Recently, it seems like every week brings us a new study purporting to show what public policies matter for high growth entrepreneurs. (Recent examples include studies from the Kauffman Foundation and Endeavor Insight). These studies are often helpful, but may be focused on only one country or suffer from ideological blinders. It’s likely that a conservative study will note that taxes matter, while liberal researchers point to an embrace of diversity as important pro-entrepreneur attribute.
A solid new study from the UK-based Nesta offers useful insights on the question of what policies and business climate characteristics are associated with the development of high-growth firms. The report, “What Drives the Dynamics of Business Growth?,” compares the climate for high growth firms in ten developed economies (the US, Canada, and eight advanced European economies). The environment for high growth firms in these economies share several characteristics. First, churn is good. Economies that have high levels of job destruction also have high levels of job creation. Second, new high growth firms create the bulk of new jobs in all of these economies. Third and not surprisingly, younger firms, and firms in certain sectors (such as service and manufacturing) face more volatile operating environments than more mature firms or firms operating in manufacturing sectors.
What policies seem to be correlated with more high growth firms? The paper stresses the great importance of flexible labor market rules. Nations with stringent job protection rules also tend to have less dynamic economies. Bankruptcy rules also matter. It’s no surprise that bankruptcy regulations that punish entrepreneurs for failure tend to also reduce their willingness to take risks. A more diverse and competitive banking sector also helps ensure better access to capital for new firms. Finally, the study highlights an interesting result related to R&D subsidies. Extensive R&D subsidies may have the effect of protecting incumbents and larger firms as opposed to spurring innovation by new companies. Since many of these subsidies take the form of tax credits (often of limited benefit to new and barely profitable start-ups), they generally are used more liberally by larger and more established companies.