Government Support for Entrepreneurs in the UK - Case Study Example

Government Support for Entrepreneurs in the UK 0) Terms of Reference This report explores the level of support that the entrepreneurs in the UK are afforded by governments. The report will particularly focus on entrepreneurship and innovation role in developing the economy, emergence of entrepreneurship policy in the United Kingdom and the role of governments in supporting entrepreneurship especially during economic depression 2.0) Introduction Entrepreneurship can be referred to as the process of organising all the factors of production with an aim of accumulating wealth (McDaniel 2002). Different scholars however, have different meaning of the term entrepreneurship. An entrepreneur is a risk taker. He is a unique person in the society with skills that are crucial for championing change. On the other hand, any individual who works as his own boss is considered as an entrepreneur. Entrepreneurship is a term that is often used interchangeably with innovation. Innovation can be referred to as an intentional process of change aimed at creating value by targeting opportunity and in quest of advantage. Entrepreneurship emphasizes on the creation of new products and services, new production processes, new organisational structures and the invention of new markets. New entrepreneurial ideas are those that can be commercialized and should be able to contribute greatly to the development process of the entire society. 3.0) The Significance of Entrepreneurship to the Economy Entrepreneurship plays a very crucial part in economic development process. Economic development is usually influenced to a great extent by entrepreneurial activities. Innovation propels the economic growth and development of any country. The level of economic performance relies hugely on the level of technology used by firms. Research and development, which is characteristic of entrepreneurship, provides a great thrust to technological advancements in companies and hence production efficiency. Neo-classical economics acknowledges that economic growth is as a result of enhancements to the basic factors of production such as labour and capital, which is the main objective of entrepreneurs. Entrepreneurship is characterised by competitive actions that spur market processes to success. The introduction of new activities in the market is essential for the development process of trade. Established firms as well as new entrants in the market develop new products that respond to the varying needs of consumers and thus contribute enormously to the development of the economy and betterment of the society (Wong et al 2005). Entrepreneurship and innovation are thus universal primary determinants of economic growth. Small and medium enterprises, which are perceived to be more entrepreneurial, contribute hugely to the economy by employing great masses of people who would otherwise be jobless (Analoui & Karami 2003; Stokes et al 2010). These companies are crucial for economic growth through their inventive nature and support to larger companies. Outsourcing, which has become a major strategy for large firms to cut down their production cost, could not be possible without innovative small and medium business enterprises. The creation of innovation has long been the work of entrepreneurs. Economic breakthrough have been stimulated by individuals of small and medium size companies to a considerable extent, pulling their resources to bring their ideas to reality through shear determination to achieve certain set of entrepreneurial objectives (Carter & Jones-Evans 2006). In most cases, smaller business enterprises have more patents than large organisations (Blackburn 2003). From this point of view, one can reach a conclusion that small and medium enterprises are more entrepreneurial and fundamental part of developing the economy of any country. Small and medium business enterprises generate more patents for budding technologies (Blackburn 2003; Stokes et al 2010). These generic patents on new ideas are usually centred on particular innovations with high economic impact on the society. The technologies have high return on investment and thus contribute enormously to the economies of nations. 4.0) Myths and Theories of Entrepreneurship Numerous myths have evolved to shed light on the concept of entrepreneurship. These theories basically pivot on the failures and successes of entrepreneurial undertakings. Shane (2008) argues that most of these myths are connected with the perception of strong financial background. Some of the common myths on entrepreneurship include: Starting a venture is not an easy process as it may sound. Most people who have given it a shot to start up different companies have hit a snag. Their efforts have been futile in operational business. Many businesses usually fail to accrue any profit during their initial financial periods. Entrepreneurs are instinctive about where to begin when it comes to doing business. This common intuition usually leads to the collapse of many business ventures. Most entrepreneurs fail to identify lucrative business industries or fields because they assume to be all knowing about investment opportunities in the market (Ács & Audretsch 2010). Thirdly, many people tend to think that money is needed in order to become an entrepreneur and generate cash inflows. With the exception of some industries such as information technology, most companies or individuals do not start