Teaching support materials
Entrepreneurship, Small Business and Public Policy by Robert Bennett (Routledge, 2014)
Chapter 1 Why does policy matter to entrepreneurs and small businesses?
Learning objectives
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To understand the policy needs of different types of entrepreneurs and small businesses;
to understand the objectives of policies;
to understand the context for policies: the ‘business enabling environment’ (BEE);
to understand range of possible instruments (see Table 1.1).
Examples
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Targeted policies: loan guarantees, support for exporters, advice and information provision.
Non-targeted policies: effective educational policies; efficient labour market policy; policies
aimed at non-business objectives that influence small businesses and entrepreneurs
disproportionately (e.g. tax policy and regulations); macro-economic policies.
Individual policies are contained within social and institutional norms: the BEE.
Why is small businesses policy important?
1. Small businesses are the vast majority of all businesses in all countries. Even using narrow
definitions they are at least 80 per cent of all businesses, accounting for around half of
output; on wider definitions they are 99 per cent of all firms; hence, as the majority of firms,
all policies need to take account of the managerial capacity of firms.
2. There is some evidence that small firms have been growing more rapidly than large firms in
capacity to create employment and reduce unemployment and state welfare benefits, and
increase taxes and resources for social and other expenditures.
3. They provide potential efficiency benefits in an economy by increasing competition,
increasing the rate of market entry and exit, and helping to limit the adverse effects of
monopolies and inefficient incumbents.
4. They can be significant sources of innovation and new products, with potential for new
industries. Even one new high growth small firm like Apple in the USA or Alibaba in China
can make a major impact on an economy.
5. They offer opportunities for personal independence and initiative, particularly for new
entrants to self-employment and entrepreneurship, as an alternative to employee status in
larger firms with greater personal satisfaction; often beneficial for specific groups such as
young people, ethnic minorities or women; offering opportunities to diffuse development in
developing countries.
6. They are efficient means to organise production for markets where the volume of sales is
small, with low and/or very varied capital needs, and usually where entry costs are low. New
technologies may be making these conditions more frequent; this is important for
developing countries and transition economies.
7. They provide variety and hence wider consumer choice.
8. They can provide alternatives and variety to the supply chain which can improve sales
potential and may reduce costs through offering opportunities for outsourcing; they are
complementary to large firms.
9. They may be able to respond more quickly and rapidly than large firms to new market
conditions and opportunities; some argue that without the ‘heterogeneity and volatility’
provided by entrepreneurs and start-up firms ‘the economy eventually stagnates or even
collapses’ – what Schumpeter called ‘creative destruction’ (Schumpeter, 1942; Carlsson,
1999: 109).
10. They may offer scope for experiment with high risk investments.
What are small businesses?
(i) Entrepreneurs: individuals.
(ii) Owner managers, partners and the self-employed.
(iii) Small and medium sized enterprises (SMEs).The most common policy term: include (i)
and (ii), but also larger and established businesses.
(iv) Other types:
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incorporated non-incorporated;
formal and ‘informal’: informal not formally registered;
family firms;
‘intrapreneurship’ and ‘competence enhancement’: large business that become
more entrepreneurial;
‘corporate venturing’: large businesses setting up subsidiaries (or buying start-up
firms) to provide entrepreneurial feeds, spinout innovative elements or speculate.
Summary of Chapter 1
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You should understand the basics of entrepreneurship and small business policies.
Definitions are difficult.
It is often difficult to grasp the object at which policies are directed.
Policy definitions used in practice, although focusing on small business and entrepreneurs,
often include firms up to businesses of 1,000 or 1,500 employees.
Summary of rest of book
Chapters 2 and 3
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The case for policies.
Constraints on policy.
Chapter 4
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Institutions and meta-institutions and the ‘business enabling environment’.
Chapter 5 (The US)
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The characteristics of ‘the leading entrepreneurial economy’.
Targeted small business policies through a dedicated agency, the SBA.
Chapter 6 (Britain)
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Lessons from the development of ‘the first industrial economy’.
Chapter 7 (Japan and South Korea)
East and Southeast Asia: Government-led economies and SMEs.
Chapter 8 (China)
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The characteristics of ‘a socialist market economy’.
Chapter 9 (Developing and transition economies)
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Challenges for transition from ‘informal’ to ‘formal’ businesses.
Challenges of change in oligarchic economies.
Chapter 2 The case for policy
Learning objectives
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To understand the different cases for intervention:
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institutional
macro-economic
entrepreneurial
market failures/gaps.
To understand how policy instruments are used to meet these policy objectives.
To understand the contrasts between policies for:
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small businesses
entrepreneurs.
Main cases for policy
A. Institutional case: the enabling environment
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Formal principles: laws, standards, regulations;
informal principles: codes of conduct making one form of behaviour preferred to another.
Four basic elements (Baumol et al., 2007):
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policies to make it easy to form a business;
structure of rewards for productive activity through rule of law, property and contract
rights (and IPR) allowing risks to be reliably assessed and encouraging elites to support
change;
disincentives for unproductive activities: rent seeking by existing elites and narrow
interest groups, corruption and illegal behaviour;
incentives for businesses to innovate and grow, by controlling market oligopolies and
monopolies.
Institutions underpin endogenous growth: determine how factors combine by businesses and
supporting agents, e.g. ‘endogenous growth theory’ or ‘new growth theory’.
B. Macro-economic case
1. Government as regulator to meet small business and entrepreneurship needs:
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Challenges:
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relevance
compliance costs
need for better regulation and cutting red tape.
Competition and antitrust regulation:
(i) to prevent fixing of prices or output by cartels;
(ii) to prevent mergers between firms that have dominance or large proportions of
market share;
(iii) to prevent predation or abuse of market power by large firms.
2. Government as economic agent:
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taxation;
procurement rules;
as employer;
distribution and welfare programmes.
3. Government as strategic planner and promoter:
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strategic vision for the economy;
stimulating the knowledge economy, technology and innovation;
increase jobs.
C. Entrepreneurial case
Main targets:
(i) increasing the number of entrepreneurs (the supply side);
(ii) increasing the rate of converting entrepreneurial ideas into projects and new businesses
(demand side);
(iii) increasing the rate of growth of entrepreneurial businesses once established.
Six main policy channels (G1 to G6) (see Figure 2.1):
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Channel 1 government influence on demand conditions: R&D, reducing tax disincentives,
antitrust and regulatory activity.
Channel 2 government influence on the supply side: educational policy (what is taught and
how), welfare and tax policies to increase incentives to become entrepreneurs.
Channel 3 fill market gaps in finance, knowledge and information, e.g. by loans, grants,
subsidies, information agencies and advisors.
Channel 4 further supply-side actions to influence preference for entrepreneurship and risk
attitudes: fostering entrepreneurial culture through education; media and government
portrayal entrepreneurship.
Channel 5 influence on the ‘choice filter’ to improve entrepreneurial judgement.
Channel 6 demand-side intervention, competition and anti-trust policy, property rights,
regulations allowing new entrants.
D. Market failure case
(i) Information gaps;
(ii) finance gaps ‘Macmillan gap’;
(iii) training and R&D.
Overview
Gaps – causes – policy actions (see Table 2.1).
Exercises
1. Which case do you believe is strongest for policy intervention in your case study area:
institutional reform, macro-economic needs, entrepreneurism, endogenous capacity
building, strategic vision?
2. How does the case for policy intervention differ between countries or policy fields studied
by other students in your peer group?
3. What are the main contrasts between polices to encourage entrepreneurship and policies to
encourage SMEs?
Chapter 3 Constraints on policy
Learning objectives
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Is there a valid macroeconomic case and do significant market failures occur?
Is there a demonstrable ‘need’ and, given the effects of bureaucracy and clientalism, can the
need be met effectively?
Can we ever know if policies are effective?
Can targeting help to mitigate policy deficiencies?
See Keynes
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Actions should be restricted to the aggregate level: the economy as a whole.
Small firms have an ‘animal behaviour’ that makes them too varied and unpredictable for
effective government policy.
The views of entrepreneurs (Box 3.1)
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The best US presidential policy is ‘Back off and let us do what we do. Don’t help, don’t
harm!’ (US entrepreneur during the 2012 presidential election, quoted in Wave, 2012).
Rather than ‘tinker with taxpayers’ money’ to give small business supports and loans, it
would be ‘better if businesses retained their money in the first place. Less government
means enterprise can get on with running successful businesses’ (UK entrepreneur Roger
Dudding, letter in IoD Director Magazine, February 2009: 27).
‘Most small business policies are ineffectual, over-bureaucratic, and inaccessible’ (Jim
Hewitt, UK Engineering Alliance, quoted in Financial Times, 7 May 2003).
‘Current [Japanese] SME policies are for large SMEs after all … The current subsidy system is
difficult for small-sized business operators to use’ (CFSMEs, 2012: 12).
Possible cases
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A valid macro-economic case?
Do significant market failures occur?
Is there a demonstrable need?
Can needs and gaps be met effectively?
Design principles
(See box 3.1.) To meet:
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information principle
monitoring-intensity principle
control principle
incentive-intensity principle
the Ratchet effect
risk neutrality.
Positive harm? The dangers
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Deadweight: policy supports to what would have happened anyway.
Displacement: policy support to one business undermines the costs or markets of other
businesses.
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Zero-sum: a special form of displacement: policies in one locality shift investment from
elsewhere – pure deadweight, and beggar-thy-neighbour.
Crowding out: policy support undermines market and voluntary sector providers through
subsidies and political incentives.
Dependency: policy supports provides the only economic base for business survival.
Moral hazard: government support acts, like insurance, to make businesses less careful and
efficient, and/or distorts delivery partners to ‘chase the funding’. Greater risks result in
higher failure.
Adverse selection: policies target the weakest because they need support, rather than
looking for opportunities with greatest economic payoff.
Distortion of incentives: policies are to distort incentives to favour small business,
encouraging capital, labour, entrepreneurship or innovation to favour small size and play an
‘eligibility game’, with no benefit for overall economic efficiency.
Easy options: because policies are difficult to design effectively, easy options for targets are
preferred.
Perverse side effects: tax benefits and preferential regulatory treatment encourage (i)
smallness creating a ‘notch problem’ at the size threshold (ii) a culture problem, to think it is
better to stay small.
Clientalism and bureaucracy
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Political objectives;
bureaucratic creep and competence;
slow policy termination;
clientalism: political lobbies and pressures.
Will we know if policies are effective?
Upward biases from:
(i) adverse selection from eligibility criteria;
(ii) self-selection bias that those using schemes are most likely to be favourable to them;
(iii) selection bias from the advisors and agencies delivering them.
Possibilities for targeting
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Can reduce expenditure by focusing resources where they are ‘needed’;
easier to market;
can increase value added.
Common forms of targeting (see Box 3.2)
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Stages of business development or life cycle;
types of business;
factor inputs and resources.
Exercises
1. In countries where you are developing case studies, find statistical information on the size of
market failures or other gaps affecting entrepreneurs and small businesses; how large are
they relative to the whole economy?
2. Taking examples from previous evaluation studies referred to here, or in your case study
areas, how valid are they, and what do they show about the most effective policies?
3. Taking examples of one small business or entrepreneurship intervention, analyse its
structure of principal-agent relationships, and categorise the incentives for each main agent
involved. Compare your findings with others.
Chapter 4 Policy institutions and meta-institutions
Learning objectives
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To understand how firms and economies evolve over time;
to understand the role of institutional meta-structures;
to understand the contrasts between structures such as ‘strong states’.
Lessons from business history
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No natural tendency for institutions to improve; can get worse.
Institutions are constrained from the past: both positively and negatively.
Over the long run this results in striking differences in performance of firms and economies.
Small businesses depend more heavily on institutions and externalities than large
businesses.
Every institution, rule or legal structure reflects the different interest groups at the time they
were enacted by government, small firms are usually ignored.
Strong interest groups at the start defend the rules benefiting them, and suppress
innovative and entrepreneurial alternatives (Olson, 1982; Acemoglu and Robinson, 2006).
Powerful interests dominate over weaker.
Large firms increasingly distort policy decisions away from economic efficiency and benefit
over small ones and ‘entrepreneurs’.
All entrepreneurism can be distorted into ‘political entrepreneurship’ over economic
innovation.
Meta-institutions and institutional ‘toolkits’
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Institutional structure changes most easily and at lowest cost when there is a metainstitution with wide legitimacy that encourages elites and the wider populations to jointly
participate.
Tool kits
e.g. World Bank, 2010 (IFC, 2011). Toolkits for improving the quality of the business enabling
environment (BEE):
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improve operating environment through basic regulations supporting business
institutions and transactions;
legal and administrative reform to reduce compliance costs and rebalance workers’
rights, health and safety regulations with the modern conditions of SMEs;
strengthen agent capability for advocacy to ensure improved regulations are
implemented and enforced transparently.
Other examples
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AfDB (2013) Fund for African Private Sector Assistance Toolkit
ILO (2009) BEE Toolkit.
ADB (2000, 2009) BEE Toolkit.
European Commission (EC) acting as ‘toolkit’ for transition economies (see Design
principles: Table 4.1):
 Green Paper on Entrepreneurship (EC, 2003)
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SME Action Plan (EC, 2004)
Small Business Act (EC, 2008).
Institutional regimes make change easier or harder (see Box 4.1)
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Strong state, state-led, or government-guided;
oligarchic states;
big-firm capitalism or managed economy;
entrepreneurial.
Comparing institutional regimes (see Table 4.2)
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Steps for state-led success (see Box 4.1).
Exercises
1. Develop a checklist of current entrepreneurship policies compared to the components of the
toolkits listed here and on the various agency websites. How far do your case studies meet
the needs for institutional change?
2. Using case studies, examine how different parts of entrepreneurship and small business
policy are held back by state industries, state involvement, oligarchies, large firm dominance
or other institutional features. Again a checklist may be used.
3. Compare the ‘comparative institutional advantages’ of your case.
Chapter 5 Small business and entrepreneurship policy in the USA
Learning Objectives
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To understand the claimed attributes of the leading entrepreneurial economy, including
philanthropy.
To understand the strengths and weaknesses of the policies of the US SBA.
To understand tensions in SBA and difficulty of shifting policy from large SMEs to
entrepreneurs.
‘Exceptionalism’ as the leading entrepreneurial economy?
Key features of US entrepreneurism and their policy implications:
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Individuals identify the opportunities and exploit them. Policies focus on education and tax
reform, deregulation, and withdrawal from dense networks between large firms and
government (corporatism).
Dynamic firm-size structures, where firms grow or decline in line with new opportunities.
Policies accept this by not supporting failing industries or firms, enforce antitrust,
deregulate, and encourage foreign investment
Within successful larger firms intrapreneurship increases. Policies encourage large firm
adaptation through deregulation, labour market and tax reform.
Within successful small firms and start-ups investment is led by innovation. Policies
encourage entrepreneurism to encourage new entrants.
Knowledge transmission mechanisms are essential for spillover and externalities to other
entrepreneurs to act as growth multipliers. Policies encourage networking and links between
knowledge producers (universities and R&D establishments) and knowledge
commercialisers.
US model Transferable?
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Unique features of US history.
Entrepreneurship is ‘the process by which agents transform knowledge into wealth …
and reconstitute wealth into opportunity for all.’ (Acs and Armington, 2006: 155)
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Philanthropy model relies heavily on partners and intermediaries for delivery with significant
principal-agent problems – at odds with encouraging initiative and self-help.
Not all philanthropy is advantageous; some is entirely political or self-seeking for the donor.
Corporate responsibility of businesses is to make a profit – everything else is ‘hogwash’
(Friedman, 1970).
Business or entrepreneur donations are just a form of taxation on shareholders and
customers. It is for government to tax. It is for businesses to run their businesses.
Philanthropy supplements normal business activity and government. Public services and
externalities have to be paid for.
Entrepreneurship does not need a philanthropic justification.
US Small Business Administration: the SBA
Development of the SBA:
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Began 1954 to fill ‘financial gap’/‘Macmillan gap’ chiefly through loans.
Expanded 1958 to include Small Business Investment Companies (SBICs).
Expanded in 1964 for Equal Opportunity Loans (EOL).
Further expansion in a wide range of crises: disaster relief, military veterans; convenient
vehicle for federal government to aid varied ‘good causes’. Not all specifically small business
policies.
Administered under House Small Business and Entrepreneurship Committee (SBCE) and
Senate Small Business and Entrepreneurship Committee (SBCE).
Budget from annual Congress votes, about $1bn per year, plus costs of loan guarantees
businesses fail to repay, about $6–7bn per year; guaranteed loans outstanding $70bn 2011.
Main programmes
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Loans (see Text p. 67; Table 5.1):
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Chief is Basic 7(a) Loans: for starting, acquiring and expanding small businesses: the
longest standing and largest activity.
Procurement Assistance (8(a) Prime Contracting Assistance).
Counselling and education of potential and current entrepreneurs through many partners
and centres.
Research Grants to small business R&D through federal agency R&D: $15bn chiefly from the
federal departments.
Small Business Innovation Research and Small Business Technology Transfer: the largest US
small business grants: R&D funding to research collaboration between businesses and nonprofit research institutions.
Community Adjustment and Investment Program (CAIP): assistance to US companies in
other countries affected negatively by North American Free Trade Agreement.
Advocacy: acting as a representative of small business interests, since the 1970s through the
SBA Office of Advocacy.
Assessment of the SBA
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Advocacy: often weak. Most effective advocates usually NFIB and US Chamber of
Commerce.
Dilution: has given most support to medium-sized and larger firms.
Swamping and the ‘pork barrel’: survival of the SBA largely depends on response to political
pressures from Congress and the House and Senate Committees to support pet ‘good
causes’ and specific businesses in their localities.
Fraud and malfeasance: more than 68 per cent of 7(a) loan guarantees are made by lenders
using delegated authority with limited SBA oversight: high risk lenders account for 80 per
cent of outstanding loans in 2010. Frauds from guarantees made by loan packagers and
partners to high risk or ineligible businesses lacking repayment ability. Independent auditors
found 27 per cent improper payments 2009: (SBA Office of Inspector General, 2009).
Adverse selection, moral hazard and inefficiency: long-term default rate over the life of SBA
loans is roughly 14 per cent for 7(a) Loans; low rates of ‘graduation’ from 8(a) procurement
assistance show continuing dependency; two thirds of SME contractors fail to fulfil their
contracts (long standing issues: GAO, 1980, 1981, 1994, 1995, 2003, 2013a).
Partnership and principal-agent problems: Partners reduce SBA administrative costs and
provide expertise, but SBA unable fully to police them: principal-agent problem. Most
partners too small to provide effective controls and support. Most have fewer than five
staff; pressure from policy targets to meet quotas (evaluations: GAO, 1994, 2003, 2013a,
2013b).
Exercises:
1. Using recent reports on the SBA and related websites, how far does current US policy
support entrepreneurship or remain mainly focused on SMEs and larger firms?
2. Using the material in historical studies of the SBA and recent evaluations, develop a checklist
of SBA successes and failures: what do you feel the balance has been between the two?
3. How far can the policies claimed to characterise the US entrepreneurial economy be applied
in your case study or region?
Chapter 6 Britain: policy evolution in the ‘earliest industrial nation’
Learning objectives
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To understand institutions and general economic policies in early economic growth.
