Until recently few emerging economies were looking to attract foreign entrepreneurs to set up in their country, much of this because of the fear that foreigners could steal jobs that should go to locals, or because it is hard for governments to justify spending incentives on non-tax paying visitors.
But that it seems is slowly changing, at least in some emerging economies like Chile which in 2010 launched a $40-million programme (Start-up Chile) to attract 1,000 entrepreneurs within three years, with the only requisite that they set up in the South American country for six months. Chile reached the 1,000 mark in September last year. Since then a long list of countries – including most recently Jamaica – have followed with similar programmes.
Putting a lid on them
South Africa doesn't have a start-up programme yet and looks unlikely to join the bandwagon any time soon. Instead it looks to be clamping down on immigrants wanting to start a business there.
Last year the Department of Trade and Industry withdrew a bill (the Business Licensing Bill) that would require all businesses to obtain a license to operate. The bill is being reworked and may be launched under a new name, after substantial opposition from business. Many believe the government's real intention with the bill is to control the large number of foreign traders that have sprung up there in recent years.
The latest cause for concern comes with fresh immigration regulations that took effect in May under the new minister of home affairs Malusi Gigaba (pictured above).
Among various new measures that will affect foreign visitors to South Africa, the new regulations state that a foreigner issued with a business visa must now have a staff complement made up of 60% South Africans or permanent residents. The previous requirement was for only five people. On top of this the foreigner will have to prove that their business will benefit South Africa before being granted a business visa.
Immigrants add value
But South Africa badly needs more new ideas and talent to inject into its economy which is fast stagnating. In this immigrants can play a key role.
In the US over 40% or more of businesses are started by entrepreneurs or the children of entrepreneurs. They are also nearly twice as likely as US-born citizens to start new businesses each month, while more firms run by immigrants export goods or services than do non-immigrant firms - a real boost for their new found home.
This, while the Hamilton Project (part of think tank the Brookings Institution) points out that on average, immigrants raise the overall standard of living of American workers by boosting wages and lowering prices, rather than effecting a race to the bottom.
In South Africa the families of immigrants still play a major role in entrepreneurship - for example Jews, who arrived in the early 1900s and Indians, who began arriving in the 1860s mostly as indentured labour, both play a significant role in business ownership in the country.
How to score
Apart from launching a start-up programme such as Chile's, another way to get smart people to move to your country is by giving them a start-up visa. A number of developed countries have begun to do so.
The hope is that in return for residency, high-growth entrepreneurs will help create jobs and bring with them new ideas to stimulate the economy of their new country. This kind of visa is good for those emerging economies sceptical about being swamped with low-skilled labours that may compete with local workers.
While the US is still debating a Startup Visa, two countries offer interesting examples for policymakers from emerging economies - the UK and Canada.
The UK, which introduced a new entrepreneur visa in 2008, in 2012 added an additional route tailored for recent graduates from UK universities with entrepreneurial ambitions.
Canada now allows immigrants (capped at 2 750 a year) that work with incubators and venture capital funds to take out a start-up visa (the Start-up Business Class), launched in April last year. Applicants must secure at least $75 000 from a designated Canadian angel investor group or $200,000 from a designated Canadian VC fund.
In this way the business support community and investors are used to filter applicants, rather than civil servants with no business experience that have to pour over an applicant’s business plan (as in Chile and
Brazil’s investor visa – which in the latter can take up to nine months to secure).
Should you put cash down?
The first question for policymakers when designing an investor or start-up visa is whether to have applicant invest a minimum start-up capital.
Brazil asks for R$150 000 for a five-year renewable investor visa (817 were issued in 2012), while Chile (one-year renewable) doesn’t have a minimum investment requirement - but applicants must produce evidence of the funds they will need to start the business and submit a report of the impact of the business and structure.
But the risk is that an entrepreneur won't always end up doing what they promised in the time prescribed by governments (which is often very limited).
