outcomes from:understanding entrepreneurship: issues and numbersentrepreneurship indicators project expert workshop26-27 october 2005
The first phase of the Entrepreneurship Indicators Project will culminate in the delivery of a plan for an international entrepreneurship indicators programme. This work plan will be presented at the end of February 2006. Among other elements the plan will include recommendations on an international data collection initiative, content, data sources, management and governance, as well as, importantly, plans for engaging countries and other stakeholders in the programme. The Expert Workshop, held in Paris on October 26-27, 2005, was designed to provide critical inputs to that overall plan.
The Expert Workshop involved some forty selected experts from government, academia and the OECD. The agenda of the meeting can be found in Annex 2 of this paper. Through their invited presentations and discussions they were asked to debate and advise on the programme and plans for the Entrepreneurship Indicators Project. More specifically, the Workshop participants were asked to address seven questions:
Why is Entrepreneurship important?
What are, or should be, the key policy issues?
What does the existing data offer?
Where are the remaining data gaps?
Is there a need for standard definitions?
How can data best be assembled or developed?
How can countries be engagedto join and support an international programme?
This document provides a summary of the key outcomes of the workshop.
Why is EntrepreneurshipImportant?
The Workshop underscored several aspects of the importance of entrepreneurship. The first relates to the link between entrepreneurship and economic growth.The second concerns the link between entrepreneurship and job creation. And the third concerns the role that entrepreneurship could play in improving the economic and social position of groups within society.
There is some debate about whether entrepreneurship causes economic growth or whether it is a facilitator or enabler of economic change. The evidence appeared to be that both entry and exit played a very powerful role in enhancing productivity.If anything, it appeared that if entrepreneurship led to the more rapid exit of low productivity firms, that this was particularly desirable when they were replaced by new firms that were more productive.
FORA, the Danish Ministry of Economic and Business Affairs' Division for Research and Analysis, did a study using a database in Denmark containing all firms to investigate the link between high growth firms and multi-factor productivity (MFP). On the x-axis is the growth level within a given industry (100 industries and all firms less than five-years old in Denmark). When one looks at the growth rate within that industry and the MFP (turnover) within that industry, the graph confirms that high productivity firms do grow.
The link between entrepreneurship and employment growth was also emphasised. Entrepreneurship is often closely associated or equated with SMEs and hence, the size of the firm. However, it was shown that in looking at the net employee change, after two years of age, every cohort loses, not gains employment. The reason for this is productivity. Therefore, when we look at entrepreneurship as being important in terms of job creation, it is actually the age, and not the size of the firm that is important. In this sense, it is important not to equate all SMEs, not matter what the age, with entrepreneurship.
It was recognised that entrepreneurship could also play an important social function. Some ethnic minorities, throughout history, have seen entrepreneurship as a way of escaping from disadvantage, particularly the case for recent immigrants. In other cases women have often not been able to be considered as equals in the male-controlled corporate structure and have seen entrepreneurship as an appropriate and desirable employment opportunity.
What are, or should be, the key policy issues?
Despite the explosion of entrepreneurship research in recent years, there still seems to be a disconnect between research and policy. Anders Lundstrom has recently characterised Swedish initiatives in support of entrepreneurship as “trial and error”, “not based on any theoretical foundation”[1]. And Sweden is not alone; many other countries rely on case studies and best practices, rather than empirical evidence, to assess the impact of their entrepreneurship programmes.
With respect to broader entrepreneurship policy issues, five specific policy questions emerged from the Expert Workshop.These were:
What kind of a framework can be used to examine priories in entrepreneurship policy?
What are the most relevant policy areas?
What can be learned from more enterprising countries?
Can less enterprising countries change their policies so as to become more enterprising?
Will these policies actually make a difference?
What kind of a framework can be used to examine priories in entrepreneurship policy?
David Storey asked the participants to consider entrepreneurship policy from the point of view of the constraints that prevent one from becoming an entrepreneurship. The constraints that could form the basis for policy could be, for example:
Ideas/opportunity
Financing
Motivation
Information
Lack of Skill
Anders Lundström, President of the Swedish Foundation for Small Business Research, looks at entrepreneurship policy from a model that 1. provides motivation, 2. provides skill and 1. provides opportunity. According to him the policy for entrepreneurship and SME overlap. Entrepreneurship policy begins at the pre-start phase, through the nascent phase, up until the post start-up up to 42 months. The SME policy begins at the nascent phase and goes until maintenance and expansion. Therefore, the overlap phase is between nascent and post start-up to 42 months.
He provides a list of different types of entrepreneurship policy measures, examples of stated problems in implementing the policy, how much research has been done and examples of possible policy initiatives.