To understand the role of small business and entrepreneurship policies relative to other
policy objectives.
To understand different models for delivery of business advice and consultancy.
Institutions and firms in the ‘earliest industrial nation’
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Leading formalised law and institutions from the seventeenth century (North and Weingast,
1989; North, 1990; Mokyr, 1990, 2009).
Britain as prime example of a modern economy where meta-institutions had early wide
legitimacy, opening the way for successive waves of entrepreneurship and international
trade expansion.
Led to early reduction of elite privileges and unproductive patronage positions.
Path dependency was broken, acting as a ‘tipping point’ for subsequent evolution.
British institutions were not optimal but they were ahead of most other countries.
Origins of small business policy
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No early small business policy: reliance on open markets from the nineteenth century.
Small business policy not seen as necessary until 1914 and later – see Marshall.
Increasing business concentration during the twentieth century; at its height in the 1960s
and 1970s.
Supported by government committees and tripartism (‘corporatism’ of trade unions,
government and large businesses).
Bolton Report (1971) was first significant shift to smaller firm policies.
Followed a ‘market failure’ argument to fill gaps for small firms:
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support competition policies to improve market entry;
establish of a Small Firms Division within government ;
press banks to provide better support to small firms;
Small Firms Service (SFS) offering information to small businesses.
Current small business policies
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Deregulation: since 1996, now under Regulatory Policy Commission (RPC).
Tax incentives for small firm investments: introduced in 1995, subsequently extended:
Enterprise Investment Schemes (EIS), Venture Capital Trusts, more general venture funds,
and Business Angels/Mentors.
The Small Firm Loan Guarantee Scheme (SFLGS): considered by Bolton and rejected. Loan
guarantees were first introduced in 1981, and expanded as Enterprise Finance Guarantees
(EFG) in 2009; also Small Firms Training Loans, Career Development Loans and various startup loan assistance, with a Seed EIS since 2012.
Support for R&D in small firms: historically low, with preference for pure research in
universities and a bias towards large firms. Shifts in university funding since 2000 emphasise
technology transfer through so-called ‘third stream funding’. Some graduate mentoring
programmes.
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Export Credit Guarantee Scheme (since 1917): marketed through Trade Partners UK,
renamed UK Trade & Investment (UKTI) in 2010.
Non-specific supports: general government policies but despite many initiatives since the
1980s, businesses still complain about poor, skills, literacy and numeracy; poor
infrastructure; and perverse welfare programmes.
Business advisory services
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Britain a major example of using advisory services as a major policy.
Has used different delivery partners, forms of management, and methods of financing.
Experiments fall into five periods (See Table 6.1).
History of support is an increasingly complex and expensive service.
Good example of ‘bureaucratic creep’ and political entrepreneurism.
Ever larger adventures to supply services with little demonstrable market failure
justification.
Assessments of the different models
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Take-up and satisfaction (see Table 6.2):
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Management and cost-effectiveness:
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mixed: private sector and voluntary better than public of single purpose public.
The use of fees:
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mixed, with decentralization low on effectives and high on costs: generally simpler
has been better.
little evidence of benefits for client involvement or satisfaction.
Wider lessons.
Quality of advice, effectiveness, and client satisfaction significantly higher when managed by
partners with private sector expertise in established markets.
‘Turf wars’ between partners limit integration of services, and reduce referrals.
Targets for raising fee income are unrealistic, severely distort manager and advisor
behaviour, are resented, and make referral less likely.
Personal business advisors (PBAs) prove problematic. Their establishment presupposed
broad expertise many did not have, and a ‘need’ for continuing relationships most SMEs did
not want. The main factor behind quality variability – ranging from a few SMEs highly
satisfied to many dissatisfied.
Exercises
1. How far, and in what ways, does British historical evolution provide indicators of
institutional changes possible elsewhere to support entrepreneurism?
2. As far as you can judge from reports, websites and other reading, which current British
policies are most important: those specifically aimed at small business and entrepreneurs or
general policies supporting economic stability?
3. Compare British advice schemes with those in your case study; what lessons can be learnt to
improve such schemes?
Chapter 7 East and Southeast Asian ‘exceptionalism’: Japan and South Korea
Learning objectives
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To understand special structures of East and SE Asia for entrepreneurship and small business
policy.
To understand role of technology champions and related supply chains the state-led model.
To understand the strengths and weaknesses of East and SE Asian state-led model.
Underpinnings of East and SE Asian success
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Remarkable growth from the 1960s until the 1997 financial crisis: identified as ‘exceptional’
and ‘Asian Miracle’. Factors behind growth, World Bank (1993):
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macro-economic stability, stable finance, high investment, openness to foreign
technology;
selective interventions to prioritise business environment, investment, savings,
credit, low interest rates, fixed exchange rates, trade control and a heavy export
push;
however, World Bank down-played the importance of state intervention and overplayed the benefits of ‘Washington consensus’ liberalisation. Has led to revived
interest in positive role of government.
Key role of SMEs:
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absorption of shocks, by offering diversified response to financial crisis and mopping
up unemployed;
increasing TFP, often more rapidly than in large firms (especially in China);
innovation often as high as large firms, with clusters and techno-parks sometimes
significant through organic development rather than policy-driven link-ups.
Subcontracting structures helping SME survival and growth, and especially from
internationalisation and inward and outward FDI.
A. Entrepreneurship and SME policy in Japan
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Definitions of small business for policy in Japan (See Table 7.1).
History of policy focused on large firms through METI (formerly MITI), with protection using
industrial concentration/rationalisation (gorika) to shelter key internal markets.
SMEs until 1980s seen as ‘too many, too small’, trapped in pre-modern forms.
Early policy to form manufacturing cooperatives.
Major shift with Basic Law for SMEs 1963 (Chūshō-kigyō Kihonhō):
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correct the disadvantage of SMEs;
plan their growth and development;
advance the industrial structure and reinforce international competitiveness of
industries;
promote technological education;
regulate subcontracting to prevent ‘excessive competition’ through antitrust;
support SME exports;
improve SME labour relations;
provide government-supported business parks.
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But SMEs moved away from pre-modern economy without the policy, especially through
keiretsu: tightly-connected groups of sub-contractors tied to major companies that helped
SMEs to modernise.
Since 1963 A SME Agency established under METI
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



