Abstract
Public policy is currently shifting from SME policy toward entrepreneurship policy, which supports entrepreneurship without directing attention to quantitative goals and specific firms or employment groups. The institutional framework set by public policy affects the prevalence and performance of both productive entrepreneurship and so-called high-impact entrepreneurship in turn. Although varying contexts and economic systems make prescribing a general panacea impossible, a number of relevant policy areas are identified and analyzed. Independent of environment, productive entrepreneurship should be rewarded and unproductive entrepreneurship should be discouraged. Successful ventures must also have the incentive to continue renewing themselves just as it must be easy to start and expand a business. In particular, we analyze regulatory entry and growth barriers, labor market regulation, liquidity constraints, and tax policy at length.
This is a draft chapter for the new edition of Handbook of Entrepreneurship Research (New York: Springer), edited by Zoltan J. Acs and David B. Audretsch. We are grateful for useful comments and suggestions from Robin Douhan and Linda Nyberg. Financial support from the Gustaf Douglas Research Program on Entrepreneurship at IFN and from the Jan Wallander and Tom Hedelius Research Foundation is gratefully acknowledged.
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Notes
- 1.
Audretsch et al. (2007).
- 2.
- 3.
Lundström and Stevenson (2005, 37).
- 4.
See Henrekson and Johansson (2010) for a survey of the evidence.
- 5.
Hoffmann (2007, 140). This does not preclude that an entrepreneurial venture is sold to an incumbent fairly quickly. The full potential of a business idea will more likely be realized if it is sold to an established business with the requisite know-how and financial strength (Norbäck & Persson 2009).
- 6.
- 7.
Reynolds et al. (2002). Sometimes the terms “pull” and “push” effects are used instead to distinguish whether individuals start ventures due to their lack of better alternatives or to exploit entrepreneurial opportunities.
- 8.
See, e.g., Baumol et al. (2007).
- 9.
This maximization behavior does not necessarily imply narrow selfishness. The entrepreneur could care about the welfare of kin and friends, or even about the welfare of the general public. It suffices that the business decisions are decoupled from such considerations. The entrepreneur maximizes profits selfishly, but no constraint is put on the use of these profits. These may or may not be spent with altruistic considerations in mind.
- 10.
- 11.
See Acs (2008) for an in-depth discussion of HIE. Acs claims that HIE should be an activity focused on (homogeneous) mass production within the product market sector. However, we find it unnecessary to restrict the concept of HIE to specific business activities and/or strategies.
- 12.
See Douhan et al. (2009).
- 13.
Hart (2003).
- 14.
Lundström and Stevenson (2002).
- 15.
See, e.g., Storey (2003) or van Stel (2007). Audretsch et al. (2007) mention network, knowledge, and learning externalities as three examples of market failures that work against SMEs in the economy. Rodrik (2007) points to information and coordination externalities as one basis for government intervention.
- 16.
Audretsch et al. (2002, 45).
- 17.
Cf. Holtz-Eakin (2000), who claims that it is virtually impossible to clearly identify entrepreneurs.
- 18.
Cf. Holtz-Eakin (2000).
- 19.
- 20.
Acs and Szerb (2007, 112).
- 21.
See, e.g., Shane (2008, 162), who states that: “[N]ew company formation per se isn’t what matters; rather it’s the creation of a small number of super-high-potential new companies, which among them generate almost all the economic growth and job and wealth creation that comes from having an entrepreneurial economy […] A strategy that revolves around increasing the number of new business created every year is flawed.”
- 22.
Johansson (2010).
- 23.
Lundström and Stevenson (2002).
- 24.
Audretsch et al. (2002).
- 25.
Orszag and Snower’s (1998) study of the complementarity of different policies in the area of unemployment provides an interesting parallel. They show how the effectiveness of one policy depends on the implementation of other policies.
- 26.
OECD (2007).
- 27.
Cf. Boetttke and Coyne (2009, 144).
- 28.
- 29.
Acs and Szerb (2007).
- 30.
Acs and Szerb (2007) state that information, opportunity recognition, and skill development are the most important factors influencing entrepreneurial activity in the short run.
- 31.
- 32.
Audretsch et al. (2002).
- 33.
- 34.
Storey (1994).
- 35.
OECD (2007).
- 36.
- 37.
The income elasticity of these services has been estimated to be as high as 1.6 (Fogel 1999).
- 38.
- 39.
See, e.g., Shleifer (1998).
- 40.
See, e.g., Jensen and Stonecash (2005) for an overview of public sector outsourcing. Even if only part of public production is privatized, the non-privatized part may improve. Bergström and Sandström (2005) have found that school results in Swedish public schools improved due to competition from independent schools under a voucher system covering all children.
- 41.
- 42.
- 43.
- 44.
- 45.
- 46.
Ho and Wong (2007).
- 47.
Dean and Meyer (1996).
- 48.
OECD (1998).
- 49.
Nijsen (2000).
- 50.
- 51.
Audretsch et al. (2002).
- 52.
Kauffman Foundation (2008).
- 53.
