Sustaining the region’s economic growth depends on a vibrant private sector from which dynamic entrepreneurs can emerge to innovate and create many jobs. Digital entrepreneurship helped keep economies afloat during COVID-19 and it can become a major engine of growth in the post-pandemic world.
Yet, with the exception of Singapore and the Republic of Korea, global ranking shows most of the region’s economies are lagging when it comes to the environment for digital entrepreneurs. Digitalization and strong rule of law can facilitate innovative entrepreneurship—two areas where policy makers can help create a conducive environment for dynamic entrepreneurs to flourish.
Entrepreneurship refers to the activity of starting and running a business. Entrepreneurs are a heterogeneous group, ranging from street vendors to game-changing innovators.
As a result, their economic contributions are marked by a great deal of heterogeneity. New analysis of 14,892 businesses less than 42 months old in 17 Asian Development Bank developing member countries (DMCs) suggests that a small group of dynamic entrepreneurs contribute disproportionately to the positive economic impact of entrepreneurship. For example, just 0.4% of the entrepreneurs in the sample account for 46% of the aggregate employment created by these businesses. Those dynamic entrepreneurs are often innovators, who are a relatively small minority of entrepreneurs.
Sustained economic growth depends on a vibrant private sector, and private sector development depends in turn on innovation and the emergence of new businesses—that is, on entrepreneurship.
Innovative entrepreneurs generate dynamic competition in which new firms, products, and technologies compete with existing counterparts. Transformative entrepreneurs often play a central role in the introduction of such game-changing products as personal computers and mobile phones. More recently, the scientist-entrepreneur couple Ugur Sahin and Özlem Türeci of BioNTech were instrumental in developing one of the world’s first safe and effective COVID-19 vaccines. Yet, despite its large economic potential, entrepreneurship remains a relatively under-researched topic in economics, in part due to a lack of good data on entrepreneurs—a gap which this chapter helps fill.
Developing Asia has reached a development stage where the private sector typically assumes a larger role in economic growth.
While the government’s role remains vital, it is increasingly to provide an enabling environment for private enterprise. As ADO (2017) points out, rapid growth has transformed Asia into a predominantly middle-income region where sustaining rapid growth becomes harder than at low-income. It is at this stage where innovation becomes critical. In economies that succeeded, such as the Republic of Korea, visionary entrepreneurs and innovators created world-class companies which contributed greatly to the journey from middle to high income. The ongoing digitalization of economic activity that accelerated during COVID-19 has fortunately opened up a world of entrepreneurial opportunities. Digital entrepreneurship can thus become an engine of growth in the post-COVID world.
The global health and economic crisis triggered by COVID-19 highlighted the pivotal role of ICT in economic resilience.
ICT enabled economies and societies to continue to function under an epidemic unprecedented in modern times. New analysis of 12,990 firms in 32 countries and 28 industries globally from May to September 2020 empirically confirms a significantly positive impact from digital technology on entrepreneurial resilience during the pandemic. Compared with entrepreneurs who did not have web pages or social media presence, those that did were significantly more likely to have remained open. Digitalization enables entrepreneurs to shift more of their activities online. Digital entrepreneurship, in turn, helped keep economies afloat during the pandemic.
Information and communication technology (ICT) reduces the cost of starting a business by facilitating extensive outsourcing of activities and eliminating the need for physical retail space even as it enables new firms to reach customers far and wide at low cost through the internet. Better access to foreign business partners and customers through ICT boosts internationalization and exports. More generally, digitalization improves productivity and efficiency, lowering the cost of economic transactions. Digital technology expands not only the opportunity landscape for entrepreneurs but also the avenues available for pursuing new opportunities.
The Global Index of Digital Entrepreneurship Systems (GIDES) measures the quality of the environment for digital entrepreneurs by capturing the degree of digitalization in society and the economy and how it supports the entrepreneurial ecosystem. The index is constructed with eight pillars that capture the diverse elements of the digital entrepreneurship environment: culture, institutions, market conditions, infrastructure, human capital, knowledge, finance, and networking. Significantly, the index allows for a meaningful comparison of the quality of national digital ecosystems across 113 global economies.
Singapore, which has the top GIDES score at 81.3, is one of only 15 leaders. The 10 followers are primarily innovation-driven high-income economies such as France, Israel, and the Republic of Korea while the 15 catchers-up are a mixed group which includes Chile, the People's Republic of China, Italy, and Malaysia. The 32 laggards, which include 7 DMCs, are mainly upper-middle-income while the 41 tailenders, which include 10 DMCs, are mostly low-income and lower-middle-income. Two stylized facts stand out. First, there is sizable scope for improvement even for leaders, which have an average score of 71.2 out of 100. Second, there is a huge gap between economies since the four other group averages are 53.8, 39.1, 26.0, and 14.2.
New analysis of more than 190,000 entrepreneurs in 14 DMCs explored the relationship between the national digital environment, measured by GIDES, and firm productivity. For new businesses which are less than 42 months old, GIDES had a significantly positive effect on two indicators of individual firm productivity: product innovation and expected future job creation. For example, an increase by one standard deviation in GIDES is associated with a 9.1 percentage point increase in the probability of innovation by a new business.
