Description
Within this brief illustration define can government policies promote entrepreneurship evidence from costa rica, uruguay.
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Working Paper Series
CAN GOVERNMENT POLICIES PROMOTE ENTREPRENEURSHIP?
EVIDENCE FROM COSTA RICA, URUGUAY AND CHILE
Jennifer W. Spencer
School of Business and Public Management
The George Washington University
2023 G Street NW Lisner Hall 230
Washington, DC 20052
Tel: 202-994-9858
Fax: 202-994-7422
[email protected]
Carolina Gómez
Department of Management and International Business
College of Business Administration
Florida International University
University Park
Miami, FL 33199
[email protected]
2033 K STREET, N.W. ? SUITE 230 ? WASHINGTON, DC 20052
TEL (202) 994-5236 ? FAX (202) 994-5225 ? E-MAIL: [email protected]
The Center for Latin
American Issues
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CAN GOVERNMENT POLICIES PROMOTE ENTREPRENEURSHIP?
EVIDENCE FROM COSTA RICA, URUGUAY AND CHILE
EXECUTIVE SUMMARY
Governments around the world have begun to look to small- and medium-sized
enterprises (SMEs) as sources of employment and economic growth for their domestic
economies. However, neither public policy makers nor researchers have a solid
understanding of which government policies are most likely to be most effective. We
examined government policies towards entrepreneurship in three Latin American countries to
identify the programs that appeared to the most promising avenues for success.
Governments in each country implemented three types of policies toward
entrepreneurship. They improved their regulatory environment for entrepreneurship by
offering SMEs financial assistance and simplifying bureaucratic rules. They improved their
cognitive environment for entrepreneurship by offering programs to teach would-be
entrepreneurs the knowledge and skills necessary to run a small enterprise. And they
strengthened their normative environment for entrepreneurship by working to improve
society’s perception of the entrepreneurial sector.
We conclude that the most effective policies were those that targeted all three of these
dimensions. In particular, programs that brought SMEs together into a community of
entrepreneurs helped them gain market power, obtain economies of scale, share knowledge,
and achieve a range of other advantages. While specific policy prescriptions depend on a
country’s circumstances, we recommend that public policy makers and small business owners
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consider forming communities of entrepreneurs to further their national and individual
interests.
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In 1993, several small wine producers in the Maule region of Chile were
struggling for survival. They knew that some of the most successful wine
producers in the world were growing large enough to achieve scale economies
and devote substantial resources to process innovations and global marketing
strategies. Unfortunately, these small Chilean firms lacked the resources to
match this approach, and their own technology was becoming more obsolete by
the day. These entrepreneurs lacked an understanding of the global market for
wine, had little experience with managing growing business concerns, and were
becoming increasingly afraid that they might begin to lose even the small level
of export sales that they had already achieved, valued at approximately US
$83,000 a year. With such a small sales volume and so many global
competitors, these winemakers had little chance of obtaining bank loans to
improve their process technologies, build larger vineyards, or undertake strong
marketing efforts on the world market (Cabrera Gajardo, 2001).
Firms in a wide range of industries and countries face dilemmas similar to the
circumstances of these Chilean wine producers. National governments often profess an
interest in aiding these small entrepreneurs, citing small firms’ success as a source of
economic development for their domestic economies. However, it is unclear what policies
governments can implement that will truly improve the chances that these small enterprises
have to survive and grow into thriving businesses. In this paper, we explore how government
policies can contribute to national environments that promote small business
entrepreneurship. We provide examples of programs that have been introduced in three Latin
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American countries -- Costa Rica, Uruguay, and Chile -- to illustrate how both public and
private programs have contributed to the performance of local entrepreneurs.
Policy makers have recognized that small- and medium-sized enterprises (SMEs) play
a critical economic role, employing more than half of the working population in each of these
three countries. Even so, these small firms display high mortality rates and rarely grow into
thriving, innovative businesses. Government officials have made tacit or explicit decisions
concerning policies toward their entrepreneurial sector. An understanding of the effects of
these policies on domestic entrepreneurship holds clear relevance for government officials,
executives of start- up firms, and owners of small businesses. In addition, managers of large
enterprises often wish to partner with domestic entrepreneurial ventures, and multinational
enterprises often prefer to locate in countries in which entrepreneurial firms will emerge to
provide a strong infrastructure by marketing supporting goods and services. Therefore, even
managers of larger, established companies have an interest in understanding how public
policies influence the strategies and performance of entrepreneurial ventures.
NATIONAL ENVIRONMENTS FOR ENTREPRENEURSHIP
The volume and success of the entrepreneurial activity in a country depends on the
independent economic decisions of each of its residents. The probability that residents will
participate in entrepreneurial ventures is based on their individual motivation to become
entrepreneurs, ability to undertake entrepreneurial activities, and perceptions about the
opportunities that are available to them (Gnyawali & Fogel, 1994). National environments
can influence each of these factors. Government policies that provide entrepreneurs with
financial assistance via subsidies, preferential procurement, or favorable tax policies (we call
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this a strong regulatory environment for entrepreneurship) increase the opportunities
available for new ventures and small businesses. In countries in which business education
and training programs are prevalent and residents understand how to found and manage a new
business (we call this a strong cognitive environment for entrepreneurship), individuals are
more likely to hold the ability to successfully manage their own company. Finally, in
countries in which entrepreneurial activity is valued and admired (we call this a strong
normativeenvironment for entrepreneurship), more individuals are likely to be motivated to
found a new business or manage a small business. These regulatory, cognitive, and normative
environments form three pillars of support for a country’s entrepreneurial activities (Busenitz,
Gomez & Spencer, 2000; Kostova, 1996; Scott, 1995).
Governments vary in their preferences for promoting one sector of economic activity
over another. Some governments may prefer to avoid interfering in their domestic
marketplace by prioritizing one sector over another. And a few governments may even prefer
to discourage entrepreneurship. For example, while imposing a tax on self-employment
activity in Cuba, Fidel Castro declared, “We need a tax on robbery!” reinforcing an ideology
that condemns those who put their individual interest over the interests of society (Miami
Herald, 1995).
We suggest that governments that choose to promote domestic entrepreneurial activity
will be best off if they implement policies to strengthen all three of the relevant pillars—
regulatory, cognitive, and normative. Public policies targeting the regulatory environment
can improve the opportunities available to entrepreneurs by offering small businesses
financial incentives or preferential treatment in government procurement. Governments can
strengthen the cognitive environment, and thus increase the abilities of entrepreneurs, by
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offering government-sponsored training programs or consulting services. And by improving
the normative environment for entrepreneurship -- for example, by using the bully pulpit to
sway public opinion toward an admiration of entrepreneurs -- governments can increase the
motivation of entrepreneurs.
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--------- Figure 1 About Here ----------
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The process by which a strong environment for entrepreneurship emerges in a country
is incremental and cyclical (See Figure 1). An increase in the number of small businesses in a
community will prompt new entrants or established businesses to invest in profitable ventures
that support entrepreneurship. For example, small businesses are likely to patronize
consulting services, law firms, accountants, and other business service providers who target
their services toward the entrepreneurial sector. Likewise, as the number of new ventures
increases, financing mechanisms such as venture capital and bank loans aimed at
entrepreneurs, may emerge as potentially lucrative investments for financial organizations.
Similarly, a growing entrepreneurial sector is likely to attract the attention of publishers, who
may introduce magazines targeted at entrepreneurs, and schools and universities, which may
begin offering courses and degrees in entrepreneurship. An increase in the number of
entrepreneurs in a country also gives a stronger voice to small business interest groups, and
therefore increases the chances that government officials will offer policies that promote new
business development.
And the presence of these newly established support services and government
programs, in turn, should facilitate the entry of the next generation of entrepreneurial
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ventures. Therefore, countries that are able to provide an impetus for entrepreneurship in
their domestic economies may be able to place themselves on a trajectory of increasing small
business growth over time.
NATIONAL ENVIRONMENTS FOR ENTREPRENEURSHIP IN
COSTA RICA, URUGUAY, AND CHILE
The national environments of Costa Rica, Uruguay, and Chile are similar along
several dimensions. Each of these Latin American countries displays similar cultural values.
All are relatively low on individualism, meaning that people in these countries value the
interest of their group -- particularly their family-- over their individual needs. Each country
scores relatively high on uncertainty avoidance, meaning that individuals in these cultures
prefer to avoid ambiguous situations and have a relatively low tolerance for risk. Chile and
Uruguay display high power distance, meaning that people in these cultures tolerate the fact
that some people in an organization or in society, in general, hold power, while others do not.
However, power distance appears to be smaller in Costa Rica.
Historically, the government of each country has looked to the development of large
enterprises and foreign direct investment as its primary source of economic growth, often
ignoring the entrepreneurial sector. Similarly, individuals in each of the countries have
traditionally not valued employment in start- up ventures or small firms. In fact, economic
experts in local Chambers of Commerce have noted that local residents historically preferred
to work for a department or agency of the government rather than for a private business.
More recently, as governments have begun to play a smaller role in the economy, individuals
have displayed a preference for working in larger, established corporations. Although
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residents are increasingly aware of the importance of the SME sector, experts report that most
residents lack a real understanding of how to successfully manage an entrepreneurial venture.
Experts have also noted that entrepreneurs have traditionally had a poor image, with a
reputation for corruption and for pursuing their own profit at the expense of society.
Therefore, while many programs’ most immediate objective lies in helping entrepreneurs
overcome tangible hurdles to founding and managing a business, their longer term goal rests
in encouraging the local culture to become more receptive to entrepreneurial activity.
Despite similarities in the cultural and historical conditions for entrepreneurship in
Costa Rica, Uruguay, and Chile, each of the countries’ entrepreneurial environments is
unique. The Costa Rican government has only recently started to promote domestic
entrepreneurship. The government of Uruguay began programs to promote entrepreneurship
in the early 1990s, and has relied on the efforts of business organizations such as Chambers of
Commerce for some of their most important programs. Finally, although its focus on
promoting entrepreneurship is fairly recent, Chile offers perhaps the most extensive collection
of programs of all.
Costa Rica
Of the three countries studied, Costa Rica has the newest focus on promoting small
business entrepreneurship. The Costa Rican government has pursued export- led development
for the last two decades by providing incentives to firms that export products and services.
The biggest exporters in Costa Rica have generally been large multinational enterprises with
foreign investment in the country. As a result, for nearly twenty years Costa Rica has
maintained one of the most thriving foreign trade zones in Latin America (Arino, 2001;
Monge, 1998). At the same time, the government is aware that the majority of Costa Ricans
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are employed by SMEs (Arino, 2001). In fact, estimates of SME employment go as high as
90% of the workforce. In addition, the Costa Rican government has made a commitment to
the World Trade Organization to abandon export-related subsidies and assistance by 2003,
placing smaller businesses in a more prominent position within the economy. Therefore, the
government is becoming increasingly interested in promoting small and new businesses
within Costa Rica.