Those jobs they pledged may not materialise. It's probably because of this that one group of attorneys in Chile says bureaucrats there often adopt a strict approach when applicants apply for a second year of residency under its investor visa. This is the likely counter to waiving capital requirements.
Madeleine Sumption of the Migration Policy Institute (pictured above) points out however that tight deadlines may discourage risk-taking or prevent entrepreneurs from adjusting their business plans in sensible ways if these decisions would jeopardise their visa status. The trick is to get the balance right.
Start-up South Africa?
South Africa should do more to attract immigrants. Compared to many emerging economies it is an attractive destination to set up a business. It has an advanced financial sector, relatively good infrastructure and a good legal system. Costs are low and the middle-class can enjoy a high standard of living.
With Africa ow experiencing soaring growth, the country's leading cities Johannesburg and Cape Town could become the next start-up capitals of Africa. Encouraging more foreign high-growth entrepreneurs to set up there and getting rid of unnecessary red tape will go some way to help the country on its way to achieving this.
Stephen Timm writes on small business. He currently lives in São Paulo, Brazil but is originally from Cape Town, South Africa. For more on the start-up scene there, visit the Silicon Cape initiative and Cape Town Activa.
Governments around the world are getting into venture capital (VC) investing, hoping to replicate what Israel's government in the 1990s did to help launch one of the world's most successful VC markets. Today the governments of countries like Chile and Malaysia are getting stuck in too. India is the latest to look to do so.
But unlike before more governments are beginning to realise that it's only by partnering with the private sector and improving the existing entrepreneurial ecosystem that they will make any headway to boosting high-impact entrepreneurs.
India's move follows an announcement in July by Finance minister Arun Jaitley (pictured above) in his budget speech, of a plan by the Indian government to create a 100-billion rupee ($1.6 billion) VC fund.
Although it's not all that clear how the fund will operate, it seems the government will likely favour partnering with private VC funds, in a kind of fund-of-funds in disbursing the capital. Lending directly to entrepreneurs may not prove so effective, based on recent research (see below).
The government has already been involved in VC funding since at least 1999, through Sidbi ventures, a subsidiary of India's small business funding agency Sidbi. The subsidiary has invested directly into small firms, rather than via private VC funds which chose which entrepreneurs to then invest in.
But concern is growing that India's early-stage venture capital investing lags behind other countries, a 2012 report to India's Planning Commission found. Its authors were also concerned that there was a need to widen the lender-base beyond just Sidbi.
Among other recommendations, including improving the entrepreneurial ecosystem, the report suggested that the government could set up a fund-of-funds to seed other early stage venture funds.
After all the VC sector has been hotting up in India, having more than doubled from US$600-million to US$1.4-billion in investments between 2006 and 2012 according to a report by accounting firm EY. It's still small in comparison to the US ($33 billion in invested capital) or even Israel ($1.7 billion), but it's none the less growing.
But does government really have a role?
The knee-jerk reaction of many is that governments should stay out of VC funding, but many experts believe otherwise. They say governments have a key role to play in the building a VC market for small firms and start-ups, many point to the involvement of the US military as critical in the development of California’s Silicon Valley.
Harvard Business School professor Josh Lerner (pictured left) says governments can prove useful in three ways: by creating an ecosystem that encourages entrepreneurship and venture capital; by ensuring that the programme reflects the needs of the market; and by revising it where necessary.
Added to this Lerner says policymakers must listen to the market and avoid the temptation to jump into popular areas.
He points out that the SBA's SBIC programme, set up in 1958, helped create the US's VC industry as many early VC firms started as SBIC awardees, before opting out. The programme has also built the ecosystem of service providers to the sector.
Even in India the government has helped. EY attributes India's growing number of VC investments in part to the elimination of tax on capital gains and the relaxation of rules preventing foreign investment.
So what's the success rate?
Not many assessments have been carried out on how successful the government has been in VC funding, however a 2013 report (using a sample of 20,446 enterprises in 25 countries), found that companies that received investment from a mixture of both private and government VC entities tended to receive more capital and exit with higher returns than did those backed only by private or by government VC.
