There are numerous macroeconomic policies that can influence dimensions of entrepreneurship. Van Stel et al. (2006) take one entrepreneurship policy objective to be the “conversion” of nascent to actual entrepreneurs. Using GEM data, their conversion rates are shown in Table 5.4. Amongst OECD countries, those with high rates are Sweden, Korea, and Netherlands. Those with low conversion rates are France, Belgium, Germany and the United States. In seeking to explain these country differences they confirm the earlier findings on the influence of social security expenditure, but find limited support for the business licensing argument.
From the above it is clear there are numerous influences upon entrepreneurship and small business performance in a country. It is also clear that decisions on taxation, immigration, legislative burdens and enforcement, that strongly influence SMEs, are normally made by departments of government other than the main SME department. Furthermore, the main SME department of government almost certainly exerts only a very modest influence upon these decisions. A key challenge for SME policy makers is therefore to identify the most important of these policy influences on entrepreneurship and then to influence key decision-making departments elsewhere in government.
An interesting example of this broader approach to policy formulation comes from Denmark. Table 5.5 identifies 16 policy areas that influence SME performance, and challenge is for Denmark to decide where it should focus its efforts.
The Danish policy target is that by 2015 Denmark should be one of the top three countries in the world in terms of both start up rates and proportion of
Table 5.4. Average conversion rates young businesses/nascent entrepreneurs, 2000-2004
Mexico 0.35 (3) Finland 0.74 (6)
Poland 0.37 (4) Singapore 0.75 (9)
Slovenia 0.38 (5) Russia 0.77 (3)
Peru* 0.41 (1) Jordan* 0.80 (1)
Croatia 0.44 (5) Portugal 0.81 (2)
South Africa 0.45 (7) Switzerland 0.82 (3)
France 0.47 (9) Spain 0.82 (9)
Venezuela* 0.51 (1) Iceland 0.83 (5)
Germany 0.56 (9) Greece 0.85 (3)
Belgium 0.57 (9) Hong Kong 0.87 (5)
Argentina 0.57 (9) Australia 0.89 (9)
United States 0.58 (9) Denmark 0.89 (9)
Hungary 0.58 (4) United Kingdom 0.89 (9)
Japan 0.59 (6) India 0.90 (5)
Italy 0.60 (7) Netherlands 0.98 (7)
Chile 0.64 (3) Brazil 1.03 (9)
Canada 0.64 (9) Uganda 1.18 (3)
Ecuador* 0.66 (1) Sweden 1.20 (7)
Ireland 0.69 (7) Korea 1.23 (5)
New Zealand 0.70 (7) China 1.43 (3)
Norway 0.72 (9) Israel # 2.05 (6)
Thailand* 0.72 (1) Taiwan* 2.41 (1)
Notes: Average of “current” conversion rate (average 2000-2004) and “lagged” conversion rate (average 2001-2004). In case of missing observations the average conversion rates are computed over the available years. The number of observations on which the statistic is based is given in parentheses. For the countries marked with:
* The “current” conversion rates shown are actually computed for just one year.
# The relatively high conversion rate for Israel is mainly due to a very low nascent rate in 2001.
Table 5.5. Selecting policy areas Low correlation with
performance
Significantly correlated with performance
High Priority among Top 3 Corporate Tax Bankruptcy Legislation Wealth and Bequest Tax Administrative Burdens
Entrepreneurship Education Restart possibilities Personal Income Tax Venture Capital Labour Market Regulation Access to Foreign Markets Low Priority among Top 3 Exit
Capital Taxes
Government Programmes Traditional business education Loan capital
Technology Transfer
Culture/Motivation Entry Barriers
SMEs’ experiencing rapid growth. Its intermediate target is to become one of the European elite, according to these criteria, by 2010.
The analysis on which Table 5.5 is based takes data for 20 OECD countries on start up and growth, and examines the extent to which this links to the policy areas in the Table. A total of 61 measures are identified for the 16 policy areas and these are set out in full in Appendix E where that link is significant it is shown in bold in the final column.
