A General Policy Framework for Entrepreneurship Anders Hoffmann, Ph.D. Creative Director, FORA – Centre for Economic and Business Research

A General Policy Framework for Entrepreneurship

Anders Hoffmann, Ph.D.Creative Director, FORA – Centre for Economic and Business Research

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dk

Research, Statistics and Policy

> “Es ist nicht genug zu wissen, man muss es auch anwenden; es ist nicht genug zu wollen, man muss es auch tun.”

Johann Wolfgang von Goethe, 1749-1832


Point of departureDenmark in the late 1990s

> Entrepreneurship is not that important

> Policies should focus on increasing the number of people starting new firms through affecting culture

…as entrepreneurship is like love “it is in the air…”


The two levels of our Work

> Our political motivation:> Denmark aims at being one of the most

entrepreneurial economies in the OECD by 2015

> Our analytical objective:> Develop a better understanding of the drivers of

entrepreneurship and support fact based policy formulation


Political motivationNew Goals, Government Platform, 2005

> Table of content:

> Denmark as a leading knowledge societyDenmark as a leading entrepreneurial societyWorld-class educationInnovation of primary and lower secondary schoolPost-secondary education for everybodyThe most competitive society in the worldA sound economy - Tax freeze – and lower taxation of earned incomeMore people in workBetter health care


Political motivationNew Goals, Government Platform, 2005

> The Government will, therefore, draw up an ambitious, holistic and multi-year strategy to make Denmark a leading growth, knowledge and entrepreneurial society.

> Denmark as a leading entrepreneurial society: Our goal is for Denmark, by 2015, to be one of the societies in the world where most growth enterprises are launched.


Our analytical objective

> The objective is to provide policy makers with an overview of which policy areas that should be an essential part of a country’s overall strategy to promoting entrepreneurship.

> The analysis is based on a cross-country comparison of indicators measuring both performance and the underlying business environment for entrepreneurship.


What is Entrepreneurship?

> No single definition exists of entrepreneurship simply because entrepreneurship cannot be seen as a single event.

General population

Want-to-be 30%

Entry 1%

Survival 70%

Exit 25%

Growth 5%GEM

Eurostat


What are the policy objectives?(From the SME Ministerial Conference 2004)

> Job creation

> Economic growth, productivity improvement, and competitive innovation

> Poverty alleviation and social opportunities


Methodology – What generates economic growth?


Define good performance based on policy objectives

> This study defines entrepreneurship as > entry and exit of firms and > creation of high growth firms,

…as analyses link these two stages in the entrepreneurship process directly to productivity growth (Audretsch and Thurik, 2000; Scarpetta et. al. 2002, OECD 2003, Brandt, 2004).


High growth and MFP

0,6

0,8

1

1,2

1,4

1,6

1,8

-150 -100 -50 0 50 100 150 200 250 300

Growth among new firms within a given industry

MF

P le

vel,

200

2

Average MFP level, 2002


Method:A 7-step approach

1. Select performance indicators that relates to the definition of entrepreneurship

2. Examine performance

3. Define relevant policy areas and select indicators

4. Test for correlation between performance and policies


Method:A 7-step approach

5. The critical areas of the framework conditions are identified

6. Weak points in national framework conditions are identified

7. Improve weak points by using peer review to learn from policies in best performers


Dealing with Indicators

> Many of the examined policy areas are multi-dimensional and cannot be captured by a single indicator.

> The analysis consequently builds on composite indicators

> Several problems are associated to the use of composite indicators. This chapter uses an approach developed by the OECD and the Joint Research Centre of the EU Commission (Giovannini et al, 2005).


Step 1: Select performance indicators

Entry of Firms New High Growth Firms

Firm entry rates, average 2000-2002 (New firms in% of

existing firms)

Share of young firms with more than 60% growth rates in turn-over in a three year

period, 1999 – 2003

Entrepreneurial activity (TEA) from Global

Entrepreneurship Monitor, average 2000-2002

Share of young firms with more than 60% growth rates in employment a three year

period, 1999 – 2003


Step 1: Select performance indicators - High Growth Firms

> High-growth firms are defined as the share of young firms with a growth rate (in either employment or turnover) higher than 60% in a three year period.

> A young firm is less than five years old in the first

year of the three year growth period.

> The firms have at least 15 employees (in the initial year)


Step 1: Select performance indicators - High growtn firms

> From Bureau Van Dijk (BvD), an electronic publishing firm.

> BvD specialises in cleaning and organising data supplied by national information providers in various countries to create a broader data set (e.g. Companies House in the UK, Kamers van Koophandel in the Netherlands).

> The database has been used by several other researchers (see for example, Desai, Gompers and Lerner, 2003).


