Microsoft word - delitheou2_18.03.2005

«Επιχειρηµατικότητα και Τοπική Ανάπτυξη» ∆ρ. Βασιλική ∆εληθέου, τ. Στέλεχος Ε.Τ.Ε. Από το πόνηµα του Ο.Ο.Σ.Α.: Entrepreneurship and Local Economic Development,
O.E.C.D., Paris 2003
Macroeconomies and entrepreneurship
Across the twenty-nine countries surveyed in the 2001 Global Entrepreneurship Monitor - including twenty-two of the thirty OECD member countries - an average of just under ten per cent of the adult population was starting a new firm or owning an active business. At a macroeconomic level it is increasingly clear that entrepreneurship is one of the keys to economic dynamism and job creation (Reynolds et. al., 2001). The birth of new firms fuels the drive for efficient resource use by raising the degree of product market competition (with possible benefits for consumers). At least as important, entrepreneurship accelerates the process of generating, disseminating and applying innovations in technology and organization. This process of innovation is fundamental to sustainable growth. Company creation is in fact an essential carrier of structural change. As part of the OECD Growth Project the OECD Secretariat has examined the micro- economic underpinnings of productivity change in a set of ten OECD member economies (mostly for the period 1989-94). This research is one of the few studies of its sort to use a common multi-country analytical framework. The findings suggest that for seven of the countries studied new firms represent a significant source of overall productivity growth. However, the contribution of new firms was not the same across all industries. The role of company creation in raising productivity was particularly significant in newer industries such as information and communication technologies (OECD, 2001). The quantitative importance of new firms in employment creation can also be significant. From 1970 to 1985 new businesses accounted for twenty-seven per cent of annual job creation in manufacturing in Canada, and twenty-one per cent in the United States (Baldwin el a\., 1995). Acs (1999) and others argue that enterprise creation was critical to differences in the record of private-sector job-creation between Europe and the United States through the 1990s. Across the countries studied by the OECD (OECD, 2001) some five to ten per cent of employees are directly affected by enterprise creation and exit each year. More broadly, a sizeable literature suggests that a dynamic small firms sector brings with it particular micro- and macroeconomic benefits. For instance, Robbins et al. (2000) highlight the role of small firms in maximizing the utility of labor and capital through their use of secondary resources in the marketplace (such as first-time labor market entrants). They also emphasize the highly self-adjusting character of small firms in the face of changes in resource costs. The inference drawn is that a population of dynamic small firms will help to attenuate trade-offs between employment and inflation. In this connection, the authors found that in the United States, States with high proportions of employment in small and micro-enterprises have experienced higher productivity and growth of State income, and lower wage inflation Examining the impact of entrepreneurship on local economies
As a means of generating jobs and raising incomes, increasing rates of enterprise creation is an almost universal concern among local authorities. Along with efforts to attract investment, stimulating entrepreneurship is one of the two pillars of most local and regional development strategies. Nevertheless, few empirical studies have systematically examined the relationship between the creation of new firms and local economic development. A greater understanding exists of the interactions between enterprise births and national and regional economic development. Consequently, much that is written on the encouragement of enterprise as a local development strategy is based on inference from national and regional data and analyses. Such inference is not always reliable, as some aspects of the relationships between firms and local economies do not operate in the same way over larger areas. Variations in business activity across distinct types of locality have also been under- researched. Local areas with distinct characteristics exhibit markedly different enterprise demographics. For instance, within urban areas the inner city may be home to a large number and variety of firms. However, peripheral estates often contain fewer companies. Inner city districts may be near to high-income markets, transport facilities and business contacts, all of which are conducive to enterprise survival and growth. Large urban areas can provide easier access to public and private business support services. And commercial opportunities and the density of networks are usually more limited in rural areas than in urban centres. Patterns of enterprise can also differ in local areas that depend on a small number of dominant economic Enterprise birth rates differ greatly across regions
