The Critical 5 Percent

THE CRITICAL 5 PERCENTWhy Scaleup Companies are Vital for Job Creation in Bangladesh

“ Scaleups growing at 20 percent or more per year represented only 5 percent of Banglasdeshi firms, but they created over 70 percent of the total new jobs.”

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EXECUTIVE SUMMARY

The key findings of this report are as follows:

• Bangladesh needs to create 11.4 million new jobs for young people by 2020. According to recent estimates, 3.4 million people are unemployed in Bangladesh, including over 1.6 million young people between 15 and 24 years old.1 In addition, Bangladesh’s labor force is projected to expand by 9.8 million people between 2014 and 2020, due primarily to young adults entering the market.2

• Scaleups3 are some of the largest job creators in Bangladesh and can help to reduce unemployment. A 2013 World Bank survey found that only 5 percent of Bangladeshi companies were scaleups, but these companies created 74 percent of all new jobs generated during the previous three years.4

• Scaleups need access to markets, talent, and funding in order to succeed. According to a survey of more than 1,000 entrepreneurial leaders from around the world, these three factors are the most important contributors to a firm’s growth and success. Contrary to the prevailing wisdom among many policymakers, respondents did not mention other factors such as regulatory frameworks or low taxes.5

1 World Development Indicators, The World Bank (2014) & ILO, Economically Active Population, Estimates and Projections (6th edition, October 2011).2 Ibid.3 For the purposes of this report, a scaleup company is defined as a firm that is more than three years old with an average annual employment growth

rate greater than or equal to 20% during the previous three years.4 World Bank Enterprise Surveys (2013) http://www.enterprisesurveys.org5 WEF Entrepreneurial Ecosystems Report (2013): Exhibit 3-1

The data in this report is drawn primarily from the most recent World Bank Enterprise Survey (2013) of 1,442 Bangladeshi companies. This report analyzes job creation by firm type: startups up to three years old, scaleups greater than three years old that have 20 percent or more average annual employment growth, and other companies greater than three years old that have less than 20 percent average annual employment growth. More information on the methodology underpinning this analysis can be found on page ten.

This report was created by Edward Kong and Rhett Morris in the summer and fall of 2014 with assistance from Michael Goodwin and Matt Lerner.

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4 / The Critical 5 Percent: Why Scaleup Companies are Vital for Job Creation in Bangladesh

Bangladesh needs to create 11.4 million new jobs for young people by 2020.

• 1.6 million young Bangladeshi’s between the ages of 15 and 24 are unemployed.

• Bangladesh needs to create an additional 9.8 million jobs for young people by 2020.

The economic turmoil of the last six years has created a global job crisis. The International Labor Organization (ILO) estimates that the world’s economies need hundreds of millions of new jobs to create opportunities for two groups: those currently unemployed and the growing population of young people entering the workforce during the next decade.6 This jobs crisis is apparent almost everywhere in the world, and it affects countries at every level of development.

In Bangladesh, 3.4 million people are unemployed (4.5 percent), including 1.6 million youth between 15 and 24 years old (8.9 percent).7 Economists note that unemployment among young adults has an adverse impact on skill development and future earnings.

As more young people enter the labor force, demand for jobs will continue to grow. Bangladesh’s workforce is projected to increase by 9.8 million people between 2014 and 2020, primarily due to young adults entering the job market.8 When combined with the 1.6 million 15–24 year olds who are currently unemployed, this suggests that 11.4 million jobs are needed for young Bangladeshis who will be looking for work in the next six years.

6 International Labor organization, Global Employment Trends 20127 World Development Indicators, The World Bank (2014). 8 ILO, Economically Active Population, Estimates and Projections (6th edition, October 2011)

Total number of firms surveyed

0%

40%Other firms

10%

50% Scaleups

80%

20%

60%

90%

30%

70%

100%

Total number of jobs created in previous 3 years

The Critical 5 Percent: Why Scaleup Companies are Vital for Job Creation in Bangladesh / 5

Scaleups are some of the most important job creators in Bangladesh and can help to reduce unemployment.

Although much attention has been given to startups and microenterprises, supporting existing entrepreneurs who can scale their businesses is crucial to meeting Bangladesh’s job needs. Scaleups create more jobs than other types of firms. The World Bank Enterprise Survey, which was last conducted in Bangladesh in 2013, provides comprehensive company-level data about firms in emerging economies.9 The Enterprise Survey demonstrates the significant impact that scaleups have on job creation: scaleup companies growing at 20 percent or more per year represented only 5 percent of Bangladeshi firms, but they created over 70 percent of the total new jobs generated during the previous three years.10

A significant body of research on North American firms confirms that scaleups are the drivers of job creation, demonstrating that a small percentage of fast-growing companies account for a disproportionate percentage of job growth. For example, a 2008 study from the U.S. Small Business Administration found that the fastest growing 2-3 percent of firms account for almost all U.S. private sector job growth.11

• Scaleups represent 5 percent of Bangladeshi firms, but create 74 percent of new jobs.

