DOING BUSINESS 2009

World Bank has issued the recent report Doing Business 2009, comparing countries throughout the world regarding the ease of doing business and entrepreneurship (link).

R&D, ENTREPRENEURIAL EDGE AND COMPETITIVENESS

Dani Rodrik recently published a post entitled How Ireland does it, where he cited an article from The New York Times about the competitive and growing entrepreneurship in Ireland. The article emphasized the combination of pro-growth economic policy, economic liberalization and tax cuts that empowered the growth of innovative and competitive entrepreneurship.

The central question concerning the economic policy is whether government agencies such as Enterprise Ireland really support growth and innovation or do they actually present a barrier to the entrepreneurial edge. There has been different evidence in different countries. The answer to this particular question rather depends on the size of government spending as a share of the GDP. For example, Ireland is known for restrictive fiscal policy, low corporate tax rate and low public spending while countries in continental Europe have had quite different experience. In Slovenia, public spending equals almost 50 percent of the entire output and public administration accounts for a considerable part of the GDP. In fact, cuts in public spending revived Ireland's "the-sickest-and-poorest-of-the-rich" economy to become a roaring Celtic tiger (link).

Different quantitative studies suggested that there is a positive correlation between the efficiency and quality of services provided by public administration and low public spending. The empirical evidence has confirmed that the inefficiency of services provided by the public administration strongly correlates with oversized and inadequate staff with poor track on productivity performance.

There is hardly any externality that could justify the existence of government agencies as information providers. True, the coordinative, productive and cooperative government inputs are essential to the core public products such as the rule of law, sound regulatory environment and administrative quality. New economy and the age of IT have succinctly eliminated a large slice of the information asymmetry and markets can successfully provide the needed information to entrepreneurs and start-up companies.

Should government agency support R&D activities at the university and at the company level. Again, it depends on behavior. Cooperative behavior may definitely enhence the efficiency of such incentives while rent-seeking behavior may definitely provide political incentives to manipulate with the information resulting in a growing rate of inefficiency.

The question is to which extent can government agencies such as Enterprise Ireland promote the entrepreneurship. First, it is important to rely on private-decision making instead of the enhencement of government ownership and intervention. Second, competitiveness is a microeconomic phenomena that emerges from the product and service quality of the companies competing on a rock-bottom incentive to provide the largest possible quantity and the lowest possible price. Third, the ultimate way to promote the entrepreneurship is the economic policy. Restrictive fiscal policy, lower public spending, product market deregulation, administrative reforms, tax cuts and the liberalization of the productive capacity, the rule of law and efficient institutions provide important incentives to launch the productive behavior such as saving, investment, labor supply and entrepreneurship nonetheless.

There is also a doubt whether public funds are truly as efficient as the conventional wisdom claims. Honestly, the best and most attractive R&D projects are privately funded. Google Inc. has been started by Sergey Brin and Larry Page. Apple was started by Steve Jobs, Jerry Yang started Yahoo.com and Pierre Omidyar succeeded with eBay without government funds and public R&D programs. Also, cutting-edge innovation in pharmaceutics and life sciences is usually pioneered by providing private funds.

Rok SPRUK is an economist.

Copyright 2008 by Rok SPRUK

BUSINESS COMPETITIVENESS AND THE ROLE OF TAXES

The Tax Foundation presented the 2008 version of the State Business Tax Climate. The research is a valuable tool in comparing the level of competitiveness among states regarding the favorability of tax regime for business and capital creation. Through empirical point of view, the productive mechanisms such as investment and labor supply (link) are highly sensitive to tax rates and the level of levied taxes which businesses and individuals have to bear.

The index shows that Wyoming's tax system is best for business (link). California, New York and New Jersey occupy 47th, 48th and 49th place on the index respectively. The lesson is that states with higher income taxes stagnate in terms of the quality of the business environment. Nevertheless, taxes are an important part of state's competitive position, seeking to attract investment and labor supply. On the other hand, states with lower or zero-income tax benefit from low tax burden and business climate favorable to job creation and capital creation, thus receiving high rewards from competitiveness efforts.

POLITICAL ENTREPRENEURSHIP AND CORRUPTION

Writing for Wall Street Journal, Burt Folsom compares the entrepreneurship in two countries; the U.S. and Mexico.

The discussion in the article is focused on Carlos Slim who supossedly surpassed Bill Gates as the world's richest person. As the article demonstrates, the spread of political entrepreneurship coexists with weak contract security and insecure protection of private property rights. In comparison to market entrepreneurship, political entrepreneurship is costly to growth and does not embrace risk-taking, quality maximization and price minimization as strategic terms. Here is an interesting story:

"Enter Carlos Slim. His father, Julian Slim Haddad, a Lebanese immigrant, made his money as a merchant during the chaos leading up to the Constitution of 1917. Carlos Slim greatly expanded the family fortune by working closely and cleverly with government officials. (In fairness to Mr. Slim, there may not be another avenue to great wealth in a massively interventionist economy.) His major opportunity came when President Carlos Salinas de Gortari decided to privatize some inefficient industries. Mr. Slim bought Telmex, the nation’s phone company, in 1990 in a controversial auction which was decidedly less than transparent. With that purchase came a six-year monopoly guaranteed by the government. Although Mr. Slim was supposed to relinquish the monopoly in 1997, he used a variety of legal and political tools to maintain it, for example filing injunctions in court to block orders from the regulator to provide competitors fair access to his network. According to OECD figures, Mexican consumers and businesses still pay above market telephone rates. Fewer than one-fourth of Mexican homes have telephones. With a near monopoly of fixed-line telephones and data access (the Internet), Mr. Slim has reaped windfall profits which, wisely invested, have propelled him to immense wealth. Meanwhile, Mr. Slim’s newer ventures—his construction company and his oil services company—rely on government contracts for their major business. Recently President Felipe Calderon met with Mr. Slim and urged him to accept greater competition."

Source: Burt Folsom, Slim Pickings, Wall Street Journal, August 29, 2007 (link)