Costa Rica does not maintain a specific government agency dedicated to promoting
SMEs, but the interests of small businesses lie in the domain of the Ministry of Economy,
Industry and Commerce. This ministry works with private business associations to offer
industry fairs and training programs for small business owners. Entrepreneurs can access free
business training on topics ranging from identifying and evaluating business opportunities to
more specific topics such as accounting, marketing, capital budgeting, and sales. Some
business associations also offer training at a cost. For example, the Center for Business
Incubators (partly sponsored by the Technological Institute of Costa Rica, a public
university), which fosters knowledge exchange and development of high technology start-ups,
offers its own training programs for entrepreneurs. The National Bank of Costa Rica has
agreed to analyze and consider financing the businesses that develop in this incubator.
Although the Ministry of Economy, Industry and Commerce does not offer its own
financing programs for SMEs, multilateral development banks and state-owned banks provide
credit lines with preferential interest rates for smaller businesses. Most policies toward SMEs
focus on simplifying bureaucratic hurdles and providing business owners with clear
information regarding the logistics of founding and managing a new business. The newly
written Manual for the Investor spells out the steps, paperwork, and logistics of getting a
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business started, providing entrepreneurs with extensive information about the bureaucratic
process of founding a new company. The government has also tried to simplify the process of
business registration. This is an ongoing process by which the government hopes to identify,
revise, and sometimes eliminate, the paperwork and procedures that are most burdensome to
entrepreneurs. In addition, tax regulations allow entrepreneurs to submit less paperwork and
maintain simpler records than are required by larger businesses.
The Ministry of Economy, Industry and Commerce has also created an internet-based
information program called the System of Information for Costa Rican Enterprises (linked
through their website www.meic.go.cr, El Sistema de Información Empresarial Costarricense,
www.seic.go.cr). The objective of this website is to simplify and expedite the distribution of
information to the industrial sector to improve entrepreneurs’ understanding of the domestic
business environment. Ultimately, this system is expected to provide entrepreneurs with all
the information they need to establish and operate a business within Costa Rica. Currently,
the website provides information on credit lines, industry fairs, training programs, exporting
and importing opportunities, trade law, government statistics, links to domestic and foreign
business associations, and a link to the Manual for the Investor.
Uruguay
Historically, as one of South America’s highest taxed countries, Uruguay has had a
hard time fostering small business activity. One analyst concluded that excessive government
intervention and high inflation have inhibited entrepreneurs from growing into lasting,
innovative enterprises, and have instead promoted the establishment of smaller, informal
micro-enterprises that barely achieve subsistence (Dana, 1997).
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To address this weakness, the government of Uruguay has developed some programs
intended to promote domestic entrepreneurial activity. The country launched its primary
program to promote entrepreneurial activity, called DINAPYME (National Agency of Arts
and Crafts and SMEs), in 1990. DINAPYME’s objective lies in coordinating activities to
promote micro-, small- and medium-sized enterprises that have fewer than 99 employees,
annual sales of less than $5,000,000 and assets under $350,000. More than 90% of
organizations in Uruguay’s private sector fit this classification. However, according to
economic experts, the mortality of these SMEs is quite high (Benavente, 2001).
DINAPYME, itself, does not provide financing. However, it does offer consulting
services and training intended to help entrepreneurs in developing business plans, making
presentations to investors and lenders, and presenting financial data appropriately.
DINAPYME develops many of its programs in close consultation with the private
sector. The largest effort is called Red Propymes (The Network for Small and Medium
Enterprises). This network integrates organizations that share the objective of promoting
micro-, small- and medium-sized enterprises in Uruguay, including DINAPYME, chambers
of commerce, banks, and other private and semi- governmental organizations. Red Propymes
provides training for entrepreneurs, assists businesses’ efforts to reach new markets and
obtain new technology, expands firms’ abilities to obtain capital, improves firms’ access to
information, serves as an incubator of ideas, and even increases the environmental conscience
of budding entrepreneurs. For example, the network provides an award to the most
innovative SMEs according to an annual theme such as environmentalism, employment-
creation, or globalization, and works to improve the negative image of SMEs by conducting
fairs and expos around the country.
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Each member of Red Propymes also develops its own programs directed toward
SMEs. For example, Uruguay’s chamber of commerce launched a pilot program called the
Industry Sector Nucleus program, with financial assistance from Germany’s Agency for
Cooperation (GTZ). This program is aimed at creating a nucleus of companies in a particular
industry or regional area. By working together with a specialized consultant, these firms are
better able to exploit synergies and overcome the difficulties inherent in being small. For
example, thirteen butchers in a neighborhood of Uruguay’s capital, Montevideo, joined forces
to buy distribution truck and freezer. By working together, these entrepreneurs saved money
on their capital investments and were able to gain leverage over their suppliers by buying in
volume. In one year, the Industry Sector Nucleus program constructed 25 nuclei representing
over 300 companies. Many of the participating SMEs have expanded their operations, and
none have reduced personnel. Due to the program’s success in maintaining and often
increasing employment, even in the midst of an economic recession, the International Labor
Organization as agreed to sponsor and finance an extension of this program into the future.
Another Red Propymes member, the Technology Laboratory of Uruguay (LATU), is a
quasi- governmental organization that organizes industry fairs, assists with quality certification
programs, and operates a business incubator for SMEs in the information and communication
sectors. Although this incubator does not provide SMEs with direct financial support it does
provide administrative support, business plan assistance, training, and other services to help
new firms within the designated sectors.
In addition to the DYNAPYME program, Uruguay’s tax system offers some basic
assistance; SMEs qualify for tax breaks not available to the country’s largest businesses, and
micro enterprises are altogether exempt from some taxes. In addition, a new program allows
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entrepreneurs to pay a small social security tax so that they qualify for government retirement
benefits. Since these benefits are fairly extensive in Uruguay, this new tax provision is
expected to benefit entrepreneurs substantially.
Chile
Finally, of the three countries, Chile has implemented the most aggressive policies
towards entrepreneurship. Chile’s National Training and Employment Service (SENCE)
offers tax benefits to all Chilean firms who develop and train their employees, with special
benefits accruing to smaller organizations whose employees tend to earn lower salaries.
SENCE also helps SMEs finance training programs offered by other business associations.
In addition, Chile maintains two programs aimed at promoting success in
entrepreneurial ventures. The Solidarity and Social Investment Fund (FOSIS) directs its
efforts at self-employed individuals and micro-business, and the Corporation to Promote
Production (CORFO) maintains fairly extensive programs that facilitate the development of
small and medium-sized businesses (Segura, 2001).
The Solidarity and Social Investment Fund (FOSIS)
FOSIS was founded in 1991 with the goal of developing and financing projects that
facilitate the social development of Chile. These programs are intended to increase domestic
employment, improve Chile’s quality of life, and help individuals work their way out of
poverty. Within FOSIS is the “Program to Promote Productivity,” which assists self-
employed individuals and micro-businesses by offering training programs, as well as
providing some financing.
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Corporation to Promote Production (CORFO)
CORFO, a government-based organization founded in 1939, has historically played a
strong role in Chile’s economy. While its goals and structure have changed markedly over
time (see the text box on the next page for a description of its changing role over the last sixty
years), CORFO remains one of the most prominent organizations in Chile devoted to business
development. While its goals and structure have changed markedly over time, shifting from
an emphasis on state-run companies and the nationalization of private firms, to a focus on
privatizing these state-owned businesses, to an emphasis on promoting SMEs, CORFO
remains one of the most prominent organizations in Chile devoted to business development.
Today, one of CORFO’s main goals lies in assisting SMEs by facilitating access to financing,
promoting collective efforts among small organizations, and helping small firms identify and
employ the most modern technologies and management techniques.
CORFO provides a range of programs for SMEs. For example, CORFO offers direct
and indirect financing to help SMEs invest in fixed assets, restructure debt, and overcome
other obstacles. For example, CORFO recently announced plans to offer 100 SMEs “fast
track” loans through a streamlined evaluation process, in order to support small firms that are
struggling in the recent recession (Global News Wire, 9/26/2000).
Several of CORFO’s programs are designed to help groups of firms work together to
achieve a common goal. For example, the Program for Development of Suppliers (PDP),
attempts to increase the competitiveness of production chains by establishing relationships
between larger companies and a network of smaller suppliers. CORFO’s program of
technical assistance (FAT) will match investments made by firms or groups of firms who
employ consultants to help them improve production, finance, design, marketing, or strategic
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planning activities. CORFO is also working with private industry to create a website for
SMEs to trade products and services, establish contacts, and gain access to industry-related
services such as online training, financing, inventory auctions, and legal services (Global
News Wire, 1/8/2000).
The history of CORFO parallels the turbulent history of Chile. Early on, some of Chile's
biggest state-owned enterprises were founded under CORFO’s watch, including the national
electric company (Endesa), the national petroleum company (Enap), the national steel
company (Cap), and the national sugar company (Iansa). CORFO was also responsible for
providing credit lines, capital, and direct subsidies to many industries such as mining,
agriculture, transportation, hotels, pharmaceuticals, fishing, tires, and films. During the
socialist government of the 1960s and early 1970s, CORFO launched a new effort to create
large enterprises, such as the national telecommunications company (Entel). During this time,
CORFO also dedicated effort to nationalizing enterprises across critical sectors of Chile’s
economy.
In 1973, Chile’s economic policies shifted dramatically towards free market reforms, and
CORFO's objectives reversed themselves, focusing primarily on privatization of state-owned
enterprises such as Endesa and Entel.
With the return to a democratic government, CORFO's role was redefined once again in the
1990s. Policymakers determined that the private sector in general, and SMEs, in particular,
played a critical role in Chile's economic development. In addition, policymakers noted that
public and private sectors require very different profiles for success. Therefore, the public
sector component of CORFO’s operations was transferred to a new agency called the
Administrative System of Enterprise (Sistema Administrador de Empresas, SAE). And
CORFO was asked to focus primarily on fostering a positive environment for the
development of small and medium sized businesses in Chile.
Perhaps one of the most interesting programs started by CORFO focuses on
Associative Projects of Promotion (PROFOS). CORFO completed a pilot program in 1993,
and formally launched PROFOS in 1994. PROFOS aims to improve the competitiveness of
SMEs by fostering interaction and association between groups of small businesses operating
in similar or complementary industries. CORFO promotes the PROFOS program directly,
and also recruits members through other organizations such as chambers of commerce,
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SERCOTEC (Technical Cooperation Service), ASEXMA (Association for Manufacturing
Exporters), and many others.
The PROFOS program focuses on priority sectors such as manufacturing,
manufacturing services, tourism, fishing, arts and crafts, and agricultural industries. Figure 2
illustrates the process by which firms come together and coordinate action within the
PROFOS program. SMEs progress from acting as a set of independent organizations with
little knowledge about other participants, to a fairly cohesive co-operative that identifies
common problems and works together to tackle them.
