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Paternalism and entrepreneurship the emergence of state-made entrepreneurs
Paternalism and Entrepreneurship The Emergence of State-Made Entrepreneurs MIRI LERNER* Tel Aviv University This article considers the government's role in encouraging or hampering entrepreneurs. Following the analysis by Jurgen Habermas cx~) o f state regulated capitalism, the article will focus on a sociological analysis of paternalism in establishment-industrial entrepreneurship relations. A type of entrepreneur emerges as the result of establishment nurture, which we shall here call state-made entrepreneurs. The segmented labor market theory and its application to the field of entrepreneurship will serve as a theoretical starting point for the investigation of the problem of various patterns of entrepreneurship which develop in a society in which there exists massive paternalistic government intervention in the economy.
~SritACI':
The impact of strong intervention by the government on entrepreneurs is evident in a number of contexts. In many developing countries, the govemment serves as the main apparatus for attaining the goal of development. Derossi o~ showed that in Mexico, where the government protects local industries by legislation, control, and taxation, the role of the entrepreneur should not be viewed only in production, but also from the socio-political aspect of the creation of ties with the regime and its representatives. A second broad context in which entrepreneurslaip is influenced by the central role of the government in the economy is in the planned economies of the Communist Bloc (Levin(2a)). Kentt~9>pointed to a political environment that establishes constraints on the scope, direction, and success of entrepreneurship within the command economies, even though, in Hungary, for example, there is emerging a new class of *Direct all correspondenceto: Mid Lemer, Tel Aviv University, Ramat-Aviv, 69, 978 Tel Aviv, Israel. The Journal of Behavioral Economics, Volume 18, Number 3, pages 149-166. Copyright © 1969 by JAI Press Inc. All rights of reproduction in any form reserved. ISSN: 0090-5720.
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entrepreneurs, which is responding to the incentives, both negative and positive, that the system provides. Another context in which the dependence of entrepreneurship on government occurs is in the industrialized capitalistic countries, which HabermasOO called state-regulated capitalism. Israel provides an interesting opporttmity for investigating private entrepreneurship in a state-regulated capitalism.
The Theoretical Framework The theoretical framework on which the analysis of government-entrepreneurs relations in general, and state-made entrepreneurs in particular is based is labormarket segmentation. In this article the criterion for segmentation is the presence or absence of government paternalism toward entrepreneurs. Recent sociological literature claims that the stratified socioeconomic structure is not a unidimensional hierarchy. The labor market is divided into various segments, differing one from the other in the social composition of the labor force belonging to each and in the structure of their opportunities and rewards (Wilkinson¢~; Ya~3°~). There are a number of segmental approaches suggesting various typologies of the labor market. The main differences between them are the criteria proposed for identifying the segments. There are some models that identify the segments according to manufacturing sectors, and some according to occupational groups. The idea shared by all is that in each segment there is a common labor market structure, although there are differences among the segments as to labor conditions and income attainment. Each market segment has a different structure of oppommities (Piore~; EdwardsO2~; Hodson and KaufmanO~). Other bases of segmentation have been investigated. One is along ethnic lines (BonacichCT~). Another direction is the segmentation of the labor market according to kinds of work typical for men or women, on a gender basis. Buchelec9~for example, analyzed sex discrimination in employment and earnings from a labor market segmentation perspective. Still another labor market segmentation is the regionalization of the work force. Parcel("~ analyzed regional labor markets and their impact on the workers' eamings. YaarOO~proposed discriminating between those occupations requiring the presentation of credentials and those in which entrance does not require them. The present article suggests applying the theory of the segmented labor market to the area of economic entrepreneurship. The concept of the split entrepreneurship market will be used to analyze the phenomenon of entrepreneurs operating under differential economic conditions in the same economy, with the existence of govemment sponsorship or paternalism toward economic entrepreneurs serving as the central criterion for the identification of segments in the entrepreneurial market. Instead of perceiving the market in which entrepreneurs operate as a single entity, it will be split into separate markets, some sponsored and others non-sponsored.
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In a state-regulated capitalistic society where a split entrepreneurship market exists, with some of its segments protected by government paternalism for entrepreneurs while others are not, questions should be raised about the differences among the entrepreneurs and firms in the different markets. The hypothesis is that this segmentation is related to but not identical with economic sectors, and is based on additional characteristics such as the entrepreneur's ties with the establishment, the extent to which he is prepared to operate in accordance with government directives, etc. In those markets where a system of massive state support exists, which will hereafter be called sponsored, entrepreneurs enjoy more favorable conditions for raising capital: they get government guarantees and loans on easy credit terms, and benefit from government investment in industrial infrastructure, tax exemptions, etc. In the sponsored markets the government shares the entrepreneurs' risks, helps them with financing, allows the deferment of loan repayments, and more. In the non-sponsored markets, entrepreneurs operate without state support.
Entrepreneurship in a Context of Massive State Intervention Eisenstadt¢~3~pointed out the penetration of political regulation into economic markets in Israel. The central economic institutions wield wide political control of the economy, not necessarily by means of direct ownership by the state, but because of the government's strategic position in most markets. The government controls the import of capital to a large extent and its position in most markets allows it to determine the rate of economic activity, the extent of investment and channels of investment, and the sectors to which that investment is directed. Government intervention in the capital markets is direct as well as indirect in mobilizing and allocating capital resources, through various budgetary means. It also intervenes in the banks by means of direct control and by providing governmental credit. The fact that the govemment is the biggest buyer of certain goods and services in the market also increases its heavy influence upon the activities of entrepreneurs in those sectors where it is active, by creating a secure market for their goods and services and comparatively easy credit. In view of the above, Shimshoni (1982) argues that politics and economics interlock on many levels. Government has a very great measure of central direction, and its central political aims influence many economic levels.
Industrial Entrepreneurs in a Sponsored Environment The government of Israel has faced major problems of security and quick economic development, while absorbing more than a million new immigrants since its establishment in 1948. These factors created a situation in which the govemment became the prime mover of economic development. In agriculture and industry the
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government became an institutional entrepreneur. R determined priorities of those sectors and the location, size, and rate of expansion of those enterprises in which public funds would be invested. In such a structure, there develops a considerable dependence of private enterprise upon the central institutional system. This dependence arose also because of the policy of massive support by the government for local industrial entrepreneurs. The state channeled government investment to industry and operated in a number of ways to encourage industrial progress: 1) Participation in financing industry by means of subsidized loans, price subsidies, tax reduction, and a favorable rate of exchange for the import of raw materials. The state's development budget became an important instrument for financing industry. 2) Especially favorable conditions and protection were given by the government to" approved" enterprises, particularly those located in development areas, and/or which export at least part of their production. 3) Tariffs and administrative constraints were imposed to protect the local products. (This support was gradually abolished.) The state's support and protection of specific local industries and of industrial enterprises which contributed to exports, to employment, and to an improved balance of payments had an important impact for the entrepreneurs. This paternalistic approach requires private entrepreneurs to be in close contact with the government bureaucracy. It is therefore connected with the central role of the public bureaucracy in the process of selecting and assisting those entrepreneurs whom we may call state-made entrepreneurs. State-made entrepreneurs developed mainly in the public sector, but there are also many entrepreneurs in the private sector who are sponsored by the government. They are supplied resources such as cheap credit and grants and a convenient industrial infrastructure for their enterprises. It appears that the mere opportunity to be selected as people to whom these financial resources will be made available, is a condition for their transformation into state-made entrepreneurs by government bureaucrats who make them owners of"approved enterprises." In the following section we shall argue (following Larsonl ~°)in a different context) that the government controls "the production of the producers." The purpose of the present study is to compare the special characteristics of economic entrepreneurs who operate in sectors of the economy where the government is patemalistic to entrepreneurs operating in other sectors of the same economy, where the active involvement of the government is less important, and state incentives are nonexistent.
The Research Design and Methodology The data were gathered by means of in-depth interviews with seventy-five top entrepreneurs in Israel. Those interviewed were active in 1) manufacturing, in textile, metals, and high-tech industries, 2) construction, 3) advertising. The research
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was designed to compare the characteristics of successful entrepreneurs in sectors affected by government to characteristics of entrepreneurs operating with no government involvement. Manufacturing is the sector most affected by the government; construction is less sponsored and advertising not at all.
The Sectors According to the Extent of Government Sponsorship for Entrepreneurs Sector With No Government
Support
SectorWith Some Government Support
SponsoredSector With Major Government Support
Advertising
Ckmstruetion
Manufacturing Textiles, Metals, and High-Te.eh
The entrepreneurs interviewed were the top executives of the largest firms in their sectors, and were either the individuals who founded the firms, or inherited and expanded them. All the entrepreneurs interviewed were owners and more than half of them are at present the chief executive officer of their respective finns. The other half controlled and operated firms whose shares were traded in the stock market. A good portion of the interviewees fit the definition of MacMillan (1986) of habitual entrepreneurs, for they initiated and established more than one business. In addition to that gathered in interviews, information about the entrepreneurs was gathered from the economic press, including economic data from Dun & Bradstreet's (Israel) publications on the leading Israeli enterprises.
