Entrepreneurs and global wealth since 1850 – Part III

November 11, 2013

“We live today in a world where most people are poor and some are very rich, and the category in which you find yourself is largely determined not by your job, your age or your gender but by your location.”

According to HBS Professor Geoffrey Jones’s latest book, much research has analyzed why firms and business systems vary among nations but very little has focused on “why the entrepreneurs and firms in Latin America, Africa, and most of Asia were so delayed in producing powerhouses of corporate innovation.”

In Part I we outlined Jones’s framework of three eras of economic development since 1850, and in Part II we discussed how national institutions encourage or discourage entrepreneurial energy.  Here in Part III we recount a few of his thoughts on colonialism and culture.

The role of colonialism poses the most serious challenge to institutional explanations of variations in the allocation of entrepreneurial energy. Colonialism forms an important element of the institutional economics explanation for the lack of growth in developing countries, but much of the treatment is ahistorical.

Colonialism changed greatly over time, but most attention is given to the highly exploitative first stages of European colonialism. While colonialism is from today’s perspective wholly unacceptable, there was a huge difference between Spanish conquistadores in the sixteenth century looting the Aztec and Inca empires, and pious (if racist) late Victorian British colonial officials in India and Africa. There was a huge difference between those Victorian officials and their rapacious eighteenth century predecessors in the East India Company. The policy regime of empires changed over time. While traditional Indian handicraft industries suffered from British free trade policies in the nineteenth century, during the interwar decades British India was protectionist, including against British imports. In general, empire was a heterogeneous rather than a homogeneous phenomenon. British colonies got common law systems, while French colonies got civil law systems, with all the consequent different alleged effects on corporate governance. In Africa, while the vast Belgian possessions in the Congo in the late nineteenth century have long been regarded as a prime example of worst-case exploitative imperialism, in the British colonies the relationship between the colonial administration and expatriate business were much more distant and nuanced.

The late nineteenth century British colonial regime is especially interesting for its impact on entrepreneurship. The British brought not only political stability, but their legal system with protection of property rights and contract enforcement. The empire even offered the prospect of upward social advancement for highly successful business leaders of any ethnicity. Ethnic Indian, Jewish, Chinese and other diaspora moved within the imperial umbrella, frequently being co-opted into the British imperial system.

In fact, Professor Jones concludes that the best equipped to overcome the challenges of colonialism were often entrepreneurs from within minority communities:

However, the pre-eminence of ethnic and religious minorities in entrepreneurial activity does point towards some combination of cultural and institutional explanations of retarded entrepreneurship.  As many Asian, African, and Latin American countries began to industrialize, minorities or immigrants were especially important in new firm creation.  These included Chinese in southeast Asia, Indians in east Africa, Lebanese in west Africa, Italians in Argentina, and French in Mexico.  Their success was often ascribed to particular ethical or working practices, but their role is more plausibly explained as a demonstration of the challenges faced by entrepreneurs in societies where trust levels were poor, information flows inadequate, institutions weak and capital scarce.  In such situations, small groups with shared values held major advantages as entrepreneurs.  If in addition they established an intermediary role between “more local locals” and Western firms, they could secure easier access to knowledge and information, from and about, Western countries.

Jones also refers to the work of Mark Casson, professor of economics at the University of Reading in England and Director of the Centre for Institutional Performance:

Mark Casson has gone furthest in identifying the features of societies which may cause them to differ in their receptiveness of entrepreneurship. He defines an “entrepreneurial culture” using theories of entrepreneurship that emphasize the functions of innovation, risk-bearing, and arbitrage. Entrepreneurial cultures, he proposes, can thus be defined in terms of attributes – such as scientific and systems thinking – that promotes or retards these functions in a society. Cultural differences towards information and “trust” levels may have been especially important in explaining variations in the quality of entrepreneurial judgments.

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