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--------- Figure 2 About Here ----------
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Through PROFOS, five or more SMEs team up to pursue a specific objective such as
jointly purchasing capital equipment, coordinating export efforts, pursuing marketing
campaigns, or overcoming technical hurdles. CORFO provides a network manager, who
focuses on identifying appropriate members for a given PROFO, diagnosing problems, and
developing a collaborative project that can improve the performance of all member firms.
CORFO subsidizes the collaborative project for up to three years, with the government paying
70% of project costs in the first year, 60% in the second year, and 50% in the third, and
generally final, year.
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While CORFO hopes that many of the associations will sustain activity
beyond the three years of government assistance, some PROFOS are intended to be short-
lived. For example, a PROFO may well disband after it successfully completes a temporary
project such as attaining ISO 9000 certification for member firms.
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In special cases where SERCOTEC believes the investment will lead to a unique economic opportunity for Chile, it will
consider subsidizing a PROFO for up to five years
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PROFOS appears to be fairly successful. An early study provided evidence that many
of the PROFOS that had been in existence for 20 to 30 months showed signs of becoming
independent (Dini, 1993),and other data has suggested that many of these associations of
SMEs have expanded their market share and gained access to markets within Chile and
abroad (Humphrey & Hubert, 1995). For example, one PROFO of small metalworking firms
help members improve their performance and, together, these firms became regular suppliers
to the state mining company. Externally, organizations such as the Institute of Development
Studies and the United Nations have referred to PROFOS as one of the most successful
associative programs in Latin America (Tilman, Qualmann, & Weller, 2001).
Private organizations also work to assist SMEs in Chile. Many government programs
such as PROFOS are implemented in conjunction with private business associations. In
addition, associations such as Chambers of Commerce work with money provided by the
InterAmerican Development Bank, the European Union, and other foreign and multilateral
organizations, to assist entrepreneurs with market studies, logistics, and other necessary
activities.
WHICH PUBLIC POLICIES ARE MOST EFFECTIVE?
Figures 3, 4 and 5 summarize how the public policies implemented in each country
contribute to regulatory, cognitive, and normative dimensions of their environments for
entrepreneurship.
Regulatory Institutions for Entrepreneurship
Countries offering government support for entrepreneurship through tax breaks, loan
guarantees, and other regulatory programs increase the chances that residents will perceive an
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appealing business opportunity and, therefore, decide to launch their own business. For
example, Chile offers financial incentives to micro-businesses and SMEs through the FOSIS
and CORFO programs. Uruguay provides tax breaks to SMEs and offers some financing
through the Industry Sector Nucleus program, and Costa Rica provides domestic SMEs with
preferential credit lines in addition to the financial help available from the Center for Business
Incubators.
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--------- Figure 3 About Here ----------
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Providing financial resources to SMEs is one of the most popular approaches to
promoting entrepreneurship in countries around the world. For instance, financial support or
preferential treatment for entrepreneurial ventures has come in the form of government
procurement programs in Canada, tax incentives in Singapore, low interest loans and grants in
the Virgin Islands, and business development assistance in the US (Doutriaux, 1998; Dana,
1987; Phillips, 1993).
This financial support may be particularly important for Latin American
entrepreneurs, who regularly cite a lack of financing as a critical obstacle to starting a
business. For example, a study conducted by the University of Chile found that, while
PROFOS provided real benefits for SMEs, entrepreneurs still perceived a lack of financing as
their number one obstacle (Benavente, 1998).
Costa Rica has also simplified the process of starting a business and articulated
national bureaucratic requirements very clearly. This focus on bureaucratic details may be
critical for entrepreneurial growth. Research in Saint Martin, the Cayman Islands, and China
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has shown that burdensome procedural requirements may limit entrepreneurial activity, and
that uncertainty and instability in government policies may reduce entrepreneurs’ interest in
developing long-term growth strategies (Dana, 1990; Tan, 1996).
Evidence from Costa Rica, Uruguay, and Chile demonstrates some success for
programs designed to improve their regulatory environment for entrepreneurship. As an
example, Cristián Cremaschi, a vineyard manager in Chile summarized how government loan
guarantees and funding can help struggling entrepreneurs who lack the capital and collateral
often expected from market institutions. “If I had not entered PROFOS, I would never have
been able to make the investment that I did—nearly 100 million pesos, because I wouldn’t
have had the sales to make [a loan] feasible with the bank.”
Cognitive Institutions for Entrepreneurship
Programs that focus on the dissemination of management knowledge and
entrepreneurial skills focus on strengthening cognitive institutions, and this can improve the
ability of local entrepreneurs to found and maintain their own private enterprises. Costa Rica
has focused its efforts on making the steps required of entrepreneurs as widely understood as
possible by maintaining a website and publishing a manual designed to improve individuals’
understanding of the process of launching a new business. Costa Rica also offers some
training programs for entrepreneurs. Uruguay’s DINAPYME program provides consulting
services to small businesses, and Red Propymes provides training to entrepreneurs. In
addition, the Industry Sector Nucleus program helps firms work together to understand their
industry environment. Finally, Chile offers training for SMEs and micro-enterprises, and its
FOSIS and CORFO programs help firms develop the entrepreneurial skills necessary to
succeed.
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--------- Figure 4 About Here ----------
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Other countries have also emphasized the importance of strengthening cognitive
institutions. Studies in the US and Australia have pointed to the existence of business
education and management training programs, as well as the availability of assistance with
market research and other business development activities, as contributors to the
entrepreneurial skill set of a society (Pennings , 1982; Dana, 1987; Hawkins, 1993; Phillips,
1993 ).
The Center for Business Incubators in Costa Rica demonstrates the importance of
developing the cognitive skill set of entrepreneurs. The Center not only offers many
administrative services for participants, but also provides extensive training and consulting to
budding entrepreneurs. The Center has sponsored about 100 programs since 1994, resulting
in viable high technology companies such as Fortech Quimica, which markets chemical
products, and AEC Electronica, which provides technical support to the electronics sector. A
recent study found that the average SME in the incubator directly or indirectly created eight
new jobs for Costa Ricans (Centro de Incubación de Empresas. 2001).
Normative Institutions for Entrepreneurship
Finally, programs geared toward improving society’s view of entrepreneurs can
influence a country’s normative environment, and thus improve individuals’ motivations to
become entrepreneurs. Our economic experts suggested that normative institutions are
perhaps the most difficult element of the entrepreneurial environment to change, and noted
that it would take several generations to truly alter how people in a society view
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entrepreneurs. One expert pointed out that his culture tends to perceive entrepreneurs
skeptically because of years of public messages equating entrepreneurs with opportunists
(Arino, 2001).
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--------- Figure 5 About Here ----------
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All three countries are engaging in strategies aimed at changing these societal
perceptions. Costa Rica has offered fairs and expos to promote entrepreneurship. Uruguay
has sponsored awards that highlight how local entrepreneurs contribute to the objectives of
society, and has funded fairs and expos to draw attention to the entrepreneurial sector. Chile’s
community-building programs such as PROFOS strive to meet similar objectives. And
government leaders have taken up the task of promoting Chileans’ entrepreneurial spirit. The
head of a Chilean brokerage firm summarized, “…Chilean management isn't
entrepreneurial… Part of the problem is in Chilean culture. Fortunately, we have a
[President] Lagos today who is smashing both political and social taboos" (Rudnick, 2000).
Research on other countries such as Japan has pointed to a relationship between public
attitudes toward entrepreneurs and a country’s level of domestic entrepreneurial activity.
Some researchers have recommended that governments offer “entrepreneur of the year
awards,” and that national leaders regularly offer informal remarks praising the activities of
local small business owners to change societal attitudes towards SMEs (Gnyawali & Fogel,
1994). We concur with these recommendations, and note that government can work to
provide a positive environment that legitimizes entrepreneurship as a respected career in their
domestic economy.
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There is some evidence that individuals in the general population in Chile have begun
to view entrepreneurship more positively. According to local economic experts, the Chilean
population increasingly looks toward the private sector and entrepreneurship for national
economic growth. While in the past, individuals aspired to work as government officials or
employees in large, established firms, most people today seem to be interested in starting their
own business (Segura, 2001). Further evidence of changes in how entrepreneurs are
perceived comes from Costa Rica. Increasing interest in the topic of entrepreneurship has led
private media firms to publish magazines, such as Entrepreneurial Costa Rica, that are aimed
at SMEs.
Communities of Entrepreneurship:
Programs that promote all three dimensions of the institutional profile simultaneously
should earn greater success than programs that focus on only one or two areas. Both the
PROFOS program in Chile, and Uruguay’s Industry Sector Nucleus program stand out as
having particularly good probabilities of success because they contribute to each of the three
pillars concurrently. These programs strengthen regulatory institutions by providing seed
money and other financial resources for entrepreneurs. They also contribute to entrepreneurs’
skill sets by providing a professional manager to guide member firms’ activities, and
encouraging firms to learn from one another. They help firms build a network of supporting
industries that can provide both intellectual and tangible resources to small enterprises. And
finally, by putting entrepreneurs in touch with one another, they help build legitimacy for
entrepreneurship, both in the perceptions of entrepreneurs, themselves, and in the community
at large.
24
By addressing all three dimensions simultaneously, improvements in one dimension
can induce progress in the others. For example, a program that provides financing to an
entrepreneur who lacks basic skills will likely be a waste of money, and may even worsen the
standing of entrepreneurship, in general. Communities of entrepreneurship, on the other
hand, can be designed to strengthen regulatory and cognitive dimensions directly, while
slowly building the normative pillar of a country's entrepreneurial environment.
When founding a new business or managing a small enterprise, managers face
challenges that are not necessarily present for executives of large, established firms. By
nature of their size and age, entrepreneurial ventures often rely on an external support
infrastructure for everything from mundane business tasks such as small-batch printing jobs,
to more strategic activities such as market analysis and product distribution. Entrepreneurial
firms are often too small to purchase capital equipment that lets them achieve an efficient
scale. They lack the resources necessary to engage in extensive research and development or
to market their product adequately.
By maintaining ties with other entrepreneurial firms, a small venture can increase its
knowledge acquisition, pursue co- marketing strategies with other SMEs, and obtain financial
and other resources that they may not have access to alone (Yli- Renko, Autio & Sapienza,
2001; Hartmann, 1993; Stuart; Hoang & Hybels, 1999). In addition, many new ventures
require an infrastructure tailored the specific needs of their industry. Entrepreneur ial ventures
in high technology industries, for example, rely on an extensive infrastructure of materials and
components, manufacturing equipment, and complementary products tailored specifically for
their emerging technology.
