1 Introduction
The economic importance of entrepreneurship is well established and there is a surge of interest in better understanding how national policy can fuel this engine for economic growth (Isenberg
2010; Liguori et al.
2019; Roundy
2019). A central question that is often debated among academics, policy makers, and ecosystem stakeholders is what can we do at a national level to spur entrepreneurial activity? Often, this debate revolves around whether it is better to foster entrepreneurship through government programs (i.e., social spending) or rely upon the market to act as a self-regulating system (Sandström et al.
2019).
Social spending is of great controversy in the national policy-entrepreneurship debate as policy researchers often disagree about its value to increasing entrepreneurial activity. On one hand, market failure theorists suggest that entrepreneurship and innovation are public goods and should receive governmental support such as subsidies, tax breaks, or grant money similar to other public goods (e.g., clean air and water) (Hausmann and Rodrik
2003; Martin and Scott
2000). Advocates of social spending argue, from a position of market failure theory, that these policies encourage individuals to choose entrepreneurship as a career, because they create safety nets and allow entrepreneurs to take risks without the fear of facing personal destitution in the event of failure (Olds
2013,
2014; Sinn
1996). Conversely, the Austrian economics perspective contests that social spending is a disincentive to entrepreneurship because it increases the opportunity cost of starting a business. Tax schemes are often required for social spending which may hamper profit incentives (Parker
2004) and social spending provides would-be necessity entrepreneurs an alternative to self-employment (Henrekson
2005). The Austrian view suggests that market freedom, rather than social spending interventions, is the most conducive means to enhance entrepreneurial activity because entrepreneurs can reap the largest rewards (Freytag and Thurik
2007; Kirzner
1997). Despite considerable debate about the implications of social spending on entrepreneurship, very few studies investigate this topic (Sandström et al.
2019). Thus, our research question is
Does social spending (country level) impact entrepreneurial attitudes and activity (country level)?
This area of research is of particular concern as scholars have found that governmental institutions often
intend to stimulate entrepreneurial activity, but they are less efficient than markets at allocating resources (e.g., Engberg et al.
2019). This is a major issue for policy makers and ecosystem stakeholders who need to understand the implications of social spending policy in order to determine which path to take for economic development. A second major concern in this line of inquiry is that, unfortunately, most studies that investigate national policy characteristics and entrepreneurship focus on an individual country or region (e.g., Heinonen et al.
2010; Sternberg
2012) but this approach can be problematic in terms of generalizability to other country contexts.
To address these challenges and investigate how national social spending impacts entrepreneurial attitudes and activity, we follow recent scholarship from the domain of
comparative international entrepreneurship. This line of inquiry is gaining momentum (Engelen et al.
2009) and focuses on cross-national comparisons of entrepreneurial activity across countries (Terjesen et al.
2016). Aldrich (
2000) cautioned that researchers have sometimes presumed their findings are universal rather than being nation-specific, thus limiting understanding and theory development. Cross-national research enables comparison and replication and reduces the risk of nation-specific results that are not generalizable to other countries. In this vein, we draw from a unique longitudinal sample of developed countries to provide actionable advice about how national social spending translates to entrepreneurial attitudes and activity at the country level. Thus, we take a data-driven approach to test which view of social spending—market failure or the Austrian approach—prevails in the modern economy. To conduct a robust analysis, and paint a more complete picture, we test the direct effects of social spending on (a) entrepreneurial activity, (b) business ownership, and (c) the public’s view of entrepreneurship as a career choice. Economic development involves a number of indicators that represent development and progress (Naude
2013). Key indicators such as attitudes towards entrepreneurship as a career choice, degree of entrepreneurial activity, and business ownership represent important criteria for policy makers to consider relative to spurring entrepreneurship. Another consideration is that while national social spending may be essential to improving a specific indicator, it may be less helpful, or even harmful, to other indicators of entrepreneurial activity. Our empirical undertaking clarifies how differences in national social spending systematically influence entrepreneurial attitudes and activity.
We believe that this research makes a number of contributions to the literature: first, to develop hypotheses and further theorize upon the topic of social spending and entrepreneurship we draw from and extend research on Austrian economic theory. As a result of our empirical undertaking, we highlight the negative effects of market intervention via social spending on nationwide entrepreneurship indicators. We apply an Austrian perspective of economic development to clarify how social spending increases the opportunity cost of entrepreneurship. Second, we inform the institutions versus markets debate (Sandström et al.
