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 Entrepreneurship Index 2004
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3. Entrepreneurial activity and framework conditions
There are various approaches to measuring entrepreneurial activity. In this study the assessment of country performance for entrepreneurial activity refers to start-up activity and new firm growth. This definition was used in last year’s report1 and the OECD also applied the definition in their benchmark study: “Micro Policies for Growth and Productivity”.2
This section reviews entrepreneurial activity in Denmark and other selected OECD countries, and framework conditions in the top-performing countries are described in detail. The link between framework conditions and entrepreneurial activity is explored in detail, leaving us to conclude that activity levels and framework conditions are correlated. In light of this the report aims to identify framework conditions conducive to entrepreneurial activity.
3.1 Entrepreneurial activity
Start-up activity
In Denmark app. 16,000 new enterprises are launched annually. During the IT-bubble some 18,000 firms were launched, and over the past couple of years app. 16,000 new businesses have been started. This is in line with start-up activity levels registered in the early 1990s (Figure 3.1).
Click on the picture to see the html-version of: Figure 3.1 New enterprises in Denmark 1990-2001
The fact that individual countries use different sources to measure start-up rates makes it difficult to compare start-up activity levels across countries. Eurostat has been active in harmonising statistics, thereby providing a set of comparable data for selected European countries. In the United States start-ups are registered in a manner that allows for comparison with Eurostat data.
The Danish start-up rate is 10%. (Start-up rates are calculated as the number of entering firms as a proportion of the total number of active firms in the same sector). The Danish start-up rate is on a level with the United States and is among the best in Europe (Figure 3.2).
Until recently international comparisons of start-up rates were hard to come by. Previous studies have shown Danish start-up rates to be low. That, however, is not the case.
A high start-up rate is vital to economic development for two major reasons:
- New firms often have a different approach to conducting business, which challenges existing firms and fosters a highly competitive environment. Efficient competition fuels competition and productivity across sectors or clusters. Thus new firms may have a significant dispersion effect.
- New firms may demonstrate an entirely new way of conducting business, i.e. a unique business model or a new product that has a lasting impact on the competitive environment. Even if only a limited number of new firms are engaged in promoting a new business model or product, it could have a significant impact on economic growth (See Box 3.1).
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Entrepreneurs fall into three distinct categories:
- The freelancer typically runs a one-man business and has no ambition to hire additional staff. Another example of a freelancer is the ”weekend-entrepreneur” that runs a wine importing company in his or her spare time.
- The independent entrepreneur runs his or her business based on a well-known business plan or a product that is marketed by other companies. Independent entrepreneurs include hairdressers, kiosks, and skilled trade, among others.
- The innovative entrepreneur has the potential and ambition to create a global, market-leading company based on an all-embracing innovation (see Box 3.1).
All three brands of entrepreneurs make vital contributions to the continued growth of the economy – nurturing efficient markets, a high level of innovation, and higher wealth and employment. Thus framework conditions that address all types of entrepreneurs and emerging companies are vital.
For some time Denmark has addressed the need for improved entrepreneurial framework conditions, and the prolonged effort has translated into a remarkable start-up rate.
Start-ups funded by venture capital
The past few years have witnessed a strong focus on growth entrepreneurs engaged in building companies with a global perspective and high-growth potential. High-growth companies are prevalent across all sectors, but are particularly noticeable in knowledge intensive industries, where innovation is driven by distinctly advanced skills, such as a profound knowledge of customer needs and experiences, or a particularly advanced technology.
In high-growth companies the core business idea is either protected by an immaterial right or may be standardised on a high scale thereby preventing competitors from replicating the idea.
The ability of emerging knowledge intensive companies in exploiting a global opportunity necessitates the in-flow of capital resources that exceeds potential company earnings. Thus venture capital forms the foundation of global expansion.
The United States has long been the front-runner in creating globally successful knowledge-intensive companies, and is therefore regarded as the ultimate benchmark for other countries.
A significant number of innovative and successful entrepreneurship firms in the United States receive a large share of venture capital in the early stages, and some opt to go public to support continued growth. Over the past 30 years more than 2000 venture capital-funded companies have gone public. In 2000, one in five companies listed on the Stock exchange was funded by venture capital, constituting almost one third of the total market cap.3
The success of the United States in supplying venture capital may not be a practicable road for other countries. New firm venture funding has been dominated by the IT- and biotechnology sectors leaving us to conclude that venture capital is well suited for those sectors. Still there are numerous examples of venture capital diffusing into other technologies and sectors prone for global success.
