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Learning from China's Emerging Growth Companies by Teaching Them

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Emerging Growth

While entrepreneurship is crucial to the progress of emerging economies, many programs designed to foster ventures end in failure. The key is to focus on growth companies, says Wharton Professor Ian MacMillan, who is helping to lead the Wharton Global Clinic, a new Wharton initiative providing advice growing firms in China — and learning from them about what works.

Entrepreneurship is a powerful driver of job and wealth creation in emerging economies, so governments and aid agencies have invested billions of dollars in start-up firms and small entrepreneurial businesses. The results can be impressive. In the People’s Republic of China, for example, Shanghai has become the nation’s wealthiest city, in large part because of the small and medium enterprises that collectively generate $71 billion in annual sales. Across China, the rise of private enterprises helped to boost GDP per capita from $150 to $760 between 1978 and 1998 and to reduce the number of households with income of less than $1 per day from 80 % to 12 % in the same period.

Squandering Millions

Yet for all the promise, creating effective programs to promote entrepreneurship in emerging economies is a complex challenge. Estimates are that as many as 50 % of these enterprises fail.

"Government and international agencies have squandered hundreds of millions of dollars on misguided attempts to promote economic and social development by encouraging entrepreneurship," said Ian MacMillan, director of the Wharton School’s Sol C. Snider Entrepreneurial Research Center.

He said one of the primary reasons these programs go wrong is that they focus on funding unproven start-ups rather than helping finance the growth of proven firms. "If you put money into standing enterprises, wealth will follow," he said. "They should be supporting enterprises that have survived the market test and need funding to promote growth."
As an example of this problem, MacMillan points to a Scandinavian country that created a well-intentioned plan to offer start-up funds to unemployed citizens. The would-be entrepreneurs used the government funding to secure bank financing. But the ventures quickly failed, leaving the business founders worse off. In short measure they had lost the government money, returned to the ranks of the unemployed, and built up a large bank debt to repay.

The Wharton Global Clinic

How can entrepreneurship be promoted effectively in emerging economies? A new research project at Wharton, The Wharton Global Clinic, is conducting experiments that address this question, concentrating initially on a group of Chinese businesses.
Given the problems of supporting start-ups noted by Professor MacMillan, the Wharton Global Clinic is concentrating on established small businesses poised for growth. And unlike traditional aid programs, the project is supplying knowledge rather than financial support. The project also is experimenting with a creative mix of technology, student consultants at Wharton and in China, and a network of partner firms in the United States to test different models for delivering knowledge and advice. Through these approaches, researchers are studying ways to leverage Wharton’s entrepreneurial expertise thousands of miles from its Philadelphia campus.

"We are building a vehicle to capture and disseminate entrepreneurial knowledge in other markets, particularly in emerging markets," said Jimmy Thompson, associate director of the Wharton Global Clinic and a visiting scholar from the University of Cape Town in South Africa. "We have a tremendous resource here at Wharton that other people don’t have access to."

The Wharton Global Clinic’s first international effort began with China in December 2000, providing support, via the Internet, to high-growth businesses there. Through major universities in China, the Clinic is currently working with over a dozen medium-sized China-based companies, developing strategies in general business areas (such as marketing, finance, pricing and operations processes) so that these firms will thrive as China becomes increasingly integrated with the global economy.

Student consultants from the University of Pennsylvania, many of whom are fluent in Chinese, help implement the program. These consultants will soon help replicate the Wharton Global Clinic by training counterparts based at Chinese academic institutions to carry on the program’s mission locally.

A Laboratory

Above all, the Global Clinic is a laboratory. "It is very experimental, very much a research project," Thompson said. Researchers are learning about the limitations and applications of technology and the challenges of translating knowledge across geography and culture. Based on the results of these experiments, the Global Clinic will continue to evolve. "It is different from what it started out as," Thompson said. "Given that this is a new space, we are acutely aware that things will change continuously. We will continue to adapt as we move forward. We are watching, learning, trying different things and getting different results."

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For more information on this topic:

• Wharton Global Clinic
  
  
• Knowledge@Wharton: "’Informal’ Entrepreneurship Is the Key to China’s Success"
  
  
• World Bank Report on Small and Medium Enterprises
  

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