What we need is more and more of our own people having a go off their own bat – becoming entrepreneurs. Most of these imaginative and courageous people will lose their stake. But some will not. The successful few will attract emulators, competitors, suppliers and users in new, fast-growing industry clusters. After a while the economy will be transformed.
The real question, therefore, is how to stimulate business start-ups and trials and rapid expansions of young businesses – how to stimulate entrepreneurship.
The answer is: smaller government, lower taxes, less business regulation and freer labour markets. These changes will not only encourage more start-ups and new industries, they will also help existing businesses to expand by cutting their costs, and making it more profitable to invest.
In my last article, I reviewed the evidence in support of this economic growth program by looking at its role in West Germany’s economic miracle following World War Two.
In the present article, I look at policies to stimulate entrepreneurship and small business based on two further significant pieces of evidence:
- Lois Stevenson and Anders Lundstrom, Patterns and Trends in Entrepreneurship/SME Policy and Practice in Ten Economies, Vol 3 of the Entrepreneurship Policy for the Future Series, Swedish Foundation for Small Business Research, 2001/2; and
- European Commission, Enterprise and Industry Directorate-General, Report of the Expert Group: Models to Reduce the Disproportionate Regulatory Burden on SMEs, European Commission, May 2007.
In my next article I will review policies in the United States that have allowed some States to grow fast and some to grow slowly, based on work by Stephen Moore, Arthur B. Laffer and Joel Griffith – 1,000 People a Day: Why Red States Are Getting Richer and Blue States Poorer.
In their study of policy and practice in ten economies, Stevenson and Lundstrom say that there is growing global recognition that dynamism, innovation and entrepreneurship are central elements in the transition from a “managed” economy to an “entrepreneurial” economy.
They note that adverse effects on the level of entrepreneurial activity flow from a dominant public sector, the existence of strict labour laws, high non-wage labour costs and negative attitudes of the population towards entrepreneurship. Countries with large public sectors relative to the private sector and strict labour laws tend to have lower levels of business ownership.
A high level of unionisation and worker protection, large public sectors, rigid labour laws, high taxation and high social security costs militate against entrepreneurial activity.
Policies reviewed that raised the level of entrepreneurial activity included:
- Reducing taxes, especially income taxes, capital gains taxes, and inheritance and estate taxes.
- Providing tax relief for start-ups through reducing corporate tax rates on small profits, giving start-ups tax allowances and exemptions, and reducing taxes for sole proprietors.
- Enhancing the possibilities for new and young firms to raise their own and outside capital through micro-loan funds, crowd funding, loan guarantee programs, venture capital funds and business angel networks.
- Improving the risk/reward ratio associated with self-employment compared with paid work by allowing under- and un-employed people to start their own businesses without losing unemployment and other benefits.
- Reducing the complexity of starting-up a business and its compliance costs, simplifying licensing and permit requirements, introducing one-stop shops.
- Providing business support programs and services for new entrepreneurs through incubators, web portals, advisory services, one-stop shops, mentoring and networking, including in regional areas.
The European Commission’s Expert Group found that the regulatory burden on small businesses could be as high as 10 times the cost (per employee) of the burden on a large business, because there is a large fixed element in these costs. If start-up and small businesses are to thrive, efforts need to be directed at cutting the burden of regulation imposed on them.
The experts identified 10 categories of good methods for doing this, including exempting start-ups and small businesses from the regulations (which was the most widely-used method), reducing the obligations imposed on them by the regulations, simplifying the regulations for start-ups and small businesses, providing on-stop shops for dealing with all regulations in the one place and all together, and similar ideas.
On the basis of their analysis of good practice cases, the expert group put forward a set of recommendations on how to improve the regulatory environment for small businesses, including:
- Think small first. Embed this principle systematically in all new policies that bear on businesses.
- Evaluate the special impact of new rules on small businesses and systematically include an evaluation of special options for small businesses in impact assessments.
- Make simplification and improvement of the regulatory environment a permanent task.
- Exempt small businesses whenever possible. Use partial or at least temporal exemptions if a full exemption would defeat the purpose of the regulation.
- Give businesses the possibility to interact with government and take care of administrative duties electronically.
- Consider reduced fees, faster service and similar forms of privileged treatment for small enterprises.
A number of Stevenson and Lunstrom’s suggestions as well as the European Commission’s Expert Group’s fall under Commonwealth jurisdiction.
South Australia has not been loath to look for special treatment from the Commonwealth in Government spending; why should it not look for special treatment in Commonwealth taxes (especially income and capital gains taxes) and regulations (exemptions for South Australian start-ups and small businesses).
Such special treatment could be dressed-up as inexpensive trials in an economically-depressed state that would be continued and spread to other states if they pass cost/benefit evaluations.
Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia.
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