Courtesy of Ernst & Young

Government policies that encourage entrepreneurship are most likely to result in increased innovation.

Individual government policies toward entrepreneurship and innovation vary widely, but the consensus among policy-makers and academics is that without a favorablemarket and regulatory environment, innovation cannot stoke economic growth.

“The regulatory environment plays no small role in innovation. Policies that protectfirms or industries can result in reduced incentives for entrepreneurs to invest ininnovative ideas and for large firms to invest in R&D because they no longer facethe competitive pressure to constantly improve their product in order to improve (ormaintain) their market share,” notes a 2009 report from The Conference Board.

Governments, which are often viewed as most effective when they stay out of the business sector’s way, actually play an important role in nurturing and protecting one of their most important engines of growth: entrepreneurs.

Here are some ways governments can help:
Strengthen and invest in education systems.
Innovation requires a well-educated, competitive labor market, brimming with both skills and ideas.
Encourage businesses to connect with global, cross-border markets. The point is most relevant for entrepreneurs launching a start-up or expanding an existing business so they can consider the largest possible market for their services or goods.

Cultivate confidence in capital markets.
Governments are responsible for creating conditions that attract foreign investors. Adopting a financial reporting language (such as IFRS) that can be understood by investors around the world will go a long way to ensuring a common language. The reform provides a vehicle for tapping international capital flows that can benefit business activity at home and boost growth — especially when attracting capital for initial public offerings.

Simplify procedures and requirements.
Burdensome processes can create roadblocks that increase the cost of doing business. This is an entry barrier for many nascent and growing businesses. No government can afford this during a time of economic downturn or recovery.

Seventy-nine percent of Americans say entrepreneurs are critically important to job creation, ranking higher than big business, scientists, and government.

Kauffman Poll: Entrepreneurship and Economic Recovery, March 2009