Economics 1 largely uses a framework for analysing the economy that does not take account of technological change. As a result, while it is very helpful for understanding and dealing with many problems, Economics 1 is not 100 per cent helpful in understanding South Australia’s present economic plight.

To understand why South Australia is struggling economically, one has to look at how economies – and the companies largely comprising them – evolve over time.

According to Professor Richard Kaplan of Yale University, the average life span of a company listed on the S&P 500 index of leading US companies has fallen over the last century from 67 years to 15 years. The average lifespan of today’s multinational is only 40-50 years. In 10 years’ time, more than three quarters of the US’s S&P 500 index will be companies that have not been heard of yet.

An essential fact about economies is that new innovations undermine old ones in a continuous evolutionary process. Hence, the birth rate of firms in an economy is a key indicator of how vibrant and successful that economy is likely to be: the higher the birth rate, the more dynamic, innovative and continuously successful the economy. The old firms are picked off by new firms growing within the economy, instead of new firms growing outside it.

As well as being the two economically slowest-growing Australian states, South Australia and Tasmania share the lowest birth rate of firms in Australia. In 2013-14, 11.4 per cent of South Australian firms were newly-born, compared with 13.7 per cent for Australia as a whole (and 14.6 per cent in the Northern Territory).

By the same token, 11.4 per cent of firms in South Australia died in 2013-14, for no net gain in the number of firms, whereas 12.4 per cent of firms died in Australia as a whole for a 1 per cent net gain. In 2010-11, 2011-12 and 2012-13, the number of business deaths in South Australia, although low by Australian standards, exceeded the number of firm births, so that the number of businesses in South Australia actually fell.

The Adelaide City Council has shown the way in Adelaide with its sanctioning of “pop-up” eateries around the city. Of course, established cafes and restaurants have objected to this increase in competition, and cited regulations that they had to meet that the “pop-ups” did not, showing the influence of regulations in stifling competition.

Corporatist political mindsets, like those that have been dominant in South Australian politics for a long time, always favour protecting existing firms against competition. These firms employ voters and have money. Start-ups that compete with and undermine existing firms are often seen as a menace to the established economic (and political) order. Too bad that in an open economy like ours, interstate or international start-ups will eventually come across the border and knock off our old firms, anyway, instead of our start-ups knocking off their old firms, both interstate and overseas.

On 21 May, the Productivity Commission issued its Draft Report in its Inquiry into Business Set-up, Transfer and Closure. The commission is looking into the nature and extent of barriers to entry by new firms. The barriers identified include the regulation of product and service markets, regulations affecting the ease of starting, operationalising or closing a business, and time spent on and cost of complying or dealing with government regulation, licensing and bureaucracy.

The commission considered that regulators needed to be able to respond flexibly to innovation-driven business models that are challenging regulatory requirements, for example by giving regulators the capacity to provide fixed term exemptions to specific regulatory requirements that deter business entry, but do not threaten consumer, public health and safety, or environmental outcomes.

Regulatory frameworks should also identify and focus on desired outcomes, not on imposing red tape. Prescriptive or inflexible regulatory requirements can shield existing businesses from competition, impose unnecessarily high costs on new business entrants and hinder innovation and economic growth. Government responses to innovation-driven (“disruptive”) new business models are critical to their success.

The Adelaide City Council has shown the way in Adelaide with its sanctioning of “pop-up” eateries around the city. Of course, established cafes and restaurants have objected to this increase in competition, and cited regulations that they had to meet that the “pop-ups” did not, showing the influence of regulations in stifling competition. Often, as the Productivity Commission has noted, regulations are supported by established businesses as a means of restricting competition.

A “pop up” bookshop in Rundle Mall.

A regulation that has this effect is the regulation that all commercial buildings must be wheelchair accessible. Many old buildings in the city stand empty because it is not worthwhile to bring them up to this standard. By the same token, many start-ups could not afford the rent if these buildings were upgraded. This situation serves no good purpose. The old buildings should be allowed to be rented to start-up businesses (less than three years old, say). Some thriving new businesses will evolve that will make the city centre more innovative and dynamic.

The Presiding Commissioner of the Productivity Commission Inquiry, Commissioner Warren Mundy, has also said to me that in his opinion (after looking at a lot of start-ups globally) start-ups tend to occur in clusters driven by local circumstances.

With a sufficiently outcomes-focussed (rather than red tape-focussed) regulatory regime, and the great ideas that abound in Adelaide, this city could well become a global start-up hub.

Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia.