Effectiveness of entrepreneurship policy

This section discusses research addressing the outcomes of entrepreneurship policy. The Entrepreneurship 2020 Action Plan identifies investment in education as being fundamental to entrepreneurship, and a primary method of promoting it. Researchers have encouraged increased public investment in higher education (e.g. Castaño-Martínez et al., 2015). There is consensus that better educated individuals (i.e. generally with tertiary education) are more likely to engage in entrepreneurship (see Bosma et al., 2018). For instance, Barreneche García (2014) finds that European cities with higher numbers of university students experience higher rates of venture creation. Tertiary education is also linked with ventures that are generally more productive and beneficial to the economy (van Praag & van Stel, 2013). In Europe, education ecosystems and cultures with a strong knowledge base grounded in science are linked with the creation of new ventures focused on innovation (Del Monte &

Pennacchio, 2019; Dilli et al., 2018; Fritsch & Wyrwich, 2018;). Environments with rich traditions of education support the creation of new ideas and entrepreneurial opportunities which in turn encourage entrepreneurship activity. Entrepreneurship education can also provide the necessary bridge to entrepreneurship activity when other institutional support is lacking (Walter &

Block, 2016).

However, when specifically considering the impact of entrepreneurship education,²⁹ overall results are mixed and ambiguous (see Nabi et al., 2017).

Some researchers find education geared towards entrepreneurship can produce the necessary human capital required for venture creation (De Clercq et al., 2013;

Martin, McNally & Kay, 2013) and reinforce a desire to engage in entrepreneurship (Rauch & Hulsink, 2015). Others question whether entrepreneurial attitudes, skills or innovation can be taught (see De Jorge-Moreno et al., 2012). Walter & Block (2016, 217) finds that “entrepreneurship education is more effective, in terms of stimulating more entrepreneurial activity, in entrepreneurship hostile institutional environments”. In their meta-analysis of 73 articles, Bae et al. (2014) found that whether students had any intentions of engaging in entrepreneurship prior to commencing their entrepreneurship education was more important in determining likelihood of entrepreneurship activity than the actual entrepreneurship education itself. The implication is that entrepreneurship education enhances rather than triggers entrepreneurship activity.

A key critique of entrepreneurship education studies is that they generally “focus on short-term, subjective impact measures such as

29 Recall from section 4.4.1 that entrepreneurship education is exclusively focused on developing entrepreneurial attitudes and skills, and promotion of new venture creation.

entrepreneurial attitudes and intentions, rather than longer term ones such as venture creation behavior and business performance” (Nabi et al., 2017, 278)³⁰. While the concept of “intention” in other disciplines has been found to be highly correlated with subsequent action, intention alone tends not to be significantly related to entrepreneurial activity and better measures, such as actual behaviour, are recommended (Bae et al., 2014). Entrepreneurship education incorporated into labour market policy measures to assist individuals affected by business closure has been found to encourage actual transition into entrepreneurship (Nyström, 2020).

Education can fill knowledge gaps about entrepreneurship but a significant barrier to entry is the lack of real world experience in creating and running a business (Giacomin, Janssen, Pruett, Shinnar, Llopis & Toney, 2011;

Staniewski & Awruk, 2015). The probability of failure for entrepreneurship is generally, substantial (Criscuolo, Gal & Menon 2017; Peng et al., 2010; Shane 2009) and the risk is exacerbated by a lack of actual experience (Mátyás, Soriano, Carpio & Carrera, 2018).³¹ As a result, researchers warn against measuring the success of teaching simply by the number of ventures created by students and encourages universities to provide a more realistic education by ensuring students are aware of the high risk of failure, provide ways to increase the probability of success and focusing on evidence-based choices rather than theoretical outcomes (Buchnik, Gilad & Maital, 2018).

A lack of practical knowledge or experience can be moderated by offering “well-mentored experiential simulations of the startup process” which ultimately lead to more venture creation (Buchnik et al., 2018, 17). Action-based, or learning-by-doing, education programmes have been found to overcome knowledge and experience gaps, and supports new venture creation (Donnellon, Ollila & Middleton, 2014; Gielnik, Frese, Kahara-Kawuki, Katono, et al., 2015; Watson et al., 2018). Educational business games that simulate the actions and decision-making process during the start up phase can increase an individual’s knowledge of business administration, planning and preparation.

In Germany, this has led to new venture creation at approximately twice the standard rate (Kriz & Auchter, 2018).

Moreover, connecting individuals to social sources of learning, resources and experiences attained through networks, mentoring, and professional associations have also been found to be beneficial (Buffart, Croidieu, Kim &

Bowman, 2020; Donnellon et al., 2014; Ozgen & Baron, 2007; Rigg & O'Dwyer, 2012; Nabi et al., 2017). Exposure to role models is positively related with venture creation (De Clercq et al., 2013). Learning from external sources of

30 Entrepreneurial intentions are “desires to own or start a business” (Bae et al., 2014: 218).

31 It can be difficult to find definitive percentages but Lee et al. (2020) states that 50 percent of new ventures in the USA fail.

education and networks is also related to innovation (Gimenez-Fernandez, Sandulli & Bogers, 2020).