Comparisons of Entrepreneurship Patterns in the Various Sectors (1) In metals, textiles, and the high-tech industries contacts; 2) The way in which the founding of the enterprise was financed; 3) The degree of risk taking; 4) The firm size; 5) The form of ownership; and 6) The percentage of exporting firms. The second part of the findings focuses on the personal characteristics of the entrepreneurs and on ways of becoming a state-made entrepreneur.
Comparisons of Entrepreneurship Patterns in the Various Sectors In metals, textiles and the high-tech industries it is possible to find entrepreneurs who at some stage operated with government sponsorship. Obviously not all entrepreneurs in these industrial sectors are state-made. The number seeking government aid is much greater than those who receive it. In addition, everyone one-time grant or tax reduction does not make an industrial entrepreneur a state-made entrepreneur. Table 1 shows the distributions of our sample by sector based on automony, i.e., entrepreneurs who founded their firms without government support, vs. sponsorship, entrepreneurs who were sponsored by the government. In some cases, the risk involved in the set-up cost of an enterprise was shared by the
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Table 1" Distribution of Entrepreneurs According to Autonomy or Sponsorship in Establishing Their Firms Sector
Advertising
Construction Textile& Metals
High-Tech
Total
E~aabli~Lment Autonomy Sponsorship
% 92.3 7.7 100.0
% 63.6 36.4 100.0
% 50.0 50.0 100.0
% 12.5 87.5 100.0
% 53.5 46.5 100.6
P (0.0002 N=71)
government. Entrepreneurs aided by existing Israeli corporations and by foreign investment were also included in this category, even though there is a difference in the sponsorship given to them. The data shown in the table show that the corporation of entrepreneurs assisted by the government in setting up their firms is high in manufacturing, especially in high-tech. In the other sectors, especially in advertising, the entrepreneurs who founded their firms without special government assistance are in the majority. As was expected, the advertising entrepreneurs were the most autonomous and the manufacturers the most sponsored. An analysis of the interviews provides explanations of the evident trend. First of all, there are real differences between the pattem of establishment of the high-tech firms and the other industrial finns in the sample. In the textile and metals sector, half the entrepreneurs began their industrial entrepreneurship by autonomous founding of a small business. Only after growth did they receive "recognition" and begin to enjoy various governmental benefits. In contrast, the other half of the entrepreneurs in textile and metals gained government sponsorship in the early stages of setting up their business. In the high-tech industries the method of sponsorship is different. Most of the entrepreneurs enjoy sponsorship, but they also have the backing of Israeli or American concerns, in the form of joint ventures. In construction, most of the entrepreneurs began as small independent contractors and continued in the same way when their firms expanded. A third of them, however, developed strong dependence on the govemment, through construction for govemment ministries as their main activity.
Differences in Source of Capital Ronen(~ (p. 142) says "Indeed, the ability to get financial backing emerges as probably the most crucial factor in embarking on any entrepreneurial project." One of the main indications of autonomy or sponsorship is the source of capital. Entrepreneurs operating with government sponsorship have at their disposal many avenues of assistance. It is reasonable to hypothesize that entrepreneurs in the
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155
industrial sectors in the study will report higher dependence on establishment capital than the entrepreneurs in non-sponsored sectors. It is also reasonable to assume that obtaining capital in the high-tech sectors is different from other sectors, since governmental and govemment supported institutions aim at research and developmerit, and there are venture capital firms in Israel especially designed for the establishment of high-tech industries. Table 2 shows the distribution of entrepreneurs in the different sectors and as a whole, as to the variable of capital source for the establishment of their firms. The data in the table clearly show the significant difference in the pattem of capital enlistment for the establishment of firms in the sectors where governmental sponsorship exists from those which are non-sponsored. While the foundation capital in construction and advertising is entirely from own or family and partner sources, the sources in the industrial sectors are more varied. In high-tech industries the most common source is venture capital from large firms, Israeli or American, from foreign investors, and from large-scale bank loans with government guarantees, so that 70 percent of the high-tech entrepreneurs founded their firms with outside capital. Comparison of capital sources of the industrial entrepreneurs reveals an interesting distinction: Most of the entrepreneurs in textile and metals manufacture raised their own capital (75 percent) and not from government sources, as might have been expected. Other data show that in the textile manufacturing sector 40 percent of the entrepreneurs brought their capital with them from abroad.
Risk Taking Patemalism in regard to private enterprise applies also to the problem of the entrepreneur's risk taking (Ronen(ZS~).The state-made entrepreneurs' risk is reduced, since it is the state that assumes the risk in case of losses. In Israel it was the state
Table 2: Distribution of Entrepreneurs According to Source of Capital, by Sectors, in Percentage Sector Source of Capital Existing Firm Own or Family or Partnership Govemment Capital or Bank Loans & Ventur~ Capital
P (o.o01 N = 72)
Advertising
Construction
Textile& Metals
High-Tech
Total
30.8 69.2
31.8 68.2
15.1 60.0
0.0 29.4
19.4 56.9
0.0
0.0
25.0
70.6
23.6
I00.0
I00.0
I00.()
I00.0
I00.0
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that suffered from the disappearance of investments during the failures that took place for some of the entrepreneurs of this sort, and the state was also forced to bail out failure by the purchase of faltering textile plants (AvnerF3)). An analysis of the state-made entrepreneurs, as contrasted with private entrepreneurs acting without establishment backing, shows that even though part of the investment is made by the government, it is the entrepreneur who enjoys the profits while the risk as well as the loss of collapses and failures is bome by the government (O'Connor¢~). The following table shows the differences among entrepreneurs in the different sectors according to the risk they bore in founding their finns. When comparing the entrepreneurs in different sectors as to the risk they took, it appears that in industry almost all took upon themselves some risks, even if they had establishment backing. Entrepreneurship in industry appears to entail more risk than in a sector such as construction, but government intervention lessens the risk and usually gives assistance in cases of difficulties to some industrialists, but not at all to building contractors on the verge of collapse. In advertising, all the entrepreneurs emphasized the risk they took when starting up their finns, mainly due to their having left secure employment in their previous workplace, usually in a veteran advertising firm. But it should be remembered that their risk was lower, for the f'mancial investment required to establish an advertising agency in Israel is much less than for an industrial enterprise.
Firm Size Entrepreneurs in industry, as seen in the table below, usually employed more people than those in construction and advertising. The table shows that entrepreneurs in textile and metals were more labor-intensive while the entrepreneurs in advertising had fewer employees. The significant differences among the various sectors are explained by the special characteristics of textile, metals, and construction, which are labor-intensive, and also by the seniority of the firms, since age and size are related. State-made entrepreneurs head the largest firms in their sectors. The connection between govemment sponsorship and firm size is two-directional.
Table 3: Distribution of Entrepreneurs According to Risk at Firm Start-up in Different Sectors, in Percentages Sector
Advertising
Construction
Textile& Metals
High-Tech
Total
No Risk Risk
0.0 100.0 100.0
45.5 54.5 100.0
14.3 85.7 I00~0
5.9 94.1 100.0
19.2 80.8 100.0
P (o.ool N = 75)
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Paternalism and Entrepmneurship
Table 4: Distribution of Entrepreneurs According to Size and Sector, in Percentage Sector
A d v e r t i s i n g Construction
Textile & Metals
High- Tech
Total
20.0 40.0 40.0
31.3 37.5 31.3
43.8 31.3 25.0
Number of employed Under I00 100--600 Over 600
91.7 8.3 0.0
56.3 31.3 12.5
P (O.OlN = 75) On the one hand government aid is given more to existing large firms than to small ones, since one of the criteria for bestowing sponsorship is the labor-intensity of the enterprise. In this way entrepreneurs fostered by government paternalism in the textile and metals sectors head enterprises employing thousands of workers. On the other hand, the very fact of government support enables growth to take place by expanding production lines and employing additional labor. In the high-tech industries, where the criterion for obtaining government support is the high-tech potential and export potential, the number of employees is only one of the considerations. There are other factors such as the possibility that a high-tech firm will attract engineers from the central part of the country to a development area and thus help attain a government goal of geographic population distribution. In high-tech industries the consideration of employment of high-level professionals seems more important than their number. Another aspect is the advantage large economic units have in gaining access to the establishment (Aharonim).
