Abstract
It is time that Europe took another look at entrepreneurs, as it did between the First Industrial Revolution and the Second World War, and enabled them to help solve our problems and to make our society better. When it comes to entrepreneurship, however, the problem with Europe is not only the lack of early-stage entrepreneurs, but also the lack of growth among start-up companies. In the quest for new ways to tackle the big issues, entrepreneurship-friendly policies are an almost-zero-cost path that may reinvigorate the stagnant economic system without increasing deficits. ThinkYoung highlights three main problems with tackling youth unemployment through higher rates of entrepreneurship: the lack of entrepreneurship education, the imperfect and incomplete single market, and the stigma of failure. We are in the midst of the Third Industrial Revolution: Europe can decide to embrace it, be open and focus on its competitive advantage in order to provide a future for its youth, or it can decide to do nothing and be left behind.
Introduction
Entrepreneurship and its unexplored potential became a trending topic at the European level as soon as it was established that the economic stagnation we are currently experiencing was not going to be short-lived. In fact, despite its long tradition of entrepreneurship, Europe is lacking in policies to unleash the potential of the many youngsters willing to transform their business ideas into reality. In this article, we review the main academic debates on the topic, dating back to the nineteenth century, and will show how necessary we think it is to restore a business-friendly environment to our continent. ThinkYoung, through its experience, has spotted three key points that need to be tackled urgently: the lack of entrepreneurial education, the imperfect European single market and the stigma of failure. Today knowledge and skills are more important than capital, and virtual connections, along with extended personal and professional networks, mean that everyone has the opportunity to be an entrepreneur, regardless of their socio-economic background.
A brief literature review
There is an enormous amount of literature on the relationship between culture (and cultural backgrounds) and entrepreneurship. The literature is so vast that scholars do not agree on whether or not a specific country or a specific culture can influence entrepreneurship (Gerschenkron 1962, 1966; Berghoff and Möller 1994; Collins 1990).
We tend to favour the thesis that gives culture a strong influence over the three phases of entrepreneurship: its beginnings, its development and its stabilisation. Among the authors who favour this theory is Marc Casson (1995), who suggests that different countries have different levels of trust within cultures, which affects the transaction costs. When discussing culture, the relationship between entrepreneurship and religion should not be forgotten (Weber et al. 2002). Tawney (1960) and Landes (1998) both clearly argue that Protestantism explains ‘the triumph of the West’ (Roberts 2001). Even if one minimises the effect of Calvinism on the development of the Western modern capitalist system (Cantoni 2009), this scholarly tradition demonstrates how relevant an entrepreneurship-friendly mentality is to developing a growing economy.
Giannetti and Simonov (from the Stockholm School of Economics) explore the business environments and cultural values that contribute to predicting the differences in entrepreneurial activity across Sweden. ‘Individual characteristics and business environment are the most important factors in explaining entrepreneurial choice. However, we find that cultural values and, most likely, social norms, also matter. The data suggest that individuals are more likely to become entrepreneurs where there are more entrepreneurs, even if entrepreneurial income is lower’ (Giannetti and Simonov 2004, 269). The paper underlines how, within the same country, the rate of entrepreneurship varies between 3% and 28%, depending on the municipality (and local social norms).
In the study European Young Leaders by ThinkYoung (2010), young Europeans highlighted three main problems when starting or growing a business: the lack of entrepreneurship education in Europe, the still imperfect European market and the fear of failure. What is surprising is that money is not mentioned. Despite the fact that the study took place in the midst of the financial crisis, there was little to no reference among the young survey respondents to capital, the need for financing, the payment of taxes or the level of wages. As if to stress the results of the Giannetti and Simonov study, young people seem to want a specific social and cultural environment of role models, an open market, and the chance to try and fail, rather than money for start-ups, tax breaks and cash-related incentives. This trend is confirmed by the ThinkYoung (2012) study Youth Attitudes to the Job Market: The Skills Mismatch, in which young people, describing the ideal job, placed emphasis on challenging, learning and networking opportunities, rather than financial compensation.
Do entrepreneurs offer the greatest potential for Europe?
Starting with the vision of ‘one computer in every house’, continuing with the concept of the ‘knowledge economy’, and enhanced by the Internet, society has now arrived at a ‘sharing economy’. Thus, we can, without a doubt, say that we are in the midst of the Third Industrial Revolution. Those people, companies and countries that do not understand this will be left behind.
