4. Promoting entrepreneurship and private sector engagement

Alternative funding instruments can support entrepreneurs in regions in industrial transition

For regions in industrial transition, alternative financing instruments provide an important addition to traditional debt instruments, which entrepreneurs with innovative business models might not be able to access due to a high-risk profile. The spectrum of available alternative financing instruments is large and covers different financing needs, firm characteristics and risk profiles (Figure 4.5). In principle, asset-based finance and alternative debt mechanisms are available to a wide range of firms and are particularly suitable for firms that have a low risk of default, but also limited returns. Hybrid instruments combine debt and equity schemes and are most suitable to more mature or high-growth firms. Public and private equity instruments target high-growth, high-risk ventures.

Figure 4.5. Alternative debt-financing instruments by firm profile and stage of development

Source: Revised from OECD (2018d), “Enhancing SME access to diversified financing instruments”, http://www.oecd.org/cfe/smes/ministerial/documents/2018-SME-Ministerial-Conference-Plenary-Session-2.pdf. 

New opportunities for SME financing are also found in a range of technology-enabled financial service innovations, such as Fintech, digital platforms and blockchain technologies. A basic example of a Fintech offering is the mobile banking services offered by most traditional banks. As they often drive transactions costs down, these technological developments will likely make it more profitable for financial institutions to serve a client base that includes (small) businesses in remote or rural areas (OECD, 2018a). Blockchain technology will further allow start-ups and scale-ups to undertake transactions at increased speed and transparency, offering a number of opportunities, including the development of smart contracts, reducing reliance on intermediaries and raising additional funding.

In regions in industrial transition, the availability and access to different sources of financing is constrained by a combination of barriers. Many entrepreneurs and business owners lack the financial knowledge, resources or sometimes the willingness to successfully access financing beyond debt-based resources. Public policy dedicated to financial literacy programmes can help increase the awareness and capacity of SMEs to access external financing. These programmes aim to improve the quality of loan applications and financial pitches, and to increase knowledge of different financing options.

Governments in regions in industrial transition can help increase knowledge and awareness of the range of instruments available

Governments in transition regions can help facilitate access to financing for start-ups and scale-ups by offering grants (e.g. vouchers), loans or loan guarantees. Care needs to be taken however, not to crowd out the private sector. To this end, regional governments can also promote alternative sources of financing. One technique is to help develop business angel networks. Another is to back private venture capital schemes through co-investment, particularly in the case of early-stage entrepreneurial ventures, as seen in Saxony, Germany (Box 4.1). Regional governments can also offer co-financing based on contractual arrangements.

Strengthening entrepreneurship through dedicated training

Entrepreneurship support typically aims to increase an entrepreneur’s knowledge about starting or growing a business and provide networking opportunities. For regions in industrial transition, entrepreneurship support programmes can increase levels of information and awareness about entrepreneurship as an alternative route to the labour market. Effective policy packages should include a suite of tools, certainly including essential information but also covering including more intense forms of support such as coaching and mentoring provided by incubators and accelerator programmes.

Entrepreneurship support programmes are often most effective when combining and tailoring intervention areas to a local context. The Ben Franklin Technology Partners programme in the state of Pennsylvania (United States) provides an example of how entrepreneurship is supported in a holistic manner (Box 4.2). Three important functions for regional governments in regions in industrial transition can be identified:

1. 1. An intelligence function: In order for regional-level entrepreneurship policies to be successful, there needs to be a clear sense and vision of the nature of the challenges and opportunities that the region faces in stimulating entrepreneurship. Regions can play a role in defining economic vision and smart specialisation for their territories.

2. 2. A support function: Regions can build and strengthen the local entrepreneurship system through supportive policy actions in a range of areas, such as entrepreneurship and SME policy, education and science policy, including as part of a broader regional development policy.

3. 3. A linkage function: Regions as institutional entrepreneurs can also facilitate networks for enhancing knowledge spill-overs between firms, higher education institutions, civil society and government.