• Jobs created by scaleups are durable and of high quality.

9 The World Bank, Enterprise Surveys (http://www.enterprisesurveys.org)10 Ibid.11 Acs, Zoltan, William Parsons and Spencer Tracy. “High-Impact Firms: Gazelles Revisited.” Small Business Administration Office of Advocacy, (2008).

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Scaleups are also durable. The same study found that only 3 percent of fast-growing firms failed in the four years after they experienced high-growth.12 A separate study in the journal of Small Business Economics likewise found that scaleups create long-term jobs. The authors examined Canadian firms with the fastest employment growth from 1985 to 1999 and found these firms to be resistant to job losses during periods of recession.13

These statistics may actually underestimate the full job creation impact of scaleups, which can strengthen value chains and generate positive spillovers for other firms. Research has shown that successful innovation-driven enterprises, which have similar growth characteristics to scaleups, create about five auxiliary jobs for each direct job.14

Finally, scaleups promote their employees’ professional development. As these companies grow and add new employees, workers who started in entry-level positions often move into middle management, developing project management and governance skills along the way. These skills add value to the company and allow workers to increase their earnings.

12 Ibid.13 Henrekson, Magnus and Dan Johansson. “Gazelles as job creators: a survey and interpretation of the evidence.” Small Bus Econ, (2010) 35:227–24414 Ibid.

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Scaleups need access to markets, talent, and funding in order to succeed.

The World Economic Forum, in partnership with Stanford University and Endeavor Insight, recently conducted a survey of more than 1,000 leaders at entrepreneurial companies around the world in order to identify factors that helped their companies to grow.15 Contrary to the prevailing wisdom among many policymakers, these respondents rarely mentioned regulatory frameworks and taxes, lack of coordination with major universities, and low-quality entrepreneurship education as barriers to the growth of their companies. These leaders instead highlighted the importance of the following three factors:

• Human Capital (mentioned by 62 percent of entrepreneurs surveyed): This includes the various sources of talent available to entrepreneurs as they staff their companies. Management and technical talent were the most important resources cited in our survey.

• Accessible Markets (60 percent): This includes public- and private-sector customers in domestic and foreign markets. Respondents frequently cited domestic, private-sector customers as most critical to their growth.

• Funding and Finance (59 percent): This includes all types of debt and equity capital available to entrepreneurs. Various forms of equity capital, such as seed investments by family and friends, angel capital and venture capital, were rated most highly by respondents.

• A group of over 1,000 leading entrepreneurs identified access to talent, markets, and funding as the most important factors that helped their companies grow

15 WEF Entrepreneurial Ecosystems Report (2013): Exhibit 3-1

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Profile of a Bangladeshi scaleup entrepreneur: Sakhawat Hossain, co-founder of Western Marine Shipyard

Sakhawat Hossain co-founded Western Marine Services (which would later become Western Marine Shipyard) in 1994 and currently serves as its managing director. He began his career with the Bangladesh Shipping Corporation and served in various capacities in Singapore and Malaysia until 1993. He has received multiple awards including the 2010 CIP for large scale industry from the Ministry of Industries. Hossain holds a degree in Marine Engineering from the Bangladesh Marine Academy.

Company Overview

Western Marine Shipyard was founded in 1994 by a group of marine professionals. It initially began as a ship repair and services company under the name “Western Marine Services.” In July of 2000, it was incorporated under its current name, Western Marine Shipyard, as an export-oriented shipbuilding company focused on small and medium sized vessels. It went public in 2009 and currently directly employs 3,500 skilled and semi-skilled workers alongside 6,500 indirect laborers. The company has received several awards including a Certificate of Outstanding Achievement in Shipbuilding and a National Export Trophy by the Government of Bangladesh.

1. Could you give us some background about yourself? How did you become involved with founding Western Marine Shipyard? What was your inspiration at that time? Was there any event or circumstances that made you want to start this company?

My background is in Marine Engineering.I sailed ships for 13 years and have traveled around the globe. During that time, I engaged in a lot of work with ship repairs. From that interest, I saw shipbuilding from a different point of view. I took this leadership and all of this work in Singapore, China, the Middle East, all these things I saw, how ships were made from inside and outside, technically and commercially. Then we discussed this matter with our friends, how to build a shipyard or repair facility in Bangladesh, what is the recipe? What are the things we need to make this business work?

