Entrepreneurship: A Solution to Poverty

1. Entrepreneurship:A Solution to Poverty 2013 봄학기 숙명여자대학교 Chull-Young Lee

2. Chull-Young Lee • - College of Business, Seoul National University, Korea(BA) • Columbia Business School, New York City, U.S.A. (MBA) • Honorary Professor, Social Enterprise • Sookmyung Women’s University School of Global Service, Korea • CEO, Social Enterprise Network, Korea • Partnership of 14 business schools on Social Enterprise • CEO & Chairman, ARK Private Fund, Korea • Investment Principles : Value Investing + SRI • Co-Chairman, Bausch & Lomb Korea Ltd., Korea • Contact Lenses and Care Products

3. Contents Rich Countries vs Poor Countries I-1. Business System & Entrepreneurs in Rich Countries I-2. Anti-Business System & Entrepreneurs in Poor Countries I-3. Ease of Doing Business. II. Understanding of Entrepreneurship II-1. Entrepreneur: Three Cases II-2. Meaning of Entrepreneur (Entrepreneurship) II-3. Making of Entrepreneurship III. Conclusion

4. I. Rich Countries vs Poor Countries I-1. Business System & Entrepreneurs in Rich Countries I-2. Anti-Business System & Entrepreneurs in Poor Countries I-3. Ease of Doing Business

5. I-1. Business System & Entrepreneurs in Rich Countries The Industrial Revolution is a period of later part of 18thcentry to 19thcentry. It began in England and spreaded to Europe, North America and some other parts of the world. It brought unprecedented prosperity to human race in currently rich countries, even though with income and wealth disparities brought too. Edmund Cartwright’s Power Loom • Per capital income growth in Europe: • -1,500 years before 18th:appox0% • (From ancient Rome until Industrial Revolution) • -18thcentry:20-30% • -19thcentry:200-300% • -20thcentry:700-800%

6. Even before the Industrial Revolution. business sector had already grown in Roman Empire, Venice, Amsterdam and London in Europe. James Watt’s Steam Engine Development of business system, together with business sector’s growth, was the key that made the Industrial Revolution possible. Entrepreneurs, innovative business people, were the key players in the free market economies.

7. The leap to industry owed little or nothing to scientific discovery. Cartwright’s power loom and Whitney’s cotton gin(engine) worked by mechanics that the ancient Greeks and Chinese already knew. Medieval China had invented paper, printing, gunpowder, umbrellas,compasses, and spinning wheels. But China’s government prohibited or expropriated innovations, ensuring that they did not reach a wide market. By contrast, free market competition forced businesses to turn technologies into practical innovations for wide commercial use. In this process, innovative business people, ie, business entrepreneurs played the leading role. Eli Whitney’s Cotton Gin

8. Chung-Hee Park(1917-1979) was bad, when he mad a coup in 1961.But he made a good decision for Korea’s future, when he chose to continue “free market economy” instead of switching to “national socialism”. During his 18 years dictatorial presidency, he led industrialization of S. Korea through export-driven growth, with a great success. It was possible, due to the business system already existent but to be further improved, as well as great business entrepreneurs he met and supported. • Byoung-Chull Lee(Samsung), Ju-Young Chung(Hyundai) and Woo-Choong Kim(DaeWoo) were a few of them. With industrialization, social problems were also brought to the society, like income and wealth disparities, corruptions and environment pollutions.

9. In poor countries, instead of pro-business systems, anti-business systems rose for reasons of national socialism, dream of technology, tribalism, depotism and charity trap. They strangled growth of business systems and entrepreneurs. I-2. Anti-Business System & Entrepreneurs in Poor Countries The new governments in poor countries, at the end of colonialism (mainly European), nationalized foreigners’ businesses and took control of major businesses. Many restrictions on business were made to prevent the ex-colonial foreigners from taking over the economy again. And the restrictions continued. National Socialism Nazism At the beginning, the new governments promised to give the foreigners’ wealth back to their own people. But it did not happen. Instead, the governments, corrupt government officers and their families took them.

10. Dream of Technology Sputnik 1 in 1957 showed the world that the Soviet Union had better science than the liberal business countries. Through central planning, governments in poor countries wanted to develop industrial technologies faster. The Soviet union had excellence science. But, since it had no business system, its scientific success did not lead to prosperity. Sputnik 1 In Europe, the rise of business system was the key that made the industrial revolution possible in 19th century.

11. Tribalism Among members of a family or a tribe, they help each other. They exclude non-members from their inner circles. In socialistic society of poor countries, the easiest way of making money is to get a job at government office. So they create more jobs at government to help more of their tribal families. Brazilian Indigenous chiefs of the Kayapo tribe If you get a government job with your tribe’s help, you have to return some of the moneyyou earned back to your tribe. This tribalism leads to corruption and deters development of business systems.