- 54.
Ho and Wong (2007).
- 55.
Ho and Wong (2007).
- 56.
- 57.
- 58.
- 59.
Klinger and Lederman (2006).
- 60.
Audretsch et al. (2002).
- 61.
See, e.g., Audretsch et al. (2002).
- 62.
- 63.
- 64.
Baumol et al. (2007, 236).
- 65.
Baumol et al. (2007, 205).
- 66.
Fazzari et al. (1988).
- 67.
EU (2008).
- 68.
Kauffman Foundation (2007, 34).
- 69.
See de Meza (2002) and de Meza and Southey (1996) for an in-depth discussion. de Meza actually claims that too many low-quality projects are being funded due to asymmetric information. The problem is then that too many projects are financed. In accordance, he argues that public policy should be used to reduce lending to entrepreneurs.
- 70.
See, e.g., Hayward et al. (2006) who discuss the Hubris theory of entrepreneurship; many potential entrepreneurs have overconfidence in their knowledge, predictions, and personal ability.
- 71.
- 72.
- 73.
Kauernman et al. (2005) and Bamford et al. (2004).
- 74.
Pelikan (1988) provides forceful arguments supporting this view. Data from the United States show that businesses below 2 years of age are equity financed to 48%, in which the bulk comes from internal sources. Consequently, debt financing constituted 52%, but only 28% of the debt consisted of funding from financial institutions (Berger and Udell 1988).
- 75.
- 76.
Ho and Wong (2007).
- 77.
- 78.
- 79.
OECD (1998).
- 80.
- 81.
See, e.g., Bottazzi and Da Rin (2002) and Da Rin et al. (2006)
- 82.
OECD (1998).
- 83.
Scarpetta et al. (2002).
- 84.
Borger et al. (2000).
- 85.
See, e.g., Gompers and Lerner (2004) or Gompers et al. (2009). Cf. Birch (2006), who claims that it is impossible to “pick winners.” Svensson (2008) has also shown that soft public financing in the early stage (seed) phase often leads to inferior firm performance and that public loans always should be granted on commercial terms. See also Bergström (2000).
- 86.
However, openly and politically influenced decisions are at times deliberate support of, e.g., impoverished regions. Supporting specific minority groups, like immigrants or women, may also be a way to compensate for possible (credit market) discrimination in the economy.
- 87.
Baumol et al. (2007, 220).
- 88.
Cf. Shane (2008) who claims that politicians should think like venture capitalists and copy their strategies instead of supporting the “typical” venture with a supposedly low impact on the economy. Politicians cannot “pick winners” but they can try to avoid “picking losers”. Baumol et al. (2007) asserts that the Advanced Technology Program (ATP), administered by the Commerce Department in the US, only supported ventures which also attracted private money and there is some support that this has been successful. The largest program in the United States is the Small Business Innovation Research (SBIR) program. Program evaluation can be very complex, but Siegel et al. (2003) concludes that both ATP and SBIR have been successful.
- 89.
Gompers and Lerner (1999) find that a crucial factor behind the growth of the United States venture capital industry was that the decrease of capital gains tax rates boosted demand for venture capital as more workers got an incentive to become entrepreneurs. Keuschnigg and Nielsen (2004b) have shown theoretically that inefficiently low entrepreneurial effort and venture capital support may arise in the economy and that capital gains taxation may be particularly harmful. See also Keuschnigg and Nielsen (2004a) for an additional discussion.
- 90.
Henrekson and Rosenberg (2001).
- 91.
Da Rin et al. (2006). They conclude: ”[T]he European experience suggests that the creation of active venture capital markets might depend on providing investors and entrepreneurs with the possibility to reap the benefits of their efforts rather than providing them with more funds.”
- 92.
Drucker (1976).
- 93.
Hart (2003, 10).
- 94.
Audretsch et al. (2002, 47).
- 95.
van Stel et al. (2007).
- 96.
OECD (1994).
- 97.
OECD provided an update of the 1994 study in 2009. See Shedinger (2010) for details.
- 98.
van Stel et al. (2007).
- 99.
- 100.
Niehof (1999).
- 101.
OECD (2003).
- 102.
Baumol et al. (2007, 210, 222).
- 103.
See Caballero (2007).
- 104.
Ho and Wong (2007).
- 105.
- 106.
See, e.g., Ilmakunnas and Kanniainen (2001) for an econometric analysis of the effects of risk insurance in the welfare state.
- 107.
See, e.g., Audretsch et al. (2002).
- 108.
- 109.
Delmar et al. (2005).
- 110.
See, e.g., Acs et al. (2009).
- 111.
Baumol (2002).
- 112.
See, e.g., Acs (2008).
- 113.
See, e.g., EU (2002).
- 114.
Bhidé (2008).
- 115.
The amount of R&D may not only be large but also exploited inefficiently. Da Rin et al. (2006) examined 14 European countries in a panel between 1988 and 2001 and did not find any positive relationship between public R&D spending and the rate of innovation, defined as the share of high-tech and early stage venture capital investments.
- 116.