Rates of enterprise creation differ markedly across regions within OECD member countries. Some regions have annual firm birth rates two to six times higher than others (Reynolds et al, 1994). Significant influences on enterprise creation can vary from one region to another, and have been shown to include the following:1 • demographics, as more densely populated areas, regions with young populations and urban • unemployment, which for different reasons can both encourage and diminish rates of • wealth, with more affluent areas expected to have high rates of enterprise creation owing to higher levels of demand and a greater availability of capital; • educational and occupational characteristics of the workforce. For example, there is a positive link between the proportion of managers in the workforce and the level of firm • the prevalence of small firms, it being argued that employees in small businesses will aspire • the extent of owner-occupied housing, given that property is an important source of collateral for the financing of enterprise start-up (and development); and • infrastructure endowment, which is positively associated with investment demand. For example, public traffic infrastructure has been important in determining the distribution of start-up activity across Germany's regions (Egeln et al, 1997). The presence of large numbers of firms working in the same sector may also promote entrepreneurship (Garofoli, 1994; Reynolds, 1994). While impossible to fully capture in quantitative terms, a region's history might play a role, particularly if imitation is instrumental in the spread of entrepreneurship (see Chapter 3). In most cases the direct influence of public policy on regional start-up rates appears negligible. Regional growth is broadly associated with enterprise creation
Evidence suggests that fast-growing regions tend to have high rates of enterprise formation. Based on an analysis of data from close to four hundred labour market areas across the United States Reynolds (1994) tentatively concluded that high business birth rates precede increased regional net job growth. High rates of enterprise creation were found to play a statistically significant role in regional growth in Sweden (Davidson et al., 1994). And Ashcroft and Love (1996) showed a strong positive relationship between employment change and new firm formation across English counties in the 1980s. In the United States, the underpinning to federal entrepreneurship strategies was provided in part by the statistical work of David Birch. Birch (1987) - the statistical basis of which has been the subject of some debate among economic geographers - identified business formation and the growth of small firms as the major factor differentiating growing and declining regions. However, the evidence is not uniform. For example, Fritsch (1997) found no significant relationship between start-up activity and employment in (West) German planning regions. In another study examining (West) German planning regions Audretsch and Fritsch (forthcoming) showed that neither a high rate of enterprise births, nor a high rate of entry and exit combined, were sufficient for growth. The authors likewise observed interesting changes over time. The rate of company creation had no significant influence on the growth of employment during the 1980s. But regions with higher start-up rates did have higher employment growth during the 1990s. This was explained as reflecting change in "growth regimes".2 New and incumbent firms had made significant contributions to economic development at different times. These findings suggest that in some locations large firms will make a greater contribution to growth, while in others a more important impact will come from small firms. By implication, a policy setting that facilitates entry and attends to the needs of incumbent firms appears advisable. In summary, the evidence suggests that the creation of new firms is positively associated with the growth of regional economies. New firms in manufacturing appear to make a particularly important independent contribution to regional growth (Reynolds, 1994). However, the level of enterprise births is itself an outcome influenced by other causes of growth. Enterprise creation therefore appears to be a necessary if not sufficient condition of regional growth.3 Few studies have examined entrepreneurship and economic development across local
As previously mentioned, there are few empirical assessments of the impact of entrepreneurship on local economies. However, data from the United Kingdom broken down by local authority area show a broad tendency for disadvantaged areas (assessed on a multiple index of deprivation that includes unemployment) to have comparatively low levels of enterprise births (Westall et a\., 2000). Nevertheless, this relationship is not straightforward. Some areas of significant deprivation were also seen to experience high rates of firm creation. Indeed, fourteen out of the twenty most deprived Local Authorities in the United Kingdom were found to have an income per capita in line with or above the European Union average. The relationship between firm creation and employment in local economies is often uppermost in the concerns of policymakers. Some of the regional and local studies already cited suggest that the connection to net job creation is ambiguous. In fact, a number of conceptual, measurement, and labour market considerations v;ill make a straightforward relationship between firm creation and local (un)employment hard to detect. For example: • Causation between enterprise