The International Research Conference on Entrepreneurship in Emerging Regions held at ISB- Hyderabad brought some of the worlds best researchers together. The three day event had a whole host of papers ranging from cluster formation, social capital, role of government in spurring entrepreneurship and a lot of discussion and debate between participants on social entrepreneurs, and entrepreneurship. Here are some snippets of what caught the author's attention.

Dot.com to Dot.gone:

In a fascinating study of the Internet IPO Firms in the US. during the heady Dot.com days (1996- 2000), Jayaraman Narayanan (Georgia Tech) et al. studied 160 Internet Firms which went for an Initial Public Offering (IPO) while still not having achieved profitability and examined various factors like the track record of management, Venture Capitalists, time to IPO etc to see how these factors determined how soon these companies became profitable, or if they became profitable at all after they were listed. The study throws up some very counter-intuitive findings which are very useful for policy making as well as for entrepreneurs to take decisions. Here is a gist of the findings of their paper "Determinants of Probability of Profitability and Time-to-Profitability of Internet IPO Firms."

1.  The proportion of firms going public prior to achieving profitability has been increasing over time. This is because of more technology firms going public. Even though there is a lot of uncertainty of them becoming profitable these companies still go public even while they are unprofitable.

2. The older the firm is before going public the more likely it is that the firm will be profitable and time to profitability is also sooner.

3.  The fact that developmental stage technology firms take longer to achieve profitability is consistent with the view that these firms were rushed to the market too early without adequate seasoning.

4.  Similarly more the number of employees at the time of going public, the more likely that the firm will be profitable and that it will be profitable sooner.

5.  On the other hand the probability of profitability decreases the higher the amount of money raised at the IPO; it also takes longer

6.  Surprisingly the probability of profitability decreases and the time-to-profitability increases with venture capital participation.

The authors say "the results are suggestive of VCs taking advantage of investors' appetite for Internet IPOs by taking their portfolio companies public early, thereby shifting the risk of financing start-up technology firms to the public equity markets. Furthermore, the reduction in lock-up periods during the Internet phenomena allowed VCs to cash out earlier resulting in lost benefits to the issuing firms from post-issue venture capitalist monitoring."

1.       "Increase in the proportion of outside directors on the board is associated with a lower probability of post-IPO profitability and consequently longer time-to-profitability. This provides evidence on the importance of insider control in early stage entrepreneurial firms. These firms are often critically dependent on the ideas, entrepreneurial spirit, expertise, and particularly risk taking propensity of their founders, top management, and other insiders, and often make huge risky bets on ideas or technology regarding which there is little or no evidence on viability or market acceptance. Further, since these firms are in new and emerging industries with no established path to development, outside directors may have relatively little to contribute in terms of providing guidance, expertise or monitor managerial actions. These types of firms will benefit from less control and monitoring from outsiders and instead are more likely to thrive in an environment where insiders have greater influence on firms' operating and financing decisions."

2.       variables associated with CEO and CFO characteristics are weakly associated with time-to-profitability.

3.       CFO's relevant industry experience is unrelated to the probability of profitability (time-to-profitability).

4.       Furthermore, while the CEO's prior experience in a reputable firm is unrelated to time-to-profitability, the CFO's prior experience in a reputable firm is weakly negatively related to the probability of profitability.  These results suggest that in new industries such as those that comprise the Internet sector, the skills and competencies required of top management are fundamentally different and prior organizational experience is not very relevant.

     This paper was most fascinating to me, since it throws up results which are so counter intuitive, there is a lot more to building a profitable Internet company than the track record of the top management, the venture capitalists and the board of directors. As the authors point out, charting course in new industries needs a lot of decisions and risks to be taken which only the entrepreneur has the propensity to take.

 "The Entrepreneurial Role of Border Traders in Emerging Markets"

Edward Rubesch, Ph.D- Thammasat Business School

A case study on the border between Laos and Thailand provides good examples of how border entrepreneurs operate. Thailand is a relatively well-developed consumer market, which has attracted a number of local and multinational manufacturers to supply it. Laos is a lesser-developed country and has little manufacturing capability of its own. Vientiane, the capital of Laos and a market of 500,000 people, lies within 25 km of the border with Thailand.

