European Entrepreneurial Culture

Contents

I Defining entrepreneurship

II The role of entrepreneurship for the EU’s economic strategy
1. The Schumpeter Mark I regime (first decades of the 20th century)
2. The Schumpeter Mark II regime or the “Managed Economy” (from the 1940s to the 1970s)
3. The Entrepreneurial Economy (from the late 1970s onwards)

III Entrepreneurship policy

IV Determinants of entrepreneurship

V Fostering entrepreneurship in Europe

Conclusion

References

Table of Figures and Tables

Figure 1: Development in business ownership in four OECD countries, 1972-2004 (share of entrepreneurs in labour force)

Figure 2: Factors that influence the decision for or against an entrepreneurial career

Figure 3: Eclectic Framework of Entrepreneurship

Table 1: Factors influencing the demand of entrepreneurial activity

Table 2: Factors influencing the supply of entrepreneurial activity

Table 3: Factors influencing the availability of resources, skills and information for new entrepreneurial ventures

Table 4: Factors influencing the preferences, values and attitudes of individuals towards entrepreneurship

Table 5: Factors aimed at altering the risk-reward profile of potential entrepreneurs

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.

I Defining entrepreneurship

- been a shadowy and elusive figure in the history of economic theory. ‘^[1]

While it has been widely acknowledged that entrepreneurship is a vital force in the structure and functioning of organisations and economies, there is little consensus on the definition of entrepreneurial activity. The first reason for this complexity stems from the fact that entrepreneurship is a multifaceted economic and social phenomenon cutting across a broad range of disciplines such as psychology, management studies, economics and public policy. However, no single subject discipline has a monopoly of wisdom about what entrepreneurship is.^[2] Aldrich and Zimmer argue that traditional perspectives on entrepreneurship treat entrepreneurs either as ‘atomized decision-makers, operating as autonomous entities, or as prisoners of their cultural environment, predisposed to entrepreneurship’.^[3] The interdisciplinary nature of entrepreneurship research reflects a subject that crosses the boundaries of multiple units of observation and analysis such as individual, groups, enterprises, cultures, geographic locations and industries. While each particular discipline may be well suited to analyse any particular unit of observation, no discipline is equipped to analyse them all. Whereas psychology studies have focused on motives and character traits of (potential) entrepreneurs (personality theories), economic studies have focused on the impact of the economic climate, including scarcity and opportunity costs (economic, rational actor theories). Whereas sociological studies have focused on the collective background of entrepreneurship (margination theories), management theories have studied utilising resources and processes within the firm and cultural theories have focused on individualism and the economic independence of creative individuals.

The second complexity derives from the concept's linkage, on the one hand, with other concepts such as innovation, the knowledge economy, the digital society, and on the other hand with similar but nuanced notions - self-employment, new business formation and SMEs. Entrepreneurship is typically considered identical with business start-ups or the creation of new organisations despite the fact that these concepts are not synonymous. In terms of the structure and types of activities, there is a broad range of entrepreneurial ventures from one-person companies to co-operatives, from high-tech new start-ups to traditional workshops. Aldrich and Zimmer argue that entrepreneurs are driven by opportunity-seeking behaviour, not by a simple desire to invest resources. While managers are driven by a concern to invest resources, treating resources as an end by themselves, entrepreneurs see resources as a means to an end.^[4] Thus a distinction has to be made in terms of the roles and functions served by the entrepreneur. Does the entrepreneur create a radically new means-ends framework for recombining resources or seek opportunities which are not very innovative and replicate existing organisational forms? According to Carree et al. entrepreneurs are a small fraction of business owners. They differ from what Kirchhoff calls the ‘economic core’, namely managerial business owners.^[5] Managerial business owners are to be found in the large majority of small firms. They include many franchisees, shopkeepers and people in self-employed professional occupations.^[6] In contrast, from a Schumpeterian perspective, the entrepreneur pursues a radically innovative activity. ‘The function of entrepreneurs is to reform or revolutionise the patterns of production by exploiting an invention, or more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way.’^[7] Since entrepreneurship is a type of behaviour focusing on opportunities rather than resources, Schumpeter argues that new information is important in explaining the existence of entrepreneurial opportunities. He argues that changes in technology, political forces, regulation and macro-economic factors create new information that entrepreneurs can use to recombine resources in more valuable forms.^[8] Based on the Schumpeterian perspective, Shane defines entrepreneurship in more innovative terms: ‘Entrepreneurship is an activity that involves the discovery, evaluation and exploitation of opportunities to introduce new goods and services, ways of organising, markets, processes and raw materials through organising efforts that have previously not existed.’^[9] The final source of complexity occurs for policy makers in formulating policies targeted at SMEs. Entrepreneurship is now at the centre of many policy questions related to science and technology, sustainability, poverty, human capital, endogenous resources, and employment. The surge of political interest in entrepreneurship has been accompanied by growing academic research into its dynamics and processes. Policy-makers increasingly look at entrepreneurship not only as a vehicle for job and wealth creation, but also for bringing more goods for the society in terms of general prosperity such as the development of human capital and social inclusion. Nuanced aspects of entrepreneurship contribute to this complexity such as a focus on different societal groups – immigrants, women, academic entrepreneurs as well as social entrepreneurship, defined by the Global Entrepreneurship Monitor as: ‘individuals engaged in entrepreneurial activities with a social goal’^[10]. Additionally, there is an uneven distribution of small firm innovation between a few highly innovative and high-growth firms and the great majority of SMEs that innovate very little compared to their larger counterparts. According to the OECD, only 6.5% of new entrepreneurs are high-expectation entrepreneurs, who expected to create 20 or more jobs in five years’ time.^[11] Policies have to distinguish between these two groups of firms, reflecting the variety of SMEs.^[12] In EC parlance, SMEs refer to enterprises with fewer than 500 employees regardless of the type of enterprise. Thus an entire array of questions arise: Should policies target only high-growth SMEs or have a generic ‘one-size-fits-all’ policy framework? Is entrepreneurship a more distinct policy area from SMEs policy? What institutional arrangements are required?

