Scott Shane is the 2009 Winner of the Global Award for Entrepreneurship Research. This essay (in Small Business Economics 2009, 33(2):141-149) is the Prize Lecture he gave upon receipt of the Award in May 2009 in Stockholm, Sweden. The essay draws on his book: Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors and Policy Makers Live By. Yale University Press, 2008.
In this paper, Shane argues that policy makers should avoid subsidizing the typical start-ups and instead focus on high-growth firms. His rationale is that high-growth firms, sometimes called ‘gazelles’, are the source of economic vitality and job creation. Using various sources of data, he demonstrates that typical start-ups are headed by people not necessarily motivated by growth, in industries in which most start-ups fail, and not necessarily the best entrepreneurs, hence not generating innovation, jobs and wealth as policy makers would like to believe. He argues that this is not just a U.S. phenomenon since studies conducted elsewhere show similar results.
This is a rather strong argument given that most government officials do not want to ‘pick winners’ to support. Yet, Shane argues that start-ups with a high probability of generating jobs and enhancing economic growth can be identified.
In Canada, several, such as Wells and Hungerford (Policy Options, September 2011), are advocating that high-growth entrepreneurship is key to Canada’s future economic success.
Questions (to my entrepreneurship students but open to all to comment):
1) What are Shane’s key arguments against policies to support more people to become entrepreneurs?
2) What is your opinion of this paper: do you agree? disagree? why?
3) What is the situation in Canada? (Hint: google the Policy Options paper I mentioned above as one source of information)
(Note: Click on the text bubble next to the title of this post to leave your comment.)
Diane A. Isabelle 
1) What are Shane’s key arguments against policies to support more people to become entrepreneurs?
Shane’s key arguments against policies to support more people to become entrepreneurs was that policymakers looking to allow and support the creation for more start-ups to help the economy’s depression, generating more innovation into the economy, and essentially creating jobs is not the correct approach. Shane’s argument, in fact, is that the opposite happens – by controlling the number of start-ups (agencies such as the government analyzing which start-ups are the most profitable/likely to be successful) to only providing support for those with a growth potential would it help the country’s economy.
Shane argues that not all start-ups and entrepreneurs can be successful and generally will only last for no more than 5 years at the most. That is why many start-ups struggle to stay in business for as much as 5 years and only a handful of start-ups actually have the real potential to grow and possibly contribute to the economy. He asks that instead of supporting and giving incentives for people to become entrepreneurs and create their own start-up, we look at towards the subset of businesses that have the growth potential and become profitable (for example, by looking at the source of funding/financing).
“In short, the question is not whether having a large number of typical start-ups is better than having a small number of high-growth start-ups. The latter is clearly better” (Scott Shane, 2009)
2) What is your opinion of this paper: do you agree? disagree? Why?
In my opinion, I actually do agree with what Shane is saying and his supporting facts. Currently, the perception of start-ups, for most people in my opinion, hasn’t been too positive or it’s just neutral. In my view, I don’t view or take many start-ups seriously because the image I have of most start-ups are these local, advertising/infomercial business. To clarify what I mean, imagine the type of products/services are advertised on a television on the Home Shopping Channel. Not all products are of great quality or value (a majority) and not a lot of sales are generated thus why they appear on the Home Shopping Channel. Though some products/services have been very successful and eventually moved out of television to physical stores like Wal-Mart, Zellers, etc, there have only been a handful out of the hundreds advertised.
I do believe that by better modifying our current policies to putting more resources to potential growing businesses, we can better utilize taxpayers’ and government money to supporting businesses that have the chance to be successful and create great innovation and better our economy.
3) What is the situation in Canada? (Hint: google the Policy Options paper I mentioned above as one source of information)
In Canada, we have invested significantly in public investments such as R&D, educated citizens (highly educated – post-secondary students), and providing little barriers to business and competition. However despite the amount of investments made, Canada has been unable to fully leverage the outcomes of its investments – “few innovation-based multinationals”. According to the High-Growth Entrepreneurship: The Key to Canada’s Future Economic Success, Canada has not had many of its public companies be able to successfully go through the whole Gazelle Life Cycle – many failing between the Transition and Growth Stage. This is because of Canada’s/Canadian entrepreneurs’ faces challenges such as missing networking/connections, short of experienced business managers in Canada, early funding, lack of Canadian financing support and investors, ineffective R&D incentives, and the application of university research. By focusing more on solving these problems and putting more focus on supporting potential high-growth Canadian start-ups can Canada being to cultivate innovation, build its (entrepreneurial) economy, and create valuable & long-lasting jobs for Canadians.
