1. ENTREPRENEURSHIP AND INNOVATION AS ENGINES OF GROWTH Ruslan Stefanov Coordinator of the Economic Program Center for the Study of Democracy, Sofia, Bulgaria

2. Presentation outline Entrepreneurship and innovation are the growth engines of modern market economies The nature of entrepreneurship – How do entrepreneurs come to be? – Can entrepreneurs be grown? – What are the right environments for entrepreneurship to flourish? – What are the prerequisites for entrepreneurs to emerge and develop? Barriers to entrepreneurship Innovation - what does it mean and how does it relate to entrepreneurship? Discussion of entrepreneurship and innovation in Eastern Europe

3. What is entrepreneurship? Individual efforts of entrepreneurs have been the driving force in the development of modern market economies Entrepreneurship has been at the core of democratic and market-oriented reforms in Eastern Europe and elsewhere Developing entrepreneurial culture is crucial for modern societies Entrepreneurship is the capacity of individuals and companies to undertake risk.

4. Entrepreneurial culture There are different kinds of entrepreneurs BUT entrepreneurial culture relies on certain shared institutions – Freedom of choice – Freedom to start and run a business – Freedom to employ people – Freedom of information These institutions create the right environment for entrepreneurship – They must include protection of returns on entrepreneurial activity Free markets nourish entrepreneurship.

5. Harnessing a nation’s creative powers… Entrepreneurship and the private sector are central to free markets because they: Bring new ideas Create new goods and labor markets (jobs) Open new avenues for development Create new wealth Address the needs of consumers Free markets mean that people can freely exchange goods and enter into contracts, within a shared legal and regulatory framework

6. Harnessing a nation’s creative powers… Protecting property rights is one of the key roles of the state – Whenever there is a mutual benefit from the exchange between two persons, they should be able to secure that exchange through a contract – The state has to protect property rights from infringement and enforce contracts If protection of property rights is lacking, people have no incentive to be entrepreneurs – e.g., it is very difficult to conduct entrepreneurship in many African nations because of the lack of protection of property rights and weak rule of law

7. Harnessing a nation’s creative powers… For markets and entrepreneurship to function, there must be a certain degree of certainty that law and rules apply to everyone The rule of law means enforcing the same rules for everybody in the society People must face the same constraints provided by the legal and regulatory environment – If someone is exempt from abiding by the same laws, that creates an unfair advantage Rule of law Is much more than putting criminals behind bars.

8. Democracy and entrepreneurship Democracy and entrepreneurship are intertwined – They share the common principles of respect for political and economic freedom, property rights, and the rule of law Public attitudes towards entrepreneurs show whether democracy in a given country works – In many states in Eastern Europe or the former Soviet Union entrepreneurs are associated with oligarchs and people who became rich through breaking the law – In a country where entrepreneurs or businesses are understood as people unlawfully enriching themselves, democracy and market economy cannot flourish

9. Cultivating entrepreneurship Entrepreneurs today have physical and virtual (via the internet) ability to move – If a given country is not conducive to business, entrepreneurs may leave abroad or go underground into the informal sector Free market access is the most important prerequisite for entrepreneurs to stay in the formal economy – Needs to be accompanied by the rule of law and respect for private property – Requires rules that make it possible to start and grow a formal business easily Entrepreneurship is very delicate. While it takes a lot of time to develop an entrepreneur-friendly environment, it can easily be broken.

10. Tax and administrative burdens Tax burden on businesses is a delicate balance – Other things being equal, the more taxes are taken by the state, the less incentives an entrepreneur has to start a business – BUT this is only true for the really high tax burdens not associated with corresponding delivery of public goods Tax burden has to be understood as more than just tax rates – it includes administrative burdens – The way taxes are collected, inspections are conducted, etc. The size of the underground economy is a clear sign of the way the formal institutions work.

11. Ease of doing business in Eastern Europe and Central Asia Source: Doing Business Database, The World Bank

12. Creative businesses Entrepreneurship is the first prerequisite for a vibrant and well-functioning market economy BUT it is not important for businesses to be created – they must be creative and productive – When appropriate incentives are not in place, businesses may look for ways to acquire gains without providing real value or circumvent the law Entrepreneurship and innovation are the two engines of economic growth in modern economies – Technological innovations – Market and organizational innovations Innovation brings new and higher value to customers and markets - the ultimate entrepreneurial goal.

13. The role of competition Competition is the key driver of innovation Fair competition means that the same rules are being applied to everyone, thereby helping drive competitive forces Competition is sometimes perceived negatively as the adversarial “animal spirit” of markets – BUT fair competition is not a ruthless fight – It is the role of the market rules to ensure fair competition – Rules of competition must create level playing field Fair competition channels entrepreneurship and innovation into new products, services, etc.

14. Measuring innovation National and international indexes – The World Bank’s Knowledge Economy Index (KEI) – The EU’s European Innovation Scoreboard (EIS) Corporate innovation measurement – e.g., Boston Consulting Group’s annual survey on corporate innovation What gets measured gets done – A push towards measuring and managing innovation Not all innovation comes from scientific labs or results from well- designed processes – Innovation still remains a black box in many respects Measuring innovation tells only part of the story; managing it is far more difficult.

15. Entrepreneurship and innovation: Experience from Eastern Europe Changing formal rules is easier than changing informal institutions Lack of proper enforcement raises problems with creating a level playing field for everybody Slow reforms can give a bad name to free markets and democracy Although the challenges of necessary reforms may be daunting, building an institutional environment conducive to entrepreneurship and innovation pay off in the long run It is easy to write down formal rules – applying them is difficult

16. Knowledge, innovation and growth (1995 – 2008) Source: International Monetary Fund, The World Bank Average Real GDP Growth Knowledge Index Change (%)

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