I discussed the four archetypes of capitalism: (1) “state-guided capitalism,” in which the state tries to guide the market by picking and promoting would be “winners” (national champions) among different industries, and even individual firms; (2) “oligarchic capitalism,” in which most power and wealth is concentrated in the hands of a cadre of individuals and families; (3) “big-firm capitalism,” in which huge and powerful companies carry out the most important business activities; and (4) “entrepreneurial capitalism,” in which small innovative firms play a critical role. In this column, focusing on the importance of entrepreneurial capitalism in the economic development of Turkey, I will discuss the preconditions for successful entrepreneurial capitalism and the major problems that innovative Turkish entrepreneurs encounter.Under entrepreneurial capitalism, small innovative firms started by entrepreneurs play a critical role in the creation of new products and processes that radically change the economic landscape and improve standards of living drastically. Entrepreneurs recognize and exploit an opportunity either to sell a new product or service or to sell an existing product or service at a lower cost by using a new way of producing or delivering it. Not all small businesses are entrepreneurial; in fact, most small businesses are not. Therefore, it is a mistake to equate entrepreneurship with starting a new small business since most small businesses sell existing products and services using existing processes, i.e., they are started by entrepreneurs who imitate but do not innovate. Entrepreneurial capitalism is the most conducive, among the four types of capitalism, to seminal technological breakthroughs and radical innovations, and hence the most dynamic and competitive type of capitalism. It combines entrepreneurial vigor with high risk in the way it generates what Joseph Schumpeter called “creative destruction.”
What are the preconditions for successful entrepreneurial capitalism? (1) Entry into a new business and exit from an old business must be relatively easy and cheap. In other words, it must be easy to start and grow a business, and to get out of a failed business without time-consuming and expensive bureaucratic red tape, such as burdensome licensing and registration requirements. (2) Access to finance is crucial. A relatively well-developed and decentralized financial system, consisting of banks and other financial intermediaries such as insurance companies and pension funds, as well as capital (bond and stock) markets, must exist to channel funds from savers to entrepreneurs. Private equity and venture capital funds (business angels) as well as micro-credit financial institutions can also be highly beneficial. (3) Labor markets must be relatively flexible without rigid rules so that entrepreneurs can hire and fire workers with relative ease. (4) Society should financially reward successful and socially useful entrepreneurship, through the rule of law that provides for enforceable property (including intellectual property rights such as patents) and contract rights, enhancing the psychic income entrepreneurs drive from their activities. Avoidance of onerous taxation is also important in providing the proper financial incentives and rewards. (5) Public institutions and laws must encourage activities that increase the size of the economic pie and discourage socially unproductive wealth-grabbing activities such as lobbying and rent-seeking that aim at dividing the pie by transferring wealth from one group to another. (6) Legislation and policies, such as antitrust laws and openness to foreign trade and investment that promote healthy competition, must keep the winners on their toes. Providing strong incentives to existing successful innovative entrepreneurs and larger companies resulting from earlier innovations for continued innovation and growth will help avoid stagnation and sclerosis. (7) Government support for R&D, especially for basic scientific research, can play an important role in stimulating innovative entrepreneurship. The ease with which university inventions are commercialized, with substantial benefits to their individual inventors, has been shown to be very effective in stimulating innovation. (8) Culture and educational systems must encourage risk-taking behavior, based on continual brainstorming, experimentation, without shaming those who initially fail as innovative entrepreneurs. (9) Society must provide a constructive safety net to shield unsuccessful entrepreneurs from failure through effective bankruptcy protection. (10) It must also help those people who are harshly impacted by the “creative destruction” generated by innovative entrepreneurship so that they do not resist disruptive radical change.
A Turkish Industrialists and Businessmen’s Association (TÜSİAD) report titled “Entrepreneurship in Turkey” (”Türkiye’de Girisimcilik,” Yayın No. TÜSİAD-T/2002-12/340) identifies and analyzes the major problems encountered by Turkish entrepreneurs. The report also offers various solutions to these problems, which relate very closely to the 10 preconditions for innovative capitalism identified above. It correctly emphasizes the real importance of entrepreneurship in the restricted sense of being “innovative” as opposed to “replicative.” Its measurement of entrepreneurial activity, however, is in terms of small business start-ups, which does not distinguish between “innovative” and “replicative” entrepreneurship. The report’s overall conclusion is that entrepreneurship in Turkey is underdeveloped relative to all seven countries chosen for comparison. It finds that entrepreneurial activity is highly concentrated in İstanbul and Kocaeli provinces, situated in the most developed region of the country.
The Global Entrepreneurship Monitor (GEM) is a not-for-profit academic research consortium, which has since 1999 provided the largest single annual study of entrepreneurial activity in the world. It issues national reports for individual countries, but Turkey is not included among them. According to the GEM’s 2006 “Annual Global Report” (http://www.gemconsortium.org/download/1184426771859/GLOBAL%20SUMMARY%202006B%20Final.pdf), “Total Entrepreneurial Activity” as well as “Business Angel Activity” in Turkey was below the GEM average for all 42 participating countries, despite a very positive attitude toward entrepreneurship. The fear of failure as well as existing obstacles prevented many Turks from becoming entrepreneurs. The report identifies the major obstacles to entrepreneurial activity as: (1) lack of financial support, coupled with high cost of credit; (2) onerous regulations, such as contractual requirements that restrict access to capital; (3) burdensome taxes; and (4) ineffective protection of intellectual property rights. Its evaluation of the innovativeness of Turkish entrepreneurs is discouraging: “Turkish entrepreneurs have relatively high job growth expectations but do not perceive new product market opportunities and they do not think they will be able to use new technologies and they are more oriented towards the domestic market.”
In a column (Ease of doing business around the globe and in Turkey) in March, I noted that in the World Bank’s “Doing Business 2007” report, intended to represent entrepreneurial freedom based on 10 quantitative indicators, Turkey dropped in the rankings on the ease of doing business from 84th among 155 countries in 2005 to 91st among 175 countries in 2006. Its overall lower ranking was caused by lower rankings across all but one of the 10 indicators. What was striking was the very low ranking in both years in terms of Dealing with Licenses, Employing Workers and Closing a Business. These are the areas in which reform is needed most urgently to encourage innovative entrepreneurship in Turkey.
