The impact of regional policy on entrepreneurship

Table of Contents

I. Regions, Regional Policy and its Objectives

II. The Impact of Regional Policy on Entrepreneurship
1. Regional economic policy within the nationwide economic policy
2. Policy instruments that influence entrepreneurship
a Competition policy
b Labour market
c Providing knowledge creating infrastructure
d Network creation
e Creating an innovative milieu
f Service support by government
g Access to finance
3. The economical impact of entrepreneurship

III. Conclusion

IV. Bibliography

I. Regions, Regional Policy and its Objectives

It seems helpful to me, first to clarify the two most important terms of the title of this essay. The first term is “regional policy” that includes two parts that should be explained: region and special policy for regions.

- Regions

Regions are marked through a number of special criteria:

- “singleness (unique position)
- otherness (differentiation criteria)
- commonness (culture, traditions, landscape)
- collective identity (shared history, doom)
- regional awareness (feeling of belonging together, identification)
- government’s organisation (administration, policy)
- elected representation (self-determination, -administration)
- homogeneity (socio-economical, cultural, ethnical)
- functional togetherness (networks)
- power-connection (domination, dependency, interconnections)
- inter-organisational networks (socio-economical milieu)
- openness (cross-linking, knowledge-transfer)
- global competitiveness (competition, networks)”^[1]

The policy that especially affects the concerns of regions is called “regional policy”. Regional policy aims to support the planned development of regions in the way of coordinated measure setting. As regional policy is embedded in the nationwide policy, it aims from the viewpoint of the national government to

- maximise economic growth and
- minimise social costs^[2]

As development of regions always includes entrepreneurship to create regional value, I would like to collect state of the art knowledge about how regional policy can support entrepreneurship. Here the question appears, what could been understand under regional policy.

- Regional policy

Regional policy is the sum of law, strategies and measures for setting and influencing a framework and processes in particular areas of a nation through the government.^[3] With special regional policy government seeks to reduce spatial disparities in economic.^[4]

The last term I would like to introduce for my essay is Entrepreneurship. In this context, entrepreneurship is not each business activity in a wider understanding of the term but I mean the field of founding new enterprises based on an idea for providing products or services that are not available in or near the region yet.

- Entrepreneurship

”Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time and/or career commitment or provide value for some product or service. The product or service may or may not be new or unique, but value must somehow be infused by the entrepreneur by receiving and locating the necessary skills and resources.”^[5] “Early this century, the concept of innovation was added to the definition of entrepreneur-ship. This innovation could be process innovation, market innovation, product innovation, factor innovation, and even organisational innovation.”^[6] An entrepreneur also is defined in this case through funding a new business as a pioneer.^[7]

Thornton and Flynn mention the relation between Entrepreneurship and regional policy. They found that Entrepreneurship is increasingly a domain not only of individuals, but of regions. The regions with agile entrepreneurial activities are these ones that offer rich opportunities and resources.^[8] The environment that invites for setting entrepreneurial activities is influenced and created with the instruments of regional policy as “entrepreneurship is increasingly the domain of organizations and regions, not individuals.”^[9]

II. The Impact of Regional Policy on Entrepreneurship

1. Regional economic policy within the nationwide economic policy

Each region has its specific characteristics. Thus, regions have advantages that can attract investors and on the other hand, disadvantages that can retard investments. So places could be well developed in respect of economy or less well developed. Investors are willing to invest capital where it would “produce” the highest return. This could explain disparities between certain regions. So at this point it seems helpful to explore what regions could provide for companies. Research found several variables that could describe economical environment. The following scheme contains the most important variables:

illustration not visible in this excerpt

Figure 1: Area differentiating variables as explanation for interregional disparities, taken out of Krätzschmar, in: Bräuer (1997), page 12