25
Innovative firms in these technology-based industries also tend to make faster progress
on commercializing a new product when they work together. A recent study on the wind
turbine industry (Garud & Karnoe, forthcoming) found that some national technological
communities approached innovation somewhat collectively, with firms working together to
contribute their incremental advances to others in the technological community. Others
approached innovation more individually, with firms working in relative isolation, pursuing
unique and incompatible product designs. This study found that the community approach
appeared to foster faster product development, and produced technological designs that had a
greater likelihood of becoming accepted in the global marketplace. Therefore, entrepreneurial
ventures pursuing new product commercialization appear to stand a better chance of success
when managers build relationships with other organizations in their own industry community.
(Garud & Karnoe, Forthcoming).
In sum, government policies that facilitate these community-building activities hold
greater potential than policies that support firms’ isolated efforts because a network of firms
can internalize spillovers, achieve economies of scale, and attract the requisite industry
infrastructure. Therefore, in many contexts, a consortium of small firms may leverage a given
financial subsidy into greater success than would be achieved if the same funding went to
dispersed SMEs. For example, none of the butchers in Uruguay’s industry nucleus in
Montevideo could afford to buy a refrigerated truck for their own small- volume business.
However, these butchers, who were losing money prior to forming the nucleus, began to make
a profit and grow within their first year of working together.
Several small toy manufacturers in Chile engaged in a similar effort through the
PROFOS program. On their own, each firm lacked the capital and expertise to make
26
investments to increase labor productivity or engage in extensive international marketing
activities. However, after coming together to form a co-operative, called Chilean Toys
Manufacturers, these small companies were able to develop new products, adopt more
advanced technology, and better promote their products at home and abroad. Sales, both
within Chile and abroad, more than doubled within four years (Gajardo, 2001).
Policy makers in Chile are pleased with the success of the PROFOS program. They
have concluded that the program has provided several specific benefits to participating firms.
It has facilitated the use of quality control programs, factory automation, and production
planning. It has also increased the availability of employee training programs, and given
firms greater access to local technical and market knowledge. According to CORFO
calculations, each US $1 invested by a member company has, on average, generated US $2.40
in additional sales (Benavente, 1998). CORFO managers are also pleased by the results from
a public policy perspective, concluding that the program has led to an increase in national
employment, and that every US $1.00 invested by the government has produced an additional
US $3.20 in tax revenues from the VAT. Therefore, by bringing entrepreneurs together into a
community, governments can leverage small investments into more significant strides in their
promotion of entrepreneurship. Table 1 summarizes some of the advantages that can stem
from building communities of entrepreneurs.
---------------------------------------------
---------- Table 1 About Here ----------
---------------------------------------------
27
LESSONS FROM LATIN AMERICA
Several basic conclusions from these cases can be instructive to policy makers, would-
be entrepreneurs, and managers of small, medium, and large businesses.
Promotion of entrepreneurship is an incremental, cyclical process. As the number
of SMEs increases in a country, a support system will arise to bolster that entrepreneurial
activity. And this support system will motivate even greater entry into the entrepreneurial
sector. For instance, the magazine, Entrepreneurial Costa Rica emerged to satisfy market
demand from budding entrepreneurs, and offers articles that educate small business owners on
topics such as organizing the SME, engaging in effective marketing strategies, dealing with
business partners, and reaching international quality standards. This magazine’s presence on
newsstands, informative articles, and promotions, such as an Entrepreneur of the Year award,
will also likely increase both the amount and success of entrepreneurship in the future.
Therefore, although a country’s early efforts to promote entrepreneurship may be slow
going, the pace of growth is likely to accelerate as institutions arise to support SME activity.
Similarly, regulatory, cognitive, and normative institutions will not materialize at the same
speed. While the regulatory environment toward entrepreneurship may emerge relatively
quickly, it will take longer for knowledge and entrepreneurial skills to become widely
distributed in society. And efforts to change the attitudes of a society toward an admiration of
entrepreneurs will be slower, still. Therefore, even with a concerted effort by both public and
private organizations, a country’s progress toward building a thriving entrepreneurial sector
may be incremental.
Public polices can target regulatory, cognitive, and normative pillars of a
national environment. It appears that the most common public policies toward
28
entrepreneurship focus on the regulatory environment by offering entrepreneurs financial
assistance of one sort or another. While there is evidence that these financial incentives may
facilitate entry and growth of entrepreneurial ventures, they are rather blunt instruments that
often do not address weaknesses in an economy’s normative or cognitive environments for
entrepreneurship.
A recent study reported that countries with a strong regulatory environment also had a
large percentage of companies on their national stock market that were new listings,
indicating that government regulatory and financial support associated with fairly advanced
forms of entrepreneurship. However, the strength of the regulatory environment did not
associate positively with domestic self-employment activity or the percentage of firms in the
country’s manufacturing sector that were SMEs. Instead, it appeared that countries with
strong normative environments for entrepreneurship had a large number of local residents
who chose entrepreneurial forms of employment such as self employment. And countries
with a strong cognitive environment tended to have a large percentage of firms in the
manufacturing sector that were SMEs, as well as many new listings on their domestic stock
exchange (Spencer & Gomez, 2001). Together, these findings suggest that in addition to
providing financial incentives, governments should consider policies that enhance the skill set
of the country’s residents, and that improve the status that entrepreneurs enjoy within the
country.
Policies that bring firms together into a community may go farther. Countries
may increase their likelihood of success by addressing all three pillars of the institutional
environment simultaneously. In particular, by implementing policies that help SMEs form
communities of entrepreneurs, governments may help firms overcome many of the obstacles
29
that result from their smallness or newness. Government support is not a prerequisite for such
community efforts, however. Managers in SMEs may wish to coordinate community efforts
on their own by identifying firms in similar circumstances and devising strategies that will
yield market power, economies of scale, advancements in infrastructure, and opportunities to
share knowledge.
Governments vary in their needs, as well as their capabilities to implement
policies toward the small business sector. Countries launching efforts to promote domestic
SME activity start with different institutional profiles for entrepreneurship. Therefore, the
mix of policies that a country should pursue will vary cross-nationally. Countries vary in the
relationship that exists between domestic business associations, such as industry associations
and chambers of commerce, and the government. And countries vary in terms of their
governments’ abilities to sustain policies that support firms, industries, and sectors in their
domestic economy. Some countries maintain reputations for sustaining such these policies
over extended periods of time, while others are known for quickly abandoning policies that
are not politically popular (Murtha & Lenway, 1994). Therefore, it is clear that a
government’s best strategy toward the entrepreneurial sector depends on its unique
circumstances.
CONCLUSION
The small Chilean wine producers described at the beginning of this article recognized
the challenges that lay before them. They needed to improve their technology, develop
international marketing strategies, and manage production and human resource activities with
growing sophistication. To meet these challenges, they designed a strategy to work together
30
within the PROFOS program in a co-operative that they named “Viñedos Valley of Maule
S.A”. A PROFOS consultant assisted them in developing an export strategy. Member firms
worked together to transfer technology among vineyards, set high quality standards, adopt
quality control processes, and implement cost-saving technologies. Within four years, the
value of the vineyards’ collective exports had increased from approximately US $80,000 to
about US $4 million annually, and some wine labels began winning quality awards in
international forums.
Government policies toward entrepreneurship have clear implications for the strategies
and performance of small and new businesses within a national economy. They also have
important implications for managers of larger firms. Established firms may prefer to locate
foreign operations in countries that have the potential to provide an extensive supply
infrastructure. For example, Intel’s manufacturing plant in Taiwan purchases about 80% of its
supplies locally. In contrast, its newer plant in Costa Rica imports more than 90% of its
supplies from abroad, since no domestic electronics industry yet exists (Stone, 2000). Intel’s
ability to assess the likelihood that a domestic supply infrastructure will emerge to support its
investment in a new country such as Costa Rica may contribute to the effectiveness of its
international location decisions. Perhaps one of the reasons that Intel relies little on a local
supporting infrastructure the lack of an entrepreneurial spirit in their host environment.
Policies to foster new business development and to strengthen small- and medium-
sized enterprises top the policy agenda of governments across the world. More and more
policy makers are looking to SMEs to spearhead technological advance, economic growth,
and job creation in their national economies (Vives, 2000). Publications by multilateral
organizations such as the International Monetary Fund, World Bank, International Labor
31
Organization, and Inter-American Development Bank have emphasized that promoting
entrepreneurship can help a country foster economic development. And countries with high
levels of entrepreneurial activity tend to display greater economic growth than less
entrepreneurial countries (Reynolds, Hay & Camp. 1999). Clearly, public policy makers
have a strong interest in understanding how to foster entrepreneurial activity within their
borders. We hope that the lessons summarized here will help them with that endeavor.
32
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Table 1: Advantages to Community Efforts
Market Power
? Gaining power over suppliers by buying in bulk
? Shaping industry environment for new technology
? Building long-term relationships with buyers, suppliers, or makers of complementary products.
Building Infrastructure for Entrepreneurship or Specific Industry
? Building legitimacy for idea of entrepreneurship
? Building legitimacy for particular industry or technology
? Attracting supporting firms to the market (e.g., business service firms)
Economies of Scale
? Joint purchase/sharing of capital equipment
? Sharing marketing costs through co-marketing agreements
? Sharing administrative costs of bureaucratic activities such as ISO 9000
Knowledge Sharing
? Sharing knowledge about incremental advances within a new technology
? Sharing technical knowledge about manufacturing
? Sharing information about marketing issues
37
Entry of
Entrepreneur
s
Increase of
Infrastructure
Government
Policies toward
Entrepreneurshi
p
Entry of
Entrepreneur
s
Increase of
Infrastructure
Government
Policies toward
Entrepreneurshi
p
Figure 1: Emergence of Entrepreneurship as
an Incremental and Cyclical Process
38
TIME
Figure 2: Objective of PROFOS
Source: PROFOs
39
• Preferential Credit Lines for Small Business
• Program Simplification
Regulatory
Environment
For
Entrepreneurship
• Tax breaks for SMEs
• Industry Sector Nucleus Program
• FOSIS Financing
• PROFOs
• PDP (Program for Development of Suppliers)
Uruguay
Costa Rica
Chile
Figure 3
40
• Training programs
• Center for Business Incubators
• Website
• Manual for the Investor
Cognitive
Environment
For
Entrepreneurship
• Assistance on applying for credit and
developing business plan
• Red Propymes Training for Managers
• Industry Sector Nucleus Program
• LATU (Technological Laboratory of Uruguay)
• FOSIS training for the self-employed
• CORFO initiative to modernize
technology and management
• PROFOs
• National Training and Employment Service
• PDP (Program for Development of Suppliers)
Uruguay
Costa Rica
Chile
Figure 4
41
• Fairs and Expos
Normative
Environment
For
Entrepreneurship
• Propyme Entrepreneur Award Program
• Fairs and Expos
• Industry Sector Nucleus Program
• PROFOs
Uruguay
Costa Rica
Chile
Figure 5
doc_451082574.pdf
Within this brief illustration define can government policies promote entrepreneurship evidence from costa rica, uruguay.
