Public Policy in an Entrepreneurial Economy

Public Policy in an Entrepreneurial Economy

INTERNATIONAL STUDIES IN ENTREPRENEURSHIP Series Editors: Zoltan J. Acs George Mason University Fairfax, VA USA David B. Audretsch Max Planck Institute of Economics Jena, Germany Books in the series: Black, G. The Geography of Small Firm Innovation Tubke, A. Success Factors of Corporate Spin-Offs Corbetta, G., Huse, M., Ravasi, D. Crossroads of Entrepreneurship Hansen, T., Solgaard, H.S. New Perspectives in Retailing and Store Patronage Behavior Davidsson, P. Researching Entrepreneurship Fornahl, D., Audretsch D., Zellner, C. The Role of Labour Mobility and Informal Networks for Knowledge Transfer Audretsch D., Grimm, H., Wessner, C. Local Heroes in the Global Village Landström, H. Pioneers in Entrepreneurship and Small Business Research Lundström, A., Stevenson, L. Entrepreneurship Policy: Theory and Practice Elfring, T. Corporate Entrepreneurship van Stel, A. Empirical Analysis of Entrepreneurship and Economic Growth Fritsch, M., Schmude, J. Entrepreneurship in the Region Reynolds, P. D. Entrepreneurship in the United States Congregado, E. Measuring Entrepreneurship: Building a Statistical System Acs, Z., Stough, R. Public Policy in an Entrepreneurial Economy: Creating the Conditions for Business Growth

Zoltan J. Acs Roger R. Stough Public Policy in an Entrepreneurial Economy Creating the Conditions for Business Growth

Editors Zoltan J. Acs George Mason School of Public Policy Fairfax, VA USA Roger R. Stough George Mason School of Public Policy Fairfax, VA USA Series Editors Zoltan J. Acs George Mason School of Public Policy Fairfax, VA USA David B. Audretsch Indiana University Bloomington, IN USA ISBN: 978-0-387-72662-5 e-isbn: 978-0-387-72663-2 DOI: 10.1007/978-0-387-72663-2 Library of Congress Control Number: 2008924176 2008 Springer Science+Business Media, LLC All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com

Preface Dedicated to our Students Ever since my days at the Small Business Administration, I have been interested in entrepreneurship policy. Over the years I have pursued this question at the Max Planck Institute in Jena Germany and the Kauffman Foundation. The subsequent discussion and chapters in this book is a product of that deliberation. This volume grew out of my PhD course in Entrepreneurship and Public Policy at George Mason University. The School of Public Policy and my colleagues have been working on articulating a policy perspective for the past several years. In particular we have focused on developing countries, innovation and technology and social entrepreneurship. The present volume represents a viewpoint on the subject. Acknowledgments We would like to thank Scott Jackson who in addition to his contribution to this volume has been the point person for compiling the book. He worked closely with me and the other authors and has continued to facilitate the process long after his obligations have been met. Scott has demonstrated conscientiousness, diligence and excellent communication skills in this effort. He committed numerous hours to review and editing of chapters, team meetings discussing, formally commenting on content and in discussions with myself, the other primary author Dr. Roger Stough and his classmates to pull together the camera ready version of the book. Zoltan J. Acs, Professor School of Public Policy George Mason University

Contents Preface...v 1. Introduction...1 Zoltan J. Acs and Roger R. Stough 2. Entrepreneurship and Small Business Policies under the Presidential Administrations of Presidents Carter, Reagan, Bush and Clinton: 1977 to 2001...23 Linda Le 3. The Unintended Consequences of the Sarbanes-Oxley Act on Small Business...67 Jiamin Wang 4. The Impact of Sector Specialization on Entrepreneurial Activity..95 Haifeng Qian and Huaqun Li 5. Entrepreneurial Healthcare: A Study in State Policy Arbitrage...117 Scott Jackson 6. Evaluating University Technology Transfer Offices...139 Kirsten Sachwitz Apple 7. Simulating the Impact of Policy on Entrepreneurship...159 Ryan Sutter 8. Putting the Entrepreneur Back into Development and Foreign Policy...195 Nicola A. V. Virgill 9. Innovation in Manufacturing...235 Juan Julio Gutierrez 10. The Entrepreneurship - Development Nexus...255 Roger R. Stough

viii Contents 11. Democratic Capitalism and Philanthropy in a Global Economy 281 Sameeksha Desai and Zoltan J. Acs 12. Index...295

