1042-2587

© 2008 Baylor University

The Role of
E T&P Government Policy
on Entrepreneurial
Activity: Productive,
Unproductive, or
Destructive?
Maria Minniti

This paper serves as an introduction to the special issue of Entrepreneurship Theory and
Practice on government policy and entrepreneurial activity. Entrepreneurship is an impor-
tant engine of growth. Government policy, in turn, shapes the institutional environment in
which entrepreneurial decisions are made. Thus, government policy is important for entre-
preneurship. But what policies are more conducive to productive entrepreneurship? In spite
of a significant amount of work on this and related topics, there is still much we do not know
about this important relationship. After reviewing recent literature on entrepreneurship
policy, this paper summarizes the contributions included in this volume and puts them in the
context of the ongoing research debate. The goal of the special issue is to address important
unanswered questions and trigger a constructive debate among diverging views.

1. Introduction

An enduring claim in the field of entrepreneurship is that entrepreneurial activity

promotes economic growth and development. This realization, in turn, has generated a
significant amount of interest in how government policies may be instrumental in fos-
tering entrepreneurial activity, and whether their effects may be consistent across coun-
tries.1 Already, in 1934, Schumpeter stressed the role entrepreneurship plays in the
development and spreading of innovation. Along complementary lines, Acs, Audretsch,
Braunerhjelm, and Carlsson (2004) argue that the main contribution of entrepreneurship
to economic growth consists in playing the role of a “knowledge filter” that transforms
inventions into commercially viable products and processes.
In the last decade or so, many governments have paid increasing attention
to entrepreneurship and have implemented policies aimed at fostering it in their

Please send correspondence to: Maria Minniti, tel.: (1)-214-768-3145; e-mail: mminniti@cox.smu.edu.
1. Recent interesting books published on entrepreneurship policy include Acs (2008); Audretsch, Grilo, and
Thurik (2007); Hart 2003; and Shane 2007.

September, 2008 779

countries.2 Unfortunately, the results of such policies have been mixed and, with some
exceptions, researchers have been unable to tackle this issue satisfactorily. In fact, a broad
search of the literature reveals that the fundamental and general question of how, and if,
governments are able to influence positively entrepreneurial activity is far from being
resolved (Capelleras, Kevin, Greene, & Storey, 2008). The main purpose of this special
issue of Entrepreneurship Theory and Practice is to take stock of what we know about the
topic, provide some new theoretical and empirical evidence, and, hopefully, generate a
serious debate among different views.
This paper serves as an introduction to the special issue and proceeds as follows:
Section 2 discusses whether government policy can, in fact, influence entrepreneurial
activity. Section 3 reviews some of the more common types of entrepreneurship policies.
Section 4 summarizes the contribution of each paper selected for this special issue and
puts it in the context of extant literature. Section 5 concludes.

2. Does Government Policy Matter for Entrepreneurial Activity?

The relationship between entrepreneurship and economic growth has seen increased
interest at the local, state, and national levels, and recent studies have shown that the
contribution of the entrepreneurial sector to employment and GDP is increasing
(Audretsch & Thurik, 2001; Birch, 1987; Kumar & Liu, 2005). A significant amount of
work has also established that entrepreneurial activity has important social implications
(Chell, 2007). As a result, policy discussions have centered on the idea that governments
seeking to stimulate their economies should reduce constraints on entrepreneurship (Acs
et al., 2004; Minniti, Bygrave, & Autio, 2006).
In practice, entrepreneurship policy presents a significant challenge since, more than
for any other type of industrial policy, its effectiveness depends on the establishment of an
appropriate trade-off between market concentration and productivity performance. In this
trade-off, low degrees of market power, characteristic of highly fragmented industries,
yield higher industry performance; but high degrees of market power, characteristic of
oligopolies, often yield economies of scale and scope (Audretsch, 2004). During much
of the last century, industrial policies focused on finding mechanisms capable of harness-
ing efficiencies associated with large-scale production while, at the same time, minimiz-
ing the negative effects resulting from industrial concentration. The result of these efforts,
together with attempts to correct alleged market failures, resulted in the routine use of
regulations, antitrust laws, and various forms of public ownership (World Bank, 2004).
Thus, to a large extent, the entrepreneurial sector remained excluded from industrial
policy except for the widespread belief that it should be somewhat protected for political
and social reasons.

