A General Policy Framework for Entrepreneurship Anders Hoffmann, Ph.D. Creative Director, FORA – Centre for Economic and Business Research

Copyright 2005 © 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,

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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…”

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - What is Entrepreneurship? >No single definition exists of entrepreneurship simply because entrepreneurship cannot be seen as a single event. General population Want-to-be 30% Entry 1% Survival 70% Exit 25% Growth 5% GEM Eurostat

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Methodology – What generates economic growth?

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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).

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - High growth and MFP

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Dealing with Indicators >Many of the examined policy areas are multi- dimensional 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).

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Step 1: Select performance indicators Entry of FirmsNew High Growth Firms Firm entry rates, average (New firms in% of existing firms) Share of young firms with more than 60% growth rates in turn-over in a three year period, 1999 – 2003 Entrepreneurial activity (TEA) from Global Entrepreneurship Monitor, average Share of young firms with more than 60% growth rates in employment a three year period, 1999 – 2003

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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)

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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).

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Step 1: Select performance indicators - Data on high-growth firms

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Step 2: Examine performance

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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),

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø -

Audretsch, Thurik and Verheul

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Our model

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Step 3: Define relevant policy areas - 61 indicators

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Step 4: Test for correlation All correlation coefficients within the 95% confidence interval of the median (0.43 and 0.7) are significantly different from zero.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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).

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Step 5: Critical policy areas are identified - correlation coefficients

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Step 5: Critical policy areas are identified - Comparative analysis

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - My conclusions >Most important: >Venture capital >Bankruptcy legislation (restart possibilities) >Entrepreneurship education >Personal income tax >Labour market regulation

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - The Danish Entrepreneurship Index 2005

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - Main conclusions

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø -

Low correlation with performance Significantly correlated with performance High priority among top- 3 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 Low priority among top- 3 Exit Capital taxes Government programs Trad. business education Loan capital Technology transfer Culture/motivation Entry barriers

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.

Copyright 2005 © FORA, Langelinie Allé 17, 2100 Kbh Ø - 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.