United States Institute of Peace

International Network for Economics and Conflict

GEDI: A New Tool for Entrepreneurship-led Development

The effects of economic development are well known: reduced suffering, increased opportunity, broader prosperity, and enriched lives.  Development also helps to stabilize governments and increases the likelihood of peace.  The causes of development, however, are less well understood.  But, there are many new studies shedding light on the subject.

Recent INEC postings have suggested that these studies provide a foundation for a new development model.  Based on organic entrepreneurial activity offering market-based solutions to local needs, growing small- and medium-sized business would kick start virtuous cycles.  We at the Global Entrepreneurship and Development Institute (GEDI) couldn’t agree more.

Ambassador Robert Loftis recently wrote in these pages here that the present U.S. foreign aid system needs to be transformed.  He suggests centering American assistance on releasing “pent up entrepreneurial spirit and capability” to ignite economic growth.  Many organizations, such as SPARK – which posted this article about its programming – are attempting to do just that.  We have studied the essence of entrepreneurship, and our findings provide a robust intellectual framework for achieving long-lasting, durable, and sustainable impact.

What is well established in studies of economic development is that job creation is the result of growth by relatively new businesses.  For example, in the United States just about all new jobs during the past 30 years were created by firms less than five years old.  Thus, job creation is the purview of new businesses, not well-established large firms.  It’s a by-product of successful entrepreneurial actively.

With this in mind, four years ago, we initiated a study of factors that lead to sustainable entrepreneurship.  We drew primary and secondary data sets from more than 120 countries and, through a multilayered analytical process, distilled the 34 essential institutional and individual elements that make up every country’s national system of entrepreneurship.

We then compiled our data and analysis into a unique global entrepreneurship and development index.  The Index measures the efficacy and efficiency of entrepreneurship based on fixed criteria in the countries for which we have data.  But, because entrepreneurship comes in many varieties – what we’re really seeking to understand is productive, high impact entrepreneurship – we developed novel methods for measuring quality.  These measures capture the contextual quality of entrepreneurship by focusing on entrepreneurial attitudes, activity, and aspirations – the 3 A’s of development – and by identifying every country’s societal weaknesses, or bottlenecks to growth.  By employing a proprietary algorithm, the Index is able to predict accurately how improvements in weak areas would affect overall system performance.

Our study holds the promise of unleashing a country’s economic potential by providing a means of diagnosing and prescribing the most effective interventions.  When tied together, our textured country data sets, in-depth analysis, and novel methodology, becomes a powerful tool for four entities: governments, donor agencies, international assistance providers, and multinational corporations.

For governments, GEDI is an efficient resource allocation tool directing attention and funds to areas that have the greatest impact on future economic growth.  For donor agencies and foundations, GEDI is a compass for identifying initiatives that impact whole societies.  For international assistance providers, such as SPARK, GEDI is a roadmap for interventions that target a country’s most critical areas – as well as for creating monitoring and evaluation plans that accurately measure societal impact.

Lastly, and perhaps most significantly, for companies, GEDI is a method for transforming traditional corporate social responsibility (CSR) and philanthropy into strategic growth initiatives.  GEDI is a framework for initiatives focused on creating sustainable market expansion.  Such programming creates economic value by improving a company’s position in a foreign market, but it also creates social value by improving the business environment.

Post-conflict Bosnia and Herzegovina (BiH) presents a noteworthy example.  BiH is in an early stage of development and competes through low-cost efficiencies in the production of commodities or low value-added products.  To move to the next development stage, the efficiency-driven stage, BiH must improve its use of knowledge and technology for innovation.  Our research confirms that a significant constraint on entrepreneurial activity in BiH is low levels of research and development investment, which inhibits new product development as well as the adoption and imitation of existing products.

BiH also suffers from high levels of overall regulatory burdens that constrain entrepreneurs who see economic opportunities but do not pursue them fully – that is, they choose not to scale up their businesses.  These burdens do not prevent new business formation – it’s relatively quick and easy to create a new business entity – rather the plethora of requirements that entrepreneurs report encountering during normal operations inhibit them from seeking to grow.  A third constraint on entrepreneurial activity is high levels of business risk that result primarily from a lack of reliable corporate financial information.  This keeps banks and investors from providing the financial support growing businesses need.  Together, regulatory burdens and the lack of financial support block promising new local business from scaling up to regional, national or international business operations.

Bosnia has a strong foundation on which to build a knowledge-based entrepreneurial economy: its people.  Our research revealed that entrepreneurial activity is not restricted by individual attitudes and aspirations – being an entrepreneur is seen as a good, high-status career choice.  A high number of Bosnians believe they have skills necessary to start and run a new business and there is a ready pool of skilled talent among Bosnia’s educated workforce.

Given the foregoing, the best use of government and assistance providers’ resources would be to focus on increasing new product development.  Streamlining regulations, improving accounting standards and supporting training for accountants would release pent up entrepreneurial energy and result in growing businesses that create jobs and kick off virtuous economic cycles.  Boosting research and development investments, perhaps through a mixture of tax incentives and funding improved research facilities, as well as increased support for post-secondary education in science, technology, engineering, and mathematics (STEM), would dramatically impact Bosnia’s future.  Philanthropic initiatives by foreign corporations in these areas, such as targeted training programs, would not only improve their operational environment, they would enhance demand for their products and services by fueling overall growth of the Bosnian market.

At the heart of development is the freeing of human beings’ creative capacity.  Too often this gets lost to the details when planning specific policies, programs, or initiatives.  People are innately innovative.  When channeled through entrepreneurship to productive ends, this capability ignites dynamics that better society: serving all mankind.  GEDI can unlock the powerful forces that in recent history have made the world a better place.

The author, Peter Komives, is a Senior Advisor at the Global Entrepreneurship and Development Institute (GEDI), a Washington, DC-based non-profit, research and consulting firm committed to expanding economic opportunities around the world.  To learn more, please visit www.thegedi.org

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