1
Working Paper Series
CAN GOVERNMENT POLICIES PROMOTE ENTREPRENEURSHIP?
EVIDENCE FROM COSTA RICA, URUGUAY AND CHILE
Jennifer W. Spencer
School of Business and Public Management
The George Washington University
2023 G Street NW Lisner Hall 230
Washington, DC 20052
Tel: 202-994-9858
Fax: 202-994-7422
[email protected]
Carolina Gómez
Department of Management and International Business
College of Business Administration
Florida International University
University Park
Miami, FL 33199
[email protected]
2033 K STREET, N.W. ? SUITE 230 ? WASHINGTON, DC 20052
TEL (202) 994-5236 ? FAX (202) 994-5225 ? E-MAIL: [email protected]
The Center for Latin
American Issues
2
CAN GOVERNMENT POLICIES PROMOTE ENTREPRENEURSHIP?
EVIDENCE FROM COSTA RICA, URUGUAY AND CHILE
EXECUTIVE SUMMARY
Governments around the world have begun to look to small- and medium-sized
enterprises (SMEs) as sources of employment and economic growth for their domestic
economies. However, neither public policy makers nor researchers have a solid
understanding of which government policies are most likely to be most effective. We
examined government policies towards entrepreneurship in three Latin American countries to
identify the programs that appeared to the most promising avenues for success.
Governments in each country implemented three types of policies toward
entrepreneurship. They improved their regulatory environment for entrepreneurship by
offering SMEs financial assistance and simplifying bureaucratic rules. They improved their
cognitive environment for entrepreneurship by offering programs to teach would-be
entrepreneurs the knowledge and skills necessary to run a small enterprise. And they
strengthened their normative environment for entrepreneurship by working to improve
society’s perception of the entrepreneurial sector.
We conclude that the most effective policies were those that targeted all three of these
dimensions. In particular, programs that brought SMEs together into a community of
entrepreneurs helped them gain market power, obtain economies of scale, share knowledge,
and achieve a range of other advantages. While specific policy prescriptions depend on a
country’s circumstances, we recommend that public policy makers and small business owners
3
consider forming communities of entrepreneurs to further their national and individual
interests.
4
In 1993, several small wine producers in the Maule region of Chile were
struggling for survival. They knew that some of the most successful wine
producers in the world were growing large enough to achieve scale economies
and devote substantial resources to process innovations and global marketing
strategies. Unfortunately, these small Chilean firms lacked the resources to
match this approach, and their own technology was becoming more obsolete by
the day. These entrepreneurs lacked an understanding of the global market for
wine, had little experience with managing growing business concerns, and were
becoming increasingly afraid that they might begin to lose even the small level
of export sales that they had already achieved, valued at approximately US
$83,000 a year. With such a small sales volume and so many global
competitors, these winemakers had little chance of obtaining bank loans to
improve their process technologies, build larger vineyards, or undertake strong
marketing efforts on the world market (Cabrera Gajardo, 2001).
Firms in a wide range of industries and countries face dilemmas similar to the
circumstances of these Chilean wine producers. National governments often profess an
interest in aiding these small entrepreneurs, citing small firms’ success as a source of
economic development for their domestic economies. However, it is unclear what policies
governments can implement that will truly improve the chances that these small enterprises
have to survive and grow into thriving businesses. In this paper, we explore how government
policies can contribute to national environments that promote small business
entrepreneurship. We provide examples of programs that have been introduced in three Latin
5
American countries -- Costa Rica, Uruguay, and Chile -- to illustrate how both public and
private programs have contributed to the performance of local entrepreneurs.
Policy makers have recognized that small- and medium-sized enterprises (SMEs) play
a critical economic role, employing more than half of the working population in each of these
three countries. Even so, these small firms display high mortality rates and rarely grow into
thriving, innovative businesses. Government officials have made tacit or explicit decisions
concerning policies toward their entrepreneurial sector. An understanding of the effects of
these policies on domestic entrepreneurship holds clear relevance for government officials,
executives of start- up firms, and owners of small businesses. In addition, managers of large
enterprises often wish to partner with domestic entrepreneurial ventures, and multinational
enterprises often prefer to locate in countries in which entrepreneurial firms will emerge to
provide a strong infrastructure by marketing supporting goods and services. Therefore, even
managers of larger, established companies have an interest in understanding how public
policies influence the strategies and performance of entrepreneurial ventures.
NATIONAL ENVIRONMENTS FOR ENTREPRENEURSHIP
The volume and success of the entrepreneurial activity in a country depends on the
independent economic decisions of each of its residents. The probability that residents will
participate in entrepreneurial ventures is based on their individual motivation to become
entrepreneurs, ability to undertake entrepreneurial activities, and perceptions about the
opportunities that are available to them (Gnyawali & Fogel, 1994). National environments
can influence each of these factors. Government policies that provide entrepreneurs with
financial assistance via subsidies, preferential procurement, or favorable tax policies (we call
6
this a strong regulatory environment for entrepreneurship) increase the opportunities
available for new ventures and small businesses. In countries in which business education
and training programs are prevalent and residents understand how to found and manage a new
business (we call this a strong cognitive environment for entrepreneurship), individuals are
more likely to hold the ability to successfully manage their own company. Finally, in
countries in which entrepreneurial activity is valued and admired (we call this a strong
normativeenvironment for entrepreneurship), more individuals are likely to be motivated to
found a new business or manage a small business. These regulatory, cognitive, and normative
environments form three pillars of support for a country’s entrepreneurial activities (Busenitz,
Gomez & Spencer, 2000; Kostova, 1996; Scott, 1995).
Governments vary in their preferences for promoting one sector of economic activity
over another. Some governments may prefer to avoid interfering in their domestic
marketplace by prioritizing one sector over another. And a few governments may even prefer
to discourage entrepreneurship. For example, while imposing a tax on self-employment
activity in Cuba, Fidel Castro declared, “We need a tax on robbery!” reinforcing an ideology
that condemns those who put their individual interest over the interests of society (Miami
Herald, 1995).
We suggest that governments that choose to promote domestic entrepreneurial activity
will be best off if they implement policies to strengthen all three of the relevant pillars—
regulatory, cognitive, and normative. Public policies targeting the regulatory environment
can improve the opportunities available to entrepreneurs by offering small businesses
financial incentives or preferential treatment in government procurement. Governments can
strengthen the cognitive environment, and thus increase the abilities of entrepreneurs, by
7
offering government-sponsored training programs or consulting services. And by improving
the normative environment for entrepreneurship -- for example, by using the bully pulpit to
sway public opinion toward an admiration of entrepreneurs -- governments can increase the
motivation of entrepreneurs.
---------------------------------------------
--------- Figure 1 About Here ----------
---------------------------------------------
The process by which a strong environment for entrepreneurship emerges in a country
is incremental and cyclical (See Figure 1). An increase in the number of small businesses in a
community will prompt new entrants or established businesses to invest in profitable ventures
that support entrepreneurship. For example, small businesses are likely to patronize
consulting services, law firms, accountants, and other business service providers who target
their services toward the entrepreneurial sector. Likewise, as the number of new ventures
increases, financing mechanisms such as venture capital and bank loans aimed at
entrepreneurs, may emerge as potentially lucrative investments for financial organizations.
Similarly, a growing entrepreneurial sector is likely to attract the attention of publishers, who
may introduce magazines targeted at entrepreneurs, and schools and universities, which may
begin offering courses and degrees in entrepreneurship. An increase in the number of
entrepreneurs in a country also gives a stronger voice to small business interest groups, and
therefore increases the chances that government officials will offer policies that promote new
business development.
And the presence of these newly established support services and government
programs, in turn, should facilitate the entry of the next generation of entrepreneurial
8
ventures. Therefore, countries that are able to provide an impetus for entrepreneurship in
their domestic economies may be able to place themselves on a trajectory of increasing small
business growth over time.
NATIONAL ENVIRONMENTS FOR ENTREPRENEURSHIP IN
COSTA RICA, URUGUAY, AND CHILE
The national environments of Costa Rica, Uruguay, and Chile are similar along
several dimensions. Each of these Latin American countries displays similar cultural values.
All are relatively low on individualism, meaning that people in these countries value the
interest of their group -- particularly their family-- over their individual needs. Each country
scores relatively high on uncertainty avoidance, meaning that individuals in these cultures
prefer to avoid ambiguous situations and have a relatively low tolerance for risk. Chile and
Uruguay display high power distance, meaning that people in these cultures tolerate the fact
that some people in an organization or in society, in general, hold power, while others do not.
However, power distance appears to be smaller in Costa Rica.
Historically, the government of each country has looked to the development of large
enterprises and foreign direct investment as its primary source of economic growth, often
ignoring the entrepreneurial sector. Similarly, individuals in each of the countries have
traditionally not valued employment in start- up ventures or small firms. In fact, economic
experts in local Chambers of Commerce have noted that local residents historically preferred
to work for a department or agency of the government rather than for a private business.
More recently, as governments have begun to play a smaller role in the economy, individuals
have displayed a preference for working in larger, established corporations. Although
9
residents are increasingly aware of the importance of the SME sector, experts report that most
residents lack a real understanding of how to successfully manage an entrepreneurial venture.
Experts have also noted that entrepreneurs have traditionally had a poor image, with a
reputation for corruption and for pursuing their own profit at the expense of society.
Therefore, while many programs’ most immediate objective lies in helping entrepreneurs
overcome tangible hurdles to founding and managing a business, their longer term goal rests
in encouraging the local culture to become more receptive to entrepreneurial activity.
Despite similarities in the cultural and historical conditions for entrepreneurship in
Costa Rica, Uruguay, and Chile, each of the countries’ entrepreneurial environments is
unique. The Costa Rican government has only recently started to promote domestic
entrepreneurship. The government of Uruguay began programs to promote entrepreneurship
in the early 1990s, and has relied on the efforts of business organizations such as Chambers of
Commerce for some of their most important programs. Finally, although its focus on
promoting entrepreneurship is fairly recent, Chile offers perhaps the most extensive collection
of programs of all.
Costa Rica
Of the three countries studied, Costa Rica has the newest focus on promoting small
business entrepreneurship. The Costa Rican government has pursued export- led development
for the last two decades by providing incentives to firms that export products and services.
The biggest exporters in Costa Rica have generally been large multinational enterprises with
foreign investment in the country. As a result, for nearly twenty years Costa Rica has
maintained one of the most thriving foreign trade zones in Latin America (Arino, 2001;
Monge, 1998). At the same time, the government is aware that the majority of Costa Ricans
10
are employed by SMEs (Arino, 2001). In fact, estimates of SME employment go as high as
90% of the workforce. In addition, the Costa Rican government has made a commitment to
the World Trade Organization to abandon export-related subsidies and assistance by 2003,
placing smaller businesses in a more prominent position within the economy. Therefore, the
government is becoming increasingly interested in promoting small and new businesses
within Costa Rica.