I found four main items. First, you need land near a river or sea, you cannot build ship in landlocked country like Nepal. Then, you have to have infrastructure, cranes, and heavy structures. In Bangladesh we have both of these. Then, I found you need skilled manpower, like welders, electricians, engineers, technicians, designers.I found that in many shipyards, mostly in the Middle East and Singapore and other places, 70% of the skilled manpower comes from Bangladesh. The final, most important piece is a quality management system. You need managers who know how to do the work from A to Z, a chain of command that works. This is to be done by professionals.

We few friends joined hands, and started this business as a quality management system for shipbuilding or ship repair. We started at a very small scale in 1994, and then built our knowledge with repair, maintenance, survey, and other docking work for six years, and we fixed over 100 ships. In 2000, we took on more friends, and the 11 of us joined hands to establish a shipyard on the bank of the River Karnaphuli in Chittagong.

2. What challenges did you face when you were scaling up your company?

As a developing country, Bangladesh has a lot of challenges: geographically, commercially, and


financially. For shipbuilding, our initial challenge was government policy. No policies existed for shipbuilding. As industry pioneers, we ran into problems with financial and tax issues. This was our challenge. We had to integrate the government – to know them and explain our needs.

Our second challenge was infrastructure. Our infrastructure – roads, power – is not like developed countries. Poor infrastructure hinders us. We need support from port to ship and ship to port. You have to import all items, take deliveries – it is all very specialized.

Our last challenge was financial. Building a shipyard is a huge capital investment. Our shipyard needed 100 million dollars in capital investment, then you also need working capital. To get money is easy, but the rate of interest is not that suitable. In Bangladesh, we have interest rates of 16-18 percent compared to 3-4 percent in Korea and China. For shipbuilding, I think it is killing us. These were our initial three challenges.

3. What did you do to overcome these challenges?

We approached government with the benefits of shipbuilding. We gave seminars and talked to high officials. If one shipyard is built, there will be huge employment, foreign currency earning, and foreign currency saving also.We will no longer need to import ships and spend our foreign currency. Industrialization and commercialization will be there. All these things will help the nation and even contribute to GDP. Once they realized this, they made everything easy. The government gave us lots of privileges, such as low income taxes to incentivize entrepreneurs in shipbuilding, duty free for raw materials and machinery, and cash incentives. Everything is there, except low interest rates. That part is in process, because we have other industries in Bangladesh: R&D, textiles, etc. In light of this, they could not realize our rate of interest. So we are trying to pursue them. Now policy makers are working on it. If goes through, growth could be doubled.

In addition, we hire based on talent, not on geography. We recognized early on that some of the best product strategists, sales and marketing experts in the world are based in the U.S. So we opened offices in Boston and Palo Alto to bring on talent to meet those needs.

4. Why do you think entrepreneurship is important for Bulgaria and Southeast Europe?

Because we are a developing country, and this is labor-intensive work. So there are lots of opportunities to develop these kinds of industries. High tech industries are for European and western countries. That is where the western world is focusing.Shipbuilding, where huge manpower is needed, is being left to Asia, and thus Bangladesh. So we have a competitive advantage because costs of labor and manpower are less than western countries like the United States and others. That is our main advantage number one. Number two, our know how on the subject is also better.

To grab this competitive advantage, we need new entrepreneurs. Especially in Bangladesh and Southeast Asia, new entrepreneurs should come forward. They should take this opportunity to provide guidance and good business leadership to maximize this competitive advantage.

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Methodology

The World Bank Enterprise Survey is a representative sample of firms in an economy’s private sector. The World Bank typically interviews 150 firms in small economies, 360 in medium-size ones, and 1,200-1,800 in larger economies. The sample is constructed using a stratified random sample based on firm size, business sector, and geographic region within a country. According to the World Bank, “Enterprise Surveys tend to oversample large firms since larger firms tend to be engines of job creation.”16

The analysis contained in this report is based on the following three survey questions:

• “In what year did this establishment begin operations in this country?”

• “At the end of fiscal year [insert last complete fiscal year], how many permanent, full-time employees did this establishment employ?”

• “Three fiscal years ago, in the year [insert three complete fiscal years ago], how many permanent, full-time employees did this establishment employ?”

Using firms’ responses to these questions, we construct an employment compound annual growth rate (CAGR). We summarize job figures using sampling weights. Therefore, findings should be considered valid at the economy level.

16 “Methodology.” Enterprise Surveys. http://www.enterprisesurveys.org/Methodology.


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Endeavor Insight, Endeavor’s research arm, studies high-impact entrepreneurs and their contribution to job creation and economic growth. Its research educates policy makers and practitioners on how to accelerate entrepreneurs’ success and support the development of strong entrepreneurship ecosystems. In 2013, Endeavor Insight joined with the Kauffman Foundation and the World Bank to launch the Global Entrepreneurship Research Network.

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Documents

The Critical 5 Percent