The rows of Table 5.5 show those policy areas where the top three countries currently (USA, Canada and Korea) – which Denmark aims to join by 2015 – place their policy emphasis. By implication these are the policy areas where Denmark will seek to place more (or less) emphasis in its efforts to match these countries. Based on statistical analysis, the columns of Table 5.5 show the links between policy activity and measures of entrepreneurship. So, for example, bankruptcy legislation or wealth taxes in the left hand columns are not strongly related to entrepreneurial performance. In contrast, entrepreneurship education or programmes to support access to foreign markets are characteristic of entrepreneurial economies.
The key box in Table 5.5 is then the one in the top right, since these policies are both significantly correlated with performance and also where the top three countries currently place more policy emphasis than Denmark. It implies that Denmark, if it wishes to achieve its 2015 ambition, would be expected to focus more heavily on entrepreneurship education, restart possibilities and the lowering of personal income tax.
The value of the Denmark analysis is that it takes a set of policy priorities and then conducts an analysis upon its competitors, in terms of those policy areas. From this emerge a set of policies that appear to explain good performance, but where Denmark devotes less policy attention than the exemplars. Using this approach the coherence of the total policy can be reviewed.
Of course such an approach does not “solve” all problems, or the need for further political discussion and debate. What it does do is provide the basis of a better informed debate. An example might be over such issues as focussing upon entrepreneurship education. Those favouring such policies will point to Denmark being deficient in comparison with the high performing entrepreneurial countries. Those who do not favour such a focus would point out that entrepreneurial education programmes cannot be expected to impact upon entrepreneurship in the short run. Hence they are likely to fail to deliver results by the target date of 2015. A separate debate might also be about whether the lowering of taxes across the board is politically acceptable. So, whilst it does not lead directly to problem solution it frames, in an informed manner, the debate about options in SME and entrepreneurship policy.
Conclusion
This section has examined the macroeconomic context for SME and entrepreneurship policies. It concludes that:
● Total public funds devoted to encouraging entrepreneurship and supporting SMEs are likely to be substantial in many countries. The total sum is rarely quantified but, where it has been in the UK, it is approximately equivalent to total spending on the police force.
● Control, or influence, over that total expenditure is rarely exercised by the department of government responsible for SME policy. Instead, other departments or organisations of government often have considerably larger budgets, but may have very different priorities from that of the main SME department. Hence there is a strong case for considering a cross-government group to decide spending priorities on SME and entrepreneurship policy.
● Whilst SME and entrepreneurship policies are important in influencing the creation of new firms and the development of SMEs, so also are other government policies which do not have an explicit SME/entrepreneurship focus. These include: macro policies to create a stable economic environment, with low inflation, interest rates and unemployment;
taxation; unemployment benefits; business regulation policies (licensing policies); immigration/emigration policies; competition and public policies.
● The evidence reviewed points to high interest rates and macro economic uncertainty depressing rates of new firm formation. The impact of unemployment has a more mixed effect, with some people being stimulated, and others inhibited, from starting new businesses.
● The evidence on the impact of the tax regime on entrepreneurship is perhaps even less clear. Early work asserted that high taxes depressed enterprise on the grounds that business owners would be less prepared to work harder – and longer – if they were subject to high taxes. Recent research is more ambiguous since business ownership becomes more attractive under a high tax regime since it provides opportunities for tax evasion and/or avoidance.
● High unemployment benefits appear to be associated with low rates of new firm formation.
● Reducing the time and cost to start a new business has been the focus of policy in several countries. The evidence is that lowering these “barriers”
does lead to more new businesses being registered, but how many of these are informal businesses that convert to being formal is less clear.
● There is no doubt that many groups of immigrants to a country make a major contribution to enterprise in the host country. There is also evidence that educated returning migrants can play an important role in enterprise creation.
● Finally competition and public procurement policies can also powerfully influence enterprise creation and development.
● The challenge for SME/entrepreneurship policy makers is therefore to identify these macro policies and their links to enterprise. It is then to ensure that macro policies – which do not have enterprise as their central aim – nevertheless work in a way which is congruent with the objectives of enterprise support. The current approach of the Danish government can be considered to be an example of this.
The Framework has emphasised the importance of factors such as the tax regime, the regulatory environment, immigration and emigration as well as macro policies seeking to achieve low inflation, interest rate and unemployment.
These policies, perhaps significantly more than specific SME and entrepreneurship policies, influence rates of new firm formation and the growth of the SME sector in a region or country.