up their business enterprises on strong financial background. Most entrepreneurial undertakings are usually of low capital and lean in their initial stages (McDaniel 2002). Therefore, despite the fact that entrepreneurship demand cash injection, it is not in order that the funds must be of great magnitude at the initial stages of development. Success is determined by entrepreneurial talent and not the type of venture. This notion does not actually hold to some extent. The profitability of an industry strongly determines the success and growth of business enterprise. The industry itself therefore, proves to be a stronger determinant of business success than the underlying talent of operators (Carter & Jones-Evans 2006). From the critical examination of the myths above, it can be seen that the general perception of entrepreneurs and non-entrepreneurs are quite parallel within the real business world. According to Virtanen, psychological theories focus on individual characteristics, intentions and motivations. The theories postulate that entrepreneurs have iron need for high achievement. Entrepreneurs have strong conviction in themselves that they have the capacity to initiate and accomplish tasks effectively. Interior locus serves to differentiate successful entrepreneurs from unproductive ones. Success in the perception of entrepreneurship is gauged on the level of achievement of entrepreneurial objectives. This however, might lead to the generalisation that high return businesses and highly successful self-employed individuals are successful entrepreneurs, which might not be absolutely true. Motivation to achieve specific objectives is the main differential in economic growth and entrepreneurial development (Grebel et al 2001). Trait theories have close connection to entrepreneurial abilities and skills. 5.0) Approach to an Evolutionary Concept of the Entrepreneur This approach considers how resources are endowed by the agent. Incomplete information about future economic development creates a situation of uncertainty in resource distribution. This approach defines the agent in three fundamental dimensions: entrepreneurial motives, human and investment capital. 5.1) Entrepreneurial Element This element is perceived as the outcome of the agent’s individual resource allocation. Entrepreneurial constituent includes intangible qualities of Schumpeter entrepreneur who is an innovator and creative destroyer of existing equilibrium in his pursuit of market opportunities. This view avoids stereotyping and supports the notion that all people have the ability to perform all actions as executed by others. 5.2) Human Capital This component attempts to explore optimal investment and income distribution. The operations of the firm are surrounded by great uncertainty and agents do not know with certainty the possible return on investment when starting organisations. They however, have information on their value in the labour market thus if they know that private investment would yield more returns than being in employment, they will usually opt to be entrepreneurs. 5.3) Investment Capital In this dimension, the role played by the capitalists and entrepreneurs are examined. The basic premise is that potential entrepreneurs need venture capital to initiate their businesses, regardless of whether they are debt finance or equity capital. It is a general knowledge that entrepreneurship is constraint by financial inadequacies. 6.0) Should Governments Support Or Discourage Entrepreneurship? Entrepreneurs have strong conviction that entrepreneurship is a crucial process that deserves the support of governments. However, economists may not have the same feeling. They are always suspicious of such assumptions with no strong empirical backing. It is interesting that some economists have audaciously come out in protest that there is too much of entrepreneurship and that governments should think of going the other way by starting to discourage entrepreneurship (Shane 2005). The opponents of entrepreneurship argue that there are no evidences of beneficial outcomes of entrepreneurship ((Parker 2005). They further argue that there is likelihood that there can be excess investment by entrepreneurs, which surpasses competitive equilibrium. Consequently, most entrepreneurs will always invest in projects that do not benefit the entire society. Their project costs would in most cases outweigh the projects’ social benefits. These pessimists on entrepreneurship think that by making capital more expensive, citizens can be made better off (Parker 2005). These perceptions by economists however, do not hold and have been overshadowed with too much support for entrepreneurship that has become a mantra in economic development of various countries. The proponents of entrepreneurship hold that it promotes competition, stimulates innovation and job creation. It is often perceived as a critical path out of poor living standards and poverty into a better society. Under free market conditions, too little incentives exist for entrepreneurship. This calls for government intervention to rectify market failures and ensure active participation of entrepreneurs in the best interest of the society (Parker 2005). 