And, of course, if entrepreneurship is so key to fiscal success doesn’t it make good sense to spend public money to help it along? Which explains why it is increasingly difficult to find a country, large or small, developed or developing that does not have some form of programme designed to make the entrepreneurial spirit of its citizens burst into a bright and warming flame.
But do such initiatives actually work?
In a bid to get a definitive answer to this question we decided to look at the Global Entrepreneurship Monitor (GEM) – a survey of entrepreneurial activity in just under 100 countries – for every year between 2002 and 2013, concentrating on its data for OECD countries and supplemented the finding with extra macroeconomic information from both the OECD itself and the World Bank.
And this is what we found:
1. Start-up support programmes have no effect on a country’s entrepreneurship activity
Our study specifically looked at whether the percentage of a country’s adult population involved in a business less than 42 months old was significantly affected by the amount of public expenditure allocated to business start-up programmes intended to tackle unemployment. And the disappointing answer – certainly for those responsible for the funding and the tax payers behind them – was a clear ‘no’. In fact, our study found that the main factor behind a significant rise in effective entrepreneurship was not government handouts, but the level of economic activity in the country. Or to put it another way, if the economy is doing well individuals* will be more likely to take a chance on setting up a new business and if it’s not, throwing cash at them is not likely to help.
2. Start-up support programmes might raise the ‘necessity’ entrepreneurship rate, but not the ‘opportunity’ rate
What do we mean by this? Put simply ‘opportunity’ entrepreneurship refers to the situation where you think you have a good idea for a business and believe you can make it work. And ‘necessity’ entrepreneurship is when you go it alone because you can’t get a job. And you very likely won’t be surprised about which has the better chance of success.
3. The amount of support and protection a country’s unemployed receive is directly linked to the efficacy of start-up programmes
This is perhaps stating the very obvious but is often ignored by political leaders. We therefore see many examples of governments simultaneously investing heavily in both social protection for the unemployed and business start-up programmes for them – a bit like trying to drive an automatic car with both accelerator and brake firmly pressed to the floor – and then being puzzled as to why entrepreneurial activity doesn’t rise.
4. Publicly funded entrepreneurship programmes intended to tackle unemployment do not reduce it
The sad fact, according to our study, is that these specific types of programmes do not reduce unemployment either directly or indirectly. Unemployment only falls if GDP goes up. Which is not to say that entrepreneurship does not play a part in a rise in GDP – of course it must. However, GDP is built on successful entrepreneurship – largely the properly thought out ‘opportunity’ kind which stands the best chance of generating sustainable businesses that generate new jobs. The problem with most publicly funded support programmes is that they end up promoting the wrong type of entrepreneurship – the ‘necessity’ kind.
Getting it right
So what should government do? And what is the best way of them spending our hard earned, euros, dollars, pounds, etc to tackle unemployment and build a better economy? We have a couple of suggestions:
1. Work with the societal and economic context you already have
As highlighted earlier, trying to provide high levels of social protection and stimulate high levels of effective entrepreneurship at the same time just doesn’t seem to work. Governments should perhaps acknowledge how their societies actually work (perhaps even in contrast to the ways they would like them to work) and tailor their incentivisation accordingly. Those with flexible employment models, such as the USA, would therefore be justified in spending heavily on promoting entrepreneurship, while those, such as France, with a protectionist tradition could look at reconfiguring assistance to get individuals back into conventional jobs more effectively.
2. Spend the money on something else
Yes, we really did say that. A healthy, well-educated population is more likely to produce the sort of ambitious, confident entrepreneurs who will develop robust, sustainable businesses and consequent, not just job, but also career opportunities for their fellow citizens. Of course spending on hospitals, schools and universities doesn’t provide the ‘quick fix’ solution so beloved of politicians with an election in prospect. But then it might just be the solution that actually works…