Tue | Jan 21, 2020

Lipton Matthews | Smarter policies needed to yield higher outcomes

Published:Friday | December 6, 2019 | 12:37 AM

Small businesses are often touted as drivers of economic growth and innovation. Therefore, to stimulate innovation, policymakers pursue a raft of initiatives. Because of their perceived importance, both political parties agree that providing support to such establishments is necessary.

Though these intentions are good, entrepreneurial policy is built on the misguided notion that small businesses are major producers of jobs and innovation. The reality, however, is that high-growth innovative firms are the true creators of employment and innovation.

During 2002-2008, for example, in the United Kingdom, six per cent of high-growth firms generated half of employment growth (NESTA, 2013). In fact, in their article published in the Harvard Business Review of Tuesday, February 3, 2014, Isenberg and Ross assert: “The literature consistently shows that a very small number, from one per cent to six per cent, or so, of all ventures in a region account for the lion’s share of net job creation and other spillovers from entrepreneurship. However, increasing the number of start-ups has not increased the number of high-growth ventures.”

Banking on small businesses to effect sustainable jobs is bad policy since within five years, 80 per cent of small businesses fail (Ormsby Street, 2016). High rates of entrepreneurship are usually indicative of low economic growth. This is why research frequently shows that Jamaicans are entrepreneurial because a large percentage of local entrepreneurs start businesses out of necessity (GEM, 2017).

Opportunity-driven entrepreneurship, on the other hand, is associated with more growth-oriented enterprises (Fairlie, 2018). When an economy is booming, businesses expand so employment is generated, therefore, people are less likely to start their own ventures.

Managing a business is a complicated and risky activity, hence, choosing to start a project in prosperous times increases liabilities. But when job prospects are low to prevent future unemployment, prudent people will embark on new schemes. Most small businesses are inefficient, thus the rate of scalability is low.

LACK OF COMPETITIVENESS

Consequently, it is unsurprising that studies published by the Jamaica Business Development Corporation aver that small businesses possess a litany of technical deficiencies. Because of their widespread inefficiencies, research asserts that the relationship between growth rates and new firm formation is negative (Bogenhold and Stabler, 1991). As a result, despite investing in programmes for small businesses, returns have been low.

A few years ago, The Gleaner, dated September 1, 2013, published a piece titled ‘Billions pumped into MSME project, but few jobs created’. It read: “The Development Bank of Jamaica has provided financing for nearly 20,000 projects in the micro, small and medium-sized enterprises (MSME) sector over the past three years, data from that office has revealed. Over the past five years ending 2012-2013, the employment returns on that disbursement have been 3,324 jobs.”

In this piece, analysts attributed the failure of businesses to high-interest rates. But a deeper point is that such businesses are not competitive enough to participate in a free market. Furthermore, microfinance institutions must charge higher rates to small businesses because these enterprises are riskier and expensive to service.

In addition, policymakers have been pursuing the wrong strategy to foster innovation and job creation. Instead of boosting the capabilities of high-growth firms, the objective is usually to provide equal support to all small businesses. The truth is that most Jamaican small businesses are uncompetitive.

In a recent publication, the Statistical Institute of Jamaica (STATIN) notes that 90 per cent of businesses surveyed are not accessing business loans. This fact should not surprise policy makers since reports consistently show that Jamaican small businesses are unbankable. Hence, in this context, one would not expect most establishments to access loans due to the requirements of banks.

IMPROVING THE PRODUCTIVITY

Similarly, in a recent feature published in The Gleaner, Marlon Johnson, acting director of the Business Development Workforce Solutions Department at the HEART Trust/NTA, argues that “many small businesses are not grant-ready or bankable”. As such, technocrats must discriminate when crafting policy to boost innovation and job creation.

Government policies should focus on improving the productivity of high-growth businesses. For example, grants could be offered to high-growth firms to upgrade technology. Additionally, more companies ought to follow HoneyBun and create foundations to offer training and mentorship to unbankable businesses. Also, STATIN or The University of the West Indies should study the features of high-growth Jamaican firms.

The latter may even create a centre to explore high-impact entrepreneurship. To design policy enabling the success of high-growth firms, technocrats will need to be guided by data.

The Government cannot continue to waste public funds on low-potential firms. Moreover, technocrats can promote innovation, but they should implement smarter policies able to yield higher outcomes.

Email feedback to lo_matthews@yahoo.com and columns@gleanerjm.com.