Two friends and I started a business six months ago. Called Mandala, it's an economics advisory firm that uses data and econometrics to help solve the big challenges facing Australia. We have a growing team of more than a dozen people and a list of great clients.
I tell you this for two reasons. First, it's a shameless plug for our new business (sorry!) But more importantly, creating Mandala revealed to us just how unnecessarily difficult it can be to start a business in Australia.
Turns out, this is a big problem. There is a growing body of evidence that Australia's declining rate of new businesses is driving many of our biggest problems.
These problems range from weak productivity growth and low wages to a lack of competition and declining opportunities for our young people.
Making it easier to start a business is about as close to an economic silver bullet as we'll get. And there are simple things we can do.
The first challenge we faced was finding a place to work. Even after we found a place, it took more than four months to get the lease signed and the fit-out completed.
The data predicted this. The World Bank's Doing Business indicators shows that Australia ranks behind New Zealand, Canada, Singapore and Hong Kong in the ease of starting a business.
We rank 11th in dealing with construction permits, 42nd in registering property and a shocking 62nd in getting electricity.
The second challenge we faced was doing business across state borders.
Because we have offices in Canberra, Sydney and Melbourne, we face three different sets of rules around payroll tax, workers compensation and a range of occupational licensing restrictions.
And it was easier for us to start Mandala than it is for others.
If your business involves food preparation, construction, dealing with vulnerable people or transport, you face a barrage of regulatory restrictions, which often vary from one state to the next meaning someone licenced in NSW can't necessarily work in Victoria.
These aren't one-offs. IBIS World analyses the regulatory restrictions faced by all industries in Australia. They reckon that 70 per cent of Australian industries face regulatory restrictions that are either "heavy" or "medium".
The third challenge we faced was getting work from one customer in particular: the government.
The majority of our work is with the private sector. But with government representing about a quarter of the economy, it's a hard customer to ignore.
Doing work with government is notoriously difficult. Getting on procurement panels takes years. It involves tonnes of paperwork and is very opaque.
Research by the e61 Institute shows the consequences of this. By matching government procurement data to firm-level data, e61 found that government contracts predominantly go to businesses that are big, old and that have received lots of government contracts in the past.
This is the opposite of what the government should be doing with its buying power given these businesses are the least productive.
The fourth barrier that new businesses face, especially in professional services, are restrictions on post-employment activities. These clauses are impenetrable, legalistic and are impossible to fully interpret without spending a lot of money getting legal advice or a lot time waiting.
Research from the United States shows that most people don't have the luxury of being able to work somewhere else for a short period. Most people give up and don't bother trying to start a new business at all.
The research showed that when California banned these clauses, the rate of new businesses increased sharply. It's the reason Silicon Valley is in California instead of Massachusetts.
It's no surprise that US President Joe Biden is seeking to ban non-compete clauses all over America. Sadly, such clauses remain alive and well in Australia.
With all these challenges, it's little wonder why the rate of new business creation has fallen in Australia. The e61 Institute shows why this is a big problem.
First, they show that younger firms are typically more innovative and productive than the old incumbents. Fewer young firms means lower productivity and less innovation.
Second, younger firms disproportionately higher younger workers. Fewer new firms means fewer opportunities for young people who are now increasingly unlikely to be in employment or education.
Third, new businesses are great for competition. Fewer new businesses means less pressure on firms to innovate and treat customers well.
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Finally, new businesses push up wages. They drive productivity and drive competition for workers. Little wonder why real wage growth has been stagnant or negative.
So, how do we create more businesses?
We need to reduce barriers faced by new firms. Non-compete clauses, planning and zoning laws and visa quotas are ripe areas for reassessment.
We should shift our tax breaks for small business supports towards new small businesses. It is young employers, not small employers, that most create jobs.
We should remove regulatory restrictions that shelter industries from competition. Pharmacies, airlines, banks, the medical profession and the legal profession should face competition like everyone else.
And government procurement should be part of the solution, not the problem. When all else is equal, the government should use its checkbook to support new businesses rather than cementing in the old-guard.
The godfather of behavioural economics, Richard Thaler, famously said that if you want to encourage someone to do something, make it easy. So if the government wants more start-ups in Australia, it should stop making it so difficult.
- Adam Triggs is a partner at Mandala. He is a non-resident fellow at the Brookings Institution and the ANU Crawford School.
Adam Triggs
Adam Triggs is a director within Accenture Strategy, a visiting fellow at the Crawford School at the Australian National University, a non-resident fellow at the Brookings Institution, and a fellow at Macquarie University's E61 institute. He writes fortnightly for ACM.
Adam Triggs is a director within Accenture Strategy, a visiting fellow at the Crawford School at the Australian National University, a non-resident fellow at the Brookings Institution, and a fellow at Macquarie University's E61 institute. He writes fortnightly for ACM.
