Contact: Clarkslegal (Reading, England)
Following the collapse of the global economy in 2007, entrepreneurship has become a go-to concept for the private and public sectors alike. With the American presidential election looming and the UK’s coalition government in survival mode, not to mention Europe’s increasingly precarious fiscal situation, entrepreneurship is increasingly being touted as a tool to alleviate economic woes.
Many an academic study has focussed on the role of opportunity-based entrepreneurship (as opposed to needs-based entrepreneurship) in promoting economic growth. The theory is that entrepreneurship has a positive effect on economies through increases in employment, investment and productivity. It is a theory that has been embraced wholeheartedly by governments around the world. Some examples of policies and initiatives include the Startup America, StartUp Britain, the JOBS Act in America, and entrepreneur visas in the UK, Canada, Australia, amongst others. Does this theory translate into practice in terms of expected outcomes?
A recent paper by the British Private Equity and Venture Capital Association (BVCA) succinctly outlines the available peer-reviewed evidence and concludes that entrepreneurship, including venture capital, is likely to yield gains in overall economic productivity rather than direct job creation or investment. So the evidence suggests that a boost in entrepreneurship is unlikely to yield what government policies aim to achieve: investment and jobs. However, an increase in productivity, and thus national income, is nothing to scoff at. Assuming, then, that this is what national startup policies are hoping to achieve, does Europe have what it takes to deliver?
Unfortunately, the answer to the question is no. In the UK, for example, despite encouragement from government to boost entrepreneurship through the likes of TechCity (London’s attempt at Silicon Valley), StartUp Britain and the entrepreneurship visa, there are fundamental cultural and framework factors which need to be resolved before the UK, and Europe, is able to truly create its own Silicon Valley. In fact, a recent article by The Economist argues that the European economic and growth crises are a direct function of Europe’s ‘failure to encourage ambitious entrepreneurs’. The article outlines a number of these cultural and framework factors relating to risk aversion, lack of capital sources and regulatory impediments, all of which are issues afflicting not only the UK but Europe generally:
- Ability to fail. European jurisdictions tend to make ‘failing fast’ impossible which thus inhibits those entrepreneurs from trying again. Being discharged from debts as a result of bankruptcy can take as long as 9 years in France, up to 6 years in Germany and more than 12 months in Britain. In comparison, the process can be significantly shorter than 12 months in America. This not only creates a culture of risk aversion but also encourages entrepreneurs to migrate to friendlier jurisdictions.
- Lack of European VC funding. There is intense competition for money. European VCs tend to act as mini private equity houses, rarely investing in businesses without proven technology and revenues, whereas the definition of ‘venture capital’ suggests otherwise.
- Labour and corporate law. Europeans make it extremely difficult to discharge employees. The ability to effectively manage costs in a small, growing business is of utmost importance to its survival. Without this ability, the probability of failure is that much greater. Additionally, there are unnecessary legal hurdles associated with providing shares to new employees as incentives.
Perhaps a more productive use of resources would be to concentrate on alleviating bottlenecks to innovation, possibly directly related to two of the three factors outlined above, excluding the dearth of VC funding if one believes the argument that with innovation comes funding.
There is a strong trend for governments globally to support innovation in large corporations through tax breaks and R&D incentives, again as a tool to combat recession. In fact, the recession itself is forcing these businesses to consider entrepreneurship in their own way. Corporate entrepreneurship, also known as ‘intrapreneurship’, is increasingly being encouraged in large businesses as a strategy for development of competitive advantage and promotion of innovation and growth. Some organisations have a long history of successfully harnessing intrapreneurship. Google, for example, encourages engineers to take advantage of its Innovation Time Off programme, where they are given 20% of their time to pursue approved intrapreneurial activites. This has led to development of highly successful services such as Gmail and Google News. 3M, the other commonly cited example, allows employees to use up to 15% of their time to pursue entrepreneurial endeavours, a policy that helped lead to the development of the ubiquitous sticky note. Sir Richard Branson openly advocates that encouraging intrapreneurship was and still is one of the keys to the success of his Virgin empire. The BVCA’s paper highlights studies which suggest that direct job creation (and elimination) occurs at equal rates both in large established businesses as well as start-ups. The ability to foster intrapreneurship not only yields the advantages of innovation, growth and competitive advantage but also simultaneously harnesses otherwise unused intangible tools such as employee creativity and ensures employee satisfaction by providing flexibility to pursue innovative solutions to problems which may otherwise never be solved or come to light.
As such, a two-pronged approach to encouraging both entrepreneurship and intrapreneurship could produce the desired effect with regards to reversing current European economic woes. However, whilst the recession in itself is acting as a driver to foster intrapreneurship, encouraging European entrepreneurship requires broader changes to cultural, legal and framework factors that are hindering innovation.
Zafar Kanani
