Babson College/London Business School Release Global Entrepreneurship Monitor

(GEM): The Definitive Study of Entrepreneurship in 2005

'Innovative' Entrepreneurs Drive Economic Growth; Entrepreneurs in Middle-

Income Countries Play Catch-up, Tap into New Technologies

WELLESLEY, Mass., and LONDON, Jan. 12 /PRNewswire/ -- Entrepreneurs in
middle-income countries are beginning to catch-up to their
counterparts in richer economies by tapping into technologies
unavailable to them just a year ago, according to the seventh annual
Global Entrepreneurship Monitor (GEM). Directed by Babson College and
London Business School, the report is the largest annual measure of
entrepreneurial activity worldwide, compiled by more than 150 scholars
from 35 countries.

GEM 2005 also found that entrepreneurs with 'innovative' businesses
drive higher growth rates of GDP per capita. Additionally,
middle-income countries tend to start more businesses than high-income
countries. Yet 'quantity' of start-ups does not necessarily translate
into 'established' businesses.

Classic venture capital is up for the first time since the year 2000,
according to GEM's focus section on finance. More importantly, GEM
sees 'microfinancing' as the new banking solution for entrepreneurs
everywhere. Viewing access to credit as a human right, GEM believes
microfinancing is an innovative antidote to world poverty.

The GEM focus report on 'high-expectation' entrepreneurship places
North America at the top and pulling in the highest numbers in new job
creation among early-stage entrepreneurs.

For the first time, the GEM report divided countries into middle and
high- income clusters. Strong variations exist among these clusters in
both the frequency and quality of entrepreneurial activity.

This year, GEM researchers took their policy recommendations to the
next level by showcasing new initiatives among GEM nations that have
been successful in growing entrepreneurial activity.

"This year's GEM report gives us a clear understanding of the
importance of free markets to the livelihood of an entrepreneurial
society," said Maria Minniti, Associate Professor of Economics and
Entrepreneurship, Babson College, and GEM Research Director. "In all
countries, regardless of living standards, governments need to remove
barriers to competition, promote fiscal responsibility, and ensure
transparency of the law and a clear legal framework for property
rights and regulatory oversights."

"Open global markets are also vital to continued entrepreneurial
growth," said Professor Michael Hay, Deputy Dean of London Business
School. "Trade restrictions tend to penalize entrepreneurs more than
other groups due to the nature of their enterprises. Liberalized world
markets also allow for the free flow between nations of previously
unavailable financial capital."

KEY FINDINGS FROM THE GEM 2005 GLOBAL REPORT

Entrepreneurial Activity, Motivation, Innovation, Growth, and Industries

Middle-income countries are tapping into new technologies. Both early-
stage and established business owners in middle-income countries are
using technologies unavailable to them a year ago. Starting at a lower
level, they have more room and opportunities to upgrade than
entrepreneurs in high-income countries.

'Innovative' entrepreneurs drive economic growth. Middle-income
countries with higher levels of innovative entrepreneurship
demonstrate higher growth rates of GDP per capita. Early-stage
entrepreneurs claim more often to offer innovative products then
established entrepreneurs. Still, findings show that innovation is
relatively rare in all countries.

Middle-income countries tend to start more businesses than high-income
countries. For the first time, GEM 2005 divides 35 countries into
middle and high-income clusters; findings show a strong variation
across clusters both in frequency and quality of entrepreneurial
activity. Middle-income nations such as Venezuela (25%) and Thailand
(20.7%) outperformed high income countries like Japan (2.2%) and
Belgium (3.9%) in early-stage entrepreneurial activity.

High rates of early-stage entrepreneurship do not necessarily
translate into high rates of established business ownership. Japan for
example scores very low in early-stage entrepreneurial activity but
ranks in the middle group of countries for established businesses.
Early-stage entrepreneurs in high- income countries are more likely to
become established business owners than the more numerous early-stage
entrepreneurs in middle-income countries.

Success is best among 'opportunity-driven entrepreneurs,' who have
lower failure rates among early-stage businesses. In general,
countries with healthy and diversified labor markets or stronger
safety nets in terms of social welfare provisions can be more
selective in the kinds of businesses they choose to start...and have
higher ratios of opportunity to necessity- driven motivation. Denmark
comes in number one with a 27 to 4 ratio of early- stage opportunity
to early-stage necessity ventures.

All entrepreneurs believe they face strong competition, but
established business owners (65%) perceive more competition in their
marketplace than early-stage entrepreneurs (55%). Additionally,
early-stage businesses in high-income countries feel they are more
successful in finding market niches than their counterparts in the
middle-income cluster.

