Policymakers often wonder how they can better support entrepreneurs to spur local job creation in a recession. New research from Sweden offers a number of interesting ideas.
Simon C. Parker reviewed academic literature and existing policy solutions in a paper called Entrepreneurship, Norms, and the Business Cycle to find out how entrepreneurship and economic growth are related, and what governments can do to use business creation as a stimulus. Here is what he found:
- Entrepreneurship rates follow economic growth, rising in booms and falling in busts. Although the exact causes are unknown, Parker speculates that it may be because economic expansion allows new business owners to spend more, generating business for other firms. New business financing is also more available in times of economic growth, and much more constrained in a recession when businesses would need it the most.
- Policymakers should step in to support entrepreneurs when times are bad. Encouraging new business creation can help to provide a way out of a recession. New firms create a disproportionate number of new jobs, and the unemployed are a lot more likely to become entrepreneurs than employees are.
Parker also lists a number of policy solutions that can support employment and consumption growth.
Solution 1: Work with banks to sustain lending to small firms in a recession. Governments can substitute for shrinking private-sector lending by backing banks in their lending to small businesses, or by taking on some of the risk through loan guarantee schemes. Some governments even set up state-backed small business banks in response to the tighter banking rules in the aftermath of the financial crisis.
Solution 2: Support venture capital in bad times, (and bad times only). It should not come as a surprise that venture capital moves closely with the economy: it is abundant in booms, and evaporates in busts. Careless government support of VCs in good times may even fuel bubbles; but public support of private VC firms in a recession can stimulate the economy through encouraging entrepreneurship, which fuels consumption. Similarly to the Kauffman Foundation, Parker also mentions that providing incentives for private VCs to invest more is much preferable to setting up public VC firms.
Solution 3: Invest public funds to attract entrepreneurship to depressed economic regions. In using entrepreneurship as a regional development tool, policymakers should consider if large businesses or small businesses would serve better to help the region weather economic shocks. Large businesses tend to be better at surviving in crises, but small, locally-owned chains tend to care more about the fate of the region and its inhabitants.
Solution 4: Provide employment assistance schemes and business advisory services. Governments can provide an incentive for the unemployed to become entrepreneurs by making it less risky for them to operate their own business: even if they fail, they have an option to fall back on public benefits. This may have the unintended consequence of increasing the number of unsuccessful business ventures that may die in a year or two, but it may still result in a much needed short-term consumption growth.
Contributed by Lili Torok.