Form of Ownership A study of the entrepreneurs in the different sectors shows differences also in the form of ownership of the firms they established. From the table, large significant differences in form of ownership are evident. While all the entrepreneurs in advertising head private firms (usually owned by an individual or two or three partners), there is no such consistency in other sectors. In construction 62 percent of the entrepreneurs head family-owned firms, while the rest sold some of their shares to the public. In the industrial firms the incidence of private firms is much lower, and large differences are to be found among the different sectors, with 37 percent privately owned in textile and metals, but only 24 percent in high-tech industry. The other entrepreneurs head firms that became public either by becoming partners with public firms or floating shares themselves---so that 63 percent of the entrepreneurs in textile and in metals head firms which are currently public, or half public. And finally, the data show that in high-tech industry there are a number of firms (23.5 percent) whose shares are listed on both the Israeli and the
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Table 5: Distribution of Firms According to Current Ownership, in Percentages Sectors Ownership Partnerships & Private Firms not on the Stock Ex. Public Firms: inc. partnership with public on the Stock Exchange Firms on Israeli & American Stock Exchange Foreign-Owned Firms
Advertising
Construction
Textile & Metals
High-Tech
Total
62.0
37.0
24.0
53.0
0.0
38.0
63.0
29.0
36.0
0.0
0.0
0.0
23.5
5.5
0.0
0.0
0.0
23.5
5.5
100.0
v (o.0ol N = 70) New York Stock Exchange. An additional 23.5 percent of the firms in this sector are subsidiaries of American, and in one case of Swiss firms. This trend is explained by Beilin: "While in the early years of the state the main investment in industry came from the government budget for development, in later years the government directed industrialization through the agency of intermediary financial institutions, without decreasing the extent of its own intervention. In contrast to the western trend of separating ownership and control, the large sums available to owners of firms from the govemment budget or through its institutions made it unnecessary for the entrepreneurs to raise capital by going public, so they did not give up the control of their firms" (Beilin~o p. 131). Export One of the main criteria for govemment support of private entrepreneurs is their firms' export potential. For many years, exporters received monetary incentives according to the rate of the value added to goods they produced and exported. An investigation was made of whether the export potential came to fruition. The following table reveals large differences between the sectors as to the firms that export. All the entrepreneurs in the sophisticated industrial sectors and also a majority of the textile and metals entrepreneurs (85 percent) export their products. Entrepreneurs in construction and advertising do not export their products or services. Among the exporting entrepreneurs, a large proportion (64 percent) are licensed and certified exporters, some having received the Export Award a number of times.
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Table 6: Firms Exporting, by Sector, in Percentage Sector Expoaing Not Exporting
Advertising 0.0 I00.0
Construction
Textile & Metals
26.0* 74.0
85.0 15.0
High-Tech 100.0 0.0
Total 55.0 45.0
P (0.001 N=67)
The Emergence of State-Made Entrepreneurs Below we shall indicate a number of ways in which entrepreneurs sponsored by the government are chosen: 1. The entrepreneur enlisted from abroad: He usually is a successful industrialist from Europe, South America, or the U.S.A., who came to Israel, was recruited by government representatives, sometimes even the Finance Minister himself, and got the benefit of paternalistic assistance. Entrepreneurs enlisted by the government invested some of their capital and initiative in Israel, received supplementary government money, which was sometimes more than their own investment, were provided with infrastructure, governmental guarantees, loans, and convenient credit and cheap labor, usnally in development towns. With the advantage of such conditions, they developed into owners of medium- to large-sized concerns, usually in the textile manufacturing sector. 2. The second type of state-made entrepreneur is a graduate of the government bureaucracy, or a government-owned enterprise. Leaving the public sector, he enjoys an easy transition to a prominent management position in the private sector, or establishes his own firm with government aid. 3. The third type of state-made entrepreneur is a graduate of the military and defense establishment. He is usually found in eleclronics and electro-optics high-tech industries as well as in metals. In this type, as in the preceding one, the period of his previous career in the establishment framework means a greater opportunity to create contacts with high governmental officials, which can be utilized to secure an array of financial incentives. 4.
The fourth type of entrepreneur arising from government support is the research scientist or engineer, whom the establishment attracts from a university or research institute in Israel or abroad. The government helps him become the owner of a high-tech industrial firm by giving grants for the application of industrial innovations. These are either completely privately owned firms, partnerships with bank-owned investment firms, or joint ventures with venture capital investors from abroad, with governmental sponsorship and guarantees.
5. The fifth type of government sponsored entrepreneur is a second-generation businessman, the "entrepreneur by inheritance," who along with family business also inherited network contacts giving him access to the government. The
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inherited networks is extended by activity in professional organizations in which government representatives are active. . The sixth type is the salaried manager in an existing corporation, who makes the transition to a state-made entrepreneur. The knowledge, contacts, and experience gained and opportunities discovered in his former position become advantages when he turns to starting-up a new firm. Many of these entrepreneurs tried to carry out their ideas in the existing framework and failed, and so left their jobs and established a new firm of their own. Their reputation, based on their former careers helps them to overcome one of the most serious impediments for an entrepreneur;, the difficulty of persuading investors that he is capable and trustworthy (Ronen¢25~).Their access to the capital market is easier. The above profiles of state-made entrepreneurs have been separated for the purpose of analysis, but they often coalesce in a particular career. They all have a number of characteristics in common. Not a single one achieved government sponsorship as an anonymous person. The government recognition was awarded when they were already well-known, either in a government ministry or a scientific establishment, or as sons of established industrialists or successful managers in their own right. More than their lack of anonymity, the state-made entrepreneurs are similar in their access to the establishment. All have the ability and possibility of reaching govemment functionaries and obtaining assistance and benefits from them. Networks and networking have become fashionable topics in the literature about entrepreneurs (Aldrich and Zimmer~2~).In most types of state-made entrepreneurs from the government and military apparatus, and from inheritance or previous managerial career, the use of networks and networking can be discerned. Acquaintanceships and ties created in the course of the previous organizational career or by inheritance give entrepreneurs a valuable advantage which can be utilized to secure an array of financial incentives by short-cut. Some studies have shown how prospective entrepreneurs incubate in existing corporations while developing ideas, contacts and support for their entrepreneurial businesses (RonstadtC~). The governmental0 military, and academic establishments can be viewed as a similar sort of incubation organizations. While working in them the entrepreneurs discovered opportunities that were overlooked or ignored by their organizations. All types of state-made entrepreneurs, except the scientist, have accumulated business cultural capital. The term is applied here following Gourdieu (1979), who spoke of cultural capital as including appropriate cultural and linguistics codes, relevant knowledge, etc. In these enlistment paths to state-made entrepreneurship, the asset of knowledge---information on sources of finance, experience, and knowledge of the economy--stands out as a key resource, the centrality of which for entrepreneurship has already been noted by Gilad, Kaish and RonenO4~). The above characteristics of those state-made entrepreneurs are related to our theoretical argument which follows.
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Changes in Paternalism and State-Made Entrepreneurship~from Personal to Institutionalized Paternalism State-made entrepreneurs have not, as we have seen, developed in every economic sector, but mostly in manufacturing. A deeper investigation reveals a number of changes in the profiles of state-made entrepreneurs which represent a transition from labor-intensive industrial sectors toward highly technological ones. At the same time, a transition occurred from personal to institutionalized patemalism toward private entrepreneurs. In the early phase of accelerated industrialization, the Minister of Trade and Industry was personally responsible for the development of state-made entrepreneurs, mostly in the textile industry. The dominant criteria were the labor intensity of the business and its geographical location. The characteristic profile of the entrepreneur at that period was someone enlisted from abroad with capital and expertise. In the second phase, the importance of aid to enterprises fulfilling defense demands grew, and metals and electronics emerge. In this stage the entrepreneurs were locals who came from the military establishment or its vicinity and were more educated than the previous ones. The military establishment becomes a customer who ordered projects from them. Paternalism was changing from a personal to a more institutionalized one. Owners of metal-working enterprises were aided by the government assistance apparatus (for example, in the purchase of heavy equipment on easy terms). Later, in the 1970s, and 1980s, the criteria for government sponsorship became the export potential and technological innovation of planned enterprises. Institutional paternalism was provided by the Chief Scientist in the Ministry of Trade and Industry. The entrepreneurs had higher, often scientific education, having emerged from research laboratories in scientific research institutions. Some admitted that they were more scientifically and technologically oriented than business oriented. In addition to the socialization, these entrepreneurs went through the Technion or Weitzman Institute, most also had a period of training in the United States, where they were exposed to American technological industry. This group of state-made entrepreneurs is also characterized by the international level of their technological innovations, which find them export markets.
Conclusion: Market Segmentation and Entrepreneurships The analysis was taken from the standpoint of market segmentation, with the patterns of economic entrepreneurship examined in sponsored and non-sponsored segments in the same system of state-regulated capitalism. The table below presents the variables found relevant to sponsored entrepreneurship. The table shows four dimensions, three of which have already been discussed. The fourth dimension, the politics of entrepreneurship, will be dealt with in the final section.
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Table 7: Parameters Found to Influence Govemmental Paternalistic Selection Processes of Entrepreneurs
1.
Formal Criteria for Goverranem Patcmalism General: The Entrepreneurs' Responsiveness to the Chang-
ins Requirements~ Gowmmcnt Policies. Specific:
*Location of enterprise in a manufacturing sector in which the government is interested. * Ownership of an existing enterprise and/or willingness to establish one in a developrnem area and to employ local labor. *Fulfillment of special needs defined by the security establishmeftt. *Potential for export. *Technological innovativeness with market potmtiaL
2.
Socio/personal C~aracteristics of the Entrepreneur. General:
Human Capita.
Specific:
*Appropriate education, part/culady in high-techindustries. *Second generation of industrialists. *Previous career in government, army, or oorporations. *Ownership of capital (unnecessary in high-tech based on venture capital. *Ownership of cultural business capital such as: know how, socialization relevant to lousiness, previous business experience.
3.
The Politics of Entrepreneurship. General:
Networking and bargaining power.
Specific:
*Connections with government representatives. *Accessibility to government, skill in translating connectiot3s into sponsorship.
4.
Characteristics of Entrepreneurs' Firms Achieving Government Sponsorship. General:
Industrial Entewrises.
