278A. Coad et al.

applications take time for applicants to prepare, capabilities in writing an engag-

ing proposal may be different from capabilities required for entrepreneurial

success,3 and also the individuals making the selection may make imperfect

decisions amid uncertainty. Picking winners can be a useful preselection tool to

winnow down the pool of applicants, separating out the lower-quality applicants,

while not attempting the ﬁner distinctions between higher-quality applicants

(McKenzie, 2017). 2. Self-selection can potentially avoid problems of asymmetric information regard-

ing business quality, by letting promising entrepreneurs use their background

knowledge of the ﬁrm to select into support programs that are of little interest to

less-promising entrepreneurs. Important here is clarity and transparency regard-

ing the costs, commitments, and beneﬁts of policy support schemes, to facilitate

the cost-beneﬁt analysis for potential applicants (Roper & Hart, 2013). Self-

selection schemes should involve a hurdle that is only worth overcoming for

high-potential entrepreneurs. This hurdle can refer to the time costs of preparing

an application and dealing with bureaucracy,4 participation fees, or perhaps

options or convertible fees that have negligible cost in the case of full compliance,

but that entail costs in the case of incomplete compliance. An example of the

latter type of option would be ﬁnes for non-participation.5 3. Milestones can be useful devices in situations of investments under uncertainty,

according to Real Options theory (Klingebiel & Adner, 2015). Milestones make

the availability of successive rounds of support conditional on satisfying certain

requirements, and shift the problem from picking winners to retaining winners.

Milestones can be effective ways of reducing uncertainty as well as motivating

participants to keep making progress, and may even help to provide timely

support across growth stages (Autio & Rannikko, 2016). 4. Random allocation of support can help when a limited number of places must be

allocated to a large number of applicants of almost-equal quality. Another

advantage of randomization is that it facilitates the ex-post evaluation of the

overall causal effect of the policy (McKenzie, 2017).

3For example, older ﬁrms with previous application experience and better political connections might be able to prepare better grant applications. 4Regarding the self-selection hurdle, ﬁnancial costs are probably preferable to time costs of bureaucracy, because high-potential entrepreneurs can be expected to have higher opportunity costs of time than low-potential entrepreneurs. 5An example would be the LEAD program: “individuals had to commit themselves to 2 days a month for 10 months. Following a series of interviews, 65 SMEs were selected to take part in the program on the understanding that nonparticipation would result in a £15,000 forfeit” (Roper & Hart, 2013, p. 20).

279Policy Instruments for High-Growth Enterprises

An Overview of Areas Relating to HGE Policy

Instruments

Table 1 provides an overview of the previous literature on public policy to support HGEs, which is the literature to which we seek to contribute. It shows that the number of areas relating to possible HGE policy instruments is large, and includes a number of policy areas with potentially conﬂicting priorities (Bradley et al., 2021) and whose links to HGEs may not be immediately obvious (Acs et al., 2016). We begin with the more obvious policy areas, before discussing some that may be, at ﬁrst glance, less obviously related to HGE policy. Finance Access to ﬁnance for SMEs, young ﬁrms, and HGEs is a classic area for HGE policy. A fundamental problem for HGE ﬁnance arises from asymmetric information: Investors may deem HGEs to be poor investments using traditional indicators, and HGEs may not be able to convince investors of the merit of their business idea. Relevant to our discussion of reducing information asymmetries for (innovative) HGEs, Brown et al. (2017) observed that more R&D investment in high-tech industries is observed in countries that have stronger accounting standards and better contract enforcement. Information asymmetries presumably are a heavier burden for younger ﬁrms, which could be why HGE policies in various E.U. member states have focused speciﬁcally on supporting young ﬁrms (Flachenecker et al., 2020, p. 43). Bank ﬁnancing for HGEs is not ideal, because banks would not share in the HGEs’ upside gains in cases of success (banks would receive a ﬁxed interest rate), although banks would bear the brunt of an HGE’s failure (in terms of not recovering the loan). Hence, ﬁnance via equity rather than bank loans is more appropriate for risky high-potential ventures. The ﬁnancial sector now includes a variety of actors that can play a role in supporting the ﬁnancing needs of HGEs: incubators, accelerators, grants from research councils for basic research, business angels, venture capital (VC) and corporate venture capital, and the relatively recent emergence of crowdfunding. In addition, there are many government initiatives to provide funding to SMEs, young ﬁrms, and potential HGEs (such as grants, guaranteed loans, government VC funds, government co-funding, and government certiﬁcation).

The multiplicity of available options for HGE ﬁnancing has a number of advantages. HGEs have ﬁnancing needs that exceed the available bank loans, and therefore they are more likely to apply for equity ﬁnancing (Ferrando et al., 2019). After reaching a certain leverage ratio, equity type ﬁnancing helps to improve the balance sheet structure and this way opening up also for new rounds of debt ﬁnancing. Also, there is evidence that ﬁrms that use several ﬁnancing instruments are more likely to invest in R&D and software activities, and more likely to develop new products (Ferrando & Lekpek, 2018). Crowdfunding and venture capital complement each other (Sorenson et al., 2016), and bank loans and capital markets complement each other (Ferrando & Lekpek, 2018). Private ﬁnance is more developed in the United States than in Europe, as highlighted by recent evidence that European startups