The same report also found that privately-funded companies out performed those funded only by government operations.
So what should the Indian government and other governments looking at getting into VC funding consider? Here are three tips:
1-Act as a lender to private sector
When it decides to partner with the private sector, the state can either hand over the capital and not expect a return - or hand it over with the expectation that the financial institutions will be well resourced enough to repay the state on whatever is lent out.
The SBA's Small Business Investment Company (SBIC) programme, which has been in operation since 1958 is an example of the latter. Big names like Fedex, Intel and Apple number among the over 166,000 investments that SBIC has made (into 2,100 funds it has licensed).
In the programme SBICs are licensed and regulated by the SBA and a SBIC must have at least $15 million in capital). SBICs then use their own private capital plus funds borrowed with an SBA guaranty to make investments in qualifying small businesses.
The debentures an SBIC receives from the state have a term of 10 years and provide for semi-annual interest payments and a lump sum principal payment at maturity. In effect the programme operates at no subsidy cost to the American taxpayer.
You might say this only in well developed countries could this model (where private funds pay back what they lent from the state) possibly work, but with India's and other emerging economies' growing venture capital market the SBIC model may just be something to consider. Like this no taxpayer money is wasted. And capital can therefore be better utilised elsewhere - like on roads, healthcare and education.
2-Governments must adapt as they go
Another key lesson is that governments must be prepared to update their VC programmes as the programme advances or as the market changes.
In Chile, the government’s small business support agency Corfo has invested in a number of VC funds via three funding rounds. With each round it has adapted the rules to ensure that funds are disbursed in the best possible way.
The latest change, in 2012, saw Corfo launch two new VC programmes, one to focus on financing early stage companies and another to finance growing businesses - this after the agency found that about 75% of the investments made between 1999 and 2010 were concentrated in established businesses.
3-Get in and get out
Finally the most important tip is for governments to get in, spur the market and get the heck out. If the state stays in too long it risks creating all kinds of problems related to the use of taxpayers money or to the crowding out of the private sector VC market.
Governments should aim to do what the Israeli government did when it invested in Yozma in 1993. The programme effectively gave birth to the country's VC market when the group established 10 drop-down funds, each capitalised with more than $20 million. The government then sold its stake and pulled out of the VC sector when the success of its efforts were evident.
But the experience in Malaysia on the other hand has been different. There the government, like in Chile, remains involved in VC investing over a decade on, through the Malaysia Venture Capital Management (Mavcap).
Mavcap invests in private VC funds (as part of its outsource partners programme) which in turn invest in high-tech Malaysian small firms. The third round was launched recently. The sector is perhaps not ready, even though the third round has involved Mavcap raising capital from partners in the US, Europe and Asia.
But it's not as bad as in South Africa, where a planned R100-million government VC fund which would've invested in at least three private funds, was last year put on hold by the government's Technology Innovation Agency, according to the agency's Pontsho Maruping.
What history has shown so far is that it's not so bad for the state to get involved in pumping up the VC sector.
Creating the necessary ecosystem to support co-investing with the private sector is the hard part, as is opting to exit and leave the rest to private sector VC investors who have grown to become more keen on start-ups and riskier investments.
Stephen Timm writes on small business. Watch out for his upcoming advice on how emerging economies can boost angel investors.
With a budget twice the size of the US's Small Business Administration (SBA) and with some 700 centres and 9,500 business consultants reaching 1.5 million business owners, Brazil can lay claim to the world's biggest small business agency - Sebrae.
The resources at its disposal - currently $1.8-billion - dwarves most other small business agencies (see table below). Its budget is 0.1% of Brazil's gross domestic product (GDP), which is about the same level of spending by Chile's Corfo on small businesses, but significantly higher than the SBA (0.06% of GDP).
Where does the money come from?