The policy implication of this are that the main department responsible for SME policy has to work closely in conjunction with other departments of government responsible for matters relating to economic policy, the tax regime, or immigration/emigration. It is also recognised that these departments of government are likely to have expenditures relating to SMEs that dwarf the main SME department. Hence the development of strong relationships to ensure policy coherence is a pre-condition for successful policy delivery.
Overall the evidence presented in Section 5 has demonstrated that the evaluation techniques appropriate for assessing the impact on SMEs of
“macro” policies differs radically from that for SME policies and programmes discussed in Section 2-4. Evaluation of macro-policies such as competition policy, immigration policy, licensing policy as well as traditional macro- policies such as the control of inflation and aggregate demand, rely heavily upon the availability of long established time series information and the ability to make valid international comparisons. Here the OECD is well positioned to play a key role in the future in this form of evaluation.
Notes
1. “Cross Cutting Review of Government Services for Small Businesses”, DTI, London, September 2002.
2. Responsibility for enterprise policy now resides with the Enterprise Directorate which is part of the Department of Business, Enterprise and Regulatory Reform.
3. The difference is explained by Shane using the change in the ratio of businesses to the population for each year, rather than the ratio itself. It emphasises the possible sensitivity of such findings to the choice of dependent variable.
4. He was significantly less persuaded that the other two elements of what he called the Washington consensus – privatisation and trade liberalisation – had made
much contribution to the economic development of low income countries. These comments are reported in an interview with Multinational Monitor, April 2000 (http://multinationalmonitor.org/mm2000/00april/interview.html).
5. To develop this point slightly: high tax societies are also likely to have high
“exemptions”. Hence in a high tax society the individual knows that in the event of a business failure s/he will be able to write off any losses against either current or future tax. This may make them more willing to take risks, in the knowledge that their personal downside losses will be minimal.
6. Bjuggren and Sund (2005), for example estimate that a lifetime succession plan would cost between 50 000 and 500 000 euros.
7. A classic example is reported in Storey (1994). He reports on the work of Rees and Shah (1994) who found that whilst income tax rates fell sharply following the election of a Thatcher government in Britain in 1979, this was associated with the self employed working fewer hours – the opposite to that which Thatcher’s aides had forecast. The reason was that most self-employed individuals had a “target”
level of after-tax pay. Since they achieved this target when taxes were lower by working fewer hours, the outcome should have been entirely predictable.
8. www.doingbusiness.org/economyrankings/.
9. For example the 2005 OECD SME and Entrepreneurship Outlook, page 222-3 reports that, in 2004 there were 225 000 new start ups in France. “This is the highest number in history and compares with an average of 175 000 in the late 1990s.” The sharp rise follows the Economic Initiative Act of 2003, one key theme of which is “making enterprise creation fast, simple and available to all”. A second example is provided by Haggarty et al. (2006) who reports that, following a major simplification of business licensing in Lima, Peru, “in the first four months of operation the municipality has licensed nearly as many firms as in the previous two years”.
10. The much quoted study of this type of procedures is by De Soto (1990).
11. The new firms examined in the comparison were created and identified before the change in the Spanish legislation.
12. The reason we would expect the registered Spanish firms, on average, to start larger than the English is because licensing is an (almost) fixed cost. So, if the cost of licensing is high and the sales of the business are expected to be small then registration is unlikely, and it is the elimination of the very small firm firms that raises the average size of the registered Spanish firms.
13. It might be argued that the willing transfer of businesses from the informal to the formal sector itself has economic benefits. For example, it may mean that an entrepreneur who previously ran a business in the informal sector is no longer apprehensive of expanding for fear of being discovered by the relevant authorities.
This expansion could provide considerable economic benefits, but it is difficult to quantify its significance.
14. This is taken from the Australian Small Business De-Regulation task force and is reported in the 2005 OECD SME and Entrepreneurship Outlook.
15. See Vickers (2005).
16. Storey (2005) shows that although one third of small firms are aware of anti- competitive practices and one quarter of SMEs have experienced such practices themselves, their most frequent reaction is to ignore it. Those SME owners most likely to report it is an educated male networker owning a somewhat larger business outside the traditional sectors.
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