Entrepreneurial networks are key sources of expertise and knowledge

Governments in regions in industrial transition can help connect innovative and new entrepreneurs to existing local and global networks and value chains and support cross-fertilisation between existing networks. Innovative entrepreneurship is largely influenced by knowledge spill-overs and networks accessible to start-ups and small firms, as well as by the broad innovation system in which they are embedded. As innovation increasingly involves collaboration among a variety of players such as suppliers, customers, competitors and universities – as well as government and entrepreneurs – a key challenge for start-ups and small businesses is to connect to appropriate knowledge networks at the local, national and global levels.

Engagement in entrepreneurial networks provides start-ups and scale-ups with access to business partners, ideas, clients, financing, and help to share knowledge and expertise (OECD, 2017a). Start-ups, in particular, might have smaller and less well-developed networks and thus less access to important business resources and clients. It is, therefore, important for policymakers to increase the scale of resources available to new and potential entrepreneurs by helping them expand their networks, for example by creating networking events and developing online platforms to connect entrepreneurs with the wider business community. Entrepreneurship centres, such as that established in Cantabria, run a range of entrepreneurship training programmes to diffuse an entrepreneurship culture and provide an important platform for networks amongst future and established entrepreneurs (Box 4.5).

Universities can act as knowledge brokers for start-ups and SMEs

In addition to their teaching and research obligations, generating and maintaining ties with entrepreneurs and young companies could be considered a “third mission” for universities (OECD/EU, 2018). Experience among some regions in industrial transition shows that start-ups and SMEs in regions in industrial transition can have difficulties in participating in university research and cannot usually afford to divert human resources to organise and manage collaborations. In such cases, universities can contribute to improving the conditions for innovation diffusion in SMEs and in overcoming absorptive capacity problems. Policy instruments that can support and promote the relationship between SMEs and universities through instruments include SME innovation vouchers, and start-up and SME integration in science parks.

Higher education institutions also provide a regional economy with new knowledge that can be exploited through university spin-offs. A university spin-off is an entirely new business formed around a university innovation and can be owned by the university or created by outside partners (Shane and Stuart, 2002). A unique feature of these spin-offs is that they are often very closely aligned with public research, thus providing a mechanism to transfer tacit knowledge from the research team to those responsible for the daily operations of a firm. The creation of spin-offs, however, often requires considerable financial and human capital. Such capital can be built through such targeted policy interventions as supporting the entrepreneurial competencies of researchers and providing business advice. For regions in industrial transition, this can be of particular interest in future-oriented sectors such as information and communication technology (ICT) or smart manufacturing, as also illustrated by the support scheme for innovative start-ups and spin-offs in Piemonte, Italy (Box 4.6).

Creating a level playing field

Lengthy and costly company registration procedures are a major business constraint. Their impact is most heavily felt by micro- and small-sized enterprises, and they can discourage entrepreneurial activity by acting as a significant barrier for new start-ups (van Stel and Stunnenberg, 2006). Although most regulatory policy for business is designed and enacted at the national level, there is room for regional actors to play a role in managing the administrative and regulatory burden that entrepreneurs in their areas might face. Regional governments can help entrepreneurs navigate the regulatory system and often ensure that regional-level regulations are sufficiently simple but still in line with national regulatory requirements. Among the policy approaches that can be adopted at the regional level are:

• Consultation with the business sector: Consultations support regional policymakers in identifying what regulatory requirements firms perceive as burdensome.

• Applying regional Regulatory Impact Assessment: Regulatory Impact Assessments (RIA) at the regional level can contribute to reducing the regulatory burden on local SMEs.

• Creating one-stop-shops: One-stop-shops offer entrepreneurs information about national and regional regulations as well as public support programmes. They can be accessed via the Internet (i.e. as a web portal) and potentially backed up by a call centre.