The past decade has witnessed a remarkable surge in venture markets in Canada, the UK, Israel, Korea, Singapore, and Sweden and, to some extent, Finland.4
2000 was a solid year for the venture business. In the United States some 2,500 firms received venture capital while in the UK app. 500 new firms were funded by venture capital. When adjusting for the size of the economies the United States and the UK are on level terms. When comparing this to the relative size of the Danish economy app. 50 new firms should receive venture capital funding annually. In 1998 only 17 startups received venture capital. Since then the share of venture capital-funded firms has surged, and in 2002 venture investment were made in 145 new Danish enterprises.5
In recent years the share of Danish start-ups funded by venture capital has surpassed the performances of the top-performing countries. It is possible that the Danish success reflects a congested demand for early-stage venture capital and that we will see numbers stabilise in the foreseeable future.
The remarkable surge in the share of start-ups funded by venture capital (seed- and start-up) may be attributed to the active participation of venture-funding incubators, the Danish Growth Fund, and a range of emerging private venture funds (Box 3.2).
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When it comes to start-up activity the analysis appears to confirm that Denmark is one of the leading countries. This applies both to the number of start-ups and the number of start-ups with a global potential funded by venture capital. The question is: Is in fact the global potential realised and transformed into higher production, growth and employment?
New firm growth
So far it has been virtually impossible to compare new firm growth across countries. The capital market in general and the venture market in particular have been used as proxies to determine new firm growth. This is by no means a reliable measure. Consequently the report attempts to establish a comprehensive method for measuring new firm growth.
The method is built on an international database (Orbis) that contains more than three million company accounts. The database has some inconsistencies and reliable data on actual new firm growth is not available. Still it is our assessment that the database does allow for identifying the share of high-growth firms based on two-year averages. A correlation between current country performance and longer-term country performance shows rankings to be stable.6
Thus the share of new firms with a growth rate higher than 60% is used as an indicator for new firm growth. Country rankings are not affected when setting growth at 30 or 40%.7
Available data covers 15 countries. The data for the United States and Korea is based on a limited number of observations and should therefore be treated with some caution. The United States and Korea head the ranking while the UK, Holland and Spain also perform well (Table 3.1).
Click on the picture to see the html-version of: Table 3.1 Share of new firms with a growth rate higher than 60%, 2000-2002
The solid performance of the United States is supported by other studies.8 We have not been able to locate additional sources to support Korea’s rank.
In Finland, Norway and Sweden between 5 and 6% of all start-ups shows annual turnover growth of more than 60%. In Denmark the share was 3%.9
New firms with a large global potential are vital to economic growth. However, table 3.1 suggests that only a limited number of start-ups see significant growth. Other surveys that are based on other definitions of start-ups show that only 5% of all start-ups move on to become high-growth firms, which corresponds well with the findings in table 3.1.
Several studies show that of the new start-ups about 25% will cease to exist within the first year, while 70% will survive but not grow.
While only a limited number of enterprises move on to become high-growth business the contribution to total economic growth from the entry and growth of new firms is significant. As much as 40% of the difference in wealth creation across nations can be explained by differences in entrepreneurial activity levels.10
While the Danish framework conditions for start-up activity are ranked among the best, conditions for new firm growth remains a critical issue in Denmark.
In last year’s growth report from the Danish government the issue was given due attention and a wide range of initiatives were announced. Extensive and persistent efforts are necessary for Denmark to claim a place among the world’s leading entrepreneurial nations. Among other things efforts should focus on improving critical framework conditions for new firm growth.
3.2 Indices for entrepreneurial activity and entrepreneurship policies
Denmark has been an active participant in OECD’s effort to identify growth factors in the global knowledge economy. Systematic benchmark studies are important in this matter. The goal of the benchmark studies is to identify framework conditions conducive to a high level of entrepreneurial activity, and to establish a link between performance and framework conditions. In other words: will effective policies lead to higher entrepreneurial activity?
In 2003 the first study on entrepreneurship was published.11 The Danish government decided to expand the scope of the benchmark study. Other countries were invited to participate in the process and eight countries are currently part of the consortium while other countries have expressed a keen interest in participating. Facilitated by Monitor Group, the OECD and A.R.T have also been involved in the process.
