In a free market system politics and business sometime form a toxic mix. Picking winners and losers for special incentives has not always led to the smartest choices. Allocating subsidies and tax breaks to specific companies more often than not skewers the competitive landscape and provides advantages to the wrong players.
A perfect example of this exists in authoritarian economies where certain government connected companies become a branch of the state and are given special banking accommodations and protection against competition.
This is the route to inefficient and flaccid state monopolies that eventually lead to a large zombie inventory of none performing companies of all size. This is an example of too much state control.
On the other hand, there are the libertarians who want no part of any government help. In between, however, there are successful models in various parts of the globe that serve as good examples of how a balanced approach can improve the success rate of small companies with limited access to critical funding, and political clout.
It is important to realize that entrepreneurs who start and operate companies don’t time their entries into business based on whatever fiscal incentives may be in place, but because they are driven by their own needs and passions.
Once the business has been operating for a while government fiscal action can provide benefits and increase survival rates.
The Keynesian approach, which favors government fiscal intervention to stimulate and balance the economy, has always had its defenders and detractors. History has provided many examples of trial and error methods that have led to both success and failure.
Whenever contradictions exist it is always safer to take the middle road – not excessive government intervention but some timely and proven assistance. It is also up to small business owners and their supporters to help their own cause by forming alliances and lobby groups that have more heft and force governments at all levels to take notice of their special needs.
Apart from funding, there are other needs that can enhance survival rates and allow small companies to grow:
Promote business education for everyone – for many young people starting out in their career paths the road is often blocked by labor supply and demand restrictions, and sometime unreasonable demand for experience.
Without preparation they often miss the other potential path, which is open to them: to start their own business. But what if basic business was part of the required curriculum at the secondary or high school level?
It would serve to broaden choices and provide a sounder preparation for the business option.
This is an area where governments that control the educational system can play a major and much needed role. Business basics can, with a little effort, be made appealing to the young at a very early age.
Provide business education incentives – Providing tax credits or deductions for business courses is a win-win because it improves the chances of survival of small business owners and helps the economy to grow.
With the entry of Mass Open Online Courses (MOOCs), which cover an ever broader area of educational subject matter there are many good sources for improving business knowledge. This form of assistance does not have to be expensive.
Cut the red tape – In a recent survey of small business firms in the USA, one out of five companies complained about excessive regulations, which negatively affect their business.
This probably holds through for most countries, and can be even more burdensome in those with a powerful bureaucracy. Regulations need to adapt to the times, many go back to the horse and buggy era, and are totally unsuitable for the 21st century.
Regulations should be subject to periodic reviews by an unbiased, and expert agency. The Zero Budgeting concept would be appropriate for this exercise.
This implies justifying the need for all the parts of the regulation from a cost benefit standpoint. However, environmental and social impact should also be considered in the equation.
Dedicate a ministry to small business – although this is being done in many countries it often doesn’t receive the serious attention that large businesses do. It is also essential to appoint a minister that has had both academic and practical small business experience.
This individual should have personally witnessed some of the specific needs of small business and will know what the priorities are.
Set up small business lobby groups – Politicians can be swayed by the size and power of voter groups. As a separate business the persuasive power is tiny, but organized into larger groupings under chambers of commerce they can form very powerful entities, which can lobby for their interests.
Although these commercial federations exist at the local and national level in many countries, they are often not sufficiently supported by businesses who may not fully appreciate their value.
Better promotion through proactive websites, which can also educate the business owners on how their activities can help them, should be improved.
Subsidize smartly – While it is true that governments often botch subsidies and offer it for the wrong reasons or to the wrong parties, it is also true that without some form of business subsidies many of today’s thriving industries would not be around.
One has to only look at the renewable energy industry.
The problem with government assistance of this kind is that it is often given for solely political reasons, to shore up voter support in particular jurisdictions.
This kind of favoritism ultimately provides no winners, and enhances the perception of corruption in the minds of voters.
Smart subsidies should look into the future and support companies that are leading the way.
Improve access to funding – More should be done to provide funding for both working capital and purchase of assets for start-ups and young businesses.
The established venues for loans, such as banks, should be given tax incentives to provide more of these riskier loans.
This is not to say that strict due diligence is not necessary. Banks have a right to protect their self interest, but even small government incentives would provide a more flexible system.
The other need is to promote new sources of small business funding such as Fintech supply chain funding, and crowd funding. Both governments and small business federations should take the lead here.
Government regulations can be crafted to allow equity participation through crowd funding, where small investors can take controlled, and limited risks.
Support Industry hubs and incubators – Silicon Valley is the prime example of such a hub. When properly coordinated it can form a powerful nucleus of creative technology, venture capital, talent magnet and powerful driver of the economy.
Some of these hubs grow organically, others are helped by government incentives for the needed infrastructure, and to encourage businesses with common interests to join.
Playing politics can get in the way, if it is the prime driver. The creation of hubs should be best left to the private sector with very focused support from the government.
Provide inspired immigration policies – A full 50% of the most innovative companies in the world have been founded by immigrants to a particular country, or their first generation children. Steve Jobs’ father immigrated from Syria.
Universities in the western world draw an inordinate talent pool from all countries, recognizing their powerful influence on the economy, and promoting a fast track to citizenship is an act of logical self preservation for any country.
Many talented immigrants have started small garage operations that have turned into massive winners.
Award success – Recognition on a local and national level for small business entrepreneurs, who have made exceptional progress or contribution, motivates others to follow in their footsteps.
Organized by the commerce ministry, and provided with media hoopla it would serve to raise the profile of small business. Awards for best in specific business categories become a treasured accomplishment.
Businesses that are awarded for excellence often continue to gain ever greater success that boost the economy.