Some economies are vibrant, growing and have low unemployment. Others are stagnant and have high unemployment. The key difference is whether entrepreneurial behavior is flourishing.
Since it is so critical to healthy economies, several governments and academic institutions have studied "business formation," which is what academics call entrepreneurial behavior, to determine what factors help or hinder it.
Although several reasons are cited, the primary determinants seem to be: the size and power of government, taxes and culture and attitudes. I will address the second and third topics in later articles.
The empirical evidence on the first point is clear. If governments are large and bureaucratic, entrepreneurship is weak. If governments are small and lean, entrepreneurship tends to flourish.
In a recent study, the World Bank reported that there is a strong negative correlation between standard of living and cost of registering a business. In the poorest countries, it took more than 120 percent of a year's salary to pay all the registration and licensing costs to start a business; in the wealthiest countries, it took less than 10 percent.
In the poorest countries, it took more than 16 procedures to register a business; in the wealthiest countries it took less than five. Not coincidentally, the poor countries saw very little business formation.
The regulatory environment is also critical. Europe has unemployment rates that are nearly double those in the United States. The most frequently cited reason is restrictive work rules.
The paradox is that the rules put in to help workers actually end up hurting them.
For example, it can be extraordinarily difficult and expensive to lay off or fire workers in many European countries. In addition, there are many rules limiting overtime hours, requiring minimum pay, preventing rapid plant closures and specifying
how union negotiations can be conducted. As a result, businesses are building relatively few new plants in Europe and are often investing in other countries, including the United States, especially for startup and new technology operations with high risk.
The result is that countries with less restrictive rules get more investment, business formation and jobs. Workers are forced to change jobs more often, but lower unemployment makes that easier. Of course, for new technology, it is also important to have advanced research universities and other infrastructure. But companies that can't lay workers off easily will be afraid of hiring them in the first place. The result is higher unemployment.
Even worse than the cost of bureaucracy is the unfortunate fact that large and powerful governments have often led to corruption. In many emerging markets, entrepreneurs are forced to pay bribes — often disguised as special licensing fees, oversight fees or registration fees — that wind up in the pockets of government officials. If the entrepreneurs refuse, they don't get the necessary licenses or registrations; the desperately needed businesses and jobs they create never get started.
Closely related to the negative impact of government rules and regulations is what researchers call the "brain drain." Because bright entrepreneurs cannot start businesses easily in their home countries, they come to the United States or other Western nations with greater freedoms and develop their new technologies here rather than in their home countries where the jobs are desperately needed.
What is true for countries is also true for states or cities. Next time a political issue arises that forces additional licensing requirements for business, raises tax revenues from "rich businesses" or is supposed to help workers by restricting what employers can do, be careful about the law of unintended consequences. What is intended to help may actually be hurting.
The brain drain of entrepreneurial talent is just as severe for cities as it is for countries.
Hal Heaton is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.