Europe’s Entrepreneurial Challenge

Jonathan Ortmans, President, Public Forum Institute

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

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

The policy implications are clear. There are fewer entrepreneurs in EU countries than in the U.S. The idea of taking the risk of starting and growing a business is not deeply embedded into European culture or education. One often cited culture distinction about acceptance of failure still rings true.  Some of the advantages of the U.S. as an entrepreneurial economy come from the longstanding belief among Americans that failure is merely a part of learning how to be successful, and this belief is supported by policies and institutions that encourage entrepreneurs to try again. In contrast, in many parts of Europe, would-be entrepreneurs face a stigma for both failure and success. The 2007 Flash Eurobarometer Survey revealed that more people in the EU agree with the notion that entrepreneurs are more likely to be thinking about their own wallet (45% agreed with this statement in the EU, while only 24% did in the U.S.). Perhaps this also helps explain why only 45% of the Europeans would like to become their own 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 interesting campaign 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 to follow the entrepreneurial route compared to 30% for all EU citizens. I was told that while trying to change the mindsets of French men and women in their 50’s would be fruitless, one can see a new “post-Google generation” in France that is less suspicious of business and entrepreneurs. 

While I remain somewhat skeptical of the effectiveness of EU top down government programs designed to promote entrepreneurship, the rising number of universities in Europe that offer entrepreneurship courses and 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 culture of entrepreneurship in Dutch society through a new education curriculum that trains students in entrepreneurship. And today in Berlin, I was impressed by the speed at which the Technische Universität Berlin moves its graduating technology entrepreneurs to fail fast or succeed.

In the U.S., the results from entrepreneurial programs at universities have been positive, where 63% of the barometer survey respondents said that schools helped give them an entrepreneurial attitude and initiative. A more recent survey of U.S. students highlighted the impact of an entrepreneurial education on innovation: students who took an entrepreneurship class were more likely to have engaged in offering new products or services, obtaining patents or copyrights, and using production techniques that differ from those of the industry’s main competitor.

Yet, there is more that leaders can do in Europe and beyond. Entrepreneurship, particular high-growth entrepreneurship, requires an enabling environment, including access to start-up and growth financing, low rates of tax on capital gains, sensible regulation and intellectual property rules, and many times simply policies that do not stand in the way. This is a difficult task. Even in the U.S., where entrepreneurship is widely embraced and supported by institutions, entrepreneurs feel that their interests were not met by the economic recovery efforts. A recent Kauffman survey of entrepreneurs revealed that 53% of them believe the stimulus package has hurt entrepreneurial activity. The majority of entrepreneurs said that they want government to 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 to help entrepreneurs develop great ideas by providing them with training, funding, advice, and access to data. This effort will help entrepreneurs cut through the red tape of establishing a start-up, but long-term help lies in changing regulations, especially those that constrain growth entrepreneurs.

The Lisbon Agenda’s objective to support open coordination among economies trying to nurture innovative and entrepreneurial behavior is to be applauded, but there is also an urgent need for government to step back in some areas rather than step in on many issues.  In November 2008, the European Commission launched a Recovery Plan to restore confidence the European economy. I was glad to see that entrepreneurs were at least mentioned in the plan and that SMEs were a major target for “smart investment.” However, much of the success of these policies for recovery will depend on how they enable entrepreneurial growth. The key characteristic of an entrepreneurial economy is that it gives birth to new businesses, with some of these companies rapidly growing in scale.

Of course, we can’t really identify which companies are going to be high-growth, but we can make it easier for entrepreneurs to grow their businesses. The Doing Business report suggests some areas in which countries can make improvements that are likely to go a long way to encourage entrepreneurs.

At the end of the day, we will see entrepreneurship rise in importance in European cultures because new generations of Europeans are more global and more comfortable with doing well and doing good.  Let’s just hope that in their infinite wisdom, their well meaning governments do not find they have slowed growth rather than unleashed the flow of ideas from their most innovative citizens into the marketplace.

 

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Jonathan Ortmans is a senior fellow at the Kauffman Foundation where he focuses on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues.

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