Specific:
*Size--comparatively large labor force. *Risk-taking--4he entrepreneur's risk is not avoided but lessened because of government backing. *Source of capital--usually own (especially in textiles and metals (75 percent of finns). In high-tech~venture capital enlistment with government aid (70 percent).
Expert~all firms sponsored are exporlers, particularly high export sales in high-tech. *Vacillations in sales and export (ups and downs). *Ownershiv--most sponsored fLrms are corporate joint ventures whose stocks are listed on the stock exchange.
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The Politics of Entrepreneurship In a process where the state intervenes in economic life and has a tremendous influence on the economy, a dependence of many of the large and important entrepreneurs upon the state and its institutions follows. The massive support by the government for those selected by it is based on several formal criteria. One of the criteria is the readiness of the entrepreneur to locate a plant in an area defined by the state as a development area and to employ local labor. Other criteria are the potential for export of the proposed enterprise, and its being technologically innovative. The formal criteria refer to the functional ability of those applying for the bonuses to meet the purposes of the stated policy. In practice, there is a great deal of ambiguity about the eligibility for bonuses and incentives. In a system requiring a permit, or where incentive payments are made for various activities, and where the criteria for giving them are neither clear nor fixed, there is created not only a concentration of authority and great dependence on the govemment, but also preference for those acquainted with the system. Both personal "connections" as well as the size of economic units enjoying easy access to the govemment influence the choice of preferred entrepreneurs (AharoniO)). Ambiguity on the question of the application of these criteria to certain people in fact is related to the potential for power--political pressure as an instrument for economic activity. The massive support of entrepreneurs chosen by the govemment is not only given because of the government's recognition of the importance of entrepreneurs for encouraging economic growth, but also as a control apparatus for insuring the continued dependence of the entrepreneurs on government offices. A situation in which a selected enterprise can become prosperous of altematively fail according to government directives, limits the room for maneuver of the entrepreneur and makes him, to a large extent, dependent on his establishment connections. The control given to the government through the process of selecting preferred entrepreneurs, coupled with the vagueness of the criteria for this selection, provide grounds for bargaining over the definition of select entrepreneur. The phenomenon of centralization of authority, the complexity of the government apparatus, the necessity of almost daily contact with govemment representatives by industrialists and building contractors, result in their constant use of all the resources and connections at their disposal. It appears that only a small percentage of entrepreneurs in the fields studied get to the top without developing various ties with the government and making use of them with various degrees of intensity. About 70 percent of all the entrepreneurs in the study emphasized the fact that they had connections, but it appears that those in manufacturing industry are more outstanding in this respect. More than 83 percent of them indicated that they had a widespread network of connections with the establishment, while only about half of those in building and in advertising made the same claim. Success in business means knowing how to utilize connections and using them in the right way to foster business interests. In advertising, success is also conditional to a large extent on the ability
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to obtain the advertising budgets of large finns and of political parties, so that in this non-sponsored sector as well, the politics of entrepreneurship is important. Bachrach and Lawler (1980) noted the presence of a dimension of politics and power in organizations by means of bargaining and the creation of coalitions. There is no doubt that one should be aware of efforts to enlist support and the creation of bargaining power to understand the operational methods of economic entrepreneurs in a state-regulated economy such as Israel. It is perhaps more surprising that this subject comes up in regard to entrepreneurship in American Society. The following paragraph from Calvin Kent's book, The Environment for EntrepreneurshitY 19~) clearly refers to the politics of entrepreneurship: several observers of the contemporary scene have commented on the transformation of entrepreneurship in this nation, transformation brought about by political activity. In the past, entrepreneurs followed the models of Schumpeter and Kirzner. Entrepreneurs were the exploiters of technology, the innovators of new products and processes, the niche-finders. The new entrepreneurs (according to Hughes¢18))must "be adept in the exploitation of federal, state, and local regulations at a time when the predominance of power is on the side of the legislators who mold the entrepreneurial function to a large extent. The government is now the market to be exploited" (Kento9~p. 178). We shall conclude with support for the criticism raised by BeilinCSabout the policy of government direction of economic entrepreneurship in Israel as well as in other places. The disadvantage of this policy, it is claimed, is that it weakens personal enterprise, by increasing the dependence of entrepreneurs upon the government. It strengthens a system in which the entrepreneurs are in fact agents of the government; they obtained generous capital assistance, were directed to particular sectors, and the risk they took upon themselves was minimal (Beilin¢*~).It must be emphasized that this policy established industry (in the Sapir period), but the dependence created as a result had its price. This was expressed in the vacillations of profitability of industrial enterprises, largely based on government policies, and the short life of some enterprises which were established on the basis of directed entrepreneurship dependent on government policy. The present analysis investigated differences between sponsored and non-sponsored entrepreneurs in various sectors of an economy, in which massive state intervention exists. Further analysis is proposed to investigate the differences in profitability between sponsored and non-sponsored finns in the same economy. My hypothesis is that there is not a high correlation between government sponsorship and profitability, because government patemalism is not given to entrepreneurs according to pure economic criteria. It is instead based on formal criteria such as full'aliment of social demands, defined by changing government policies. The analysis pinpointing the relationships between government paternalism and profitability would certainly contribute to our understanding of paternalism and entrepreneurship.
ACKNOWLEDGMENT:
This article is based upon data gathered for the author's
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Ph.D. research in the Departmem of Sociology and Anthropology at Tel Aviv University under the supervision of Professor E. Yuchtman-Yaarand Professor R. Shapira. REFERENCES (1) Aharoni, Y. Structure and Perfornumce in the Israeli Economy. Goman, Tel Aviv, 1976 (Hebrew). (2) Aldrich, H. and C. Zimmer. "Entrepreneurship through Social Networks." In The Art and Science of Entrepreneurship, edited by Sexton, D. and R. Smilor. Ballinger, New York. 1985. (3) Avneri, A. Sapir. Peleg, Tel Aviv, 1976 (Hebrew). (4) Bachrach, S.B. and E.L. Lawler. Power and Politics in Organizations. Jossey Bass Pub., San Francisco, 1980. (5) Bar Yosef, R. & E. Leshem (eds.). Labor Research in Israel. The Hebrew University, Jerusalem, 1974 (Hebrew). (6) Beilin, Y. Roots oflsraelilndustry. Keter, Jerusale~n, 1987 (Hebrew). (7) Bonacich, E. "A Theory of Ethnic Antagonism--The Split Labor Market." American Sociological Review 37 (1972): 547-559. (8) Bourdieu, P. "Cultural Reproduction and Social Reproduction." In Karabel J. and H. Halsey (eds.), Power and Ideology in Education. Oxford University Press, N.Y. (1971): 487-510. (9) Buchele, R. "Sex Discrimination and Labor Market Segmentation." In Wilkinson, F. (ed.), The Dynatrdcs of Labor Market Segmontation. Academic Press, London ( 1981): 211-227. (10) Derossi, F. The Mexican Entrepreneur. Development Canter of the Organization for Economic Cooperation and Development. Paris, 1971. (11) Dun & Bradstreet (Israel). 100 Israel Leading Eraerprises. Tel Aviv, 1988. (12) Edwards, R.~, M. Reich and M. Gordon (eds.). Labor Market Segmontation. Lexington, 1982, Ma~.~Hea~ ~ '~ ('13) ~isenstadt, S.N. Israeli Society. The Magnes Press. The Hebrew University, Jerusalem, 1967. (14) Gilad, B., S. Kaish, J. Ronen. "The Enterpreneurial Way with Information."Applied Behavioral Economics, Vol. 1, Maital, S. (ed.). Wheatsheaf Book Ltd. U.K. 1987. (15) Granovetter, M.S. "The Strength of Weak Ties: a Network Theory Revisited." In Marsden, P.V. and Lain, N. (eds.), Social Structure and Network Analysis. Sage, Beverly Hills (1982): 105-130. (16) Habermas, J. "Technology and Sciance as Ideology." In his Toward a Rational Society. Heineman Educational Books, London, 1971. (17) Hodson" R. and Kaufman" L. "Economic Dualism: ACritical Review."American Sociological Review 47 (6):(1982) 727-739. (18) Hughes, J.R.T. Encyclopedia of American History. Charles Scribners Sons, New York (1980): 226. (19) Kent, C.A. The Environment for Entrepreneurship. Lexington Books, Mass., 1984. (20) Larson" M.S. The Rise of Professionalism: A Sociological Analysis. Berkeley, University of California Press, 1977. (21) Levin" H.S. "On the Nature and Location of Entrepreneurial Activity in Centrally Planned Economies: The Soviet Case." In J. Ronen (ed.), Entrepreneurship. Lexington Books, Mass., 1982. (22) O'Connor, J. "The Fiscal Crisis of the State." Reprinted in his The Corporation and the State: Essays in the Theory of Capitalism and Imperialism. Harper Torchbooks, N.Y., 1978. (23) Parcel T.L. "Race, Regional Labor Markets and Earnings." American Sociological Review 44 (1979): 262-279.
