Why Competition Matters

Earlier this year, Kauffman unveiled the Entrepreneurship Policy Map, a new tool for entrepreneurs, policymakers and others. The tool helps to determine what specific barriers different types of entrepreneurs run into and where solutions lie.

The tool was developed from our background in entrepreneurship research and policy discussions. Its purpose is to provide not just a list of policies that help reduce barriers to entrepreneurial entry and success, but to illuminate what areas of policy have the most potential to make a change for good.

One of the aspects of the policy map I have been particularly interested in is how the startup entrepreneurs are affected by the policy environment. Competition evokes a bright image in the American imagination. For example, rival firms jockeying for market share, government trust-busting in the early twentieth century, or a new entrant, convinced his idea will disrupt an entire industry, determinedly fighting for space against long-standing incumbents. It is based on a sense of fairness that the best will rise and be rewarded.

Throughout our history, competition has been part of our historical and cultural DNA as a virtue worth pursuing. At its most effective, competition incentivizes new innovation, better product quality, and unlocks new opportunities. These are all qualities the presence of competition shares with entrepreneurial opportunity. Entrepreneurs of all kinds take advantages of opportunities to compete in existing markets and even create their own markets.  

This is why competition matters. Often we talk about policy that help gets entrepreneurship back on track or removes barriers to new business formation or young, growing businesses. All of these tie into the over-arching idea that entrepreneurship blossoms when the rewards for success and consequences for failure are in balance. When we reach that equilibrium, economic indicators shift into a harmonic formation. New firms start up at higher rates, challenging established firms with dreams of reaching those heights. Firms that secure market share have the resources (and the motivation) to fund innovations in new products and markets, creating greater product variety, utility, and overall consumer surplus.

However, deciding that promoting competition is a worthy goal is the easy part. Competition, as a policy aim, is many-faceted and combines legislative action, regulatory guidance, and can even be influenced by force of personality and cultural norms. It is not as simple as choosing to remove a quota, tweak an individual law, or trimming up unnecessary rules that interfere with productive activities. Nor is it a particularly politically popular issue that will bring in acclaim. And it is easy to misinterpret the kind of competition that allows for entrepreneurial entry and growth, promotes inclusive innovation, and dissuades and penalizes firm that act in particularly anti-competitive ways. It is not simply about ensuring a certain number of firms exist or that one firm doesn’t get too big. It is about designing the rules of the game and field of play so that those outcomes are the natural result.

Policymakers have a more nuanced and difficult task here. The multitude of different pieces that make up “competition” cross a number of disciplines:

  • Antitrust philosophy and action
  • Labor market fluidity
  • Market structures that encourage innovation and unshackle those with entrepreneurial tendencies
  • Local policy that uses effective zoning and planning to develop infrastructure that facilitates opportunity
  • Access to capital and financial assets

As competition spans across many policy areas, it creates space for improvement. However, the question remains: Can we recognize that opportunity and take advantage?

 

To learn more about the specific areas where improved competition policy can boost entrepreneurship, check out Kauffman’s policy digest on competition policy

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chris jackson

Chris Jackson

Chris Jackson is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, assisting in the understanding of what policies and environments best promote entrepreneurship and education in the pursuit of economic growth.