In this article, Scott Shane raises many key points that denounce the adverse effects of policies that support more individuals to become entrepreneurs. Where new start-ups were meant to create economic prosperity and new job creation, Shane is finding that start-ups are not a main source of country wealth and they do not account for the majority of the jobs created yearly. Policies that choose to promote/fund new ventures and budding entrepreneurs often have negative effects as it may not be the correct individuals that are being drawn in. It is the entrepreneurial team that plays the largest role in the success of a start-up, and the right individuals are needed to create a healthy start-up. These start-ups are not the source of economic vitality as it often does take a few years for the firm to be profitable and create more job positions. Shane raises the key point that as countries become wealthier, the rate of new start-ups goes down. The opportunity cost associated with entrepreneurial endeavors is higher, as the rate of real wages rises.
I do partially agree with the opinion voiced in this article, although there are limitations to this point of view. Start-ups are necessary to feed a thriving economy, without the emergence of new business entities there would be a lack of innovation and initiative. Although I do agree that policies may be inciting the wrong people to try their hand at creating their own businesses, there still needs to be business creation throughout the world. Every company was once a start-up and there is no telling where the next big idea will come from. Countries need to continue to preserve and educate their labor force to capitalize on new opportunities that can emerge.
The situation in Canada demonstrated in the Wells and Hungerford article is similar in some ways to Shane’s article, although the authors state that high growth entrepreneurship is key to Canada’s success. The authors both mention ‘gazelles’ which need to be the primary focus to pursue economic success. Canadian entrepreneurship also falls under the same opinions expressed in Shane’s article but more specifically, the country needs to be geared towards the sustainability and creation of new ‘gazelle’ type companies. The renewed focus on cultivating and encouraging the growth of these start ups will lead to greater job creation and future economic growth.
1) Shane disagrees with policies that support more people to become entrepreneurs because he argues that those who start what he calls “typical business” are not the best entrepreneurs. Moreover, he makes emphasis on the fact that those who start a company because they are desperate for a paycheque or because the opportunity cost is low are “the worst entrepreneurs.” In conclusion, according to the author of the article, policies to support more people to become entrepreneurs are not a smart solution to encourage economic growth.
2) I must say that I agree with Shane’s opinion to a certain degree – But not really.
After reading the article and checking some of the sources he provides, I believe that if all Governments want is to encourage economic growth in the short run, then, they should not be encouraging more people to become entrepreneurs. However, I strongly believe that there is much more than just short-term result behind encouraging entrepreneurship. Many of those successful entrepreneurs mentioned in the article such as the creators of Google, failed in other businesses before they came across Google. Policy makes encourage more people to become entrepreneurs because they know that it goes hand-by-hand with innovation and motivation. It is crucial to celebrate failure at an organizational level as well as at a national level. Furthermore, it has been stated by many that the lessons learned by failing are not as meaningful as those learned while being successful. Therefore, what would it be of a country -or a community- without people who are starting “typical business” and failing at them so that they can learn to live life better and maybe, they may start successful and high growth businesses in the near future?
3) Canadians, in general, recognize the importance of encouraging entrepreneurship. More specifically, in Ontario, there is a significant amount of resources being allocated to this area. For instance, as of October 2013, organizations such as the Ottawa Community Loan Fund (OCLF) (www.ocf.org) received almost $120,000 from the Ontario Trillium Foundation with the objective of promoting entrepreneurship in the Ottawa area. This same organization- that has been around since the year 2000-, has given more than 200 loans (mostly business loans) that exceed $2,000,000.
Just like the OCLF in Ottawa, there are many different organizations like it around Canada. The purpose of these is to encourage entrepreneurship and to discover and empower those high-growth business that are so important for a county’s economic growth.
