Small companies in poor countries(economist.com)
economist.com
Small companies in poor countries
http://www.economist.com/node/21564265
6 comments
We don't need the next Apple or Google to come out of the developing world. We need legions of successful small businesses. Eventually an Apple or Google may come out of it, but thats more a vanity goal than anything else.
Here in Argentina the government put a major halt on imports, bringing serious problems to all kinds of local industries. They are not concerned that those improvised measures can bring down a growing company.
you will found a lot of those small Web companies from poor countries on http://pivoted.co/
> Can the spirit of enterprise be taught?
That's the wrong question to ask.
The correct question to ask would be: "Does the government of that country let entrepreneurs breathe?"
Having witnessed first-hand how taxation systems work in real-life in the U.S. and in a few poor countries, I can say this: when the IRS has suspicions about your accounting treatments, they begin sending you letters politely asking for photocopies of individual legal documents. There are a few rounds of this back-and-forth, after which the IRS figures out whether you committed fiscal fraud or not. This is pretty much a hands-off approach.
In poor countries, where governments are usually corrupt, things happen differently. Tax inspectors show up (unexpectedly and carrying guns) at the door of your small business. They are incentivized by the policies of the fiscal enforcement agency not to leave until they found even the tiniest mistake in your accounting treatments. And then they slap a hefty fine on you - legislations in poor countries do not provide for any sort of sense of proportion. Also, legislations are contradictory and skewed such that you can't really be an honest entrepreneur, even if you try really hard. There is always more than one accounting treatment for anything more complex than revenue=5, expenses=4 => profit=1. And the tax inspectors slap you with fines for not going with the other accounting treatment.
All of this has a chilling effect on entrepreneurship, unfortunately.
That's the wrong question to ask.
The correct question to ask would be: "Does the government of that country let entrepreneurs breathe?"
Having witnessed first-hand how taxation systems work in real-life in the U.S. and in a few poor countries, I can say this: when the IRS has suspicions about your accounting treatments, they begin sending you letters politely asking for photocopies of individual legal documents. There are a few rounds of this back-and-forth, after which the IRS figures out whether you committed fiscal fraud or not. This is pretty much a hands-off approach.
In poor countries, where governments are usually corrupt, things happen differently. Tax inspectors show up (unexpectedly and carrying guns) at the door of your small business. They are incentivized by the policies of the fiscal enforcement agency not to leave until they found even the tiniest mistake in your accounting treatments. And then they slap a hefty fine on you - legislations in poor countries do not provide for any sort of sense of proportion. Also, legislations are contradictory and skewed such that you can't really be an honest entrepreneur, even if you try really hard. There is always more than one accounting treatment for anything more complex than revenue=5, expenses=4 => profit=1. And the tax inspectors slap you with fines for not going with the other accounting treatment.
All of this has a chilling effect on entrepreneurship, unfortunately.
So true. The actual trick is that in a broken country they don't expect people to be honest. Quite the contrary -- it's more profitable for everybody else if you are corrupt.
Actual quote from an IRS employee from Romania: "Don't you worry about that [rules]. You just worry about making money and we'll worry about taking the money from you."
Actual quote from an IRS employee from Romania: "Don't you worry about that [rules]. You just worry about making money and we'll worry about taking the money from you."
This, so much!
In many instances the only choice you have is to bribe the tax inspector so he doesn't impose a completely unreasonable fine on your business. Then you're essentially fighting the government to see who pays the tax inspector more money...
In many instances the only choice you have is to bribe the tax inspector so he doesn't impose a completely unreasonable fine on your business. Then you're essentially fighting the government to see who pays the tax inspector more money...
This is both true and false. While corruption is rampant and often expected, the environment can be easier particularly for lower capital businesses.
If you want to open a restaurant here in DC, it will take you quite a long time to get all the permits, permissions and inspections done. If you have to remedy anything, it probably won't be cheap. Once you have all the permits, you have to apply for special exemptions to stay open later, to serve alcohol, etc.
