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HGE Policy Instruments

2.1 Stylized Facts on HGEs

Policy discussions about providing support for HGEs need to take into account a number of stylized facts and basic considerations about the nature of HGEs, which are presented here. • A small number of HGEs create a large share of new jobs. This is a classic

ﬁnding from research into ﬁrm growth, with for example 4% of ﬁrms being

observed to create 50% of the jobs (Storey, 1994; Bravo-Biosca et al., 2013;

Bravo-Biosca, 2016; Hallak & Harasztosi, 2019). • HGEs tend to be young but are not necessarily small. The ﬁrst 5 years of a ﬁrm’s

life correspond to a period of unusually rapid growth (Haltiwanger et al., 2013;

Coad et al., 2018). For this reason, HGE policies in various E.U. member states

have focused speciﬁcally on young ﬁrms (Flachenecker et al., 2020, p. 43). HGEs

are particularly uncommon among old micro ﬁrms (Coad & Karlsson, 2022). • HGEs are found in all industries (Henrekson & Johansson, 2010) and are,

if anything, less common in research and development (R&D)-intensive Policy Instruments for High-Growth Enterprises

275manufacturing industries (Daunfeldt et al., 2016), although they are overrepresented in knowledge-intensive service industries (i.e., service industries with a high share of human capital, Daunfeldt et al., 2016). HGE policy should therefore avoid focusing too much on high-tech sectors (Mason & Brown, 2013), and instead focus on innovative activity more broadly deﬁned, which extends beyond high-tech manufacturing sectors to include knowledge-intensive industries. • Rapid growth is not persistent for individual ﬁrms. Therefore observing which ﬁrms grew fast in the past will not give useful insights about their future HGE status. In this sense, it is better to think of high-growth episodes rather than highgrowth ﬁrms (Grover Goswami et al., 2019). The low persistence of high-growth status is a difﬁcult challenge for policymakers seeking to target HGEs (Grover Goswami et al., 2019). • Rapid growth may be persistent at the regional level, in the sense that regions with above-average HGE shares in one period may be expected to have aboveaverage proportions of HGEs in the next period (Friesenbichler & Hölzl, 2020). This persistence of HGEs at the regional level contrasts with the lack of persistence at the ﬁrm level, and suggests there could be a role for locally embedded culture and entrepreneurial institutions in facilitating HGEs. • HGEs are heterogeneous. A plethora of different HGE deﬁnitions can be found in the literature.1 Findings from one sample cannot easily be generalized to others. For example, ﬁndings of entrepreneurial learning among a sample of venture capital recipients (Gompers et al., 2010) may not be very relevant for discussions of entrepreneurial learning among entrepreneurs escaping unemployment. • HGEs are difﬁcult to predict, both for government policymakers and also for venture capitalists. The approach taken by venture capitalists is to inspect a large number of detailed applications, from which they select a broad portfolio, in the hope that one or two ﬁrms receiving investments will become blockbuster hits that can cross-subsidize the losses of the other portfolio ﬁrms. Therefore, we argue that the responsibility should not be on policymakers to identify HGEs (in the context of a targeted HGE policy), but instead potential HGEs should be able to self-select into the fast track (if they believe that is where they should be), where the fast track is an up-or-out type of policy environment that can give a valuable boost to ambitious growth-oriented ﬁrms although it is not a comfortable place to linger for less ambitious ﬁrms.

1For example, ﬁrm growth can be deﬁned in terms of absolute growth (total amount) vs relative growth (proportional rate of growth), employment growth vs sales growth, top 1% or top 5% or a time-varying proportion of ﬁrms with growth above a certain threshold (e.g., 20% growth threshold), growth measured over different timescales (e.g., 1- or 3- or 5-year growth periods), whether or not to include micro ﬁrms in the relevant sample, or whether to deﬁne high-growth entrepreneurs in terms of billionaires only.

276A. Coad et al.

Rationales for Policy Intervention

Rationales for policy intervention include the improvement of existing institutions and infrastructure to support businesses (including HGEs), as well as interventions that are targeted more toward removing barriers and providing assistance to certain subgroups of HGEs (e.g., young HGEs or HGEs from certain technological sectors), and another category of policies that seeks to awaken in potential HGEs ambitions for rapid growth. Improving the infrastructure and institutions for business can improve the conditions for HGEs (and for business more generally). This could include upgrading existing infrastructure and the labor force’s skill base (e.g., transport, broadband in rural areas, education), removing barriers to growth, such as streamlining and simplifying bureaucratic procedures, and facilitating growth such as through export assistance or the removal of export barriers (e.g., in the case of the E.U. single market and the E.U. single digital market). We can also mention here attempts to alleviate information asymmetries that affect the ﬁnancial sector and may disproportionately affect new small ﬁrms. Deregulation is often heralded as a way of improving the business environment, although we should remember that regulations were often set up with good reasons in mind (a better world would perhaps have fewer rules, but better rules).

Beyond the provision of universal infrastructure are policy interventions that target speciﬁc categories of ﬁrms. An example is the case of young ﬁrms: Many policy measures to support HGEs give privileged treatment to young ﬁrms (Flachenecker et al., 2020, see their Table 5 on p. 42). HGEs may also be targeted to promote emerging technologies (Flachenecker et al., 2020, p. 43), although targeting HGEs here would be less effective if targeted at speciﬁc sectors than if focused instead on ﬁrm-level innovation capabilities (because many HGEs are not in high-tech sectors, Mason & Brown, 2013; Daunfeldt et al., 2016).

A ﬁnal, and more controversial, category of policy interventions consists of providing highly targeted relationship-based support to potential HGEs (“relational” support in Brown & Mawson, 2016), which could require large investments of policymakers’ attention, and also be ineffective if HGEs cannot be predicted in advance. Similarly, we can mention efforts to awaken in potential entrepreneurs’ growth ambitions that they did not previously have, for example through entrepreneurship education programs that seek to teach entrepreneurial skills to a broad audience. While it has been observed that some ﬁrms are sleeping gazelles (i.e., potential HGEs) in the sense that they have high proﬁts but are not engaging in employment growth (Bornhäll et al., 2015), nevertheless it is not clear whether a policy intervention could be set up to turn these sleeping gazelles towards rapid growth.