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Do You Want To Be Your Own Boss?

Friday, October 1, 2004

Observers comparing our economy with those of other countries often note that Americans seem to be much more willing to become entrepreneurs. A recent survey found that more than 70 percent of American adults would prefer being an entrepreneur than working for someone else. In contrast, the same survey showed that only 46 percent of adults in Western Europe, 41 percent in Japan and 58 percent in Canada preferred being an entrepreneur over working for someone else.

What Sets the U.S. Apart?

When economists try to explain differences in entrepreneurship across countries or regions, they typically examine the roles of economic, governmental and institutional factors. These things are important, but they don't tell the whole story. U.S. policies and social factors—what might be called the entrepreneurial spirit—also contribute to Americans' willingness to take risks and become their own bosses.

How Do Policies Matter?

Some ways in which the United States stands out in supporting the entrepreneurial spirit include:

  1. legal institutions that ensure property rights, including intellectual property;
  2. our competitive financial system, which provides financial capital from a variety of sources;
  3. a free market ensuring that all markets, including labor, are not over-regulated; and
  4. a business-friendly tax structure that—compared with those of other developed economies—is relatively low.

Risky Business

European policy-makers have found that it's not enough to have laws and regulations that encourage entrepreneurship. Attitudes—especially toward risk—are also important. A recent survey commissioned by the European Union finds many Europeans have never considered starting their own business. Nearly one-half said that one should not start a business if there is any risk that it might fail.

What Will $210 Get You?

Rules across developed countries vary greatly in what an entrepreneur must do to establish a business as a legal entity. These rules are important because once a business becomes established as a legal entity, it has the ability to borrow from the financial system and to enforce legal contracts.

The World Bank has catalogued the processes an entrepreneur must satisfy to establish a business in different countries. Table 1 provides these differences for rich countries, including the United States, across four categories:

  • the number of procedures,
  • the amount of time to satisfy the procedures,
  • the costs associated with the procedures and
  • the minimum amount of financial capital that an entrepreneur must have on hand at the time the business is established.

Table 1


Number of Procedures Time (days) Cost (US$) Minimum capital (% per capita income)
Australia 2 2 402 0
Belgium 7 56 2,633 75.1
Canada 2 3 127 0
Denmark 4 4 0 52.3
France 10 53 663 32.1
German 9 45 1,341 103.8
Greece 16 45 8,115 145.3
Ireland 3 12 2,473 0
Italy 9 23 4,565 49.6
Japan 11 31 3,518 71.3
Netherlands 7 11 3,276 70.7
New Zealand 3 3 28 0
Norway 4 24 1,460 33.1
Portugal 11 95 1,360 43.4
Spain 11 115 2,366 19.6
Sweden 3 16 190 41.4
Switzerland 6 20 3,228 33.8
United Kingdom 6 18 264 0
United States 5 4 210 0

In the United States, it typically takes four days and $210 to establish a business as a legal entity. The steps include registering the name of the business, applying for tax IDs, and setting up unemployment and workers' compensation insurance. But in Japan, a typical entrepreneur spends more than $3,500 and 31 days to follow 11 different procedures.

Can We Do Better?

Although there are many ways in which U.S. policy is friendly to entrepreneurs, there is still room for improvement. Many regulations place too much of a burden on entrepreneurial activities without generating large benefits to society. Tax codes for individuals and businesses are, in many ways, needlessly complicated and introduce distortions in decision-making. And we are often tempted to impose labor-market or trade restrictions to make it more costly for firms to move operations overseas.

The entrepreneurial spirit has provided the spark that enlivens the U.S. economy. That growth can only continue if we resist the urge to over-regulate entrepreneurs and if we provide prudent policies that foster free enterprise.

This article was adapted from "Entrepreneurs in the U.S. Face Less Red Tape," which was written by Bill Poole and Howard Wall and appeared in the October 2004 issue of The Regional Economist, a St. Louis Fed publication.

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