Innovative small biz will bring growth
Published:Friday | March 11, 2011 | 12:00 AM
Wilberne Persaud, Financial Gleaner Columnist
Jamaica Producers Group's former chief executive Marshall Hall has placed the matter of business bankruptcy on the agenda for Jamaica's turnaround to innovation and growth. His motivation to raise this issue derives from details of businesses that failed in the late 1980s and early 1990s, ending in bankruptcies with sums owed to commercial banks they could not repay, even if the business and its owner(s) lived three more lifetimes.
The absurdity of these situations somehow seems to either miss our policy formulators, or have little traction for those who push to change the law.
The joint stock and limited liability company have been of key importance in capitalist business development.
They have allowed, first, pooling of resources so great ideas need not languish on drawing boards for want of funds and second, allowed risk takers to place a cap on total loss if, as often happens, a venture ends in failure.
Here in the Caribbean, our legislation followed the British. Our commercial banks tended to take on norms prevalent in the United Kingdom. As a result, overdraft financing of business prevailed, and largely still does.
Banks found a way, on paper at least, to cover risk beyond thatallowed by the limited-liability company. This took the form of the personal unlimited guarantee of a business owner or his/her guarantor. It defeats the purpose of the limited-liability concept.
In addition, there are two further implications of this scenario that need to be looked at in trying to come to terms with changing the business environment to foster innovation and growth.
Jamaica needs a credit-rating scheme for potential borrowers in the financial system. This issue has been a matter of discussion for years, apparently with no end in sight.
Second, the matter of small- and medium-size enterprises must become an element of major focus for specialised aspects of financing and other support mechanisms.
Currently, as Hall appropriately points out, bankruptcy is associated with failure and shame. I would also add, particularly in our environment, ridicule, derision and contempt. All this arises, in part, from the fact that the would-be innovator is often seen as becoming too big for his breeches, upstart or 'uppity'.
So failure takes a huge toll. Mind you, this is not unique to our environment, indeed some cultures drive the failed business owner to fall on his sword. It is particularly this perception of failure that we want to address.
IBM is reputed to have had an apparently contradictory maxim governing the pursuit of innovation: Fail faster!
The governing principle here is that the road to success is paved with mistakes and failure. Get through them quickly and learn; move on to the success!
As counter-intuitive as this seems it is absolutely true. Teflon was a mistake; the ubiquitous 'Post it' notes derive from a failed adhesive. The point is potential success of a business is always unknown. With no one willing to take on risk, the whole system atrophies.
Perhaps most important in seeing this point is the fact that of start-up businesses many don't last beyond their first three years - 65 of every 100 start-ups are gone after five years. The US Small Business Association estimated in 2008 that more than 627,000 new businesses open annually while 595,000 businesses close their doors.
For us, the so-called informal sector partly represents the drive to innovate as much as our small- and medium-size businesses.
For our gross domestic product numbers and standard of living to respond robustly to infusions of investment capital, our business environment requires appropriate legislative, institutional and attitudinal change.
Our education system should also reflect this as we include training in entrepreneurship - difficult as this may be - among arts and humanities, as well as science students. The idea need not always be: 'Where shall I find a job?' It could be: 'Here's my best idea, how can I implement it?'
If we change the bankruptcy law, create credit reporting, simplify the incorporation process, provide specialised funding, mentorship programmes, identify angel investors and some venture capital for small business development, we might yet pleasantly surprise ourselves.