How to promote entrepreneurship?

One of the buzzwords in international development is entrepreneurship promotion. Governments in countries like India have hitched their growth wagons behind the energy and spirit of entrepreneurship. 

Public policies have been formulated to support entrepreneurs. Entrepreneurship training programs abound. Start-up incubators and accelerators are being established by governments across cities with policies to encourage their establishment. And the major driver of improving the ease of doing business may be unlocking of entrepreneurial energies. 

But what is the evidence that such policies promote entrepreneurship? Edward Glaeser and Wengtao Xiong's excellent summary on urbanisation and agglomeration in developing countries has this to say regarding public policy on entrepreneurship,

The public role in generating entrepreneurship is less clear. It seems quite reasonable to believe that local regulations can stymie entrepreneurship, although there has been little research using U.S. data documenting such a relationship. While local governments do occasionally try to increase entrepreneurship by supporting specific “innovation clusters,” we know little about whether such clusters are really effective or whether other local policies, like entrepreneurship training programs, will bear fruit....

The U.S. literature does indicate that local entrepreneurship has been important for local economic growth. There is not yet any comparable literature for developing-world cities, and there is little hard evidence – in either the U.S. or elsewhere – on how public policy can potentially encourage local entrepreneurship. There are at least three public policy strategies aimed at increasing local entrepreneurship: training, clusters and deregulation. Business schools have tried to train entrepreneurs for decades, yet there is little rigorous evidence that such training works. There are cheaper programs that try to provide disadvantaged youths, such as “The Possible Project” in Cambridge, Massachusetts, but they have not yet been evaluated with randomized control trials. It consequently remains an open question whether cities can actually teach entrepreneurship.

A second approach focuses on the generation of entrepreneurial clusters, which presumably allow entrepreneurs to learn from each other. Boston’s Innovation District is one such public initiative. Private initiatives, such as co-working spaces for small start-ups, also provide scope for sharing entrepreneurial knowledge. In a sense, markets filled with small, individual merchants in the developing world, either with or without explicit public support, represent yet a third form of entrepreneurial cluster. Again, we have little firm empirical evidence on whether the formation of such clusters materially increases the overall level of entrepreneurship within a city.

A third approach starts with the view that at least some entrepreneurs are deterred by various regulations. Many U.S. cities, for example, forbid food trucks to provide meals on city streets, which appears to deter at least one form of urban entrepreneurship. In the developing world, really small-scale entrepreneurs typically ignore labor- and product-market regulations, so deregulation seems unlikely to increase the number of really tiny firms. However, it seems more likely that these regulations prevent the growth of such firms, especially when they reach the point to employ non-family members. Such regulations may explain the dominance of small firms in the firm-size distribution in the many developing countries. Small firms can’t grow into larger firms because they would then have to follow the rules.

In India's case, the concern should not be about whether the country needs more entrepreneurs or not, but that it may be having too many. So the concern should be about promoting the right kind of entrepreneurs. An even bigger challenge!