Shane’s has a few key arguments against policies that support more people to become entrepreneurs. The first is that policy makers need to recognize that only a select few entrepreneurs will actually benefit the economy and create growth and jobs. As much as this is argued, the companies that will succeed can be identified. He explains that the situation is the same in many countries, and they encourage people to become entrepreneurs that don’t really have any huge desires for growth. These people would be better off working for a growing company, and helping that company grow. Policy makers need to start being more selective of which entrepreneurs to support, and give more support to the ones that look promising.
In my opinion, Shane is right. We are putting too much money on any entrepreneur that randomly decides to start a company, even when you know that it is a company that won’t go far. Obviously there are some companies that may not seem like great opportunities, like the high school student that starts a cleaning business (p.147), but if he has a good business sense, he could potentially turn that into a big company that is contracted to clean commercial buildings, for example. However, in general, this would not happen, especially since with this example, there are very low barriers to entry compared to the software company.
In Canada, we are in the same position as other countries, where we are not doing enough to promote and support “gazelles”. Currently, Canada leads the world with investment in Research and Development. Canada has very few companies that have made it through the 4 stages to become a gazelle, because most companies fail in the transition between the traction. Stage and the growth stage. This is where Canada should put more focus. If they can try and help companies get past the “valley of death” we might be able to create more gazelles in the future. Canadian managers lack formal training, which affects the chances of the companies’ success. Also, entrepreneurship should be pushed into science and engineering programs, where innovation is more of a focus.
Hungerford, Geordie and Wells, Shannon, 2011. HIGH-GROWTH ENTREPRENEURSHIP: THE KEY TO CANADA’S FUTURE ECONOMIC SUCCESS [accessed Sept. 24,2013].
Click to access wells.pdf
1) What are Shane’s key arguments against policies to support more people to become entrepreneurs?
Shane makes a few key arguments, starting with his stance on policy makers. He states policy makers are supporting all new start ups as a form of job creation and stimulus, which he claims to be wrong. Shane goes on to talk about how such a low percentage of start ups are good ideas, that can be innovative and viably sustained as a business.
2) What is your opinion of this paper: do you agree? disagree? why?
I Have never disagreed with a piece of work as much as I disagree with this paper. To think that policy makers could even judge what is qualified as a “good” start up is insane. I personally have my own start up and have worked on over a dozen more and from experience I can say that some of the best ideas dont always start that way. If you cut funding to start ups that policy makers deem as a low percentage of making it, you could be killing something great. Time and time again I have seen start ups that were not so good, pivot their stance and technique and become successful. In the end, even if there are a low percentage of start ups making it, 2 out of 10 at most, is it not worth it to bank on those two. The start ups that do do really well can eventually employ 10, 20, 1000 people? who knows an exact number, but it is furthering our economy and strength as a nation.
3) What is the situation in Canada? (Hint: google the Policy Options paper I mentioned above as one source of information)
The current situation in Canada, is that innovation is being described as a “Downstream” policy. There is not enough focus on innovation and competition. Competition is highly influenced in canada by shifts in the economy, mainly in recent years the privatization of crown corporations. All of this being said growth in Canada has lagged in recent years, the GDP falling behind the US at $9200 as apposed to american $9500
1. Shane states that the typical start-up companies that receive support from policies are not innovative, doesn’t generate jobs for the community, and small gains in profit. He compares the typical start-up companies to that of high quality, high growth companies like Google and Wal-Mart. He provides solid statistics on many of the aspects of a typical start-up company in the United States. Shane shows how these companies fail in the early years of development and subsequently creates very little jobs compared to existing businesses. He argues that the amount of effort to start a new company is not worth the output from it. The main point he states is that, on average, only 9 jobs will be created from a start-up that was founded after ten years. He mentions that new companies are less productive than existing ones in terms of resources used. That is why a typical entrepreneur is not smart in picking the correct industry to make a start-up company. He provides data that says the correlation in the United States between start-up rates and failure rates is 0.77. He believes that the government is attracting the wrong type of people for starting up new companies because they aren’t choosing innovative industries. He wants the policy to gear towards giving money into the Small Business Innovation Research Program, which supports R&D projects at small companies. He wants the policy makers to focus more on extraordinary entrepreneurs “gazelles” rather than the typical ones. It is a means of identifying and supporting a select few new businesses that would seem more productive than others.
