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Entrepreneurship and Public Policy: Reinvigorating Economic Competition

July 31, 2016

The Ewing Marion Kaufman Foundation, a Missouri-based nonprofit organization at the forefront of supporting research on entrepreneurship and innovation in the United States, recently published a policy paper titled “A Fair Fight: Entrepreneurship and Comp

The Ewing Marion Kaufman Foundation, a Missouri-based nonprofit organization at the forefront of supporting research on entrepreneurship and innovation in the United States, recently published a policy paper titled “A Fair Fight: Entrepreneurship and Competition Policy,” which included several policy recommendations for reinvigorating economic competition in America.

The first policy recommendation addresses entrepreneurial entry and focuses on labor markets. Kaufman recommends limiting the scope, duration, geography, and eligibility of non-compete agreements, which restrict fledgling entrepreneurs from starting a business that competes with their former employer and often blocks or delays the opening of a competing business. Kaufman also argues that a service economy should have occupational licensing requirements that create appropriate consumer protections with only minimal regulatory burdens and licensure restrictions. Further, Kaufman recommends professional licensure boards should increase the number of non-licensed practitioners, or “public members,” and be directly accountable to elected officials.

Complementing the Kaufman recommendations, the Arlington, Virginia-based Institute for Justice, a nonprofit public policy organization, has recently updated (with this author’s assistance) its hierarchy of occupational regulatory options that includes an increased array of so-called “private governance” choices that should be evaluated by state policymakers before the traditional public regulatory responses of registration, certification, and licensure. Moreover, while Kaufman recommends a “greater number” of non-licensed practitioners on state licensing boards, I would recommend having a majority of qualified public interest members, as it would likely provide increased benefits to consumers (rather than to the regulated profession itself).

The second policy recommendation addresses tax incentives and public subsidies. Kaufman recommends reconsidering the targets and effectiveness of economic-development tax incentives, which are provided overwhelmingly to larger businesses, therefore reducing entrepreneurial competition. Moreover, Kaufman recommends allowing laws and regulations to evolve as entrepreneurs commercialize innovative products, services, and business models.

In addition to the Kaufman recommendations, this so-called “tilting of the playing field” of public subsidies needs far greater scrutiny from the “public” rather than simply remaining in the cloistered world of the public policy process. Calls for greater transparency in identifying which companies or industries are being targeted, as well as demanding periodic benefit-cost evaluations of the effectiveness of such tax incentives, as well as that of existing laws and regulations which may be impediments to innovation, are legitimate “good government” initiatives. The greater use of social media and other forms of non-traditional Internet media scrutiny can shed much needed “light” on public policies that are crucial to supporting a dynamic, competitive American business environment.

Thirdly, Kaufman recommends resisting “rent-seeking” behavior in the public policy process. By rent-seeking activities, Kaufman identifies legislative “carve-outs”, exemptions, or other special privileges that create a competitive advantage for a single company or an industry. One Kaufman recommended remedy to countering rent-seeking activities is to bolster congressional capacity by increasing institutional staffing and salary.

However, regardless of Kaufman’s noble intentions, twenty-first century “political capitalism” is now approaching an apex level, moving beyond the obvious recognition that organized political behavior influences the American economic system, to where political and economic elites are now designing and controlling political institutions and establishing the rules for their own benefit. While increasing staffing and salaries may attract more and better quality individuals, it will have little substantive impact on the existing tide of rent-seeking behavior and “crony capitalism.” The ascendancy of the “political” marketplace shows little sign of abatement, short of institutional reform re-focusing “competition” back to the economic marketplace.

Lastly, Kaufman believes that innovation is more likely to occur in a competitive market environment where opportunities and resources for developing new products and earning profits exist. Kaufman argues that abusive litigation by patent holders in industries where intellectual property plays an important role in competition negatively impacts entrepreneurial firms’ efforts at incremental innovation of the original technology.

There is no question that an overly broad interpretations of patent property rights has increased patent infringement litigation in recent years. This enforcement activity by so-called non-practicing entities in an industry is not driven not by a business model of employing these acquired patents in an industrial process, but a litigation strategy of threatening patent infringement enforcement resulting in financial settlements with the alleged infringers, thus dampening entrepreneurial innovation of the foundational technology. Fortunately, the likely results of pro-innovation provisions in the America Invents Act, passed by Congress in 2011, show a recent decline in the volume of patent enforcement litigation cases initiated annually, especially in the information technology sector.

In summary, like many lists of policy recommendations, Kaufman’s has a mix of those worth immediately pursuing (occupational licensing reform and evaluating economic tax incentives for effectiveness), a non-starter – at least for now (addressing egregious rent-seeking behavior), or in the process of being legislatively addressed (IP abuses threatening entrepreneurial innovation).

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Author
Thomas A. Hemphill is a Professor of Strategy, Innovation and Public Policy in the School of Management, University of Michigan-Flint.
thomashe@umflint.edu