A General Policy
Framework for
Entrepreneurship
Anders Hoffmann, Ph.D.
Creative Director, FORA –
Centre for Economic and Business
Research
Research, Statistics and Policy
> “Es ist nicht genug zu wissen, man muss es auch
anwenden; es ist nicht genug zu wollen, man muss
es auch tun.”
Johann Wolfgang von Goethe, 1749-1832
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Point of departure
Denmark in the late 1990s
> Entrepreneurship is not that important
> Policies should focus on increasing the number of
people starting new firms through affecting culture
…as entrepreneurship is like love “it is in the air…”
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The two levels of our Work
> Our political motivation:
> Denmark aims at being one of the most
entrepreneurial economies in the OECD by 2015
> Our analytical objective:
> Develop a better understanding of the drivers of
entrepreneurship and support fact based policy
formulation
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Political motivation
New Goals, Government Platform, 2005
> Table of content:
> Denmark as a leading knowledge society
Denmark as a leading entrepreneurial society
World-class education
Innovation of primary and lower secondary school
Post-secondary education for everybody
The most competitive society in the world
A sound economy Tax
freeze – and lower taxation of earned income
More people in work
Better health care
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Political motivation
New Goals, Government Platform, 2005
> The Government will, therefore, draw up an
ambitious, holistic and multi-year strategy to make
Denmark a leading growth, knowledge and
entrepreneurial society.
> Denmark as a leading entrepreneurial society:
Our goal is for Denmark, by 2015, to be one of
the societies in the world where most growth
enterprises are launched.
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Our analytical objective
> The objective is to provide policy makers with an
overview of which policy areas that should be an
essential part of a country’s overall strategy to
promoting entrepreneurship.
> The analysis is based on a cross-country comparison
of indicators measuring both performance and the
underlying business environment for
entrepreneurship.
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What is Entrepreneurship?
> No single definition exists of
entrepreneurship simply because
entrepreneurship cannot be seen as a
single event.
Eurostat
General
population
Want-to-be
30%
Entry
1%
GEM
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Exit
25%
Survival
70%
Growth
5%
What are the policy objectives?
(From the SME Ministerial Conference 2004)
> Job creation
> Economic growth, productivity
improvement, and competitive
innovation
> Poverty alleviation and social
opportunities
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Methodology – What generates economic
growth?
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Define good performance based on
policy objectives
> This study defines entrepreneurship as
> entry and exit of firms and
> creation of high growth firms,
…as analyses link these two stages in the
entrepreneurship process directly to
productivity growth (Audretsch and Thurik,
2000; Scarpetta et. al. 2002, OECD 2003,
Brandt, 2004).
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High growth and MFP
1,8
1,6
MFP level, 2002
1,4
1,2
Average MFP level, 2002
1
0,8
0,6
-150
-100
-50
0
50
100
150
Growth among new firms within a given industry
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200
250
300
Method:
A 7-step approach
1. Select performance indicators that relates to the
definition of entrepreneurship
2. Examine performance
3. Define relevant policy areas and select indicators
4. Test for correlation between performance and
policies
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Method:
A 7-step approach
5. The critical areas of the framework conditions are
identified
6. Weak points in national framework conditions are
identified
7. Improve weak points by using peer review to learn
from policies in best performers
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Dealing with Indicators
> Many of the examined policy areas are multidimensional and cannot be captured by a single
indicator.
> The analysis consequently builds on composite
indicators
> Several problems are associated to the use of
composite indicators. This chapter uses an approach
developed by the OECD and the Joint Research
Centre of the EU Commission (Giovannini et al,
2005).
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Step 1: Select performance indicators
Entry of Firms
New High Growth Firms
Firm entry rates, average 2000- Share of young firms with more
2002 (New firms in% of
than 60% growth rates in
existing firms)
turn-over in a three year
period, 1999 – 2003
Entrepreneurial activity (TEA)
from Global
Entrepreneurship Monitor,
average 2000-2002
Share of young firms with more
than 60% growth rates in
employment a three year
period, 1999 – 2003
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Step 1: Select performance indicators
- High Growth Firms
> High-growth firms are defined as the share of young
firms with a growth rate (in either employment or
turnover) higher than 60% in a three year period.
> A young firm is less than five years old in the first
year of the three year growth period.
> The firms have at least 15 employees (in the initial
year)
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Step 1: Select performance indicators
- High growtn firms
> From Bureau Van Dijk (BvD), an electronic
publishing firm.
> BvD specialises in cleaning and organising data
supplied by national information providers in various
countries to create a broader data set (e.g.
Companies House in the UK, Kamers van
Koophandel in the Netherlands).
> The database has been used by several other
researchers (see for example, Desai, Gompers and
Lerner, 2003).
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Step 1: Select performance indicators
- Data on high-growth firms
30
25
%
20
15
10
5
Employment
Turnover
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Step 2: Examine performance
100
Top 10
Top 6
Top 3
60
40
20
0
Step 3: Define relevant policy areas
> Many words and definitions are used in the
literature to describe the factors affecting
entrepreneurship.
