Every year, reports from the World Bank, the OECD and numerous private sector researchers tell us that nations are improving their regulatory environment in terms of reducing the complexity and cost of regulatory processes for starting a business. However, comprehensive reforms to stimulate startup creation are still relatively hard to find. Will the ever-intensifying global race to build strong startup ecosystems from the bottom-up change this?
That the White House focused on startup legislation in President Obama’s first term is significant. While challenges lie ahead in passing Startup Act 2.0, the legislative successes to date—including the JOBS Act—demonstrate an understanding about the need to look at economic growth through the lens of stimulating more potential high-growth startups. The World Bank’s 2013 Doing Business report has been tracking the progress of more than 180 economies over ten years. It found that countries determined to remove barriers to business creation tend to start with simplifying regulatory processes through changes in administrative procedures and only later move on to more challenging reforms to strengthen legal institutions relevant to business regulation (e.g. in areas such as obtaining credit for startups). These reforms usually require more political commitment since they demand amendments to key pieces of legislation, and therefore the involvement of more powerful branches of government.
Success stories from other governments commitment to startups is beginning to get more visibility. Among the nearly 2,000 regulatory reforms implemented by 180 economies over the past decade, the 2013 Doing Business report highlights the example of Latvia’s amendments to the laws on value added and corporate income tax, which aimed at resolving specific issues identified by businesses through public comment on the draft tax legislation. Latvia enjoyed significant growth during the reform period: from 2000 to 2004 GDP growth averaged 7.5%, and unemployment fell from 14.2% to 9.9%. Moreover, in 2004, Latvia achieved its goal of joining the European Union.
Soon, thanks to the strengthening of various data sources, we should be able to monitor more news among the economies recognized as having improved the rules of their own startup ecosystems. While nations like Singapore, the United States, and Denmark continue to top the global rankings in terms of entrepreneurship and innovation, the global race to build the best startup ecosystem is opening the field to new nations. TThis is illustrated in the World Bank’s Doing Business study where new entrants to the top 10 reformers include Georgia, Poland, Sri Lanka, Ukraine, and Costa Rica who are implementing sweeping legislative reforms governing startup dynamics.
Of course, an ecosystem’s legislative framework is not everything. Building talent, capital and cultural acceptance of risk taking and failure are the hard challenges for nations. However, there is plenty of momentum from the bottom-up. For example, Global Entrepreneurship Week (GEW) by connecting disparate startup support organizations for a non-controversial mission of planning a national celebration each November, is building platforms for collaboration on a host of other issues of importance to new and young firms. Further, the example set by Startup America is spurning dozens of other startup “nation” campaigns that identify where legislative action is needed to foster new local startups. Through their typical public-private partnerships, they form natural alliances that can increase pressure for comprehensive reforms to the regulatory framework governing entrepreneurial ecosystems.
The work of these partnerships is revealing the weakest points of startup ecosystems, and their collective collaboration ensures that strangle points for young businesses are heard. For example, following the success of the Start-Up Chile program, a bill that could dramatically improve Chile’s harsh bankruptcy regime emerged. Simply put, these initiatives are creating actionable roadmaps for policymakers.
The startup “nations” movement is also growing cultural capital for entrepreneurs, in the sense that even non-entrepreneurs are becoming aware of the benefits to the economy arising from entrepreneurial endeavors. This also creates bottom-up pressure and support for pro-entrepreneurship reforms. Pablo Longueira, Chile’s economy minister, recently told recently told The Economist that Start-Up Chile has helped to drive broader changes such as media attention about the economic impact of entrepreneurship and a rise in the number of universities that teach students about enterprise.
With the help of partnerships or not, achievements in one nation set wake up calls abroad. As some strengthen their ecosystems, others watch the attractiveness of their home ecosystem pale in comparison. For example, in 2003, the European Commission cited a study showing that during the 1990s, 19% of mid-sized firms in the U.S. were classified as fast-growers, compared with an average of just 4% in six EU countries. More recently, a study by Ernst & Young showed that German, Italian and French entrepreneurs were far less confident about their country as a place for startups than those in America, Canada or Brazil.
This increased awareness is translating into action. To take the example again of the rise of what has been dubbed “Chilecon Valley,” Chile’s experiment with immigrant entrepreneurs has spurred interest elsewhere–including in the United States. This success story is fueling Silicon Valley’s support for the passage of legislation that will ensure the U.S. no longer shuts out immigrant entrepreneurs.
The European Commission, in trying to discover what holds back entrepreneurs, found last year that many countries’ insolvency regimens unfairly treat honest failed entrepreneurs like fraudsters, keeping them from trying again. For example, the commission found that Germans expect it to take six years to get a fresh start and that insolvent entrepreneurs in the country can face a lifetime ban on senior executive positions at large companies. Another obstacle was confirmed to be Europe’s rigid labor laws.
Aside from increased and stronger data, research, and success stories, the prolonged economic struggles challenging growth in many countries could likely allow changes that were previously politically risky for policymakers. For instance, Italy and Spain were both reported to have been taking steps to make it somewhat easier to fire workers.
While entrepreneurship is inherently a chaotic process and government cannot organize it, it needs a supportive political, regulatory and legislative infrastructure to thrive. Only a few years ago, non-for-profit organizations like the Kauffman Foundation were lonesome voices in the effort to make entrepreneurs a priority for politicians. Fortunately, now governments around the globe are paying attention to the comparative study of entrepreneurship economics.
At the Global Entrepreneurship Congress on March 18th in Rio, leaders from 130 countries will gather to discuss, among other things, national startup bills. It could not be happening in a more fitting place. In 2013, Brazil is planning to launch its own program to vie for the place as Latin America’s hub for entrepreneurship, as the recent Economist article pointed out and my conversations with local entrepreneurship leaders have confirmed. At one point or another, in terms of starting a business, legislative action in Brazil is inevitable given that the World Bank ranks it 121st out of 185 countries—worse than Nigeria or Mali. Let’s hope in Rio, all leaders rise to the occasion—taking a look at how their efforts compare to that of other nations and returning home committed to removing even more barriers to the development of potential high-growth firms.
This Week in Entrepreneurship Policy
Emerging Scholars Recognized for Work in Entrepreneurship