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How to support entrepreneurship

Small and medium enterprises (SMEs) are at the core of the economic activity both at local and the national level, and often the sector is referred to as the “lifeblood of our economy” by heads of states, ministers, and other top public administrators.
The economic activity of SMEs is a powerful drive in sustaining a healthy economy and an enterprising society. The literature finds strong links between entrepreneurial activity and the competitiveness of an economy and economic growth. SMEs provide jobs and reduce unemployment, support the social security system and government income through tax contributions, and offer the means for economic and social mobility. Countries thus have an interest in supporting SMEs and promoting entrepreneurship. If one takes a look on the World Bank's annual “Doing Business” report will most certainly conclude that this is not so; not all countries support entrepreneurship at the same level, or using the same avenues.
Countries where business regulation is most burdensome are more likely to be undemocratic, characterised by official corruption, have larger unofficial economies and lower levels of wealth.

Simeon Djankov

Thus, the foundations for healthy entrepreneurial activity are:
  • Democracy
  • Zero corruption
  • Official economy
  • High levels of wealth
Some are easier said than done, but what this tells us is that if you live in a developed democratic country that has low corruption and black market is close to inexistent, then entrepreneurship should be very strong. Most OECD countries should share these foundamental characteristics. Nevertheless, there are major differences even among OECD countries on how they choose to strengthen entrepreneurship.
The central choice is to either follow a low regulation route or to follow a high ‘‘support’’ route.

Andre van Stel

Minimum capital requirement required to start a business is found to lower entrepreneurship rates across countries, and its effect is much more significant than say the time, the cost, or the number of procedures needed to start a business. Even with regards to the survivability of nascent or young businesses, access to capital and cheap funding is identified as the most important factor.
Many scholars have also drawn attention to the negative impact of high corporate taxation on the growth of firms, and consequently their survivability. But what is considered "high" and what "low" is more a matter of opinion rather evidence of empirical research. In the United States for example, the top bracket corporate tax stands at 35 percent and top bracket long-term capital gain at 39.6 percent. These might seem high, but one needs to consider that in the time when Microsoft, Apple, Hewlett-Packard and Intel were start-ups the highest marginal tax rate was at 70 percent. Still these companies managed not only to survive but grow to dominate markets across the globe. In support of the limited importance of low corporate tax rate one needs only to look into the situation of low corporate tax countries with weak entrepreneurial support like Greece, where effective corporate tax is at 20 percent but entrepreneurship is quite weak beyond family businesses and established corporations.
According to the World Bank Doing Business 2009 report Greece has one of the least business-friendly regulatory environments in the OECD area in terms of starting/closing businesses


To get the situation in Greece into context, so that the reader understands what "least business-friendly" means, one has only to point out that even after all the recent reforms the country still has one of the lowest scores in enforcing contracts, which take on average 3 and a half years, or that resolving insolvency takes on average another 3 and a half years when in other European countries is less than 2. Even if it has become rather quick to start-up a business the fact that an unsuccessful enterprise makes it quite impossible to get up on your feet and start again cancels out the ease of starting a business. To understand how important this is, you only need to think that Henry Ford had a series of failed businesses before actually succeeding, and if he was an entrepreneur in such a country, then Ford Motors would have never existed.

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