Among other things the consortium discusses what “lies behind the numbers”. It has not been the ambition to apply identical benchmark methods across all participating countries.
The model applied for this study is more elaborate than the one used in last year’s report. 14 countries are covered and data is collated from a wide range of international statistical sources.
The benchmark method
The benchmark model does not attempt to identify causal connections. Still it serves as an important tool in identifying policy implementations in the top-performing countries, providing valuable insight into the workings of best-practice policies.
The benchmark analysis presents a collective measure for entrepreneurial activity and framework conditions conducive to entrepreneurial activity. Accordingly the link between activity levels and policy implementations is investigated in further detail. In the event that such a link exists further analyses of best-practice framework conditions are carried out.
Using this method we are able to identify strengths and weaknesses in the Danish framework conditions vis-à-vis the top-performing countries.
Index for entrepreneurial activity
A collective measure for entrepreneurial activity combines data on start-up activity and new firm growth. Data is currently available for 14 countries.
Data on start-up activity is available for nine European Union countries, Norway and the United States. The most comprehensive statistic on start-up activity is the Global Entrepreneurship Monitor that surveys the proportion of the adult population engaged in new firm activity. GEM data covers 28 countries.12
On average one in every 10 adults was engaged in start-up activity, but only 1 to 2% report that they are actively managing a firm in which they are the full owner.13 There is s healthy correlation between the GEM survey and actual start-up rates for the nine countries covered.14 Therefore the survey data is applied throughout the analysis.
The share of new firms with revenue growth of more than 60% is used as an indicator for new firm growth. The indicator is available for 15 countries (Table 3.1).
Data on start-up activity is not available for Portugal and Austria. Hence the two countries have been omitted from the analysis. No growth data is currently available for Canada. However Canada is an interesting entrepreneurship country and has therefore been added to the study. The report applies capital market indicators as a measure of new firm growth in Canada. The capital market indicator was used in OECD’s benchmark study from 2003, and further analysis points to a strong correlation between the growth data and the capital market indicator.
There is significant variation in country rankings on start-up activity and new firm growth. The composite ranking depends on how the two elements are weighted. By applying alternate weights we have determined the possible top 3, top 5, and top 10 rankings.
Results are shown to be robust to changes in weights. The United States and Korea are ranked in the top 3 in nearly 100% of the outcomes and make up the top 2 (Figure 3.3).
 Note: Growth data is available for 15 countries. Growth data for Canada is based on nine capital market indicators. A high correlation between growth data and the capital market indicator implies that the relative difference between the United States and Canada with regards to the capital market indicator is transferred to the growth data. This implies that Canada’s ranking with regards to growth data vis-à-vis the United States is equal to Canada’s position on the capital market indicator in proportion to the United States. Start-up data covers both the share of individuals currently trying to start a new business, and the share of individuals having recently started a new business. Growth data has been compiled over the past five years and has shown to be internally consistent and in line with other statements. To identify top-performing countries a robustness analysis has been carried out to test the weighted indices for start-up activity and new firm growth. The figure shows the possible top 3, top 5, and top 10 rankings based on 100,000 randomly generated weights. The selected countries are covered in full by the indicators applied in measuring entrepreneurial activity. Source: National Agency for Enterprise and Construction/FORA. Own calculations. |
Spain, Canada and the UK make up the second best group whereas none of the countries in the residual group claim a top 3 ranking.
Index for entrepreneurship policies
Five policy areas conducive to start-up activity and new firm growth have been identified. Each policy area covers a number of sub-areas:
- Regulation
Entry barriers, labour market regulation, administrative burdens, bankruptcy legislation and income taxes - Financing
Venture capital, loans and guarantees, buy-outs, stock markets, bequest tax, wealth tax, and corporate tax - Guidance
Government programs, private advisers, incubators, and global vision - Education
Basic-, upper secondary- and higher education - Culture
Entrepreneurial culture and risk-taking
The model is comprised of 18 sub-areas that each contributes to entrepreneurial activity. 47 indicators have been used in benchmarking policy areas.
12 of the policy areas are covered by register (“hard”) data, while the remaining six are built on survey data (Figure 3.4).