> Two main contribution to a policy framework come
from by Audretsch, Thurik and Verheul (Audretsch
et al, 2002) and Lundström and Stevenson
(Lundström and Stevenson, 2001, 2002, 2005),
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Favourable business climate e.g. tax regime, competitive environment, savings, flexible
labour market, competitive banking system, low inflation, low interest rates, etc.
Make it easier to go through
Make it easier to survive
the steps.
and grow.
Reduce entry/exit barriers.
Improve access to resources
Improve access to advice,
Opportunity
information, networks,
- financing, networks,
expertise.
mentoring, incubators.
Improve access to markets,
Provide access to micro-
employees, technology.
loans and seed capital.
Reduce regulatory and
Make it easier to gain
labour market obstacles.
Make it easier to gain
management know-how.
management know-how.
Put entrepreneurship
Access to counselling,
education in schools.
Skills
Tailor entrepreneurship
technical assistance,
management skills, peer
training programs.
networks, ‘best-practice’
Support student venture
management tools,
programmes.
performance.
Establish peer learning
networks.
Increase
awareness and
Influence ‘will to grow’
legitimacy of
motivation
entrepreneurship.
Promote new business
Provide information about
Motivation
possibilities
its role in society.
Promote growth
Profile role-models
possibilities
Promote entrepreneurial
Promote role-models
Role as feasible option
For start-up
Create entrepreneurial climate
General Population ’A want-to-be’ Nascent Start-Up
t-n
t
For growth
Survival
t+ 42 months
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Growth
Audretsch, Thurik and Verheul
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Our model
Demand
Supply
Potential amount of
entrepreneurship opportunities
Number of potential
entrepreneurs with
skills and capital
Incentive structure
Potential benefits versus
Potential costs
Motivation/Culture
Entrepreneurial motivation
Entrepreneurship
Activity
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Step 3: Define relevant policy areas
- 61 indicators
Total measure of the business environment for entreprenurship
Factors affecting
entrepreneurial
performance
Opportunities
Capital
Entry Barriers/
deregulation
Loans
Access to foreign
markets
Policy arears affecting
entrepreneurial
performance
Wealth &
bequest tax
Ability
Incentives
Motivation/Culture
Trad. Business
education
Personal
Income tax
Entrepreneurial
motivation
Entrepreneurship
education
Business tax &
Fiscal incentive
Initiatives towards
Specific groups
Communication
About heroes
Technology
transfer
Business Angels
Restart
posibilities
Social security
discrimination
Private demand
factors
Venture capital
Entrepreneurship
Infrastructure
(public)
Administrative
burdens
Procurement
regulation
Capital taxes
Entrepreneurship
Infrastructure
(private)
Laubor market
regulation
Stock markets
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Bankruptcy
legislation
Step 4: Test for correlation
100
Canada
Performance
80
Korea
Ireland
60
United States
Spain
40
Denmark
Japan
20
Belgium
Norway
France
United Kingdom
Italy
Finland
GermanySweden
Netherlands
Austria
Portugal
0
40
50
60
70
Framework conditions
80
90
R2 = 0.43
All correlation coefficients within the 95% confidence interval of the median
(0.43 and 0.7) are significantly different from zero.
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Step 4: Test for correlation
- However!
> The transmission mechanism among policy areas
and performance varies substantially.
> A system of indicators needs to exist for a large
time series in order to support solid conclusions on
causality.
> (Changes in the business environment tend to be
rather slow, so it is plausible that the correlation will
stay significant as the data is updated).
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Step 5: Critical policy areas are identified
> Ideally, the importance of the various areas should
be determined in a multi-variant regression analysis
that includes all policy areas.
> Two alternative approach exist
> Examine partial regression coefficients between
the various policy areas and performance.
> Analysis of the business environment in the top
performing countries (Canada, Korea and the
United States) could provide additional insights.
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Step 5: Critical policy areas are identified
- correlation coefficients
Personal income tax
Restart possibilities
Labour market regulation
Entrepreneurship education
Entrepreneurial motivation
Venture capital
Bankruptcy legislation
Access to foreign markets
Entry barriers/deregulation
Business tax & fiscal incentive
Stock markets
Administrative burdens
Loans
Entrepreneurship Infrastructure
Traditional business education
Capital taxes
Wealth & bequest tax
Tech transfer
0%
20%
40%
60%
80%
Insignificant correlation
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Kbh Ø -correlation
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100%
Step 5: Critical policy areas are identified
- Comparative analysis
Bankruptcy legislation
Business tax & fiscal incentive
Restart possibilities
Wealth & bequest tax
Venture capital
Personal income tax
Entrepreneurship education
Labour market regulation
Administrative burdens
Access to foreign markets
Loans
Entrepreneurial motivation
Entry barriers/deregulation
Capital taxes
Entrepreneurship Infrastructure
Traditional business education
Stock markets
Tech transfer
0%
20%
40%
60%
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- www.foranet.dk
prioritised Not prioritised
80%
100%
Step 5: Critical policy areas are identified
- All in all
Not significantly correlated with
performance indicators
Significantly correlated
with performance
indicators
High
priority in
top-3
countries
Business tax & fiscal incentive
Administrative burdens
Wealth & bequest tax
Access to foreign markets
Venture capital
Restart possibilities
Bankruptcy legislation
Entrepreneurship
education
Personal income tax
Labour market
regulation
Low
priority in
top-3
countries
Exit markets
Capital taxes
Traditional business education
Entrepreneurship Infrastructure
Loans
Tech transfer
Entrepreneurial
motivation
Entry
barriers/deregulation
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BUT! Can we learn from each other?
