Financing Entrepreneurial Spirit : What Is The Right Approach?
How can you economically drive a generation of entrepreneurs?
Small businesses, with their ability to bring growth and innovation to a niche area, are crucial to a nation’s economy. China and France, two of the world’s largest economies, initiated different reforms to support startups and small business in hopes of spurring on growth. Their respective policies, however, are rather stark and have produced differing challenges.
As GDP growth fell to a 30-year low, China initiated a government-led campaign to boost small business financing, in hopes of reviving the weakening economy. This encouraged banks to reduce interest rates and promote relaxed lending standards. Money lent to small businesses with limited access to capital reaching a record high RMB $2tn ($286bn) in the first 10 months of 2019, up from RMB 1.7tn in the whole of 2018, and interest rates fell from 7.4 to 6.8% in the same period. However, with a disproportionately high non-performing loan ratio and the inability for banks to make a profit, the prospects of growth for the nation’s economy following the campaign appear despondent.
According to Ji Shaofeng, a former official at the China Banking and Insurance Regulatory Commissions, banks are failing to make a profit having to price ‘small business loans at below the 8% average cost of funds’ for small business loans to keep them attractive. Additionally, according to the People’s Bank of China, by May 2019, the non-performing loan ratio for small business were up 4.5%, at 5.9%, compared to their larger counterparts. To make matters worse, many better-managed small companies are declining the offer of loans after seeing the lack of lucrative investment opportunities within the country.
On the other side of the world, the number of new small business has surged following Mr Macron’s rise to office, reaching almost 809,000 in 2019; up 45% compared with the year before the President took office in May 2017. The rapid growth has been attributed to the nation’s policies to slash red tape, reduce taxes and encourage innovation through state financial assistance and special visas for the technology sector to attract talent. Just as the government had hoped for, French start-ups raised a record €2.79bn, up 43 per cent on the previous year and higher than Germany.
Although the favourable tax treatment and appeal of being one’s own employer has led to a near-decade low in unemployment, at 8.6%, the rise of micro-entrepreneurs has sparked anxiety about the emergence of an economy with low-paid, unskilled work and fewer rights for the society at large. Although in the short-term, the benefits repeated from lower taxes are significant, in the long run, ‘micro-entrepreneurs pay fewer social contributions, and thus have less rights to unemployment and pension benefits, leaving the working population less prepared for retirement, says Eric Heyer from the French Economic Observatory at University Sciences Po.
Even though the policies in both countries pose difficulties and challenges, the rosier prospects for the French economy could see an increase in foreign investment and mergers and acquisitions, while foreign investment continues to die down in China, leaving the future of the country’s economy rather uncertain.
By Marcus Cheung