Other policy initiatives, such as R&D expenditure encouraged by the Europe 2020 strategy have also been positively linked with entrepreneurship activity. Encouraging R&D spend has been popular with governments and in the 1990s shifted the source of Germany’s regional growth from established firms to new ventures (Audretsch & Fritsch, 2003; Audretsch & Keilbach, 2004).

Spending on R&D by higher education organisations is particularly useful in new venture creation especially in more developed, entrepreneurial economies (Murdock, 2012). Using European data, Castaño-Martínez et al. (2015) finds that more expenditure on R&D by governments and universities stimulates entrepreneurship activity. In a follow up study using different methodology, Castaño et al. (2016) was able to replicate these results.

However, Fini, Fu, Mathisen, Rasmussen & Wright (2017) found that institutional pressure and incentives to create ventures resulting from university R&D in three European countries (i.e. Italy, Norway, the UK) was linked with higher rates of venture creation but the overall quality of these ventures was low. More recently, Burke et al. (2019) found that in Europe, higher levels of R&D expenditure is linked with the creation of better quality ventures which contribute more to the economy and society, including job creation. As with much of entrepreneurship research, results are ambiguous.

Changes to tax regimes have also been linked with entrepreneurship activity. Baliamoune-Lutz & Garello (2014) finds reducing tax progressivity in Europe for the higher income range has a positive and significant effect on entrepreneurship activity. In other contexts, Darnihamedani et al. (2018) finds that lower corporate taxes can increase innovative entrepreneurship but favourable capital taxes (i.e. on property and goods) on returns is more likely to result in the creation of viable, high quality ventures in the longer term without increasing income inequality or government debt. In contrast, to many studies which use data from countries with relatively low tax levels and less substantial welfare systems or social insurance programmes, Stenkula (2012) examines the effects of taxes in Sweden – a high-tax welfare state. Stenkula (2012) finds that despite the various taxes imposed in Sweden, there is a significant but small negative relationship between payroll taxes and entrepreneurship activity. They argue that the results reaffirm the importance of considering the holistic design of a tax system and the institutional context in which it operates.

Another salient influence on entrepreneurship activity is ease of access to resources, such as finance (e.g. De Clercq et al., 2013). Although, simply providing resources may not be a motivating factor for venture creation in Europe, facilitating access to resources (e.g. finance) is helpful for individuals already motivated to engage in entrepreneurship (Vegetti & Adăscăliţei, 2017).

Access to finance has been found to be particularly important for young, innovative companies (Giraudo et al., 2019). In their extensive literature review of entrepreneurship and innovation, Block et al. (2017) finds that access to venture capital is overwhelmingly important for encouraging innovation. Using German employment data, Koch et al. (2013) finds that labour market freedom enables new venture growth by allowing easier access to the labour needed to

fulfil human resource needs. In line with economic freedom principles, reducing start up costs to remove barriers to entry has also been found to increase venture creation although this may unintentionally encourage entrepreneurship with high failure rates, and produce few benefits to the economy or society (Darnihamedani et al., 2018; Sobel, 2008).

The USA has historically been considered an innovation leader and taken the lead on instituting economic freedom (Botta, 2017). Research examining economic freedom rely on US-centric measures (e.g. Economic Freedom of North America (EFNA) index) and often find a positive relationship between economic freedom and entrepreneurship in the USA (e.g. Powell & Weber, 2013). The alternate US-based Fraser Institute Economic Freedom of the World (“EFW”) Index is used by studies primarily focused on explaining economic growth (Sobel, 2008) but has also been used by researchers examining links with entrepreneurship activity. An alternative measure of economic freedom is the Heritage Economic Freedom Index (“EFI”).³² There is no consensus on which measure to use (e.g. Aidis et al., 2012). During the literature search, it was difficult to find studies examining economic freedom using a European dataset. Irrespective, examining the impact of economic freedom on entrepreneurship can help researchers and policymakers understand its effectiveness, and where European data has been used, it has been noted.

Using the Fraser Institute EFW measure of economic freedom Bjørnskov

& Foss (2008)’s influential study finds that high rates of government spending (i.e. bigger government) discourages entrepreneurship activity but monetary freedom (e.g. low inflation) and access to finance encourage it. Angulo-Guerrero, Pérez-Moreno & Abad-Guerrero (2017, 33) finds that “better legal structure and security of property rights and more lenient regulation of credit, labor and business tend to favor entrepreneurship by opportunity” and that a lack of economic freedom pushes individuals into entrepreneurship because it produces an environment with limited opportunities: although, they admit that due to limitations, their results can “not be interpreted as definitive” (Angulo-Guerrero et al. (2017, 35). Also using the Fraser EFW Index, Dempster & Isaacs (2017), finds that the economic freedom index has a large impact on entrepreneurship activity but upon further analysis, only size of government and trade freedom were positively related to beneficial, or more productive forms of entrepreneurship activity. In contrast, Baliamoune-Lutz & Garello (2014) finds that economic freedom does not significantly affect entrepreneurship activity in Europe.

