Policy-Making for Business and Entreprenuership

Posted on April 2, 2008
Filed Under Business & Entrepreneurship |

The Kaufmann Foundation came out with an interesting paper about local and state policymakers targeting entrepreneurs rather than existing businesses.  Typically there are big incentives, usually in the form of tax breaks, which are offered to an existing business to move its operations to the new state.  The paper argues that this type of thinking is essentially a zero sum game.  One state wins and the other loses.  On the other hand, fostering a healthy and supportive entrepreneurial environment is a much better strategy for policy makers, and is also a positive sum game.

Likewise, policymakers at local and state levels increasingly recognize that entrepreneurship is the key to building and sustaining their economies’ growth. Although this is a seemingly obvious proposition, it represents something of a departure from past thinking about how local, state, or regional economies grow. Historically, state and local policymakers have put their energies into trying to attract existing firms from somewhere else, either to relocate to a particular area or to build new facilities there. Such “smokestack chasing”-or, in this cleaner era, simply “firm chasing”-often has degenerated into what is essentially a zero-sum game for the national economy. When one city or state offers tax breaks or other financial inducements to encourage firms to locate new plants or headquarters, and succeeds, some other city or state loses out in the process.
Local, state, and regional economic development centered on entrepreneurship, however, is a fundamentally different phenomenon. The formation and growth of new firms, especially those built around new products or ways of doing things, wherever this occurs, is clearly a positive sum game, not just for the locality, but for the nation as a whole. A brief look at the various “high-tech” or innovative clusters that have grown up around the country-from Silicon Valley to Austin, Research Triangle Park (N.C.), San Diego, Boise, Denver, Madison, Route 128 around Boston, and northern Virginia, to name just a few-demonstrates this. The U.S. economy as a whole clearly has benefited enormously from the innovative products and services the major companies from these various “hubs” or “clusters” have introduced to the country.

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