A study by the National University of Singapore (NUS) Business School has found that the introduction of the Home Office Scheme (HOS) in late 2001, a home-based entrepreneurship scheme by the Singapore government, has effectively promoted business creation activities, especially those businesses permitted to operate in residential properties.
Compared to other businesses that are not permitted under the HOS, the creation of new businesses under the HOS rose by 23 per cent after the implementation of the pro-entrepreneurship scheme.
According to the study, the effect was most pronounced among entrepreneurs living in Housing Development Board (HDB) flats. The HOS scheme reduces entry cost, which is a barrier to new business creation, and promotes entrepreneurship at home. HOS also affects the quality of newly created businesses under the scheme. The new businesses are larger and have longer survival rates; and new entrants are more likely to become serial entrepreneurs starting second and subsequent businesses.
The study was co-authored by Professor Sumit Agarwal, Low Tuck Kwong Distinguished Professor in Finance, and Associate Professor Sing Tien Foo, Dean’s Chair and Director of Institute of Real Estate and Urban Studies (IRES); together with Assistant Professor Song Chang Cheng from Singapore Management University and Assistant Professor Zhang Jian from the Hong Kong Baptist University.
The research team looked at firms before and after the new policy reforms were introduced. Data was obtained from the Accounting and Corporate Regulatory Authority on firms created between 1990 and 2015. They then merged the firm database with a unique database of individuals in Singapore who registered new firms.
Under the HOS, there are stipulated prohibited businesses, such as employment agencies, massage parlours, restaurants and retail shops that may cause disturbance to neighbours.
The prohibited businesses were used as a control group, while businesses allowed under the scheme made up the treatment group. Controlling for industry productivity and macroeconomic environment, the effects of HOS are examined based on the outcomes of new firm creation before and after the implementation of the new scheme.
Using housing type as a proxy for entrepreneurs facing financial constraint, the study found that businesses in the treatment group attracted more entrepreneurs living in HDB flats. This indicates that reducing entry cost to start a business is important to encourage firm creation.
The results showed that firms created under HOS have higher productivity, lower risk and a higher survival rate. Newly created firms after the HOS have lower exit rate of 29 per cent relative to other firms created before the HOS. The top five most popular HOS businesses are involved in the following activities:
Prof Agarwal said, “A key barrier to starting a business is cost, such as space rental and purchase of office equipment. Lowering such fixed costs not only encourages those with limited resources to enter the market, it also enables businesses to operate in a leaner way and survive longer.”
“With lowered barriers, individuals can put concepts into practice with much lower risk than if they had to set up an actual office unit. A discreet home business emboldens entrepreneurs to dare to fail without obvious social consequences,” he added. Having the option of operating a home-based enterprise showed an increase of 23 per cent of first-time entrepreneurs establishing companies, relative to non-home-based businesses. These new entrants were also 2.3 per cent more likely to open a second and usually larger business, to become serial entrepreneurs.
“It is very encouraging that these firms are not only of good quality, but also display signs of sustainability,” said Assoc Prof Sing. “HOS provides an effective mechanism to help lower entry barriers and increase workplace flexibility if we want to entice an untapped workforce, opening up possibilities for those who would not have entered the market otherwise, to spur entrepreneurial activities and attract more entry into self-employment.”