Evaluating the Effect of Soft Business Support to Entrepreneurs in North Jutland

Gabriel Pons Rotger and Mette Gørtz

Context

North Jutland Entrepreneurial Network (NiN), an entity coordinated by ‘Væksthus’ North Jutland, Denmark, offers together with the local business offices counselling to about 1200 entrepreneurs and SME’s each year. NiN has an annual budget of about 5.4 million DKK (2009 prices), partly funded by the Regional Fund of the European Union.
This evaluation focuses on two of NiN’s core counselling ‘products’ which are basic counselling before start-up with private-sector advisors and extended start-up assistance after the business has begun.
AKF, Danish Institute of Governmental Research, was invited to undertake a statistical evaluation of the impact of these services to assess their effects – specifically on new ventures’ size, survival and growth. It was also invited to comment on possible improvements in the targeting of these programmes.
In this evaluation a distinction is made between businesses seeking assistance in 2002-2003 and those seeking assistance in 2004-2005 because the service and rules of eligibility changed during that time.

Key Results

The key results for the 2002-2003 cohorts were:

1. Basic counselling provided by private-sector advisors enhanced the two-year survival rate of new firms by 8%, the three-year survival rate by 6% and the four-year survival rate by 5%.
2. Basic counselling also enhanced subsequent job creation and sales. Concretely, three years after participation the programme had contributed to 165 new jobs and to an average increase in terms of sales of 127,000 DKK. The programme effects on job creation and firm turnover tend to wear off over time.
3. Basic counselling had no significant impact on the growth of the new ventures in either period.
4. Extended start-up assistance further enhanced the two-year and three-year survival rates by 7.6%, and the four-year survival rate by 6.4%.
5. Extended start-up assistance further contributed to job creation and sales of new ventures.
6. Unlike basic counselling, extended start-up assistance did enhance the growth rate of businesses. Concretely, start-up support led to a 3% higher frequency of new firms which grow (in terms of sales or employees) at least 20%.
7. Basic counselling enhanced the one-year survival rate of new firms by 3%. Two- and three-year survival rates cannot be calculated because the data are not yet available.
   
   

   The key results for the 2004-2005 cohorts were:

8. Basic counselling enhanced the one year employment size and sales turnover of new firms.
9. Extended start-up assistance enhanced one year survival rates by 12%.
10. Extended start-up assistance had no significant effect on employment size or sales turnover after one year.
    
    

    Taking both groups together we found:

11. Survival rates were higher than average for firms in the construction and hotel & restaurant sectors.
12. Survival rates were higher for businesses which had registered before obtaining counselling, and lower for those registering whilst taking the advice or after taking the counselling.
13. Survival rates were higher amongst those using their full allocation of business advice hours, and lower amongst those that ‘quit early’.
14. Survival rates were not particularly affected by the socioeconomic characteristics of the business owners such as their education, age, experience or gender.

Interpretation

The evaluation points to the business counselling provided by NiN having a positive impact on the performance of its clients. The statistical methods used to derive this result are leading edge and so provide policymakers with an improved basis for decision-making.
The analysis draws a clear distinction between businesses registered and assisted in 2002-2003 and those registered in 2004-2005. This is for two reasons which may be interconnected. The first is that a key rule changed in 2004 when participants were charged an ‘entrance fee’ of 500 DKK. The second is that we observe changes in the composition of participants. For example, we find that those seeking basic business counselling in 2004-2005 – after the entrance fee is charged – were less likely to have registered their business with the relevant authorities than those seeking these services in 2002-2003. At the same time we find the opposite pattern among those participating in the start-up assistance in 2004-2005, that is this group was more likely to have registered their business than those seeking this type of programme in 2002-2003. The implication of this relates to Finding 12 above – that survival rates are higher when the business has registered prior to seeking advice. The effect of the ‘rule change’ may therefore partly explain the lower one-year survival rate of the 2004-2005 cohorts seeking basic counselling and the higher impact on survival figures of the 2004-2005 cohorts assisted during the start-up phase. Our interpretation is that perhaps some entrepreneurs, if they know they have to pay 500 DKK, will delay the registration decision until they have received basic counselling. However, at the same time the ‘entrance fee’ might deter the unconvinced, meaning that only strongly committed business owners use the extended counselling, thus explaining the high survival rates of these businesses.
A second important difference between the 2002-2003 and 2004-2005 cohorts relates to the proportion of entrepreneurs who expect to start a new firm in the construction sector (18% during 2002-2003 and 26% during 2004-2005). For 2002-2003 we observe that 9% of the participants in both basic and extended counselling had previous experience in the construction sector. In 2004-2005, 10% of the participants in basic counselling had experience in construction, while 16% of the participants in extended counselling had similar experience. Thus, in 2004-2005 there was a growing interest for starting a new firm in construction, and this also attracted entrepreneurs with no previous job experience from the construction sector. However, changing sector may potentially be difficult. This seems to have a negative impact on entrepreneurs’ returns from participating in especially the early phase of the programme, i.e. basic counselling. On the other hand, for those entrepreneurs who proceed to extended start-up counselling, sector change does not seem to reduce their gains from participating in the programme. Overall, the average effect of extended start-up counselling is higher in 2004-2005 due to the higher proportion of firms in the construction sector which generally benefit mostly from NiN’s programme.
Finally, we find that having registered the firm before participation in basic counselling is a strong predictor of the programme effect. On average, firms that participated in NiN’s programme in 2002-2003 seemed to be better prepared for the programme in the sense that the time span between firm regi¬stration and programme participation was on average longer than what was the case for 2004-2005.

Implications for Policy

• Overall the counselling services – both basic and extended – appear to be effective in terms of enhancing the performance of new firms. The positive evaluation of NiN counselling effects might be used to consider possible extension of similar support programmes to other regions with similar workforce and business sector distribution.

• This research has pointed to groups or types of entrepreneurs or new firms that seem to benefit most strongly from the take up of counselling services. We note that those who take up their full allocation of hours, and those who have already registered their businesses prior to seeking counselling, do better. We therefore suggest that policymakers consider how to target such groups.

• Some entrepreneurs wish to start a new firm in a sector in which they have no or only little previous job experience. Basic counselling to those entrepreneurs should be improved with a better assessment of whether their skills acquired through previous job experience are sufficient to secure a satisfactory performance in the new sector.

• Finally, we note that during the period, firms in construction, tourism and restaurants had high survival rates, but we suspect these sectors have performed less well recently due to the particularly severe economic downturn. This points to the need to continually monitor the outcomes, and in particular to update the survival rates of the 2004-2005 cohort of firms that used the counselling services.

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