Entrepreneurship support is not always a good thing

From a Web site full of research and commentary from critical thinkers comes a piece critical of blindly encouraging new business formation; that is to say, entrepreneurship is not always good.

At least that’s the point made by Scott Shane in his “The Start-Ups We Don’t Need” essay at American.com. Shane is a professor of entrepreneurial studies at Case Western Reserve University and the author of “The Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors and Policy Makers Live By.”

Shane poses this question: “Are we encouraging the creation of too many low-productivity businesses?”

From that question he launches into a series of scorching arguments that attempt to debunk the fact that all small business start-ups are sacred; that government should do all it can to support new business start-ups; and that small business growth is key to overall national employment growth.

Although Shane’s rebuttal of the conventional wisdom of supporting entrepreneurship seems harsh, he does include a recommendation that could be instructive for states or communities with limited resources: “Stop subsidizing the formation of the typical start-up and focus on the subset of businesses with growth potential. Getting economic growth and jobs creation from entrepreneurs isn’t a numbers game. It’s about encouraging the founding of high-quality, high-growth companies.”

His other key arguments include:

• “Policymakers believe a dangerous myth. They think that start-up companies are a magic bullet that will transform depressed economic regions, generate innovation, create jobs, and conduct all sorts of other economic wizardry. So they provide people with transfer payments, loans, subsidies, regulatory exemptions, and tax benefits if they start businesses. Any businesses. … This is bad public policy.”

• “We also have ample evidence that when governments intervene to encourage the creation of new businesses, they stimulate more people to start new companies disproportionately in competitive industries with lower barriers to entry and high rates of failure. That’s because the typical entrepreneur is very bad at picking industries and chooses the ones that are easiest to enter, not the ones that are best for start-ups.”

• “It also takes a lot of entrepreneurs to create lasting jobs. To get one business employing at least one person ten years from now, we need 43 entrepreneurs to begin the process of starting a company. And how many jobs will that startup have, on average, ten years after it was founded? The answer is nine. In short, 43 people have to try to start companies so that we can have nine jobs a decade from now. That’s not the spectacular yield that you might expect if you read the press reports about the job creation of start-ups.”

• “We need to reallocate resources to programs that support high-growth companies. For instance, we could shift money into the Small Business Innovation Research Program, which requires federal government agencies to set aside a portion of their budgets to support commercially viable R&D projects at small companies. The recipients of these funds are much more likely than the typical start-up to contribute to economic growth and to create jobs.”

• “Some might argue that we can’t just focus on the small number of highly successful startups because we don’t know which start-ups will become high-growth businesses and which won’t. As a result, we must throw mud against the wall and see what sticks. This view may be politically appealing, but it is naive. It assumes that we can’t identify the things that make new businesses more likely to survive, generate profits, increase sales, and hire people. Unless the beliefs of venture capitalists and sophisticated business angels are completely wrong, we know what criteria to focus on.”