This explains that regional policy in general has a strong impact on a region’s economy. One policy part is to create a business-friendly environment. The major part of this work explains what regional policy should provide to make entrepreneurship possible. First it seems helpful to show up the different levels of economic policy, as not only regional policy has an impact on regional economic and entrepreneurial activities. However, “regional policy is an important mechanism by which enterprise policy can be delivered.”^[10]

illustration not visible in this excerpt

Figure 2: Regional economic policy in the context of the nationwide economic policy, based on Peters (1975) from Balsinger (2005), www.fowi.ethz.ch/ppo/stud/fnpiiiws04_05/Regionalpolitik.pdf

2. Policy instruments that influence entrepreneurship

a Competition policy

Competition policy is important each for the whole economy also for the chance of entrepreneurial activities. Competition policy sets the framework for doing business. Surprisingly, competition is not the objective of competition policy. “Efficiency and fairness are the objectives, and when these conflict, the objective is to evaluate the tradeoff between them. (…) Efficiency has a fairly clear economic meaning. It is a conversational objective; it aims to minimize waste.”^[11] This is important especially for new market participants. As entrepreneurship in the context of this paper has an innovative component (compare with the definition of entrepreneurship in the first section of this essay) I presume that innovative ideas offer the opportunity to enhance efficiency. Beside an innovative product that could supplement existing ones and add additional value or a total new product idea, efficiency could be achieved through a better production process, new ideas for transportation and logistics, a new approach to the mixture of production factors or bettering of the internal organisation.

But, in which way can competition policy influence entrepreneurship ? First, I short would explain the design of competition policy. “The definition of a market is a key issue in competition policy and analysis. It is necessary to define a relevant market in order to establish whether a firm has a dominant position in the market. Similarly, in analysing whether a restrictive agreement among firms has an appreciable effect on reducing competition in a market, it is necessary to define the relevant market and then to evaluate the impact of the agreement in that market. Market definition is an initial step in competition analyses. It provides the context in which to evaluate the level of competition and the impact of anti-competitive conduct.

There are two aspects to the definition of a market, the product (including a service), and the geographic area in which the product is sold. In defining the product, close substitutes are normally included. The analysis of substitutability is generally conducted from the demand side, which is from the prospective buyers of the product.”^[12]

Within the European Union the basic framework was set in the “Treaty of Rome”. This agreement is the basis for founding the European Community as an organisation with shared market organisation and rules. “The European Union has rules to ensure free competition in the Single Market.”^[13] The relevant articles that ensure that market forces could evolve are article 81 and 82 of the Treaty of Rome. Within the E.U. creation of monopolies, anti-competitive agreements which may affect the trade between member states or prevent, restrict or distort competition within the Single Market are prohibited^[14]:

1. Article 81. “The following should be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;
(b) limit or control production, markets, technical development, or investment;
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their name or according to commercial usage, have no connection with the subject of such contracts.”^[15]

[...]

^[1] Giffinger (2005), in: Balsinger (2005), www.fowi.ethz.ch/ppo/stud/fnpiiiws04_05/Regionalpolitik.pdf

^[2] Compare Hansen (1974), page 42

^[3] Compare www.fowi.ethz.ch/ppo/stud/fnpiiiws04_05/Regionalpolitik.pdf

^[4] Compare en.wikipedia.org/wiki/Regional_policy

^[5] Hisrich/Peters/Shepherd (2005), www.sbaer.uca.edu/publications/entrepreneurship/pdf/11.pdf

^[6] Di-Masi, www.gdrc.org/icm/micro/define-micro.html

^[7] Compare Kilby (1971), page 97

^[8] Compare Thornton/Flynn, in: Acs/Audretsch (2005), page 401

^[9] Acs/Audretsch (2005)

^[10] European Economic and Social Committee (2003), page 14

^[11] Graham/Richardson (1997), page 7

^[12] cbdd.wsu.edu/kewlcontent/cdoutput/TR503/page10.htm

^[13] www.dti.gov.uk/bbf/competition/policy/ec/index.html

^[14] Compare www.dti.gov.uk/bbf/competition/policy/ec/index.html

^[15] ec.europa.eu/comm/competition/legislation/treaties/ec/art81_en.html