November 2016

The start-up bubble: How abundant money is actually not helping

A start-up office in New York.
Photo Credit: © Victor Mulas

We are in the grip of start-up hype. Today, every large city in the world aspires to become a start-up hub. New York City became a start-up role model; Berlin and London were the “go to” start-up hubs in Europe two or three years ago; Nairobi is the start-up darling in Africa; and Dubai promoted itself as start-up destination.

Start-ups are seen as the new solution for job creation in the emerging economy of the so-called “fourth industrial revolution.” Indeed, they can help produce the jobs of the future — those new employment opportunities that are created in brand-new industries or technology categories. For instance, this has already happened in New York City, where the connection with local industries has resulted in new jobs, new industries, and greater competitiveness for traditional sectors. And it is has not been only about jobs. Solutions for critical development challenges, such as online payments and access to energy in off-grid areas, have emerged from Nairobi and India’s ingenious start-up scenes.

As I visit these cities, however, I wonder if the actual — and potential — impact of these emerging start-up ecosystems is being exaggerated and if we are all collectively witnessing an overflow of attention and resources that cannot translate into “magic” solutions to unemployment and other global challenges.

Indeed, many of the ecosystems I visited and studied seem to be overinflated. Not many start-ups become sustainable businesses, and the few successful examples are cited over and over again. Start-ups are disconnected from local industries and there is little absorption of start-up innovation by the economy.

In some cases, the result is a massive, large-scale training program where a new generation of aspiring entrepreneurs can learn technical and management skills (this is a good outcome). On fewer occasions, the ecosystem becomes sustainable, producing successful new businesses that reinvest in new talent and connect with the local industry base (this is a better outcome).

But these seem to be a handful of cases, and it’s not easy to get there. I suspect this is the result of a lack of maturity of the infrastructure supporting the ecosystem, as well as the poor understanding of what we need to translate the energy of new entrepreneurs and innovators into productivity and business success.

Photo Credit: Stephan Bachenheimer / The World Bank

Women today represent about 50 percent of the world’s population and, for the past two decades, about 50 percent of the labor force. Yet there are stark differences in the outcomes they achieve: Women are only half as likely as men to have a full-time wage-earning job. The women who do have paid jobs earn as much as one-third less than men. Fewer women than men are involved in trade or own registered companies. And women are more likely to work in low-productivity activities or informal employment.

There are many reasons for these outcomes, including socio-cultural norms, access to high-quality jobs, the lack of transport and the lack of child-care facilities. In many countries, such differences also continue to be written in the law.

For the first time since it was launched in 2002, the World Bank Group’s annual Doing Business report this year added a gender dimension to its measures, including to the annual ranking on each country's ease of doing business. This is good news, since the report attracts the attention of policymakers worldwide. Global benchmarks and indicators are a powerful tool to raise awareness, motivate policy dialogue and, above all, inspire action by policymakers.

Ensuring that women have the same economic opportunities by law and in practice is not only a basic human right, it makes economic sense. A recent study estimates that achieving equality in economic opportunities for women and men could spur $28 trillion in world GDP growth by 2025 – about the equivalent of the size of the Chinese and U.S. economies combined.

Looking at gender differences when it comes to starting a business, registering property or enforcing contracts, Doing Business shows that 23 countries impose more procedures for women than men to start a business. Sixteen countries limit women’s ability to own, use and transfer property. And in 17 economies, the civil courts do not value a woman’s testimony the same way as a man’s.

This pattern might give the impression that such legal differences are really only an issue in a selected group of countries. But Doing Business’ sister publication – Women, Business and the Law – tells us otherwise. The report analyzes gender parity in accessing institutions, using property, getting a job, providing incentives to work, building credit, going to court and, most recently, protecting women from violence. It finds that 90 percent of the 173 countries measured have at least one law impeding women’s economic opportunities. In 30 economies, there are 10 or more legal differences between men and women, predominantly across the Middle East and North Africa.

To counter this, there is ample evidence that those countries that have integrated women more rapidly into the workforce have improved their international competitiveness by developing export-oriented manufacturing industries that tend to favor the employment of women. Legal gender disparities are also associated with lower female school enrollment and labor-force participation.

