The Role of Government in Entrepreneurship
August 08, 2022
Entrepreneurs drive economic growth and progress in many communities, but some need help getting off the ground. What is the role of government in boosting private sector success?
Entrepreneurs are essential players in the economy; they contribute significantly through job creation, economic development, innovation, community development, and wealth creation.
Academics have long understood that entrepreneurs constitute significant economic contributors. In his influential 1979 paper "The Job Generation Process," MIT professor David Birch asserted that small businesses drove job creation—not large corporations, as was conventionally held.
That's why it makes sense for governments to encourage and promote entrepreneurship. SMEs sometimes need support from the government, venture capitalists, and startup incubators to get out of the gate. As small and medium-sized enterprises (SMEs) continue to grow, what role should the government play in how those businesses operate and succeed?
Currently, support levels vary by state as well as by industry. Interventions come not only through incentives, initiatives, and tax breaks but also in the form of government regulations, some of which reduce a business' burdens while others represent potential obstacles.
This article discusses the role of the government in entrepreneurship, exploring:
- Government agencies and programs
- Targeted tax incentives
- Broad tax reduction
How government impacts entrepreneurship
Governments assist entrepreneurs through economic policy, infrastructure development, business development support, and the imposition and easing of regulations. Developed nations enjoy a huge advantage in this regard, as developing nations may lack the necessary resources or lag in the development of the support infrastructure entrepreneurs require to nurture startups.
Silicon Valley has become synonymous with entrepreneurship. Its many technology startups—including Apple, Facebook, and Google—established the blueprint for innovation and entrepreneurial activity. Governments elsewhere may err in attempting to replicate the Silicon Valley model, however. As many have learned the hard way, it's not that simple. What works in one location or one business sector may not translate elsewhere.
That's where the concept of the "entrepreneurial ecosystem" comes in. What role does government play in establishing fertile grounds for new businesses? This question sparked a Small Enterprise Association of Australia and New Zealand (SEAANZ) white paper series. It addressed nine primary elements:
- Government policy
- Regulatory framework and infrastructure
- Funding and finance
- Mentors, advisors, and support systems
- Universities as catalysts
- Education and training
- Human capital and workforce
- Local & global markets
The papers recommend:
- Making the promotion of entrepreneurship a government priority
- Establishing broad, holistic government policies that nurture all startups rather than targeting a select few
- Encourage natural growth rather than top-down solutions
- Don't focus exclusively or even primarily on high tech; encourage growth across all sectors
- Provide high-level leadership but leave ground-level decisions to entrepreneurs
- Develop policy that benefits both the businesses themselves and their management as individuals
Similarly, professor Daniel Isenberg of Babson College published a Harvard Business Review article stressing the importance of addressing all ecosystem elements, not just one or two. He recommends:
- Stop trying to replicate Silicon Valley
- Tailor the ecosystem to fit into its local entrepreneurial climate
- Involve the private sector from the start
- Shift the focus to startups with high potential
- Celebrate the successes of entrepreneurial ventures
- Dispel social norms about entrepreneurship
- Provide financial support sparingly to develop grit and weed out opportunists among business owners
- Avoid overcomplicating clusters and remain sector-neutral
- Remove regulatory barriers
The proper government approach can yield results beneficial to all: profits and achievement for entrepreneurs, jobs for workers, increased tax revenues for the government, and valued new products and/or services for all.
Government agencies and programs
Small business owners often need assistance from financiers or investors to get their operations up and running. This assistance can come from venture capital groups, traditional banks, or, in some instances, grants from government agencies. For example, the U.S. Small Business Administration (SBA) provides limited funding through small business grants to support entrepreneurs establishing new ventures. Additional financial assistance may come from COVID-19 relief programs, grants for state entities, and programs targeting small businesses engaged in scientific research and development.
New businesses equal new jobs and innovation, not just in the United States but also globally. In India, the government allocated over $3 billion to Startup India for 2022-23, and that's just one of a number of government programs providing seed money to nascent businesses across the subcontinent.
Targeted tax incentives
Taxes are complex for everyone, and especially so for small business owners. The COVID-19 pandemic further complicated an already challenging process, but in doing so offered entrepreneurs much-needed relief through the CARES Act. The Small Business Tax Credit Program and the Paycheck Protection Program were among programs enabling startups to weather the storm. While everyone was hurting, startups were in a particularly challenging position, as even in the best of times many startups require three to four years of doing business before they begin to turn a profit.
