HOW SHOULD STATES ENCOURAGE ENTREPRENEURSHIP?
Interesting commentary by Joshua Hall over at The Independent Institute considering Oklahoma’s interest in creating a billion dollar investment pool for innovation and entrepreneurship.
While of specific interest to me because of the Oklahoma connection, I would recommend it as an interesting twist on the debate occurring right now on the role of state investment in early stage innovation.
Using the number of sole proprietorships and patent activity in a state as measures of entrepreneurship, Kreft and Sobel find that increased entrepreneurship causes more venture capital to automatically flow into the state. More importantly, they find that influxes of new venture capital do not then cause entrepreneurship to increase. Crowding out of private venture capital is one possible reason why state funded venture capital fails to increase entrepreneurship. This suggests that the trend of state-sponsored venture capital funds have the cart before the horse. Since entrepreneurial activity appears to be what attracts venture capital into a state, the best way to encourage entrepreneurship within a state is to focus on creating a policy environment where individuals are free to be innovative.
Unfortunately Wisconsin is currently planning to invest $50 million from its $66.5 billion state employee trust fund state into venture capital firms that invest primarily in local companies. Similar efforts have been undertaken in other states, including Colorado, Michigan, Ohio, Oklahoma, and Minnesota. However Kreft and Sobel’s new research shows that state financing of venture capital in these states is unlikely to stimulate entrepreneurship.