OECD and the Evolution of Entrepreneurship Policy Université du Québec à Trois-Rivières Anders Hoffmann, Ph.D. Creative Director, FORA Ministry of Economic and Business Affairs, Division for Research and Analysis

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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, ”With data you are just another guy with an opinion” FORA’s slogan

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Two levels of my work A political motivation: Denmark aims at being one of the most entrepreneurial economies in the OECD by 2015 An analytical objective: Develop a better understanding of the drivers of entrepreneurship and support fact based policy formulation

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Political motivation: SME policy in Denmark

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Political motivation: Entrepreneurship policy The Political Platform for the Danish Government, 2005 The Government will draw up an ambitious, holistic and multi-year strategy to make Denmark a leading growth, knowledge and entrepreneurial society Our goal is for Denmark, by 2015, to be one of the societies in the world where most growth enterprises are launched

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Analytical objective Provide policy makers with a prioritised list of policy areas to promoting entrepreneurship

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Entrepreneurship Entrepreneurship cannot be seen as a single event. General population Want-to-be 30% Entry 1% Survival 70% Exit 25% Growth 5% GEM Eurostat ICE

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Defenitions need to come from the policy objectives? Job creation Economic growth, productivity improvement, and competitive innovation Poverty alleviation and social opportunities Others?

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Why is entrepreneurship important: Job creation and destruction - by age group

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Why is entrepreneurship important: Job creation - by different types Employment first year Employment after 5 years Average number of employees after 5 years Entrepreneurs Growth Entrepreneurs Total

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Why is entrepreneurship important: Impact on productivity Growth Entrepreneurs had a 40% higher productivity (MFP) than the average Danish firm Growth Entrepreneurs had a higher share of highly educated people A doubling of the number of growth entrepreneurs would increase GDP by 0.6%

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Why is entrepreneurship important: - average wage level by firm type 1000 DKR

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Define 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).

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Comparing Performance Entry of new firms The EU: EUROSTAT Business Demography provides start-up rates for 11 countries (more countries will be available soon) The US: Four main sources (US Census Bureau, Small Business Administration and Bureau of Labour Statistics) of start- up rates - varying from around 10% to around 20%. The US data only includes employer firms Apply the US definition in the EU (joint work with the OECD and Statistics Denmark)

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Comparing Performance - Creating New Firms (Business Demography) EUROSTATEmployee-firms

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Comparing Performance - high-growth entrepreneurs/firms The share of firms with a growth rate (turnover and employment) higher than 60% over a three-year period and with a growth rate of at least 20% each year. (Based on Birch Gazelles definition) The data is from the Bureau Van Dijk (BvD)

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Comparing Performance - Generating High-Growth Entrepreneurs

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - “Concluding” on policy focus…. Growth entrepreneurs create more jobs (at higher wages) and increase productivity A higher number of new firms does not automatically lead to a higher number of growth entrepreneurs! So why no focus on creating growth firms….

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - From policy objectives to policy areas “The most important policy implication is that the stimulation of productive entrepreneurship is a much more straightforward and feasible undertaking than previously recognised” William J. Baumol in Kaufmann Though Book 2005

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Key Policy Areas for Stimulating High-growth Firms Methodology 1. The framework conditions for entrepreneurship are defined and quantified 2. The empirical links between the indicators measuring the framework conditions and the indicators measuring high growth are tested 3. Identify key policy areas for enhancing entrepreneurship performance based on regression and comparative techniques

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - The framework conditions are defined - what constitutes a high-growth firm A great idea

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - The framework conditions are defined - what constitutes a high-growth firm The right people A great idea

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - The framework conditions are defined - what constitutes a high-growth firm The right people Financial backing A great idea

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - The framework conditions are defined - what constitutes a high-growth firm Incentives Culture

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - OpportunitiesCapitalAbility Culture Incentives Policyarears Totalmeasureofthebusinessenvironmentforentreprenurship

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - EntryBarriers/ deregulation Venturecapital Stockmarkets Wealth& bequesttax Restart posibilities Loans Trad. Business education Personal Incometax Bankruptcy legislation Businesstax& Fiscalincentive Laubormarket regulation Entrepreneurial motivation Administrative burdens OpportunitiesCapitalAbility Culture Incentives Policyarears Totalmeasureofthebusinessenvironmentforentreprenurship Initiativestowards Specificgroups Socialsecurity discrimination Business Angels Technology transfer Entrepreneurship Infrastructure (public) Access toforeign markets Entrepreneurship education Communication Aboutheroes Capitaltaxes Procurement regulation Entrepreneurship Infrastructure (private) Privatedemand factors

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - The framework conditions are quantified A quality assessment of indicators has highlighted 61 indicators - 18 policy areas quantified. Composite indicators are almost an art form in itself and highly controversial. The methods suggested in the Handbook on Constructing Composite Indicators: Methodology and User Guide published by the OECD and the Joint Research Centre of the EU Commission in Ispra

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Links between performance and framework conditions Belgium Denmark United Kingdom Finland France Greece Netherlands Italy Korea Norway Switzerland Spain Sweden Germany United States Austria R 2 = Simple average of framework condition indicators Share of high-growth firms

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Identifying key policy areas for enhancing entrepreneurship performance

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø Income taxes Administrative burdens - start Incentives Bankruptcy Business taxes Administrative burdens - growth Labour market regulation Distance between Denmark and the top countries

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø Change DK Change DK–T4 Change T Income taxes Administrative burdens - startup Incentives Bankruptcy Business taxes Administrative burdens - growth Labour market regulation

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Identify key policy areas - An example: Venture capital Correlation0.59 R20.34 Observation28 Estimatet-statP-value Intercept Venture capital

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Not correlated with performance Significant correlated with performance High priority among the Top-4 Bankruptcy Legislation Labour Market Regulation Access Barriers Venture Capital Entrepreneurship Education Restart Possibilities Income Tax Corporate Tax Culture Entrepreneurship Infrastructure Low priority among the Top-4 Access to Int. Markets Business Education Wealth and Bequest Tax Knowledge Transfer Adm. Burdens Loan Capital Stock Markets Capital Tax

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Selected Conclusions Europe lack growth firms not start-ups Entrepreneurship policy can generate both jobs and higher productivity especially if it is targeted towards high-growth More new firms do not mean more high-growth! Important policy areas can be identified

Copyright 2007 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Contact information services/entrepreneurship services/entrepreneurship