2. To some extent I agree with this paper. If we are talking in terms of purely on an economic-based success, it makes sense that the typical start-up businesses aren’t the large contributors to the country. It is a fact that most start-up companies will fail in the early years of development. It would then make sense for the government officials to focus more on subsidizing start-up companies that have a strong effort of succeeding, based on their backgrounds. For instance, the example where Scott Shane brought up, comparing the difference between a personal cleaning business and an Internet company, is a great way to predict the possible success of each company. Yes, there are many more factors involved with this type of situation but looking at the potential of the Internet Company through advancing technology is much more promising than a cleaning business. Everyone can start a cleaning business but starting an Internet Company requires someone who actually has the expertise in technology. On the other hand, my definition of an Entrepreneur is someone who takes risks and fails at times, but it is the way that they bring themselves back to success is what makes them an Entrepreneur. These are the type of people who will drive the innovation and eventually reach their goals. In the long-run they will help with the growth of the economy because they strive to succeed in their own way. With the government giving aid to that, it will help them achieve it even sooner.
3. In the current state of Canada, there have been very few large public companies that have made it as a “gazelle”. A “gazelle” is a young company that disrupts the market and produces innovative products, services and processes. Many of the Canadian start-ups fail early as they can’t transition from the Traction Stage to the Growth Stage. Even if some Canadian companies happen to make it to the Growth Stage, a majority of them also fail to move beyond that point because they are bought out by larger firms or they have insufficient capital. In Canada, there is a low-barrier to entry for new start-up companies but similar to that of Shane’s article, they fail very early in the stages of development. There are less experienced managers in Canada that can’t help support the growth of new start-up companies. They also lack the required international networks and experience to help grow a new company. Although Canada excels at fundamental research, it is not enough to use those results to create successful businesses.
Reference:
Wells, Shannon and Hungerford, Geordie. “High-growth entrepreneurship: The key to Canada’s future economic success.” IRRP (2011). Accessed September 24, 2013. http://www.irpp.org/en/po/innovation-nation/high-growth-entrepreneurship-the-key-to-canadas-future-economic-success/
1) Scott Shane has two main arguments against the policies that support more people becoming entrepreneurs. He has called the two arguments: the economic growth myth and the job creation myth.
The Economic growth myth describes Shane’s opinion on the matter that the typical start-up is not considered to be any more efficient, or any larger a contributor to the economy than an already established business. It is most average start-ups that aim to be a ‘placeholder’ and subsidize for wage-substitution, and have more in common with self-employment that with the creation of a company. He also goes to argue that many countries that have a lot of entrepreneurs are the less wealthy, as there is a need for job creation and growth. However, these countries are still in the agricultural stage, which is more often associated with self employment.
His second argument is that of the Job Creation Myth. He believes that very few people actually work at small companies. He believes that although there is an increase in jobs in year one of companies incubation, there is actually no net jobs created due to the amount that are lost by companies closing down. Of the jobs that are created, they offer less in wages, offer worse benefits, and provide less job security than jobs in existing firms.
2) I agree with Shane in his arguments. I feel as if his term “the peanut butter is being spread too thin” is a great analogy for what is happening. I believe that there is not enough attention to decipher between a “ma and pop” corner store and a potentially giant technology start-up. The backing from policies may be the same, however the corner store will likely create much fewer jobs over the life-span of its existence to that of a rising technology company. The economic difference a high potential start-up can make is surely overlooked and I think that policy should be re-written to seek out the higher potential start-ups.
3) It has been made clear according to Well and Hungerford (policy options, September 2011) that as Canada moves out of its economic recession, it would make all efforts to support entrepreneurs in creating new jobs. However, they have determined that they would seek out and cater to the needs of potentially high growth companies, such as “gazelles”. There has been a motion to fund and help grow start-ups that are more sufficiently innovative and ambitious to compete on the global scale.
