Entrepreneurship and Public Policy Lecture 2: Policy Landscape for Entrepreneurship

EPP – Lecture 2 -2 Spring 2009 Lecture Outline Types of Capitalistic economies Promoting productive growth Discussion questions

EPP – Lecture 2 -3 Spring 2009 Policy Landscape for Entrepreneurship Baumol et. al (2007) offers insights on how public policy affects entrepreneruship and economic growth The authors discuss several types of capitalism that exist throughout the world –State-guided capitalism –Oligarchic capitalism –Big-firm capitalism –Entrepreneurial capitalism Suggest that the optimal “growth machine” is a mixture of big-firm and entrepreneurial capitalism.

EPP – Lecture 2 -4 Spring 2009 State-Guided Capitalism The government plays a substantial role in deciding which industries and/or which firms should grow –Industry policy is often achieved through the state ownership of the banking system –Tax breaks for certain companies –Exclusive licensing –Government contracts –Tariffs Examples include India, South Korea and Japan, to some extent China and Southeast Asian countries State guided capitalism can be very effective in helping a country “catch up” (replicative entrepreneurship) Potential limitations of state-guided capitalism –Inefficient investment by the government –Vulnerability to corruption –Difficult to allow failure

EPP – Lecture 2 -5 Spring 2009 State-Guided Capitalism The government plays a substantial role in deciding which industries and/or which firms should grow –Industry policy is often achieved through the state ownership of the banking system –Tax breaks for certain companies –Exclusive licensing –Government contracts –Tariffs Examples include India, South Korea and Japan, to some extent China and Southeast Asian countries State guided capitalism can be very effective in helping a country “catch up” (replicative entrepreneurship) Potential limitations of state-guided capitalism –Inefficient investment by the government –Vulnerability to corruption –Difficult to allow failure

EPP – Lecture 2 -6 Spring 2009 Oligarchic Capitalism Government policies are designed predominantly to promote the interests of the elite class Examples include Latin America and some African countries Oligarchic capitalism impedes economic growth in the long run –Leads to black economy –Results in economic inequality which in turn creates anti- reform tension –Can squelch innovation that threatens the status quo

EPP – Lecture 2 -7 Spring 2009 Big Firm Capitalism In big firm capitalism, large firms dominate the economic landscape –Generate large cash flow, economies of scale and scope –Have been successful in the past in providing incremental improvements in products and services Common examples are continental Europe and Japan Big-firm capitalism has shown signs of problems recently –Is reluctant to innovate resistant to change –Oligopolistic characteristics

EPP – Lecture 2 -8 Spring 2009 Entrepreneurial Capitalism Defined as an economy where large numbers of actors have the drive and incentive to invent and commercialize radical or breakthrough innovations –Bold rather than incremental innovations –Usually driven by a single individual or a new firm Entrepreneurial economies embrace and encourage change –Remove barriers that allow resources to shift from dying sectors to dynamic industries –Constructive safety net needed to encourage risk taking Constant change in the list of top companies Example: U.S. Information Technology industry

EPP – Lecture 2 -9 Spring 2009 Entrepreneurial Capitalism Defined as an economy where large numbers of actors have the drive and incentive to invent and commercialize radical or breakthrough innovations –Bold rather than incremental innovations –Usually driven by a single individual or a new firm Entrepreneurial economies embrace and encourage change –Remove barriers that allow resources to shift from dying sectors to dynamic industries –Constructive safety net needed to encourage risk taking Constant change in the list of top companies Example: U.S. Information Technology industry

EPP – Lecture Spring 2009 Lecture Outline Types of Capitalistic economies Promoting productive growth Discussion questions

EPP – Lecture Spring 2009 Is a Combination of Big-Firm and Entrepreneurial Capitalism the Best Engine of Growth? Big-Firm capitalism can supply economy of scale and incremental improvement Entrepreneurial capitalism can supply radical innovation Logically, both appear to be necessary What is the right balance and how can public policy support it?

EPP – Lecture Spring 2009 Strategies for Promoting Productive Entrepreneurship Make it easy to start and grow a business –Business registration –Bankruptcy protection –Access to finance Create rewards for productive entrepreneurial activity –Legal system (including contract and property) –Tax policy –Regulatory policy –Patent policy –Government funded R&D –Immigration policy Create disincentives for unproductive activity (rent seeking, predation) Keep the winners on their toes

EPP – Lecture Spring 2009 Strategies for Promoting Productive Entrepreneurship Make it easy to start and grow a business –Business registration –Bankruptcy protection –Access to finance Create rewards for productive entrepreneurial activity –Legal system (including contract and property) –Tax policy –Regulatory policy –Patent policy –Government funded R&D –Immigration policy Create disincentives for unproductive activity (rent seeking, predation) Keep the winners on their toes

EPP – Lecture Spring 2009 Emerging Policy Concerns for U.S. Entrepreneurship Removing barriers to entrepreneurship –Incentives for start-ups to “go public” rather than sell out to larger firms have diminished –Barriers to bankruptcy have increased –Inevitability of tax reform: how to increase taxes without harming entrepreneurship –Excessively liberal patent policy Discouraging unproductive entrepreneurship –Misuse of antitrust laws –Limiting other non-meritorious litigation Keeping winners on their toes –Protectionism in trade, immigration and FDI –Promoting the transfer and diffusion of foreign technology –Encouraging innovation through the corporate income tax system –Commercializing university innovation

EPP – Lecture Spring 2009 What Policy-relevant Topics Are In Need of Further Research? Health insurance and entrepreneurship Taxation and entrepreneurship The role of intellectual property rights (and markets for IP) in promoting entrepreneurship Spillovers from entrepreneurship to the rest of the economy and society The effects of regulation on entrepreneurs Policy evaluation (of specific policies) Discrimination in credit markets against members of ethnic minorities Imperfect competition Labor demand/Labor supply Entrepreneurial learning Regional variations in entrepreneurship Non-standard forms of start-up finance Medium enterprise development

EPP – Lecture Spring 2009 Lecture Outline Types of Capitalistic economies Promoting productive growth Economics of Entrepreneurship Discussion questions

EPP – Lecture Spring 2009 Discussion Questions What are the pros and cons of each type of capitalistic economy? –Should we as a society promote entrepreneurship? Why? –How might a researcher begin to determine whether the current mix of capitalism is optimal? What are some characteristics of a legal and financial system that promote entrepreneurship?