Click on the picture to see the html-version of: Figure 3.4 Entrepreneurship Index Model
Since no guidance is provided in determining the importance of each of the policy areas, alternative weights have been used in ranking framework conditions. Figure 3.5 shows the results of the robustness analysis that details the frequency with which countries are ranked in the top 3, top 5, and top 10, respectively.
The comparison of country performance through distributions based on random weights shows that the United States, Canada and Korea are ranked in the top 3 in all but a few of the outcomes (Figure 3.5).
Holland, the UK and Finland make up the second best group. Country differences in the residual group are hardly detectable rendering any further grouping of countries meaningless.
The correlation between entrepreneurial activity and entrepreneurship policies
The strong positive correlation between entrepreneurial activity and framework conditions renders probable the benchmark methods. We have shown a positive correlation between entrepreneurial activity and framework conditions for the United States, Canada and Korea. The correlation is confirmed by a statistical analysis (Figure 3.6).
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The correlation is clear, yet fragile. The United States and Canada show consistently good results in both entrepreneurial activity and framework conditions. Entrepreneurial activity in Korea is much higher than suggested by the quality of Korean framework conditions. This may be explained by the fact that growth data is based on a limited number of observations.
Entrepreneurial activity and framework conditions are markedly lower for the residual group. If the top-performing countries are excluded from the analysis the statistical correlation is non-existing (R2).
This implies that the results deduced from the benchmark analysis rest on differences between the top 3 and and the 11 European countries. Country differences among the residual group are hardly measurable and provide little guidance in making any solid conclusion.
Data coverage for the United States is solid, while available data on new firm growth in Canada and Korea is insufficient. Steps should be taken to improve data coverage for Canada and Korea, and to include more countries in future benchmarks. New Zealand and Australia in particular are obvious candidates in that respect. Singapore is another candidate for further analysis.16
Based on existing data we conclude that the United States, Korea and Canada are far ahead of the competition in terms of both entrepreneurial activity levels and entrepreneurial framework conditions.
It will take a considerable effort to improve framework conditions across the European countries for them to match top 3. An important element in that respect is to identify policy areas conducive to entrepreneurial activity.
3.3 Areas targeted for entrepreneurship policies
It is a fundamental principle in benchmarking that critical policy areas are those that the top-performing countries have given high priority. While no evidence exists in determining the relative importance of a given policy area, it is assumed that the relative importance of a policy areas is determined by the average index value for the best-performing countries (Figure 3.7).
This does not imply that other policy areas are not important, but rather that top-performers have achieved good results without giving a high priority to other policy areas.
The benchmark analysis suggests that the areas of bankruptcy legislation, income tax, start-up capital, wealth- and bequest tax, education and culture are potentially the most important for entrepreneurial activity in the top-performing countries (Figure 3.7). In these areas Danish framework conditions are significantly inferior to those of the top 3.
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Note: The nine policy areas are identical to the blue boxes in Figure 3.4. The spiderweb compares Denmark to the top 3 (the United States, Canada and Korea). The country with the best framework conditions (indicated in brackets) is assigned the value 100 while the lowest-performing country is assigned the value zero. For example a zero score in the area of public guidance does not imply that the country in question has no public guidance programs, but simply that the level of public guidance is the lowest among all countries included in the analysis. The green area shows the average value for the three best-performing countries, and the grey area shows the Danish values. |
In the areas of administrative conditions and public guidance Denmark match the record of the top 3. The elimination of the wealth tax has been a major contributor to Denmark’s current position in the area of wealth- and corporate taxes.
Denmark performs well in policy areas that are somewhat less important to entrepreneurial activity among the top-performers. The distance from the green area to the best-performing country, which is shown in brackets, illustrates this.
The importance of a given policy area can also be illustrated by analysing the statistical link between total entrepreneurial activity and each of the identified policy areas. A significant statistical correlation between entrepreneurial activity and individual policy areas indicates that the policy area in question is important to entrepreneurial activity.
On the other hand a low statistical correlation suggests that the policy area is less important. If the mean value of a given framework condition is high, the low statistical correlation may be the result of solid performances by all countries.
It should be noted that the benchmark method fails to identify any causal connection, and merely compares countries with different characteristics. Furthermore available data only makes it possible to analyse data for a single year. Future analyses will enable us to register changes in country rankings in each of the identified policy areas.
