277Policy Instruments for High-Growth Enterprises

Key Issues Regarding HGE Policy Instruments

Four main issues are discussed in this subsection regarding HGE policy instruments.

First, HGEs have urgent needs. Rapid growth is accompanied by higher costs. For example, HGEs are more likely to have their loan applications refused, and face higher interest rates for loans than slower-growing firms (Rostamkalaei & Freel, 2016). Rapid-growth firms may also have lower survival rates (Zhou & van der Zwan, 2019; Coad et al., 2020). Therefore, policy interventions need to act fast. Policy instruments such as tax credits may be more suitable for mature established firms, which can afford to wait until the end of the tax year to receive the benefits (Brown et al., 2017). Instead, grants or targeted support schemes through loans guarantees may be more effective for HGEs.2 Furthermore, faster payment for SMEs (e.g., the “quickpay reform” that is evaluated in Barrot & Nanda, 2020) could be especially valuable for HGEs. Also, policy efforts to create a venture ecosystem via capital market, venture capital but also diverse debt financing sources such as venture debt are crucial for the fast growing scale-ups. Venture debt in particular helps scale-ups to meet financing needs and reduce equity dilution concerns.

Second, creating a culture of dependency should be avoided. Large amounts of public investment in supporting potential HGEs could result in a culture of dependency, whereby low-quality firms could strategically invest in building networks and connections, and honing their skills in making applications. Brown and Mawson (2016, p. 827) discuss the case of business incubators for science-based firms that generate a “dependency culture” but do not help these firms to prepare for the challenges of facing the market. A culture of dependency would distort incentives, such that low-quality firms overinvest in perfecting their grant applications, while high-quality firms are (temporarily) overtaken.

Third, regulatory change may breed HGEs, even if it is just a change for change’s sake: any regulatory change opens up new opportunities that fast-movers can exploit. When the U.S. government passed the Public Utility Regulatory Policy Act of 1978, for example, independent energy firms became able to sell electricity to the grid, which generated considerable growth opportunities that were snatched up by entrepreneurs (Sine & David, 2003). Fourth, decisions regarding the selection of which firms actually receive the policy support involve a mix of (1) picking winners; (2) self-selection; (3) milestones; and perhaps (4) randomization. 1. Picking winners refers to the selection of applications and business plans by

government officials and/or external experts, often using quantitative perfor-

mance assessment or subjective assessments of growth ambitions (Roper &

Hart, 2013). Possible drawbacks of a picking-winners approach could be that

2Dvouletý et al. (2021) review the evidence on grants for E.U. SMEs, and observe that grants are generally accompanied by improvements in survival, employment, tangible or fixed asset stocks, and sales, while the evidence regarding productivity is mixed.