• Introducing e-government services: National- and regional-level ICT solutions can cut transaction costs for entrepreneurs, improving the efficiency of public administration, generating savings on data collection and transmission, providing of information to and communicating with businesses, and enhancing government information and its accessibility (thereby increasing transparency).

Supporting entrepreneurial mindsets through entrepreneurship education

Young people with entrepreneurship education are more likely to set up their own companies and businesses started by individuals with entrepreneurship training are more ambitious (Galloway and Brown, 2002). However, entrepreneurial competencies are not only vital for business innovation and business growth. Entrepreneurship education can also be understood as a journey providing individuals at every age with skills and attitudes to develop a “can do” confidence, proactivity and flexibility. For regions in industrial transition, entrepreneurship education can contribute to successful industrial modernisation. These regions tend to be home to firms with traditional business and operational models and a risk-averse attitude to innovation. Supporting entrepreneurship education in regions in industrial transition can help trigger new business models and allow entrepreneurs and established companies to move into new markets.

Entrepreneurship competencies can be acquired either through entrepreneurship education in the formal education system, starting from a young age, or through entrepreneurship training programmes at the workplace or at the university. In the workplace, entrepreneurship education enables potential entrepreneurs and entrepreneurial employees in established companies to provoke and adapt to change. Building local entrepreneurship education systems includes engaging teachers and school administrations in teaching entrepreneurship skills. Experimental and hands-on-learning can also be provided by locally organised extracurricular activities, such as business plan competitions. There is also a role for local universities to help take the entrepreneurial skills and spirit learned to a higher level. Higher education institutions (HEIs), such as research universities and universities of applied science, have become important contributors to the development of entrepreneurial mindsets (Box 4.7).

More needs to be done to develop monitoring and evaluation capacity

Monitoring and evaluation are needed to assess the economic efficiency of SME and entrepreneurship policies and to inform the design and mix of SME and entrepreneurship programming. Creating effective monitoring and evaluation frameworks can be challenging for all regions, but especially those with limited experience or capacity in the design and implementation of performance measurement systems, as is the case for some regions in industrial transition. Common challenges include clearly identifying policy objectives, establishing targets and indicators, making better use of existing data and collecting new data, and capitalising on the possibilities offered by Big Data. A further challenge is evaluating the impact of policy interactions and their outcomes.

Across the OECD, data and methodologies available to monitor and evaluate SME and entrepreneurship policy has improved dramatically over the last decade. However, high-quality evaluations remain rare and there is little evidence that a comprehensive approach to evaluating entrepreneurship and innovation policies is evolving (OECD, 2018b). The OECD Framework for the Evaluation of SME and Entrepreneurship Policies and Programmes established a “six steps to heaven” approach to monitor and evaluate SME policy. This approach suggests different methods of monitoring and evaluation. It starts with the monitoring of the take-up of schemes, through surveys for example, and ends with sophisticated quantitative evaluation methods (Table 4.4).

The framework can guide policymakers and programme implementers in charge of monitoring and evaluating SME and entrepreneurship policies and programmes. For the exercise to be effective, however, some critical elements need to be in place, including:

• Clear policy objectives: many policies do not have a clear objective and they often have more than one objective, which makes evaluation difficult.

• A good understanding of the full policy mix: a clear overview of all policies implemented and their potential interactions; and how some instruments may potentially complement or offset each other.

• Good data: studies often fail to find a statistically significant effect when evaluating policies because of poor quality data. More and better data helps widen the scope of evaluations and improve their precision.

• Going beyond outcomes: Policymakers should consider different variables that could affect evaluation effectiveness. These include the selected eligibility criteria, the targeted sample, the spatial unit of reference (e.g. regions or municipalities), how policy is communicated to stakeholders, etc.

• A commitment to evaluation: A monitoring and evaluation culture should permeate all stages of the policy cycle, from defining the problem and setting the vision to evaluating results and adjusting if necessary.