Hamish McRae: Even self-starters need a push

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The Independent Online

Entrepreneurs matter. We are in a world where most of the growth of employment comes from smaller companies and the industrial structure changes at a seemingly ever-faster rate.

Entrepreneurs matter. We are in a world where most of the growth of employment comes from smaller companies and the industrial structure changes at a seemingly ever-faster rate. So the speed at which new companies are created is an enormously important competitive issue: create lots of companies and you will create lots of jobs; fail to do so and you won't.

The rhetoric has certainly changed. Treasury ministers can hardly make a speech without an obligatory nod to entrepreneurs. Yet for all the talk of the UK's spirit of entrepreneurial zeal, we are not, it seems, doing that well – or rather, while we are doing better than most other European countries, we are not doing so well by world standards. The Business Council for the United Nations has just produced its third report on the subject. Two key elements of the study are shown in the graphs: the scale of entrepreneurial activity and the volume of venture capital.

The first shows "opportunity-based" activity. There are two reasons why people set up businesses. One is because they want to; the other because there is nothing else to do. The second sort, "necessity-based" activity, is headed by India, Mexico, Brazil, Korea and Poland. At the bottom of that league table come countries like Norway and the Netherlands. The more relevant measure for developed countries is the opportunity-based table, which as you can see is headed by New Zealand, Australia, Mexico and the US. In New Zealand 15 out of every 100 adults carry out some kind of entrepreneurial activity, compared with 10 in the US, five here, and only two in Japan and Israel.

The criterion is the proportion of people who say they are trying to start a business or are running one that is less than three and a half years old. There are puzzles here. Intuitively, New Zealand feels too high, for the place is suffering a brain drain of its qualified young people, often to Australia, which presumably would reduce entrepreneurship. And Israel, at the other end, feels too low, for there is an explosion of vibrant, innovative software business there.

Still, as a broad guide it is a useful one – and one on which the UK does not look good. We do better on the other measure, the volume of venture capital funds available in a rather narrower group of countries, shown in the right-hand graph. The authors divide the source of venture capital into two groups: that which comes from formal venture funds; and the informal sources "friends and family". The latter sour- ces are particularly important in the US.

Unsurprisingly, the US tops the league and intriguingly it is followed by New Zealand. That would support the high rating on the other measure – but then comes Israel, which ought to be at the bottom of the league. After all, if few people there are starting businesses, where is all the money going? There is also a puzzle over Korea: why is the informal figure so low? In the US at least, Koreans have relied on family funds to finance their businesses and set up new ones.

Still, the overall picture fits with what we know from other sources, like rates of business start-ups, certainly as far as the UK is concerned. They show that the UK has roughly half the level of start-ups as the US, but double those of most continental European countries.

What now? Over-simplifying a bit, the problem at the moment is that there is plenty of money hunting for projects in which to invest and quite a lot of projects coming forward. But since so much money has been blown in the dot-com boom and bust, there is a profound lack of confidence in most entrepreneurial projections. This varies from country to country, but people with serious money only want to back people with track records – not hopefuls.

For true start-ups where there is no track record, the informal sources of money are the only way to get projects started.

From a narrower British perspective, the results are disappointing because we rank at the top of the OECD countries as having the lowest barriers to business formation. We also have the largest venture capital industry in Europe, 37 per cent of the EU total. So what do we do?

The Government, reasonably enough, presses on with the rhetoric. There is evidence that as political leaders use their influence to push a line, this does affect political opinion. The lags in social attitudes, too, are bound to be long. This is a generational thing: for many older people, status is associated with working for an elite government department like the Treasury or the Foreign Office, or a crack accountancy firm like Andersen (whoops), or a large financial institution. Setting up one's own business is a bit grubby.

My guess is that this is changing quite fast, certainly in the metropolitan areas. If you look at magazines targeted at the affluent 20-somethings, the featured readers are often running their own businesses: aspiration is to be one's own boss. Once people who set up businesses start to become heroes and heroines in the TV soaps, we will know the battle is being won.

I suspect the Government has done about all it can on the rhetoric front. It needs now to convert words into action, not by doing more but maybe by doing less. It should apply a "does this screw up small businesses?" test to any new tax or regulatory change and, if the answer is "yes", think again.

Finally, if the Government really believes entrepreneurs matter, why are so few of them recognised in the honours list? Our Prime Minister has applied his genius for patronage in so many other areas, maybe he should have a crack at this one.