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(24) Piore, M. "The Dual Labor Markets: Theory and Implications." In Gordon D. (ed.), Problems in Political Economy: An Urban Perspective. Lexington, Mass. (1971): 93-97. (25) Ronen"J. Entrepreneurship. Lexington Books, Mass., 1983. (26) Ronstadt, R. Entrepreneurship. Lord Pub., Dover, Mass., 1984. (27) Shaliv, A. Industry in Israel. Center of Industrial Planning. Jerusalem, 1981. (28) Swirsky, S. The Ethnic Division of Labor in Israel. Machbarot Lemechkar Ulebikoret, Haifa, 1981 (Hebrew). (29) Wilkinson, E (ed.). The Dynamics of Labor Market Segmentation. Academic Press, 1981, London. (30) Yaar (Yuchtman), E. "Private Entrepreneurship as an Avenue to Socioeconomic Mobility." Megamot 29-4, (1986): 393--412 (Hebrew).
~SritACI':
The impact of strong intervention by the government on entrepreneurs is evident in a number of contexts. In many developing countries, the govemment serves as the main apparatus for attaining the goal of development. Derossi o~ showed that in Mexico, where the government protects local industries by legislation, control, and taxation, the role of the entrepreneur should not be viewed only in production, but also from the socio-political aspect of the creation of ties with the regime and its representatives. A second broad context in which entrepreneurslaip is influenced by the central role of the government in the economy is in the planned economies of the Communist Bloc (Levin(2a)). Kentt~9>pointed to a political environment that establishes constraints on the scope, direction, and success of entrepreneurship within the command economies, even though, in Hungary, for example, there is emerging a new class of *Direct all correspondenceto: Mid Lemer, Tel Aviv University, Ramat-Aviv, 69, 978 Tel Aviv, Israel. The Journal of Behavioral Economics, Volume 18, Number 3, pages 149-166. Copyright © 1969 by JAI Press Inc. All rights of reproduction in any form reserved. ISSN: 0090-5720.
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entrepreneurs, which is responding to the incentives, both negative and positive, that the system provides. Another context in which the dependence of entrepreneurship on government occurs is in the industrialized capitalistic countries, which HabermasOO called state-regulated capitalism. Israel provides an interesting opporttmity for investigating private entrepreneurship in a state-regulated capitalism.
The Theoretical Framework The theoretical framework on which the analysis of government-entrepreneurs relations in general, and state-made entrepreneurs in particular is based is labormarket segmentation. In this article the criterion for segmentation is the presence or absence of government paternalism toward entrepreneurs. Recent sociological literature claims that the stratified socioeconomic structure is not a unidimensional hierarchy. The labor market is divided into various segments, differing one from the other in the social composition of the labor force belonging to each and in the structure of their opportunities and rewards (Wilkinson¢~; Ya~3°~). There are a number of segmental approaches suggesting various typologies of the labor market. The main differences between them are the criteria proposed for identifying the segments. There are some models that identify the segments according to manufacturing sectors, and some according to occupational groups. The idea shared by all is that in each segment there is a common labor market structure, although there are differences among the segments as to labor conditions and income attainment. Each market segment has a different structure of oppommities (Piore~; EdwardsO2~; Hodson and KaufmanO~). Other bases of segmentation have been investigated. One is along ethnic lines (BonacichCT~). Another direction is the segmentation of the labor market according to kinds of work typical for men or women, on a gender basis. Buchelec9~for example, analyzed sex discrimination in employment and earnings from a labor market segmentation perspective. Still another labor market segmentation is the regionalization of the work force. Parcel("~ analyzed regional labor markets and their impact on the workers' eamings. YaarOO~proposed discriminating between those occupations requiring the presentation of credentials and those in which entrance does not require them. The present article suggests applying the theory of the segmented labor market to the area of economic entrepreneurship. The concept of the split entrepreneurship market will be used to analyze the phenomenon of entrepreneurs operating under differential economic conditions in the same economy, with the existence of govemment sponsorship or paternalism toward economic entrepreneurs serving as the central criterion for the identification of segments in the entrepreneurial market. Instead of perceiving the market in which entrepreneurs operate as a single entity, it will be split into separate markets, some sponsored and others non-sponsored.
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In a state-regulated capitalistic society where a split entrepreneurship market exists, with some of its segments protected by government paternalism for entrepreneurs while others are not, questions should be raised about the differences among the entrepreneurs and firms in the different markets. The hypothesis is that this segmentation is related to but not identical with economic sectors, and is based on additional characteristics such as the entrepreneur's ties with the establishment, the extent to which he is prepared to operate in accordance with government directives, etc. In those markets where a system of massive state support exists, which will hereafter be called sponsored, entrepreneurs enjoy more favorable conditions for raising capital: they get government guarantees and loans on easy credit terms, and benefit from government investment in industrial infrastructure, tax exemptions, etc. In the sponsored markets the government shares the entrepreneurs' risks, helps them with financing, allows the deferment of loan repayments, and more. In the non-sponsored markets, entrepreneurs operate without state support.
Entrepreneurship in a Context of Massive State Intervention Eisenstadt¢~3~pointed out the penetration of political regulation into economic markets in Israel. The central economic institutions wield wide political control of the economy, not necessarily by means of direct ownership by the state, but because of the government's strategic position in most markets. The government controls the import of capital to a large extent and its position in most markets allows it to determine the rate of economic activity, the extent of investment and channels of investment, and the sectors to which that investment is directed. Government intervention in the capital markets is direct as well as indirect in mobilizing and allocating capital resources, through various budgetary means. It also intervenes in the banks by means of direct control and by providing governmental credit. The fact that the govemment is the biggest buyer of certain goods and services in the market also increases its heavy influence upon the activities of entrepreneurs in those sectors where it is active, by creating a secure market for their goods and services and comparatively easy credit. In view of the above, Shimshoni (1982) argues that politics and economics interlock on many levels. Government has a very great measure of central direction, and its central political aims influence many economic levels.
Industrial Entrepreneurs in a Sponsored Environment The government of Israel has faced major problems of security and quick economic development, while absorbing more than a million new immigrants since its establishment in 1948. These factors created a situation in which the govemment became the prime mover of economic development. In agriculture and industry the
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government became an institutional entrepreneur. R determined priorities of those sectors and the location, size, and rate of expansion of those enterprises in which public funds would be invested. In such a structure, there develops a considerable dependence of private enterprise upon the central institutional system. This dependence arose also because of the policy of massive support by the government for local industrial entrepreneurs. The state channeled government investment to industry and operated in a number of ways to encourage industrial progress: 1) Participation in financing industry by means of subsidized loans, price subsidies, tax reduction, and a favorable rate of exchange for the import of raw materials. The state's development budget became an important instrument for financing industry. 2) Especially favorable conditions and protection were given by the government to" approved" enterprises, particularly those located in development areas, and/or which export at least part of their production. 3) Tariffs and administrative constraints were imposed to protect the local products. (This support was gradually abolished.) The state's support and protection of specific local industries and of industrial enterprises which contributed to exports, to employment, and to an improved balance of payments had an important impact for the entrepreneurs. This paternalistic approach requires private entrepreneurs to be in close contact with the government bureaucracy. It is therefore connected with the central role of the public bureaucracy in the process of selecting and assisting those entrepreneurs whom we may call state-made entrepreneurs. State-made entrepreneurs developed mainly in the public sector, but there are also many entrepreneurs in the private sector who are sponsored by the government. They are supplied resources such as cheap credit and grants and a convenient industrial infrastructure for their enterprises. It appears that the mere opportunity to be selected as people to whom these financial resources will be made available, is a condition for their transformation into state-made entrepreneurs by government bureaucrats who make them owners of"approved enterprises." In the following section we shall argue (following Larsonl ~°)in a different context) that the government controls "the production of the producers." The purpose of the present study is to compare the special characteristics of economic entrepreneurs who operate in sectors of the economy where the government is patemalistic to entrepreneurs operating in other sectors of the same economy, where the active involvement of the government is less important, and state incentives are nonexistent.
The Research Design and Methodology The data were gathered by means of in-depth interviews with seventy-five top entrepreneurs in Israel. Those interviewed were active in 1) manufacturing, in textile, metals, and high-tech industries, 2) construction, 3) advertising. The research
Paternalism and Entrepreneurship
153
was designed to compare the characteristics of successful entrepreneurs in sectors affected by government to characteristics of entrepreneurs operating with no government involvement. Manufacturing is the sector most affected by the government; construction is less sponsored and advertising not at all.
The Sectors According to the Extent of Government Sponsorship for Entrepreneurs Sector With No Government
Support
SectorWith Some Government Support
SponsoredSector With Major Government Support
Advertising
Ckmstruetion
Manufacturing Textiles, Metals, and High-Te.eh
The entrepreneurs interviewed were the top executives of the largest firms in their sectors, and were either the individuals who founded the firms, or inherited and expanded them. All the entrepreneurs interviewed were owners and more than half of them are at present the chief executive officer of their respective finns. The other half controlled and operated firms whose shares were traded in the stock market. A good portion of the interviewees fit the definition of MacMillan (1986) of habitual entrepreneurs, for they initiated and established more than one business. In addition to that gathered in interviews, information about the entrepreneurs was gathered from the economic press, including economic data from Dun & Bradstreet's (Israel) publications on the leading Israeli enterprises.