Partly modelled on US SBA.
Role of government tax concessions.
Large loans programme (Fiscal Investment and Loan Programme, FILP) derived from post
office savings accounts, insurance and pension funds; one of largest SME programmes in the
world.
Advice.
Use of partner support bodies (business associations, chambers of commerce, cooperatives),
especially for advice services.
Amendment of the SME Basic Law for SMEs 1999




SMEs recognised positively for the first time: ‘in charge of’ creating new industry and
employment; old statement of ‘disadvantage correction’ removed.
Market signals and promotion of diversity replaced attempts to direct SMEs to specific
sectors and bureaucratically-defined ‘market gaps’.
Decentralisation to municipal governments support centres to provide financial and
technical assistance, and consultancy.
However, SME Agency slow to adapt:



SME policy still focused on larger enterprises not easily taken-up by small and micro
enterprises;
inflexible supports;
partner organizations and consultants slow to adapt.
Further restructuring since 2012
Focus on:




(i) Promoting innovation and start-ups;
(ii) strengthening existing SMEs;
(iii) facilitating adaptation;
(iv) budget re-focused:





Loan subsidies, investments through the Japan Finance Corporation, credit
guarantees (33 per cent).
Management assistance programmes (25 per cent).
Research and technology transfer initiatives (18 per cent).
Support for business associations and advisory schemes (14 per cent).
Start-up assistance/Job Cafes (6 per cent).
B. Entrepreneurship and SME policy in South Korea
•

Definitions of small business for policy in S. Korea (see Table 7.2).
Distinctive for high level of state leadership and control of banking, credit, investment and




access to foreign currency.
Trade unions restricted, wage increases controlled through state agencies and other means.
Military-supported rule 1961–93, remains strongly centralised with state support depending
on the president and close advisors.
Most distinctive is chaebol conglomerates with strong export focus; mainly family-owned,
usually through a network of core companies. In 1981 the top ten chaebol produced 30 per
cent of all manufactures; by 2011 the top ten accounted for 79 per cent of GDP – Samsung
alone for 28 per cent.
Main early SME policy was Acts from 1961 encouraging small business to form cartels and
cooperatives; subsequently developed, e.g.




Credit Guarantee Act (1974);
SME Subcontracting Act (1975);
Promotion Corporation (1978) to force SME cooperation;
Procurement Act (1981).
Small and Medium Business Administration (SMBA) formed in 1996




shift in focus, partly modelled on US SBA;
tax incentives for SME investments and income;
Korean Credit Guarantee Fund (KODIT), with failures made up by government;
local centres for incubators, technical and R&D, packaging, and design.
Main SME policies of SMBA since 2014 (smba.go.kr):
i.
ii.
iii.
iv.
v.
vi.
vii.
Start-up Incubation Centres; start-up education for young people to visit the USA,
China, and other countries; support for venture businesses; promotion of NewTechnology Start-up Clusters by universities and research institutes.
SMBA direct administrative control of some colleges (Meister) and R&D institutions.
Promotion of careers in entrepreneurship through reform of junior college and
technical high school curricula, work placements, recruiting foreign technical
professionals, and managerial education.
Finance support for SMEs through venture support, commercialisation, and
continued promotion of productivity (TFP).
Marketing assistance, public procurement, trade missions, and export incubators.
Technology support and funding for ‘Inno-Biz’ (high-growth potential businesses),
R&D, and industry collaboration with universities and research institutes.
Programmes for micro-enterprises (less than 5 or 10 employees), for education and
consulting, retail modernisation and help for traditional markets.
Assessment






Effectiveness SME policy is rated moderate and satisfaction low, but increases with firm size.
Most government-supported SME advisory services (mainly through agencies) are too
general, low in relevant skills, and too difficult to access.
Only service from agencies ‘highly valued’ by exporters is trade fairs.
Government financial supports are limited by narrow eligibility criteria, bureaucratic
processes, and delays.
Subcontracting support is highly valued, chiefly for technology and exporting, but less for
finance or marketing.
Networks of subcontracting that develop organically are more valued than ones started




quickly under government pressure.
Despite consolidation under SMBA there are too many diffuse programmes: over 1,100
supports run by 13 government agencies and many local government initiatives (in 2014).
State planning is intrusive but with antitrust enforcement.
Micro-businesses still neglected.
Entrepreneurs and large SMEs have received most benefits through participation in supply
chains, with other SMEs and micro-businesses neglected and subject to predation.
Exercises
1. How far is East and Southeast Asian success derived from entrepreneurship and small
business policy or large business ‘industrial strategy’?
2. Using the latest reports and web-based sources, examine the entrepreneurship and small
business policies currently being followed in Japan and/or Korea.
3. How far do other countries you know reflect aspects of the successes and failures of East
and Southeast Asian state-led entrepreneurship and small business policy? (You could draw
up checklists for making comparisons.)
Chapter 8 China
Learning objectives



To understand the special structures of Chinese entrepreneurship and small business policy.
To understand how SME policies operate in the Chinese market.
To understand the challenges facing small business policy in China in the future.
Chinese Economic Developments



Main policy is from Ministry of Industry and Information Technology (MIIT, formerly MII).
Rapid growth since the Open Door Policy began in 1978.
Undergoing transition to unique form of ‘socialist market economy’ – ‘reform and opening
up’ (gaige kaifang).
Stages of SME policy development
Stage 1: After the Open Door begun under Deng Xiaoping leader 1978:




First law on joint ventures between Chinese and foreign investors 1979.
Petty trading in agricultural commodities after agricultural reforms 1978–85.
First TVE modernisation (Town and Village Enterprise: collective bodies mostly set up by
municipal and county governments).
Quota system for TVEs allowed surpluses by owners; stimulated output and recognised
profits for first time
Stage 2:



Opening of labour market 1984.
Application to join WTO in 1986.
Private enterprises could operate more freely, but many became collective ownership
structures to protect assets: so-called ‘red hat’ businesses.
Stage 3:









Reform of state-owned enterprises (SOEs) begun in 1990s under Jiang Zemin.
Small SOEs (mainly TVEs) privatised 1993 - reduction of 53 million jobs.
First polices for SMEs to absorb surplus labour.
Private business owners officially recognised and allowed to join party 2001.
SME Promotion Law 2003 first definition of legal status of SMEs and allowed eligibility
for government support.
Accession to WTO in November 2001; most WTO compliance completed over 2005–7.
Agreed to Kyoto environmental protocols.
Unregulated internet banking and credit guarantee companies help SMEs and start-ups
based on e- and m-commerce.
Current Definition of SMEs (see Table 8.1).
Problems remain (Box 8.1)

Box 8.1 Entrepreneur views on constraints on small businesses in China.
We have great difficulty getting a licence to trade. Then you’re skimmed at the top,
hamstrung by restrictions and squeezed by malpractice/bribe culture and priced out
by the [SOE] market before being painted as a bogeyman when necessary.
(Entrepreneur quoted in Financial Times, 27 November 2013)




Response to 1999 Asian financial crisis put non-performing bank loans into four Asset
Management Companies (AMCs: ‘bad banks’).
Predatory.
Unfair competition with SMEs and all private enterprises.
Numerous ‘shadow banks’, grown rapidly since 2007 financial crisis, giving massive loan
support to unviable and corrupt local government projects squeeze out small
businesses.
Chinese SME Policy




Historically SMEs seen as backward, inefficient using capital that held back large businesses.
Party Congress reform 1995 adopted ‘grasp the large and let go of the small’ (zhuada
fangxiao) and ‘deregulation to render agile’ (fangkai gaohuo).
Industry departments combined in State Economic and Trade Commission (integrated into
the National Development and Reform Commission (NDRC) in 2003.
Within this first SME Department established, building a SME support system.
Credit guarantee scheme was launched 1999, further credit law help for SMEs 2001, 2014.

SME Promotion Law 2003






Defined the legal status of SMEs.
Initiated local support policies and system (Article 4) – the main outcome.
Local government credit guarantees (Article 19).
Financial support and access to state finance and banking (Articles 10 and 19).
Service supports (Articles 11 and 38).
Main stages of recent SME Policy, since 2001 (see Summary: Table 8.2)
Current: 12th 5-Year Plan (2011–6), SC Policy Framework of 2012 (row nine of Table 8.2 new
policies)

Fiscal: Enterprise Income Tax 20 per cent for SMEs (firms under Rmb30,000):





Special SME Fund (Rmb14.1bn for 2012) to encourage SME structural reform and
optimization (capability in manufacturing, R&D, IT applications, strategic industries,
environmental protection, and patenting).
SME Development Fund Rmb15bn over 5 years was set up to support early stage
micro and small enterprises and local government support to venture capital.
Financial: increased loan guarantees to SMEs; small financial institutions; new instruments
e.g. ‘composite bond’, ‘business district loan’, ‘supply chain loan’, ‘factoring’.
Innovation: R&D tax allowances; new R&D facilities, IPR reform; Technology Incubators;
expansion of private investment in education, social welfare, technology, tourism and
commerce; encourage reduced pollution, and lower resource consumption.
Market development: Encourage e-commerce, international exhibitions, joint purchase,
improve Customs for SMEs; simplify procedures in domestic market for export firms.



Management Development: Improve SME accounting, quality, safety, energy saving,
environment; subsidy for university graduates to start new venture or work in SMEs.
Clusters: Land and rent subsidies, Technology Incubators; infrastructure and service
‘platform’ for e-commerce.
Public services: ‘platform’ to support information on policies, venture & innovation,
investment & finance, IPR, testing, accounting, etc.
Exercises
1. Exercise: Using the latest reports and web-based sources, examine the entrepreneurship
and small business policies currently being followed in China, and the nature of ‘double
entrepreneurism’.
2. How far does Chinese economic success derive from entrepreneurship and small business
policy or large business ‘industrial strategy’?
3. Develop a checklist of Chinese SME policies and compare these against those of your case
study area; which do you think is most effective in its context?
Chapter 9 Developing and transition economies
Learning objectives



To understand changed views of entrepreneurship and small business in development
policy.
To understand policy challenges in developing countries and transition economies.
To understand processes of capacity building that facilitate entrepreneurship.
Changing views of development policy
Model 1950s–1980s:







Government-led.
Aid-based approach.
Interlocked and self-reinforcing.
‘Old economic growth models’ (see Chapter 4): belief that increasing the inputs of capital
will lead to economic growth.
Allocations by government, its agencies, and intermediaries.
Generally ignored need for institutional change.
Reinforced oligarchic control:






favoured state industries, rigid development plans, generally inefficient;
small firms and entrepreneurs usually forgotten;
dominance of ‘modernisation policy’, focused on infrastructure, land development,
and major industrial investment projects;
the most important business policies: ‘industry policy’ to favour ‘champions’ or
‘leading sectors’.
USSR specific format of rigid 5-year planning.
Influence of USSR regime expanded to cover a wide group of other countries until 1989–92.
Emergence of ‘Washington consensus’ (See Table 9.1)
Now developed to underpin Toolkits of World Bank, IMF, AfDB, ADB, and UN – ‘Lists’



Originally a survey of economists and development agencies in 1989 (Williamson, 1994).
Controversial if overstated – but carries mainstream policies.
Difficulties:






major countries achieve sustainable development without some of the policies;
some policies harmful at certain stages of development ;
‘Lists’ do not give different weights to different policies or order to be undertaken;
speed of changes require care;
‘Lists’ generally ignore entrepreneurism and small firms;
but do offer improvement of major help area - business enabling environment.
Changes since 1980s


Entrepreneurs and small businesses now recognised as key part of institutional change.
Small business a means to redistribute economic and political power.





Reinforces ‘bottom-up’ development processes.
Supported by arguments of ‘New’ endogenous growth theory.
Goes with grain of the reality of many developing and transition economies with large
‘informal’ business sectors already with significant endogenous resources and skills (see
Table 1.2).
Offers strong opportunities for female participation.
Entrepreneurs and small businesses increase participation by poor people at the ‘bottom of
the pyramid’.
A. Policy challenges in developing countries




Since these countries are mostly very poor and most businesses are informal – key policy has
to be transition from informal to formal.
Agricultural diversification from subsistence to selling small surpluses.
Support services as well as manufacturing- easier to evolve from a household industry to
modern self-employment.
Many developments allow jumps: e.g.
 mobile phone/tablet devices radically reduce costs and diffuse faster vs.
infrastructure based on fixed land lines and the computer PC;
 Energy through solar cells: low cost allowing more diffuse development.
Moving beyond ‘toolkits’





Reform requires tackling interlocked, deep-seated and self-reinforcing institutions.
Need to overcome ‘bad laws’ and ‘bad agencies’.
Key issues (See Box 9.1).
Most small business needs ignored by traditional development policies.
Preference to transfer policies from advanced economies as ‘bolt-ons’:


do not match local need and capacity;
do not change existing institutions and rules that hold back SMEs.

Participation rates in government programmes usually very low because:



(i) entrepreneurs want to avoid increased state scrutiny and interference;
(ii) the number of micro businesses makes difficult to go beyond ‘one shot’ services;
(iii) exacerbated by limited resources and donor rules.
But institutions remain chief challenge



Concern that entrepreneurship is diverted into ‘political entrepreneurship’ to play the game
with existing elites, or informal sectors, illicit trade.
‘Mikado game’: everything supports everything else.
Possible U-shaped relation between level of country’s economic development and the rate
of entrepreneurship.
B. Policy challenges in transition economies



Break-up of the Soviet Union after 1989–92.
Significant differences between countries but share a common background.
Internal Soviet market.







Centralisation.
State ownership of all major industry.
Control of formal banking and credit.
Restrictions on foreign currency ownership and exchange.
Rigid five-year economic plans; bureaucratic planning with systemic misallocation of
resources and endemic shortages; little delegation of authority to business or managers.
Regime with low trust between economic or political players, people and the state.
Small firms and entrepreneurism:




Turning a blind eye to some informal businesses, often in return for bribes; though
subject to ad hoc purges.
Shadow or black market sectors: mainly construction, lesser extent in artisanal
industries and tourism.
SMEs as part of nationalist and personal survival strategies.
Helped keep entrepreneurism alive to find ways to beat the system, or survive a
little more comfortably through informal activity.
Variety of responses
1. Soviet-influenced and border states; e.g. Azerbaijan, Belarus, Georgia, Ukraine slowest.
2. Central Asia also slow:



mostly land-locked;
resource-dependent states;
strong continued Russian control/influence; note Ukraine, Georgia, etc.
3. Central Europe relatively complete break with the past; ‘end of history’: East Germany,
Poland, Austro-Hungary and Baltic Republics:



EU membership important stimulus for reform, some are part of the Eurozone.
Jump quickly into a new meta-institutions.
Still serious ‘black barriers’ from past, some supported by current Russian influence.
Example: Central Asia – Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan






Weaker previous economic development.
Legacy of micro-enterprises and cooperatives frequently purged.
Few and less well adapted institutions to support entrepreneurship and modernisation.
Political instability, continued Russian influence.
USSR legacy: lopsided resource dependence, semi-colonial institutions, endemic corruption.
State and business oligarchies remain fundamental constraints on small business.
Change since 1990s (similarity to stages in China: see Chapter 8)
Stage 1


Stage 2
Early expansion of small retailers, artisans and peasant producers.
New entrepreneurs often linked to former Soviet enterprises in best position to exploit
opportunities from privatisation or trade.


From c.2000 diversification of SMEs into construction, real estate, small manufacturing,
tourism and entertainment.
Growing capacity for small businesses to take on foreign franchises in luxury goods,
detergents, body care, cosmetics and general distribution.
Stage 3




Since 2010, difficulties of moving on.
Also strengthening of Russian influence.
‘Mikado game’ prevents change.
Small businesses have to cope with fluidity, instability and uncertainty as opportunities are
opened and closed by oligarchy players who compete with each other.
C. Small business policy and capacity building: summary of actions needed
 Re-training of officials and know-how transfer through secondments and courses in the
advanced economies.
 Improving the procedures and skills of existing medium and large businesses to shift to
standard modern accounting and legal structures allowing more ready contracting with
foreign networks, and opening domestic networks to SME participation.
 Simplification of basic public administration procedures allowing some relatively easy gains
without challenging established power bases; especially for business registration, accounting
standards, and taxation to encourage informal small business to become formal.
 Know-how transfer and training for staff in state agencies and sovereign wealth funds.
 Student placements abroad in relevant companies and small firms to bring back tacit skills
and know-how.
 Development of efficient intermediaries that help network local small and medium
businesses to foreign markets and partners.
 Development of linkages with foreign-based export finance guarantees to reassure foreign
investors about security of local investments.
Exercises
1. For a selected developing or transition economy develop a checklist of the main institutional
barriers to the development of entrepreneurism and small businesses.
2. Using recent web-based and published reports, assess how far entrepreneurship policies in a
selected case area are tackling the main institutional barriers to development.
3. How far do policy reforms to help transition from ‘informal’ to ‘formal’ provide the main
engine for entrepreneurship? What other policies are also needed? How far do existing
policies act as bolt-ons or tackle key small business needs?
Chapter 10 Evolution and revolution: new opportunities, old dangers
Learning objectives



To understand the evolution of policy.
To understand how these policies fit with current economic evolution.
To understand how far policies need to change in the future.
Evolution
Past history of policies to now:













Most government policies still provide most support for large firms and large SMEs, rather
than small businesses, particularly micros.
Few policies engage effectively with the complementarities between large and small firms,
or encourage venture capital, and corporate venturing.
More attention is still given to business-based rather than person-based policies, often
failing to reach entrepreneurs and owners of businesses who are the decision takers.
In almost all countries small businesses and entrepreneurs are disempowered and play only
marginal roles in policy design.
The main policies influencing entrepreneurship and small business are often located in
specialist SME agencies, departments or ministries; these provide specialist policy
knowledge, but are often marginal to businesses and peripheral to government
mainstreams.
The main externalities that are important to entrepreneurs and small businesses depend on
government ministries that are little influenced by small business concerns and the needs of
the ‘business enabling environment’: education, culture, home affairs, transport, energy,
etc.
The main concerns of small business owners and entrepreneurs are economic stability and
regulations which are managed within government ministries little influenced by small
business concerns: usually the economics ministry/Treasury, tax administration,
employment and labour departments, social welfare, environmental ministries, etc.
Few supposed ‘market failures’ and other ‘needs’ now exist in advanced economies even if
they did in the past, and few policies fill the gaps effectively; in developing and transition
economies institutional failure usually outweighs market failure gaps by orders of
magnitude.
The engine creating new regulations, although recently held more in check by deregulation
initiatives and regulatory impact assessments, in all countries shows no sign of diminishing:
everywhere red tape and bureaucracy is identified as an increasing barrier for businesses.
Where policy attention is given to innovation and technology transfer, although there is
much useful modern reform, policies are overwhelmingly provided through higher education
in traditional disciplines in universities and through research institutes that primarily
respond to government bureaucratic incentives rather than entrepreneurial needs.
Few countries have developed policy designs that overcome the constraints of information
asymmetry, moral hazard, adverse selection, ratchets and risk neutrality that limit effective
monitoring and undermine effective management of principal-agent relationships with
partners and intermediaries.
Although there is increasing emphasis on proper evaluation of policies, this is still
infrequent, and few evaluations make the most basic checks of logical consistency, or
organisation of management and delivery to meet objectives.
In developing countries there is still too much emphasis on big projects rather than

entrepreneurial needs, and imported policy ideas ‘bolted-on’ to existing institutions rather
than significant institutional reform.
In almost all countries, but especially transition economies, too little attention has been
given to policy incentives to encourage political and large-firm oligarchies and elites to
participate in domestic reforms needed for entrepreneurship development.
Revolution in business?
Features suggesting possibly radical changes in small firm – large firm balances are:
1. Many industries and innovations now have radically lower costs for market entry as a
result of new technology enabling small businesses participation.
2. Most previous ‘market failures’ justifying policy support have diminished or disappeared
with the growth of e- and m-based commerce: information, advice and IT infrastructure
(cloud storage, big data, etc.) all have vigorous market suppliers mostly with increasing
accessibility and diminishing costs.
3. Even the ‘Macmillan gap’ in finance for SMEs seems to be disappearing: venture capital
has expanded everywhere and is becoming more internationalised into developing and
other countries where it is most needed; peer-to-peer lending (‘crowd sourcing’) is
growing rapidly; and micro finance is migrating to m-based systems (e.g. China’s Alibaba
had a $2bn loan book in 2013).
4. Within globalisation and modern communications, externalities are more widely
available. They can operate as much through international networks as local ones, and
small businesses can participate more widely irrespective of location.
5. Much new value is contained in knowledge, but this is difficult to protect because many
innovations are easy to transfer and imitate with almost zero marginal costs and no loss
of use value even if the product spreads everywhere; this leads to more diffuse
economic development and favours small firms that operate over wider geographical
areas.
6. It is easier for developing countries and lagging regions to engage in many new
industries because they can ‘jump’ intermediate stages of development facilitating
business entry and entrepreneurship: e.g. m-commerce mobile devices radically reduce
the costs compared to fixed infrastructure, enabling business innovators to miss out the
stages of development of fixed land lines and computer PCs; the same is occurring with
supply of medicines, energy supply though the radically reduced costs of solar cells, and
will increasingly affect other sectors.
7. Industries are much more directly and quickly affected by changes in consumer and
intermediate industrial demand, and less amenable to control by governments or large
businesses to limit what is on offer; this stimulates market fragmentation, more rapid
innovation, providing increasing potential for entrepreneurs and smaller producers.
8. However, as a consequence of the same new technologies, opportunities for supernormal profits and large rents from innovations are often radically reduced and shorter
lived, so the rate of innovation must increase to keep pace; this encourages small
businesses and innovators with lower fixed and sunk costs.
Revolution in policy?
Needs:
1. Bring entrepreneurs and small business owners into the mainstream of policy design.
2. Shift emphasis from focused and expensive supports that can benefit only a few people or
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
firms to broad-based policies that offer systemic support, e.g. education and training
outputs, macro-environment, and macroeconomic stability.
De-bureaucratise policy delivery: ensure greater involvement of entrepreneurs in the design
and delivery of policies rather than through government departments, using the ‘venture
capital model’ of participation as a more direct way to incentivise involvement between
firms, and between entrepreneurs and commercialisers.
De-layer policy delivery: reduce the number and tiers of intermediaries involved, focusing on
the most effective that are closest to markets: entrepreneurs, non-profit market bodies, and
small firms themselves.
Streamline regulations of all interventions in the light of more rapidly changing conditions.
Develop rapid policy adaptability to ensure entry barriers remain low to match more diffuse
development.
Adapt ministerial structures and institutional meta-structures to enhance business support
across a wider range of government departments and policy fields.
Maintain and increase the speed of antitrust action to limit anti-competitive behaviour and
predation by new industry giants; expand coverage to emerging markets through
streamlined and low cost systems.
Incentivise large firm support to small businesses through corporate venturing.
Incentivise participation by political elites, primarily through venture capital vehicles
producing returns for all participants.
Rethink means of policy delivery to be more widely available to all firms, including micros.
The high transaction costs for widening support overcome by transferring support systems
to e- and m-delivery rather than branch networks.
Adapt policies to increasingly varied geographical contexts not just delivered through central
agencies from a few points, again diffusely available through web-based and mobile media.
Decentralisation is less relevant (and very costly and inefficient, as shown by UK experience)
than mobile supports including greater mobility by advisors.
Exercises
1. Using your case study country or region, how have polices recently evolved to meet
changing technological opportunities for assessing business and entrepreneurial needs, takeup, satisfaction, and effectiveness? What proportion of policy delivery is e- and m-based?
2. Assess the extent of venture capital vehicles in your case study area; what are the sources of
this capital; how far are local elites currently participating domestically; how can venture
capital be expanded in the future?
3. What are the greatest impediments to future policy change in your case study areas and
how might they be overcome?