Anders Hoffman is creative director of FORA, as the head of the International Consortium for the Dynamic Entrepreneurship Benchmarking. The goal of the Danish government is to be a leading entrepreneurial society, where the most high growth enterprises are launched by 2015. On order to achieve this goal, FORA has elaborated a General Policy Framework for Entrepreneurship to serve as a model for the collection of indicators which can then, in turn, be used to create systematic evaluations and internationally comparable benchmarks of entrepreneurship policies. Dr. Hoffman pointed out that the two main contributions to a policy framework come from Audretsch, Thurik and Verheul (Audretsch et al, 2002) and Lundström and Stevenson (Lundström and Stevenson, 2001, 2002, 2005) which are shown below. FORA’s model follows.
What are the most relevant policy areas?
One of the most important things to keep in mind when setting policy priorities, according to Alistair Nolan of the OECD, is selecting areas that policy makers will support because they believe there will be a yield. Many aspects that have an effect on entrepreneurship will not be of use to policy makers. For example, it has been shown that entrepreneurs who maintain contact with other entrepreneurs tend to be more successful. However, this is not an area in which policy can intervene. Likewise, even though we know the profile of someone who is more likely to become a successful entrepreneur we cannot deny those who are less likely entrepreneurship advisory services.
Mr. Nolan created a wish list of entrepreneurship data to be used in the policy areas gaining increasing importance.
- More time series data to better understand framework conditions and the impact they have in support of high quality business creation is needed.
- Although we have quite a bit of information on regulatory burden and administrative barriers, there is a paucity of information on tax effects.
- Why is there such a difference between the rates of stated preference for self-employment and actual lower rates of self-employment?
- More work is needed on gazelles. They make a disproportionately high impact in terms of growth and employment. Why do they exist and what are the key traits?
- Data related to demographic change. Life expectance increases by one month each year but only 1 in 3 French over the age of 55 are economically active. Japan responds with programmes to encourage older groups to stay economically active. Age based over-sampling in an international survey to gain greater analytical depth could be a possibility.
- Data related to technologicalchange. There are important differences across countries in regards to their patterns of technology use. According to the OECD adult literacy and life skills survey which surveyed 7 or 8 countries, in Norway 7% of the adult population has never switched on a computer. The percentage is 40% in Italy. This is extremely relevant to policy.
Internet using firms have high value added, superior job creation, higher salaries, higher performance, but we do not know the direction of causality. Is it because of the Internet, or do higher performing firms use the Internet?
Technology will bear out in how the services are provided for entrepreneurs. GEM indicates that business angel networks are important in that theyallow entrepreneurs to bypass standard introduction procedures. But it could also encourage angel networks to add value to other services, for example, work with clients on equity for service arrangements, pick out best projects etc.
- Impact of demonstration and motivational effects. Importance of imitation in driving entrepreneurship. Intergenerational component. Many entrepreneurs come from families with a history of entrepreneurship. Women having a husband who is self-employed are twice as likely to choose this path. Is imitation significant, or is it other factors? If you are in an area with low rates of start-ups and imitation is an important variable, then you are likely to have low-rates in the future as well.
- Marital stability in family owned firms could have policy ramifications given that family pensions and mortgages are often tied up in family businesses. Marital and spousal support for couples that are entrepreneurs is not available.
- Regional and local data.
Under what conditions and how will enhancing the birth rate also add to regional growth? The fact that we see strong correlations over time in the birth rate in the same regions, in the same places gives grounds for pessimism about the efficacy of public policy in the ability to change birth rates. However, the policy stakes are sufficiently high and volume of resources dedicated to regional development in the European Union are so great that this is clearly an issue that merits continued analytical attention.
At the regional level there is almost no data examining the impact of sub-national regulations on entrepreneurial activity. There was one study done in the US that looked at statebuilding codes, land use and zoning. This study suggested that there is a significant compliance burden and had an adverse effect on small and minority firms and their start-up decisions.
Individual programmes at local level. Training, incubations, micro-finance are not being examined with any degree of rigor and could provide clues as to interesting things that may be going on in different countries and point to robust policy oriented research agendas.
André Letowski of the Agence pour la Création des Entreprises (APCE) of France suggested that the two biggest obstacles to entrepreneurship in France are the parents and the media. Parents tend to warn their children against risk taking instead of encouraging it and prefer their child choose a secure path as an employee. The media focus on examples of the extremely rich, successful and intelligent entrepreneur which gives an image of inaccessibility and intimidation, as opposed to presenting entrepreneurship as possible career choice for everyone.