Abstracts 1. Introduction, Zoltan Acs (no abstract) 2. Entrepreneurship and Small Business Policies under the Presidential Administrations of Presidents Carter, Reagan, Bush and Clinton: 1977 to 2001, Linda Le The author surveys the entrepreneurial and small business policies from Carter through Clinton, evaluating each based on how they fostered entrepreneurship, or small business ownership, and if these policies seek to create economic efficiency or target market equity for specific groups. It provides a theoretical framework for analyzing each administration s major small business and entrepreneurship policies and examines each policy s overall effects on small business and entrepreneurial activities, its qualifications as a target market equity or economic efficiency policy, and the policy s beneficiaries. This discussion should provide policy makers, researchers, and academics the ability to recognize the types of policies which best foster entrepreneurial and small business activities, and also encourage policy makers to pursue these types of policies. 3. The Unintended Consequences of the Sarbanes-Oxley Act on Small Entrepreneurial Business, Jiamin Wang The Sarbanes-Oxley Act, with the purpose of improving corporate disclosure integrity and restoring investor confidence, seems to have generated unintended consequences on small entrepreneurial business. A theoretical analysis of both the benefits and costs of SOX implies that while SOX certainly plays a positive role in reducing the agency problem and information asymmetry for entrepreneurial firms, it has also imposed disproportionately higher direct compliance cost on those firms, and incurred tremendous opportunity costs. This is explored using data on the going public tendencies and venture capital patterns of these firms. The author finds that SOX has affected not only the tendency of firms to go private but also observes that these firms are smaller as a result of SOX possibly

x Abstracts the result of increased compliance costs. Policy recommendations are made accordingly. Keywords: Sarbanes-Oxley Act (SOX), small entrepreneurial business, going-private, compliance cost, computer software industry 4. The Impact of Sector Specialization on Entrepreneurial Activity: Empirical Analysis and Policy Implications, Haifeng Qian and Huaqun Li Entrepreneurship is becoming widely recognized for its role in economic growth. The successes of Silicon Valley, Austin Texas, and Northern Virginia in the U.S. suggest that entrepreneurial activity is preferential for specific sectors (e.g. high-technology industries). This implies a sector concentration of entrepreneurship. The author explores whether sector specialization has an impact on the level of entrepreneurial activity or not in U.S. Metropolitan Statistical Areas. The econometric results show that sector specialization is a significant contributor to entrepreneurial activity, while, local factors such as population growth, income growth, unemployment rate, average establishment size and human capital all affect entrepreneurship. The paper sheds some light on the direction that future entrepreneurship policy should take. Keywords: Economic growth, entrepreneurship, sector specialization, firm formation, region 5. Entrepreneurial Healthcare: a Study in State Policy Arbitrage, Scott Jackson The author explores the relationship between entrepreneurship and health policy, specifically insurance policy, and the question of optimal design of insurance system to catalyze entrepreneurial activity in light of current policies designed primarily to address equity and cost issues. The analysis reviews the theory on the impact of social policy, specifically health insurance, upon the entrepreneur, and constructs a framework for analysis of health financing/insurance with respect to entrepreneurial activity. It presents a high level summary of current state initiatives and Health Savings Accounts (HSAs)/High-Deductible Health Plans (HDHPs) and evaluates them in light of this framework. The author finds that HSAs/ HDHPs and transitioning the insurance market to an individually oriented market remain the policy alternative most consistent with an entrepreneurial economy.