Step 1: Select performance indicators- Data on high-growth firms

0

5

10

15

20

25

30

%

Employment Turnover


Step 2: Examine performance

0

20

40

60

80

100

Korea

Canad

a

Irelan

d

United

Stat

es

United

King

dom

Spain

Norway

Japa

n

France

Denmark

Finlan

d

Netherl

ands

Sweden

Belgium

Austri

a

German

yIta

ly

Portug

al

Top 10

Top 6

Top 3


Step 3: Define relevant policy areas

> Many words and definitions are used in the literature to describe the factors affecting entrepreneurship.

> Two main contribution to a policy framework come from by Audretsch, Thurik and Verheul (Audretsch et al, 2002) and Lundström and Stevenson (Lundström and Stevenson, 2001, 2002, 2005),


Favourable business climate e.g. tax regime, competitive environment, savings, flexible

labour market, competitive banking system, low inflation, low interest rates, etc.

Opportunity

Skills

Motivation

Influence ‘will to grow’

motivation

Promote new business

possibilities

Promote growth

possibilities

Promote role-models

Make it easier to survive

and grow.

Improve access to resources

- financing, networks,

expertise.

Improve access to markets,

employees, technology.

Reduce regulatory and

labour market obstacles. Make it easier to gain

management know-how.

Access to counselling,

technical assistance,

management skills, peer

networks, ‘best-practice’

management tools,

performance.

Make it easier to gain

management know-how.

Put entrepreneurship

education in schools.

Tailor entrepreneurship

training programs.

Support student venture

programmes.

Establish peer learning

networks.

Make it easier to go through

the steps.

Reduce entry/exit barriers.

Improve access to advice,

information, networks,

mentoring, incubators.

Provide access to micro-

loans and seed capital.

Increase awareness and

legitimacy of

entrepreneurship.

Provide information about

its role in society.

Profile role-models

Promote entrepreneurial

Role as feasible option

For start-up Create entrepreneurial climate For growth

General Population ’A want-to-be’ Nascent Start-Up Survival Growth

t-n t t+ 42 months


Audretsch, Thurik and Verheul


Our model

Incentive structurePotential benefits versus

Potential costs

DemandPotential amount of

entrepreneurship opportunities

SupplyNumber of potential entrepreneurs with skills and capital

EntrepreneurshipActivity

Motivation/CultureEntrepreneurial motivation


Step 3: Define relevant policy areas- 61 indicators

Entry Barriers/deregulation

Venture capital

Stock markets

Wealth & bequest tax

Restartposibilities

LoansTrad. Business

educationPersonal

Income tax

Bankruptcylegislation

Business tax &Fiscal incentive

Laubor marketregulation

Entrepreneurialmotivation

Administrative burdens

Opportunities Capital Ability Motivation/CultureIncentivesFactors affecting entrepreneurial

performance

Policy arears affectingentrepreneurial

performance

Total measure of the business environment for entreprenurship

Initiatives towardsSpecific groups

Social securitydiscrimination

Business AngelsTechnology

transfer

EntrepreneurshipInfrastructure

(public)

Access to foreignmarkets

Entrepreneurshipeducation

CommunicationAbout heroes

Capital taxesProcurement

regulation

EntrepreneurshipInfrastructure

(private)

Private demandfactors


Step 4: Test for correlation

United States

United Kingdom

Sweden

Spain

Portugal

Norway

Netherlands

Korea

J apan Italy

Ireland

Germany

France

Finland

Denmark

Canada

BelgiumAustria

R2 = 0.43

0

20

40

60

80

100

40 50 60 70 80 90

Framework conditions

Perf

orm

ance

All correlation coefficients within the 95% confidence interval of the median (0.43 and 0.7) are significantly different from zero.


Step 4: Test for correlation- However!

> The transmission mechanism among policy areas and performance varies substantially.

> A system of indicators needs to exist for a large time series in order to support solid conclusions on causality.

> (Changes in the business environment tend to be rather slow, so it is plausible that the correlation will stay significant as the data is updated).


Step 5: Critical policy areas are identified

> Ideally, the importance of the various areas should be determined in a multi-variant regression analysis that includes all policy areas.

> Two alternative approach exist> Examine partial regression coefficients between

the various policy areas and performance. > Analysis of the business environment in the top

performing countries (Canada, Korea and the United States) could provide additional insights.