2. In 1998, for example, the OECD launched the program Fostering Entrepreneurship, while the European
Union released the report Fostering Entrepreneurship: Priorities for the Future. Kim and Nugent (1999)
documented that, following a change of the country’s constitution, Korean public policy shifted from
supporting large conglomerate firms (chaebol) prior to the 1970s, to promoting small business and new
startups during the 1980s and 1990s. Also, in the last few years, the governments of Australia, Finland,
Germany, Ireland, Israel, Italy, United Kingdom, and several other countries have launched a series of
initiatives designed to create science and industrial parks, enhance entrepreneurship, and to promote it as a
source of employment. Finally, the OECD, the World Bank, and the IMF have all produced reports and
launched programs related to entrepreneurship.

780 ENTREPRENEURSHIP THEORY and PRACTICE

 Things changed in the 1980s, when various Western countries, faced with the inability
to sustain competitive production and the growing importance of the service sector, began
privatizing publicly owned enterprises and reducing regulatory controls on industries.
Audretsch and Thurik (2001) argue that the role of the entrepreneurial sector changed
when industrial comparative advantages shifted toward knowledge-based economic activ-
ity. First, large firms in traditional manufacturing industries lost their competitive edge.
Second, smaller and more flexible entrepreneurial firms gained new importance in an
increasingly knowledge-based economy. Along similar lines, Gilbert, McDougall, and
Audretsch (2006) suggest that, in the last 20 years, industrial policies have undergone a
significant shift in which smaller and more dynamic ventures have been acknowledged as
drivers of innovation, and a new set of interventions designed to promote entrepreneurial
activity has emerged to promote the viability of such firms.
This renewed need for effective entrepreneurship policies rekindled the debate about
how government can foster entrepreneurial activity. Baumol’s (1990) distinction between
productive, unproductive, and destructive entrepreneurship, coupled with North’s (1990)
analysis of institutions and their role in society, remain, to date, the most satisfactory
framework to discuss entrepreneurship policy.
In his classic 1990 piece, Baumol argued that the supply of entrepreneurs and the
nature of their motives undergo no significant change from one period to another: As
Mises (1949) puts it, entrepreneurship is a characteristic of human action and can be found
anywhere at any point in time. What matters, instead, are institutions, that is, the rules of
the game dictating the ultimate effect of entrepreneurship on the economy via the allo-
cation of entrepreneurial resources (Boettke & Coyne, 2007). In other words, Baumol’s
basic hypothesis is that, while the total supply of entrepreneurs is relatively constant
across societies, the productive contribution of entrepreneurial activity varies because of
its allocations between desirable activities, such as innovation, and unproductive activ-
ities, such as rent seeking or organized crime. Thus, by setting in place the appropriate
institutions, government policy can influence the allocation of entrepreneurship more
effectively than it can influence its supply (Baumol, 1990; Bowen & De Clercq, 2008).
Within this context, North (1990) provides a framework integrating the emergence of
institutions with the development of entrepreneurship. The institutional environment
determines the formal and informal rules of the game, places constraints on human action,
and, possibly, reduces uncertainty. Thus, institutions (and the policies that shape them) are
crucial in determining entrepreneurial behavior. Entrepreneurship is the mechanism
through which economic growth takes place, but institutions (such as the policy environ-
ment) are what allocate entrepreneurial efforts toward productive or unproductive activ-
ities by influencing the relative incentives and payoffs offered by the economy to such
activities. Government policies mold institutional structures for entrepreneurial action,
encouraging some activities and discouraging others. It is therefore clear that government
policy has the power to influence entrepreneurial activity. It is also clear that such
influence is not necessarily desirable as it may steer entrepreneurs toward actions that
have negative socioeconomic externalities.

3. One Size Does Not Fit All

One of the main policy implications of the previous analysis is that “one size does not
fit all.” In other words, if entrepreneurial efforts are to be allocated to productive activities,
policy strategies, with respect to entrepreneurship, need to be tailored to the specific
institutional context of each economic region (Wagner & Sternberg, 2004). For example,

September, 2008 781

the environments required for the emergence of productive entrepreneurship are likely to
differ significantly between a rural area, a high-technology cluster, and a metropolitan
area. Therefore, policy design needs to take account of local differences, and to adapt to
the different scale and nature of existing resources, networks, and market capabilities. In
spite of this need for diversity, entrepreneurship policies tend to be based on a handful of
policy tools. Among them are financing, taxation, regulations on trade, and encourage-
ment of innovation activities.
Many attempts have been made at policies that enhance financing offerings to entre-
preneurs (Harrison, Mason, & Girling, 2004). Specifically, governments have tried to
reduce financial constraints faced by entrepreneurial ventures by adding instruments like
mutual credit guarantee and microfinance schemes to traditional bank loans. Mutual credit
guarantees have the advantage of reducing information asymmetries, thereby reducing
transaction costs. Microfinance schemes, instead, have the advantage of circumventing the
financial risk of the borrowers by selecting collateral requirements that are satisfied by
nonmonetary accountability based on reputation or small-group enforcement mechanisms
(Khoja & Lutafali, 2008). The empirical evidence on the effectiveness of financing support,
however, is mixed. While microfinance schemes are usually assessed positively, other forms
of financing have been criticized. Li (2002), for example, shows that credit assistance
programs in the form of interest subsidies exert strong effects on the allocation of credit to
targeted entrepreneurs, but that this comes at the cost of nontargeted entrepreneurs. He also
finds that total entrepreneurial activity is reduced and a significant loss of output is incurred.
Some governments have also focused their efforts toward attracting new venture
capital. Here the underlying assumption is that more venture capital allows an increase in
successful entrepreneurial activity. The empirical evidence, however, is once again mixed.
Cumming (2007), for example, found that the Australian Innovation Investment Fund
governmental program, first introduced in 1997, has facilitated investment in start-up,
early-stage, and high-tech firms, as well as cost-effective monitoring. Kreft and Sobel
(2005), on the other hand, suggested that the causal relationship between entrepreneurship
and venture capital is reversed—in other words, that entrepreneurial activity attracts new
venture funding while the reverse is not true. Finally, venture capital has been shown to
account for only a very small amount of overall financing to entrepreneurship, and to be
of significance only for a relatively small group of high-potential ventures in a limited
number of countries (Bygrave & Quill, 2007).
A second common type of entrepreneurship policy includes the manipulation of taxes
at various jurisdictional levels; the basic idea being that a taxation system favorable to
smaller and entrepreneurial ventures may encourage more people to start businesses.
Gentry and Hubbard (2000) studied to what extent progressive marginal tax rates discour-
age entry by entrepreneurs with the most promising business projects. Their results
showed that while the level of the marginal tax rate has a negative effect on entrepreneurial
entry, the progressivity of the tax also discourages entrepreneurship, and significantly so
for some groups of households. This is consistent with Takii’s (2008) argument that, as
expansionary fiscal policy partially crowds out private consumption, entrepreneurship is
discouraged when profit taxes are high and government expenditure does not reflect
changes in consumers’ tastes. On the other hand, using U.S. time series to examine the
importance of various taxes on self-employment rates, Bruce and Mohsin (2006) showed
that most of these taxes have significant but negligible effects on entrepreneurship. Their
results suggest that although taxes can have significant influences on entrepreneurship,
they are not likely to be effective tools for generating appreciable changes in its overall
level. Also, Holtz-Eakin (2000) finds little support for asymmetric tax policies favoring
entrepreneurial firms, and points out that, at the aggregate level, failure is not necessarily

