GOVERNMENTS and policymakers are wrong to focus on supporting start-ups and to believe that by helping first-time entrepreneurs to get off the ground the country will help create jobs and transform depressed regions. This is the view of award-winning US professor of entrepreneurship studies, Scott Shane.
In a paper published by the Research Institute of Industrial Economics, Shane said policymakers should stop subsidising the formation of the typical start-up and focus on the subset of businesses with growth potential.
Shane is the 2009 Winner of the Global Award for Entrepreneurship Research and a professor of Entrepreneurial Studies, at the Weatherhead School of Management at Case Western Reserve University in Cleveland, Ohio.
Writes Shane: “The vast majority of people founding new businesses aren’t entrepreneurs in the sense of people building companies that grow, generating both jobs and wealth. Rather, they are founding wage-substitution businesses that have more in common with self-employment than with the creation of high growth companies.”
He said this phenomenon was not only limited to the US, but could be found across the 34 countries surveyed by the Global Entrepreneurship Monitor (Gem) report between 1998 and 2003.
Shane’s explanation for the declining level of entrepreneurship across the world is that as countries become wealthier, the rate at which they create start-ups goes down.
This he attributes to a range of factors, including wealthier countries being able to generate more attractive wages which draws many into working for someone else rather than fork out the subsequent rising cost to run a business in a wealthier nation.
He contends that rather than picking industries in which new companies are most successful, most entrepreneurs pick industries in which most start-ups fail.
Start-ups also create less jobs than existing business, he argues. Added to this it takes a lot of entrepreneurs to create lasting jobs, he argues.
“To get one business employing at least one person in 10 years, we need 43 entrepreneurs to begin the process of starting a company. And how many jobs will that start-up have, on average, 10 years after it was founded? For the United States, the answer is 9.”
He said it meant that 43 people had to try to start companies so that the US could have 9 jobs a decade from now.
Shane contends that “a tiny sliver” of companies accounts for the vast majority of the contribution to job creation and economic growth that comes from entrepreneurial activity.
Some commentators might argue that policymakers cannot afford to focus solely on the small number of highly successful start-ups, because it’s not always clear which start-ups will become high growth businesses and which won’t. But Shane says most know which businesses to back from the beliefs of venture capitalists and angel investors.
As an example he says if it came to choosing to back a personal cleaning business that is started by an unemployed high school drop out, or an internet company that is started by a former SAP employee with 15 years of experience in the software industry, most people would go with the latter.
Responding to questions on how South Africa would fit in his study, Shane said policymakers in countries with high poverty and unemployment were faced with a dilemma.
There were two political problems when it came to aiming funds at more innovative businesses. The first, he said was that in many cases it takes a long time to create jobs through this process and people can’t wait especially when they vote in elections.
The second is that the creation of a small number of good jobs was seen as “politically inferior” in many cases to a larger number of temporary, poor jobs.
“So if elected officials can get a bunch of start-ups formed where the entrepreneur provides a job for himself for a year at 60 percent of the wage of someone employed by someone else, that is preferable to a lot of politicians to a situation where a smaller number of entrepreneurs create a smaller number of jobs that last longer and pay the prevailing wage, but take three years to create,” said Shane.
However Wolfgang Thomas, Professor in Economics at the University of Stellenbosch Business School, argued that the high failure rate of start-ups simply meant organisations and government should increase and not slacken off, support to those looking at setting up a business.
He said while Shane’s argument might be suitable for those countries that already had quite expensive and sophisticated support programmes for small business, but believed South Africa was not spending nearly enough on start-ups.
Thomas, who wrote 1995’s White Paper on the national strategy for the development and promotion of small business, said the country’s high failure rate of businesses meant more should be done to supply mentoring and business information these businesses.
This article appeared in Business Day on 22 September 2009.
Stephen Timm is a