Abstracts xi 6. Evaluating University Technology Transfer Offices: How to unclog the system and let entrepreneurship through? Kirsten Sachwitz Apple Programs to transfer technology from universities and government agencies to the private sector are a cornerstone of economic development in the US economy. Most US universities today have a centralized technology transfer office which handles all of their intellectual property; however, the question remains is this the most effective means of technology transfer? The evidence is mixed or minimal for all other measurements including licensing and spin-offs, but suggests a bottleneck remains in the commercialization of new technologies. The author posits a new operational model and strategic principles university technology transfer offices should employ. 7. Simulating the Impact of Policy on Entrepreneurship, Ryan Sutter The resurgence of interest in role of the entrepreneur in economic change has led to a reexamination of the role of public policy strategies that seek to facilitate and promote entrepreneurship. However, the impacts of many proposed public policies on entrepreneurial outcomes are difficult, at best, to quantify. As a result, little public policy analysis regarding the potential for the success of the proposed sets of policies exists. This research at-tempts to, in part, fill in this gap by first generalizing a sample policy proposal to its most basic dimensions of effect and then analyze the impacts of these generalized dimensions on entrepreneurial outcomes using simulation modeling. The results of the analysis suggest that public policies directed at: 1) increasing the aggregate level of human capital and 2) increasing the aggregate stock of new knowledge; have the most influential impact on entrepreneurial outcomes. 8. Putting the Entrepreneur Back into Development and Foreign Policy, Nicola A. V. Virgill Over the last 60 years, developing countries have generally used two strategies in their pursuits of development - import substitution and export promotion with limited results except for East Asia. Both approaches relied on strong state intervention and persistent market distortions to sustain their viability, and thus, have often crowded out or thwarted altogether the traditional role of the entrepreneur the driving force of creative change and innovation in an economy. The author finds that developing countries face greater institutional barriers to entrepreneurial activity and that these institutional barriers negatively impact economic performance. The

xii Abstracts analysis suggests that countries which seek to improve their economic performance should improve their business environments, and recommends the promotion of entrepreneurship and entrepreneurial institutions through targeted development assistance aimed at business environment restructuring become a key foreign policy objective for the United States. Keywords: Development Policy, Entrepreneurship, Export Promotion, Foreign Policy, Import Substitution 9. Innovation in Manufacturing: the role of foreign technology transfer and external networking, Juan Julio Gutierrez This paper explores the determinants of three innovation outputs in low technology manufacturing factories by exploring innovation dependent on the factory s network of relationships, both internal (intra-firm cooperation) and external (inter-factory and inter-firm) using data from, the World Bank s Investment Climate Survey (ICS). The results support the idea that external networks, mainly interaction with universities, and purchasing of foreign licenses constitute a mechanism for generating innovation outputs in low-technology sectors. Foreign ownership does not appear to be a driver of innovative outputs. On the iput side, the results show importance and robustness of capital goods, adaptation and development within the factory where learning by doing, and new technical personnel. 10. The Entrepreneurship and Development Nexus: Conceptualizing the Nexus with Examples from China and India, Roger R. Stough The Entrepreneurship and Development Nexus provides some perspective on why entrepreneurship has become more important in recent years for developing countries. In providing some answers to this question insight is provided into why entrepreneurship policy and programs have grown in popularity as part of the primary development tools used in both developed and developing economies. With this rising importance comes the basic question of how entrepreneurship can be applied as a tool to promote growth and development at the regional level especially in a development framework. Further, the chapter recognizes that there has recently been a huge rise in the general importance of entrepreneurship in social, political and economic realms. This is supported by the fact that there has been an enormous growth in the amount of scholarly and gray entrepreneurship literature.

Abstracts xiii 11. Democratic Capitalism and Philanthropy in a Global Economy, Zoltan J. Acs and Sameeksha Desai When the market creates social problems, non-market solutions may alter or equalize them. The response to social problems in many countries has been through legislative, regulatory or other government action. In many countries in the developing world, state solutions are crippled by poor funding resources for social issues, lack of technical ability to achieve adequate solutions, and in some cases, lack of government legitimacy. Given this, the ideal solutions for social problems must come from non-market and non-state sources. We argue that philanthropy, a social innovation born in the United States, has great potential to work in other countries.

List of Contributors Acs, Zoltan J., PhD Desai, Sameeksha Gutierrez, Juan Julio Jackson, M. Scott Le, Linda Li, Huaqun Qain, Haifeng Sachwitz-Apple, Kirsten Stough, Roger R., PhD Sutter, Ryan Virgill, Nicola A. V. Wang, Jiamin The George Mason University School of Public Policy 4400 University Drive, MS3C6, Fairfax, VA 22030 U.S.A.