible than large firms. The advance of ICT presents challenges but also offers SMEs new ways and means to access markets and intelligence, and also to engage in new kinds of business networks and collaboration where size is less of a prerequisite. For any firms, big as well as small, success in the long term is critically about constant renewal and innovation. Again, large firms have more resources to invest in intelligence and research activities. As they establish themselves in particular niches, they tend to innovate by way of developing variants of their core products. They may, for instance, create new products for sale to new customers in new markets (e.g. Google and Android). On the other hand, changes in customer tastes, new technologies, legislation, new competitors, etc. leverage the scope for disruptive innovation as well. Large businesses almost invariably develop a culture of staying in line, partly reflecting their specialisation (their ultimate source of strength), and thus have a tendency to adopt an entrenched culture that makes disruptive innovation extremely difficult to execute (Andersson and Djeflat, 2012). SMEs are, in a sense, not there yet. With a greater dependency on learning-by-doing, they will generally require their staff to handle more multi-task assignments as well as offer a larger window for experimentation and trying out what is new. On that basis, SMEs may, despite their relative lack of resources, enjoy an advantage in being more nimble and flexible than larger entities. In many industries, corporate directors of big business compensate for this state of affairs by staying alert to opportunities to acquire smaller innovative companies (cf., Buyable start-ups). The popularity of open innovation is also underpinned by such sentiments in large firms. Without the efforts and the risks assumed by individual entrepreneurs, however, there will be no new business enterprises, and any job creation strategy will stall. It is worth reflecting on what is the limiting factor here. Where the availability of entrepreneurial capacity exceeds the opportunities, unfulfilled expectations discourage even an otherwise positive attitude towards entrepreneurship. Similarly, entrepreneurial opportunities in excess of capacity will not generate commercial outcomes (see Figure 1). Both imbalances depress the level of entrepreneurial activity. Consequently, the growth of entrepreneurship is the product of a three-pronged strategy: Developing entrepreneurial capacity; Cultivating and detecting entrepreneurial opportunities; and Attaining an equilibrium encompassing a higher level of both entrepreneurial capacity and opportunities from the creation of entrepreneurial growth companies.

Creativity in business involves the generation of new ideas that are converted into economic activity. Hence, training that serves to generate creative thinking is a must, but also needs to be accompanied by a strong culture of commercialisation. If a new thought has been developed, in
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order to test the market it has to be validated. Only when a prototype has been created can the competitive environment be assessed, the product tested, feedback obtained and used to refine its properties and a business plan tightly constructed and executed when the new entrepreneur is ready to seek outside investors. The process fostering entrepreneurship must start early. On the question whether an entrepreneur is borne or grown, there is no absolute answer; personal traits matter. Still, any human being will have his or her curiosity, imagination, team-working ability, and judgement and willingness when and how to experiment and assume risk, hugely impacted during childhood and through primary school. Then in secondary school, and even more at university level, when professional skills are attained, the degree to which entrepreneurial skills, mindset and also practical conditions that can help enable entrepreneurship form part of the picture will influence the choice of career paths and avenues in life. The path of an entrepreneur is seldom easy, but it can lead to path breaking results, and society needs that some talented and highly motivated individuals choose that path. Figure 1: Matching Entrepreneurial Capacity and Entrepreneurial Opportunities

Source: Andersson et al. (2010). In practice, SMEs and entrepreneurs are constrained or grounded not by individual hurdles but by the combined weight of a number of factors. Limitations in the strategy or skills of the business owner, or weaknesses in the business idea and plan, may be aggravated by regulatory and bureaucratic impediments, weaknesses in contractual conditions hindering orderly payment of invoices, or other hurdles that sap the energy of the individual or the organisation. It may be difficult to discern what constitutes an unfair and costly impediment and what is merely indicative of normal market competition.

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Experience worldwide demonstrates the difficulty of improving the situation for SMEs and entrepreneurship through piecemeal efforts. Under no circumstances can government agencies boost entrepreneurship and SME growth by just giving money away to entrepreneurs who want it. Any such policy is bound to end in failure. Enterprise creation or development is not a jobs programme for the unemployed or local populace. Accepting this state of facts is of prime importance for governments around the world to find a way forward to addressing their key societal challenges, which are now more acute that ever in regions as disparate as the European Union, the Middle East and North Africa, Latin America and South Saharan Africa. They also matter greatly for generating more high-value added jobs and more sustainable enterprises in South and East Asia. Because of the lack of mobility between public and private life, policymakers generally have too little practical experience and real understanding of the factors that matter most crucially to the business environment, and especially for young and small enterprises. Those factors include the regulatory issues and red tape that consume the time and energy of the entrepreneur, the conditions that influence attitudes to risk, success and failure, the level of skills and access to experience (mentorship and coaching) for entrepreneurs, the availability of workers with relevant skills and the mindset to innovate on the job, the extent and quality of opportunities for training and skills upgrading, access to seed and venture capital, business angel activity, supportive specialist services, and so forth. Governments cannot command these factors, but they need to get them into the centre of their radar screen, and identity the ways and means through which they can work together with other stakeholders to help enable they fall into place. References Andersson, T. (2012), Fulfilling the potential of ICT through SMEs, World SME News, by World Association for Small and Medium Enterprises, March, p. 5-6. Andersson, T., Curley, M., and Formica, P. (2010), Knowledge-Based Entrepreneurship, the Driving Forces behind Social and Economic Transformation. Springer, New York. Andersson, T. and Djeflat, A. (2012), Addressing Critical Challenges for the Middle East: CapacityBuilding in Research, Innovation, and Entrepreneurship, Springer, New York, forthcoming. Brynjolfsson, E. and McAfee, A. (2011), Race Against the Machine: How the Digital Revolution Is Accelerating Innovating, Driving Productivity, and Irreversibly Transforming Employment and the Economy, Digital Frontier Press, Lexington. Global Entrepreneurship Monitor (2012), 2011 Global Report, Babson College, Boston.

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