A recent paper from the Netherlands concludes that some companies contribute to economic growth more than others, and advises policymakers to take this into consideration.
Policy circles are increasingly looking to encouraging entrepreneurship as an economic development strategy. What some of them fail to account for is the diversity of businesses, that new company creation is not always the biggest obstacle to job creation, that survival, growth, and profitability all play a role in determining if a company will be able to contribute to economic growth.
As a result of this disregard for the wide variety of companies and entrepreneurial potential, to this day, most entrepreneurship support policies are designed to encourage entry, or startup creation. Based on a more in-depth look at the differences between companies, below are a few lessons from Elisa Calza and Micheline Goedhuys at the Maastricht Graduate School of Governance.
- Do not just provide credit for new firms as a one-size-fits-all policy. Focusing only on access to credit to facilitate market entry for new firms is often ineffective as a policy. Sometimes, these policies cause a net waste to the economy, because they lower the quality of the entrepreneurial pool, and lead to turbulence (the resulting exit rates are higher than the rates of new firm entry). Policymakers should investigate different entrepreneur profiles before designing support policies.
- Tailor policies to local needs in developing countries, and focus on forming human capital. Combined policies work better than single-objective interventions: rather than providing only training or only financial support, it is often worth it to combine training with financial support.
- Create a well-functioning internet and telecommunications infrastructure so that entrepreneurs can build on the rapidly growing internet and smartphone access in developing countries.
- Foster quality entrepreneurship and target high-growth entrepreneurs. Facilitate exports, innovation, and address the needs of high-growth companies differently than those of average entrepreneurs. These are the companies that create the most jobs to the economy after all.
- Take a second look at exits. Traditional entrepreneurship support policies tend to favor entry of new companies into the market, and it is often assumed that exits are a result of insufficient productivity. However, exits can be a learning experience, and if the entrepreneurs behind the exited company decide continue to be involved in the economy by starting a new company or making investments, it can deliver a net positive value to the growth of their sectors in the end.