References Cited:
Shane, Scott. “Why encouraging more people to become entrepreneurs is bad public policy.” Small Business Economics. no. 2 (2009): 141-149. http://web.ebscohost.com.proxy.library.carleton.ca/bsi/pdfviewer/pdfviewer?sid=909e8df5-c9a4-4595-9481-4e5444e4a9ac@sessionmgr15&vid=5&hid=12 (accessed September 24, 2013).
Wells, Shannon, and Geordie Hungerford. Institute for research on public policy, “High-growth entrepreneurship: The key to Canada’s future economic success.” Last modified September 2011. Accessed September 24, 2013. http://www.irpp.org/en/po/innovation-nation/high-growth-entrepreneurship-the-key-to-canadas-future-economic-success/.
1) Shane mainly argues that supporting marginal small firms encourages start-ups that are more likely to fail. The opportunity cost is too low, given the regularity of these firms in entering industries with low barriers to entry. In addition, he states that subsidies are sometimes too comfortable, which offers small firms little incentive to grow (ie; home businesses). As such, he recommends that the government pursue a similar strategy to promote identifiable higher growth start-ups to mirror the success of the likes of the Small Business Investment Corporation program and venture capitalists as a whole. This is because he states that there is significant evidence to state that the fair majority of employment comes from older companies.
2) I agree with his argument, as he brings up some fairly significant points which outline that governments like the United States, France, and Germany basically throws money at various hopeful small businesses in hopes of promoting growth. He states and gives ample evidence that this strategy is not effective. I am skeptical of his insinuation that all industries as a whole are affected by this idea of poor policy. For example, greater economies of scale and higher uses of capital is one reason why the industries such as manufacturing sector in Canada and the United States are shrinking. One question I have is why has the leisure and hospitality industry decreased by approximately 50,000 firms in just 4 years (1998-2002)? How much of this is because of subsidies and failures of policy makers? How many of these firms had support vs. those who have not, and who is to decide which deserved any? Others are more complicated, and it is important to include issues of globalization; particularly international competition. This includes decisions of outsourcing and layoffs, as low wages in Asia are significant factors for various firms, such as large are failing to stay competitive. In addition, how can we forget failures of various global economies such as Greece or Spain? Bailout packages are being discussed regularly by great economic minds, and I would like to know where this money is going (I find it doubtful that they are targeting only ‘high growth firms’); particularly if entrepreneurs are being targeted at all.
The Canadian government is very adamant towards entrepreneurial developments. Most specifically, much like the article, high growth enterprises (gazelles) have significant contributions towards Canadian economic growth. However, it apparent that Canadian start-ups are having similar issues. For example, innovation and financing are substantial contributing factors towards failure. More specifically because various growing companies are eventually bought out or fail to compete on an international scale (Hungerford and Wells 2013)
Statistically, from 1978-92, the job gain rate, and loss rate respectively for a firm size of 0-19 people is on average 23.4, and -20.2. For a large firm of 500+, the job gain rate was 6.8 and -6.6 (Statistics Canada 1996). Moreover, between 2001 and 2008, the GDP annual growth for a small vs. large firm is 5.1 and 6.5 respectively (Statistics Canada 2012). Therefore it is evident that small firms do have significant growth. This illustrates that with better policy making towards their betterment will lead to succeed in the future, thus improving Canada’s economy in the long run.
References
Hungerford, Geordie, and Shannon Wells. “High-growth entrepreneurship: The key to Canada’s future economic success » Institute for Research on Public Policy.” Home » Institute for Research on Public Policy. http://www.irpp.org/en/po/innovation-nation/high-growth-entrepreneurship-the-key-to-canadas-future-economic-success/ (accessed September 25, 2013).
Statistics Canada, 1996. Job Creation by Company Size Class: Concentration and Persistence of Job Gains and Losses in Canadian Companies, Research Paper #93. [accessed10/25 2013]. http://www.statcan.gc.ca/pub/11f0019m/11f0019m1996093-eng.pdf.
Statistics Canada, 2012. Small, Medium-sized, and Large Businesses in the Canadian Economy: Measuring their Contribution to Gross Domestic Product from 2001 to 2008, Economic Analysis Research Paper Series. [accessed10/25 2013]. http://www.statcan.gc.ca/pub/11f0027m/11f0027m2012082-eng.pdf.
