The Coming Entrepreneurial Revolution

Coming Entrepreneurial RevolutionIn addition to its euro and refugee crises, Europe is facing an unappreciated entrepreneurship crisis. Unlike the other two, Europe’s entrepreneurship crisis is not a sudden acute one, and without a sober understanding, it can potentially become a self-reinforcing poverty trap. This is how Wim Naudé, Dean-Director of Maastricht School of Management, reasons in an IZA discussion paper(1) published last month.

In a moment in which it is all about positive thinking, one may argue that the paper is stubbornly pessimistic. In fact, every single paragraph is a shot against conventional “wisdom”. However, that’s precisely the reason why I think the paper is a must read. We’d rather get aware of our blind spots, don’t you think so? Here is my take—beware: not necessarily unbiased.

Europe is both in relative and absolute decline. Income and wealth gaps between Europe and many emerging and developing countries are shrinking. In many European countries we see abnormally high and rising unemployment rates; the reverse of hard-won gains made after the Second World War, for instance in access to health and education, and a loss of global political influence.

Big European businesses are by and large a legacy of Europe’s past. The vast majority of them were born around the turn of the 20th century. Many indulge in lobbying, attempting to “benefit from the gravy train in Brussels”. When they innovate it is increasingly to reduce dependency on labour. Some are leaving Europe or outsourcing their jobs, to take better advantage of emerging markets, and escape altogether from Brussels bureaucracy. Other are being swallowed up by more efficient competitors from outside (in 2015 the value of acquisitions of EU-based firms from outside the EU was the highest since 1970). And a number of large, centuries-old European business icons have fallen in recent years.

Against this backdrop, governments of European countries harbour high expectations that entrepreneurship will come to the rescue. There is no doubt that entrepreneurship can contribute to economic development in Europe, but history and statistics show that this cannot be simply taken from granted. It is not the first time that entrepreneurship is promoted as a last resort policy in Europe (see featured image), and we overestimate the power of entrepreneurs.

One first conundrum to notice is a growing literature which, contrary to many claims, documents a 30-year decline in business dynamism and entrepreneurship in the US. Since 2000, such decline would affect transformational entrepreneurial firms—those that introduce major innovations and make substantial contributions to growth.

In European countries there is no significant statistical relationship between economic growth and entrepreneurship. Naudé affirms that it seems more reasonable to conclude that economic growth drive entrepreneurship and small business start-up rather than vice versa; and sometimes, even a negative relationship between entrepreneurial activity and economic growth.

There is no evidence that entrepreneurship helped to reduce unemployment in the largest European economy. Small businesses are neither creating enough jobs nor raising labour productivity. Entrepreneurs create lower quality and less secure jobs. Nor are they more innovative—they do not spend more on R&D—. And immigrant-entrepreneurs are not productively assimilated.

Entrepreneurship might even be contributing to Europe’s economic woes, because an EU over-eager to raise the number of entrepreneurs may push too many people without entrepreneurial ability into the market causing negative spillover effects on entrepreneurs with good abilities to start and run a business.

There are two big warnings in Naudé’s account of Europe crises: about demography and regulatory capture:

Demographic change has always fundamentally shaped Europe. Europe’s working age population had stopped growing in 2014. Euro-area labour productivity growth between 2000 and 2012 was a mere 1 percent. The growth in self-employment amongst 50 to 65 years old is already significant in many European countries, particularly The Netherlands and the UK.

European entrepreneurs are increasingly older and the relative earnings of the self-employed to the wage-employed has been declining significantly (20 percent in the UK since 2006). Increasingly, as in many poorer regions of the world, survivalist entrepreneurship is becoming more prominent than transformative entrepreneurship.

Worse. Quoting Baumol, Naudé says (my emphasis):

At times the entrepreneur may even lead a parasitical existence that is actually damaging to the economy. How the entrepreneur acts at a given time and place depends heavily on the reward structure of the economy that happen to prevail.

In contemporary Europe the reward structure of society is increasingly making it difficult for small businesses to grow and innovate, and increasingly motivating a privileged economic and business elite resorting to engage in unproductive and even destructive actions, including patronage, corruption and rent-seeking. Policies all too often end up prolonging of the life of inefficient and low-productivity firms.

I cannot read all this without thinking about the corruption that seems so prevalent in my own country; and seeing all us in Europe getting older while falling down the rabbit hole created by a hallucinogenic reward structure.


(1) Naudé, Wim. ‘Is European Entrepreneurship in Crisis?’ IZA Discussion Papers. Institute for the Study of Labor (IZA), March 2016.

Featured Image: “The coming entrepreneurial revolution”, a survey in The Economist of December 25, 1976, Norman Macrae


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