First published in the Financial Times on the 26th February 2013.
The fundamental ingredients necessary to breed entrepreneurship
I frequently read about politicians who want to build enterprise economies. But to breed entrepreneurs, attract investment and create jobs, certain fundamental ingredients are necessary.
Some of these elements may conflict with each other – strong legal systems often lead to too many lawyers and bureaucrats, for example.
In an ideal society it would not have to be like that. Yet almost no nation enjoys full marks. My personal list is:
- Rule of law: An honest and accessible civil justice system with enforceable contracts, and proportionate and affordable legal redress over reasonable timeframes.
- Universities: World-class institutions of higher education that champion research and foster commercial collaborations and spin-offs.
- Immigration: Open borders for able students, executives and entrepreneurs with particular abilities. Diversity boosts innovation and job creation.
- Work ethic: A culture that encourages the industrious and ambitious, celebrates success and is not resentful towards wealth creation.
- Strong regional centres: A number of cities with buoyant local business communities.
- Lawyers in check: Some countries have allowed litigation to run amok. This inhibits enterprise and leads to stagnation. Lawyers must serve the business community – not vice versa.
- Credit: Suppliers who grant credit to start-ups, reducing working capital, as well as other forms of alternative debt finance such as leasing and factoring.
- Talent: Brainpower and technical expertise among the workforce. Bright recruits should be willing to join start-ups, rather than the security of working for the state or big corporations.
- Property rights: Proper systems of property title, patents and so on. This enables security for loans, motivates owners to invest and facilitates the purchase and sale of assets.
- Infrastructure: Good quality transport systems, advanced mobile and broadband communications, and a decent stock of office, factory and warehouse facilities.
- Funding: Availability of equity and debt, ranging from angels to venture capital to private equity to stock markets to bank lenders. The most important type of finance is patient capital – new companies often take years to break through.
- Lack of corruption: A public and private sector where bribery and fraud are relatively rare and readily punished.
- Taxation: A bearable level of state extractions that encourages effort and does not enviously punish those who take risks and work hard. A tax code that is uncomplicated, predictable and applied fairly.
- Free markets: A government that does not crowd out the private sector and limits trade barriers and state interference in commerce. Restrictive practices and monopolistic behaviour should be prohibited.
- Role models: Plenty of sound examples of self-made, high-achieving entrepreneurs.
- Bankruptcy rules: A system that allows honest failures to start again within a short timeframe. It is important that people are forgiven, rather than just condemned.
- Employment laws: An ability to hire and fire staff fairly, without fear of disproportionate consequences. This promotes job creation and business expansion.
- Confidence: The belief that it can be done, and the chutzpah to go and do it. An intangible, but nevertheless irreplaceable part of the mix.
- Restricted bureaucracy: A manageable level of red tape that does not discourage initiative or sap the energy of small companies, be it health and safety or property planning.
- Supplier connections: Networks of subcontractors – be they plastic extruders or website designers – which permit companies to outsource elements of their operation and become specialists.
In themselves, none of these requirements seems too difficult to achieve. However, they involve a lot more than just government action (or, indeed, inaction). They require a culture and a national character that can take generations to develop. But when a critical mass of factors falls in to place, there can be rapid transformation – as the growth and importance of many emerging economies demonstrates.