Study raises questions over entrepreneurship policies

Apr 18, 2012 By Emma Thorne

Policymakers who try to boost the economy by creating a more favourable environment for entrepreneurs “can’t have their cake and eat it”, a new study has warned.

Such initiatives may well lead to new businesses but will also bring about more closures, according to major research into tax policy’s effects on .

The study, carried out by the University of Nottingham, questions the wisdom of efforts to rebalance the towards manufacturing.

It also describes stories of a 'High Street apocalypse' as 'nonsense', arguing that business entry and exit rates actually change little between good times and bad.

Risk-takers and go-getters

The findings come as the UK government continues to stress entrepreneurship’s role in aiding economic recovery in the wake of the global financial crisis. David Cameron has repeatedly signalled his support for 'risk-takers and go-getters' and last year described entrepreneurs as Britain’s 'only strategy' for growth.

Research co-author Professor Richard Kneller, of the Nottingham School of Economics , said: “Entrepreneurship has been identified as a crucial factor in driving future growth and employment in many countries.

“But there remains the question of whether fiscal retrenchment might itself reduce the level of entrepreneurship that takes place, so undermining its role in recovery.

“Our study confirms that some of the patterns relating to entrepreneurship are as might be expected – but there are others that are altogether more surprising.”

The research set out to examine the links between policies on corporate and personal and entrepreneurs’ decisions to open or close businesses.

Covering more than 20 countries and the period from 1998 to 2005, it drew on entry and exit data in the OECD-Eurostat Structural Demography Business Statistics.
Measuring entrepreneurship

Professor Kneller said: “The rate at which new firms open and old firms close is one of the more commonly employed methods of measuring entrepreneurship.

“Using this, we first find entrepreneurship is everywhere, not just in the high-tech sector. Old companies die and new ones are created in every industry in every country.

“We also find that policies that are aimed at creating more entrepreneurs will inevitably lead to higher rates of closure. In other words, more entry means more exit.

really need to get their heads around this idea. It’s a lesson to them that they can’t have their cake and eat it when it comes to encouraging entrepreneurship.

“Most of the exits are of firms that opened just a few years earlier. That might be no bad thing, as it suggests consumers didn’t value those firms’ products or services.”

The research found more companies die in manufacturing than are opened, with the decline more pronounced in the UK than in other countries in the sample.

In addition, rates of entry and exit as a whole were discovered to be higher in Britain than in other major European economies such as Germany and France.

Professor Kneller said: “What we don’t know is whether this is because the UK is more entrepreneurial or because it does less to support new and small businesses.

“We tend to classify someone as an entrepreneur only if they’re successful, but the reality is that there are all sorts of unsuccessful entrepreneurs out there.”

Because most entrepreneurs actually earn less than the average wage, increasing the marginal income tax rate for poorer individuals reduces entrepreneurship.

By contrast, increasing the marginal income tax rate for higher earners leads to more entrepreneurs and a rise in business entry rates – but only to a small extent.
High street apocalypse 'nonsense'

The study says one possible explanation for this is that such a move encourages the rich to become self-employed in an attempt to reduce their overall tax bill.

In general, the study shows taxation policies mostly affect those who want to open a business, with lower marginal corporate tax rates encouraging new enterprises.

But the research suggests the effect is small and that reducing the corporate tax rate by one percentage point would lead to only a few thousand new businesses.

Professor Kneller, a professor of economics, said: “One pattern evident from the data is that the rate of entry and exit really doesn’t change much over time.

“The entry rate might go down a bit while the exit rate goes up a bit, which is sufficient to generate the boarded-up shops and derelict factories that we all see.

“But the rates during the ‘bad’ times are generally the same as the rates during the ‘good’ times. The stories of an apocalypse on the High Street are nonsense.”

Explore further: Launching a new brand: Is partnering with a popular brand a good idea?

add to favorites email to friend print save as pdf

Related Stories

How successful Chinese entrepreneurs really think

Jan 16, 2012

( -- Can you really learn to be an entrepreneur? A new in-depth study offers fresh insights into how successful business players teach themselves to become better and better at making money.

From unemployed to entrepreneur

Mar 16, 2012

More than 90% of companies launched by unemployed individuals are still viable after three years. And they’ve also created additional jobs, potentially bringing even more people out of unemployment. This ...

China pays for crimes against business

Mar 22, 2012

The Chinese Government is struggling to prevent crimes against businesses, according to a new study from The Australian National University.

Refunds don't always help lower-income taxpayers

May 09, 2011

Getting a tax refund from the federal government at the end of the year may not always be the best option for lower-income populations, according to the research from Harris School economist Damon Jones.

Recommended for you

Professor analyzes role of trade sanctions against Iran

Mar 04, 2015

Israeli Prime Minister Benjamin Netanyahu addressed Congress on Tuesday as about 50 Democratic lawmakers threatened to boycott the address, offering the latest and one of the most clear microcosms of the debate about Iran's ...

Think twice about investing in own company

Mar 04, 2015

Employees whose retirement plan is invested in stock of the company where they work do not pull out money as the firms approach financial distress, a recently released, but yet to be published paper, co-authored ...

When performance comparisons spur risky behavior

Mar 02, 2015

When you're at work, there are two types of people you compete with: People with similar responsibilities at your own company, and rivals with similar duties at other companies. How do those different flavors ...

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.