Economic policymakers around the world are searching for solutions that will lift the global economy out of recession. While billions of dollars have been spent on stimulus programs and direct government lifelines have been extended to large businesses, the global economy is on course to contract by 2.9 percent this year – the worst performance since World War II, according to the World Bank.
Policymakers should try a fresh tack: Focus on entrepreneurship and innovation as catalysts for long-term economic growth.
Throughout history, during very difficult times, the best hope for economic growth has come from the often unheralded, unknown and untested companies led by entrepreneurs. More than half of the companies on this year’s Fortune list of the 500 largest U.S.-based companies were founded during a recession or bear market, according to the Kauffman Foundation. This includes Microsoft, Federal Express, Starbucks and Intuit.
One would think that the worst time to start a business would be right about now, but that’s not how entrepreneurs think. They aren’t looking for the safe road, the one paved with a steady salary and the “certainty” that comes with a career in a large corporation.
Entrepreneurs see opportunity in volatility. They look at a market place where companies are shedding jobs, abandoning emerging markets and cutting off long-term projects. They recognize that market needs are not being met.
Ernst & Young surveyed leaders of both mature multinationals and entrepreneur-led companies in the second quarter of 2009. While only 19 percent of the mature companies said they were focused on pursuing new market opportunities, 67 percent of entrepreneurs said they were. In that gap, you can find the seeds of the next major growth companies in the global economy.
All entrepreneurs will not succeed, of course. But many entrepreneurs say that it is in their failures that they achieve their greatest moments of discovery.
A cornerstone of entrepreneurial success, and long-term business success, is recognizing the dynamic nature of the global business climate. Ernst& Young research shows that the world’s major market indices turn over more than 50 percent every five years. If the market leaders of today fail to innovate, they will not necessarily be the market leaders of tomorrow.
My many years of working with some of the most innovative companies and most entrepreneurial leaders in the world leads me to believe there are a number of steps policymakers can take to spur innovation and the creation of entrepreneurial companies:
Promote an open economy and resist protectionism.
In times of economic weakness, the calls to erect walls grow louder – and nothing could be worse for innovation. Today’s entrepreneurs depend on global pools of capital, production, talent and customers. To deny this stifles economic opportunity, reduces efficiency and undermines investor confidence. Open markets promote economic growth, which in turn facilitates innovation and entrepreneurship.
Don’t over penalize failure. A well functioning economic system not only rewards success, but also allows failure. The key is to allow those who fail to quickly clear out those mistakes, and begin the process of innovation anew. Tax, accounting and legal systems need to be aligned accordingly. For example, entrepreneurs struggle with deductible expenses that are of no value without income to use them against. Instead, entrepreneurs should be able to get some benefit from those expenses – helping to move the business along – instead of accumulating a net operating loss that they may not be able to benefit from in the near future.
Create a pro-entrepreneur, stable tax policy. Fundamentally, tax rates should be low and broad-based to encourage investment. In particular, both reduced capital gains tax rates and tax incentives for research and development can encourage investors to fund new enterprises. Tax policy should also recognize that capital and labor markets are borderless in today’s global marketplace and should be designed to allow businesses to invest and employ workers anywhere in the world to remain competitive in the world markets.
Cultivate confidence in capital markets. Capital is the fuel of entrepreneurship. Adopting a financial reporting language (such as IFRS) that is understood by investors around the world will smooth cross-border investment and give domestic companies broader access to foreign capital. This can be especially critical when attracting capital for initial public offerings.
Build diverse human capital. Today’s entrepreneurs depend more on knowledge and creativity than capital-intensive machinery. But in many countries, more must be done to cultivate the richness of the nation’s human capital. That means focusing on helping more students – female and minority students in particular – master math, science and engineering, as well as build an entrepreneurial mindset and skills. And it means harnessing the strength of the nation’s diversity and building greater collaborative cultures within schools. Better ideas come from groups who tackle problems and challenges from many diverse points of view.
Streamline regulation. Unfocused and duplicative rules can be difficult to follow and increase the cost of doing business, as the World Bank’s “Doing Business” report definitively shows. This acts as a barrier to entry for many entrepreneurs, choking off innovation at small businesses that lack the resources to navigate a regulatory maze, and reducing the incentive for large firms to invest in research and development, since they face reduced competitive pressures from smaller firms.
Fundamentally, these policies would support not only entrepreneurship, but innovators at all levels of society. With the right ground rules and incentives in place, entrepreneurs can be a steady source of the dynamism and vitality that’s at the heart of a vibrant, growing economy.
James Turley is the chairman and CEO of Ernst & Young