Britain stands on the verge of an entrepreneurial revolution that could do wonders for our economy, but the current state of public policy is holding us back.

by Kitty Ussher, Managing Director at Tooley Street Research and , Chief Economist at the Social Market Foundation

This article first appeared on the Social Market Foundation’s blog. Reposted with permission.

Advances in technology, the professionalisation of the skills base, the economic shake-up that was precipitated by the recession, the desires of many to work in a way that suits them: all of these factors have caused the numbers of self-employed and owner-managers to soar in recent years. Government figures show most of the new companies created in the last decade are micro-businesses.

But this is only the tip of the entrepreneurial iceberg. Previous academic research suggests that people who create the innovative new companies that contribute most to economic growth tend to be higher-paid graduates who choose to leave employment to do so. Right now, there is a lot of interest amongst this group: new data released today by the Social Market Foundation think-tank shows around half of higher-paid graduate employees would like to start their own business.

The economic problem we face is that this cohort disproportionately feels that they aren’t in a position to do so. Despite being, on the surface of it, fairly financially secure, 62 per cent of higher earners say that their current financial situation is prohibitive to starting a business: the risk to household income and the fear of losing their place on the career ladder are the dominant barriers.

This is a missed opportunity. If these barriers were overcome, Britain could experience a supply-side revolution. There’s space to catch-up with other countries: rates of entrepreneurship of the kind that is driven by opportunity is 50 per cent higher in Sweden for example. And there’s a gender opportunity: if women in Britain pursued new business opportunities at the same rate as men, the amount of opportunity-driven entrepreneurial activity would also rise by 50 per cent.

So what can be done? We need a change in mindset amongst policy-makers. Building on the new vogue of behavioural and nudge economics, the focus should shift towards how to reduce the risk in the mind of the potential entrepreneur at the moment of decision.

We propose three specific changes to this end. The first is to abolish non-compete clauses in employee contracts (you can pay someone to go on gardening leave, but don’t prevent competition without pay). In the US, states that have done this have a far more dynamic private sector. The second is to champion the use of the new right to flexible working to start a business – and be vigilant for bias in the way such rights are granted. The third is to legislate for a time-limited “right to return” to a previous job for employees leaving to start a business – similar to the right to return to a job after parental leave. And, as a quid pro quo to employers we also propose the reinstatement of tax reliefs for corporate venturing, which of course they are free to use to invest in the talents of their own people.

Taken as a package, these measures would help unleash an army of potential entrepreneurs to shake things up, spur competition and so boost innovation, productivity and economic growth. The right to flexibility in employment would come to be seen as an economic opportunity not a burden. And most importantly Britain could seize its own economic opportunity at a critical time.