Creating Value Across Borders

A conversation with HBS associate professor Walter Kuemmerle provides insight into the entrepreneurial process in a global setting.
by Staff

With many of today's entrepreneurs starting ventures simultaneously in several countries, it is critical for the global businessperson to understand the financial and business environments in different countries and to accurately assess investment opportunities that cross borders. Recently, New Business sat down with HBS associate professor Walter Kuemmerle to discuss the entrepreneurial process in an international setting. Kuemmerle, a Novartis Fellow, holds a joint appointment in Entrepreneurial and Service Management and Technology and Operations Management.

Q: What are the similarities and differences in entrepreneurship as practiced in the U.S. and abroad? What are the reasons for these differences?

A: I'll start with a key similarity. The basic notion that people act in their perceived self-interest is a given. In cultures where entrepreneurship is not as developed as in the U.S., some people still underestimate the power of this basic principle. If you set the incentives right, there is room for entrepreneurship in every country. Now, let's look at four dimensions along which many countries differ.

The more challenging regions for venture capitalists are still Eastern Europe and Africa because property rights are more difficult to enforce there.
—Walter Kuemmerle

The first difference is the development of capital markets and the transparency of these markets. In countries where family-owned conglomerates are the main source of financing and are the risk bearers, the capital markets are not going to be very transparent. This situation often, but not always, inhibits entrepreneurship.

Capital markets have become much more transparent, for example, in France, with Le Nouveau Marche, and in Germany, with Der Neuer Markt. Plus, things such as quarterly reporting in English and relatively strict rules have been introduced with Der Neuer Markt. These advances have increased the incentives for capable managers to seek entrepreneurial routes.

The second difference is the access to technical knowledge. In some countries, a stock of technical knowledge isn't even being created, while in others, the stock of technical knowledge that can potentially be transferred into new ventures is locked up in companies. The best example is Japan, where most innovations are generated within research laboratories operated by large companies and not within the university system. In France and Germany, the university systems create a lot of inventions but not necessarily innovations.

The third difference is the varying tolerance for income disparity across cultures. While that tolerance is very high in the U.S., in many other countries, including some industrialized countries, it's a much different story. But I feel the tolerance is increasing more rapidly than a lot of people think. In tandem, the perception of entrepreneurship has also grown more positive.

The fourth difference is the stigma of failure. In the U.S., the Horatio Alger ideal of "rags to riches" is instilled in people very early. But in other countries, no such role model exists. The stigma attached to failure is not just cultural; it's also reflected in bankruptcy laws. For example, in Switzerland, where military service is very important, if you bankrupted a company, you were, until recently, stripped of your military title. This type of situation serves as a strong disincentive for anyone who has already achieved a certain social status to go the entrepreneurial route.

While these four points are critical for entrepreneurship, there's another very fundamental factor: the need for a relatively stable legal framework with enforceable property rights. In some countries without stable legal systems, you will not necessarily see the most qualified people become entrepreneurs and start companies in a legal way. Instead, you will sometimes see entrepreneurs who are a little bit on the shaky side. That difference is a critical concern in Eastern Europe and Africa.

On an optimistic note, I think that entrepreneurship is going to be the most important economic driver in a lot of countries. The U.S. will continue to serve as a very powerful and convincing role model with its transparent capital markets, stable legal system, innovative scientific and university systems, tolerance for income disparity, and culture that rewards people who pursue opportunities after assessing the risks.

Q: Did the Internet phenomenon play out internationally the same way it did here?

A: What is interesting about the Internet phenomenon is that about three or four years ago, there was a big time lag—as much as a year or more—between when a business idea was applied in the U.S. and abroad. Now, it takes probably three to four weeks before something is copied abroad.

On the other hand, we've increasingly observed another phenomenon: ideas flowing back to the U.S. Take wireless technology in Europe, for example, where the standards are more uniform and advanced than they are here. I'm now advising a one-year field study team on a wireless business plan. The group is benefiting heavily from the fact that wireless technology is more developed in Europe than in the U.S.

The market correction in April 2000 was global, and it dampened entrepreneurial activity in every continent.
—Walter Kuemmerle

We've also witnessed situations where companies that were started abroad are relocating to the U.S. Spotfire, a software company founded in Sweden, received funding from a venture capitalist who insisted that the company move its operations to the States.

I think the market correction in April 2000 was global, and it dampened entrepreneurial activity—especially with Internet start-ups—in every continent. However, the Internet has really been a catalyst for entrepreneurship in many countries, and this trend will last beyond the Internet wave.

Entrepreneurship has always played a major role in the U.S., going back to the Carnegie era. Beginning with the American Research & Development Corp. in 1946, there's a history of the venture capital industry. Not many other countries have this history nor the large-scale investment role models. But now with the Internet wave, it's as if entrepreneurship has become socially acceptable around the world.

In addition to spurring the social acceptability of entrepreneurship, has the Internet played a similar role in catalyzing venture capital activity overseas?

It has, although it's still in the infancy stage. The greatest change stems from U.S. venture capital firms going abroad and transferring their knowledge, which in turn positively affects local venture capital companies. And yet, in Germany, there were 500 to 600 professionals in the private equity industry in 1999, while in the current year there are 800—a huge jump. But I have to say the industry is developing primarily because U.S. firms are pushing abroad.

Overall, the private-risk capital market is still underdeveloped in most countries outside the U.S., with exception of the U.K., because most of the new venture capital firms have not seen their first shakeout. One of the great strengths of the U.S. venture capital system is that there are several firms that have seen at least two cyclical downturns and have developed tools to deal with crises.

Europe is clearly a region with great potential for entrepreneurship and venture capital because there is a stable legal system. The two other regions that are very interesting are Latin America and Asia. For example, while Korea has a great education system, its industry structure is still rather inefficient. The Asian financial crisis induced a healthy shakeout, and now private equity firms are very active there. The more challenging regions for venture capitalists are still Eastern Europe and Africa because property rights are more difficult to enforce there.