Global Business 3rd Edition by Mike Peng

تمرين 21

Corporate bankruptcies* have climbed to new heights in the Great Recession. Firms ranging from huge corporations (such as General Motors) to tiny entrepreneurial outfits have gone bankrupt left and right around the world. Since bankruptcies do not sound too good or inspiring, is there anything that we-the government, financial institutions, consumers, or the society at large-can do to prevent widespread bankruptcies?
Efforts to rescue failing firms from bankruptcies stem from an "anti-failure" bias that is widely shared among entrepreneurs, scholars, journalists, and officials. Although a majority of entrepreneurial firms fail, this "anti-failure" bias leads to strong interest in entrepreneurial success (remember how many times Google and Facebook were written up by the press?), and to scant attention devoted to the vast majority of entrepreneurial firms that end up in failure and bankruptcy. However, one perspective suggests that bankruptcies, which are undoubtedly painful to individual entrepreneurs and employees, may be good for the society. Consequently, bankruptcy laws need to be reformed to become more entrepreneur-friendly by making it easier for entrepreneurs to declare bankruptcy and to move on. Thus, financial, human, and physical resources stuck with failed firms can be redeployed in a socially optimal way.
One leading debate concerns how to treat failed entrepreneurs who file for bankruptcy. Do we let them walk away from debt or punish them? Historically, entrepreneur friendliness and bankruptcy laws are like an oxymoron, because bankruptcy laws are usually harsh and even cruel. The very term "bankruptcy" is derived from a harsh practice: In medieval Italy, if bankrupt entrepreneurs did not pay their debt, debtors would destroy the trading bench (booth) of the bankrupt-the Italian word for broken bench, "banca rotta," has evolved into the English word "bankruptcy." The pound of flesh demanded by the creditor in Shakespeare's The Merchant of Venice is only a slight exaggeration. The world's first bankruptcy law, passed in England in 1542, considered a bankrupt individual a criminal, and penalties ranged from incarceration to a death sentence.
Recently, many governments have realized that entrepreneur-friendly bankruptcy laws can not only lower exit barriers, but also can lower entry barriers for entrepreneurs. Although we are confident that many start-ups will fail, at present it is impossible to predict which ones will go under. Thus, from an institutionbased standpoint, if entrepreneurship is to be encouraged, there is a need to ease the pain associated with bankruptcy by means such as allowing entrepreneurs to walk away from debt, a legal right that bankrupt US entrepreneurs appreciate. In contrast, until the recent bankruptcy law reforms, bankrupt German entrepreneurs might remain liable for unpaid debt for up to 30 years. Further, German and Japanese managers of bankrupt firms can also be liable for criminal penalties. Numerous bankrupt Japanese entrepreneurs have committed suicide. As rules of the "end game," harsh bankruptcy laws thus become grave exit barriers. They can also be significant entry barriers, as fewer wouldbe entrepreneurs may decide to launch their ventures.
At a societal level, if many would-be entrepreneurs abandon their ideas in fear of failure, there will not be a thriving entrepreneurial sector. Given the risks and uncertainties, it is not surprising that many entrepreneurs do not make it the first time. However, if they are given second, third, or more chances, some of them will succeed. Approximately 50% of US entrepreneurs who filed bankruptcy resumed a new venture in four years. This high level of entrepreneurialism is, in part, driven by the relatively entrepreneur-friendly bankruptcy laws in the United States (such as the provision of Chapter 11 bankruptcy reorganization, instead of straight liquidation). On the other hand, a society that severely punishes failed entrepreneurs (such as forcing financially insolvent firms to liquidate) is not likely to foster widespread entrepreneurship. Overall, worldwide evidence from 29 countries-involving both developed and emerging economies-has identified a strong linkage between entrepreneur-friendly bankruptcy laws and new firm entries. Institutionally, there is an urgent need to remove some of our anti-failure bias and design entrepreneur friendly bankruptcy policies so that failed entrepreneurs are given more chances. At a societal level, entrepreneurial failures may be beneficial, since it is through a large number of entrepreneurial experimentations- although many will fail-that winning solutions will emerge and that economies will develop. In short, the boom in busts is not necessarily bad.
Case Discussion Questions :
What are the pros and cons for entrepreneur friendly bankruptcy laws?