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SMEs and Entrepreneurship: What can and do governments do?


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Presented at the Regional Meeting on SME, Entrepreneurship and Access to Finance Indicators, organised by the OECD-MENA Investment Initiative, December 2011.

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SMEs and Entrepreneurship: What can and do governments do?

  1. 1. D.J Storey University of Sussex, UK Presentation to Regional Meeting of the GCC countries on SME, Entrepreneurship and Access to finance Indicators, 6-7 December 2011, Dubai, UAE
  2. 2. Four economic benefits of entrepreneurship job generation; innovation; productivity and growth; A valid career option for individuals the potential to increase the ‘utility’ of individuals by increasing their, for example, satisfaction or income.
  3. 3. The role of government From the viewpoint of business owners Governments can exert either a positive or a negative influence on the extent to which these benefits materialise.
  4. 4. Positives Create an enforceable legal framework for business in which fair competition takes place Provide a stable macro economic environment Create a low tax and low regulation environment Provide “support” for new and small firms in the form publicly funded training/ advice/ finance More generally provide an education framework for its citizens from which business benefits
  5. 5. Negatives High barriers to starting a business –permits/ cost/ time High regulations in operating a business High taxes on business owners Can favour powerful cartels Corruption
  6. 6. A Simple Model Determinants of Entrepreneurship Entrepreneurial Performance Impact of Entrepreneurship
  7. 7. A Framework for Indicators Determinants Entrepreneurial Performance Impact Regulatory R&D and Entrepreneurial Framework Technology Capabilities Firm-based Indicators Job Creation Employment-based Indicators Economic Growth Other Indicators of Entrepreneurial Performance Poverty Reduction Culture Access to Finance Market Conditions
  8. 8. Determinants Regulatory Framework R&D and Technology Entrepreneurial Capabilities Administrative Burdens for Entry R&D Investment Training and experience of entrepreneurs Administrative Burdens for Growth University/ Industry Interface Business and Entrepreneurship Education (skills) Bankruptcy Regulations Technological Cooperation Between Firms Safety, Health and Environmental Regulations Technology Diffusion Product & Labour Market Regulation Broadband Access Court & Legal Framework Patent System; Standards Social and Health Security Income, Wealth,Business and Capital Taxes Access to Finance Market Conditions Access to Debt Financing Anti-Trust Laws Attitudes Towards Entrepreneurs Business Angels Competition Entrepreneurship Infrastructure Desire for Business Ownership Access to VC Access to the Domestic Market Immigration Entrepreneurship Education (mindset) Access to Other Types of Equity Access to Foreign Markets Stock Markets Degree of Public Involvement Culture Risk Attitude in Society Public Procurement
  9. 9. The 2 big decisions 1. Focus on general firm creation or Focus on high potential firms - Selectivity? 2. Focus on Macro policies or Focus on Micro policies?
  10. 10. The case for general firm Creation policies Source : Paul. D. Reynolds Higher levels of firm (and job) churning is associated with subsequent increases in net job growth and productivity increases New (not small) firms are one major source of jobs (some for short periods of time, some for longer). Some firms grow (creating create jobs) by expanding the economy, others by driving out competitors leading to offsetting job losses with less net job creation.
  11. 11. Numbers involved in business creation Source : Paul D. Reynolds Nascent Entrepreneurs Egypt New Firm Ownermanagers 3,372,889 1,496,645 253,576 191,916 1,117,332 1,523,067 Tunisia 149,848 488,697 UAE 169,794 213,980 Jordan Morocco
  12. 12. The Case against general firm creation policies Promoting firm creation is a waste of resources – 2/3 die in six years and <1% of new firms have >20 employees after 5 years. It encourages optimistic but poorly resourced individuals to take a risk and in many cases make their own position worse The link between general firm creation rates and economic development remains opaque
  13. 13. The case for Selectivity Significant job creation takes place in only a tiny proportion of firms It is the gazelles that transform an economy by changing the economic and competitive landscape There are examples of long run, government-funded selective technology projects -SBIR Business Support programmes that are selective are successful – UK Business Links There are too many businesses for everyone to be helped
  14. 14. The case against selectivity Selecting the businesses to support is very difficult The VC sector gets most of its investments “wrong” – but makes its money from the extreme successes It is too politically risky for governments to have this form of payoff The net impact on employment – in a sector/region/ economy of gazelles can be much less than the gross impact
  15. 15. The Case for Micro policies Every developed country has them Information; Training; Advice ; access to finance; public procurement; export support etc SMEs expect this form of support on the grounds that governments also help large firms (even more!) Self-report data indicates those using this support find it helpful. It can be targeted at specific types of firms [high tech?]or owners [females?] or locations [areas of deprivation?]
  16. 16. The case against Micro policies Careful evaluation studies assessing whether the assistance influences the performance of the assisted firms point to very weak and sometimes no impact. Delivering micro policies requires a substantial bureaucracy and an enlightened and well-informed political system It can be very expensive indeed Impact is only apparent in the medium term
  17. 17. Macro Policy components Ease of doing business Governance Macro-Economic stability Tax regime Formal/ Informality Ethics/ Religion Role of Females SMEs respond to, rather than lead, changes in welfare
  18. 18. So, what policies seem to work? Varies by country and region Varies by “problem” being addressed Varies by assessment method used Varies with macro-economic circumstances Varies with level of economic development So, no “one size fits all” BUT
  19. 19. Where is the Jury still out? Policies to improve access to finance Policies to change “attitudes” Policies to encourage SMEs to provide more workforce training Policies to provide firms or individuals with “advice”
  20. 20. Conclusion New and small firms can contribute to economic welfare and development Governments can contribute or reduce that contribution The effectiveness of policies depends on the circumstances of the country/region Very broadly there seems clearer evidence of the impact of macro policies –regulation, tax, macro-environment, competition, policy delivery Less evidence of impact of micro policies on access to finance, advice, training or cultural change