Using the Heritage Economic Freedom Index (“EFI”) Dau & Cuervo-Cazurra (2014) finds a positive relationship between pro-market policy measures and entrepreneurship. Saunoris & Sajny (2017, 312) finds that

32 This index comprises categories currently consist of 12 specific components. Refer to APPENDIX A for more detail about the separate components.

economic freedom positively effects entrepreneurship activity but warns that

“blanket policies that promote economic freedom might not be equally effective across countries”. Aidis et al. (2012) finds no significant relationship between EFI and entrepreneurship activity although the Size of Government (i.e. lower government spending and taxation) and, to a lesser extent the Freedom from Corruption, significantly increase entrepreneurship activity. ³³

The seminal work of McMullen et al. (2008) drills down to examine the impact of economic freedom on entrepreneurship by considering the motivations for entrepreneurship. Using the Heritage EFI, it finds that fiscal freedom, monetary freedom and labour freedom pushed³⁴ individuals into entrepreneurship out of necessity for survival. Labour freedom, as well as property rights, also worked to pull individuals into entrepreneurship to exploit profitable opportunities. Although economic freedom in advanced economies can stimulate entrepreneurship aimed at exploiting profitable opportunities, increasing the degree of economic freedom “has a greater explanatory power for economies in the earlier stages of development than for innovation-driven economies” and that overall, it is more likely to encourage entrepreneurship of poorer quality (Kuckertz et al., 2016, 1,292). Díaz-Casero et al. (2012, 1,708) finds that “almost all components of the Economic Freedom Index have a significant relationship with Entrepreneurial Activity, which is negative [emphasis added] in most of the analyses”. Most relevant to Europe, in developed countries, fiscal freedom, government size, financial freedom, property rights, freedom from corruption and labour freedom tend to pull individuals into entrepreneurship.³⁵ Using a European data, Ignatov (2018) finds that European Union members with greater economic freedom experienced higher levels of innovative entrepreneurship.

Historically, research indicates that the relationship between economic freedom and entrepreneurship activity is neither direct or straightforward (Minniti, 2008). More recently, research suggests that not all aspects of economic freedom are significantly or positively related to venture creation.

Context, such as USA versus Europe, and level of development also impact the outcome, and interactions between the various elements which can have wider implications beyond entrepreneurship activity. For instance, deregulated financial markets can increase capital market volatility and market risk while deregulated labour markets are associated with increased inequality and systematic underinsurance against risks, such as disability, old-age poverty and

33 This work is largely based on the seminal work of McMullen et al. (2008) which also uses the Heritage EFI.

34 For explanation of “push” and “pull” factors see section 4.4.3, above.

35 In developing countries, Government Size and Monetary Freedom pull individuals into entrepreneurship. In developing nations, “lack of employment prospects is high and a way out of this situation is the creation of a business or self-employment, where Business Freedom, Trade Freedom, Property Rights and Freedom from Corruption emerge as areas that are negatively associated with entrepreneurship. Government Size is the only aspect that encourages it” (Díaz-Casero et al., 2012, 1,708).

illness (Dilli et al., 2018; Hermmann, 2019). The seminal work of Audretsch &

Thurik (2000) highlighted back in 2000 that despite popular perceptions, labour market deregulation such as dismantling social safety nets to solve unemployment is unnecessary and based on the misconception that reduced wages could stimulate employment. They pointed to the Netherlands which at the time, had adequate safety nets in place and rising employment. Bjørnskov &

Foss (2013) finds that there is some support for government intervention and welfare states promoting entrepreneurship, especially through investment in high quality infrastructure. These findings raise the possibility of an optimal level of economic freedom.

The concept of economic freedom has a history of being controversial because it is complex and difficult to measure (de Haan, 2003; Gwartney &

Lawson, 2003). Aidis et al. (2012, 127) argues that using one index to measure economic freedom is inadequate to capture the complexity inherent in economic freedom and conclude that their results “demonstrate that the set of indicators has more than one dimension and enforcing a one-dimensional scale on it may not be a valid technique”. Recent studies indicate that results remain generally mixed (Nikolaev et al., 2018) and subject to measurement challenges (Bruns, Bosma, Sanders & Schramm, 2017; Su et al., 2017).

Significant effort and funding has been allocated to entrepreneurship policy over the last decade. Institutional change was expected to increase entrepreneurship but evidence of the effects of these changes on entrepreneurship activity has been mixed. The impact of economic freedom principles which is influenced by the USA’s legacy of innovation and entrepreneurship seems to be the least studied in Europe despite the shift towards a more pro-market approach. More recently, researchers are beginning to caution about having too many positive expectations from efforts to promote entrepreneurship (Mühlböck et al., 2018). The effects of institutional change not only impact entrepreneurship, but can also spill over to the wider economy and society with some unintended consequences. This is explored further in the next section.