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Welfare state good for entrepreneurship and economic growth, say experts

Business leaders call for end to stigma over failure saying benefits don’t hinder but support and stimulate enterprise

The UK needs to shed the stigma attached to entrepreneurs who rely on benefits after a venture goes wrong, business groups and experts have said. Their comments came after criticism of a property developer’s 16-year-old son who spoke out against coalition welfare cuts at the Labour conference.

Rory Weal’s speech on Monday – in which he said his “entire wellbeing” had been preserved by the welfare state after his family’s home was repossessed – wowed delegates in Liverpool. However, the inevitable media scrutiny of his background – his father was a wealthy property developer before he went bankrupt – brought accusations of hypocrisy and even, in one instance, “champagne socialism”.

But according to experts, far from being a hindrance to entrepreneurship and economic growth, in many cases the welfare state actively promotes them, both through cushioning business people following failures and via schemes such as the coalition’s fledgling New Enterprise Allowance (NEA), which provides a modest state wage to jobseekers trying to start their own business.

It is perhaps small consolation for Weal’s father, Jonathan, but in seeking welfare support during a tough time he shares an experience with some of the UK’s richest people. JK Rowling composed her first Harry Potter novel while she was getting single parent benefits, while financier and Tory donor Lord Ashcroft recalls in his memoir spending several months on the dole during his 20s while he “waited for the next opportunity to come along”.

Simon Cowell and Dragons’ Den star Peter Jones have admitted to stints in their late 20s of returning home to their parents after business ventures went belly up.

US tax data shows that during the economic crunch of 2008 almost 3,000 people both declared annual incomes of m-plus and received unemployment benefits.

“There is a stigma throughout society about having to go on to welfare and that’s something business owners might feel as well,” said Andrew Cave of the Federation of Small Businesses. “But it is quite clearly a stage that a lot of businesses owners will have gone through. When you have a recession there’s then a peak in business start-ups – a lot of people will use benefits as a stepping stone to what they have always wanted to do.”

The “smart use of welfare benefits” can directly stimulate entrepreneurship, he said, for example with the NEA’s Thatcher-era predecessor, the Enterprise Allowance Scheme, which in 1992 helped 36,000 new businesses start up. Three-quarters of them were still going 18 months later.

UK business people enjoy other, less direct, windfalls from welfare provisions, Francis Greene, associate professor of enterprise at Warwick Business School, said – not least freedom from the responsibilities of their US counterparts to think about health insurance schemes for themselves and their employees.

“Lots of business owners don’t realise the hidden costs of what they would otherwise have to provide for their workers. What they tend to see is just regulation. The thing about regulation is that it’s a two-edged sword. Yes, it can be inhibitive to business but it can also be beneficial,” he said. “There is a huge crossover between business and welfare.”What US entrepreneurs do enjoy, according to popular business belief, is a culture in which some measure of failure, or even a bankruptcy or two, is seen as a valuable part of the learning process.

The truth is subtly different, according to Marc Ventresca, a lecturer in strategy and innovation at Oxford University’s Saïd Business School, and an expert in what he calls the “fail early, fail often” world of Silicon Valley tech start-ups.

The principal differences across national boundaries, he argues, are more institutional – for example if bankruptcy laws allow you to start again easily, and whether access to venture capital means you have lost outsiders’ money rather than that borrowed from friends and family.

Silicon Valley is particularly forgiving of failure, he added, given the fast-moving and interconnected nature of that business community. “In the US, particularly in the hi-tech area, people do fail, and that’s not a stigma in the same way [as in the UK]. But it’s a piece of insight for everybody: you tried something and it didn’t work and then you regroup and do something else.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds