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Role of state in entrepreneurship

WHILE the entrepreneur struggles along the bumpy roads, dense forests and murky waters in an attempt to reach his or her desired destination; scholars, lobbyist and other interested stakeholders play their part by giving the necessary ‘soft’ moral support.

The ball squarely moves into government hands to offer support to entrepreneurial efforts, research and development and innovation through enabling and conducive public policy interventions.

That way, Sub-Sahara African governments may increase the chances of attaining knowledge-based middle income economies in the not very distant future.

The author believes that the state carries the bulk of the burden of ensuring that entrepreneurship thrives by coming up with policies that conduce the entrepreneurial operating environment.

A conducive operating environment provides opportunities and resources upon which entrepreneurship can exploit and in return create jobs and grow the national economy.

Public polices to grow African economies

The author will now carry out a comparative analysis of public policy pronouncements on entrepreneurship in Asia, Latin America, and South Africa and challenges necessitating such promulgations.

 Asian countries
Asian economies are a good example of that ‘magic wand any government can wave’ in the form of public policy on entrepreneurial activities, research and development and innovation policies. Statistics below show how effective public policy is in promoting sustainable entrepreneurial activities.

Supply side policy interventions

These include:

Tax incentives
Malaysia, Singapore and Thailand have tax incentives based on R&D expenditure. Taipei, China adopted tax credits. Where tax incentives are expenditure based, more expenses than actually spent are deducted. R&D tax credits allow firms to deduct a percentage of their R&D spending directly from company final tax liability. Singapore went further to allow for activities that took place outside of Singapore but for the benefit of Singapore for research and development as tax deductible but rates applied were lower than those for local activities. Successful innovation needs more than R&D but needs support of a combination of several activities.  More R&D incentives for start-up were introduced to meet the needs for R&D intensive start-ups, which spend the first few years developing products and incurring losses and not enjoying any tax benefits. These came in form of cash equivalent to the benefits they would receive from R&D tax credit.

Loans are popular in financing innovation in places like Thailand. Government provides loans of up to 75% of the project cost or US$1 million, whatever is less. However, these are less prominent than grants and equity in Singapore. Taipei, China has several loan schemes to finance specific and innovative projects. Malaysia has low interest loan schemes for hi-tech enterprises and entrepreneurs to stimulate technology development and innovation.

Grants are a key instrument in Singapore. The instrument applied to promote hi-tech entrepreneurship and R&D. Taipei, China uses grants as financial instruments to encourage firms to enhance their technological and innovative capacities. These schemes are seen as attempts to promote technological and innovative capabilities in the private sector and to forge relationships between industry, universities and public research institutions.

Equity instruments
Equity instruments are facilitated through venture capital financing on project life cycle targeting growth and expansion. Revenue departments provide taxation schemes to support venture capital funds investments. Investors usually inject 30% during initial stages and 70% in the growth and maturity stages. In most Asian countries, venture capital is earmarked for companies with high growth potential and less risk later stages. Venture capital is the main source of capital for early stages of development in Singapore. Direct equity financing has been seen as a way of overcoming difficulties in financing enterprises in their early stages.

In most successful economies, like Singapore and Taipei, policy instruments co-evolved with firm’s level of technological and innovative capabilities. Different levels needed different policy instruments. Policy makers understood the current needs and technological barriers facing the firm. Copying and pasting from other economies often fail.

Singapore, Taipei, China and to a lesser extent Malaysia have a higher level of flexibility and policy coordination and learning.  They offer a variety of instruments tailor-made to the needs of the industry, sector, cluster technologies, type of firm or even individual firm demands-firm-specifics or incentives.

Developing firms’ technological and innovative capabilities happen over a long span of time.

Duration and continuity of government support schemes are crucial as they reflect policy priorities and government commitments. Besides, policy makers must have deep understanding of innovations and innovations systems and how they evolve.

Supply side interventions were dominant in all economies while demand side policies were not extensively used.

Innovation financing policies require corresponding policy initiatives that produce capable human capital, attract foreign talent and help organisations work together.

Examples of these synergies are public research institutes in Taipei, China and entrepreneurial universities in Singapore.

Institutional factors shape choices and policy implementation. These include laws and regulations, unity and capability of government bureaucracy, trust, entrepreneurship, attitudes towards corruption and government’s role in supporting private firms.

 South African policy initiatives

In the Republic of South Africa, the departments of Economic Development, SMEs and Justice are among other things, responsible for the provision of regulatory framework, promotion and overseeing the activities in the sector.

The department of SMEs spearheads promotion of interests of up and coming entrepreneurs. They are mandated to-and I quote- “lead and co-ordinate an integrated approach to the promotion and development of entrepreneurship, small business and co-operatives and ensure an enabling legislative and policy environment to support their growth and sustainability.”

Its mission is to coordinate, integrate and mobilise efforts and resources towards creating an enabling environment for growth and sustainability of small businesses.

The purpose of the Companies Act (71) of 2008 as stated in Section 7 is to encapsulate Government’s macro-economic policy and the role that the Government envisages entities must play in the South African economy.

It also reflects the government’s acceptance of, and support for the enterprise as an essential component of South Africa’s economy and as an essential means of achieving social benefits and economic growth. Stein, C. 2011

In my opinion, the South African Close Corporation Act (1984) and the Companies Act (Chapter 71) of 2008 are defective because they have abolished the main object clause.

It is no longer necessary for a company to state its ‘main object’ or ‘main business’ in its MOI. Section 19 (1) (b) Stein, (2011).

The Acts have been described as instruments that empower the formally marginalised, attract investment, easy to implement and bring with them world class corporate governance standards.

Government has acknowledged the fundamental importance of companies being good corporate citizens by also providing that other purposes of the Act are: Promoting the development of South African economy by encouraging transparency and high standards of corporate governance as appropriate. (s7 (b) (iii) (Stein, C, 2011)

The Memorandum of Incorporation no longer requires an entity to state its main object or core business implying that, an entity can do anything as long as it is not illegal, immoral and contrary to public policy.

Thus, an entity that has recently been incorporated and is involved in the vending of basic food by the road side can bid for tenders requiring huge outlays of capital; like construction, civil engineering, installation of hi-tech IT solutions etc.

This has not only created Jacks of all trades with no knowledge of what they are bidding for but also corruption at highest levels. Getting the tender pretty much depends on who you know and not what you know. The customer or client, who in most cases, happens to be the government or municipal authorities are short changed.

Treasury is siphoned of cash resources without getting the desired value in reciprocation. The long-term damage is frightening, especially when contracts are entered into with unscrupulous people who go into business solely for the love of money.

In the South African business dictionary, the word tender-preneur has silently crept into the business vocabulary and is dominating business transactions, arrangements and agreements.

Entities and their owners ought to stick to what they know best and deliver desired value for money.  Value transferred to the customer comes first and money second. That way, businesses and economies grow.

In Zimbabwe, the Ministry of SMEs was created to promote and grow the activities of up and coming entrepreneurs. Its mandate is to stimulate economic growth, create wealth and employment opportunities and promote sustainable environmental practices among SMEs thereby reducing poverty while the mission is to be the nerve-centre for sustainable, inclusive socioeconomic empowerment, growth and development of SMEs. The regulatory instrument is the Companies Act (Chapter 24:03).

The impact of the Acts has become so blurred due to challenges facing the county’s economy. Policy inconstancy, corruption, hostile operating environment, non-performing loans and rising inflation have taken a toll on what appears to be a worthy cause.

Tawodzera, (2013) sums up the Zimbabwe situation when he noted that   Zimbabwe’s growth of SMEs has slowly risen as unemployment continues to sour at over 90%.

More people are starting small businesses in order to survive. Some of these remain ‘bread and butter’ types of business, while some have grown and expanded providing meaningful employment and development.

Thus, due to a volatile economic environment, many have become necessity entrepreneurs living from hand to mouth.

For Sub-Saharan countries to become middle income economies in the not very far future, they have to go back to the drawing board, seriously consider entrepreneurial activities, R&D and innovation and come up with their own brand of public policies that fit into their cultures and various backgrounds.

Ideas can be borrowed from Asia and Latin America bearing in mind that we are unique economies with our own unique set of problems: social, economic, political and legal.

Policy pronouncements must have the potential to promote entrepreneurship at a large scale, reduce obstacles to and restrictions on the latent entrepreneurial potential of individuals facing constraints in access to education, credit, technology, and markets.

They must also have the ability to promote small and medium scale entrepreneurship that creates new jobs, enhances social mobility and generates income in face of the power and influence of big corporates, conglomerates and the economic elite that pressure the government to limit competition, making it difficult for new actors to enter the market.

  • Wasara is a management consultant, founder and managing consultant of Innovative Entrepreneurs Unlimited (IEU). Email of correspondence: wasaraman@gmail.com.

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