The First Industrial Revolution created a new figure in the world: the entrepreneur. It also radically changed the world, not only by introducing new jobs and new ways of working. While the beginning of the First Industrial Revolution dates to around 1760, the word ‘entrepreneur’ was coined in 1723 (entrepreneurs are always ahead) by the Irish-French Richard Cantillon. He defined the entrepreneur as ‘the person who pays a certain price for a product to resell it at an uncertain price, thereby making decisions about obtaining and using the resources while consequently admitting the risk of enterprise’ (Brewer 1992).
This definition encompasses all the central characteristics that scholars have attempted to study for more than two centuries: the certainty of the costs; the uncertainty of the revenues; and the entrepreneur's negotiation skills, ability to use all available resources and inclination for risk-taking. For the past two hundred years, according to Leslie Hannah, historian at the London School of Economics, ‘entrepreneurship has been very much part of the European culture, until the two World Wars, when Europeans became more risk-averse’ (The Economist 2012): the legacy of war, and its destruction, has deeply influenced European attitudes to savings and venture capital. Coinciding with this distancing from entrepreneurial activity in Europe, the US emerged as the leading entrepreneurial, economic, scientific and, ultimately, political leader of the world.
It is time that Europe takes another look at entrepreneurs, as it did between the First Industrial Revolution and the Second World War, and enables them to help to solve our problems, to innovate and to make our society better off and more competitive on the global stage.
According to the Global Entrepreneurship Monitor, early-stage entrepreneurs make up about 2.3% of Italy's adult population, 4.2% of Germany's and 5.8% of France's. Thus European countries are behind America's 7.6%, let alone China's 14% and Brazil's 17% (The Economist 2012). The problem with Europe is not only the lack of early-stage entrepreneurs; it is also the lack of growth among these companies.
According to Thomas Philippon and Nicolas Véron (2008) of Bruegel, a Brussels-based think tank, more than 20 new public listed companies were formed in the most capitalised European countries between 1851 and 1875 and almost 40 between 1876 and 1900; this number fell dramatically to just 9 between 1951 and 1975, and only 3 between 1975 and 2007.
Politics alone cannot be blamed for these results, and nor can entrepreneurs, but it is likely that politics and business are closely linked in Europe in certain cases, and that in recent years this link has been too strong.
Since 2008, a Copernican shift has occurred in academia, politics and public opinion: the widely predominant Occidental masses’ trust in liberalist practices, built up during the last century and a half and made mainstream during the Thatcher-Reagan years, is now being harshly questioned. In the quest for new ways to tackle these issues, entrepreneurship-friendly policies are a quasi-zero-cost route that may reinvigorate the stagnant economic system without increasing deficits (Tirapani 2011).
The lack of early-stage entrepreneurs, lack of growth, lack of major listed companies and lack of confidence in liberalism are the main elements that have brought Europe into a stagnation that has created more unemployment, fewer tax revenues to be spent on healthcare and pensions (an urgent concern given the demographic of our society), and less political influence in the world.
The Third Industrial Revolution, which has reshaped Western economic systems around virtual pillars and the knowledge economy (see, for example, Harvey 1990), has changed one main factor for entrepreneurs: capital is no longer so important. This is due mainly to two reasons: first, investors are increasingly looking for opportunities on a global scale, making capital more accessible and easier to find. Second, and more important, the digital age has brought us a new kind of company, in which knowledge is more important than capital. Companies such as Google, Skype and Facebook needed little more than a desk and a computer to start up.
This also relates to the new kinds of workplaces that are required and offered on the market: co-working offices, incubators and accelerators have become the physical backbone of such virtual structures, being one of the few real-estate asset categories to grow during the economic downturn. Today's young entrepreneurs need places to share ideas with peers, develop their network and keep their costs down. A similar change has occurred in student housing, highlighting an increasing need for knowledge, interaction between those on different courses and the ultimate achievement of ‘life-long learning’.
Tackling youth entrepreneurship
Entrepreneurship education
The first point, the lack of entrepreneurship education, is a sign of what universities have become today: a closed environment, rather than the open organisation that a university should be. European entrepreneurs are famous for being frugal and not interested in media attention (think, for example, of Ingvar Kamprad of IKEA, Amancio Ortega of Inditex and the Ferrero family), and universities do everything in their power to keep entrepreneurs away from students. This results in a lack of role models and a lack of examples from whom young people can take inspiration. Some business schools have a clear policy of inviting consultants and bankers to meet with their students, resulting in most of their graduates becoming consultants and bankers.
