From: Foundation for Economic Growth

Our Economy
How Competitive Are We?
May 21, 2004, 12:25

The fifth global assessment of national entrepreneurial activity was completed in 2003. Surveys of the adult population were again used to locate those active in creating new firms. The national average prevalence rate - the Total Entrepreneurial Activity (TEA) index - was 9 per 100 of those 18 to 64 years old. The addition of new countries increased the range of activity from 2% to 29% - a factor of 15. There has been considerable year-to-year stability in this measure for individual countries.

Among 40 GEM countries there are 2.4 billion in the working years (18 to 64 years old); it is estimated that 300 million nascent entrepreneurs are attempting to establish 192 million new firms. The newly created Firm Entrepreneurial Activity (FEA) index reflects those established firms that expect to have an innovative impact on the market and grow. There is less variation among countries with the FEA index; the range is from 2% of existing firms and jobs in entrepreneurial firms to more than 20% of existing firms and jobs in entrepreneurial firms; a factor of 10. Within 40 GEM countries about 57 million people are managing 37 million entrepreneurial firms.

The two indices can be used to classify 40 GEM countries into five groups. The most entrepreneurial includes Chile, Korea, New Zealand, Uganda, and Venezuela. The next most active are Brazil, China, India, and Mexico. The intermediate group includes Argentina, Australia, Canada, Denmark, Hong Kong, Hungary, Iceland, Ireland, Slovenia, Spain, Singapore, Thailand, the United Kingdom and the United States. The below average group includes Belgium, Finland, Germany, Greece, Israel, Italy, Norway, South Africa, Sweden, and Switzerland. The least entrepreneurial countries are Chinese Taipei (Taiwan), Croatia, France, The Netherlands, Japan, Russia, and Poland.

The most entrepreneurial group of countries is three to six times higher than the least entrepreneurial group on all measures of entrepreneurial activity. New firms appear to provide from 2% to 15% of the current jobs in the GEM countries; this job creation is highly correlated with the level of startup activity. There is a positive, statistically significant association between national economic growth and national level of entrepreneurship (either the group classification or the level of the TEA index) in prior years. This association is higher for the TEA necessity index, reflecting those that pursue start-ups because they have “no better choices for work.” Necessity entrepreneurship is much greater in poorer countries, which have higher growth rates than richer countries.

Over the 2000 to 2003 period, about four in five new firms expect to create jobs and once they are established, one in five expect to provide 20 or more new jobs. New firms are created in all economic sectors but only one in 33 expects to have a substantial innovative impact on the market. About two-thirds are implemented by men and 60% by those
25-44 years old; 66% are starting a new firm to pursue an opportunity, 27% out of necessity, and 7% for other reasons.
Men are twice as likely to pursue start-ups as women, and younger adults (25-34 years old) are the most active. A positive personal context - knowing entrepreneurs, seeing good business opportunities, and having the skill to create a business - has a major impact on participation in firm start-ups. A cultural context that is positive toward entrepreneurship - reflected in social acceptance of entrepreneurial careers, respect for new business success, and positive media coverage - tends to increase participation in startups, but has less effect than a positive personal context.

Educational attainment and household income affects the motives for entrepreneurship - the poor and uneducated are more likely to be responding to necessity - than the absolute level of participation.

Informal funding of business start-ups was responsible for US$360 billion in resources to new firms, 11 times more than the US$32 billion provided by venture capital firms to start-ups within their own countries. About 80 percent of all venture capital support in the world is provided within the United States. Except for Israel, venture capital is not a major source of entrepreneurial financial support in most other countries.

While many national factors affect entrepreneurial processes in all countries, some factors seem to have a different impact in rich countries compared to poor countries. The higher level of necessity entrepreneurship in poor countries implies that government policies in these countries can be more effective if a range of approaches is developed for different types of entrepreneurial activity. Women in poor countries can benefit from special attention.

On the other hand, providing systematic training in entrepreneurship and firm management skills; reducing the scope of government control of national economic activities; reductions in social and economic security programs; reducing the costs for registering new firms (rich country impact); and improving the efficiency and effectiveness of government functioning as well as establishing official respect for property rights may well enhance business start-ups.

The potential impact on entrepreneurship among existing firms is less clear. Assessments of more than 800 national experts in all GEM countries suggest that most governments are not considered very effective in sponsoring programs or policies to enhance entrepreneurship.

A number of factors associated with more entrepreneurship may not be easy for governments to control. For example, it is difficult to imagine governments being willing and able to increase the percentage of young adults in the population, reduce long-term employment, increase income disparity, or expand the agricultural sector—all to increase the level of participation in entrepreneurship.

High potential new firms, those expecting or planning for substantial job growth, appear to be more prevalent in countries with a substantial research and development infrastructure. While the presence of such an infrastructure is likely to have a major long-term influence on technically based entrepreneurship, it can sometimes take decades for a significant, measurable impact.

One thing is clear, a formal national coordination mechanism is unlikely to be able to adjust a national economy fast enough to be competitive in a fast-changing, complex global marketplace. Decentralization of this social function to the private entrepreneurial sector - where new start-ups are created and existing firms are re-oriented - is likely to provide a faster, more effecting adaptation of the national economy. The government may have a major role in helping to minimize transition costs as people and regions adapt to new economic structures.

© Copyright 2003 - 2007 Foundation for Economic Growth