> No clear cut answer exists to this question.
> Each country is unique and, therefore, there will
always be limits to cross-country comparisons and
the transferability of policy experiences.
> We make a slightly blurry distinction between policy
areas and specific policy initiatives.
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My conclusions
> Most important:
> Venture capital
> Bankruptcy legislation (restart possibilities)
> Entrepreneurship education
> Personal income tax
> Labour market regulation
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The Danish Entrepreneurship
Index 2005
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Main conclusions
- performance
> Denmark trails the best-performing countries
considerably when comparing the share of growth
entrepreneurs regardless of the definitions applied.
> However, Danish start-up rates rank among the
best.
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Main conclusions
– business environment
> The Danish business environment for
entrepreneurship trails the best-performing
countries in some areas, and are among the best in
other areas.
> The analysis suggests that Denmark should pay
close attention to the areas of entrepreneurship
education, personal income taxes, venture capital,
private advisory services, as well as the possibility
of restarting following bankruptcy.
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Main conclusions
Performance
0 (Worst performance)
100 (Best performance)
DK 2004-05
On a scale from 0 to 100 Denmark has improved
its score from 26.9 points til 28.3 points.
Top-3 2004-05
On a scale from 0 to 100 the top-3 posts a 79.0
score down from 82.1
Framework conditions
0 (Worst framework conditions)
100 (best framework conditions)
On a scale from 0 to 100 Denmark posts a 56.4
point score, up from 53. 3. points.
DK 2004-05
Top-3 2004-05
On a scale from 0 to 100 the top-3 posts a 69.7
point score, down from 70 points.
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-10
-5
0
5
Incentive s
Income tax
Bankruptcy legislation
Corporat e tax (including fiscal incentives
Labour market regulation
Administrative burdens
Ability
Entrepreneurs hip education
Restart possibilities
Trad. business education
Government programs
Capital
Capital taxes
Exit
Loan
Venture capital
Wealth and bequest tax
Culture/Motivation
Entrepreneurial motivation
Market access
Access to foreign markets
Access barriers
Technology trans fer
Overall framework conditions
Denmark trailing
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Denmark ahead
Change Denmark
-4
0
4
Change top-3
-4
0
4
Change DK –Top-3
-4
0
4
Market access
Entry barriers
Technology trans fer
Access to foreign markets
Ability
Entrepreneurs hip education
Restart possibilities
Trad. business education
Public entrepreneurship infrastructure
(not updated)
Capital
Venture capital
Exit
Capital tax
(Not updated)
Wealth and bequest tax
(Not updated)
Loans
Incentive s
Labour market regulation
Administrative burdens
Income taxes
Corporat e taxes
Bankruptcy legislation
Culture/motivation
Motivation
Overall framework conditions
Denmark wors ening Den. improvingT3 worsening T3 improving
framework conditions framework
framework framework
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Allé 17, 2100
Kbh Ø - www.foranet.dk
conditions
conditions conditions
Denmark
loosing
ground
Denmark gaining
ground
Low correlation with
performance
High priority
among top3
Low priority
among top3
Significantly correlated with
performance
Corporate tax
Wealth- and
bequest tax
Administrative
burdens
Access to foreign
markets
Entrepreneurship
education
Bankruptcy legislation
Restart possibilities
Personal income tax
Venture capital
Labour market regulation
Exit
Capital taxes
Government
programs
Trad. business
education
Loan capital
Technology transfer
Culture/motivation
Entry barriers
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Main conclusions:
> Policies must match the set of macro-economic policy
objectives, so the definitions need to reflect that.
> The analysis suggests that restart possibilities, personal
income tax, labour market regulation, entrepreneurship
education, venture capital and bankruptcy legislation
could potentially be the most important policy areas for
stimulating entrepreneurship performance.
> Countries can use the presented analysis to come up with
a prioritised list of important policy areas, in which they
lag behind compared to top-performing countries.
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Limitations
> The main problem is a lack of time series for the
applied indicators, which makes causally tests
difficult.
> Only 18 OECD countries are included in the analysis
due to too many missing values for the remaining
countries, which makes multiple-regression analysis
difficult.
> Much work is needed to improve the availability of
data in order to improve the quality of the analysis.
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