782 ENTREPRENEURSHIP THEORY and PRACTICE

a negative phenomenon and, more important, that not enough is known about how to
determine which firms to target for success or failure.
In the wake of strong competition from developing countries, the issue of policies
aimed at the internationalization of entrepreneurial ventures has also attracted significant
attention from various governments, and many countries regulate or restrict the movement
of international business (Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2002). Most
often, these policies consist in the creation of tariffs or tax regimes that avoid penalizing
venture capital profits, and in instruments such as export credits and export guarantees.
Against such protectionist tendencies, Jones (2007) argued that barriers to trade are
particularly costly and detrimental to the entrepreneurial sector. In an economy open to
international competition, he argues, entrepreneurs can seek out new market opportun-
ities, while at the same time meeting the highest global standards. Along similar lines,
Puia and Minnis (2007) suggested that the regulation of entry, that is, the set of procedures
governing the entry of new or international ventures, is particularly important for entre-
preneurship, as countries with more entrepreneurship tend to be associated with lower
levels of entry regulation. Finally, although traditionally internationalization has been
described as a gradual, sequential process, more recent research has shown that firms do
not necessarily follow any consistent pattern in their internationalization (McDougall &
Oviatt, 2005; Oviatt & McDougall, 2005). In fact, start-ups emerging in knowledge-based
industries are likely to enter international markets directly and, as a result, are more likely
to benefit from low trade barriers (De Clercq & Bosma, 2008).
While globalization has expanded the frontier of entrepreneurship, a fourth very
common type of entrepreneurship policy has focused on local interventions. Storey
(2003), for example, has identified several examples of different types of entrepreneurship
policies which are increasingly at the state, regional, and local level. Among the best-
known example of such policies are the creation of formal and informal support mecha-
nisms (for example, chambers of commerce and training programs), publically sponsored
incubators, and, most of all, science, technology, and research parks. Entry, growth,
survival, and the way firms and industries change over time are linked to innovation. Thus,
the performances of regions and even entire economies have been linked to how well the
potential from innovation is expressed in the economy. Direct subsidies for R&D, support
of linkages between universities and the private sector, reflect and respond to the needs of
specific localities or regions to be effective in encouraging innovation rather than simply
importing successful policies from other areas (Jacobides, Knudsen, & Augier, 2006;
Langley, Pals, & Ortt, 2005).
While these local entrepreneurial policies are still evolving, they are clearly gaining in
importance and impact in the overall portfolio of economic policy instruments. In the last
20 years or so, governments have became increasingly active in assisting entrepreneurs at
the regional level and fostering industrial clusters, technology transfer, and high-tech
start-ups under the assumptions that these sectors will be competitive in the future
(O’Gorman & Kautonen, 2004; Sternberg & Litzenberger, 2004). Within the context of
technological innovation, Audretsch and Feldman (1996) provided considerable evidence
that knowledge spillovers result in both a geographic clustering of innovative activity, as
well as an increase in start-ups across innovative industries, such as semiconductors
(Almeida & Kogut, 1997), and biotechnology (Zucker, Darby, & Armstrong, 1998).
Audretsch and Feldman (1996) also argued that knowledge is inherently different from
traditional factors of production, such as land, labor, and capital in that it is uncertain,
asymmetric, associated with greater transactions costs, and, as a result, more difficult to
evaluate. While the contribution of innovation policy to entrepreneurship has become a
crucial concern for today’s policy makers, the implementation and assessment of policy

September, 2008 783

remains problematic as many of these initiatives are still too young to be assessed
(Cumming, 2007).
Clearly, a comprehensive review of the literature on entrepreneurship policy is beyond
the scope of this section. Nevertheless, from this brief survey, it is already evident that
many important issues concerning the types and effectiveness of entrepreneurship policy
have not yet been settled. The papers presented in this special issue provide a first attempt
to contribute to the elimination of this important gap.