Sebrae (with its current head Luiz Barreto pictured above) operates as a not-profit organisation, but receives funding from the government via a special tax of between 0.3% and 0.6% levied on employers' payrolls. The tax not only funds the agency's programmes, but those of a number of the government’s training initiatives (collectively known as Sistema S in Brazil).
The SBA itself has an impressive reach, serving about a million small businesses a year - much of this is via a network of 900 Small Business Development Centers. It also relies on over 11 000 of business professionals who volunteer their help.
However Sebrae's performance is perhaps even more impressive, as unlike the SBA which assists firms with up to 500 employees, the Brazilian agency helps only very small firms (with an annual turnover of up to $1.6-million).
On top of this the Brazilian agency, unlike the SBA, spends only on delivering non-financial support such as mentoring and technical skills to business owners(about 30% of its spend went to consultants in 2011, with a further 25% to staff). Much of the US agency's funds however help provide finance to small firms via a long running credit guarantee scheme and equity programme.
The early days
Sebrae has come a long way. After starting as Cebrae in 1972 under Brazilian development bank BNDE (which later became BNDES) and the Planning ministry, the agency quickly developed a number of finance and technical support programmes. A few years later the first business incubators began to surface.
The original aim was to support existing small businesses with help. Only in 1985 did the organisation begin helping start-ups too. The model under Cebrae saw the agency assist business owners through a network of existing business institutions and NGOS, funding 60% of their costs. It was expected that the organisations themselves would cover the remainder or find relevant sponsors in each state to do so.
In 1974 Sebrae had 230 insitutions it was working with in 19 states. By 1979 this had jumped to 1 200 business consultants and organisations.
Programmes created by the Brazilian government in the 1960s to support small businesses (BNDE and Sudene) helped to lay the foundation by creating consultants with technical skills which would later come in use when Cebrae was launched.
Almost killed off
But the Brazilian agency was almost killed off in the late 1980s by politicians, when the federal government began to progressively reduce funding to Cebrae. Staff weren’t paid for three months and in 1990 a total of 110 professionals were dismissed from Cebrae, or half of its then staff complement.
In 1990 a decision was made to turn Cebrae in Sebrae, with a new law that decoupled the agency from the public administration. Instead under the new system the agency was to receive an effective increase in contributions from the public purse, via a tax on company payrolls levied on businesses to fund the Sistema S (the others being Senai, Senac, Sesi e Sesc).
Remembers Carlos Augusto Baião, the then director-president of Cebrae during the transition of 1989 and 1990: “It was open engineering, which featured intensive institution partnerships, participation, and the majority were private institutions in (Sebrae’s) deliberative council”.
Paulo Alvim (pictured left), the present manager of Sebrae's market and financial services unit, said the motive of the restructuring was to switch the focus to assisting firms become more competitive during the opening up of the economy that took place in the 1990s.
In 1993 Sebrae launched its Empretec programme, which has since been adopted by the UN Conference on Trade and Development (Unctad) and a number of countries use it today, including South Africa.
In 2005 Sebrae helped to mobilise about 80 000 people across the country in support of a new law to promote small business, Lei Geral , which culminated in a grand protest in the capital Brasilia when it was presented to the country's Congress of Deputies. The law simplified tax for small businesses (by introducing the Supersimples system) and put in place measures for the government to buy more from small firms.
In 2009 Sebrae also helped bring about the Microempreendedor Individual law which simplified procedures for one-man traders to register their business and receive access to social benefits.
As recently as 2011 Sebrae reached 28% or almost a third of Brazilian small businesses (according to its management report for that year).
The latest data from Sebrae reveals that the share of Brazil's GDP attributed to small and micro enterprises rose from 21% in 1985 to 27% in 2011. Small and micro firms today generate just over half of all jobs in the country and account for 70% of all new jobs. Added to this salaries rose faster between 2002 and 2012 for small firms (grew by 33%) than for larger firms (22% growth).
