Recently, I chanced upon one of the best research papers ever written about entrepreneurship. The paper is by Tino Sanandaji and Nima Sanadaji from the Centre for Policy Studies and is titled “SuperEntrepreneurs.”
In this paper, the authors undertook ambitious tasks of understanding the differences between self employed and entrepreneurs; the environment conditions that are conducive for entrepreneurship activities; and the key characteristics of super entrepreneurs (defined as people who have amassed a net worth of US$1Bil). Through this research, the authors also seek to debunk common myths about super entrepreneurs. Using this research as a foundation, we can understand more in relation to our local context.
In Singapore, the term “entrepreneur” is often used to describe someone who chooses to be self employed rather than one seeking employment. A distinction must be made between the self employed and an entrepreneur. Whereas entrepreneurs start highly innovative companies that often create (and destroy) values and have scalable potential; people who are “self employed” often start small companies that have limited growth potential. This is not to discount the fact that self employment is highly essential to any economy nor that it cannot be hugely successful; but that jobs, wealth and value creation are mostly associated with innovative companies started by entrepreneurs.
Having a clear demarcation allows for policy makers to know and implement policies accurately. Apparently, in Singapore’s context, entrepreneurship with innovation is what policy makers desire. This is due to the fact that the associated technological progress and economic growth would bring benefits to the citizens and the country.
Knowing this, then, we can examine the optimal environmental factors that can promote entrepreneurship. Some of the more important factors are tax rates, regulations and legislation history. Firstly, tax rates must not be excessively high such that profits generated by innovative companies are transferred to the state. This reduces the economic benefits of entrepreneurship. Singapore has one of the most competitive tax rates in the world, and thus tax rate isn’t an impediment. Secondly, Singapore places a strong emphasis on IP rights and has one of the lowest cost in terms of setting up a business. These reduce the economic risk of pursuing entrepreneurship. Lastly, hailing from British Common Law origin, there is strong protection of property and asset rights. All the above seem to suggest that Singapore has the necessary bedrock for highly innovative entrepreneurship activities. However, though there has been a recent rise in “entrepreneurship”, the country still do not seem to have many of such activities. Why is this so?
Firstly, innovative entrepreneurship often require founders to be highly educated and/or having strong, specific domain knowledge. Common myth dictates that highly successful start ups can be founded by college dropouts. However, research has shown that more than 50% of Super Entrepreneurs in US actually have a Masters or equivalent. This should not be surprising because to create innovative companies, the founder must surely have obtained specific domain knowledge and are intellectually capable enough to improve and innovate on it. While we are witnessing more people coming out of school to pursue self employment either via opening a small cafe or creating an app, these activities are more often than not not scalable and limited in innovation.
Secondly, pursuing entrepreneurship involves huge opportunity costs: time, stable job, and good salary, in return for something that is more often than not zero in terminal value. The trade off can be too drastic and improbable for many individuals to undertake.
Lastly, highly innovative products and companies require a substantial core market backing for them to work. Unless the products can almost completely eliminate the national boundaries segregating us from our neighbors, the 6mil local population will be a limiting factor.
Let us not romanticize entrepreneurship. It is an arduous journey and often does not pay off. There is indeed an economic premium for the founders, and value creation to the society, but it is not for everybody.