Denmark: The entrepreneur’s paradise

Civitas, 8 March 2011

Entrepreneurship is a hot political topic at the moment. David Cameron in a speech to the Conservative Spring Conference stated that he was on the side of ‘go-getters’ who would create growth and jobs in the British economy. Britain could certainly do with an infusion of entrepreneurship according to the Global Entrepreneurship and Development Index (GEDI), a new measurement of enterprise and entrepreneurial activity created by Zoltan Acs of George Mason University, Laszlo Szerb of the University of Pecs, and Erkko Autio of Imperial College Business School.

According to the creators the index is superior to previous indexes and builds upon them. Rather than measuring entrepreneurial activity through quantitative assessments, such as amount of new companies, number of self-employed people or business start-up and survival rate, the GEDI integrates quantitative and qualitative measures such as educational encouragement of entrepreneurship and propensity for innovation amongst firms. Furthermore the GEDI bases results on an interaction of three sub-categories; the general disposition of the populace regarding entrepreneurship, start-up activity in the medium or high-technology sectors and the entrepreneurial aspirations of firms. If one sub-category has a low score this acts as a break or a bottleneck constraining entrepreneurship, these bottlenecks get worse as the divergences between high and low scores increase. The authors also argue that their index tracks development through stages: factor-driven, efficiency-driven and innovation-driven. Countries can be placed in such categories which indicate how they can expect entrepreneurial gains to be driven in the future. According to the index Britain, which is classed as an ‘Innovation Leader’, can expect entrepreneurial gains to be driven particularly by the entrepreneurial and innovative activity of highly educated individuals, rather than by efficiency gains from technology or basic institutional changes such as private property rights.

The index has been praised, but there are also results which could indicate weaknesses. Entrepreneurship in some countries, such as Hong Kong or Japan, seems higher than the index suggests (Hong Kong is 23^rd and Japan is 29^th). Furthermore some countries such as China (40^th) and India (53^rd) seem to contain factor-driven, efficiency-driven and innovation-driven elements in their economies, which their relatively low scores do not seem to capture. These two criticisms were voiced by the Economist in a review of the index and seem particularly pertinent. However, the index and some of the information which it draws on does provide some useful insights for British policy-makers.

According to the GEDI Britain comes 14^th with a score of 0.56. This is not bad but in some areas Britain could clearly improve according to information from the World Bank and Global Entrepreneurship Monitor, two sources of information that the GEDI draws upon. In the UK the percentage of men involved in an early stage company is more than double that of women, 7.4% to 3.6%. In terms of the general level of red tape involved in creating a business the UK comes, a very respectable, 5^th. However, it takes an average of 13 days to create a business compared to 6 days in the US, 4 days in Belgium and only one in New Zealand. Furthermore, in terms of the number of procedures involved in setting up a business there are 6 in the UK compared to 3 in Singapore and one in New Zealand. The report also highlights the lack of venture capital available for British start-ups, an interesting weakness considering the strength of the UK’s financial sector.

Indexes and raw league tables should be read with caution, it is difficult to accurately categorise countries with a single-figure and even more difficult to gather anything meaningful from this. However the GEDI and other international indexes can be useful if they provide disaggregated data on economies (as the full GEDI does, although it will set you back £252) shedding light on particular areas of weakness. According to the GEDI Britain needs to improve financial provision for start-ups and could benefit from cutting red-tape. It is perhaps concerning that it is in these two areas where the Coalition Government has had little effect so far. Red-tape has increased with a plethora of new employment and business regulations and issues to do with finance have not been solved with tentative lending agreements from the banks and minimal corporation tax cuts. More radical solutions are required in these two areas. One suggestion, concerning personal taxation, was made in the Civitas blog yesterday, and wider measures were proposed by the Director of Civitas in a Telegraph article. The Government needs to show that it is considering significant policies to encourage entrepreneurship and growth, or it could find that Britain has slipped even further down the international league table.