On the relationship between the level of education and becoming an entrepreneur, the data are discordant. A paper by Johansson (2000) concludes that less-educated people are more likely to become entrepreneurs. In contrast, Wärneryd's research (Wärneryd et al. 1987) produces data that seem to favour the relationship: thus higher education equals more chances to become an entrepreneur.
That said, the data also show that ‘education on entrepreneurship’ (which is what young people were asked about in the 2010 ThinkYoung study) is a clear way to encourage young people to take this path. Studies by both the European Commission and JADE (the European Confederation of Junior Enterprises) have shown that people who attended some sort of formal or informal education of entrepreneurship are between six and nine times more likely to start their own company within four years from the end of their studies (European Commission, DG Enterprise and Industry 2012, 61). Moreover, an education system that rewards good results, rather than punishing mistakes (as is currently the case in most European countries) would give young pupils more real-life experience and less fear of making mistakes.
The European single market: imperfect and incomplete
The second problem has to do with the single market, which has been the basis of the EU since its early years, and has been a strong focus of its work in recent years. However, if there is real freedom of movement for capital and most goods, there are still considerable obstacles that prevent entrepreneurs from ‘going European’. First, language and cultural barriers act as a strong disincentive for nascent entrepreneurs; second, many Europeans are not aware of the actual opportunities provided by the single market, meaning that the legislation already in place is not effective as it is not well communicated; third, at many levels the single market for goods and services still faces dramatically different local legislation and taxation (Tirapani 2011). On top of this, these three barriers are easily overcome by big businesses and well-structured multinational companies, while nascent European entrepreneurs are fragmented in their small to medium-sized enterprises (SMEs), and are considerably affected by these impedimenta.
As the French serial entrepreneur Guillaume Decugis (2013) points out:
Succeeding in Germany, like Xing, means nothing to a Spanish user. Even today, I don't think many British know about [music portal] Deezer, and it took something like the iPhone for [music portal] Shazam to finally exist in France, even though it launched in the UK back in 2002. On the other hand, while [the portal] Scoop.it is based in San Francisco and we rarely fly out of it, we get millions of visits every month and more importantly tens of thousands of signups and paying customers from all over the 50 states–-most of which I have never visited. The US is just one big tech market when the EU isn't. And it's even worse. Because of the aura American technology has all over the world, succeeding in the US market has a halo effect over other markets: save for a few geeks and the exception of Spotify, nobody in the US is desperately craving for the hottest European startup to finally launch in the US. The opposite is true. If you can make it there, you'll make it anywhere.
The incompleteness of the single European market means that there is a lack of opportunities for growth for European start-ups.
A key issue in policymaking is the threshold that divides self-employed youngsters from entrepreneurs at large: while creating young entrepreneurs is the first step on the path to running bigger businesses in the Anglo-Saxon context, too often in Europe this upgrade is not present. Businesses that remain too small are highly dependent on their owner; employ very few, if any, people; rarely expand to other countries; and need to be based online to properly operate in the medium to long term with such a small staff.
It is at this point that most policies fail: short-term and short-sighted actions do not encourage micro-sized and small businesses to grow.
The stigma of failure and unexplored potential
The third, and less explored topic in Europe, is the stigma of failure. This is a key element that must be studied and overcome in order to boost entrepreneurship among the younger generation. This stigma can be broken down into sub-variables, some which are immaterial (stigma due to fear of being refused and judged by peers and relevant others), and some which are formal and specific (legislation, banking procedures for those who have already faced failure). The cultural element here is extremely important since it affects different countries very differently. For example, in Anglo-Saxon countries failure is strongly stigmatised as people are judged according to their life's achievements (Hofstede 2001), but society as a whole has been structured to overcome failure through legislation that makes it easy to get a second chance and through venture capitalists who are aware that an experience with failure is a strong asset for a successful serial entrepreneur. In contrast, the rest of Europe is much more fragmented in terms of its legislation, which makes comparisons more difficult.
Landier (2002) tries to explain the differences in innovation between the US and Europe by introducing a study on the stigma of failure. In countries where failure is linked to ‘bad luck’, entrepreneurs do not hesitate to foreclose low productivity projects and start new ones. In contrast, in countries where failure is associated with incompetency, not only are entrepreneurs risk-averse, but they also continue with a low productivity project instead of closing it down. Bankruptcy law is examined in a paper by Fan and White (2002) which found that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk-averse by providing partial wealth insurance. A very interesting point raised by the paper is that incentives for risk-taking matter more than access to start-up funds.