12. Despotism Coups in poor countries produced despots (dictators like king), who rule by force(guns). Coups usually led to national socialism, which helped despots stay in power. Both of despotism and national socialism are bad for business. When IdiAmin expelled Asians(mostly Indians) from Uganda in 1972, most Ugandans cheered, but economy went down. In recent years, some Indians have returned and revived their cotton mills, with an effect of Uganda's business recovery. IdiAmin, Uganda, 1977

13. Charity Trap - Development Aid “We have invested a staggering $568 billon in development aid in Africa over the past forty-two years, and have little to show for it.“, William Easterly, former Senior Economist, World Bank (currently Economics Professor, NYU)* * “The White Man’s Burden”, William Easterly

14. - Charity Trap The rich countries themselves owe their prosperity to the business sector. Yet, for poor countries, they offer charity instead. Aids, while wasted for political reasons, also paid for corruption and expansion of government jobs in the poor countries. Shanty town in Soweto, South Africa, 2005 They did not help growth of business sector there. With a lot of charity aid given, people do not try business. Foreign charity digs wells for free, driving a local well-digging company and itsentrepreneur to bankruptcy.

15. - UN’s Millennium Development Goals Aid professional in aid organizations, government and NGO do not know how to help business sector grow. In order to stay in their jobs, they continue their current aid system rather than take a risk. “The Millennium Development Goals are a vehicle for charity. Money from rich countries pays for government agencies and NGOs to run projects in poor villages that make peoples’ lives there a little better. But such projects have never lifted people out of poverty.”··· “Aid can indeed help to end poverty, by helping the business sector.”, Glenn Hubbard, Dean of Columbia Business School & former Chairman of the Council of Economic Advisors, White House.* Governments and aid agencies should help development of business system so that entrepreneurs can start and do business easily. * “The Aid Trap”, R, G. Hubbard W. Duggon The Millennium Development Goals are a UN initiative. The MDGs in the United Nation’s Headquarters in New York

16. I-3. Ease of Doing BusinessWorld BankDoing Business Starting business. Dealing with licenses. Employing workers. Registering property. Getting credit. Protecting investors. Paying taxes. Trading across borders. Enforcing contracts. Closing a business.

17. World BankEase of Doing Business IndexRanking of all nations . . . . . . . . .

18. II. Understanding of Entrepreneurship II-1. Entrepreneur : Three cases II-2. Meaning of Entrepreneur (Entrepreneurship) II-3. Making of Entrepreneurship

19. II-1. Entrepreneur : Three Cases In1976, Steve Jobs, with his partner Steve Wozniak, founded Apple to produce the first PC against IMB’s main frame computer. Business Entrepreneur Byoung-Chull Lee founded Samsung Group, a business conglomerate in Korea. He contributed to industrial development and economic progress of S. Korea in 1950-1980. Business Entrepreneur Muhammad Yunus, founder of Grameen Bank, pioneered Micro-Finance to lend very small amounts of money to each of more than 8 million poor women in Bangladesh. Social Entrepreneur

20. II-2. Meaning of Entrepreneur (Entrepreneurship) • J. Schumpter: “Agent of change” “Innovator for creative destruction” “Driving force for socio-economic progress” • P. Drucker: “Early exploiter of change as opportunity” “Break-through innovator” • Entrepreneur provides solution to root causes of social(market) problems. He makes a systemic change, ie, innovation in society. • Entrepreneurship is a driving force(engine) for socio-economic progress. In poor countries, it is a solution to poverty.

21. II-3. Making of Entrepreneurship: Context, Characteristics, Outcome Suboptimal market equilibrium : Socio-economic problem, ie, unsatisfactory but stable market situation. • Entrepreneurial Context : S. Jobs : Computer users were dependent on IBM mainframe computer in toleration of inconvenience and waiting time. B. C. Lee : After Korean war, consumers had to tolerate expensive sugar, cloth and TV imported, still in short supply. M. Yunus : Even for tiniest amounts of credit, poor young women in Bangladesh, with no access to reasonable bank loans, could borrow only on incredibly high interest rates from local money-lenders.

22. Entrepreneurial Characteristics • Entrepreneurs see suboptimal equilibrium (problem) as opportunity for new solution (product, service or process) • Entrepreneurs see problem as opportunity because of their personal characteristics such as : • Creativity : Develop a wholly new solution to root causes of the problem, rather than a minor improvement of the current system. • Direct Action : vs Social Activism • Courage : Risk taking • Fortitude : Against barriers and challenges.

23. Entrepreneurial Outcome • Innovation : Solution to root causes, Systemic change • Imitators & competitions (Replication) • Mass-market adoption (Scaling) • New eco-system • New & higher market equilibrium • Impact & value creation in large scale

24. III. Conclusion “Entrepreneurship*, not charity, is a solution to poverty.” * Entrepreneur, Innovation, Business system, Free market competition

25. References : • “The Free-Market Innovation Machine”, WillamBaumol • “The Aid Trap”, G. Glenn Hubbard, William Dugan • “The White Man’s Burden”,William Easterly • “How to Change the World”, David Bornstein • “Social Entrepreneurship: The Case for Definition”, Roger L. Martin & Sally Osberg, Stanford Social Innovation Review