European Entrepreneurial Culture

Magisterarbeit von Veronika Minkova

Introduction:

From the 1940s to the 1980s large enterprises in Europe was clearly the dominant form of business organisation. Small businesses were believed to be less efficient than their larger counterparts and only marginally involved in innovative activities. This has gradually changed to the extent that, at present, national and supranational policy-makers have given strong priority to entrepreneurship and small and medium-sized enterprises (SMEs). Scholars argue that the outlook of the European economies has undergone a transformation from the managed to the entrepreneurial economy. This sharp change of direction has been primarily driven by a combination of factors including: the growing importance of the knowledge-economy in terms of occupational choices, factors of production and changing patterns of commercial activities; concerns for high unemployment rates, declining international competitiveness in comparison to the USA and Japan and rates of economic growth as well as an evidence of shifting patterns of consumer demand. Evidently, a new vision of the EU’s economic strategy has been conceived in terms of the belief that economic, social and environmental goals must go hand in hand in the 21st century. In the centre of this vision is the innovative entrepreneur who is believed to be a major ingredient for the revitalisation of European economies.

The subject of entrepreneurship has been the topic of scholarship and research in a variety of academic fields. The interdisciplinary nature of scholarship reflects the subject as entrepreneurship itself is a multifaceted social and economic phenomenon. However, since there is no explicit horizontal entrepreneurship policy domain at the European level, the topic has not caught sufficient attention from European Union public policy analysts.

The main purpose of the dissertation is to discuss how the EU accommodates the image of ‘entrepreneurial economy’ within its policy-making apparatus. A generalisation of ‘European’ entrepreneurial economy has been made which underlines the supranational level of analysis and gives more attention to what has been undertaken collectively rather than individually by Member States.

The dissertation begins in the following chapter by addressing the question of how entrepreneurship is understood and defined at the conceptual level. While it is clear that no specific definition of entrepreneurship exists, most studies conclude that it centres around the discovery of commercial opportunities by creative individuals. The second chapter tracks the growing importance of entrepreneurship in Europe. The perception towards entrepreneurship is examined historically in order to understand its significance for the EU’s future economic strategy. Three hypotheses which attempt to explain the re-emergence of entrepreneurship in the 1980s in the developed economies are presented. The third chapter provides an understanding of what entrepreneurship policy is and the potential rationale of policy-makers for market intervention. The fourth chapter focuses on the determinants of entrepreneurship. Examining factors shaping the extent of entrepreneurial activity is important because it provides insights as to how policy could be used to promote entrepreneurship. In particular, the determinants of entrepreneurship are considered at the level of the individual (micro), the industry (meso), and the country (macro). The final chapter seeks to answer the question: How entrepreneurship policy is designed at the EU-level? By drawing on The Eclectic Framework of Entrepreneurship designed by Audretsch et al. five types of entrepreneurship policies are tested in the European context.

Table of Contents:

Text Sample:

Chapter III, Entrepreneurship policy:

European policy-makers on regional, national and supra-national level are seeking to increase entrepreneurial vitality in recognition of growing evidence that a high turbulence rate in business demography (entry and exit rates of firms) contributes to economic growth and development. In entrepreneurial society, people with motivation and dynamism bring together resources and individuals to pursue their goals.

Public policy can be targeted at supporting entrepreneurship, yet the justification for such intervention varies. Is entrepreneurship policy an extension of enterprise policy or a more distinct policy domain? Degadt distinguishes between three government functions in enterprise policy: regulating agency, stimulating agency and potential customer. The public authority’s role in a competitive economy as a regulating agency is to set a legal framework and ensure compliance with market obligations, such as taxation, unfair competition, consumer protection and labour laws. The public authority acts as a stimulating agency in terms of maintaining a sufficient level of economic activity in its territory in order to ensure adequate supply of employment and economic growth. Finally, the public authority can act as a potential customer in terms of public procurement.

A number of other areas of economic and social policy impact on entrepreneurship, for example tax policy, science and technology policy, labour market policy, regulatory policy and regional development policy. Additionally, Khan distinguishes between SME policy and entrepreneurship policy, arguing that while SME policy is oriented towards the size of enterprises and focuses exclusively on the existing stock of enterprises, entrepreneurship policy is more encompassing and in that it includes potential entrepreneurs (latent entrepreneurship) as well as existing stock of SMEs (actual entrepreneurship). Entrepreneurship policy is defined by Lundström and Stevenson as that ‘with the primary objective of encouraging more people in the population to consider entrepreneurship as an option, move into the nascent stage of taking actions to start a business and proceed into the entry and early stages of the business’. A country’s entrepreneurship policy will depend on its views about the role of government in economic development: should the state be actively involved in the market or assume a laissez-faire approach. Just because entrepreneurship is believed to be positively linked to a country’s economic performance does not automatically justify public intervention. Why should governments do more than enhancing the general investment climate? The mandate of public policy intervention is legitimised by three causes of market failures – concentration of market power, information imperfections and externalities.

The first justification of government intervention is concentration of market power. For example, competition might fail because of barriers to entry that enable one firm to maintain a monopoly. Actions to reduce the power and the possibility of monopoly include regulation of business activities, promotion of competition, scrutiny of mergers, and prohibitions against collusive business activities such as price fixing. Regarding small and new enterprises, governments should take into account that low barriers to the entry and exit of businesses are necessary conditions for the entrepreneurial vitality.

With regard to information imperfections or asymmetry of information, an information asymmetry may occur between the entrepreneur and his constituents. A commonly given example is that prospective employees/contractors and investors alike are not going to be as fully informed about the situation as the entrepreneur is. Only he fully knows the market opportunity and has complete confidence in the ability to execute on it. Because of this differing level of information among each party, his constituents are going to perceive his venture to be riskier than it actually is.

The final reason for government intervention is externalities. An externality is defined as ‘the uncompensated impact of one person’s actions on the well-being of a bystander’, which can be either positive or negative. Audretsch identifies three types of externalities which might be overcome with public policy intervention, namely network externalities, knowledge externalities and learning externalities. Network externalities result from the geographical proximity of firms to complementary firms, often operating within a value-chain in a single industry. Local proximity is essential for knowledge spillovers and the value of an entrepreneurial firm is greater in the presence of other firms. Firms outside of clusters cannot benefit from the positive impact of network externalities and thus government intervention can overcome such market failure. The second type of externalities – knowledge externalities occur when positive economic value for third-party firms and individuals is created even if an entrepreneurial firm fails. Taking into account the high turbulence rate (creation and failure rates of new start-ups), especially in knowledge-based activities, ideas created by failed firms can be preserved only through an entrepreneurship policy. The third source externalities – learning externalities involves the learning or demonstration effect emanating from commercial activity. This is predominantly valuable in regions where entrepreneurial activity has been noticeably absent and no strong entrepreneurial traditions exist. The demonstration effect means that after the initial part of the population engages in entrepreneurship, others will observe this activity and will learn that entrepreneurship is a viable alternative to the status quo, which will result in encouragement of taking steps towards self-employment.

Thus the market failures inherent in new and small businesses result in a gap in the valuation of entrepreneurial activities between private parties and the public policy-makers. Entrepreneurial activity, combined with the propensity of knowledge to remain localised (network externalities), results in a new policy mandate for cities and regions. By filling these gaps left by market failure, public policy can create a virtuous entrepreneurial circle, where entrepreneurs become networked and linked to each other, and strong role models of entrepreneurship exist for others to emulate.