The upgrading of workforce skills is key to the competitiveness of SMEs. In today’s business environment there is a premium on innovation that enables firms to develop new products and services, new production processes and new business models. This requires both in-house innovation and the ability to absorb knowledge from other firms and organisations, both of which call for a skilled labour force. Skills are also a critical but understated resource for entrepreneurship seen in the sense of business creation. Similarly to workforce skills, entrepreneurship skills will boost the competitiveness of local businesses thanks to the improved strategic and management competences of the entrepreneur.

1. Skills and Incentives Promoting
Growth-oriented Entrepreneurship
Magnus Henrekson
Presentation at the Internat’l Workshop Skills Development for
SMEs and Entrepreneurship organized by the Danish Business
Authority and the OECD Local Economic and Employment
Development Programme (LEED)
Copenhagen, November 28, 2012

2. Motivation and purpose
• Gazelles/HGFs found to contribute
disproportionally to growth and job creation
– Seems to be the case in the U.S.
– But generally less true in Europe
• What institutional conditions most likely to be
conducive to HGFs?
– Talented entrepreneurs supply effort
– Incentives to expand if potential
– Harmonization of diverse competencies and agents
• Identify key agents

3. Key agents of change
• Entrepreneurs
• Inventors and Innovators
• Industrialists
• Skilled labor
• Venture capitalists
– Business angels
– VC funds
• Agents on the secondary (exit) market
• Competent customers

4. Interacting agents of change
Competent
customers Agents on
secondary markets
Development of Commercial- Build large
viable idea ization industrial firm
Entrepreneurs Industrialists
Inventors Entrepreneurs
Entrepreneurs Skilled labor
VC agents

5. The tax code
• Key rates and schedules insufficient to
characterize the tax code
• Tax code does not acknowledge these
categories (income from e-ship etc)
• Key agents interact in complex ways; details in
the tax system likely to be of great importance

6. Different taxes and their effects
Cannot cover this in 20 minutes, just a few remarks
Taxation of current capital income
• dividends
• interest income
Capital gains taxation
• differences across assets
• differences based on holding period

7. Taxation of stock options
• capital or labor income?
• effect of employment clause?
• Instrumental for the distribution of created
equity value across agents depending on their
importance
Taxation of return on savings
• differences across instruments
• preferential treatment of pension savings

8. Corporate taxation
• statutory rate
• two-tier taxation benefiting debt
financing?
• accounting measures to lower
effective taxation

9. Labor market institutions
• Enormous churning (every 7th job disappears
every year)
• Wage-setting arrangements
– degree of centralization and formalization
– miminum wage laws
– wage compression ”deprofessionalizes” service sector
• Labor security mandates weigh more heavily on
smaller and younger firms and on those with high
business risk (HGFs)
• Labor security mandates hamper the reallocation of
workers, jobs and capital

10. Product market regulations
• Quality of public goods: the lower and the less
certainty and political stability the more it benefits
large incumbent firms.
• The extent to which sectors of high income
elasticity of demand are open for private
production and private purchasing power:
education, personal care and health care.

11. Targeted programs
• As a policy instrument in its own right
– Only in the incipient phase
• As a second-best substitute
– Great rent-seeking risks
– Cannot recruit the right people
– Distortionary effects on other agents
– No Silicon Valley as we know it until they got the key institutions
in place
• Capital gains taxation
• Stock options taxation
• Pension funds allowed to invest in VC

12. Conclusions
• HGFs/Gazelles key to growth and job creation
• Many complementary competencies and agents in
complex interaction to take firm from small to large
• Impossible to pick winners ex ante
• Key institutions to harmonize incentives
– The tax system: have to get the details right!
– Labor market regulations and wage-setting institutions; do not
tie entitlements to long-term tenure
– Savings systems and social insurance as facilitators
– Product market regulations enabling entrepreneurial process
and product innovation