2019) by considering the institution of social spending and its relationship with entrepreneurial attitudes and activity at the country level. Third, Terjesen et al. (
2016) recently called for increased comparative international entrepreneurship research that overcomes single country or regional approaches to improve generalizability. Their research pointed out that policy antecedents and entrepreneurial outcomes have often been investigated in isolation from one another, thereby limiting theory development. We address these research gaps and perform an analysis using unbalanced longitudinal time series data across 31 developed countries
1 spanning 2004–2011.
In the next section, we review opposing theoretical perspectives about how social spending policy impacts entrepreneurship. We summarize empirical research to date and present a theoretical argument for why social spending at the country level will influence differences in entrepreneurial attitudes and activity. The method and results of our empirical examination are presented. A discussion follows and we conclude with implications for theory and practice.
4 Discussion
We set out to better understand how country level policies impact entrepreneurial activity and extend the comparative international entrepreneurship literature by exploring the implications that social spending has on entrepreneurship perceptions and activity. Although social spending undoubtedly has many societal benefits in terms of helping the less fortunate (e.g., providing healthcare, education, mental health programs), our findings which utilize a broad set of time series data, indicate that social spending inhibits entrepreneurship across a variety of measures. These findings yield a number of theoretical contributions and practical implications. First, we deduce that changes in the opportunity cost of entrepreneurship indeed play a significant role in fostering national levels of entrepreneurship and that social spending has the unintended side effect of increasing the opportunity costs of entrepreneurship. Second, we interpret this as evidence that the lure of profits rather than concerns for personal risk plays a larger and more widespread role in steering the public to become entrepreneurs.
In this study, we find the existence of a negative link between social spending and entrepreneurship. We theorize that the negative relationship is primarily driven by rising opportunity costs of entrepreneurship. That is, we suggest that greater social spending (country level) increases the opportunity costs associated with being an entrepreneur, as other jobs should become increasingly attractive (e.g., better stability, better benefits, less stress, and less risk), and taxes to fund social spending programs reduce the profits that attract would-be entrepreneurs. Our findings support the notion that social spending tends to crowd out entrepreneurship (Koellinger and Minniti
2009). Our findings regarding opportunity cost, in turn, suggest that social spending is not only an ineffective means to foster entrepreneurship, but that it is also detrimental to nationwide entrepreneurship and the public’s perception of entrepreneurship as a good career choice. None of this, of course, mitigates the positive social benefits (e.g., providing income for people with disabilities) of social spending targeted at social issues.
Next, our study supports the Austrian view in lieu of the market failure perspective, as our results suggest social spending does not bode well for entrepreneurial activity. We observe that people tend to seek out entrepreneurship in environments where the opportunity cost of becoming an entrepreneur is low, rather than in environments where the personal risk assumed by the entrepreneur is low. We find this to be a curious pattern, as loss aversion is one of the most deeply accepted doctrines of human behavior (Baumeister et al.
2001). However, if loss aversion operated as a robust and salient deterring force in entrepreneurial decision-making, then we should expect that the arguments of scholars who suggest social spending as a policy for encouraging entrepreneurship should hold up empirically (e.g., Olds
2013,
2014; Sinn
1996). We would expect that by offering social spending programs, which reduce the risks associated with entrepreneurship, then the door to self-employment would be opened to a greater number of people who have a lower risk tolerance. Yet in support of our hypotheses, we reject the notion of loss aversion or market intervention for the purpose of risk reduction as an effective means to encourage entrepreneurship. We provide empirical support to the counter argument that entrepreneurs are more motivated by the potential gains associated with a free market than they are frightened away by potential losses. Accordingly, we interpret our findings as evidence that nascent entrepreneurs assign a greater decisional weight to the potential upside of their choice than they do to the potential consequences of failure. Perhaps nascent entrepreneurs weigh upside wealth creation more heavily than the downside consequences because the potential monetary returns for success are near limitless, whereas the floor for failure is often limited to bankruptcy which is an undesirable but tolerable risk. Further, it is possible that a large portion of the population understands that entrepreneurship is an inherently risky activity such that even with the help of social spending programs, entrepreneurship still does not fit the risk tolerance of the public as a viable career option.