There is some good news. The Women, Business and the Law 2016 report shows that, between 2013 and 2015, 65 economies made 94 reforms increasing gender parity. The World Bank Group’s Trade & Competitiveness Global Practice (T&C) – a joint practice of the World Bank and the International Finance Corporation (IFC) – works across the world to support governments as they design gender-informed and gender-neutral policies, and in many cases implement gender-targeted interventions to improve the business environment and expand market opportunities for women.

"Doing Business 2017: Equal Opportunity For All" was released on October 25, and it marked record progress for the business environment reform agenda in Sub-Saharan Africa. Implementing 80 of the 283 reforms recorded globally, Sub-Saharan Africa once again claims the status of the world's top reforming region. Beyond the record reform count, this year is also marked as the year with the highest number of countries in the region having passed reforms (37 out of 48), confirming that more and more economies in Africa are putting private-sector-led growth at the heart of their development agendas.

There is actual transformation tied to those rankings. For example: It now takes 156 days to build a warehouse in Mauritius, compared to 183 days in France and 222 days in Austria. Rwanda ranks second globally on the Getting Credit indicator, not to mention that, years ago, it used to take 370 days to transfer a property in Kigali, while today it takes only 12 days.

But, beyond the figures, a few additional thoughts come to mind.

How has Africa become not only better at reforming, but also become home to some good practice that inspires many to reform?

First, one should mention the unique momentum for reform. Most African countries’ development strategies place the private sector as the engine of their growth, and recognize that creating enabling business environments is a key pre-requisite to attract investments and encourages business expansion. That is a timely move from African governments, especially in the context of the present commodity-price fall, which calls on African countries notably to move away from an exclusive dependence on minerals and to diversify their growth models.

Then, Africa countries are simply getting better at reforming. A good sign of this is that reforming today costs less in Sub-Saharan Africa. Recent analysis shows that it costs on average of $310,000 to implement a reform today, versus $730,000 merely four years ago. That is a clear sign of increased efficiency. The capacity-building and hands-on assistance of World Bank Group teams to governments and implementing agencies throughout the region is beginning to bear fruit.

Attendees at Republica Berlin 2016, an annual conference on digital culture for entrepreneurs from around the world.
Photo Credit: © Victor Mulas/The World Bank

We have witnessed in recent years the emergence of technology start-up ecosystems across the world. New technology trends are reducing the costs as well as the barriers of access to markets and resources for developing technology start-ups. If in the 1990s an entrepreneur needed $2 million and months of work to develop a minimum viable prototype, today she would need less than $50,000 and six weeks of work.

Entrepreneurs are also surging in emerging economies. India hosts major start-up ecosystems in New Delhi and Bangalore, with their start-ups having raised $1.5 billion in funding in 2016, respectively. São Paulo ranks among the top 20 start-up ecosystems with more than 1,500 active start-ups, closely followed in the region by Santiago and Buenos Aires. Warsaw hosts around 700 active start-ups, and Nairobi is the home of leading African start-ups, such as Ushahidi, M-Pesa or Brck.

Tech start-up ecosystems present new opportunities for emerging economies. Local entrepreneurs develop new business solutions that address domestic demands. For instance, in Kenya, M-Kopa is addressing the demand for energy in off-grid locations, a major issue in the country's rural areas. Unicorns, those start-ups that raise more than $1 billion, are no longer a U.S./Europe-only phenomenon. Indian, Chinese and Indonesian start-ups, such as Lu.com, Flipkart or Go-Jek, have reached this valuation, and African Internet Group from Nigeria is poised to be the first African unicorn.

Start-up ecosystems also create new jobs. Data from New York City's ecosystem on employment generated in the tech start-up ecosystem shows that most of the jobs generated by tech start-ups are not in start-ups themselves, but in local traditional industries that either are influenced or disrupted by start-ups. Think about a bank or a retail company that has to react to a mobile app providing finance or retail business and that needs to hire new talent to develop a competing app. More than 40 percent of these new jobs do not require a college degree. These are jobs like building a website, a basic database, a web or mobile app.

“Productivity isn't everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
— Paul Krugman, Professor of Economics and International Affairs Emeritus at Princeton University and a columnist for The New York Times

Paul Krugman’s conclusion about the importance of productivity is widely shared among economists. Yet productivity growth across the world has been sluggish in recent decades, in both advanced and developing countries, and restarting it is a central priority for the global development agenda.