The government doesn't offer tax incentives just to startups. Venture capitalists and other early-stage investors may also benefit from tax policies designed to promote investment. Some observers assert this approach has a greater likelihood of success, since experienced investors are arguably more expert at choosing worthwhile startups than are the government bureaucrats who manage grant programs.
Broad tax reduction
Reducing taxes returns money to all businesses, including entrepreneurs. This approach certainly helps cash-strapped startups retain more capital, but if it comes at reduced services, one could argue that the costs offset the benefits. Also, policies that favor all businesses tend to benefit the more established ones--they typically pay more income taxes, so they save more and reap greater rewards under a broad tax reduction.
Regulations offer both advantages and disadvantages for entrepreneurs. Clean energy targets, for example, can help green entrepreneurs by creating incentives for individuals, companies, and governments to seek their services. On the other hand, some regulations may create impediments to success. For example, small startup slaughterhouses are often hampered by government regulations—designed for large operations—that are too costly or impractical for smaller operations to meet.
The complexity of regulation can, in itself, pose problems for entrepreneurs. Unquestionably, simpler rules enable entrepreneurs to spend less time satisfying government requirements and more time developing their businesses.
Learning about the role of government in entrepreneurship
There's a lot to learn about the role of government policy in promoting entrepreneurship and the benefits of entrepreneurship in economic growth and development. So how will you accumulate the knowledge you need to start your business venture?
In Beyond Silicon Valley: How One Online Course Helped Support Global Entrepreneurs, author Michael E. Goldberg shares inspiring stories and experiences from entrepreneurs nationwide and worldwide, such as the Ohio Third Frontier—which addressed the lack of support for entrepreneurs in Cleveland, Ohio—and CORFO, a Chilean economic development agency.
He also charges aspiring entrepreneurs to ask themselves the following questions before determining whether there is a need to pursue government funding:
- Does the government avoid bias?
- Does the government offer to match startup funds?
- How does the government benchmark startup success?
- Should the government have a different role in promoting entrepreneurship in an economy known for corruption?
All these questions tie into the need to create "entrepreneurial ecosystems," Isenberg's exhortation to tailor the ecosystem to fit into its local entrepreneurial climate. How do you know which environment is best for your business? Knowing your strengths and weaknesses as an entrepreneur before launching your business can help determine the support, if needed, through government policies and programs.
MBA with entrepreneurship concentration
If you're looking to take your entrepreneurial mindset to the next level, a general Master of Business Administration (MBA) provides the foundation and fundamentals for starting and maintaining a business. However, an MBA in Entrepreneurship can take your business acumen to even greater heights. As a result, more MBA programs have added specialized tracks for entrepreneurs to gain a more targeted focus in their specific areas of interest. Top-tier programs include:
- Babson College's F.W. Olin Graduate School of Business Harvard University's Harvard Business School
- Indiana University - Bloomington's Kelley School of Business
- Massachusetts Institute of Technology's Sloan School of Management
- Saint Louis University's Richard A. Chaifetz School of Business
- The University of Texas at Austin's McCombs School of Business
- University of California - Berkeley's Haas School of Business
- University of Michigan - Ann Arbor's Stephen M. Ross School of Business
- University of Pennsylvania's Wharton School of Business
- Washington University in St Louis's Olin Business School
Some master's degree programs also offer online or hybrid learning, allowing more convenience and flexibility for working adults.
You may not need an MBA or any other graduate degree to learn to be a successful entrepreneur. You may be able to acquire that information from a certificate program or even from a stand-alone course. Many online providers offer such courses—in fact, our company, Noodle Learning, offers one led by Case Western Reserve University's Michael E. Goldberg, whose book was previously cited in this article.
Starting a business is no easy feat. However, knowing that there is a mutual benefit between entrepreneurs and governments can help ease the process. Therefore, as entrepreneurs continue to create jobs and contribute to economic development, governments should favor supporting and promoting these SMEs through entrepreneurship policy and regulations meant to build them up and help sustain them without creating unnecessary roadblocks in the process.
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