Step 5: Critical policy areas are identified- correlation coefficients

0% 20% 40% 60% 80% 100%

Tech transfer


Capital taxes

Traditional business education

Entrepreneurship Infrastructure

Loans


Stock markets

Business tax & fiscal incentive

Entry barriers/deregulation

Access to foreign markets

Bankruptcy legislation

Venture capital

Entrepreneurial motivation

Entrepreneurship education

Labour market regulation

Restart possibilities

Personal income tax

Significant correlation Insignificant correlation


Step 5: Critical policy areas are identified- Comparative analysis

0% 20% 40% 60% 80% 100%

Tech transfer

Stock markets

Traditional business education

Entrepreneurship Infrastructure

Capital taxes

Entry barriers/deregulation


Loans





Personal income tax

Venture capital



Business tax & fiscal incentive


Highly prioritised Not prioritised


Step 5: Critical policy areas are identified- All in all

Not significantly correlated with performance indicators

Significantly correlated with performance indicators

High priority in top-3 countries

Business tax & fiscal incentiveAdministrative burdens Wealth & bequest taxAccess to foreign markets

Venture capitalRestart possibilities Bankruptcy legislation Entrepreneurship education Personal income tax Labour market regulation

Low priority in top-3 countries

Exit marketsCapital taxesTraditional business educationEntrepreneurship Infrastructure LoansTech transfer

Entrepreneurial motivationEntry barriers/deregulation


BUT! Can we learn from each other?

> No clear cut answer exists to this question.

> Each country is unique and, therefore, there will always be limits to cross-country comparisons and the transferability of policy experiences.

> We make a slightly blurry distinction between policy areas and specific policy initiatives.


My conclusions

> Most important:> Venture capital> Bankruptcy legislation (restart possibilities) > Entrepreneurship education > Personal income tax > Labour market regulation


The Danish Entrepreneurship Index 2005


Main conclusions - performance

> Denmark trails the best-performing countries considerably when comparing the share of growth entrepreneurs regardless of the definitions applied.

> However, Danish start-up rates rank among the best.


Main conclusions – business environment

> The Danish business environment for entrepreneurship trails the best-performing countries in some areas, and are among the best in other areas.

> The analysis suggests that Denmark should pay close attention to the areas of entrepreneurship education, personal income taxes, venture capital, private advisory services, as well as the possibility of restarting following bankruptcy.


Main conclusions

0 (Worst framework conditions)

DK 2004-05

On a scale from 0 to 100 the top-3 posts a 69.7 point score, down from 70 points.

100 (best framework conditions)

Framework conditions

Top-3 2004-05

On a scale from 0 to 100 Denmark posts a 56.4 point score, up from 53.3. points.

0 (Worst performance)

DK 2004-05

On a scale from 0 to 100 the top-3 posts a 79.0 score down from 82.1

100 (Best performance)

On a scale from 0 to 100 Denmark has improvedits score from 26.9 points til 28.3 points.

Performance

Top-3 2004-05

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dkDenmark aheadDenmark trailing

5-10 0

Technology transfer

Access barriers


Loan

Overall framework conditions

Venture capital

Exit

Wealth and bequest tax



Capital taxes

Trad. business education

Government programs

Market access

Capital

Ability

Income tax




Culture/Motivation

Incentives


-5

Corporate tax (including fiscal incentives

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - www.foranet.dkDenmark gainingground

Denmarkloosingground

Venture capital

Exit

Wealth and bequest tax



Trad. business education

Capital

Ability

Income taxes

Corporate taxes


Culture/motivation

Incentives

(Not updated)

Capital tax (Not updated)


Public entrepreneurship infrastructure (not updated)

Den. improvingframeworkconditions

Denmark worseningframework conditions

4-4 0

Change Denmark Change DK–Top-3


Market access

Technology transfer

Loans


Motivation

Overall framework conditions

4-4 0

Change top-3

4-4 0

T3 improvingframeworkconditions

T3 worseningframeworkconditions

Entry barriers


Low correlation with performance

Significantly correlated with performance

High priority among top-3

Corporate taxWealth- and bequest taxAdministrative burdensAccess to foreign markets

Entrepreneurship educationBankruptcy legislationRestart possibilitiesPersonal income taxVenture capitalLabour market regulation

Low priority among top-3

Exit Capital taxesGovernment programsTrad. business educationLoan capital Technology transfer

Culture/motivationEntry barriers


Main conclusions:

> Policies must match the set of macro-economic policy objectives, so the definitions need to reflect that.

> The analysis suggests that restart possibilities, personal income tax, labour market regulation, entrepreneurship education, venture capital and bankruptcy legislation could potentially be the most important policy areas for stimulating entrepreneurship performance.

> Countries can use the presented analysis to come up with a prioritised list of important policy areas, in which they lag behind compared to top-performing countries.


Limitations

> The main problem is a lack of time series for the applied indicators, which makes causally tests difficult.

> Only 18 OECD countries are included in the analysis due to too many missing values for the remaining countries, which makes multiple-regression analysis difficult.

> Much work is needed to improve the availability of data in order to improve the quality of the analysis.

Documents

A General Policy Framework for Entrepreneurship Anders Hoffmann, Ph.D. Creative Director, FORA – Centre for Economic and Business Research