In What Ways Can Governments Encourage Entrepreneurship?

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Government and entrepreneurship are inextricably  connected  with each other. Actions of one imposes consequences on the other.  Keeping the economy healthy,  ensuring and encouraging  environment for an entrepreneurship  are the government’s best interest.

The closing communique of the 2014 G20 Leaders Summit called for accelerated economic growth which  could be carried out  by fostering competition, entrepreneurship and innovation. There was also a call to develop strategies to reduce unemployment rate  by  encouraging entrepreneurship.

The idea of stimulating  economic  and job growth through the use of entrepreneurship and innovation has been a common theme in public policy since  1970s.  MIT Professor David Birch’s report, The Job Creation Process, published in 1979, engendered such interest. 

According to the data, this work showed that jobs in the United States were not created by large companies, but small, independent enterprises. According to its recommendations, government policies should target indirect rather than direct strategies, with a greater emphasis on the role of small firms.

Promoting the development of entrepreneurial ecosystems

Government have been interested  in the development of entrepreneurship and small business  as a potential solution to the problem of slowing economic growth and rising unemployment for more than three decades.  This helped create a new field of ​​research.

This trend has been fueled by the success of iconic “technopreneurs”.   This kind of technopreneurs like Steve Jobs, Bill Gates, Jeff Bezos, or   Larry Page and Sergey Brin have become a showpiece of  the entrepreneurial movement.

It was a Silicon Valley in California  to be one of the most famous centers of high-tech entrepreneurship. And it was not the only place where innovation and entrepreneurship thrive, many governments seeking to stimulate economic growth repeated  what that center did.

Today in every corner of the world there is a “science” or “technology” park. Their format is usually the same: universities and R&D centers are located next to the park, and venture capitalists hover  around looking for deals. Most of them took the  support from government policy.

It is the wish of governments to do what  Silicon Valley did, and  form  and grow  entrepreneurial ecosystems. Such initiatives can be invested in by governments, but  their overall success rate is mixed.

What is an  “entrepreneurial ecosystem” itself?  How   their formation and growth  be dependent on  government policies? This issue was addressed in the first white paper in a series issued by the Small Business Association of Australia and New Zealand (SEAANZ). These  papers aim  to give better understanding of  what entrepreneurial ecosystems are and fuel  a more informed debate about their role in driving economic growth and job creation.

What is an entrepreneurial ecosystem?

Industry clustering and the development of national innovation systems that took place in the 1990s are the base for the  conceptualization  of the “entrepreneurial ecosystem”. Nonetheless, also management writers used this term  to describe conditions which  helped unite  people  and encourage  prospering econimcally.

Once awareness of this concept was raised with the help of an article by  Professor Daniel Eisenberg of Babson College  published in 2010. He  identified  several ways  for creating an entrepreneurial ecosystem.

The first one  was to stop copying Silicon Valley. We should admit that although Valley was successful, it was formed by unique circumstances which means there is a possibilty of being unsuccessful in attempting to replicate it. This became a base  for  the second recipe  suggesting  the  creation  of an ecosystem in local conditions. Development of  existing industries and building  on their foundations, skills and capabilities, rather than trying to create high-tech industries from the very beginning.

Then there is an  importance of involving the private sector from the outset. Here the government is involved  indirectly, and it acts as a  mediator, not manager. When   maintaining  the  growth of such ecosystems,  firms with high growth potential should be the focus of attention. They  can provide  generation of  “big wins” early on.

However, governments should not pick winners or overhaul the system. High-growth firms are  risky in nature, and highly innovative firms are usually unique. They don’t use any kind of magic formula to be successful.  In order to help these firms to succeed  obstacles which prevent them from growing  such as lack of market access, skilled employees or investment capital,   anti-competitive culture, unfair taxation of small firms, and  unnecessary bureaucracy  should be removed.

Eisenberg points out  that in trying  to  stimulate fast-growing entrepreneurial firms,  avoiding from  flooding the system with too much money that comes easely is of great importance.  Government grants and venture capital funds can be examples for the source of that kind of easely obtainable money.

It is crucial to maintain the growth of firms with strong root systems that are able to support their own growth before seeking additional funding.  Such firms must be financially sound; profitable and well managed otherwise their likely success will below.

Encouragement of  sustainable, growth-oriented and innovative firms must be in the spotlight. So, it is more important than the stimulation of new start-ups. It is easy to start a new business, but difficult to develop  successfully.

What can the government do to stimulate the entrepreneurial ecosystem

 Public policy should design  policies that work, but avoid from bringing  about change through direct intervention. A set of general public policy principles for these ecosystems were developed by a  2014 study of entrepreneurial ecosystems by Colin Mason of the University of Glasgow and Ross Brown of the University of St Andrews for the OECD.

They contrast “traditional” and “growth-oriented” approaches to developing  enterprise. The first one is an attempt to  increase  of the total number of firms through business start-up programs, venture capital funding, and investment in R&D or technology transfer.

This model puts forward  “picking  a winner” and therefore  includes business incubators or technology incubators, grants, tax credits and support programs. In fact, such programs are inherently transactional. It does not mean that  they are of no value, but  success through such direct intervention cannot be guaranteed by them.

The “growth-oriented” approach is more relational. The attention is paid to  the entrepreneurial leadership of these growing firms. He tries to understand their networks and how to  expand such networks locally, nationally and internationally.

The most important thing is the strategic intentions of the team running the business.  Firms trying  to grow need help in making connections with customers, suppliers, and other “players” in the ecosystem who can provide resources.

Government ministers can play a critical role in promoting entrepreneurship and innovation. Their role is to instruct government departments and agencies to focus on the issue and develop effective policies.

A minister who understands very well what entrepreneurial ecosystems are, how they are formed, and the role and constraints of public policy, is well placed to achieve more effective results.

Key recommendations for public  policy

Thus, the key recommendations of the state policy for the development of entrepreneurial ecosystems are the followings:

Make business development a government priority. Formulating effective policies for entrepreneurial ecosystems requires the active involvement of government ministers working with high-level government officials who act as ‘institutional entrepreneurs to shape and empower policies and programs.

Make sure public policy is broad in focus. Policies should be developed in an integrated manner and cover all components of the ecosystem, rather than aiming for cherry picking in areas of particular interest.

Allow natural growth, not top-down solutions. Create existing industries that have formed naturally in a region or country, rather than seeking to create new industries in new fields

Make sure all industries are considered to be more than just high tech – Drive growth across all industries, including low, medium and high tech companies.

Provide leadership, but delegate responsibility and ownership.  Adopt a top-down and bottom-up approach, transferring responsibility to local and regional authorities.

Develop a policy that meets the needs of both the business and its management team. Recognize that small business policy is ‘transactional’ while entrepreneurship policy is ‘relational’.

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