Ignacio de la Vega, Professor Entrepreneurship (IE Business School) Innovation ‘Out of Necessity’: Entrepreneurship - GEM report 43 countries

Click here for the article of Universia Knowledge Wharton, February 11, 2009

During a recession with fast growing unemployment, looking for ways to incentivize entrepreneurial activity and enhance corporate liquidity has become a strategic focal point for Spanish companies. Ignacio de la Vega, director of the IE Business School’s Center for Entrepreneurial Management and president of the Global Entrepreneurship Monitor (GEM), which analyzes entrepreneurial conditions in 43 countries, spoke with Universia-Knowledge@Wharton about the current economic crisis and its impact on  entrepreneurship. The GEM 2008 Global Report (2.7MB), which was recently released, is sponsored by the Ministry of Industry’s small and midsize business division and the Banesto Foundation for Society and Technology.

UK@W: Experts talk a lot about innovation and exports as two good tools for getting around the crisis. Do you believe that the right policies for addressing those subjects are getting off the ground today?

I.D.V: Innovation is not just about developing innovative R&D in technology. That is just one sort of innovation that is possible for a very specific sort of company. Many small companies don’t fit in that category. The sort of innovation within reach of small companies often involves some technology but, especially, it involves an innovative business model. For example,

a neighborhood supermarket faces a very trying situation such as declining revenues, higher costs for all sorts of things including logistics, and so forth. For this sort of entrepreneur, innovation could mean trying to generate additional value for customers with classic solutions such as discounting, or it could mean looking for more innovative products, since competing simply on the basis of price has become so difficult.

You have to invest in R&D and have a public policy [to support that], but people need to know this is about long-term investment. It doesn’t make sense to say that [R&D] is a [short-term] solution to the crisis. If we begin to invest seriously now and, for example, create a Ministry of Innovation, perhaps we can diversify the business model of the country in ten years. The reality is that the government’s R&D funding has been squandered; on occasion, it was used for buying new machinery and other initiatives that are not really R&D.

As for exports, diversified companies are more sustainable, according to the textbooks. But we are talking about small companies exporting and, at times, that is an oxymoron, a contradiction in terms. Ultimately, it is a problem of competitiveness. In order to export, you need to be competitive, and in this country we have a very troubling situation in that regard. At times, the origins of that problem are in public policy; we have trouble exporting because we have exhausted our options for exporting in many sectors. In addition, we start with an unfavorable scenario in many low-cost markets in that salaries in those countries are up to eight or 10 times lower than in Spain; absenteeism is practically zero there; quality control requirements are very lax, with no controls, etc. Things that we do not require of companies of [non-European] origin [such as China] are requirements for our companies [in the EU], and this makes our competitiveness deficit even a bit deeper. You have to start from the root of the problem: We need to educate our companies, provide them with resources so that they can be more competitive. And we all need to play with the same rules.

UK@W: The database for your report includes 50 countries. What is the profile of the typical Spanish entrepreneur? Has it changed a great deal in recent times? If so, why? How does it differ from that of neighboring countries?

I.D.V.: Our rate of entrepreneurial activity is a bit lower than in English-speaking countries, but higher than in the countries surrounding us. The profile of the entrepreneur is becoming more uniform, but the interesting thing is the change that has occurred in the last two or three years; the typical entrepreneur is maturing and aging. The average age has gone up by almost four years, and it is approaching forty [years of age]. These days, an entrepreneur coming into the market needs more professional baggage -- more knowledge of the sector and so forth. This is very common among entrepreneurs older than fifty. This is related to the concept of becoming an entrepreneur ‘out of necessity’ -- starting at that age because your professional career in Spain has come to an end even though that shouldn’t be the case. In addition, today’s entrepreneur has a higher level of training, and education now provides an additional competitive advantage. Today’s entrepreneur also invests more [in his or her business], and the average cost of an initial investment in a project has gone up. The entrepreneur contributes part of the funding from his own pocket, which means that there are fewer and fewer [external] sources of funding.

In times of crisis, the ratio between male and female entrepreneurs evens out. This is something positive, and it obscures a reality of our environment. In families where there are not workers, the woman often develops her entrepreneurial project on her own. This can even happen, at times, in traditionally masculine business sectors. Declining activity in sectors such as real estate, construction and automobiles means that male entrepreneurs are disappearing and female entrepreneurs are being created in the service sector. Traditionally, Spaniards invest in the service sector because it is more welcoming, and it has minimal risk. However, we also observe that over the past twelve months, there has been a significant increase in the industrial sector of renewable energy...