4. This Special Issue of ET&P

A large number of excellent papers were submitted for this special issue of ET&P and
the selection process forced me to make some very difficult decisions. In the end, after a
rigorous double-blind process in which each paper was reviewed by at least two reviewers,
six papers and one research note were selected. Contributing scholars have a variety of
disciplinary backgrounds including economics, organization theory, economic geography,
and management. While the research note is a provocative conceptual piece, each of the
six papers includes both a theoretical and an empirical contribution and can be classified
as contributing to one of four distinct, although related, broad areas of inquiry, namely,
policy topics at the industry, regional, national, and supernational levels.
Looking at the development of nanotechnologies, the first paper focuses on industry-
wide issues. In this work entitled “Innovation policy and nanotechnology entrepreneur-
ship,” Jennifer Woolley and Renee Rottner explore the relationship between innovation
policy and new venture creation in the United States. Using an original dataset on the history
of commercial nanotechnology, and the related new venture creation at the state level, the
authors examine public policy initiatives for economics and for science and technology
(S&T). They find a resulting increase in environmental munificence for new ventures and
an acceleration of nascent entrepreneurship. Specifically, Woolley and Rottner find that
states with both economic and S&T initiatives have six times as many new firms than states
without such initiatives. They also find economic initiatives to have a stronger effect than
S&T initiatives, probably because of their contribution to entrepreneurial infrastructure and
short-term munificence. Finally, they find evidence of first-mover advantages as states with
the earliest innovation policies also have higher rates of related firm founding over time.
Overall, Woolley and Rottner contribute to the important debate on innovation policy and
suggest that states that are most attractive to entrepreneurs, in addition to encouraging
technological innovation also encourage and legitimize commercial development.
Moving from the industry level to the aggregate level, the second and third papers
focus on regional issues, looking specifically at the relationship between entrepreneurship
policy and regional agglomeration, and to alternative governance systems at the regional
level. In recent decades, major economic changes associated with globalization and the
decline of traditional industries have generated a significant amount of interest in the role
government policy may play in stimulating the entrepreneurial dynamics of local econo-
mies (Minniti, 2004, 2005). These two papers contribute directly to this area of research.
In the paper entitled “Entrepreneurial policy: The case of regional specialization vs.
spontaneous industrial diversity,” Pierre Desrochers and Frederic Sautet argue that poli-
cies enabling entrepreneurs to exploit opportunities in a context of spontaneously evolved
industrial diversity are better facilitators of regional development. Following the idea that
regional specialization produces external economies of scale, regional policies often
emphasize the positive features of industrial environments focusing on concentrated
and clustered firms (Porter, 2000). Desrochers and Sautet contend that a push toward

784 ENTREPRENEURSHIP THEORY and PRACTICE

specialization might leave regional economies more vulnerable to cyclical downturns, and
less likely to generate innovations such as those made possible by industrial symbiosis and
Jacobs externalities.
Noticeably, Desrochers and Sautet do not argue against regional specialization.
Instead, they suggest that regional specialization and spontaneous industrial diversity
should coexist. Within this context, they provide evidence suggesting that spontaneously
developed industrial variety generates an environment very conducive to innovation, as
proximity and diversity enable entrepreneurs to build on both explicit and tacit knowl-
edge. What matters, Desrochers and Sautet argue, is not the type of industries that develop
but, rather, the environment in which entrepreneurship takes place. Finally, the authors
speculate that a good regional context for innovation would resemble a diversified city
made up of many specialized clusters, as the birth, life, and death of diversified urban
centers are essentially part of a spontaneous order that rests on entrepreneurship. Their
paper contributes directly to the debate on regional policy, and to that on the role played
by entrepreneurship in the propagation of innovations.
The next paper, entitled “Governance and the entrepreneurial economy: A comparative
analysis of three regions,” by Rachel Parker, focuses also on regional policies and political
actors. Parker’s paper contributes to the literature on governments and regional entrepre-
neurial economies by analyzing whether governance models for entrepreneurial economies
differ across regions and from governance models for national economies. Parker identifies
partnership, state–institutional coordination, and fragmentation as three possible models of
governance, and explores each model comparing evidence for the information and com-
munication technology sector from the Limerick (Ireland), Karskrona (Sweden), and
Adelaide (Australia) regions. The paper finds that regional governance arrangements do, in
fact, differ from national varieties in the partnership and in the state–institutional models,
but not in the fragmented model. The differences are shown to involve primarily the type of
actors participating in governance arrangements. Thus, Parker’s paper shows that at the
regional level, regardless of governance model types, the decision-making actors capable of
influencing economic development need to include universities, local and decentralized
authorities, and networks of small firms. According to her results, decentralized governance
models appear to be more conducive to entrepreneurship.
The fourth and fifth papers move the analysis from the regional to the national level and
focus on institutional systems. In particular, they discuss the role played in entrepreneurship
by institutional arrangements with respect to market openness and economic freedom, and
show that the degree of economic freedom affects not only profit opportunities for
entrepreneurs, but also the motivations and types of economic activities they pursue.
In their paper entitled “Economic freedom and service industry growth in the United
States,” Stephan Gohmann, Bradley Hobbs, and Myra McCrickard examine how the
entrepreneurial activity and level of employment in U.S. service industries respond to
changes in the degree of economic freedom among states. Although some work existed on
the role of economic freedom on entrepreneurship, empirical tests on service industries
were lacking. Gohmann, Hobbs, and McCrickard’s findings suggest that the relationship
between entrepreneurial outcomes and economic freedom cannot be univocally deter-
mined as it varies significantly by industry. While growth rates and employment in
industries such as business and personal services are positively related to economic
freedom, the relationship is reversed in industries such as health, social, and legal services.
Thus, evidence from the service industry suggests that the relationship between entrepre-
neurial outcomes and economic freedom varies significantly by industry. Their paper
contributes directly to the literature discussing how government policy influences the
allocation of entrepreneurship between productive and unproductive activities.

