Taxation, Labor Market Policy and High-Impact Entrepreneurship

Journal of Industry, Competition and Trade, Sep 2010

Public policy affects the prevalence and performance of both productive and high-impact entrepreneurship. High-impact entrepreneurship prospers when knowledge is successfully generated and exploited in the economy. This process depends on complementary key actors who use their competencies in what we denote a competence bloc. Although variations in economic contexts make prescribing a general panacea impossible, a number of relevant policy areas that affect key actors can be identified. In this paper this is done in the areas of tax policy and labor market policy. It is shown that high and/or distortive taxes and heavy labor market regulations impinge on the creation and functioning of competence blocs, thereby reducing high-impact entrepreneurship.

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Taxation, Labor Market Policy and High-Impact Entrepreneurship

Magnus Henrekson 0 1 Dan Johansson 0 1 Mikael Stenkula 0 1 0 Enterprises exhibit great differences in age, size, industry affiliation, growth ambitions and growth performance. It is well documented that young and small firms contribute disproportionately to net employment and productivity growth (see van Praag and Versloot 2008 for a survey). Meanwhile, most firms grow very slowly, or not at all. Zook and Allen 1 D. Johansson The Ratio Institute , P.O. Box 3203, SE-103 64 Stockholm, Sweden Public policy affects the prevalence and performance of both productive and high-impact entrepreneurship. High-impact entrepreneurship prospers when knowledge is successfully generated and exploited in the economy. This process depends on complementary key actors who use their competencies in what we denote a competence bloc. Although variations in economic contexts make prescribing a general panacea impossible, a number of relevant policy areas that affect key actors can be identified. In this paper this is done in the areas of tax policy and labor market policy. It is shown that high and/or distortive taxes and heavy labor market regulations impinge on the creation and functioning of competence blocs, thereby reducing high-impact entrepreneurship. - (1999) report that only one in seven companies achieves sustained growth while remaining profitable. Accordingly, some observers point to a small number of rapidly growing firms that contribute a disproportionately large share of net job creation and economic growth (see, e.g., Birch and Medoff 1994; Storey 1994; Schreyer 2000; Acs et al. 2008; and the survey by Henrekson and Johansson 2010). The fact that a small share of all firms plays such a disproportionate role in the economy motivates our emphasis on what Zoltan Acs (2008) has named high-impact entrepreneurship (HIE). Entrepreneurial firms with an exceptional growth trajectory are sometimes termed high-growth firms (HGFs) or gazelles as well. (We will use the terms HIE and HGF interchangeably throughout the article.) High-impact entrepreneurial activities commercialize key innovations or create disruptive breakthroughs, extract substantial entrepreneurial rents, spur growth (in both the firm and the economy) and employment, and shift the production possibility frontier outwards. In short, HIE significantly influences the economy. Yet a typical start-up is not characterized by HIE, and HIE is not necessarily performed within new (or small) companies.1 Policy discussions should take note of these facts. Rather than targeting small firms to compensate for their inherent disadvantagesa motivation for many policies in the recent pastfocus should be directed towards providing a framework for fostering a dynamic economy conducive to HIE. What bundle of policies ensures that people can start new ventures, develop these ventures into high-impact firms, and expand existing ventures to their full potential?2 The journal article format does not permit an exhaustive treatment of all pertinent policies. Instead we will focus on two policy areas of crucial importance, namely tax policy and polices pertaining to the functioning of labor markets. Other areas, such as private property rights, the functioning of financial markets and the regulation of product markets, are important but will not be dealt with here. Yet the entrepreneur is not the only agent that is of consequence for economic progress. Successful entrepreneurs who identify and exploit new ideasthereby creating and expanding businessesdepend on a number of complementary agents, such as skilled labor, industrialists, venture capitalists and secondary markets. One should keep in mind that HIE becomes impossible without these complementary competencies and inputs. Focusing solely on entrepreneurship abstracts from other factors necessary for an economy to prosper. Still, entrepreneurship is crucial; a lack of entrepreneurs cannot be fully offset by an ample supply of skilled labor or an extensive capital market. 2 Competence blocs and high-impact entrepreneurship Economic growth is a complex process involving the creation and use of knowledge. We draw on the theory of competence blocs (Eliasson and Eliasson 1996) to identify key actors with different but complementary competencies that interact to generate, identify, select, 1 See Acs (2008) for an in-depth discussion of HIE. Acs claims that HIE should be an activity focused on (homogeneous) mass production within the product market sector. However, we find it unnecessary to restrict the concept of HIE to specific business activities and/or strategies. 2 This does not preclude the prospect of an entrepreneurial venture being sold to an incumbent fairly quickly. The full potential of a business idea will more likely be realized if it is sold to an established business with the requisite know-how and financial strength (Norbck and Persson 2009). expand and exploit new ideas about how to satisfy consumer preferen (...truncated)


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Magnus Henrekson, Dan Johansson, Mikael Stenkula. Taxation, Labor Market Policy and High-Impact Entrepreneurship, Journal of Industry, Competition and Trade, 2010, pp. 275-296, Volume 10, Issue 3-4, DOI: 10.1007/s10842-010-0081-2