6.1) The Concept of Market Failure and Entrepreneurship Government intervention in business activities is usually to counter the failure of the market to provide efficiently for all citizens (McDaniel 2002). This is often a necessary but not a sufficient condition. There is often imperfect flow of information in the market. Governments normally institute policies that are meant to stimulate economic activities and the development of entrepreneurial enterprises in the economy (Owen 2004). Individual business owners fail to recognize and appreciate the benefits of their small businesses. Governments in many nations tend to develop cheap loans to support up-coming entrepreneurs and instruct banks to soften their stands on offering loan services to small and medium enterprise owners. Development of policies to promote innovation in small and medium business enterprises is often a constricting issue in the development of new technologies (Owen 2004; Parker 2005). 6.2) The Emergence of Entrepreneurship Policy in the UK Despite weak political affiliation of small and medium-sized business enterprises in the United Kingdom unlike in the United States, they have been a major policy concern. In the United States, for example, there has been discussions aimed at exposing whether small and medium-sized enterprises are not well served by financial institutions. After the Second World War, commercial banks were under pressure from the Bank of England to set up a jointly managed Industrial and Commercial Finance Corporation (ICFC), which was charged with the responsibility of supplying small firms with risk capital (Owen 2004). The development of labour entrepreneurship policy was focused on two main purposes. It was meant to avail finance for small and start-up business organisations and also to facilitate technology transmission from universities and colleges to real business world. The British government has ensured that more finance is channelled into the development and operation f small and medium-sized business organisations (Owen 2004). 6.3) Governments’ Support for Entrepreneurs in the United Kingdom A vigorous economy can be sustained by constructing a dynamic entrepreneurial culture. A nation that recognizes the value of small and medium businesses is bound to become very successful on global platform. In the United Kingdom for instance, there was a launch of Start-up Britain, a campaign by entrepreneurs to offer moral support and inspiration to small and up-coming entrepreneurs across United Kingdom. This movement received great backing from the prime minister and the government (Welstead 2012). The backing of this entrepreneurial initiative is an indicator that the government encourages entrepreneurship in the region. Individuals normally lay blames on economic downturn for entrepreneurial misfortunes (Stafford et al 1994).This is often coupled with lack of adequate finance from banks. During and after great recession, banks as well as the government need to keep cash flowing to support hard-hit entrepreneurs who are crucial part of growing the economy. While everyone has been celebrating the fruits of entrepreneurship, one cannot assume their solitary efforts to ensure a better tomorrow. It is therefore a crucial initiative for governments to have intervened and fuelled entrepreneurship, which is integral part of economic development. Entrepreneurship can be supported by the government as a growth strategy. The governments of the United Kingdom are currently in hot pursuit of entrepreneurship, an emulation of the United States, where entrepreneurship is a very crucial subject for the government (Audretsch 2002). 7.0) Conclusion Entrepreneurship is a very crucial process for economic development of all nations of the world. It can be referred to as the process of organising all the factors of production for economic gain and the advancement of the society. Entrepreneurship and innovation are often used synonymously. The main objective of an entrepreneur is to develop new ideas that are commercial in nature and are beneficial to the general society. Despite the fact that the benefits of entrepreneurship are always celebrated by majority of the population, little attention is usually given to them and they solely work tirelessly to sail against rough economic times. Entrepreneurship is one of the primary determinants of economic growth and development thus it calls for government attention in all dimensions. Market failure is one of the biggest reasons for government involvement in business activities. Free market operations are such that entrepreneurial development in some areas is restricted. The government therefore, sets in to encourage entrepreneurship in areas which seem less attractive for private investors. The government should extend adequate support for entrepreneurs at all times especially during economic depression. Channelling funds to research and development activities is likely to ensure that innovative start-up business enterprises as well as large organisations thrive during economic downturn. The government can involve in promoting entrepreneurship through establishing policies that promote co-investment in technology advancement by both large and small and medium-sized business enterprises. 