creation and unemployment is likely to operate in both directions. Rising unemployment can stimulate the birth of new firms because for a part of the workforce the opportunity cost of becoming an entrepreneur will fall. Conversely, a low rate of job creation, which is affected by the level of company births, also influences the rate of • Gross statistics can hide the sectoral mix of enterprise formation. This mix might affect employment growth. For instance, new enterprises in manufacturing typically have more employees than new firms in the service sector. And highly innovative companies might be associated with growth-inducing "spill-over" effects. • Much micro-enterprise activity is below the notice of statistical agencies. In the United Kingdom data on value-added tax (VAT) registration fails to capture businesses with an annual turnover of less than fifty-four thousand pounds. Such statistical oversight limits understanding of the impact of entrepreneurship on poorer locations, because it is here that micro-entrepreneurial activity is particularly common. Indeed, data collected by banks on the opening of new accounts show a wider geographical spread of business activity than is • Adjustments in rates of labour force participation and/or population change resulting from migration and commuting (particularly at the local level) will influence the rate of registered unemployment. Whatever its source, employment growth is not a sufficient condition for a reduction in regional or local unemployment (this is illustrated quantitatively in "Disparities in Regional Labour Markets", in OECD [2000]). • Because of migration and travel-to-work patterns the link between new firms and unemployment might be sensitive to where a locality is. And because internal migration propensities appear to vary across national labour markets the relationship between employment outcomes and enterprise creation across local economies might depend on the country being examined. Similarly, this relationship could change over time in any given country. For instance, the implementation of policies that lower the transaction costs of buying or renting accommodation could facilitate internal migration, weakening the link between local job creation and local employment. • Variation in key features of the population from one place to another- features such as educational attainment or incidence of long-term unemployment -would also affect correlations between entrepreneurship and changes in local labour markets. • Access to factor markets is also uneven across locations. For instance, in most countries there are significant regional disparities in the supply of formal venture capital. Similarly, infrastructure endowment and the quality of public programmes and institutions can differ from one area to another. All such inter-location differences can affect the size and growth of • The local geographic units from which start-up data is collected might easily include both rich and poor adjacent neighbourhoods. This could lead to an inaccurate depiction of the • The phenomenon of co-existing growth and unemployment in local and regional economies, which is not uncommon, also reflects the fact that businesses sometimes operate with few links to local product markets, while salaries may be spent outside of the locality. This implies that a given rate of enterprise creation in localities with different local supply and retail opportunities is likely to have different local multiplier effects. The above are just some of the considerations which suggest that the relationship between entrepreneurship and (un)employment across local economies will reflect a broad range of influences. Careful controls would be required to identify this relationship statistically, and there would be significant challenges of interpretation. By examining a number of localities in detail over time - which has rarely been done - the relationship between new firms, local economic growth and a range of labour market outcomes might be pictured more clearly. In this connection, the next section considers the mechanisms through which entrepreneurship Channels through which entrepreneurship can shape local economies
The principal routes through which the birth of new firms can affect local economic The investments made in establishing and enlarging new firms create jobs for owner- managers and employees. Income multiplier effects will follow for the surrounding community (but their magnitude varies greatly from place to place). Some analysts argue that small firms tend to stay within their original locality or region, and that many inject income into the area by selling to wider markets. However, newly created companies tend to serve local markets initially, reaching more distant markets as they mature. Research suggests that small and micro firms are more likely to employ local staff. The self-employed are also strongly linked to place, which largely reflects the personal services orientation of many self- employed businesses (Blanchflower, 1998). However, as discussed later, the setting up of new firms generally induces only small direct employment creation, especially over the short-run. Indirect employment effects will occur over time as workforce skills increase with periods in employment and self-employment. The creation of skilled