Sebrae says the growth in the number of small firms (today there are almost nine million registered for the Super Simples tax) is connected to the recent growth in consumers, improved education levels of would-be entrepreneurs and a better regulatory environment for small firms.
A model for others?
Whatever problems Brazil might have (such as a one of the world's worst bureaucracies, poor infrastructure and high business costs) Sebrae is a lesson for policymakers around the world. Access to considerable resources helps, but the agency is also evidence of how strong public-private partnerships and a sold focus on technical skills can over time have a marked impact on small business support. In the end there are many lessons to be drawn from the agency, here from the author are just four:
1-Private organisation, public funds
As it is a private organisation Sebrae is able to partly distance itself from political matters and focus on the professional delivery of service, while still benefiting from public money in a consistent and predictable with the help of the tax that funds Sistema S.
2-Skilled business consultants
Sebrae relies strongly on private-sector consultants, rather than on in-house business advisors who often have little or no business experience. It has its own university to train business consultants and runs bi-annual meetings to train consultants. Added to this its Geor project management system allows the public and business consultants to assess the progress of each project.
3-Use of various channels
Sebrae doesn't just use walk-in centres and business consultants to train business owners, but relies on multiple channels such as a website (www.sebrae.com.br), television channel, radio, distance learning, entrepreneurship fairs, blogs and a telephone hotline. In 2011 566 000 students completed distance learning courses.
4-Underpin planning with research
Without reliable statistics on SMEs you can't help business owners effectively. Sebrae uses its own team of researchers to ensure that there are consistent and reliable statistics on small businesses in the country. The team conducts some research inhouse and collaborates with partners like the Brazilian statistics organisation (IBGE) for other research.
Stephen Timm writes on small business. He stays in São Paulo. Much of the history of Sebrae was gleaned from Sebrae 40 anos. Download the Portuguese copy here. Learn more about Sebrae in this report the author wrote for Trade and Industrial Policy Strategies (TIPS) in 2011: Download the report here.
With just over two months to the world's biggest sporting event, the World Cup, all eyes have turned to Brazil. But for a country often pictured as a racial paradise, one thing has long eluded the nation of almost 200 million: a business ownership more representative of its ethnic diversity.
The South American country has the second biggest black population in the world, after Nigeria, but white Brazilians continue to outnumber black (including mixed-race) business owners - many of them descendants of the four million slaves brought to Brazil between the 16th and late 19th century. Now, this looks set to change.
A report published in September last year by Brazil's small business agency Sebrae, Os donos de negócios no Brasil: Análise por raça/cor (Brazilian business owners: an analysis by race), revealed that black business owners made up 49% of all business owners in 2011 - up from 43% in 2001. The group make up 52% of the population.
Proportionately the percentage of white business owners shrank from 56% to 50% over the same period, with Asian and indigenous people accounting for the remaining one percent. Yet white Brazilians still make up a disproportionately higher number of business owners, as they account for 46% of the population.
The number of black business owners grew by 29% between 2001 and 2011 - from 8.6 million to 11 million - while the number of white entrepreneurs increased by just one percent (from 11.4 million to 11.5 million) over the same period.
Fuelling the change has been a stronger and more stable economy and social policies, which helped the incomes of black Brazilians increase by 123% between 2000 and 2012 - five times faster than the rest of the population, according a report by Globo newspaper in 2012.
Still not equal
Yet despite their significant increase in numbers, black business business owners still bring in on average less than half the income of their white counterparts.
They also have proportionately less years of education, are younger (with average age of 42, compared to 45 years for white owners), and work less hours per week (39 hours, compared to 42 hours for white owners) and have less access to resources like telephones and IT.
Low job impact
Most businesses owned by black Brazilians continue to be very small - just eight percent employ more than the owner themselves, compared to 19% of white-owned firms.
A higher percentage are involved in sectors where manual labour or low skills dominate - such as construction, agriculture , street hawking, bars, hairdressers and small restaurants.