Job creation remains stagnant -- but middle-income countries have a
higher share of entrepreneurs in businesses with growth potential than
both early- stage and established entrepreneurs from high-income
countries.

Middle-income countries are more involved in businesses focused on the
consumer. Within four groups of more than 500 industry sectors --
extraction, transformation, business services and consumer oriented --
there is a strong link between income-level of a country and its
business activities. As countries develop, entrepreneurial activity
shifts from consumer activity, such as retail, to business services
that are twice as high in high-income countries that can access
skilled knowledge workers.

Entrepreneurial Capacity

Early-stage businesses catch young entrepreneurs (25-34 years old)
while more mature adults (45-54) own and operate established ventures.
Men continue to lead women in starting businesses. The gender gap
exists for both early- stage and established businesses, and in both
country clusters.

'Already' employed workers -- in both middle and high-income countries
-- most likely to start new businesses. More than 70% of early-stage
entrepreneurs and more than 80% of established business owners work
full time in their own businesses.

Education is key to success for every entrepreneur, in every country.
Yet, the least educated are just as likely as the highly educated to
own an established business in high-income countries.

Entrepreneurs with ample income are more likely to start businesses
and are more likely to own established businesses in high-income
countries than middle-income countries.

Shaping the entrepreneurial mindset -- entrepreneurs, both early stage
and established, are more confident in their skills, likely to know
more entrepreneurs, alert to new opportunities, and rank low on the
fear of failure scale. But fear of failure is more prevalent among
individuals not involved in entrepreneurial activity than among people
involved in it at any level and in all countries. Women worldwide are
less optimistic, less confident in their entrepreneurial skills, and
are more concerned about failure.

Policy Implications

Entrepreneurs do not operate in a vacuum. The political, legal, and
cultural environment directly impacts their activity and their ability
to contribute to the economic development of their country. A major
component of GEM 2005 is the platform it provides governments to
develop more effective entrepreneurial policies and best practices.

Government's role is key to develop real political and economic
stability in an entrepreneurial society. Governments must ease
barriers to competition, provide and improve efficiency and
effectiveness of services, promote fiscal responsibility, and insure a
clear legal framework for property rights and regulatory oversight.

Open global markets -- liberalizing world markets is vital to
entrepreneurial growth. Entrepreneurship is at the cutting edge of new
market development and technological innovation. Trade restrictions
tend to penalize entrepreneurs more than other groups.

Globalization also allows the free-flow among countries of previously
unavailable financial capital and it puts pressure on large
corporations, threatened by market erosion, to adjust in an
entrepreneurial manner.

High-income countries need policies to help businesses survive and to
develop technological innovation and growth through exports. GEM 2005
includes many examples of successful initiatives in countries such as
Austria, where AplusB centers fund innovative, technology-oriented
spin-offs from the academic sector, and provide professional support
for scientists turning new ideas into viable businesses. In Australia,
the State Government of Queensland began a 'pipeline' concept to build
stronger connections between entrepreneurs and public servants. The
private/public partnership is an educational resource for budding
entrepreneurs who need investment guidance and overseas linkages to
new markets. Education systems in high-income countries need to
emphasize programs for 'advanced' entrepreneurship and networking.

Middle-income countries moving from 'technology adopting' to
'technology creating' also need to foster an entrepreneurial culture
and business sector. Financial constraints and the lack of a clear
definition of property rights are of particular concern. A
government-backed program from the Brazilian Ministry of Science and
Technology provides financial support, without interest rates, to
businesses with innovative technologies. GEM 2005 cites many examples
of new government policies that help entrepreneurs market their
businesses locally and globally.

Low-income countries need policies that insure "fundamental
institutional conditions" to develop active markets. These must evolve
before focusing on entrepreneurial framework conditions. Besides
upgrading education at the primary and secondary levels, low-income
countries must welcome major established firms so that conditions --
rule of law, labor market flexibility, infrastructure, financial
market efficiency, management skills -- will further encourage
employment, technology transfer, exports, and tax revenues.

KEY FINDINGS FROM THE GEM 2005 REPORT ON HIGH-EXPECTATION ENTREPRENEURSHIP

High-Expectation Entrepreneurship is defined as all early-stage
businesses that expect to employ at least 20 employees within five
years time. Globally, GEM 2005 shows that high-expectation
entrepreneurial activity is a rare phenomenon but...

North America dominates with approximately 1.5% participation rate;
Europe and Asia are at the low end with a 0.5% participation rate.

High-expectation entrepreneurship = more new jobs -- GEM 2005 found
that some 10.1% of all new firms promise to create nearly 75% of all
new jobs by early-stage entrepreneurs.