September, 2008 785

 In the fifth paper, entitled “Economic freedom and the motivation to engage in
entrepreneurial action,” Jeffery McMullen, Ray Bagby, and Leslie Palich use the Heritage
Foundation Index of Economic Freedom and Global Entrepreneurship Monitor data to
regress opportunity-motivated entrepreneurial activity and necessity-motivated entrepre-
neurial activity on ten aspects of economic freedom and GDP per capita for 37 nations. In
this paper, the entrepreneurial decision to start a venture is rooted in a set of institutions
that influence both the motivation and the uncertainty entrepreneurs experience during
their decision-making process.
Specifically, McMullen, Bagby, and Palich equate increases in economic freedom to
reductions in transaction costs, and test for differences in levels of entrepreneurship
among countries by assessing the existence of a relationship between policy variables and
the motivation to become an entrepreneur. Regardless of entrepreneurial motivation, their
results suggest the existence of a negative association between per capita GDP and
entrepreneurial activity, and of a positive association between labor freedom and entre-
preneurial activity. All other components of the economic freedom index appear to be
uniquely related to either necessity- or opportunity-motivated entrepreneurship, but not
to both. This suggests that governmental restrictions on economic freedom may influence
entrepreneurial activity differently depending on the particular aspect of freedom
restricted (investment freedom, labor freedom, property rights, etc.) and on whether the
entrepreneur is motivated by opportunity or by necessity. This work contributes directly to
the debate on the effectiveness of alternative institutional settings on entrepreneurship.
Moving from the national to the international level, the sixth paper discusses the
relationship between supernational trade policies, entrepreneurship and venture capital
outflows. In spite of major policies surrounding economic integration among countries,
the impact of such policies on entrepreneurial activities is surprisingly under-studied.
In the paper entitled “The impact of economic integration on cross-border venture capital
investments: Evidence from the European Union,” Hadi Alhorr, Curt Moore, and Tyge
Payne make a first step toward closing this gap.
Drawing on existing research on institutional economics and on entrepreneurship, the
authors examine whether two specific forms of integration policies, namely common
market and common currency, affect the level of cross-border venture capital investments
made by nations participating in the European Union. Alhorr, Moore, and Payne find that
large-scale economic-integration policies influence the extent of foreign venture capital
investments made into other member countries. They also find that while both integration
mechanisms result in increased venture capital investments among EU countries, the
adoption of the common currency emerges as a more powerful mechanism for stimulating
cross-border investment than the common market. Thus, this study suggests that when
countries become more integrated, an increase in the amount of cross-border venture-
capital investment is likely to follow, rather than precede, an increase in entrepreneurial
activity. This paper contributes directly to the debate concerning the effects of interna-
tionalization on entrepreneurship, and also to the debate about the desirability of attracting
venture capital for the purpose of increasing new venture creation.
Finally, rooted in the mathematics of complex systems, the research note presents a
conceptual argument about the potential role of governments on entrepreneurship activity.
In this note, entitled “Computable entrepreneurship,” Roger Koppl argues that when
proposing or supporting policies, policy makers often have expectations regarding the
outcome of those policies. Unfortunately, he continues, these expectations require policy
makers to make predictions about outcomes that are, in fact, impossible to predict even
should one be able to use mathematics. This impossibility, Koppl argues, is particularly
problematic for many entrepreneurship policies since, by definition, entrepreneurs are

