My colleague, Dr. Howard Cochran, passed along this report from the Federal Reserve Bank of St. Louis on entrepreneurial activity around the world. It cites a survey that finds that Americans, as a culture, are more predisposed to entrepreneurial aspirations than most other countries.
"More than 70 percent of adult Americans would prefer being an entrepreneur to working for someone else. In contrast...only 46 and 41 percent of adults in Western Europe and Japan, respectively, preferred being an entrepreneur. One possible explanation for this difference is that, because the United States is an immigrant nation, its residents have inherited their dynamism from past generations. After all, many of those who came here had the gumption to migrate halfway around the world in search of a better life. Not only were the distances long, but the travel was often dangerous. This cannot be the whole story, however, because even in Canada-another nation of immigrants-only 58 percent of adults would prefer entrepreneurship over working for someone else."
In comparing entrepreneurial activity across countries, the Federal Reserve report finds that governmental policies differ significantly. While some countries follow a more "active approach", the US tends to favor a more passive approach.
"Passive policies are those meant to facilitate entrepreneurship by establishing institutions, laws and regulations to reduce the cost of running a business. Active policies, on the other hand, are things such as targeted tax breaks, subsidies and so forth that are meant to direct resources into particular business activities by creating specific incentives."
In comparing the two approaches, the Federal Reserve sees a clear advantage to a passive policy.
"A particular benefit of the passive approach is that entrepreneurs themselves pick the most promising areas to pursue. In contrast, active policies ordinarily involve efforts of government to pick the winners to subsidize. Experience indicates that governments have a poor track record in identifying promising new technologies. Consequently, subsidies often prove wasteful as they direct resources in directions that turn out to be unpromising. At the same time, taxes that are imposed to support the subsidies create disincentives to entrepreneurs in general."
Four areas of policy are highlighted in this report as being the most critical to fostering entrepreneurial activity.
1. Opening a Business
"The typical view in the United States is that owning a business is an inherent right and that the operation of the business should be left to the entrepreneur. The simplicity of the process to establish a business reflects this view: In the United States, it typically takes four days and $210 to establish a business as a legal entity....Many other countries seem to view the ownership of a firm as a privilege to be bestowed by bureaucrats. Additionally, some countries impose regulations that take basic business and entrepreneurial decisions out of the hands of entrepreneurs. This approach often leads to government micromanagement of the actual workings of the business, even before the business exists.
2. Competitive Financial Systems
Research seems to show that banking deregulation in the 1970s and 1980s had a major positive impact on the level of entrepreneurial activity in the US for the next two decades.
3. Labor-market Regulation
Countries with higher rates of entrepreneurial activity, particularly the US, have freer and less regulated labor markets. Europe is particularly hindered by rigid and complex labor laws.
4. Tax System
Low taxes cause entrepreneurial activity to thrive, while more taxes reduce entrepreneurship. Enough said.
The report raises some concerns for US policy related to entrepreneurship. We still have too many needless regulations. Tax policies are much too complex and create disincentives for some decisions that might lead to business growth. And, there seems to be some political movement toward the tightening of labor markets.