Comparisons of Entrepreneurship Patterns in the Various Sectors (1) In metals, textiles, and the high-tech industries contacts; 2) The way in which the founding of the enterprise was financed; 3) The degree of risk taking; 4) The firm size; 5) The form of ownership; and 6) The percentage of exporting firms. The second part of the findings focuses on the personal characteristics of the entrepreneurs and on ways of becoming a state-made entrepreneur.
Comparisons of Entrepreneurship Patterns in the Various Sectors In metals, textiles and the high-tech industries it is possible to find entrepreneurs who at some stage operated with government sponsorship. Obviously not all entrepreneurs in these industrial sectors are state-made. The number seeking government aid is much greater than those who receive it. In addition, everyone one-time grant or tax reduction does not make an industrial entrepreneur a state-made entrepreneur. Table 1 shows the distributions of our sample by sector based on automony, i.e., entrepreneurs who founded their firms without government support, vs. sponsorship, entrepreneurs who were sponsored by the government. In some cases, the risk involved in the set-up cost of an enterprise was shared by the
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154
Table 1" Distribution of Entrepreneurs According to Autonomy or Sponsorship in Establishing Their Firms Sector
Advertising
Construction Textile& Metals
High-Tech
Total
E~aabli~Lment Autonomy Sponsorship
% 92.3 7.7 100.0
% 63.6 36.4 100.0
% 50.0 50.0 100.0
% 12.5 87.5 100.0
% 53.5 46.5 100.6
P (0.0002 N=71)
government. Entrepreneurs aided by existing Israeli corporations and by foreign investment were also included in this category, even though there is a difference in the sponsorship given to them. The data shown in the table show that the corporation of entrepreneurs assisted by the government in setting up their firms is high in manufacturing, especially in high-tech. In the other sectors, especially in advertising, the entrepreneurs who founded their firms without special government assistance are in the majority. As was expected, the advertising entrepreneurs were the most autonomous and the manufacturers the most sponsored. An analysis of the interviews provides explanations of the evident trend. First of all, there are real differences between the pattem of establishment of the high-tech firms and the other industrial finns in the sample. In the textile and metals sector, half the entrepreneurs began their industrial entrepreneurship by autonomous founding of a small business. Only after growth did they receive "recognition" and begin to enjoy various governmental benefits. In contrast, the other half of the entrepreneurs in textile and metals gained government sponsorship in the early stages of setting up their business. In the high-tech industries the method of sponsorship is different. Most of the entrepreneurs enjoy sponsorship, but they also have the backing of Israeli or American concerns, in the form of joint ventures. In construction, most of the entrepreneurs began as small independent contractors and continued in the same way when their firms expanded. A third of them, however, developed strong dependence on the govemment, through construction for govemment ministries as their main activity.
Differences in Source of Capital Ronen(~ (p. 142) says "Indeed, the ability to get financial backing emerges as probably the most crucial factor in embarking on any entrepreneurial project." One of the main indications of autonomy or sponsorship is the source of capital. Entrepreneurs operating with government sponsorship have at their disposal many avenues of assistance. It is reasonable to hypothesize that entrepreneurs in the
Paternalism and Entrepreneurship
155
industrial sectors in the study will report higher dependence on establishment capital than the entrepreneurs in non-sponsored sectors. It is also reasonable to assume that obtaining capital in the high-tech sectors is different from other sectors, since governmental and govemment supported institutions aim at research and developmerit, and there are venture capital firms in Israel especially designed for the establishment of high-tech industries. Table 2 shows the distribution of entrepreneurs in the different sectors and as a whole, as to the variable of capital source for the establishment of their firms. The data in the table clearly show the significant difference in the pattem of capital enlistment for the establishment of firms in the sectors where governmental sponsorship exists from those which are non-sponsored. While the foundation capital in construction and advertising is entirely from own or family and partner sources, the sources in the industrial sectors are more varied. In high-tech industries the most common source is venture capital from large firms, Israeli or American, from foreign investors, and from large-scale bank loans with government guarantees, so that 70 percent of the high-tech entrepreneurs founded their firms with outside capital. Comparison of capital sources of the industrial entrepreneurs reveals an interesting distinction: Most of the entrepreneurs in textile and metals manufacture raised their own capital (75 percent) and not from government sources, as might have been expected. Other data show that in the textile manufacturing sector 40 percent of the entrepreneurs brought their capital with them from abroad.
Risk Taking Patemalism in regard to private enterprise applies also to the problem of the entrepreneur's risk taking (Ronen(ZS~).The state-made entrepreneurs' risk is reduced, since it is the state that assumes the risk in case of losses. In Israel it was the state
Table 2: Distribution of Entrepreneurs According to Source of Capital, by Sectors, in Percentage Sector Source of Capital Existing Firm Own or Family or Partnership Govemment Capital or Bank Loans & Ventur~ Capital
P (o.o01 N = 72)
Advertising
Construction
Textile& Metals
High-Tech
Total
30.8 69.2
31.8 68.2
15.1 60.0
0.0 29.4
19.4 56.9
0.0
0.0
25.0
70.6
23.6
I00.0
I00.0
I00.()
I00.0
I00.0
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that suffered from the disappearance of investments during the failures that took place for some of the entrepreneurs of this sort, and the state was also forced to bail out failure by the purchase of faltering textile plants (AvnerF3)). An analysis of the state-made entrepreneurs, as contrasted with private entrepreneurs acting without establishment backing, shows that even though part of the investment is made by the government, it is the entrepreneur who enjoys the profits while the risk as well as the loss of collapses and failures is bome by the government (O'Connor¢~). The following table shows the differences among entrepreneurs in the different sectors according to the risk they bore in founding their finns. When comparing the entrepreneurs in different sectors as to the risk they took, it appears that in industry almost all took upon themselves some risks, even if they had establishment backing. Entrepreneurship in industry appears to entail more risk than in a sector such as construction, but government intervention lessens the risk and usually gives assistance in cases of difficulties to some industrialists, but not at all to building contractors on the verge of collapse. In advertising, all the entrepreneurs emphasized the risk they took when starting up their finns, mainly due to their having left secure employment in their previous workplace, usually in a veteran advertising firm. But it should be remembered that their risk was lower, for the f'mancial investment required to establish an advertising agency in Israel is much less than for an industrial enterprise.
Firm Size Entrepreneurs in industry, as seen in the table below, usually employed more people than those in construction and advertising. The table shows that entrepreneurs in textile and metals were more labor-intensive while the entrepreneurs in advertising had fewer employees. The significant differences among the various sectors are explained by the special characteristics of textile, metals, and construction, which are labor-intensive, and also by the seniority of the firms, since age and size are related. State-made entrepreneurs head the largest firms in their sectors. The connection between govemment sponsorship and firm size is two-directional.
Table 3: Distribution of Entrepreneurs According to Risk at Firm Start-up in Different Sectors, in Percentages Sector
Advertising
Construction
Textile& Metals
High-Tech
Total
No Risk Risk
0.0 100.0 100.0
45.5 54.5 100.0
14.3 85.7 I00~0
5.9 94.1 100.0
19.2 80.8 100.0
P (o.ool N = 75)
157
Paternalism and Entrepmneurship
Table 4: Distribution of Entrepreneurs According to Size and Sector, in Percentage Sector
A d v e r t i s i n g Construction
Textile & Metals
High- Tech
Total
20.0 40.0 40.0
31.3 37.5 31.3
43.8 31.3 25.0
Number of employed Under I00 100--600 Over 600
91.7 8.3 0.0
56.3 31.3 12.5
P (O.OlN = 75) On the one hand government aid is given more to existing large firms than to small ones, since one of the criteria for bestowing sponsorship is the labor-intensity of the enterprise. In this way entrepreneurs fostered by government paternalism in the textile and metals sectors head enterprises employing thousands of workers. On the other hand, the very fact of government support enables growth to take place by expanding production lines and employing additional labor. In the high-tech industries, where the criterion for obtaining government support is the high-tech potential and export potential, the number of employees is only one of the considerations. There are other factors such as the possibility that a high-tech firm will attract engineers from the central part of the country to a development area and thus help attain a government goal of geographic population distribution. In high-tech industries the consideration of employment of high-level professionals seems more important than their number. Another aspect is the advantage large economic units have in gaining access to the establishment (Aharonim).
