Entrepreneurship is at the heart of a successful free market economy. Entrepreneurs who have the capacity to originate business ideas and convert them into a realty are among the most important assets of a country competing in the contemporary globalized world. From Henry Ford to Steve Jobs the American capitalist economic model was sustained by the innovator entrepreneur who developed, organised, managed and created business enterprises that surpassed any known human endeavour in creating national wealth and prosperity. Taking advancements in Knowledge, science and technology and converting them into viable business organisations was their forte.
In contrast, the Soviet Union lost the Cold War with the Western Market Economies because of its fossilised system that crushed the entrepreneurial spirit of its people and in the process destroyed its economic capability to confront the West. Unlike the bureaucrat the entrepreneur works for himself and his success or failure depends on himself. He is a risk taker while the bureaucrat is not. This basic difference between the incentives in the two systems led to the dominance of the market economy globally. When Deng Xiaoping changed the economic incentives in the Chinese economy, he unleashed Chinese entrepreneurship and growth.
In our own history when Islamic civilisation was at its peak, entrepreneurship was not only encouraged but was at the core of the Prophet's (PBUH) council of companions. From amongst the world's great religions, Islam is perhaps the only religion that sanctions business and trading as a respected and integral part of an Islamic society. Islamic property rights, Islamic principles of equity, taxes, transparency and truthfulness along with Islamic financial system of risk sharing and risk taking created the economy that fuelled the rapid spread of Islamic civilisation. A free market economy with free trade was the hallmark of all centers of Islamic governance.
Creating and nurturing an environment in which entrepreneurship flourishes should be a key policy ingredient for any Pakistani government wishing to create a sustainable, competitive and high growth market economy. If we look at the contemporary economies of Europe and America, entrepreneurship leads to creation of a family business. Almost 90 percent of all businesses are family-owned businesses. The family business category comprises not only small and medium enterprises but also includes very large conglomerates including banks.
In the developed world, the family business is defined as a business that has a majority shareholding of a family. The originator of the business has every intention of passing his ownership to his descendants, so that family majority ownership is maintained in the foreseeable future. The successful family business is more profitable and competitive than their rivals because family owners work harder and more diligently than others because of their family name and stake. Yet almost 70 percent of family businesses are sold out or closed during the lifetime of the originator and 95 percent of the businesses do not survive the third generation. In Pakistan, the casualty rate is probably higher.
Life is tough for an entrepreneur in Pakistan. From the moment of conception of the idea to its fruition the way is strewn with road blocks. The entire burden of Pakistan's dismal World Bank's Ease of Doing Business Rankings (144 out of 190 countries) falls on the budding entrepreneur. For a start his first hurdle is the availability of finance. In the absence of venture capital and entrepreneur finance in Pakistan, financing becomes an almost insurmountable barrier. The entrepreneur has to depend on his personal savings, friends and family. Thereafter, the pursuit of adequate infrastructure and connectivity, land, construction approvals, electricity and gas connections, enforcing contracts, establishing banking relationships, accessing distribution and retailing networks, paying taxes is a major nightmare that cannot be resolved without oiling the wheel of corruption in Pakistan. Add to this list ill-trained workers, poor law and order and terrorism. Once the entrepreneur sets up his business, his day-to-day operations tax his abilities to the hilt.
The support systems that can support and nourish the entrepreneur with good laws, public services, proper advice and know-how to build a sustainable business organisation does not exist in Pakistan. Building a viable and sustainable business organisation is normally the weakest part of the entrepreneur's repertoire as well. The Small and Medium Enterprises Development Authority (SMEDA), an organisation established to develop the organisational capabilities of entrepreneurs, is itself totally inadequately staffed with an inadequate budget and inadequate reach.
Entrepreneurs are naturally very possessive of their creation. Their desire to delegate is limited and given the business climate in Pakistan, a key success factor is the ability to engage in clandestine business government interaction. For this action, the entrepreneur does not need a capable and efficient organisation but a loyal organisation that fits well in the informal economy.
The cost of this informality exacts a huge price from the entrepreneur and the nation. First, the informal structure and operations do not lend themselves to achieving the full growth potential of the business or the entrepreneur. Secondly, the organisation develops a stunted brain as the most capable are ignored in favour of the most loyal. The transition from loyal family members running the show to more capable family members or professional managers does not happen. Family disputes and succession problems devastate the business organisation, ultimately leading to failure and high extinction rates.
The major challenge facing the family business is how to effect a transition from a tightly held and controlled business into a formal corporate style business entity with a capable board, outstanding management control systems, top quality senior managers, strong middle management with a talented and skilled workforce. A business that can be passed on to the descendants without creating an upheaval, with continuity and capacity to generate wealth for its owners and stockholders in perpetuity as long as it employs state of the art management systems and practices.
Task of the founder entrepreneur is then to convert his family business outlook from a 'family and personal first' orientation towards a 'performance oriented business first'. Consciously and deliberately taking decisions that are good for the business and that ultimately lead to a corporate structure and public listing. Listing is important to provide liquidity to the family members and ease the problem of distributing ownership without destroying the business entity. The job of the family stockholders would then be to elect the best boards and the best management to create the best companies in their interests as shareholder concerned with maximising value creation of their businesses.
Creating and building such a performance oriented organisation is not rocket science and has been done by thousands of leading family business houses all over the world, albeit over a long hard period of patient and consistent development. From the Tatas to the Ambanis and the Mittals in India, the Chung and Lee families, the owners of Hyundai and Samsung in South Korea, The Quandt family owners of BMW in Germany, Agnelli family owners of Fiat in Italy, Walton, Zuckerberg and Trump family of the US, owners of Wal-Mart, Facebook and the Trump Empire. Babar Ali, Mian Mansha and Hussain Dawood in Pakistan, and many more. These family businesses are now household names and have full corporate structures with access to finance, best management and importantly the owners' wealth is in the value of their shares rather than the assets of their companies. They continue to strive for organisational excellence lest they are left behind by competition. It is clear that successful family business houses are dependent on performance-oriented organisations, examples are numerous and should be the role models for budding entrepreneurs.
As far as the government is concerned, its task is to remove the burden of excessive regulatory red tape and bureaucracy from the shoulders of the entrepreneur, relieve the onerous tax system yoke from the necks of the entrepreneurs by simplifying the tax code and reducing the tax rates. Provide adequate infrastructure and support systems for incubating and empowering millions of new entrepreneurs in every region of Pakistan. Secondly, it has to ensure that, from this nursery a steady stream of successful SMEs, with creative sustainable organisations emerges that can one day graduate to the corporate structure and big leagues. This process is essential for creating the wealth, prosperity and employment for the teeming millions in Pakistan. It is high time that the entrepreneurs and the government joined hands to unleash the family businesses as the engine for high economic growth and in the process Pakistan can also become a winner in the Race of Nations.
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(The writer is a former Finance Minister)
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