Provisional calculations regarding the link between entrepreneurship activity and entrepreneurial policies suggest that bankruptcy legalisation, income taxes, financing, education and entrepreneurial culture could potentially be most important to entrepreneurial activity (Figure 3.8).
Global vision is another vital policy area. The share of new firms with exports is used as an indicator for global vision. The United States underperforms in this area simply because of the size of the domestic market. This explains the relatively poor top 3 performance.
The correlation analysis identifies global vision as a key policy area. A strong positive correlation between the globalisation of new firms and the level of entrepreneurial activity underlines this. It is vital for new firms to rapidly grow export shares – to be “Born Global”.
All countries are subject to the same trade conditions. Thus the presence of trade barriers or export subsidies fails to explain country differences. Differences may be explained by new firm competences in trade- and market-related areas. Some new firms will have access to global networks that facilitate global market-entry.
The quality and skills of new firm networks are vital to the globalisation efforts of start-ups. The network is often referred to as the entrepreneurship infrastructure and comprises 3 sub-areas: Private advisers, incubators and global vision.
A panel of entrepreneurs and experts has been asked to rate the quality of private advisers and incubators. The indicator covers eight countries. The indicator for global vision measures the share of exporting startups and comprises 14 countries.
Entry barriers, labour market regulation, administrative burdens, wealth- and bequest tax, corporate tax and public guidance are important to entrepreneurial activity. However the low correlation shown in Figure 3.8 suggests that the importance of these areas is limited.
Denmark’s position in each of the policy areas is marked with green, yellow, and red. A green marking indicates that Danish framework conditions match those of the top-performing countries. A red marking is a warning sign indicating that framework conditions significantly trail those of the top-performers. A yellow marking indicates that framework conditions are mediocre.
It appears that Danish framework conditions are weakest in policy areas that are critical to entrepreneurial activity, while conditions are at their peak in areas where framework conditions appear to have limited importance to entrepreneurial activity (Figure 3.7).
The fact that Denmark performs well in the areas of entry barriers, administrative burdens, public guidance, corporate tax, and wealth- and bequest tax, and given high start-up rates, suggests that the above mentioned areas are highly important to start-up activity. A the same time a poor showing in bankruptcy legislation, venture capital, stock markets and global vision could potentially explain the low level of new firm growth.
Entrepreneurial culture (risk-taking and prestige), education and income have a positive effect on entrepreneurial activity. However it is difficult to determine if they are critical to start-up activity, or new firm growth. It may be the case that entrepreneurial culture, education and income taxes are equally important to start-up activity and new firm growth. The extent to which framework conditions influence start-up activity and new firm growth will be further analysed as part of the 2005 Entrepreneurship Index.
3.4 Summary
Once again it should be stressed that benchmark studies fail to identify causal connections. Given the fact that statistical calculations are based on observations from a single year results should be treated with some reservation.
The analysis suggests that Denmark’s framework conditions are solid in areas related to start-up activity, whereas framework conditions appear to be weaker in areas related to new firm growth. Thus the benchmark study and the accompanying statistical analysis show that:
Four policy areas appear to be of significant importance to start-up activity:
- Entry barriers
- Labour market regulation
- Administrative burdens
- Wealth- and bequest tax.
Three policy areas appear to be of significant importance to new firm growth:
- Bankruptcy legislation
- Venture- and stock markets
- Entrepreneurship infrastructure (Global vision).
Three policy areas appear to be of significant importance to both start-up and growth:
- Education
- Income taxes
- Cultural factors including risk-taking and the prestige associated with being an entrepreneur.
Danish entrepreneurship policies have maintained a strong focus on policy areas conducive to business start-up. Denmark has achieved good results and start-up rates are healthy. Chapter 4 draws up the balance sheet for all policy areas conducive to entrepreneurship activity.
The last few years have witnesses a growing interest in addressing bankruptcy legislation. The Danish government has asked the Council on Insolvency Proceedings to go through the existing legislation. There is a growing need for improvements if Denmark is to match the conditions of the top-performing countries.
In terms of financing framework conditions for early-stage funding (seed and start-up) have been improved. However financing conditions for new firm growth should be addressed.
The quality and competences of entrepreneurial advisers have received little attention. Last year it was decided to conduct a benchmark study on incubators that addresses among other things the area of entrepreneurial advisers (please refer to section 4.3 as well as the background report focusing on incubators).
