Enter the growth enablers

Just as the search for new sources of economic growth is neverending, investors, businesses, politicians and academics alike are forever trying to discover the next emerging market, developing trend or alternative asset.

Solutions may have become harder to pinpoint amid the challenges of recent years, but entrepreneurship is without doubt one that has come to enjoy widespread support – including the enthusiastic backing of the prime minister, who on one occasion described entrepreneurs as the UK’s “only strategy” for growth.

Entrepreneurs as saviours

We hear more and more about the importance of entrepreneurs in kick-starting the economy, whether in the UK or globally. There is, however, a basic issue that frequently remains unaddressed: exactly how are we to define entrepreneurs and entrepreneurship?

The popular perception is that an entrepreneur should resemble Sir Richard Branson or Lord Sugar, a dynamic and successful businessman in the Apprentice mould. Equally, many see entrepreneurship as confined to high-tech sectors, as typified by the achievements of Apple’s Steve Jobs or Microsoft’s Bill Gates.

More realistically, an entrepreneur might simply be someone who owns a business, irrespective of its comparative majesty or modesty. In keeping with this interpretation, the rate at which new firms open and old firms close – more concisely known as entry and exit – is one of the methods most commonly employed in the field of economics to measure entrepreneurship.

The Nottingham School of Economics applied this rule of thumb when it recently set out to examine the links between policies on corporate and personal income tax and entrepreneurs’ decisions to open or close businesses.

One motivation for this work was the question of whether the kind of fiscal retrenchment we are now witnessing might itself reduce the level of entrepreneurship that takes place, so undermining its role in recovery.

Can entrepreneurship survive recession?

The study, covering more than 20 countries and drawing on entry and exit data contained in the OECD-Eurostat Structural and Demographic Business Statistics for 1998-2005, confirmed that some of the patterns relating to entrepreneurship are largely as might be expected. Others, though, are altogether more surprising.

The findings are well worth reflecting on at a time when many governments, the UK’s prominent among them, continue to stress the valuable part entrepreneurs can play in the wake of the global financial crisis.

1. Entrepreneurship is everywhere

This is the first thing we have to acknowledge and the first thing that is abundantly clear from the data. In every industry, in every country, some old firms die and some new ones are created. Every year roughly 10 per cent of firms die and are replaced by about the same amount of new entrants. Entrepreneurship, certainly on this measure, therefore cannot be viewed as the exclusive preserve of high-tech sectors.