employment in new firms might also provide incentives for individuals to invest in training. Growth in the tax base can stem from increases in personal incomes, corporate profits, consumption, property values and payroll payments. However, there is great variety in tax autonomy among sub-national governments (OECD, 1999). In many fiscal jurisdictions growth in various sources of tax revenue will accrue to central and regional levels of government, rather than local authorities. Furthermore, the size of changes in the tax base brought about by new firms is likely to be small over the short-term. This is especially so where policy has promoted entrepreneurship by providing tax exemptions or holidays, as is common in "enterprise zone" schemes. In addition, a major expansion of enterprise activity might require some increase in public spending on services. To the extent that enterprise creation is associated with poverty reduction - an effect that is usually limited - local authority spending on welfare-related services may fall. But much of this welfare expenditure will have been financed by higher levels of government. • Improved service provision and local income retention The creation of new firms can enhance the provision of local services such as retail facilities. A scarcity of such services characterizes many distressed communities. For instance, a survey of twenty poor localities in the United Kingdom found that none had a supermarket or similar shops, and only five had a chemist or a launderette (Cabinet Office, 1998). Indeed, a premise of many community development programmes is that growth will be stimulated if opportunities can be provided for money to circulate longer in the local economy. An increase in the local supply of services can help to retain incomes in the locality. More broadly, enterprise creation could also raise demand for business services. A corresponding expansion in the supply of such services might make a locality a more attractive place for others to start • Demonstration and motivational effects The birth of new companies might influence people's motivation. The presence and significance of this effect is of course difficult to quantify. However, anecdotal accounts suggest that a positive influence on expectations is possible. In this connection, studies of inner-city deprivation in the United States and elsewhere have stressed the socially corrosive effects of a lack of employed role models (Wilson, 1996). Positive role models may be particularly important in countering ethnic and gender discrimination (Reynolds et al, 2001). The possibility that imitation is important in spreading entrepreneurship is discussed in the In a related field, a growing literature on so-called "social capital" highlights the economic assets inherent to social relationships. Economic benefits are held to derive from such phenomena as social ties, sense of purpose, role models and social cohesion (OECD, 2001a).4 While the theoretical and empirical basis of the social capital literature is not fully fledged, some of the insights it provides add weight to the view that an expansion of productive enterprise could have welcome demonstration effects in distressed areas. It should be noted that some of the above effects - particularly employment and incomes growth, and increases in tax revenue - can also result from growth in existing local firms. Inner city regeneration and enterprise development: a focus of increasing policy interest Amongst others, Michael Porter (1995) has in recent years brought attention to the commercial advantages of America's inner cities, and the importance of exploiting these as part of a program of economic revitalisation. These advantages are held to include: frequent proximity to high-income markets and transport networks; population densities permitting high levels of consumer spending per unit area; and a labor force with skills which, while often moderate, are valuable to significant numbers of firms. As described in detail in this publication, scope certainly exists to further urban regeneration through pro-business strategies. However, Westall et al. (2000) note that Porter's analysis is of limited relevance to some areas of urban disadvantage. Peripheral housing estates, for instance, are often distant from city centers and poorly served by public transport. Their residents may experience multiple forms of deprivation, including extended periods without work, and sometimes have limited prospects in the mainstream labor market. The ways in which such characteristics can impede entrepreneurship in local economies are considered in the next chapter. 1. See Storey (1994) and Reynolds et al (1994) for reviews of a variety of studies. 2. The authors derive the concept of a "growth regime" from the theoretical and empirical literatures examining technological innovation under different forms of 3. By contrast, there is strong evidence that location affects enterprise growth and survival. Most authors show that location is a factor in explaining the longevity of 4. For instance, a commercial environment characterized by mistrust could require that entrepreneurs make unproductive investments in mechanisms to defend against the potentially opportunistic behaviour of counterparts.

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