Form of Ownership A study of the entrepreneurs in the different sectors shows differences also in the form of ownership of the firms they established. From the table, large significant differences in form of ownership are evident. While all the entrepreneurs in advertising head private firms (usually owned by an individual or two or three partners), there is no such consistency in other sectors. In construction 62 percent of the entrepreneurs head family-owned firms, while the rest sold some of their shares to the public. In the industrial firms the incidence of private firms is much lower, and large differences are to be found among the different sectors, with 37 percent privately owned in textile and metals, but only 24 percent in high-tech industry. The other entrepreneurs head firms that became public either by becoming partners with public firms or floating shares themselves---so that 63 percent of the entrepreneurs in textile and in metals head firms which are currently public, or half public. And finally, the data show that in high-tech industry there are a number of firms (23.5 percent) whose shares are listed on both the Israeli and the
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Table 5: Distribution of Firms According to Current Ownership, in Percentages Sectors Ownership Partnerships & Private Firms not on the Stock Ex. Public Firms: inc. partnership with public on the Stock Exchange Firms on Israeli & American Stock Exchange Foreign-Owned Firms
Advertising
Construction
Textile & Metals
High-Tech
Total
62.0
37.0
24.0
53.0
0.0
38.0
63.0
29.0
36.0
0.0
0.0
0.0
23.5
5.5
0.0
0.0
0.0
23.5
5.5
100.0
v (o.0ol N = 70) New York Stock Exchange. An additional 23.5 percent of the firms in this sector are subsidiaries of American, and in one case of Swiss firms. This trend is explained by Beilin: "While in the early years of the state the main investment in industry came from the government budget for development, in later years the government directed industrialization through the agency of intermediary financial institutions, without decreasing the extent of its own intervention. In contrast to the western trend of separating ownership and control, the large sums available to owners of firms from the govemment budget or through its institutions made it unnecessary for the entrepreneurs to raise capital by going public, so they did not give up the control of their firms" (Beilin~o p. 131). Export One of the main criteria for govemment support of private entrepreneurs is their firms' export potential. For many years, exporters received monetary incentives according to the rate of the value added to goods they produced and exported. An investigation was made of whether the export potential came to fruition. The following table reveals large differences between the sectors as to the firms that export. All the entrepreneurs in the sophisticated industrial sectors and also a majority of the textile and metals entrepreneurs (85 percent) export their products. Entrepreneurs in construction and advertising do not export their products or services. Among the exporting entrepreneurs, a large proportion (64 percent) are licensed and certified exporters, some having received the Export Award a number of times.
Paternalism and Entrepreneurship
159
Table 6: Firms Exporting, by Sector, in Percentage Sector Expoaing Not Exporting
Advertising 0.0 I00.0
Construction
Textile & Metals
26.0* 74.0
85.0 15.0
High-Tech 100.0 0.0
Total 55.0 45.0
P (0.001 N=67)
The Emergence of State-Made Entrepreneurs Below we shall indicate a number of ways in which entrepreneurs sponsored by the government are chosen: 1. The entrepreneur enlisted from abroad: He usually is a successful industrialist from Europe, South America, or the U.S.A., who came to Israel, was recruited by government representatives, sometimes even the Finance Minister himself, and got the benefit of paternalistic assistance. Entrepreneurs enlisted by the government invested some of their capital and initiative in Israel, received supplementary government money, which was sometimes more than their own investment, were provided with infrastructure, governmental guarantees, loans, and convenient credit and cheap labor, usnally in development towns. With the advantage of such conditions, they developed into owners of medium- to large-sized concerns, usually in the textile manufacturing sector. 2. The second type of state-made entrepreneur is a graduate of the government bureaucracy, or a government-owned enterprise. Leaving the public sector, he enjoys an easy transition to a prominent management position in the private sector, or establishes his own firm with government aid. 3. The third type of state-made entrepreneur is a graduate of the military and defense establishment. He is usually found in eleclronics and electro-optics high-tech industries as well as in metals. In this type, as in the preceding one, the period of his previous career in the establishment framework means a greater opportunity to create contacts with high governmental officials, which can be utilized to secure an array of financial incentives. 4.
The fourth type of entrepreneur arising from government support is the research scientist or engineer, whom the establishment attracts from a university or research institute in Israel or abroad. The government helps him become the owner of a high-tech industrial firm by giving grants for the application of industrial innovations. These are either completely privately owned firms, partnerships with bank-owned investment firms, or joint ventures with venture capital investors from abroad, with governmental sponsorship and guarantees.
5. The fifth type of government sponsored entrepreneur is a second-generation businessman, the "entrepreneur by inheritance," who along with family business also inherited network contacts giving him access to the government. The
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inherited networks is extended by activity in professional organizations in which government representatives are active. . The sixth type is the salaried manager in an existing corporation, who makes the transition to a state-made entrepreneur. The knowledge, contacts, and experience gained and opportunities discovered in his former position become advantages when he turns to starting-up a new firm. Many of these entrepreneurs tried to carry out their ideas in the existing framework and failed, and so left their jobs and established a new firm of their own. Their reputation, based on their former careers helps them to overcome one of the most serious impediments for an entrepreneur;, the difficulty of persuading investors that he is capable and trustworthy (Ronen¢25~).Their access to the capital market is easier. The above profiles of state-made entrepreneurs have been separated for the purpose of analysis, but they often coalesce in a particular career. They all have a number of characteristics in common. Not a single one achieved government sponsorship as an anonymous person. The government recognition was awarded when they were already well-known, either in a government ministry or a scientific establishment, or as sons of established industrialists or successful managers in their own right. More than their lack of anonymity, the state-made entrepreneurs are similar in their access to the establishment. All have the ability and possibility of reaching govemment functionaries and obtaining assistance and benefits from them. Networks and networking have become fashionable topics in the literature about entrepreneurs (Aldrich and Zimmer~2~).In most types of state-made entrepreneurs from the government and military apparatus, and from inheritance or previous managerial career, the use of networks and networking can be discerned. Acquaintanceships and ties created in the course of the previous organizational career or by inheritance give entrepreneurs a valuable advantage which can be utilized to secure an array of financial incentives by short-cut. Some studies have shown how prospective entrepreneurs incubate in existing corporations while developing ideas, contacts and support for their entrepreneurial businesses (RonstadtC~). The governmental0 military, and academic establishments can be viewed as a similar sort of incubation organizations. While working in them the entrepreneurs discovered opportunities that were overlooked or ignored by their organizations. All types of state-made entrepreneurs, except the scientist, have accumulated business cultural capital. The term is applied here following Gourdieu (1979), who spoke of cultural capital as including appropriate cultural and linguistics codes, relevant knowledge, etc. In these enlistment paths to state-made entrepreneurship, the asset of knowledge---information on sources of finance, experience, and knowledge of the economy--stands out as a key resource, the centrality of which for entrepreneurship has already been noted by Gilad, Kaish and RonenO4~). The above characteristics of those state-made entrepreneurs are related to our theoretical argument which follows.
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Changes in Paternalism and State-Made Entrepreneurship~from Personal to Institutionalized Paternalism State-made entrepreneurs have not, as we have seen, developed in every economic sector, but mostly in manufacturing. A deeper investigation reveals a number of changes in the profiles of state-made entrepreneurs which represent a transition from labor-intensive industrial sectors toward highly technological ones. At the same time, a transition occurred from personal to institutionalized patemalism toward private entrepreneurs. In the early phase of accelerated industrialization, the Minister of Trade and Industry was personally responsible for the development of state-made entrepreneurs, mostly in the textile industry. The dominant criteria were the labor intensity of the business and its geographical location. The characteristic profile of the entrepreneur at that period was someone enlisted from abroad with capital and expertise. In the second phase, the importance of aid to enterprises fulfilling defense demands grew, and metals and electronics emerge. In this stage the entrepreneurs were locals who came from the military establishment or its vicinity and were more educated than the previous ones. The military establishment becomes a customer who ordered projects from them. Paternalism was changing from a personal to a more institutionalized one. Owners of metal-working enterprises were aided by the government assistance apparatus (for example, in the purchase of heavy equipment on easy terms). Later, in the 1970s, and 1980s, the criteria for government sponsorship became the export potential and technological innovation of planned enterprises. Institutional paternalism was provided by the Chief Scientist in the Ministry of Trade and Industry. The entrepreneurs had higher, often scientific education, having emerged from research laboratories in scientific research institutions. Some admitted that they were more scientifically and technologically oriented than business oriented. In addition to the socialization, these entrepreneurs went through the Technion or Weitzman Institute, most also had a period of training in the United States, where they were exposed to American technological industry. This group of state-made entrepreneurs is also characterized by the international level of their technological innovations, which find them export markets.
Conclusion: Market Segmentation and Entrepreneurships The analysis was taken from the standpoint of market segmentation, with the patterns of economic entrepreneurship examined in sponsored and non-sponsored segments in the same system of state-regulated capitalism. The table below presents the variables found relevant to sponsored entrepreneurship. The table shows four dimensions, three of which have already been discussed. The fourth dimension, the politics of entrepreneurship, will be dealt with in the final section.
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Table 7: Parameters Found to Influence Govemmental Paternalistic Selection Processes of Entrepreneurs
1.
Formal Criteria for Goverranem Patcmalism General: The Entrepreneurs' Responsiveness to the Chang-
ins Requirements~ Gowmmcnt Policies. Specific:
*Location of enterprise in a manufacturing sector in which the government is interested. * Ownership of an existing enterprise and/or willingness to establish one in a developrnem area and to employ local labor. *Fulfillment of special needs defined by the security establishmeftt. *Potential for export. *Technological innovativeness with market potmtiaL
2.
Socio/personal C~aracteristics of the Entrepreneur. General:
Human Capita.
Specific:
*Appropriate education, part/culady in high-techindustries. *Second generation of industrialists. *Previous career in government, army, or oorporations. *Ownership of capital (unnecessary in high-tech based on venture capital. *Ownership of cultural business capital such as: know how, socialization relevant to lousiness, previous business experience.
3.
The Politics of Entrepreneurship. General:
Networking and bargaining power.