Consumers in Vientiane get the products they desire in three ways.

1.       They are served by authorized distributors set up by manufacturers in Thailand, China, and Vietnam.

2.       A small percentage of the population has the wherewithal to travel to Thailand to buy consumer products for their own personal use (primarily by owning their own vehicles, and having the time to make the trip).

3.       Finally, a large number of entrepreneurial border traders have emerged to supply products to the market. Known locally as the "ant army," these individual entrepreneurs find opportunities in Vientiane by identifying new customers who are interested in buying goods from Thailand, or by identifying new products which are demanded by a certain number of people in Vientiane. They travel to Thailand on a regular basis to purchase these products and return to Vientiane to re-sell them. In this way, they form a network that acts as a third channel of distribution into the market.

     The results of this case study show that the border entrepreneurs do not compete against the authorized distribution channel on price alone, since they were usually more expensive. Instead, they compete by providing a higher service level than authorized distributors, or by identifying new products that are not yet available in the market.

Authorized distributors usually ship products 2 or 3 times per week to their customers, which are retail shops in Vientiane. In contrast, border traders supply products on a daily basis, and can be called upon to go to Thailand to purchase goods on short notice. Retailers utilize the services of border traders to purchase additional stocks of products that sell out. They benefit from being able to keep smaller inventories on hand, without the need to build up safety stock to cover peak sales periods. The frequent deliveries by border traders also provide benefits to consumers in Vientiane, who like their counterparts in other developing countries, have lower purchasing power. These consumers cannot afford to buy a week-or-more worth of goods; they are unlikely to own a vehicle to allow them to travel long distances to shop; and they do not have refrigeration in their homes.

Consequently, they must purchase most consumer products on a daily basis, from a source near their home. In this case, border traders also supply products that have recently become available in Thailand, but which are not yet available through authorized distributors in Laos. Consumers benefit from this because they can quickly try new products seen advertised on Thai TV (which spills over into Vientiane), while retailers gain from the increased sales. Moreover, evidence from this case study suggests that authorized distributors also benefit, since border traders lower the risk of launching new products into the market, by identifying the opportunity and initial customers. Authorized distributors add the products to their portfolios once volume has increased to a desirable level.

One important aspect to note is that Border traders are more expensive than distributors. As one of the shop owners quoted in the study puts it "Usually, I buy from border traders only when I sell out an item. They can get it to me fast. If I order today, I will receive it tomorrow morning. Even if it is a little more expensive, it is better than not having the product at all. Border traders recognized this competitive advantage. - says the author in this report.

To me this is what entrepreneurship is all about. Sure for the Border trader, this is a much better way to earn money. However spotting opportunities in the way the market is structured, and serving the customer the way he needs is what this is all about. It also points to how entrepreneurs and people by nature can find opportunities on their own and fill gaps in the marketplace.

Are managers more inclined towards Entrepreneurship ?

Sunanda Easwaran and Y.K. Bhushan ICFAI Business School, Mumbai, India

Following long-held theories about what makes a good entrepreneur, this paper examines once again, through a study with 209 MBA students their inclination towards entrepreneurship. Prior work-experience does not appear to significantly improve the inclination of MBAs towards setting up their own business, suggesting that entrepreneurship training programmes aimed specially at MBA students with prior work experience are not likely to increase the supply of entrepreneurs.

The Authors point out "Sarasvathy has postulated that entrepreneurial behavior requires emphasis on innovation, creativity and tolerance for ambiguity, while the MBA programme emphasizes operation within a ‘planned framework'."

Just three of the papers have been covered in this issue of Businessgyan. There were a lot more fascinating research papers presented in the three day conference organized by ISB, including how clusters were formed, the governments role in forming clusters, social networks etc. etc. Businessgyan will be covering some of these research findings in the issues to come.  

Reported by Balaji Pasumarthy 

Issue BG70 Jan07

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