Costa Rica does not maintain a specific government agency dedicated to promoting
SMEs, but the interests of small businesses lie in the domain of the Ministry of Economy,
Industry and Commerce. This ministry works with private business associations to offer
industry fairs and training programs for small business owners. Entrepreneurs can access free
business training on topics ranging from identifying and evaluating business opportunities to
more specific topics such as accounting, marketing, capital budgeting, and sales. Some
business associations also offer training at a cost. For example, the Center for Business
Incubators (partly sponsored by the Technological Institute of Costa Rica, a public
university), which fosters knowledge exchange and development of high technology start-ups,
offers its own training programs for entrepreneurs. The National Bank of Costa Rica has
agreed to analyze and consider financing the businesses that develop in this incubator.
Although the Ministry of Economy, Industry and Commerce does not offer its own
financing programs for SMEs, multilateral development banks and state-owned banks provide
credit lines with preferential interest rates for smaller businesses. Most policies toward SMEs
focus on simplifying bureaucratic hurdles and providing business owners with clear
information regarding the logistics of founding and managing a new business. The newly
written Manual for the Investor spells out the steps, paperwork, and logistics of getting a
11
business started, providing entrepreneurs with extensive information about the bureaucratic
process of founding a new company. The government has also tried to simplify the process of
business registration. This is an ongoing process by which the government hopes to identify,
revise, and sometimes eliminate, the paperwork and procedures that are most burdensome to
entrepreneurs. In addition, tax regulations allow entrepreneurs to submit less paperwork and
maintain simpler records than are required by larger businesses.
The Ministry of Economy, Industry and Commerce has also created an internet-based
information program called the System of Information for Costa Rican Enterprises (linked
through their website www.meic.go.cr, El Sistema de Información Empresarial Costarricense,
www.seic.go.cr). The objective of this website is to simplify and expedite the distribution of
information to the industrial sector to improve entrepreneurs’ understanding of the domestic
business environment. Ultimately, this system is expected to provide entrepreneurs with all
the information they need to establish and operate a business within Costa Rica. Currently,
the website provides information on credit lines, industry fairs, training programs, exporting
and importing opportunities, trade law, government statistics, links to domestic and foreign
business associations, and a link to the Manual for the Investor.
Uruguay
Historically, as one of South America’s highest taxed countries, Uruguay has had a
hard time fostering small business activity. One analyst concluded that excessive government
intervention and high inflation have inhibited entrepreneurs from growing into lasting,
innovative enterprises, and have instead promoted the establishment of smaller, informal
micro-enterprises that barely achieve subsistence (Dana, 1997).
12
To address this weakness, the government of Uruguay has developed some programs
intended to promote domestic entrepreneurial activity. The country launched its primary
program to promote entrepreneurial activity, called DINAPYME (National Agency of Arts
and Crafts and SMEs), in 1990. DINAPYME’s objective lies in coordinating activities to
promote micro-, small- and medium-sized enterprises that have fewer than 99 employees,
annual sales of less than $5,000,000 and assets under $350,000. More than 90% of
organizations in Uruguay’s private sector fit this classification. However, according to
economic experts, the mortality of these SMEs is quite high (Benavente, 2001).
DINAPYME, itself, does not provide financing. However, it does offer consulting
services and training intended to help entrepreneurs in developing business plans, making
presentations to investors and lenders, and presenting financial data appropriately.
DINAPYME develops many of its programs in close consultation with the private
sector. The largest effort is called Red Propymes (The Network for Small and Medium
Enterprises). This network integrates organizations that share the objective of promoting
micro-, small- and medium-sized enterprises in Uruguay, including DINAPYME, chambers
of commerce, banks, and other private and semi- governmental organizations. Red Propymes
provides training for entrepreneurs, assists businesses’ efforts to reach new markets and
obtain new technology, expands firms’ abilities to obtain capital, improves firms’ access to
information, serves as an incubator of ideas, and even increases the environmental conscience
of budding entrepreneurs. For example, the network provides an award to the most
innovative SMEs according to an annual theme such as environmentalism, employment-
creation, or globalization, and works to improve the negative image of SMEs by conducting
fairs and expos around the country.
13
Each member of Red Propymes also develops its own programs directed toward
SMEs. For example, Uruguay’s chamber of commerce launched a pilot program called the
Industry Sector Nucleus program, with financial assistance from Germany’s Agency for
Cooperation (GTZ). This program is aimed at creating a nucleus of companies in a particular
industry or regional area. By working together with a specialized consultant, these firms are
better able to exploit synergies and overcome the difficulties inherent in being small. For
example, thirteen butchers in a neighborhood of Uruguay’s capital, Montevideo, joined forces
to buy distribution truck and freezer. By working together, these entrepreneurs saved money
on their capital investments and were able to gain leverage over their suppliers by buying in
volume. In one year, the Industry Sector Nucleus program constructed 25 nuclei representing
over 300 companies. Many of the participating SMEs have expanded their operations, and
none have reduced personnel. Due to the program’s success in maintaining and often
increasing employment, even in the midst of an economic recession, the International Labor
Organization as agreed to sponsor and finance an extension of this program into the future.
Another Red Propymes member, the Technology Laboratory of Uruguay (LATU), is a
quasi- governmental organization that organizes industry fairs, assists with quality certification
programs, and operates a business incubator for SMEs in the information and communication
sectors. Although this incubator does not provide SMEs with direct financial support it does
provide administrative support, business plan assistance, training, and other services to help
new firms within the designated sectors.
In addition to the DYNAPYME program, Uruguay’s tax system offers some basic
assistance; SMEs qualify for tax breaks not available to the country’s largest businesses, and
micro enterprises are altogether exempt from some taxes. In addition, a new program allows
14
entrepreneurs to pay a small social security tax so that they qualify for government retirement
benefits. Since these benefits are fairly extensive in Uruguay, this new tax provision is
expected to benefit entrepreneurs substantially.
Chile
Finally, of the three countries, Chile has implemented the most aggressive policies
towards entrepreneurship. Chile’s National Training and Employment Service (SENCE)
offers tax benefits to all Chilean firms who develop and train their employees, with special
benefits accruing to smaller organizations whose employees tend to earn lower salaries.
SENCE also helps SMEs finance training programs offered by other business associations.
In addition, Chile maintains two programs aimed at promoting success in
entrepreneurial ventures. The Solidarity and Social Investment Fund (FOSIS) directs its
efforts at self-employed individuals and micro-business, and the Corporation to Promote
Production (CORFO) maintains fairly extensive programs that facilitate the development of
small and medium-sized businesses (Segura, 2001).
The Solidarity and Social Investment Fund (FOSIS)
FOSIS was founded in 1991 with the goal of developing and financing projects that
facilitate the social development of Chile. These programs are intended to increase domestic
employment, improve Chile’s quality of life, and help individuals work their way out of
poverty. Within FOSIS is the “Program to Promote Productivity,” which assists self-
employed individuals and micro-businesses by offering training programs, as well as
providing some financing.
15
Corporation to Promote Production (CORFO)
CORFO, a government-based organization founded in 1939, has historically played a
strong role in Chile’s economy. While its goals and structure have changed markedly over
time (see the text box on the next page for a description of its changing role over the last sixty
years), CORFO remains one of the most prominent organizations in Chile devoted to business
development. While its goals and structure have changed markedly over time, shifting from
an emphasis on state-run companies and the nationalization of private firms, to a focus on
privatizing these state-owned businesses, to an emphasis on promoting SMEs, CORFO
remains one of the most prominent organizations in Chile devoted to business development.
Today, one of CORFO’s main goals lies in assisting SMEs by facilitating access to financing,
promoting collective efforts among small organizations, and helping small firms identify and
employ the most modern technologies and management techniques.
CORFO provides a range of programs for SMEs. For example, CORFO offers direct
and indirect financing to help SMEs invest in fixed assets, restructure debt, and overcome
other obstacles. For example, CORFO recently announced plans to offer 100 SMEs “fast
track” loans through a streamlined evaluation process, in order to support small firms that are
struggling in the recent recession (Global News Wire, 9/26/2000).
Several of CORFO’s programs are designed to help groups of firms work together to
achieve a common goal. For example, the Program for Development of Suppliers (PDP),
attempts to increase the competitiveness of production chains by establishing relationships
between larger companies and a network of smaller suppliers. CORFO’s program of
technical assistance (FAT) will match investments made by firms or groups of firms who
employ consultants to help them improve production, finance, design, marketing, or strategic
16
planning activities. CORFO is also working with private industry to create a website for
SMEs to trade products and services, establish contacts, and gain access to industry-related
services such as online training, financing, inventory auctions, and legal services (Global
News Wire, 1/8/2000).
The history of CORFO parallels the turbulent history of Chile. Early on, some of Chile's
biggest state-owned enterprises were founded under CORFO’s watch, including the national
electric company (Endesa), the national petroleum company (Enap), the national steel
company (Cap), and the national sugar company (Iansa). CORFO was also responsible for
providing credit lines, capital, and direct subsidies to many industries such as mining,
agriculture, transportation, hotels, pharmaceuticals, fishing, tires, and films. During the
socialist government of the 1960s and early 1970s, CORFO launched a new effort to create
large enterprises, such as the national telecommunications company (Entel). During this time,
CORFO also dedicated effort to nationalizing enterprises across critical sectors of Chile’s
economy.
In 1973, Chile’s economic policies shifted dramatically towards free market reforms, and
CORFO's objectives reversed themselves, focusing primarily on privatization of state-owned
enterprises such as Endesa and Entel.
With the return to a democratic government, CORFO's role was redefined once again in the
1990s. Policymakers determined that the private sector in general, and SMEs, in particular,
played a critical role in Chile's economic development. In addition, policymakers noted that
public and private sectors require very different profiles for success. Therefore, the public
sector component of CORFO’s operations was transferred to a new agency called the
Administrative System of Enterprise (Sistema Administrador de Empresas, SAE). And
CORFO was asked to focus primarily on fostering a positive environment for the
development of small and medium sized businesses in Chile.
Perhaps one of the most interesting programs started by CORFO focuses on
Associative Projects of Promotion (PROFOS). CORFO completed a pilot program in 1993,
and formally launched PROFOS in 1994. PROFOS aims to improve the competitiveness of
SMEs by fostering interaction and association between groups of small businesses operating
in similar or complementary industries. CORFO promotes the PROFOS program directly,
and also recruits members through other organizations such as chambers of commerce,
17
SERCOTEC (Technical Cooperation Service), ASEXMA (Association for Manufacturing
Exporters), and many others.
The PROFOS program focuses on priority sectors such as manufacturing,
manufacturing services, tourism, fishing, arts and crafts, and agricultural industries. Figure 2
illustrates the process by which firms come together and coordinate action within the
PROFOS program. SMEs progress from acting as a set of independent organizations with
little knowledge about other participants, to a fairly cohesive co-operative that identifies
common problems and works together to tackle them.