II The role of entrepreneurship for the EU’s economic strategy

The European Commission has set out a vision for the European economy through two documents- Lisbon Strategy and Europe 2020 highlighting long-term challenges and policy responses.^[13] Globalisation and the (re)emergence of China and India as leading economic and political powers; the erosion of Europe’s traditional comparative advantage in human capital; the need to foster the development of the knowledge-based economy; aging population and its consequences for public finances; mass migration; energy security and climate change are identified as Europe’s long-term challenges which require structural policy responses. The overall vision behind the EU’s economic strategy stems from the belief that economic, social and environmental goals must go hand in hand in the 21st century. The European Commission’s discourse is based on interlinked concepts such as the knowledge economy, innovation, the ‘digital society’ and entrepreneurship. Europe 2020 strategy formulates three mutually reinforcing priorities:

- Smart growth: developing an economy based on knowledge and innovation
- Sustainable growth: promoting a more resource efficient, greener and more competitive economy
- Inclusive growth: fostering a high-employment economy delivering social and territorial cohesion^[14]

The creation of an European entrepreneurial economy is envisioned as a response to these economic imperatives. It is acknowledged that 99 per cent of the European enterprises are SMEs.^[15] The cell of the knowledge-economy and the driver of future economic growth are considered entrepreneurial ventures in high-growth sectors such as health and well-being, sustainable energy and eco-innovation, knowledge and education.^[16] This shift to the ‘entrepreneurial economy’ as defined by Thurik contrasts with traditional economic strategies in Europe.^[17] Historically, in France the model of dirigisme practically excluded the possibility of entrepreneurship. According to Greene et al., in the UK there was effectively no small enterprise policy for the period 1930s-1970s. ‘Instead, what can be broadly seen was a policy akin to that of the dirigiste Gaullism in France. This effectively emphasised support for corporate enterprises.’^[18] The present central role of entrepreneurship for economic strategy, as underlined by the European Commission, indicates that the significance of entrepreneurship in society has changed drastically over the last half century. During the post-World War II era, the importance of entrepreneurship both in Europe and the USA was in decline. Until the 1970s there was a downward trend of rates of business ownership.^[19] For example, small business in the UK was in decline with a fall of nearly 60 per cent from 136,000 in 1938 to 58,000 small enterprises in 1968.^[20] Large corporations were seen as the sole and most powerful engine of economic and technological progress. Exploitation of economies of scale and scope were considered to be the driving force of economic development and dictated increasing firm size over time.^[21] Thurik and Wennekers argue that the European perception towards small business can be classified into three periods^[22]:

1. The Schumpeter Mark I regime (first decades of the 20th century)

Schumpeter revealed his concept of entrepreneurship within the broader scope of a theory of economic development (Theorie der wirtschaftlichen Entwicklung). Schumpeter’s initial view was developed in the first decades of the 20th century emphasising the role of the entrepreneur as the persona causa of economic development. He looked upon economic development as a dynamic process and not as a mere adjunct of the central body of orthodox economic theory defined by the static, general equilibrium approach. Schumpeter’s theory maintained that the essential function of the entrepreneur is distinct from that of capitalist, landowner, labourer or inventor and entrepreneurs do not form a social class, in the technical sense, although they come to be esteemed for their ability in a capitalist society. For Schumpeter the dynamic entrepreneur is the person who makes new combinations in production and plays a major role in challenging incumbent firms by introducing new inventions rendering current technologies and products obsolete, thus replacing obsolete businesses with new ones in a process of industrial reorganisation or ‘creative destruction’.^[23] Thus small businesses were seen as both vehicles for entrepreneurship and a source of employment and income.