When a Latino immigrant woman tried to sell her food on some neighborhood street in DC, she didn't even last a day. She tried (at least) twice, and she was promptly ticketed and got in some trouble for selling simple treats on the street.
In contrast, in the developing countries the business comes first. You worry about making money. If it's actually working, then you can start worrying about bribes and taxes and regulations. So it can be cheaper and quicker to startup as many of these expenses are on the back end instead of being front loaded.
The Romanian quote is right on.
If you want to open a restaurant here in DC, it will take you quite a long time to get all the permits, permissions and inspections done. If you have to remedy anything, it probably won't be cheap. Once you have all the permits, you have to apply for special exemptions to stay open later, to serve alcohol, etc.
When a Latino immigrant woman tried to sell her food on some neighborhood street in DC, she didn't even last a day. She tried (at least) twice, and she was promptly ticketed and got in some trouble for selling simple treats on the street.
In contrast, in the developing countries the business comes first. You worry about making money. If it's actually working, then you can start worrying about bribes and taxes and regulations. So it can be cheaper and quicker to startup as many of these expenses are on the back end instead of being front loaded.
The Romanian quote is right on.
It's not the government and it's not the business environment. The problem is with the people.
Look at some of the "worst" African countries. Chinese and Indians are coming in there and opening up shops. They are starting restaurants and barber shops and all kinds of low startup cost businesses. They are doing well, and they are putting the old school 'local' businesses out of business. In fact, in some African countries they are considering making residency much more difficult for the Chinese because they are so successful there.
Too many people in African and Latin American countries have a sense of entitlement. When they think a community needs something, they think the government should provide it or subsidize it.
It is hard to shift this mindset, but it is happening in some urban pockets. There are small circles of entrepreneurship in most bigger African/LA cities. (I'm talking about guys starting from ground up, not rich privileged people starting more capital intensive enterprises.) But it's going to take a while.
Ironically, the biggest sense of entrepreneurial spirit I was was actually in Zimbabwe. As bad is it is there right now, I have a feeling this will be a big positive turnaround sooner or later.
Look at some of the "worst" African countries. Chinese and Indians are coming in there and opening up shops. They are starting restaurants and barber shops and all kinds of low startup cost businesses. They are doing well, and they are putting the old school 'local' businesses out of business. In fact, in some African countries they are considering making residency much more difficult for the Chinese because they are so successful there.
Too many people in African and Latin American countries have a sense of entitlement. When they think a community needs something, they think the government should provide it or subsidize it.
It is hard to shift this mindset, but it is happening in some urban pockets. There are small circles of entrepreneurship in most bigger African/LA cities. (I'm talking about guys starting from ground up, not rich privileged people starting more capital intensive enterprises.) But it's going to take a while.
Ironically, the biggest sense of entrepreneurial spirit I was was actually in Zimbabwe. As bad is it is there right now, I have a feeling this will be a big positive turnaround sooner or later.
> In fact, in some African countries they are considering making residency much more difficult for the Chinese because they are so successful there.
Things have turned out a lot worse than that in the past: http://en.wikipedia.org/wiki/Expulsion_of_Indians_in_Uganda_...
Things have turned out a lot worse than that in the past: http://en.wikipedia.org/wiki/Expulsion_of_Indians_in_Uganda_...
Seeing the potential that exists when you latch on to an enthusiastic entrepreneur who is then able to provide jobs for people who would otherwise be 'reluctant entrepreneurs' is extremely motivating.
There's another comment here about people being entitled, comparing that to Chinese or Indians who set up shop in Africa and do well, but there's an extreme amount of selection bias in those results. People who get up and leave their own countries in order to travel somewhere else are in no way representative of the population, and also escape societal and social pressures that might otherwise stifle their entrepreneurship. Comparing locals to migrants and then generalizing across the population is not an accurate viewpoint. Yes there is often a culture of dependency brought on by years and years of being exposed to aid programs, but there are many, many entrepreneurs who are doing great things.