Question 1.
Shane claims that most of general start-ups would not contribute in economic growth or job creation as much as the policy makers expect from boosting the subsidization of entrepreneurship, though there were a relatively small number of start-ups eventually became the leading innovative companies on this planet, most of start-ups are still in lack of profits and productivity, which leads the companies to failure at a fast pace. As a matter of fact, the advocate of entrepreneurship effectively generates a lot of start-ups, but a typical start-up tends to last no more than five years in the market due to limited capital, inefficient execution, inexperienced managerial decisions made by business dummies, inexperienced market positioning. Because of the struggling process that every start-up has to suffer at the beginning, those companies are very likely to provide fewer jobs that are also in lack of legitimate job benefits, including wages, insurances, and basic job security. According to the researches that were addressed in Shane’s article, the correlation between business formation and country’s wealth level is also very significant, as the richer countries tend to have less business formation, which is resulted from the mature competitive market, and stable high wages in the existing firms.
Question 2.
I basically agree with Shane on the arguments against pro-entrepreneurship policies, however, the emerging IT industry does give a lot of people a great opportunity, as the profits could really be generated from pure innovation that does not need much of capital investment. Government should support both high-growth companies and innovation-oriented start-ups.
Question 3.
Canada is attempting to bring more innovative and hi-tech entrepreneurship in the market, as the country is gradually losing its comparative advantages while the existence of the lower-cost developing nations is taking away quite a bit of the market share. Though the government is ready to sparkle the innovation and help the start-ups on research and development.
My thoughts on “Why encouraging more people to become entrepreneurs
is bad public policy”:
Shane states that most start-up businesses are not contributing to economic growth. Spending money on trying to bring people starting ever new businesses is a waste. New companies have to be more productive than existing ones and if not, they have no reason to be. Fast growing new businesses (“gazelles”) are contribution more-than-proportional to the welfare of the economy. (Shane, 2009)
I disagree on the assuption that start up companies have now right to exist other than to be more productive. By limiting the means of starting business just to that, Shane misses the point. New companies should be first of bring new value to customers. While this can be done, by sticking to existing products or services but do it more efficiently and therefore be more productive, real innovations (in products, services or even business models) are able to contribute much more to that goal.
Shane argues that most game-changing companies (he mentions Google and Walmart) where never like typical start-ups. But without the entrepreneur-friendly environment, they may would have never been founded. The focus on rapid growth can be even dangerous, as demonstrated by Groupon, once the fastest growing business of all times.
I tend to agree with the argument, that new companies who apply for subsidies and grants should be evaluated thoroughly on the basis if they are likely to be (1) still existant and (2) sustainably profitable after a certain time. The question remains, who should make those findings and who should decide. Government officials are not likely to have sufficient knowledge and experience to be able to make those predictions. Business people from existing and successfull ventures in the same field my be able to make good calls on the outcome of a new business idea. But those people are also likely to try to avoid new competition and therefore give worse ratings than necessary. It still remains a major challenge how to spot the “gazelle” even before it is born.
Other thoughts: Since we are discussing economic policies here: thinking that businesses have to be big at all costs or thinking that businesses as a form of self-employment are bad is “interesting”. Basic economic principles tell us that a bigger number of market participants and a smaller concentration of purchasing or selling power contributes to the efficiency of an economy (Greenwald and Stieglitz, 1986). Hence a large number of relatively small companies (if they are profitable) is nothing to fear but more something economic policy makers should seek. Furthermore giving people the opportunity to work for themselves rather than for an anonymous company enhances personal freedom.
According to Wells and Shannon, Canada produces relativly few “gazelles” considering the good entrepreneurial conditions. Other smaller countries such as Sweden or Israel are doing much better. Wells and Shannon name a few key factors to why Canada has an “entrepreneur-friendly” but no “gazelle-healthy” economy. Missing connections and cooperations between VCs and other mentoring people or organisations, a lack of experience, ineffective funding systems and lastly low ambitions from the founders to grow their businesses quickly. (Wells and Hungerford, 2011)
Sources:
Shane, Scott. 2009. Why encouraging more people to become entrepreneurs is bad public policy. Small Business Economics 33(2): 141-149
Greenwald, Bruce C. and Stieglitz Joseph E., 1986. Externalities in Economies with Imperfect Information and Incomplete Markets. The Quarterly Journal of Economics 101(2): 229-264.
