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Europe's Entrepreneurial Challenge

Posted by: Jonathan Ortmans on October 05, 2009 Source: Policy Dialogue on Entrepreneurship

The Doing Business 2010 reporthighlighted how the financial crisis has prompted governments to act inareas where regulatory reform may be more difficult and require moretime. The report states that in times of recession, “the more quicklythe assets of nonviable firms can be freed up, the easier it is toremobilize those assets.” While the U.S. remained ranked 4th in the2010 ease of doing business list compared to its 2009 rank, othercountries have implemented several reforms that improved their ranking.How has the EU fared?

I post today from Berlin wherefollowing the recent elections there is considerable governmentinterest in new start-ups. Germany may rank 25th in the ease of doingbusiness (I learned today in a meeting with their Ministry that it onlycosts one Euro to start a business), but in “ease of employingworkers,” the country ranks 158th out of 183 economies, which can onlyconstrain Germany’s entrepreneurial potential. And the problem is notunique within Europe as you may know.  In France, where we found theword entrepreneur, there are not only the same employment constraints(155th in the ease of employing workers), but also the challenge ofproperty registration where France ranks 159th, although ithas improved since last year when it ranked 170th. 

Thepolicy implications are clear. There are fewer entrepreneurs in EUcountries than in the U.S. The idea of taking the risk of starting andgrowing a business is not deeply embedded into European culture oreducation. One often cited culture distinction about acceptance of failure stillrings true.  Some of the advantages of the U.S. as an entrepreneurialeconomy come from the longstanding belief among Americans that failureis merely a part of learning how to be successful, and this belief issupported by policies and institutions that encourage entrepreneurs totry again. In contrast, in many parts of Europe, would-be entrepreneursface a stigma for both failure and success. The 2007 Flash Eurobarometer Survey revealedthat more people in the EU agree with the notion that entrepreneurs aremore likely to be thinking about their own wallet (45% agreed with thisstatement in the EU, while only 24% did in the U.S.). Perhaps this alsohelps explain why only 45% of the Europeans would like to become theirown boss whereas the entrepreneurial urge reaches 61% in the U.S.

But mindsets in Europe have begun to change.Last Friday, I met in Paris with participants of an interestingcampaign to change this. In 2007, over half of the EU's young people(15-24 years old) who are not self-employed said they are likely tofollow the entrepreneurial route compared to 30% for all EU citizens. Iwas told that while trying to change the mindsets of French men andwomen in their 50’s would be fruitless, one can see a new “post-Googlegeneration” in France that is less suspicious of business andentrepreneurs. 

While I remain somewhat skeptical of the effectiveness of EU top downgovernment programs designed to promote entrepreneurship, the risingnumber of universities in Europe that offer entrepreneurship coursesand programs is encouraging. European universities have acknowledged their role as both educators and engines of economic growth.For example, Erasmus University in Rotterdam is focusing on the cultureof entrepreneurship in Dutch society through a new education curriculumthat trains students in entrepreneurship. And today in Berlin, I wasimpressed by the speed at which the Technische Universität Berlin movesits graduating technology entrepreneurs to fail fast or succeed.

Inthe U.S., the results from entrepreneurial programs at universitieshave been positive, where 63% of the barometer survey respondents saidthat schools helped give them an entrepreneurial attitude andinitiative. A more recent survey of U.S. students highlightedthe impact of an entrepreneurial education on innovation: students whotook an entrepreneurship class were more likely to have engaged inoffering new products or services, obtaining patents or copyrights, andusing production techniques that differ from those of the industry’smain competitor.

Yet, there is more that leaders can do inEurope and beyond. Entrepreneurship, particular high-growthentrepreneurship, requires an enabling environment, including access tostart-up and growth financing, low rates of tax on capital gains,sensible regulation and intellectual property rules, and many timessimply policies that do not stand in the way. This is a difficult task.Even in the U.S., where entrepreneurship is widely embraced andsupported by institutions, entrepreneurs feel that their interests werenot met by the economic recovery efforts. A recent Kauffman survey of entrepreneurs revealedthat 53% of them believe the stimulus package has hurt entrepreneurialactivity. The majority of entrepreneurs said that they want governmentto do more to encourage entrepreneurship (58%). Last week, the U.S.government took a step in favor of entrepreneurs. The U.S. Commerce Department is establishing a new Office for Entrepreneurship and Innovation tohelp entrepreneurs develop great ideas by providing them with training,funding, advice, and access to data. This effort will helpentrepreneurs cut through the red tape of establishing a start-up, butlong-term help lies in changing regulations, especially those thatconstrain growth entrepreneurs.

The Lisbon Agenda’sobjective to support open coordination among economies trying tonurture innovative and entrepreneurial behavior is to be applauded, butthere is also an urgent need for government to step back in some areasrather than step in on many issues.  In November 2008, the EuropeanCommission launched a Recovery Plan torestore confidence the European economy. I was glad to see thatentrepreneurs were at least mentioned in the plan and that SMEs were amajor target for “smart investment.” However, much of the success ofthese policies for recovery will depend on how they enableentrepreneurial growth. The key characteristic of an entrepreneurialeconomy is that it gives birth to new businesses, with some of thesecompanies rapidly growing in scale.

Ofcourse, we can’t really identify which companies are going to behigh-growth, but we can make it easier for entrepreneurs to grow theirbusinesses. The Doing Business report suggests some areas in whichcountries can make improvements that are likely to go a long way toencourage entrepreneurs.

At the end of the day, wewill see entrepreneurship rise in importance in European culturesbecause new generations of Europeans are more global and morecomfortable with doing well and doing good.  Let’s just hope that intheir infinite wisdom, their well meaning governments do not find theyhave slowed growth rather than unleashed the flow of ideas from theirmost innovative citizens into the marketplace.

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JonathanOrtmans is a senior fellow at the Kauffman Foundation where he focuseson public policies to promote entrepreneurship in the U.S. and aroundthe world. In addition, he serves as president of the Public ForumInstitute, a non-partisan organization dedicated to fostering dialogueon important policy issues.

Category:  Global  Tags:  doing business, eu, commerce department, lisbon agenda

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