8.0) Recommendations In brief, governments can support entrepreneurship by offering low cost risk capital to entrepreneurs. It should also develop incentives such as tax cuts, exemptions and other incentives that promote the development of new technologies. Heavy investment in research and development is an integral part of innovation. The government should therefore, channel more funds into research and development in order to spur the generation of new ideas for product and service creation to satisfy the needs of the citizens. The governments should promote education curriculum that support the transfer of relevant skills and expertise to the business industry. It should develop a framework, which ensures that all universities and colleges promote the growth of technology in areas where they are established. Finally, the governments should establish loan guarantee schemes to ensure that up-coming entrepreneurs have easy access to capital and can sustain themselves during the times of economic depression. Brief expansions of the recommendations are as follows: 8.1) Policy Establishment The government can intervene and promote entrepreneurship through creation of policies that are aimed at promoting business ventures. This could be policies that are constructed to achieve low capital gains taxes and developing programs that match funds with appropriate private sector development. This would ensure the accessibility of risk capital. 8.2) Creation of Incentives for Co-Innovate By both Small and Large Entrepreneurs It is crucial that small entrepreneurs should be supported at all times owing to their important role in economic development and their agility in search for new productive ideas. The government can come to the rescue of entrepreneurship development by establishing incentives for joint invention and innovation by small firms and established ones. The creation of tax incentive for large organisations would encourage them to invest, develop profitable associations with small business enterprises and support the innovations tailored by small firms. The new ideas developed by small organisations can only exhibit their potentialities through the support of large firms, which help them bring their innovations to the market. Large business enterprises are indeed the market for technologies developed by small business enterprises. Supporting co-investment in innovations by the government is primary for developing sustainable entrepreneurship in a country. 8.3) Investing Heavily In Research and Development (R&D) Research and development is the driving force behind innovation and technological advancements. Without adequate funding of research processes, new technologies would hardly spring up, which in turn would be injurious to the economy. The government should thus develop policies that drive high research and development and eliminate obstacles to research process for small and large entrepreneurs (Shane 2005). No single nation can dream of economic growth and development in the current world without heavily investing in the research and development sector. 8.4) Establishment of Strong Leverage into Innovation Programs The government should reduce red tape and improve infrastructure, which are essential part of investment. Besides, the government can promote entrepreneurship by implementing laws and policies that facilitate hiring and training of individuals to gain useful entrepreneurial skills. By facilitating and enforcing laws that enhances innovation in the country, governments play very crucial role in nourishing entrepreneurial trends in their economies. The creation of a culture that supports innovation is necessary for stimulating advancement in technology (Ács & Audretsch 2010). The British government, for example, has made several policy reforms to ensure that the government increases cash flows to promote entrepreneurial activities in the economy. It has facilitated the transfer of technology from learning institutions into business field, to accomplish the belief that universities should be actively engaged in improving technological advancements in their respective locations. The government has also ensured reduction in taxes on capital gains to stimulate investment activities in the economy. Tax incentives by the government have seen the birth of more innovative small and medium enterprises, supported by enterprise fund. The government has been targeting high level technology. It has intervened both directly and indirectly by sponsoring many Early Growth Funds in innovative and skill demanding business enterprises. Policy reconstruction was such that it allowed small and medium enterprises to render their services without following strictly the policies of the financial Act. The British government support entrepreneurs in the United Kingdom by assisting them to start and grow in London, encourage their participation in global trade and offer support to entrepreneurs who have economic challenges among others. During recession, the British government assist entrepreneurs to raise finances for their projects through cheap loan provision, making enterprise finance accessible to all entrepreneurs upon presentation of reasonable business plan to the government. Grant schemes was established to facilitate research and development and hence entrepreneurship. Bibliography Analoui, F & Karami, A 2003, “Strategic management in small and medium enterprises,” Thomson, London. Ács, Z J & Audretsch, D B 2010, “Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction,” Springer, New York. Audretsch, DB 2002, “Entrepreneurship: determinants and policy in a European-US comparison,” Kluwer Academic Publishers, London. Blackburn, R 2003, “Intellectual Property and Innovation Management in Small Firms,” Routledge, New York, NY. Carter, S & Jones-Evans, D 2006, “Enterprise and Small Business: Principles Practice and Policy,” FT Prentice Hall, Harlow. 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