But the low performance of black-owned firms is not unique to Brazil alone.
In South Africa where black people (African black, Indian and mixed-race people) account for 91% of the population and make up 92% of South Africa's 5.6 million business owners, according to the Finscope 2010 Small Business Survey, just 29% employ anyone other than the owner. This is against 38% of white-owned firms that employ more than the owner themselves.
For black African business owners this figure drops to 27%.
In South Africa during apartheid black Africans people were effectively banned from running and owning a business. The regime's education for black people was abysmal, while many were made to see themselves as second-class citizens. This has created not only physical barriers such as access to finance, business skills and networks, but also physiological barriers too that still linger.
Poor quality education, low savings
In Brazil black families, with lower incomes, have limited opportunities. Even among Brazilians with 12 years or more of schooling, whites still earn 32% more than black Brazilians, according to publisher Abril's 2014 almanac - many by benefiting from networks and access to better universities.
In the US many African Americans have benefited from affirmative action policies in place since the 1960s, yet the group remain under-represented in business ownership - just seven percent of business owners are African American, although they make up 13% of the population.
Added to this white-owned businesses generate sales over six times higher than their black counterparts ($490,000 compared to $72,000 a year for the latter).
In a large part experts cite the lack of personal wealth among African Americans. Things are unlikely to improve any time soon, particularly as African Americans were among the hardest hit by the foreclosure of mortgages in the 2008 crisis.
It's not just a problem facing black entrepreneurs. In Malaysia - where Malays and indigenous Malays (together referred to as Bumiputeras) make up 60% of the population, figures from SME Corp, the Malaysian government’s small business support organisation show that just 37.4% or 205 000 of Malaysia’s firms are Bumiputera-owned.
Though Malaysia's New Economic Policy (NEP) instituted in 1970 and its subsequent policies, including university quotas, may have had some success in boosting the share capital of Malays, it has also fuelled rent-seeking behaviour by Malay entrepreneurs.
All kinds of theories have been advanced as to why so few Bumiputeras are business owners, with the country's one-time prime minister Mahatir Mohamad, often dipping into the argument himself. Meanwhile Indian and Chinese emigrants - many with experience in business and strong networks with the business class in both their adopted country and in their homelands - have leapt ahead.
Some believe more sophisticated Malay entrepreneurs are now emerging following the help of state agencies and funds like the Bumiputera SMEs High Performance Programme in which the government aims to help 1 100 Malay companies to grow their business regionally.
Specific programmes and policies might help to open up more opportunities for marginalised groups, but they also have the potential to distort the market and create new problems.
In South Africa the country's Black Economic Empowerment (BEE) policy has benefited many black-owned businesses - not just well connected and well-resourced black entrepreneurs - but it has also fuelled rent-seeking behaviour and acted as a barrier against true risk-taking entrepreneurship.
For many it is easier to take equity in larger white-owned firms than to start their own firm from scratch - particularly given the country's high failure rate. Like this too many black business people have become dependent on others.
Added to this because of affirmative action policies many well-educated and well-connected black professionals can command top salaries, leaving many to remain in management positions at large companies, rather than start up their own firms. Like this it's often the desperate and under-resourced that start up, which often only increases the chance of failure.
If more black entrepreneurs and those from other marginalised groups are to be fostered what is needed is is better education for all - rich and poor and one without a hefty price tag attached to it. Society also needs to celebrate those entrepreneurs from marginalised groups that have succeeded. Here media and support organisations can play a critical role.
In the end any policy will always be a gamble. Creating equal business ownership for all might amount to a socialistic pursuit that has more chance of failure than success. What is rather needed are equal opportunities for all. People from marginalised groups must be able to get a better start in life. It means building better schools, hospitals, roads, increasing internet lines coverage, training better teachers and doctors and opening the internet to all.
Stephen Timm is a South African who writes on small business for several newspapers. He files this from Brazil. Read more on his lessons from Brazil in his 2010 report.
Stephen Timm is a