The International Consortium has defined the relevant policy areas based on 61 indicators and assessed them on the basis of the quality dimensions relevance, accuracy and availability. They then tested them for correlation between the indicators chosen for performance and those chosen to measure the business environment across countries. As correlation was demonstrated, they then chose the areas the most critical to investigate. Then they compared Denmark’s performance in those areas to the best performing countries and came up with a list of the most critical policy areas for Denmark.
Those areas deemed the most important in Denmark are:
Venture capital
Bankruptcy legislation
Entrepreneurship education
Personal Income tax
Labour market regulation
What can be learned from more enterprising countries?
It is clear that the United States, which is generally taken as an exemplar of an enterprising country has low tax rates, low levels of regulation, but also low levels of business support. Its policy focus is on enhancing competition with the private sector playing the leading role. Denny Dennis from the NFIB Research Center stressed that the US has a competition policy, not an entrepreneurship policy.
In contrast Europe is a relatively high tax economy with high levels of social security and high – if decreasing – levels of regulations.
It is also clear that it is not simply SME policy which influences the performance of small firms and contributes to overall levels of enterprise.Indeed the view of the workshop was that it was overall economic policy that was most influential upon the competitiveness of SMEs.It was also clear that government budgets earmarked specifically for SMEs were comparatively modest in comparison with overall government funding from which SMEs benefited.
Can less enterprising countries change their policies so as to become more enterprising?
The view of the workshop was that it is possible to change policies. From the paragraph above, it is clear that other developed countries could change their policies to become more like the US, but the price of so doing may be too high.
Specifically such changes would require a greater acceptance of a less equitable distribution of wealth. It would also require public acceptance of taxes being lowered on wealthy individuals and a reallocation of power away from suppliers and towards customers. There would clearly be strong vested interests that would oppose such changes and, given the inevitable short-term horizon politicians, such long-term changes might be difficult to implement. Nevertheless, the key point is that the knowledge of what is required is available.
Will these policies actually make a difference?
The workshop had different views on this question. Some participants pointed to the changes which the United States has undergone since the 1960s when it was essentially a corporatist society. During the intervening period it has experienced significant cultural change moving towards a greater focus upon enterprise. The economic success associated with these changes, has served to reinforce movements towards an increasingly enterprising economy.
However, other participants were less convinced about the possible impact policy change. In particular, they were unsure whether allof the elements in the policy package were equally important, so that a ‘pick and mix’ approach was not possible. To take a specific example it might be that even if a country spent heavily on entrepreneurship education and business support, but failed to reform a generous social security package the impact upon enterprise might still be modest. Finally, as was noted in the paragraphs above, the ‘price’ for becoming an enterprising society might be unacceptable to many.
Existing Data
A number of activities are currently available at international or national level concerning the collection of data on entrepreneurship. The list is far from being exhaustive; it is rather an initial effort accounting for existing data that directly or indirectly refer to some sort of entrepreneurial activity.
At the international level, the Global Entrepreneurship Monitor (GEM[2]) is a research programme initiated in 1998 which accounts for an annual production of harmonised data on entrepreneurship in some forty countries. Along with generic information on the population structure (gender, age, geographic distribution, ethnic background, education, etc), GEM collects standardised information on total level of national entrepreneurial activity (TEA) and factors that account for national differences in the level of entrepreneurship, so as to allow for assessment of policies for enhancing entrepreneurship and estimation of the role of entrepreneurial activity in national economic growth.
At the European level, two surveys are worth noting: the Eurostat Factors of Business Success (FOBS) and the Eurobarometer (European Commission). The FOBS, involving 15 European countries, complements information on harmonised data on enterprise births, survivals and deaths[3] where determinants of success and growth of newly born enterprises, motivations for starting up ones own business, barriers and risks encountered during the first years of existence and business plans for future development are explored. The target population of this survey are enterprises that survived for more than three years, hence the current survey is addressing newly born enterprises that entered the economy in 2002 and survived through 2005[4].
The European Commission has also been conducting longitudinal analysis of dynamic trends for the past five years through the Eurobarometer survey. It measures European and American attitudes on annual basis through telephone interviews. Such a summary represents the first effort in a series of annual reports investigating the scope and manner of regulations in order to enhance business activity.
The Panel Study of Entrepreneurial Dynamics (PSED) is designed to improve the understanding of the start-ups phenomenon (Reynolds, Carter et al.).The PSED is a U.S. research programme that provides longitudinal data on business formation. The modelling investigates external factors that may influence entrepreneurship: from a political, sociological and economic prospective. The survey uses a mix between detailed phone interviews and self-administrated questionnaires to contact respondents.