High-expectation entrepreneurs tend to be young males less than
44-years old. They are also more often employed, better educated, and
have higher household incomes compared to low-expectation
entrepreneurs.

Policies that help existing entrepreneurs realize their growth
ambitions will also bolster new job creation. Especially in
highly-developed economies, quality in high-expectation
entrepreneurship matters more than overall entrepreneurial activity.

KEY FINDINGS FROM THE GEM 2005 FINANCING REPORT

'Microfinance' the world's poorest -- to make poverty history, leaders
in private, public, and civil-society organizations need to embrace
entrepreneurship and innovation as antidotes to deprivation. Six
hundred million Africans live on less than $3 per day; for China the
number may be 400 million and India 500 million. GEM 2005 strongly
suggests throwing out traditional banking principles based on "the
more you have, the more you can borrow." Microfinancing is the new
banking and it regards access to credit as a human right. The Grameen
bank in the village of Jobra, Bangladesh microfinances its
entrepreneurs. Almost 300,000 Bangladeshis took micro- enterprise
loans and the loan recovery rate was near 99%...when relied on
personal trust instead of collateral.

Upswing in classic venture capital -- first time since 2000. In the
USA, the pacesetter for investing in high-technology companies,
classic venture capital rose to $21 billion up from $18.9 billion in
2003. The USA invests 84.1% (or 16 times as much) into high-technology
companies compared with only 20% in Europe. And the USA invested 4.6
times as much in biotech. Europe invested much more in consumer
related companies.

Venture capital matters; how it's invested also matters. American
venture capitalists invest more funds in fewer companies than their
counterparts in Europe and Japan. They are highly selective, providing
more in emerging high- technologies, a chief reason why American
companies dominate this sector. Sweden and Norway are two European
exceptions. They are closing the VC gap with USA. Sweden raised 480%
more than in 2003 and Norway 170% more. In the UK, which is the
largest venture capital market in Europe, VC funding declined by 21%.

Most entrepreneurs still funded through the '4Fs' of informal
investment -- founders, family, friends, and foolhardy strangers. On
average, founders supply 66% of their startup financing. For every new
venture funded with classic VC, there are more than 10,000 financed
from entrepreneurs themselves. Entrepreneurs should expect to invest
two-thirds of the initial capital needed to launch their ventures.

Policymakers, educators, and researchers must pay more attention to
informal investors and less to venture capitalists. Financing from
entrepreneurs and informal investors pumps 3.6% into GDP of GEM
nations compared to 0.1% from classic venture capital.

FOUNDING AND SPONSORING INSTITUTIONS: GEM 2005

Babson College, Wellesley, Mass., USA, is recognized internationally
as a leader in entrepreneurial management education. Babson grants BS
degrees through its innovative undergraduate program and grants MBA
and custom MS and MBA degrees through the F.W. Olin Graduate School of
Business at Babson College. Babson Executive Education offers
executive development programs to experienced managers worldwide. For
information, visit http://www.babson.edu.

London Business School's Vision is to be the pre-eminent global
business school, nurturing talent and advancing knowledge in a
multi-national, multicultural environment. Founded in 1965, the School
graduated over 800 MBAs, Executive MBAs, Masters in Finance, Sloan
Fellows and PhDs from over 70 countries last year. The School's
executive education department serves 6,000 executives and 60
corporate clients on its programmes every year. London Business School
is based in the most accessible and international city in the world
and is one of only two UK business schools to have twice been awarded
the highest research rating of five-star (5*), by the Higher Education
Funding Council for England (HEFCE), confirming the School as a centre
of world-class research in business and management.
http://www.london.edu

The GEM report: This is the seventh annual Global Entrepreneurship
Monitor (GEM) cross-national assessment of entrepreneurship. Started
in 1999 with 10 participating countries, the project has expanded to
include 35 countries in 2005. GEM has developed into one of the
world's leading research consortia concerned with improving our
understanding of the relationships between entrepreneurial activity
and national economic growth. No other research exists that can
provide consistent cross-country information and measures of
entrepreneurial activity in a global context.

GEM focuses on three main objectives:

* To measure differences in the level of entrepreneurial activity among

countries

* To uncover factors determining the levels of entrepreneurial activity

* To identify policies that may enhance the level of entrepreneurial

activity

New developments, and all national reports, can be found at
http://www.gemconsortium.org. The program is sponsored by Babson
College and London Business School.

For more information contact:

Michael Chmura

mchmura@babson.edu

781-239-4549

Barbara Spies Blair

blairb@babson.edu

781-239-4621

Kerry Taylor

kerrytaylor@london.edu

+44 (0) 20 7706 6972 SOURCE Babson College