Taking stock of what we understand about the productivity slowdown, and mapping out potential areas of policy action, was the focus of a recent two-day conference at the World Bank, “Second-Generation Productivity Analysis and Policy.” The conference, co-sponsored by the European Central Bank and the Competitiveness Network, brought together global experts and development practitioners.

“Bringing the most current advice to our clients about accelerating growth” is a top priority, said Jan Walliser, the Vice President who leads the Bank Group's Equitable Growth, Finance and Institutions (EFI) practice group. “The last 15 years have brought about major advances in the measurement and understanding of productivity growth,” said EFI Chief Economist William F. Maloney. The conference agenda thus sought to “sketch the frontier on the issues that are most relevant” to jump-starting productivity growth in the Bank Group's client countries.

Productivity in Cambodia's apparel and garment industry has, in recent decades, enjoyed sustained growth. This photo shows an apparel factory at the Sihanoukville Special Economic Zone. Photo: Chhor Sokunthea / The World Bank.

This is an edited excerpt from a chapter, “Quality of Firm Management in Turkey,” from the upcoming report, “Creating Good Jobs in Turkey.”

How well firms are managed, and whether their management quality (or lack thereof) affects firm performance, are questions that policymakers and researchers everywhere – especially in emerging economies – are very interested in answering.

This area of inquiry is important because much of the evidence shows that the quality of management techniques that are used to run a firm – how it manages its capital and human resources, and how it monitors inventory, among other important areas in the production process – affect firm productivity, adaptability to change, and potential for growth. These factors are especially important in competitive and challenging environments.

Despite the potential effect of management practices on firm performance, it is a relatively understudied area in the economics literature. Survey-data limitations have made it difficult for economists to analyze the relationship between firm management practices and firm performance.

But that pattern is changing: The World Management Survey (WMS) team designed a new interview-based evaluation tool to quantify the quality of management practices in firms across countries and sectors, and across 18 basic practices in four categories: operations, target-setting, performance monitoring, and talent or human-resource management. (The WMS was started by researchers at the London School of Economics and Stanford University, and it has been conducting management surveys worldwide for more than 10 years.)

In the last decade, many countries interested in benchmarking their firms’ performance have participated in the surveys. Turkey joined this effort in 2014. The new data allows us to measure how Turkish firms perform across the four benchmark dimensions of management. and it allows us to measure how they compare with competing firms across the globe. The results help the private sector and the public sector offer suitable support to improve firm performance and productivity as a whole.

In this analysis, we’ll share some of the early results from Tukey’s first quality-of-management survey, including how Turkey compares to other countries; we'll highlight the importance of measurement; and we'll try to motivate Turkish researchers and policymakers to use the results to help firms in Turkey.

Average scores for firms in Turkey are low relative to the country’s development level (Figure 1). Firms in comparator countries like Mexico and Poland have higher absolute scores, and relatively higher scores for their development level. (The average scores combine sub-scores for each of the four categories: operations, targeting, monitoring and human resources.)

Figure 1: Per Capita Income and Average Management Score

Note: On this chart, Turkey's position is just above the position of Malaysia.
Source: World Management Survey and authors’ calculations.

Relatively poor performance in Turkey, and key comparator countries, is mostly driven by a large “left tail” of poorly managed firms – a factor that is not uncommon across developing countries (Figure 2). In particular, the fraction of firms performing below the lowest quartile of U.S. firms ranges between 55 percent and 70 percent in such countries as Turkey, Brazil, Poland, Chile, but also China and India. Although there is a large variation in management scores across firms, the distribution of scores in these countries, compared to the distribution in the United States, is either narrow or flat, bimodal and/or nonsymmetrical.

Figure 2: Smooth distribution of total management scores

Note: The vertical red dashed line represents the lowest quartile of the US distribution.
Source: World Management Survey and authors’ calculations.

November 2016

The start-up bubble: How abundant money is actually not helping

Why gender equality in doing business makes good economic sense

More than a trend: Africa is becoming better by the year at reforming its business environment

How start-ups can turbocharge global productivity growth

Productivity for prosperity: 'In the long run, it is almost everything'

Management Quality Matters: Measuring and Benchmarking the Quality of Firms' Management in Turkey

November 2016

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