---------------------------------------------
--------- Figure 2 About Here ----------
---------------------------------------------
Through PROFOS, five or more SMEs team up to pursue a specific objective such as
jointly purchasing capital equipment, coordinating export efforts, pursuing marketing
campaigns, or overcoming technical hurdles. CORFO provides a network manager, who
focuses on identifying appropriate members for a given PROFO, diagnosing problems, and
developing a collaborative project that can improve the performance of all member firms.
CORFO subsidizes the collaborative project for up to three years, with the government paying
70% of project costs in the first year, 60% in the second year, and 50% in the third, and
generally final, year.
1
While CORFO hopes that many of the associations will sustain activity
beyond the three years of government assistance, some PROFOS are intended to be short-
lived. For example, a PROFO may well disband after it successfully completes a temporary
project such as attaining ISO 9000 certification for member firms.
1
In special cases where SERCOTEC believes the investment will lead to a unique economic opportunity for Chile, it will
consider subsidizing a PROFO for up to five years
18
PROFOS appears to be fairly successful. An early study provided evidence that many
of the PROFOS that had been in existence for 20 to 30 months showed signs of becoming
independent (Dini, 1993),and other data has suggested that many of these associations of
SMEs have expanded their market share and gained access to markets within Chile and
abroad (Humphrey & Hubert, 1995). For example, one PROFO of small metalworking firms
help members improve their performance and, together, these firms became regular suppliers
to the state mining company. Externally, organizations such as the Institute of Development
Studies and the United Nations have referred to PROFOS as one of the most successful
associative programs in Latin America (Tilman, Qualmann, & Weller, 2001).
Private organizations also work to assist SMEs in Chile. Many government programs
such as PROFOS are implemented in conjunction with private business associations. In
addition, associations such as Chambers of Commerce work with money provided by the
InterAmerican Development Bank, the European Union, and other foreign and multilateral
organizations, to assist entrepreneurs with market studies, logistics, and other necessary
activities.
WHICH PUBLIC POLICIES ARE MOST EFFECTIVE?
Figures 3, 4 and 5 summarize how the public policies implemented in each country
contribute to regulatory, cognitive, and normative dimensions of their environments for
entrepreneurship.
Regulatory Institutions for Entrepreneurship
Countries offering government support for entrepreneurship through tax breaks, loan
guarantees, and other regulatory programs increase the chances that residents will perceive an
19
appealing business opportunity and, therefore, decide to launch their own business. For
example, Chile offers financial incentives to micro-businesses and SMEs through the FOSIS
and CORFO programs. Uruguay provides tax breaks to SMEs and offers some financing
through the Industry Sector Nucleus program, and Costa Rica provides domestic SMEs with
preferential credit lines in addition to the financial help available from the Center for Business
Incubators.
---------------------------------------------
--------- Figure 3 About Here ----------
---------------------------------------------
Providing financial resources to SMEs is one of the most popular approaches to
promoting entrepreneurship in countries around the world. For instance, financial support or
preferential treatment for entrepreneurial ventures has come in the form of government
procurement programs in Canada, tax incentives in Singapore, low interest loans and grants in
the Virgin Islands, and business development assistance in the US (Doutriaux, 1998; Dana,
1987; Phillips, 1993).
This financial support may be particularly important for Latin American
entrepreneurs, who regularly cite a lack of financing as a critical obstacle to starting a
business. For example, a study conducted by the University of Chile found that, while
PROFOS provided real benefits for SMEs, entrepreneurs still perceived a lack of financing as
their number one obstacle (Benavente, 1998).
Costa Rica has also simplified the process of starting a business and articulated
national bureaucratic requirements very clearly. This focus on bureaucratic details may be
critical for entrepreneurial growth. Research in Saint Martin, the Cayman Islands, and China
20
has shown that burdensome procedural requirements may limit entrepreneurial activity, and
that uncertainty and instability in government policies may reduce entrepreneurs’ interest in
developing long-term growth strategies (Dana, 1990; Tan, 1996).
Evidence from Costa Rica, Uruguay, and Chile demonstrates some success for
programs designed to improve their regulatory environment for entrepreneurship. As an
example, Cristián Cremaschi, a vineyard manager in Chile summarized how government loan
guarantees and funding can help struggling entrepreneurs who lack the capital and collateral
often expected from market institutions. “If I had not entered PROFOS, I would never have
been able to make the investment that I did—nearly 100 million pesos, because I wouldn’t
have had the sales to make [a loan] feasible with the bank.”
Cognitive Institutions for Entrepreneurship
Programs that focus on the dissemination of management knowledge and
entrepreneurial skills focus on strengthening cognitive institutions, and this can improve the
ability of local entrepreneurs to found and maintain their own private enterprises. Costa Rica
has focused its efforts on making the steps required of entrepreneurs as widely understood as
possible by maintaining a website and publishing a manual designed to improve individuals’
understanding of the process of launching a new business. Costa Rica also offers some
training programs for entrepreneurs. Uruguay’s DINAPYME program provides consulting
services to small businesses, and Red Propymes provides training to entrepreneurs. In
addition, the Industry Sector Nucleus program helps firms work together to understand their
industry environment. Finally, Chile offers training for SMEs and micro-enterprises, and its
FOSIS and CORFO programs help firms develop the entrepreneurial skills necessary to
succeed.
21
---------------------------------------------
--------- Figure 4 About Here ----------
---------------------------------------------
Other countries have also emphasized the importance of strengthening cognitive
institutions. Studies in the US and Australia have pointed to the existence of business
education and management training programs, as well as the availability of assistance with
market research and other business development activities, as contributors to the
entrepreneurial skill set of a society (Pennings , 1982; Dana, 1987; Hawkins, 1993; Phillips,
1993 ).
The Center for Business Incubators in Costa Rica demonstrates the importance of
developing the cognitive skill set of entrepreneurs. The Center not only offers many
administrative services for participants, but also provides extensive training and consulting to
budding entrepreneurs. The Center has sponsored about 100 programs since 1994, resulting
in viable high technology companies such as Fortech Quimica, which markets chemical
products, and AEC Electronica, which provides technical support to the electronics sector. A
recent study found that the average SME in the incubator directly or indirectly created eight
new jobs for Costa Ricans (Centro de Incubación de Empresas. 2001).
Normative Institutions for Entrepreneurship
Finally, programs geared toward improving society’s view of entrepreneurs can
influence a country’s normative environment, and thus improve individuals’ motivations to
become entrepreneurs. Our economic experts suggested that normative institutions are
perhaps the most difficult element of the entrepreneurial environment to change, and noted
that it would take several generations to truly alter how people in a society view
22
entrepreneurs. One expert pointed out that his culture tends to perceive entrepreneurs
skeptically because of years of public messages equating entrepreneurs with opportunists
(Arino, 2001).
---------------------------------------------
--------- Figure 5 About Here ----------
---------------------------------------------
All three countries are engaging in strategies aimed at changing these societal
perceptions. Costa Rica has offered fairs and expos to promote entrepreneurship. Uruguay
has sponsored awards that highlight how local entrepreneurs contribute to the objectives of
society, and has funded fairs and expos to draw attention to the entrepreneurial sector. Chile’s
community-building programs such as PROFOS strive to meet similar objectives. And
government leaders have taken up the task of promoting Chileans’ entrepreneurial spirit. The
head of a Chilean brokerage firm summarized, “…Chilean management isn't
entrepreneurial… Part of the problem is in Chilean culture. Fortunately, we have a
[President] Lagos today who is smashing both political and social taboos" (Rudnick, 2000).
Research on other countries such as Japan has pointed to a relationship between public
attitudes toward entrepreneurs and a country’s level of domestic entrepreneurial activity.
Some researchers have recommended that governments offer “entrepreneur of the year
awards,” and that national leaders regularly offer informal remarks praising the activities of
local small business owners to change societal attitudes towards SMEs (Gnyawali & Fogel,
1994). We concur with these recommendations, and note that government can work to
provide a positive environment that legitimizes entrepreneurship as a respected career in their
domestic economy.
23
There is some evidence that individuals in the general population in Chile have begun
to view entrepreneurship more positively. According to local economic experts, the Chilean
population increasingly looks toward the private sector and entrepreneurship for national
economic growth. While in the past, individuals aspired to work as government officials or
employees in large, established firms, most people today seem to be interested in starting their
own business (Segura, 2001). Further evidence of changes in how entrepreneurs are
perceived comes from Costa Rica. Increasing interest in the topic of entrepreneurship has led
private media firms to publish magazines, such as Entrepreneurial Costa Rica, that are aimed
at SMEs.
Communities of Entrepreneurship:
Programs that promote all three dimensions of the institutional profile simultaneously
should earn greater success than programs that focus on only one or two areas. Both the
PROFOS program in Chile, and Uruguay’s Industry Sector Nucleus program stand out as
having particularly good probabilities of success because they contribute to each of the three
pillars concurrently. These programs strengthen regulatory institutions by providing seed
money and other financial resources for entrepreneurs. They also contribute to entrepreneurs’
skill sets by providing a professional manager to guide member firms’ activities, and
encouraging firms to learn from one another. They help firms build a network of supporting
industries that can provide both intellectual and tangible resources to small enterprises. And
finally, by putting entrepreneurs in touch with one another, they help build legitimacy for
entrepreneurship, both in the perceptions of entrepreneurs, themselves, and in the community
at large.
24
By addressing all three dimensions simultaneously, improvements in one dimension
can induce progress in the others. For example, a program that provides financing to an
entrepreneur who lacks basic skills will likely be a waste of money, and may even worsen the
standing of entrepreneurship, in general. Communities of entrepreneurship, on the other
hand, can be designed to strengthen regulatory and cognitive dimensions directly, while
slowly building the normative pillar of a country's entrepreneurial environment.
When founding a new business or managing a small enterprise, managers face
challenges that are not necessarily present for executives of large, established firms. By
nature of their size and age, entrepreneurial ventures often rely on an external support
infrastructure for everything from mundane business tasks such as small-batch printing jobs,
to more strategic activities such as market analysis and product distribution. Entrepreneurial
firms are often too small to purchase capital equipment that lets them achieve an efficient
scale. They lack the resources necessary to engage in extensive research and development or
to market their product adequately.
By maintaining ties with other entrepreneurial firms, a small venture can increase its
knowledge acquisition, pursue co- marketing strategies with other SMEs, and obtain financial
and other resources that they may not have access to alone (Yli- Renko, Autio & Sapienza,
2001; Hartmann, 1993; Stuart; Hoang & Hybels, 1999). In addition, many new ventures
require an infrastructure tailored the specific needs of their industry. Entrepreneur ial ventures
in high technology industries, for example, rely on an extensive infrastructure of materials and
components, manufacturing equipment, and complementary products tailored specifically for
their emerging technology.
