Mixed Messages on Entrepreneurship

entrepreneurship_whiteboardHow do you know if a country is doing enough to stimulate entrepreneurship?

The question came after reading an academic paper called “Do serial entrepreneurs run successively better-performing businesses?” Written by Simon C. Parker, it has just been published in the Journal of Business Venturing.

Tapping the US Panel Study of Income Dynamics (PSID) database, Parker explored whether serial entrepreneurs benefit more from successful or unsuccessful ventures, and what their performance trajectory is like over those ventures. The PSID is the world’s longest-running longitudinal household survey.

Parker says there are “two popular but mutually inconsistent conjectures” about serial entrepreneurs. The first is that their ventures become “ever more successful over time.” The second is that they are “galvanized by poor performance” but become complacent if they get used to success.

Implications of his research, which emphasized “the role of the entrepreneur rather than the firm,” include two issues that policy makers should be aware of.

The first is that the human capital developed by entrepreneurs is likely to help them in future ventures, “a realization which could fortify them to brave the hazards of poor performance, including failure,” Parker said.

The other finding is that the human capital developed by entrepreneurs depreciates over time. This means that any learnings from previous start-ups need to be applied quickly in the next venture. One common impediment to re-entry is bankruptcy where tough laws and lengthy discharge periods “may preclude favorable future entrepreneurial performance,” Parker said.

“Consequently, bankruptcy laws should perhaps err on the side of leniency to entrepreneurs rather than draconian punishment,” he said.

So where does Ireland stand?

“Traditionally the Irish Bankruptcy regime has tilted the balance heavily in favor of the creditor and it constitutes a harsh, stark and punitive regime for the debtor with a twelve year economic life sentence and with no realistic mechanism in place to enable the debtor to enter into a work-out relationship with his creditors,” according to lawyer Sean Kelly on the RSM Farrell Grant Sparks blog.

Now, those laws are being changed, and a quango has been set up, but it is taking a long time.

Meanwhile, the UK got a favorable mention by Parker since their 2004 Enterprise Act reduced the discharge period to one year from three.

Ironically, legacy Irish law is based on hand-me-downs left by the British and, in the case of bankruptcy law, seems to have drawn from the worst mean-spiritedness of the Dickensian era.

So how is the Irish government doing? Well, it is moving on bankruptcy, however slowly. And the country seems to score well on some aspects of the World Economic Forum’s(WEF) 2012 Global Competitiveness Index.

Ireland placed 27th last year, up two places on the year before. The US was 7th (down 2 places) and the UK was 8th (up 2 places). Switzerland, with a population of 8 million, took first place.

Countries of a similar size to Ireland were Finland (3rd place), Singapore (2nd), Denmark (12th), Norway (15th) and New Zealand (23rd place). Those countries have populations between 4.4 million and 5.6 million. For those of you counting, the Republic of Ireland has 4.9 million while the island of Ireland has 6.3 million.

Although the Republic scores well on some aspects, it falls behind badly on some of the 12 “pillars” the WEF ranks against.

One is the macroeconomic environment. This includes such things as government deficits and the cost of servicing debt. Ireland was a jaw dropping 131 out of 144 countries there.

And whatever the rights and wrongs of the bank bailout (wrong IMHO), it will take a long time to dig ourselves out of that hole.

But, there is another “pillar,” that can be acted on and this deals with entrepreneurial support.

The Financial Market Development pillar has some truly awful scores and sees the Republic in 108th place out of 144 countries surveyed.

This pillar deals with banks and the availability of capital. The report said a country needs a sound financial sector that “can make capital available for private-sector investment from such sources as loans from a sound banking sector, well-regulated securities exchanges, venture capital, and other financial products.”

When the index breaks it down further, its survey shows reality does not match the rhetoric often heard coming from government buildings.

Around three in 10 companies (30.1%) had trouble accessing finance while 16.4% said inefficient bureaucracy was a hindrance. One in 10 (10.4%) said labor regulations were a problem.

And while we all know the banks are fubar, the WEF index says venture capital is not much better. This one may surprise, because at many entrepreneur meet ups, a common refrain is that investment money is available.

Yet the WEF index puts Ireland in 88th place for venture capital availability, and in 134th place for ease of access to loans.

This is disappointing because Enterprise Ireland is a huge organization, and its departing CEO Frank Ryan once described it as the largest venture capitalist in Europe. There certainly seems to be room for improvement under this WEF pillar.

As for those financial institutions, how fubarred are they? There is a category called “soundness of banks.” Ireland scored 144th place — that is, 144th out of 144 countries.

Paddy Last.

Image courtesy Jonny Goldstein on Flickr.

2 thoughts on “Mixed Messages on Entrepreneurship

  1. Well said, I’d add one additional caveat and that would be our astonishingly low level of investment. This list http://en.wikipedia.org/wiki/List_of_countries_by_gross_fixed_investment_as_percentage_of_GDP shows we have the fourth lowest fixed investment to GDP in the world, sandwiched between Cuba and Iraq (if we adjust for the discrepancy between GDP and GNP caused by the multi national sector we’d probably be 2nd). Now I’m not sure where you put the blame for this, certainly as you’ve outlines the paucity of credit is a big concern, but surely second on this list is what exactly are Irish based businesses doing with their profits. We know certain business, are doing very badly in the current climate, but Ireland is also noted as begin one of the most profitable markets for large retail companies like Tescos (recent difficulties not withstanding). Entrepreneurship isn’t just people striking out on their own, it is also an internal process for companies that already exist starting new endeavors, that’s what investment is surely and by those figures it simply isn’t happening and I think this isn’t just a question for government but a question for business, who are very happy to have their lobbyist call for lower wages and cuts in public spending and taxes, but a lot less likely to look at their own house.

  2. Thanks for the comment, Seanán. It’s an interesting perspective to add the big companies to the mix. It would be really interesting to examine what kinds of intrapreneurship, if any, they pursue.
    John

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