Wells, Shannon and Hungerford, Geordie. 2011. High-Growth entrepreneurship: The key to Canada’s future economic success. Policy Options Sept 2011: 55-59.
What are Shane’s key arguments against policies to support more people to become entrepreneurs?
1. By promoting more individuals to start businesses won’t allow the overall economy to grow and create more jobs.
-Based on the fact that these type of entrepreneurs aren’t in business of growing a company but only sustaining a living wage.
2. These companies that are being created early-on are less productive than companies that have been around for a while.
-Firm productivity grows with the age. “start-up is dead in five years” –S.Shane
-Older companies benefit from the economies of scale and actually provide economic growth.
3. As country’s become wealthier, the opportunity cost to run a start-up goes up and setting up for failure is high.
-Startups are less common manufacturing and agriculture.
4. New business creation that is successful and contributing to the GDP and economic growth are in agriculture such as Africa or South America.
-Large economic growth countries (US), will have a decline in creating new companies.
5. Firm Formation declines as Economic Growth increases. (Blanchflower 2000)
6. New Entrepreneurs also go into the wrong business because of low barriers to entry.
-They pick industries that aren’t successful
-Very little experience and Value network in order to succeed in the industry
-Unknown hurdles and barriers one may encounter.
-Lack organizational leadership and low employee benefits in which make the job creation unattractive.
What is your opinion of this paper: Do you agree? Disagree? Why?
With my experience in working with Start-ups and my own start-up in which I became overwhelmed with contract orders, I entirely agree with this article. I’ve worked with many young start-ups that have no idea and were received large amounts of funding up to $50,000 from the government but the entrepreneur handling the funds had no direction or experience in managing his cash flow. Throughout the article, I’ve experienced that notion of creating a firm in an industry that was highly successful and in demand versus many of the IT startups I’ve encountered throughout Carleton University. My start-up was seen as a not innovative or contributed to the global environment, but the industry was very in-demand and highly lucrative. My downside and slow exit of industry was due to: Lack of capital to hire new talent or train talent, time commitment & accessing a talent pool of individuals. There were many situations in which I was required to be in three spots at once as a staffing manager, creative decision maker and co-signer for logistics and production. I decided to finish off my annual contracts and exit industry slowly, until I found top talent to delegate my responsibilities. This is due to the large decline in quality and satisfaction of the completion of my contracts.
What is the situation in Canada?
The situation in Canada from my experience in the National Capital Region (NCR), is that they are boosting entrepreneurship just as Shane explained. InvestOttawa is one of the incubators in the NCR, that promotes a large proportion of entrepreneurship. From my point of view, there are few start-ups in InvestOttawa that shouldn’t even be there and are taking in funding that is improperly used.
Canada has created this “Canada Economic Action Plan 2013” in which they fund 1.83 million dollars into supporting software development and attract private sector investment in high growth companies in the Ottawa Area. (Feddev Ontario)
This statement shows that Canada is exactly following policies of other nations listed in Shane’s article and investing their money in start-ups that really shouldn’t exist.
But looking thoroughly through the Canada Economic Action Plan 2013, the government has slowly diverted more of its funding to sustaining businesses and skilled trades. They have recognized certain businesses that create more jobs and will invest in growing those businesses. (Canadian Economic Action Plan)
References:
Stephanie Thomas, 2013. Government of Canada Supports Business Investment and Innovation in Ottawa. Feddev Ontario. Press Release
[Accessed September 23rd 2013] http://news.gc.ca/web/article-eng.do?nid=733749
James M. Flaherty, P.C., M.P., 2013. JOBS GROWTH AND LONG-TERM PROSPERITY. Canadian Economic Action Plan 2013. (March)
[Accessed September 24th 2013] http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf
1. Though many people believe new ventures will generate more economic growth for a country as well as create more jobs. Shane (2009) claims that this is a faulty argument, and that start-ups, in fact, are costly, low in the hiring sector, and takes much time to expand to a large enough company, to make any effect on the country’s economy. Shane also states that instead of people starting their own company, it is better for the economy, if they are hired by larger corporations, with more knowledge and a larger likelihood to grow. It is also stated that an entrepreneurs opportunity cost will increase as the state of its country’s economy increases. This due to the fact that wages will rise with a country’s increased economic stability.
2. Though Shane makes valid points, stating that as a country’s economic wealth increases, the amount of new ventures creation goes down, and startups being costly to the economy in general, I tend to somewhat agree with his point. I do believe that startups should be limited to actually potential growth, but I also think that this will be a difficult thing to do, especially during an economic recession, where people lose their jobs. I also believe that it is better to have people working, than living off of government welfare, which might have been the case if new venture establishment was increasingly difficult.
3. In Canada, the so called gazelles, or high-growth companies, are the foundation of the country’s economy. Even so, they only make up a small fraction of all the firms in Canada (S. Wells, G. Hungerford, 2011). S. Wells, G. Hungerford (2011) also state that Canada produces few gazelles in relation to the R&D conducted in the country.
References:
S. Shane, 2009, Why encouraging more people to become entrepreneurs is bad public policy, Small Business Econ, 33: 144-149
S. Wells, G. Hungerford, September 2011, High-growth Entrepreneurship: The Key to Canada’s Future Economic Success, Policy Options, pg. 55-59
1) What are Shane’s key arguments against policies to support more people to become entrepreneurs?
These policies may encourage more start-ups to appear on the scene, but most of them, statistically, will fail, and of the ones that don’t, they will only provide jobs and opportunities for very small numbers of employees, and this means that the population, as a whole, isn’t benefitting, as much as it’s being fragmented. His argument is that you are more likely to have successful companies; the kind that grow big and prosperous, and provide lots of jobs and economic benefits to society; if money goes towards supporting the potential successes (ie. picking winners) instead of supporting everyone across the board, giving each start-up less money, and keeping some of the weak, failing companies upright.
2) What is your opinion of this paper: do you agree? disagree? why?
I think he has a point, in terms of the best use of government funding – certainly it makes sense, within those parameters. However, I don’t agree that government officials should even be involved in ‘picking winners’ or in deciding the fate of companies whatsoever. The government has enough on its plate (too much) to also start interfering with private enterprises – this is, arguably, as upsetting to me as federal bailouts. Corporations should be responsible for themselves, and shouldn’t become parasitic drains on the state.
That being said, there is certainly ample room for venture capitalists and private investors to become more involved in selecting start-ups to fund which are selected because of their potential successes. This already goes on, of course, but it could go even further, which would have the potential to make a lot of positive social and economic change. (This could help mitigate some of the issues raised in the Policy Options paper, read below.)
3) What is the situation in Canada? (Hint: google the Policy Options paper I mentioned above as one source of information)
Canada has all the potential it needs to be a real powerhouse in terms of producing ‘gazelles’ – yet this doesn’t happen as much as it could. This is due to a variety of problems outlined in the Policy Options paper, including an inefficient networking system (“Missing Connections”), a lack of experience – especially with managers (“Shortage of Experienced Business Managers”), a lack of funding for start-ups (“Early Stage Funding Gap”), a disorganization and lack of experience of venture capitalists (“Lack of Sophistication”), a ‘push’ strategy that invests mainly in research in the hopes that it sparks innovation, instead of the more efficient ‘pull’ strategy (“University Research Push”), insufficient incentives for research and development that focus directly on business (“Ineffective incentives for business R&D”), not enough government contracts going to Canadians (“Insufficient government purchasing incentives”), and low ambition, because Canada educates people to work for companies – not to start them (“Low Ambition.”)
Citations:
Shane, S, 2009. “Why encouraging more people to become entrepreneurs is bad public policy.” Small Business Economics (33), 141-149.
Welles, S, and Geordie Hungerford, 2011, “High-growth entrepreneurship: The key to Canada’s future economic success.”