In terms of policy recommendations, while we favor spending on social programs to address specific societal concerns, our findings suggest that when it comes to fueling entrepreneurial activity, the unintended consequences of social spending may negate any anticipated gains. Thus, policy makers should seek to create policies that allow for free markets if they are striving for increased entrepreneurial activity and economic development. We note that attempting to create free markets is often at odds with social spending as social spending systems are often funded through the use of tax schemes which can inhibit market freedom and increase the opportunity costs of entrepreneurship. In effect, increasing the opportunity cost of entrepreneurship can stifle economic development by causing markets to be artificially sparse and less competitive. Further, effective altruism suggests spending decisions should consider the extent to which the intended outcomes do the most good for the most people as well as what would have happened should no interventions (spending) have occurred (MacAskill
2016). Thus, a paradox exists for policy makers in that resources invested into one social program cannot be invested into another, so understanding the net societal gain is valuable. Maximizing the net impact is an essential part of being able to make the best investment decision. In the case of our study, this applies to policy makers given that they are often faced with making decisions on the deployment of limited resources. Moreover, as the gap between the need for social programming (and the government’s capacity to respond) continues to widen (e.g., Daar et al.
2018), policy makers should seek validated approaches to prioritize social spending towards outcomes in line with constituent goals and net impact. In essence, we rely on our earlier arguments of opportunity cost in that policy makers not only have to choose among social spending programs but also need to consider that they may risk losing the positive benefits of entrepreneurship by pursing those endeavors.
The findings and techniques developed in this paper may also be used to tease out other entrepreneurial motivations. For example, the role of identity in entrepreneurship research has been on a steady rise over the recent decades (e.g., Mathias and Williams
2017), as it allows researchers another means for conceptualizing entrepreneurial motivations beyond profit seeking alone. That is, scholars expect individuals to have entrepreneurial motivations as a means to express themselves and their identity in addition to financial interests (Falck et al.
2012; Obschonka et al.
2012). For instance, researchers have demonstrated that an entrepreneur’s motivations are often tied to their identity and their need for self-expression through business ventures conducive to their identity attributes (e.g., craft work, communitarianism, or innovation; Cardon et al.
2009; Fauchart and Gruber
2011; Kuhn and Galloway
2015). However, we are not aware of any macro-level examinations regarding the extent to which noneconomic and economic interests play roles in entrepreneurially motivating the public across a nation. We encourage future studies to investigate the motivational effects of noneconomic factors such as identity by examining how national levels of entrepreneurship are affected by factors that are found to have a negative relationship with a nation’s level of entrepreneurship (e.g., social spending). The findings of the present study are interpreted to suggest that Austrian economic policy plays a widespread and pervasive role in motivating entrepreneurship, but we nonetheless expect that other motivations play a tempering role in maintaining a given level of entrepreneurship. Moreover, future research should examine this tempering role of nonfinancial motives as a means to quantify their effects.
As it pertains to entrepreneurship learning and pedagogy, at least two variables in our study should be of interest to entrepreneurship educators, namely, basic entrepreneurship education and advanced entrepreneurship education. Alarmingly, these entrepreneurship education control variables did not positively influence any of the dependent variables. Further, governmental programs (that are designed at least in part for educating potential and existing entrepreneurs) did not have a positive effect on any of the dependent variables. We are concerned with these findings such that variables pertaining to entrepreneurship education explain little to nothing about entrepreneurial outcome variables. Yet given that public education is generally considered a social good, these results are somewhat aligned with our theorizing. However, we suggest that further exploration is needed to better understand whether entrepreneurship education is a valuable metric to be used at the country level.
Heretofore, we have mentioned some areas for future research, yet we also wish to acknowledge a number of constraints on generality (Simons et al.
2017) and limitations with the present study. The study design was based on time series archival data covering the years 2004–2011 obtained from countries that were members of the OECD, an organization generally made up of democratic countries that have developed economic systems (i.e., the OECD does not track much of the third world). Thus, we expect our results to generalize to other countries with democratic political systems and developed economies. The findings and conceptual implications of our broad study are convergent with research that has taken a narrower approach in scope or sample (e.g., Aidis et al.
2008; Estrin and Mickiewicz
2011; Henrekson
2005), which credits the validity of previous scholarship as well as our findings. However, we do not have reason or evidence that our findings will replicate in developing economies. We also do not know if the results will hold into the future as the nature of work, employment, and the gig-economy could perhaps make self-employment more common than salaried work (McGrath
2013).
4.1 Summary and Conclusion
According to the findings of the present study, social spending is most aptly recognized as a drain on entrepreneurship rather than a catalyst for entrepreneurship. Moreover, the negative link between social spending and entrepreneurship held up across multiple dependent variables. We attribute this pattern of findings to social spending policies increasing the opportunity cost of entrepreneurship. Our findings suggest policy makers should carefully weigh the social returns of entrepreneurship versus social spending, as we find a clear tradeoff between these two initiatives.
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