Can government-funded entrepreneurship work?

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Business Matter

Manish Shah is the former president of Midwest Law Printing in Chicago. He also worked at Intel, PwC and Motorola. He has an MBA from Kellogg Graduate School of Management, and a MS in Computer Science from Illinois Institute of Technology. He can be reached at manishshahus@yahoo.com.

By Manish Shah

Can a government  successfully boost entrepreneurship? It can, according to Josh Lerner, author of Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have   Failed —and What to Do About It.

Lerner documents various cases where government intervention has failed to further entrepreneurship. He cites two key reasons for these failures. First, there is the problem of regulatory capture whereby regulators start favoring the interests of the industries they regulate. For example, the Interstate Commerce Commission (ICC), which was created to regulate the railroads and trucking companies, was later accused of protecting their interests.

Second, a government could misallocate the funds due to lack of expertise. The state of Kansas is a case in point. In  the 1970s, its legislature authorized the use of state’s pension funds for loans to     local businesses and real estate developers to spur economic growth. By mid-1980s almost fifth of the multi-billion dollar pension was approved for these investments. The government selected two investment firms to allocate funds on its behalf. The investment firms were paid a fee for each transaction regardless of the quality of their investment. As a result, they invested in risky ventures. For instance, they invested $65 million in a savings and loan institution which collapsed. When all was said and done, the Kansas state pensioners lost over $265 million.

Unlike the state of Kansas, Singapore has been very successful in promoting entrepreneurship primarily because it has created a favorable environment for entrepreneurs. The Singapore government has launched several programs, which include granting subsidies to researchers who move their laboratories to Singapore, mentoring first-time entrepreneurs and giving awards to failed entrepreneurs to further encourage risk taking.

According to Lerner, a government needs to follow five key principles to successfully implement an entrepreneurship program.

– Create an environment that fosters innovation.

– Use the market to provide direction on how to allocate funds rather than using a top down process.

– Be aware that these initiatives require long lead times.

– Re-engineer or shelve the parts of the program depending on their effectiveness.

– Take steps to minimize the agency problem (a situation where the individuals and organizations act to benefit themselves instead of contributing to the broader social good).

Entrepreneurs are the engines that fuel our economic growth. How about a government bailout of our entrepreneurs?

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