Ultimately the stigma of failure is embedded in continental Europe in multiple layers, namely restrictive legislation, difficult access to finance and social stigma for those whose businesses have failed.
Towards a better comprehension of youth needs
As the ThinkYoung study on the skills mismatch (ThinkYoung 2012) has unveiled, most youngsters do not actually perceive jobs in the same way as before: they are demonstrating an adaptability, creativity and willingness to find sense in their roles. Youngsters are taking into account, even before accepting a job, the long-term impact of the company they are working for, including the development of the society in which it is embedded. Not taking this factor into account will reduce the job satisfaction of young employees (and therefore the productivity of the company), and some may eventually resign. Such a trend should not be ignored: companies are already struggling to get the talent that is available. All these elements, along with the increasing habit of SMEs to employ young professionals as interns or consultants instead of hiring and embedding them in the organisation, underpin the need for entrepreneurship-oriented policies, which are able to crystallise this collaboration in a formalised legal way with a long-term plan for the future.
Young entrepreneurs are looking for exactly the same holistic fulfilment. Money is not their number one driver anymore, and they alone cannot improve the productivity of Europe at a globally competitive price and ensure that the continent reaches full employment and full job satisfaction without being forced to abandon our unique welfare system (by shrinking the public sphere significantly) or reshape our cultural transmission system (i.e. through increasingly privatised education). The current economic situation has shamelessly demonstrated this. Consequently, nascent companies can attract good candidates, give importance to the added value that their work has in society and in others’ lives, and provide them with long-term prospects and not merely an income.
As such, any policy that is to succeed needs to take into account the underlying motivators of young workers, the high level of mobility among the most skilled and their strong social conscience. These principles are embedded in the very nature of the EU, as Article 3 of the Treaty on European Union reminds us: The Union shall… work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.’
The European way: our culture versus Silicon Valley paranoia
A misleading approach that is relatively common in literature and media coverage is to consider European countries as monoliths, and to compare the US with the European nations. We should get rid of the very European idea that we will improve only by copying successful US models, especially that of trying to establish a ‘European Silicon Valley’. We think that this ‘Silicon Valley paranoia’ is what inhibits us from finding a European way for entrepreneurship that better fits our competitive advantages.
What are the characteristics of a community/city/region that make entrepreneurs flourish? What conditions are young people looking for when deciding to run their own company? In its years of research and meetings with experts, ThinkYoung has noticed that the cluster effect is extremely relevant when depicting patterns of youth entrepreneurship. The academic debate corroborates this thesis (see, for example, Sassen 2001). In addition to Europe's most famous start-up-friendly cities, such as London, Berlin and Amsterdam, several countries are experiencing a nascent entrepreneurial underground spirit, whose artistic spin-offs act as a virtuous circle, attracting more young potential. The cases of Nicosia, Patras, Bucharest and, above all, Budapest and Tallinn demonstrate that even countries whose economic systems are not genuinely Western and whose legislation makes nascent entrepreneurship very difficult can nonetheless give birth to very innovative projects.
Conclusion
Europe's competitive advantage lies in our cultural background, as is widely recognised by non-Europeans. It is no coincidence that the most successful European companies today have strong links to art, education, music, architecture and entertainment: all fields which require a strong cultural background. From fashion to food, from design to furniture and vehicles, the European champions are those that have strong cultural links.
The nine richest European entrepreneurs are Ingvar Kamprad (furniture, IKEA), Bernard Arnault (fashion, LVMH), Amancio Ortega (fashion, Inditex-Zara), Stefan Persson (fashion, H&M), Karl Albrecht (retail, ALDI), Liliane Bettencourt (cosmetics, L'Oreal), Michèle Ferrero (food, Ferrero), Dieter Schwarz (retail, Lidl) and Leonardo Del Vecchio (eyewear, Luxottica).
It would be easy to say that none of these companies represents the kind of start-up that only operates in the virtual world and is rapidly changing the world by creating new wealth and jobs. We disagree. A closer look at the most fascinating European start-ups consistently yields the same result: fashion, music and food–-industries with a strong ‘cultural’ backbone are those giving the best results. Some of the best examples of this are Yoox (fashion), Spotify (music), Shazam (music), JustEat (food) and Rovio (gaming, Angry Birds).
All in all, it is fortunate that today knowledge and skills are more important than capital and connections as this means that anyone can have the opportunity to be an entrepreneur, regardless of his or her social or economic background. Moreover, changing and revolutionary times offer the best possible training for would-be entrepreneurs.
Footnotes