===================================================================== Center for Community Economic Development University of Wisconsin-Extension Community Economics Newsletter No. 311 September 2002 ===================================================================== A Newsletter from the Center for Community Economic Development; Community,Natural Resource and Economic Development Programs, and University of Wisconsin-Extension, Cooperative Extension Service ===================================================================== Barriers to Entrepreneurship and Potential Solutions* by Steven Deller In a recent multinational study Reynolds and his colleagues (2000) combined surveys, national data set and expert interviews in 21 countries to examine the factors associated with differing levels of entrepreneurship and on how to formulate policy to better simulate entrepreneurship. The study showed significant variation in the levels of entrepreneurial activity across the study nations. For example, in the United States one-in-ten adults were attempting to start a new business at the time of the study compared with one-in-twelve in Australia, one-in-twentyfive in Germany and one-in-thirty in Spain, but only one-in-one hundred in Ireland and Japan. While Reyonds and his colleagues found several factors within and across countries, they identified four broad critical factors: 1. Finance: National experts considered problems with finance to be one of the principal factors hindering entrepreneurship in their country and the relationship between finance and levels of entrepreneurship activity was confirmed in the data. The availability of early-stage finance, either from informal sources such as individuals or formal sources such as venture capital funds, is greater among countries that have higher levels of entrepreneurial activity. 2. Education: Education plays a vital role in entrepreneurship. The study identified that if the level of participation in post-secondary were the only factor used to predict entrepreneurial activity, it would account for 40 percent of the difference between the study countries. Providing individuals with quality entrepreneurship education was one of the top priorities identified by national experts. 3. Fundamentals: The study also argued that policies geared toward boosting entrepreneurial activity should not be confined to the entrepreneurship sector per se but also extended to the macro-economic fundamentals of the country like markets, competition and regulation. In particular, the most entrepreneurially active countries had a greater ease of doing business with the government, more flexible labor markets and lower levels of non-wage labor costs. 4. Social Legitimacy: The perceived social legitimacy of entrepreneurship was also argued to make a difference. It was found that measures such as (a) the extent to which fear of failure acts as a deterrent to starting a new firm and (b) respect for those starting new businesses were associated with differences in levels of entrepreneurial activity. While some may not view these findings as new or revolutionary, the consistency in findings across a range of entrepreneurial studies lends strong credence to the findings. Reynolds suggests three ways to foster entrepreneurial activity. They include: 1. Conductive Framework Conditions: Achieving proper framework conditions the institutional arrangements within which economic activity takes place should be the foundation of policy. Healthy entrepreneurship requires the creation of a stable macro-economic environment and structural policies to produce well-functioning markets. Thus it is argued that governments need to create competitive markets, efficient capital markets (including venture capital), flexible labor markets, simplify the administrative burden of government and reduce the costs of firm closure and bankruptcy. 2. Supportive Cultural Attitudes: Although cultural attitudes are formed through complex processes that are not clearly understood, cultural factors do appear to affect entrepreneurship. In particular, cultural factors do appear to affect the willingness to co-operate with others, which can facilitate entrepreneurship. It is argued that the role of education in creating positive attitudes towards entrepreneurship merits farther attention. 3. Well-Designed Government Programs: Government programs, if well-designed, can also promote entrepreneurship. While the countries within the study, including the United States, have a wide range of programs designed to assist businesses many are not designed to have the fostering of entrepreneurship as their primary objective. In some cases some programs are targeted on different types of businesses, such as agricultural firms, high tech enterprises, manufacturing and so on. Other programs are targeted on specific aspects of business such as finance, innovation, development of business skills and so on. There is clear a role for government in fostering entrepreneurship at the national, state and local levels. Indeed, a wide range of programs do exist at all three levels. They involve a range of public, private and non-profit actors operating at various scales and a wide range of instruments such as finance programs, advice and educational services, business incubators and science parks, and network and cluster programs. The problem that Reynolds and others have identified is that these programs have been developed independently rather than in a holistic manner. It is therefore argued that a more comprehensive approach is needed to local entrepreneurship policies that recognize the wide-ranging nature of the influences on entrepreneurship that recognizes that different influences reinforce one another and that seeks to build a healthy overall environment for entrepreneurship. Specific Strategies: · Profile success stories including business, people and products using all media outlets available. · Creation of a high profile awards program across all sectors of the local economy. · Establish an Enterprise College aimed at 18-25 year olds aimed at fostering the specific skill sets required for entrepreneurship. · Develop entrepreneur internship programs matching students with locally successful entrepreneurs with clearly established educational outcomes. · Small business summer schools were interested students and community members can participate in short, focused on small business education. · School-based enterprises where students identify potential businesses, plan, create and operate small businesses using the schools as mini-incubators. · Pool local public and private funds to create a small venture capital fund. * This essay barrows from the OECD study entitled “Devolution and Globalization: Implications for Local Decision-Makers.” Chapter four, “Policies for Entrepreneurship.” OECD, 2001, Paris, France. Further reading Reynolds, P. Hay, M. Bygrave, W. Camp, S. and Autio, E. (2000) “Global Entrepreneurship Monitoring.” 2000 Executive Report, Kauffman Centre for Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation, Kansas City, Missouri, USA. Steven C. Deller Community Development Economist Issued in furtherance of Cooperative Extension work, Acts of May 8, and June 30, 1914, in cooperation with the U.S. Department of Agriculture. Carl O‘Connor, Cooperative Extension, University of Wisconsin-Extension. University of Wisconsin-Extension, U.S. Department of Agriculture and Wisconsin counties cooperating. UW-Extension provides equal opportunities in employment and programming, including Title IX and ADA.