The current tax reform lowers vital tax rates in Denmark. The unique Northern European welfare model makes it difficult for Denmark and other Northern European to match the tax levels found in the United States, Canada and Korea. The counterpart to a heavier tax burden is diversified and affordable (or free) welfare services; services that entrepreneurs outside the Northern European welfare system will have to pay for themselves.
It is conceivable that certain Danish tax rates could be lowered without conflicting with the structure of the Danish welfare model. However changes must be introduced in a gradual manner. Further potential tax cuts will be introduced following the full implementation of the latest tax reform.
It is difficult to determine the effects of cultural factors on entrepreneurial activity. A number of steps have been taken to improve entrepreneurial culture in primary and secondary education. Among other things the prevalence of various entrepreneurship awards has attracted attention and has fuelled overall interest in entrepreneurship.
It is possible that the building of a strong entrepreneurial culture is positively affected by a solid entrepreneurial track record. An excellent entrepreneurial track record and prolific role models help create a strong entrepreneurial culture. At the same time entrepreneurship awards and opinion campaigns may facilitate a stronger culture and higher risk-taking among the general public.
So far entrepreneurial education has received little attention in Denmark. Recently the Danish government has upgraded entrepreneurial education, and the forthcoming launch of the Entrepreneurship Academy is a testament to that. The Danish government also initiated a benchmark study on entrepreneurial education (please refer to section 4.2 as well as the background report on entrepreneurship education at universities in the United States, Canada and Denmark).
The report has identified four areas that are essential to entrepreneurial activity; areas where the Danish framework conditions are particularly weak compared to the top-performing countries: Bankruptcy legislation, venture- and stock markets, education and entrepreneurship infrastructure (right-hand side in Figure 3.9).
1 FORA (2003): “A Benchmark Study of Entrepreneurship – what can Denmark learn?”
2 OECD (forthcoming): “Fostering Firm Creation and Entrepreneurship”.
3 P. Gompers and J. Lerner (2001): “The Money of Innovation”. Harvard Business School Press.
4 OCED (2003): DSTI/IND; FORA (2004): “A benchmark study of the venture market – what can Denmark learn”; Monitor Group (2004): “Dynamic Benchmarking of Entrepreneurship Performance and Policy in Selected Countries”.
5 Data for the United States, the UK and Denmark comes from various sources and are therefore not 100% comparable. US data is taken from PWCoopers, while data for the UK and Denmark is taken from European Private Equity and Venture Capital Association.
6 When comparing country performance based on current growth data (2000-2002) and country performance based on a six-year period we find a correlation of 0.7. This indicates that country rankings are relatively stable. Cross-country comparisons may be affected by differences in economic conditions. However statistical tests indicate that economic conditions do not affect country rankings.
7 Martin Junge and Ulrich Kaiser (2004): “Benchmarking of Small and Medium Sized Firms for Twenty Selected Countries – Construction of Growth Indicators”.
8 Scarpetta et. al. (2002): “The role of policy and institutions for productivity and firm dynamics: Evidence from micro and industry data”.
9 EU (2003): “Entrepreneurship: A Survey of the Literature”, Prepared for the European Commission, Enterprise Directorate General by Prof. David B. Audretsch.
10 FORA (2004): “An analysis of the correlation between FORA innovation drivers and MFP-change”.
11 FORA (2003): “A Benchmark study of Entrepreneurship – What can Denmark learn?”.
12 GEM (2003): “Global Entrepreneurship Monitor”, p. 43.
13 GEM (2003): “Global Entrepreneurship Monitor”.
14 OECD (forthcoming): “Technical report: Fostering Firm Creation and Entrepreneurship”, p.7.
15 The correlation coefficient, R2, is 0,841. The correlation coefficient measures the correlation between two variables. R2 shows the extent to which variation in the dependent variable is explained by the independent variable. In other words, country framework conditions account for 84,1% of the variation in entrepreneurial activity.
16 Monitor Group (2004): “Dynamic Benchmarking of Entrepreneurship Performance and Policy in Selected Countries”.
17 The best-performing country is assigned the value 100. The black line illustrates the average value of the top three performance countries. The blue area illustrates Denmark’s position. The best-performing country for each of the policy areas is shown in the figure as well.