2. The Schumpeter Mark II regime or the “Managed Economy” (from the 1940s to the 1970s)

Schumpeter later revised his view as the power of large firms began to grow. In Capitalism, Socialism and Democracy, Schumpeter focuses on innovative activities by large and established firms. He describes how small businesses are outperformed by their larger counterparts:

Since capitalist enterprise, by its very achievements, tends to automatize progress, we conclude that it tends to make itself superfluous—to break to pieces under the pressure of its own success. The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and “expropriates” its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function.^[24]

Additionally, scholars such as Chandler and Galbraith were convinced that the future was in the hands of large corporations and small business would fade away as a victim of its own inefficiencies.^[25] Audretsch and Thurik argue that the countries of Western Europe and North America were converging towards economies ‘dominated by a handful of powerful enterprises, constrained only by the countervailing power of the state and workers. The 1950s and 1960s were an era of high and increasing concentration of economic activity.’^[26] From the 1940s to the 1970s systematic empirical evidence, gathered from both Europe and North America documented a sharp trend towards a decreased role of SMEs during the post-war period.^[27] This period correspond to what Thurik refers to as the ‘managed economy’, which is defined as: ’the political, social and economic response to an economy dictated by the forces of large-scale production, reflecting the predominance of the production factors of capital and (unskilled) labour as the source of competitive advantage.’^[28] Small firms and entrepreneurship were viewed as a luxury, needed by the West to ensure a decentralisation of decision-making, but obtained only at a cost of efficiency. According to Thurik and Wennekers: ‘Policy in the USA was divided between allowing for the demise of small business on economic grounds, on the one hand, and preserving at least some semblance of a small-enterprise sector for social and political reasons, on the other. Small business was essential to maintain democracy in the Jeffersonian tradition.’^[29] In Europe, industrial and technology policies have been framed by the perception that European enterprises was falling behind the American and Japanese multi-nationals. One early attempted solution was to create national champions. These firms, usually created by the government-sponsored merger of smaller firms, enjoyed a dominant position in the national market. Mcguire argues that the protection afforded to these firms gave the wrong incentives, and the policy produced inefficient, non-innovative firms that were to cope with the dynamism of Japanese or American competitors. For example, by the early 1980s, American computer producers held 80 per cent of the European market.^[30]

3. The Entrepreneurial Economy (from the late 1970s onwards)

The entrepreneurial economy is defined as ‘the political, social and economic response to an economy dictated not just by the dominance of the production factor of knowledge but also by entrepreneurship capital or the capacity to engage in and generate entrepreneurial activity’^[31]. Entrepreneurship capital, in terms of the capacity to harness new ideas by creating new enterprises, is seen also essential to economic output.^[32] Mounting empirical evidence documented the re-emergence of entrepreneurship after late 1970s.

[...]

^[1] Heberet and Link (1988),p.11

^[2] Carree et al. (1999), p.11

^[3] Shane (2003), p.5; Aldicht and Zimmer (1986) p. 4;Thurik and Wennekers (2004) p. 140

^[4] Aldrech and Zimmer (1986) p. 3

^[5] Kirchhoff (1996), p.636

^[6] Carree et al. (1999) , p.11

^[7] Schumpeter (1976), p. 13

^[8] Shane (2003), p. 20

^[9] Shane (2003),p. 4

^[10] Bosma and Bygrave (2009), p. 36

^[11] OECD (2010), p.24

^[12] OECD (2010), p.16

^[13] European Council (2000), European Commission (2010a)

^[14] European Commission (2010a), p.3

^[15] European Parliament (2009), p. 370

^[16] Grilo and Irigoyen (2006), p.311

^[17] Audretsch and Thurik (2004), p.3

^[18] Greene et al.( 2007), p.52

^[19] Ausretsch (2002), p. 18

^[20] Greene et al. (2007), p. 56

^[21] Audretsch and Thurik (2004), p.2

^[22] Thurik and Wennekers (2004), p. 2

^[23] Schumpeter, (1934), p.89

^[24] Schumpeter (1976), p.134

^[25] Chandler (1990); Galbraith (1956)

^[26] Audretsch and Thurik (2001), p. 268

^[27] OECD (2010), p.26

^[28] Audretsch and Thurik (2004), p. 2

^[29] Thurik and Wennekers (2004), p.2

^[30] McGuire (2006), p. 888

^[31] Audretsch and Thurik (2004), p.2

^[32] Audretsch and Keilbach (2004), p.949