why governments support business start-ups

1.3.1 Enterprise and Entrepreneurship

Characteristics of successful entrepreneurs (AO1)

• Risk‑taking – willing to invest time, money and effort without certainty of success.
• Creativity & innovation – generates new ideas, products or ways of doing business.
• Determination & perseverance – continues despite setbacks.
• Ability to organise resources – plans, coordinates and controls people, finance and materials.
• Self‑confidence – believes in the business idea and in personal capability.

Why governments support start‑ups (AO2)

Start‑ups are a major engine of economic development. By helping new firms launch, governments aim to achieve the following objectives:

• Economic growth – increase in national output and GDP.
• Job creation – reduce unemployment and raise household incomes.
• Innovation & competitiveness – new products, services and technologies keep the economy ahead of rivals.
• Regional development – stimulate activity in under‑developed areas and narrow regional disparities.
• Tax revenue – corporation tax, income tax (through employee wages) and other duties.
• Social stability – lower unemployment and more self‑employment can reduce crime and improve community well‑being.
• Alignment with stakeholder objectives – supports profit, growth and social‑enterprise goals of shareholders, employees, customers and the wider community.

Typical forms of government support (AO2)

Real‑world illustration

In 2022, Country X introduced a start‑up grant scheme worth £2 million. Registrations of new firms rose by 12 % that year, and the unemployment rate fell by 0.8 percentage points in regions where the grants were concentrated (Office of National Statistics, 2023).

Contents of a business plan (AO1)

A well‑structured plan helps entrepreneurs organise ideas, obtain finance and monitor progress. The syllabus requires eight sections:

1. Executive summary – brief overview of the idea, objectives and key success factors.
2. Mission & objectives – statement of purpose and measurable targets (e.g., profit, market share).
3. Market analysis – description of target market, customer needs, competition and market size.
4. Marketing mix (4 Ps) – product, price, place and promotion strategies.
5. Organisation & ownership – legal structure (sole trader, partnership, limited company), ownership distribution and management hierarchy.
6. Risk assessment – identification of key risks (financial, market, operational) and mitigation measures.
7. Financial forecasts – projected profit & loss account, cash‑flow statement and break‑even analysis for at least three years.
8. Appendices – supporting documents such as market research data, CVs of key staff, and any grant or loan applications.

Risk, ownership & limited liability (AO2)

• Risk – start‑ups face high uncertainty; government grants can reduce financial risk but not market risk.
• Ownership structures – most start‑ups begin as sole traders or partnerships, exposing owners to unlimited liability and sometimes limiting eligibility for certain schemes.
• Limited‑liability companies – incorporation creates a separate legal entity; owners’ personal assets are protected, making it easier to attract external finance and to qualify for R&D tax credits.

External influences on government support (AO2)

• Economic factors – recessions may trigger stimulus packages; high inflation can affect the real value of interest‑rate subsidies.
• Environmental concerns – “green” incentives (e.g., subsidies for renewable‑energy products) support climate‑change targets.
• Ethical issues – support for social enterprises encourages businesses that address poverty, health or education, aligning with wider stakeholder expectations.

Benefits to the government and the wider economy (AO2)

1. Higher tax receipts from profitable businesses and their employees.
2. Reduced expenditure on unemployment benefits and other social‑welfare payments.
3. Enhanced reputation as a business‑friendly nation, attracting foreign direct investment.
4. Stimulated innovation leading to higher productivity and long‑term economic resilience.
5. Balanced regional development, decreasing economic disparities within the country.

1.3.2 Methods & problems of measuring business size

Size can be measured in three main ways (AO1):

• Number of employees – easy to count but does not reflect productivity or turnover.
• Turnover (sales revenue) – indicates market activity but can be distorted by price changes or one‑off contracts.
• Capital employed / assets – shows the scale of investment but may vary widely between industries.

Problems (AO2):

• Different industries have different “normal” sizes, making cross‑sector comparison difficult.
• Figures can be affected by seasonal fluctuations or accounting choices.
• Size does not directly indicate profitability or efficiency.

1.3.3 Why some businesses grow and others remain small

Factors that promote growth (AO2)

• Access to finance (bank loans, venture capital, government grants).
• Effective management and planning.
• Innovation and adoption of new technology.
• Economies of scale – lower average costs as output rises.
• Favourable market conditions and demand growth.

Problems linked to business growth (AO2)

• Cash‑flow shortages when expansion outpaces income.
• Management overload – owners may lack skills to control a larger operation.
• Market saturation or increased competition.
• Difficulty in maintaining product/service quality.
• Regulatory and tax complexities that increase with size.

1.3.4 Why businesses fail

• Poor management – inadequate planning, weak leadership or lack of market knowledge.
• Insufficient finance – inability to raise capital or manage cash flow.
• Unrealistic market expectations – over‑estimating demand or under‑estimating competition.
• Operational problems – poor location, low productivity, supply‑chain disruptions.
• External shocks – economic recession, legal changes, natural disasters.

1.4 Types of business organisation

1.5 Business objectives & stakeholder objectives

Typical business objectives (AO1)

• Survival – stay in operation (especially in the first few years).
• Growth – increase market share, sales or assets.
• Profit maximisation – achieve the highest possible profit.
• Return on investment – provide a satisfactory rate of return to owners/shareholders.
• Market leadership – become the dominant player in a chosen market.
• Social‑enterprise goals – address environmental, community or ethical issues while remaining financially viable.

Stakeholder objectives (AO2)

• Owners/shareholders – profit, growth, return on investment.
• Employees – job security, fair wages, career development.
• Customers – quality, value for money, reliable service.
• Suppliers – steady orders, prompt payment.
• Community & government – employment, environmental protection, tax revenue.

Potential conflict example: Management may wish to cut costs to boost profit, while employees seek higher wages. Balancing these objectives is a key part of strategic decision‑making.

Key take‑aways (quick revision)

Suggested diagram (exam revision aid)

Flowchart (place after the “Key take‑aways” box):

Government support
      ↓
Start‑up formation
      ↓
Job creation & innovation
      ↓
Higher tax revenue & economic growth
      ↓
Social stability & regional development

Cross‑reference: See Section 2.1 – Motivation and Objectives of Entrepreneurs for how financial incentives influence entrepreneurial motivation.