Suppose you were given $500 million to promote entrepreneurship in your region. What programs would you support? Would you build business incubators? Or provide subsidies to banks to give below market rate loans to entrepreneurs? Or make venture capital investments in high tech start-ups? Or organize angel investment funds? Or provide grants to inventors seeking to commercialize their technologies? Or invest in entrepreneurship programs at your local university?
Economists and public policy researchers often look at two criteria to decide which programs to support: First, is the market failing to do something, necessitating government intervention? For instance, the fact that a lot of people don’t get financing for their new businesses because investors think their ideas aren’t very good doesn’t justify intervention. But the failure of people to get financing for very good ideas because we lack the financial markets for investors to cash out of their investments, does.
Second, which intervention has the greatest effect, as measured by some common metric? Most governments look at the number of jobs that will be created, the amount of additional investment that will be induced from the provision of those funds, or the amount of economic value added that will come from that investment to figure out which investment is the best use of resources.
Just looking to see if there is a positive effect of the intervention is not sufficient to choose. We know that if the government spends money on a program, there will almost always be some economic effect. But that doesn’t mean that the investment is the best use of the money. If the government took the same money and built wind farms, invested in fuel cells, sought a cure for cancer, invested in head start programs, or bought Alpaca farms, the (social and financial) returns on that use of money might be greater.
So if you were looking to induce investment or create jobs by encouraging entrepreneurship, what would you invest in?
In a later post, I’ll write about what research shows about the returns to different types of entrepreneurship support programs. But for now, I’d like to see what types of programs readers would support.
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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.