I recently read a paper ‘Measuring entrepreneurship’ (by Kruno Kukoc and Dominic Reagan) which discussed the meaning and importance of entrepreneurship and the difficulty of ascertaining the real level of entrepreneurial activity in Australia.
The authors discuss modern definitions of entrepreneurship and conclude that it is ‘the process of identifying, developing, and bringing forward new innovative ways of doing things for the exploitation of commercial opportunities’.
The paper raises some interesting points. In particular, the fact that significant increases in expenditure on research and development and innovation in many countries has not led to the expected increase in economic growth. Recent research suggests that the critical link between R&D and economic growth is entrepreneurship. This is because entrepreneurship takes up knowledge ‘spilt over’ from other organisations and develops them commercially. Often this knowledge that spills over is not recognised by the organisations that have it as being of commercial value.
Another key link between innovation and economic growth is competition through which other businesses have to develop their own innovations or lose market share in response to new commercialised innovation by one business. Therefore in order to maximize economic growth from investment in R&D and innovation you need conditions that encourage both entrepreneurship and competition.
How do we know whether we have a healthy level of entrepreneurship? Current data, both in Australia and overseas, is not particularly meaningful, according to the authors of the paper. In the first place you have to be able to separate entrepreneurial activity from ordinary business activities, which normal statistical information does not provide.
In 1998, the OECD commented that some data indicated that the Australian business section was not particularly entrepreneurial.
One indicator in which Australia does rank highly against other countries is annual business start ups, which averaged 17% for 2003 and 2004; only New Zealand and the US rated higher among OECD countries. The problem is that start ups don’t necessarily reflect entrepreneurial activity; they may also reflect the activity of people becoming self-employed and supplying existing products and services.
The size of the small business sector has also been used as an indicator of entrepreneurial activity, and the international comparisons by the authors of the paper indicate that Australia ranks around average in relation to the proportion of employment in the manufacturing sector by small business.
The authors cite another study by Stam, Suddle, Hessels and Stel in 2007 which looked at whether having ‘ambitious entrepreneurs’ is more important in relation to economic growth than general entrepreneurial activity. The study concluded that it does. On ‘ambitious entrepreneurship’ Australia ranked just below the average of the developed and developing countries that participated in the Global Entrepreneurial Monitor in 2002. However, the study’s findings were based on employment expectations of the business owners and did not distinguish between innovative businesses and those who operated ‘normal businesses’ who were simply optimistic about future growth of their businesses, perhaps because of buoyant economic conditions at the time.
The level of venture capital activity is also not seen as a good indicator of entrepreneurial activity. This indicator tends to understate entrepreneurial activity because it does not take account of entrepreneurs who are not funded by venture capitalists. The natural aversion of entrepreneurs for outside interference or participation in their business tends to make them shy away from venture capitalists (Australia’s venture capital activity was around medium for the OECD).
The bottom line is that we currently really don’t have a reliable measure for the level of entrepreneurial activity. Because this activity affects economic growth it is important to be able to measure it and then determine whether there needs to be regulatory change to overcome impediments and actively encourage entrepreneurship.
Accordingly to the paper, the OECD is currently working on developing internationally comparable entrepreneurship indicators which should assist Australia in developing better indicators of entrepreneurship.
So what does entrepreneurship need to flourish?
According to the authors of the paper we need “… efficient financial markets, a simple and transparent corporate taxation system, labour market flexibility and bankruptcy rules adapted to the realities of the business world”.
It is certainly not news that the ideal environment for entrepreneurship is, in many respects, at odds with the protection of the rest of the community. A simple and transparent corporate taxation system may not protect every last dollar of revenue; labour market flexibility may not offer full protection for workers and bankruptcy rules adapted to the realities of the business world may not protect every creditor.
The balance of these key issues tend to tilt one way or another depending on the tendencies of each incumbent government. Yet getting that balance right is clearly essential if we are to have a buoyant level of entrepreneurship to propel economic growth.
Sue Prestney FCA is spokesperson on SMEs for the Institute of Chartered Accountants in Australia.