Enterprise Issues: Big tax breaks or none at all, please Mr Brown

The likely Budget strategy of offering new tax breaks for certain types of start-ups seems unexciting

THE RATE at which new companies are formed is an important indicator of the health of the economy - especially at a time, like now, when there is rapid technological change. Very often new companies are the means by which new technologies are implemented and exploited, even when they are later absorbed by big ones. Corporations are, generally speaking, less innovative.

Boosting R&D and creating the conditions that encourage more people to become entrepreneurs are therefore important public policy issues. Certainly, it is something that has been taxing the minds of Treasury boffins preparing for next month's Budget.

Unfortunately, there are no clear answers to the question of what makes an entrepreneur. Successful ones seem to have some character traits in common - for instance, low formal educational attainment and anti-Establishment attitudes. But, quite apart from the fact that there are many exceptions to any such generalisation, these are hardly characteristics a government would seek to encourage.

Besides, while fuzzy attributes like personality and culture obviously play a part in explaining why, say, Americans (of many ethnic backgrounds) or Chinese (in many countries) are very entrepreneurial, that just pushes the question one level further back. What determines those cultural attributes in the first place?

Environmental as opposed to innate causes are clearly important, suggesting that governments can potentially play an important part in stimulating entrepreneurship. Take the example of science-based start-up companies in some of Britain's most prestigious university towns. Cambridge has a successful cluster of companies on its science park, including the UK's biggest software hot-spot. Oxford similarly has created a vibrant shoal of companies, more dominant in chemicals, materials and scientific instruments. But neither Edinburgh nor nearby Glasgow, both intellectually strong in the sciences, has yet established the same tradition of spinning-off innovatory companies.

There is little reason to believe that Scottish people per se are naturally less entrepreneurial than the English - or at least, it would take a bolder Englishwoman than me to say so. The explanation for the different attitudes must lie either in the financing needs of the university - how badly does it need the contribution of profits from commercial ventures - or in the finance and support it makes available for entrepreneurial academics. Given that all universities are hard up, the latter seems more likely.

There has long been a presumption that a shortage of finance lies behind the poor UK record in entrepreneurship. The review of the banking industry being carried out by Donald Cruickshank is the latest of many assessments of the provision of finance for small business over the years. Britain also has a far smaller venture capital industry than the US, for no apparent reason. But the interesting thing about university-backed start-ups is that, given the scarcity of resources in our seats of higher education, they suggest that easy access to capital might not actually be the key.

Clearly, the imprimatur of a scholarly connection, vouching for the intellectual promise of the innovation, is important for companies that go on to raise venture capital. But the important support offered by a university is probably more intangible. Resources in the form of many years of lab work and contact with students and other researchers; access to databases, libraries and all the other intellectual riches of the university; and the availability of a pool of potential employees - all of these are more important than mere cash.

This is especially true in hi-tech industries, where the intellectual resources are as important to any company as the finances. In a field where the ideas are complex and its knowledge-base is the source of a company's competitive advantage, it will actually be far easier to find financing than to sustain the right intellectual framework. This is precisely why hi-tech businesses are even more prone to clustering in particular places - like Silicon Valley or its cold and wet East Anglian counterpart, Silicon Fen - than the average business. Money, tax breaks, even infrastructure, are less important than intellectual and creative ferment. That, and the habit of thinking about good ideas as commercial ventures.

If financing is indeed less likely than in the past to be the constraint that prevents a would-be entrepreneur from setting up a hi-tech company, the likely Budget strategy of offering new tax breaks for certain types of start-ups seems unexciting. The indications are that it will not involve a lot of public money, so there is little cost to the taxpayer involved. On the other hand, the strategy will involve a Whitehall definition of "hi-tech" - and that will distort the sorts of decisions entrepreneurs make so they can derive the biggest tax breaks. When those tax breaks are not very big, they will alter the kind of start-ups that take place without giving birth to a lot of new ones that would otherwise not have taken place.

In other words, any incentives that do not apply to all new firms will be a form of picking winners - fine as long as it is clear who the winners will be. But the strategy was discredited 20 years ago because it was clear that governments had no better an idea than anybody else about where future commercial successes lay.

So tax breaks either ought to be very big in order to make a significant difference, or they ought not exist at all, because they will just distort the shape of the businesses. Perhaps it would be better to add the few millions that the Chancellor has in mind to encourage hi-tech start-ups to the higher education budget instead.

Of course, the Government cannot overlook the cultural question altogether. Here, it might well be true that a step change in attitudes to entrepreneurship does require the lubrication of fiscal incentives. It worked for Ireland, and it appears to be working for Germany too, its ageing mittelstand companies founded in the 1950s giving way to a new generation of software and advanced-engineering businesses. However, in both cases, it took a large amount of public money in the first place to persuade a population not naturally inclined to entrepreneurship that there was a lot to be said, after all, for starting up a company.

d.coyle@independent.co.uk

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