786 ENTREPRENEURSHIP THEORY and PRACTICE

individuals who deviate from the norm and act under highly uncertain (as opposed to
risky) situations. Governments are not able to make any prediction about what type of
entrepreneurial activity is more desirable, nor about how to make it emerge, since to do so
would require them to perform an impossible calculation. According to Koppl, however,
governments can create a reliable set of rules that entrepreneurs can play by. This is
because policies ensuring institutional transparency, predictable taxation, and secure
property rights do not require policy makers to compute specific outcomes in order to
achieve their intended goal of promoting entrepreneurial ventures. Koppl’s research note
contributes directly to the debate about the limitations of proactive policies and the fact
that only the market can identify value-creating ventures.

5. Conclusion

Institutions, and the policies that shape them, are crucial to entrepreneurial activity.
Entrepreneurship is the mechanism through which economic growth takes place. By
influencing their relative payoffs, institutions allow the allocation of efforts between
productive and unproductive entrepreneurship.
Previous literature and the papers included in this special issue show that an effective
entrepreneurship policy cannot be one that limits itself to business subsidies or imposes
top-down strategies. The fact that entrepreneurship is positively linked to performance does
not justify public policy intervention. Instead, as Audretsch (2004) suggests, the mandate
for public policy intervention can only be the result of fundamental market failures.
It is also clear that, when it comes to entrepreneurship policy, one size does not fit all,
and that, in the long run, governments can only provide an underlying environment
conducive to the emergence of productive rather than unproductive entrepreneurship.
Thus, government should endeavor to create enabling environments conducive to the
division of labor, the commercialization of invention, and exchange, as too much public
involvement, without co-interest from the private sector, can hinder rather than help
entrepreneurs by creating possible market distortions.
The degree of development is also important, and the relationship between policy and
entrepreneurial activity varies across countries. Dutz, Ordover, and Willig (2000) explore
the relationships between entrepreneurship and economic development in low-income
countries. In this context, they suggest that two policies are critical for promoting growth.
First, to arrest the diversion of entrepreneurial talent toward nonproductive activities, an
increased emphasis on preserving rewards from productive innovation is needed through
the protection of commercial freedom, property rights, and enforceable contracts. Second,
given that essential local inputs are vulnerable to monopolization, fostering opportunities
for grassroots entrepreneurship is paramount through an active supply-side competition
policy emphasizing access to essential business services and other required local inputs.
Acs and Szerb (2007), instead, argue that middle-income countries should focus on
increasing human capital, upgrading technology availability, and promoting enterprise
development, and that it is important to start enterprise development policies early
because the main drivers are perceptual variables that are difficult to change in the short
run (Arenius & Minniti, 2005). Finally, they also suggest that in developed economies,
high-growth start-ups are the type of venture best suited to foster further growth. Reducing
entry regulations, in most cases, will not result in more high-potential start-ups, instead
labor market reforms and financial markets deregulations may be better positioned to
support the growth of high-performance ventures.

September, 2008 787

 In the end, government policy should not aspire to the elimination of new venture
failures. Although painful at the microeconomic level, business churning is part of a
healthy economic system. Most important, only the market can determine what the
optimal amount of entrepreneurship is. We do not know enough to answer this funda-
mental question, much less to determine which firms to target for success or failure
(Holtz-Eakin, 2000). Government policy can, however, contribute actively to the devel-
opment of an institutional setting that encourages productive entrepreneurship.

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Maria Minniti is Professor and Bobby B. Lyle Chair in Entrepreneurship at Southern Methodist University’s
Cox School of Business.

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