Specific:
*Connections with government representatives. *Accessibility to government, skill in translating connectiot3s into sponsorship.
4.
Characteristics of Entrepreneurs' Firms Achieving Government Sponsorship. General:
Industrial Entewrises.
Specific:
*Size--comparatively large labor force. *Risk-taking--4he entrepreneur's risk is not avoided but lessened because of government backing. *Source of capital--usually own (especially in textiles and metals (75 percent of finns). In high-tech~venture capital enlistment with government aid (70 percent).
Expert~all firms sponsored are exporlers, particularly high export sales in high-tech. *Vacillations in sales and export (ups and downs). *Ownershiv--most sponsored fLrms are corporate joint ventures whose stocks are listed on the stock exchange.
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The Politics of Entrepreneurship In a process where the state intervenes in economic life and has a tremendous influence on the economy, a dependence of many of the large and important entrepreneurs upon the state and its institutions follows. The massive support by the government for those selected by it is based on several formal criteria. One of the criteria is the readiness of the entrepreneur to locate a plant in an area defined by the state as a development area and to employ local labor. Other criteria are the potential for export of the proposed enterprise, and its being technologically innovative. The formal criteria refer to the functional ability of those applying for the bonuses to meet the purposes of the stated policy. In practice, there is a great deal of ambiguity about the eligibility for bonuses and incentives. In a system requiring a permit, or where incentive payments are made for various activities, and where the criteria for giving them are neither clear nor fixed, there is created not only a concentration of authority and great dependence on the govemment, but also preference for those acquainted with the system. Both personal "connections" as well as the size of economic units enjoying easy access to the govemment influence the choice of preferred entrepreneurs (AharoniO)). Ambiguity on the question of the application of these criteria to certain people in fact is related to the potential for power--political pressure as an instrument for economic activity. The massive support of entrepreneurs chosen by the govemment is not only given because of the government's recognition of the importance of entrepreneurs for encouraging economic growth, but also as a control apparatus for insuring the continued dependence of the entrepreneurs on government offices. A situation in which a selected enterprise can become prosperous of altematively fail according to government directives, limits the room for maneuver of the entrepreneur and makes him, to a large extent, dependent on his establishment connections. The control given to the government through the process of selecting preferred entrepreneurs, coupled with the vagueness of the criteria for this selection, provide grounds for bargaining over the definition of select entrepreneur. The phenomenon of centralization of authority, the complexity of the government apparatus, the necessity of almost daily contact with govemment representatives by industrialists and building contractors, result in their constant use of all the resources and connections at their disposal. It appears that only a small percentage of entrepreneurs in the fields studied get to the top without developing various ties with the government and making use of them with various degrees of intensity. About 70 percent of all the entrepreneurs in the study emphasized the fact that they had connections, but it appears that those in manufacturing industry are more outstanding in this respect. More than 83 percent of them indicated that they had a widespread network of connections with the establishment, while only about half of those in building and in advertising made the same claim. Success in business means knowing how to utilize connections and using them in the right way to foster business interests. In advertising, success is also conditional to a large extent on the ability
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to obtain the advertising budgets of large finns and of political parties, so that in this non-sponsored sector as well, the politics of entrepreneurship is important. Bachrach and Lawler (1980) noted the presence of a dimension of politics and power in organizations by means of bargaining and the creation of coalitions. There is no doubt that one should be aware of efforts to enlist support and the creation of bargaining power to understand the operational methods of economic entrepreneurs in a state-regulated economy such as Israel. It is perhaps more surprising that this subject comes up in regard to entrepreneurship in American Society. The following paragraph from Calvin Kent's book, The Environment for EntrepreneurshitY 19~) clearly refers to the politics of entrepreneurship: several observers of the contemporary scene have commented on the transformation of entrepreneurship in this nation, transformation brought about by political activity. In the past, entrepreneurs followed the models of Schumpeter and Kirzner. Entrepreneurs were the exploiters of technology, the innovators of new products and processes, the niche-finders. The new entrepreneurs (according to Hughes¢18))must "be adept in the exploitation of federal, state, and local regulations at a time when the predominance of power is on the side of the legislators who mold the entrepreneurial function to a large extent. The government is now the market to be exploited" (Kento9~p. 178). We shall conclude with support for the criticism raised by BeilinCSabout the policy of government direction of economic entrepreneurship in Israel as well as in other places. The disadvantage of this policy, it is claimed, is that it weakens personal enterprise, by increasing the dependence of entrepreneurs upon the government. It strengthens a system in which the entrepreneurs are in fact agents of the government; they obtained generous capital assistance, were directed to particular sectors, and the risk they took upon themselves was minimal (Beilin¢*~).It must be emphasized that this policy established industry (in the Sapir period), but the dependence created as a result had its price. This was expressed in the vacillations of profitability of industrial enterprises, largely based on government policies, and the short life of some enterprises which were established on the basis of directed entrepreneurship dependent on government policy. The present analysis investigated differences between sponsored and non-sponsored entrepreneurs in various sectors of an economy, in which massive state intervention exists. Further analysis is proposed to investigate the differences in profitability between sponsored and non-sponsored finns in the same economy. My hypothesis is that there is not a high correlation between government sponsorship and profitability, because government patemalism is not given to entrepreneurs according to pure economic criteria. It is instead based on formal criteria such as full'aliment of social demands, defined by changing government policies. The analysis pinpointing the relationships between government paternalism and profitability would certainly contribute to our understanding of paternalism and entrepreneurship.
ACKNOWLEDGMENT:
This article is based upon data gathered for the author's
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Ph.D. research in the Departmem of Sociology and Anthropology at Tel Aviv University under the supervision of Professor E. Yuchtman-Yaarand Professor R. Shapira. REFERENCES (1) Aharoni, Y. Structure and Perfornumce in the Israeli Economy. Goman, Tel Aviv, 1976 (Hebrew). (2) Aldrich, H. and C. Zimmer. "Entrepreneurship through Social Networks." In The Art and Science of Entrepreneurship, edited by Sexton, D. and R. Smilor. Ballinger, New York. 1985. (3) Avneri, A. Sapir. Peleg, Tel Aviv, 1976 (Hebrew). (4) Bachrach, S.B. and E.L. Lawler. Power and Politics in Organizations. Jossey Bass Pub., San Francisco, 1980. (5) Bar Yosef, R. & E. Leshem (eds.). Labor Research in Israel. The Hebrew University, Jerusalem, 1974 (Hebrew). (6) Beilin, Y. Roots oflsraelilndustry. Keter, Jerusale~n, 1987 (Hebrew). (7) Bonacich, E. "A Theory of Ethnic Antagonism--The Split Labor Market." American Sociological Review 37 (1972): 547-559. (8) Bourdieu, P. "Cultural Reproduction and Social Reproduction." In Karabel J. and H. Halsey (eds.), Power and Ideology in Education. Oxford University Press, N.Y. (1971): 487-510. (9) Buchele, R. "Sex Discrimination and Labor Market Segmentation." In Wilkinson, F. (ed.), The Dynatrdcs of Labor Market Segmontation. Academic Press, London ( 1981): 211-227. (10) Derossi, F. The Mexican Entrepreneur. Development Canter of the Organization for Economic Cooperation and Development. Paris, 1971. (11) Dun & Bradstreet (Israel). 100 Israel Leading Eraerprises. Tel Aviv, 1988. (12) Edwards, R.~, M. Reich and M. Gordon (eds.). Labor Market Segmontation. Lexington, 1982, Ma~.~Hea~ ~ '~ ('13) ~isenstadt, S.N. Israeli Society. The Magnes Press. The Hebrew University, Jerusalem, 1967. (14) Gilad, B., S. Kaish, J. Ronen. "The Enterpreneurial Way with Information."Applied Behavioral Economics, Vol. 1, Maital, S. (ed.). Wheatsheaf Book Ltd. U.K. 1987. (15) Granovetter, M.S. "The Strength of Weak Ties: a Network Theory Revisited." In Marsden, P.V. and Lain, N. (eds.), Social Structure and Network Analysis. Sage, Beverly Hills (1982): 105-130. (16) Habermas, J. "Technology and Sciance as Ideology." In his Toward a Rational Society. Heineman Educational Books, London, 1971. (17) Hodson" R. and Kaufman" L. "Economic Dualism: ACritical Review."American Sociological Review 47 (6):(1982) 727-739. (18) Hughes, J.R.T. Encyclopedia of American History. Charles Scribners Sons, New York (1980): 226. (19) Kent, C.A. The Environment for Entrepreneurship. Lexington Books, Mass., 1984. (20) Larson" M.S. The Rise of Professionalism: A Sociological Analysis. Berkeley, University of California Press, 1977. (21) Levin" H.S. "On the Nature and Location of Entrepreneurial Activity in Centrally Planned Economies: The Soviet Case." In J. Ronen (ed.), Entrepreneurship. Lexington Books, Mass., 1982. (22) O'Connor, J. "The Fiscal Crisis of the State." Reprinted in his The Corporation and the State: Essays in the Theory of Capitalism and Imperialism. Harper Torchbooks, N.Y., 1978. (23) Parcel T.L. "Race, Regional Labor Markets and Earnings." American Sociological Review 44 (1979): 262-279.
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