There are two fundamental consequences of digitalization on entrepreneneurial activity. First, digitalization significantly expands the scope of entrepreneurial opportunities.
Smartphones, for example, have spawned such a wealth of innovative mobile applications from thousands of independent developers that the smartphone industry is essentially boundless. Second, digitalization facilitates entrepreneurial experimentation, which enables greater innovation. Entrepreneurs can test their ideas very quickly and cheaply by modifying descriptions of their offerings on their web pages and monitoring the reactions of potential customers almost in real time.
In-depth interviews with 685 entrepreneurs in six Southeast Asian countries—Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam—assess how their adoption of digital technology affected their business.
Digital tech applications and the digitalization of business activities both had strong positive effects on the likelihood of business model experimentation—an indirect contributor to success. More directly, both had significant positive effects on business profitability and contribution to sustainability. In other words, digitalization helped entrepreneurs not only with their bottom line but also with their social responsibility.
Just as Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam vary greatly in their stage of development, interviews of entrepreneurs in the six economies suggest that their entrepreneurial ecosystems differ substantially.
Furthermore, digital entrepreneurs have become active in a wide range of diverse industries across the subregion, reflecting the capability of entrepreneurs to leverage digital technology in versatile ways. These industries include food delivery in Indonesia, drone technology in Malaysia, arts, media and other creative industries in the Philippines, finance technology in Singapore, health and wellness in Thailand, and education in Viet Nam. Vital contributions from entrepreneurs to Thailand’s official campaign to provide online health care during COVID-19 confirms the social value added through entrepreneurship.
Digitalization facilitates entrepreneurship but it does not reduce the inherent riskiness and uncertainty of starting a new business, which entails a high likelihood of failure. Institutions define the rules of the game in an economy, both formal and informal, that organize economic relations. Growth-conducive institutions cited in the research literature include strong property rights, honest and effective governments, political stability, reliable legal systems, and open and competitive markets. They reduce the cost of economic transactions, create incentives to invest in human and physical capital, and contribute to more efficient allocation of resources. Intuitively, good institutions are beneficial for entrepreneurial activity because they mitigate the high level of risk and uncertainty that entrepreneurs face.
A growing literature examines the link between institutions and entrepreneurship. In new analysis drawing on more than 230,000 individuals in 15 DMCs, this chapter confirms a strong relationship between national institutional conditions and productivity of individual firms. In particular, strong rule of law, which mitigates the risk and uncertainty that entrepreneurs face, has a strong positive association with the propensity of entrepreneurs to introduce new products. A one-standard deviation improvement in the rule of law was associated with an increase in the likelihood of product innovation by businesses less than 42 months old by 5.4%.
Starting a business requires an individual to assume a lot of risk because many new ventures fail. Corruption deepens risk by potentially reducing returns from successful risks with the threat that profits may be arbitrarily expropriated. New cross-country empirical analysis confirms that corruption is significantly associated with lower entrepreneurship. A decrease in corruption by one standard deviation is associated with an in increase in the entry of new entrepreneurs by as much as 10 percentage points.
Entrepreneurship is inherently an individual and private pursuit. Policy makers must realize therefore that they have little direct influence on entrepreneurship—unlike investing in, for example, power plants.
What policy makers can do is influence how individuals weigh entrepreneurship against other pursuits by creating an institutional, digital, and broader environment conducive to entrepreneurship. This is especially important for nurturing talented individuals who may establish high-growth firms or “gazelles” that contribute disproportionately to the economy by innovating, exporting, and creating lots of jobs. Such gazelles may later grow into globally recognized brands. Ample experience shows that policy makers cannot pick these winners, but they can give them the right environment to grow.
Among the 113 global economies measured by the Global Index of Digital Entrepreneurship Systems, Singapore has the world’s best digital environment for entrepreneurs.
The Republic of Korea is in the second tier of economies while Malaysia and the People’s Republic of China are in the third tier. However, 17 out of the 21 measured DMCs were in the fourth tier (7) and fifth tier (10). This shows plenty of scope for improving the quality of the region’s entrepreneurial climate. DMC scores across the eight pillars which make up GIDES are relatively balanced, which suggests that a broad policy mix will have a bigger impact than focusing on any single policy area. DMCs have very different digital entrepreneurship system profiles, pointing to a need for tailored policies on entrepreneurship and digitalization.
New analysis presented here provides strong empirical evidence of a significant and positive effect of a conducive digital and institutional environment—encompassing a wide range of elements from a high-speed broadband network to strong rule of law—for productive entrepreneurs who innovate, export, and create many jobs.
For the region as a whole, the weakest GIDES pillar is culture and informal institutions. One way to strengthen that pillar is by improving public perceptions of entrepreneurship, for example through education. To conclude, there is plenty of scope for policymakers to foster a more entrepreneurial Asia full of dynamic entrepreneurs who innovate, create jobs, and propel growth.
|Rank out of 113 global economies||Score (0-100)|
|Republic of Korea||22||54.1|
|People's Republic of China||39||35.3|
Source: Asian Development Bank. Asian Development Outlook 2022 Update: Entrepreneurship in the Digital Age (September 2022)