25
Innovative firms in these technology-based industries also tend to make faster progress
on commercializing a new product when they work together. A recent study on the wind
turbine industry (Garud & Karnoe, forthcoming) found that some national technological
communities approached innovation somewhat collectively, with firms working together to
contribute their incremental advances to others in the technological community. Others
approached innovation more individually, with firms working in relative isolation, pursuing
unique and incompatible product designs. This study found that the community approach
appeared to foster faster product development, and produced technological designs that had a
greater likelihood of becoming accepted in the global marketplace. Therefore, entrepreneurial
ventures pursuing new product commercialization appear to stand a better chance of success
when managers build relationships with other organizations in their own industry community.
(Garud & Karnoe, Forthcoming).
In sum, government policies that facilitate these community-building activities hold
greater potential than policies that support firms’ isolated efforts because a network of firms
can internalize spillovers, achieve economies of scale, and attract the requisite industry
infrastructure. Therefore, in many contexts, a consortium of small firms may leverage a given
financial subsidy into greater success than would be achieved if the same funding went to
dispersed SMEs. For example, none of the butchers in Uruguay’s industry nucleus in
Montevideo could afford to buy a refrigerated truck for their own small- volume business.
However, these butchers, who were losing money prior to forming the nucleus, began to make
a profit and grow within their first year of working together.
Several small toy manufacturers in Chile engaged in a similar effort through the
PROFOS program. On their own, each firm lacked the capital and expertise to make
26
investments to increase labor productivity or engage in extensive international marketing
activities. However, after coming together to form a co-operative, called Chilean Toys
Manufacturers, these small companies were able to develop new products, adopt more
advanced technology, and better promote their products at home and abroad. Sales, both
within Chile and abroad, more than doubled within four years (Gajardo, 2001).
Policy makers in Chile are pleased with the success of the PROFOS program. They
have concluded that the program has provided several specific benefits to participating firms.
It has facilitated the use of quality control programs, factory automation, and production
planning. It has also increased the availability of employee training programs, and given
firms greater access to local technical and market knowledge. According to CORFO
calculations, each US $1 invested by a member company has, on average, generated US $2.40
in additional sales (Benavente, 1998). CORFO managers are also pleased by the results from
a public policy perspective, concluding that the program has led to an increase in national
employment, and that every US $1.00 invested by the government has produced an additional
US $3.20 in tax revenues from the VAT. Therefore, by bringing entrepreneurs together into a
community, governments can leverage small investments into more significant strides in their
promotion of entrepreneurship. Table 1 summarizes some of the advantages that can stem
from building communities of entrepreneurs.
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---------- Table 1 About Here ----------
---------------------------------------------
27
LESSONS FROM LATIN AMERICA
Several basic conclusions from these cases can be instructive to policy makers, would-
be entrepreneurs, and managers of small, medium, and large businesses.
Promotion of entrepreneurship is an incremental, cyclical process. As the number
of SMEs increases in a country, a support system will arise to bolster that entrepreneurial
activity. And this support system will motivate even greater entry into the entrepreneurial
sector. For instance, the magazine, Entrepreneurial Costa Rica emerged to satisfy market
demand from budding entrepreneurs, and offers articles that educate small business owners on
topics such as organizing the SME, engaging in effective marketing strategies, dealing with
business partners, and reaching international quality standards. This magazine’s presence on
newsstands, informative articles, and promotions, such as an Entrepreneur of the Year award,
will also likely increase both the amount and success of entrepreneurship in the future.
Therefore, although a country’s early efforts to promote entrepreneurship may be slow
going, the pace of growth is likely to accelerate as institutions arise to support SME activity.
Similarly, regulatory, cognitive, and normative institutions will not materialize at the same
speed. While the regulatory environment toward entrepreneurship may emerge relatively
quickly, it will take longer for knowledge and entrepreneurial skills to become widely
distributed in society. And efforts to change the attitudes of a society toward an admiration of
entrepreneurs will be slower, still. Therefore, even with a concerted effort by both public and
private organizations, a country’s progress toward building a thriving entrepreneurial sector
may be incremental.
Public polices can target regulatory, cognitive, and normative pillars of a
national environment. It appears that the most common public policies toward
28
entrepreneurship focus on the regulatory environment by offering entrepreneurs financial
assistance of one sort or another. While there is evidence that these financial incentives may
facilitate entry and growth of entrepreneurial ventures, they are rather blunt instruments that
often do not address weaknesses in an economy’s normative or cognitive environments for
entrepreneurship.
A recent study reported that countries with a strong regulatory environment also had a
large percentage of companies on their national stock market that were new listings,
indicating that government regulatory and financial support associated with fairly advanced
forms of entrepreneurship. However, the strength of the regulatory environment did not
associate positively with domestic self-employment activity or the percentage of firms in the
country’s manufacturing sector that were SMEs. Instead, it appeared that countries with
strong normative environments for entrepreneurship had a large number of local residents
who chose entrepreneurial forms of employment such as self employment. And countries
with a strong cognitive environment tended to have a large percentage of firms in the
manufacturing sector that were SMEs, as well as many new listings on their domestic stock
exchange (Spencer & Gomez, 2001). Together, these findings suggest that in addition to
providing financial incentives, governments should consider policies that enhance the skill set
of the country’s residents, and that improve the status that entrepreneurs enjoy within the
country.
Policies that bring firms together into a community may go farther. Countries
may increase their likelihood of success by addressing all three pillars of the institutional
environment simultaneously. In particular, by implementing policies that help SMEs form
communities of entrepreneurs, governments may help firms overcome many of the obstacles
29
that result from their smallness or newness. Government support is not a prerequisite for such
community efforts, however. Managers in SMEs may wish to coordinate community efforts
on their own by identifying firms in similar circumstances and devising strategies that will
yield market power, economies of scale, advancements in infrastructure, and opportunities to
share knowledge.
Governments vary in their needs, as well as their capabilities to implement
policies toward the small business sector. Countries launching efforts to promote domestic
SME activity start with different institutional profiles for entrepreneurship. Therefore, the
mix of policies that a country should pursue will vary cross-nationally. Countries vary in the
relationship that exists between domestic business associations, such as industry associations
and chambers of commerce, and the government. And countries vary in terms of their
governments’ abilities to sustain policies that support firms, industries, and sectors in their
domestic economy. Some countries maintain reputations for sustaining such these policies
over extended periods of time, while others are known for quickly abandoning policies that
are not politically popular (Murtha & Lenway, 1994). Therefore, it is clear that a
government’s best strategy toward the entrepreneurial sector depends on its unique
circumstances.
CONCLUSION
The small Chilean wine producers described at the beginning of this article recognized
the challenges that lay before them. They needed to improve their technology, develop
international marketing strategies, and manage production and human resource activities with
growing sophistication. To meet these challenges, they designed a strategy to work together
30
within the PROFOS program in a co-operative that they named “Viñedos Valley of Maule
S.A”. A PROFOS consultant assisted them in developing an export strategy. Member firms
worked together to transfer technology among vineyards, set high quality standards, adopt
quality control processes, and implement cost-saving technologies. Within four years, the
value of the vineyards’ collective exports had increased from approximately US $80,000 to
about US $4 million annually, and some wine labels began winning quality awards in
international forums.
Government policies toward entrepreneurship have clear implications for the strategies
and performance of small and new businesses within a national economy. They also have
important implications for managers of larger firms. Established firms may prefer to locate
foreign operations in countries that have the potential to provide an extensive supply
infrastructure. For example, Intel’s manufacturing plant in Taiwan purchases about 80% of its
supplies locally. In contrast, its newer plant in Costa Rica imports more than 90% of its
supplies from abroad, since no domestic electronics industry yet exists (Stone, 2000). Intel’s
ability to assess the likelihood that a domestic supply infrastructure will emerge to support its
investment in a new country such as Costa Rica may contribute to the effectiveness of its
international location decisions. Perhaps one of the reasons that Intel relies little on a local
supporting infrastructure the lack of an entrepreneurial spirit in their host environment.
Policies to foster new business development and to strengthen small- and medium-
sized enterprises top the policy agenda of governments across the world. More and more
policy makers are looking to SMEs to spearhead technological advance, economic growth,
and job creation in their national economies (Vives, 2000). Publications by multilateral
organizations such as the International Monetary Fund, World Bank, International Labor
31
Organization, and Inter-American Development Bank have emphasized that promoting
entrepreneurship can help a country foster economic development. And countries with high
levels of entrepreneurial activity tend to display greater economic growth than less
entrepreneurial countries (Reynolds, Hay & Camp. 1999). Clearly, public policy makers
have a strong interest in understanding how to foster entrepreneurial activity within their
borders. We hope that the lessons summarized here will help them with that endeavor.
32
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Table 1: Advantages to Community Efforts
Market Power
? Gaining power over suppliers by buying in bulk
? Shaping industry environment for new technology
? Building long-term relationships with buyers, suppliers, or makers of complementary products.
Building Infrastructure for Entrepreneurship or Specific Industry
? Building legitimacy for idea of entrepreneurship
? Building legitimacy for particular industry or technology
? Attracting supporting firms to the market (e.g., business service firms)
Economies of Scale
? Joint purchase/sharing of capital equipment
? Sharing marketing costs through co-marketing agreements
? Sharing administrative costs of bureaucratic activities such as ISO 9000
Knowledge Sharing
? Sharing knowledge about incremental advances within a new technology
? Sharing technical knowledge about manufacturing
? Sharing information about marketing issues
37
Entry of
Entrepreneur
s
Increase of
Infrastructure
Government
Policies toward
Entrepreneurshi
p
Entry of
Entrepreneur
s
Increase of
Infrastructure
Government
Policies toward
Entrepreneurshi
p
Figure 1: Emergence of Entrepreneurship as
an Incremental and Cyclical Process
38
TIME
Figure 2: Objective of PROFOS
Source: PROFOs
39
• Preferential Credit Lines for Small Business
• Program Simplification
Regulatory
Environment
For
Entrepreneurship
• Tax breaks for SMEs
• Industry Sector Nucleus Program
• FOSIS Financing
• PROFOs
• PDP (Program for Development of Suppliers)
Uruguay
Costa Rica
Chile
Figure 3
40
• Training programs
• Center for Business Incubators
• Website
• Manual for the Investor
Cognitive
Environment
For
Entrepreneurship
• Assistance on applying for credit and
developing business plan
• Red Propymes Training for Managers
• Industry Sector Nucleus Program
• LATU (Technological Laboratory of Uruguay)
• FOSIS training for the self-employed
• CORFO initiative to modernize
technology and management
• PROFOs
• National Training and Employment Service
• PDP (Program for Development of Suppliers)
Uruguay
Costa Rica
Chile
Figure 4
41
• Fairs and Expos
Normative
Environment
For
Entrepreneurship
• Propyme Entrepreneur Award Program
• Fairs and Expos
• Industry Sector Nucleus Program
• PROFOs
Uruguay
Costa Rica
Chile
Figure 5
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