To make the point crystal clear: it was neither Bill Gates nor Henry Ford who invented the technologies they used in their ventures. They were entrepreneurs who successfully exploited new or existing technologies. These entrepreneurs were needed to successfully exploit the inventions. Only focusing on inventions and R&D misses at least half of the story. Increased R&D will not automatically bring forth entrepreneurs undertaking entrepreneurial activity based on new R&D. Perhaps it is even the other way around, i.e., in an economic system encouraging productive entrepreneurship a great deal of R&D is undertaken because the results from R&D are demanded (Holcombe, 2007).
- 117.
- 118.
Audretsch et al. (2002).
- 119.
Lindelöf and Löfsten (2003).
- 120.
Carlsson (2009).
- 121.
Kauffman Foundation (2007).
- 122.
Kauffman Foundation (2008) and Baumol et al. (2007). See also Henrekson and Rosenberg (2001). There are innumerable examples of programs supporting science parks, clusters, and spin-offs, especially within the academic sector. Even if many studies find a positive effect from these programs, fair evaluations are difficult due to endogeneity problems and a lack of a counterfactual benchmark (how institutional arrangements would have spontaneously evolved had there been no public support). There are, however, also examples of failed policy programs such as the UK support program for young people (Meager et al., 2003). See OECD (2007) for a further discussion of evaluations of entrepreneurship policies and programs.
- 123.
Holtz-Eakin (2000, 288).
- 124.
Audretsch et al. (2002, 55). Research based on UK data also shows that targeted regional start-up subsidies to under-performing regions tends to encourage individuals with limited human capital to start firms. This group seldom develops high-impact firms and often leaves the market after some time. See van Stel and Storey (2004).
- 125.
Baumol et al. (2007, 234).
- 126.
Cf. Ho and Wong (2007).
- 127.
- 128.
- 129.
de Soto (2000).
- 130.
Rodrik (2007, 156). Rodrik stresses the importance of control. Formal property rights which in practice do not render control rights are useless. In the same way, even if formal property rights are absent, sufficiently strong control rights may be enough to provide sufficient incentives for potential entrepreneurs.
- 131.
See Johnson et al. (2002) who investigates new firms in the post-communist countries.
- 132.
- 133.
These effects can, e.g., be compared to Slemrod (1986) who only distinguishes between two effects to tax changes: real responses and avoidance responses.
- 134.
See, e.g., the discussion in OECD (1998).
- 135.
- 136.
Engström and Holmlund (2009).
- 137.
Henrekson and Johansson (2009).
- 138.
This argument was first put forward by Domar and Musgrave (1944).
- 139.
A recent discussion of this effect is Cullen and Gordon (2007). It is noteworthy that in practice no tax system has full loss offset.
- 140.
Gentry and Hubbard (2000).
- 141.
Audrestch et al. (2002, 46).
- 142.
Audrestch et al. (2002, 46).
- 143.
For a general overview of the research until 2003, see Schuetze and Bruce (2004).
- 144.
See, e.g., Robson and Wren (1999).
- 145.
Gentry and Hubbard (2000).
- 146.
- 147.
- 148.
Henrekson and Johansson (2009).
- 149.
Henrekson (2007).
- 150.
Michaelas et al. (1999).
- 151.
Cf. Audretsch et al. (2002, 46).
- 152.
- 153.
See Rosen (2005) for an overview.
- 154.
- 155.
These kinds of highly complicated estimates have been made for a number of countries using the methodology developed by King and Fullerton (1984).
- 156.
Jorgenson and Landau (1993).
- 157.
Rydqvist et al. (2009).
- 158.
Henrekson and Johansson (2009).
- 159.
Cf. Acs and Szerb (2007).
- 160.
Audretsch et al. (2002) and OECD (1998).
- 161.
- 162.
Audretsch et al. (2002) and OECD (1998).
- 163.
EU (2008) and OECD (1998). A survey has, e.g., shown that 47% of the Europeans would be reluctant to order from a business owned by somebody who has previously filed for bankruptcy. This will hardly facilitate entrepreneurial activities for re-starters. The average time to complete a bankruptcy varies also considerable within EU, from 4 months to 9 years (EU, 2008).
- 164.
Audretsch et al. (2002).
- 165.
See Ucbasaran et al. (2008) for an overview of habitual entrepreneurs.
- 166.
See Baumol et al. (2007) for a further and more detailed discussion.
- 167.
Gilbert et al. (2004).
- 168.
- 169.
Jaffee and Lerner (2004). In the United States, the United States Patent and Trademark Office (USPTO) is overburdened as it is too easy to get a patent; the special court in the United States that deals with these issues (CAFC) has over time given greater protection to patent claimants (Kauffman Foundation 2007, 24).
- 170.
Cf. Baumol et al. (1982).
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Henrekson, M., Stenkula, M. (2010). Entrepreneurship and Public Policy. In: Acs, Z., Audretsch, D. (eds) Handbook of Entrepreneurship Research. International Handbook Series on Entrepreneurship, vol 5. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-1191-9_21
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