By Neil R. Brown Apr 06, 2017
Recently Neil Brown, Director in the KKR Global Institute, participated in a EuroGrowth Task Force convened by the Atlantic Council of the United States (ACUS) that examined policy strategies to encourage growth within the European Union. In the following interview, Neil discusses opportunities to foster entrepreneurship. The ACUS report, A Roadmap for Economic Growth in Europe, can be found here.
ACUS: As the Director of Policy and Research of the KKR Global Institute, you are constantly traveling to many different economies to evaluate market developments and growth prospects. Entrepreneurship and innovation are considered key to fostering sustainable economic growth in any country. From your experience identifying best practices in fast growing economies, what can Europe learn from these economies to boost entrepreneurship and innovation?
Neil: Keep in mind that innovation and entrepreneurship are not the same concepts. At its core, innovation is about technological or process improvements that, once adopted, will collectively make an economy more productive. Those ensuing productivity gains are essential in Europe to offset declining demographics. However, innovation alone will tend to displace jobs if those technologies and processes are not also used to create new businesses. That is why entrepreneurs are vital. Entrepreneurs identify opportunities in market failures or gaps and grow businesses around them, creating jobs in the process. The most dynamic economies in the world blend innovation and entrepreneurship.
There is no one-size-fits-all formula for success. Europe is a diverse place with countries at quite different stages of economic and institutional development, so it is natural that the EU and its member states look for diverse models for successful economic outcomes. Georgia, for example, set up “one stop shops” to ease regulatory burdens on businesses in areas such as customs clearances and new business licenses. I like that example because western European regulatory burden is well-known to be a special challenge for small business, and that creates a high barrier to entry for entrepreneurs. Start-ups have very limited manpower and money, so policy should encourage them to spend both of those vital resources on originating ideas and building businesses around those ideas, rather than managing regulatory bureaucracy.
No country has a monopoly on good ideas. The European Union should be open to ideas from developed and emerging economies alike, choosing models based on the particular challenge that needs to be solved. Many European states have many component pieces for entrepreneurial edge, but the whole is less than the sum of the parts. Innovation and entrepreneurship feed off a local ecosystem of market needs and strengths, from education to finance. Israel is a great example. The government invests heavily in Israelis’ technical education due to market isolation and for security reasons. That creates a cadre of highly-capable individuals in areas like IT, agriculture, and water and world-class universities. Government seeded both finance (VC) vehicles and companies directly to help jump-start the industry in the 1990s. Now, the ecosystem feeds on itself as young Israelis see entrepreneurship as a highly attractive area and there is a good availability of early stage private capital. The result is a country that punches well above its weight on the global economic stage in the tech start-up area.
ACUS: What lessons can Europe learn from the United States to reignite a culture of entrepreneurship in Europe and create a better environment for aspiring entrepreneurs?
Neil: I like that you said “reignite” because, historically, Europe has produced some of the most innovative industrial companies in the world. Europe today also has a lot of entrepreneurs in the form of small shop owners that provide important services to their communities. In that respect, Europe has largely done better than the United States in supporting a culture of small business. However, Europe has more recently under-performed in producing new fast-growing companies. In the United States, those companies frequently rely on an underlying innovative technology. Europe’s lag in that is not for lack of education, creative thinkers, or hard workers—just look at the impressive number of Europeans succeeding in Silicon Valley.
In the United States, the entrepreneurship culture embraces failure. Entrepreneurs anywhere love market failures. Finding a better way to do something, or even avoid doing that thing altogether, and then building a business around that idea it is the hallmark of an entrepreneur. More uniquely though, Americans look favorably upon professional failure in pursuit of new ventures. We encourage individuals that take a risk to try a new idea, fall short, and get up to try again. Professional failure is not something that is shameful or a demerit on one’s CV. Entrepreneurship is inherently risky, and the willingness to take on that risk is as much a social decision as it is an economic decision.
Culture is both the most critical component to encouraging entrepreneurship and the most elusive element for government to support. But, government can help both in soft ways, like publicly celebrating entrepreneurs and seeding business incubators associated with universities, and in more concrete ways like easing bankruptcy rules. I already mentioned the Israeli example. I also like an emerging example in Switzerland. Switzerland is already a rich country with even richer technical capacity, but it lags in reaching its potential for fast growing tech companies. Through an initiative called digital Switzerland, federal and canton governments, corporates, and universities are working together to establish Switzerland as a tech-hub in the heart of Europe. Coordinated initiatives target to areas like attracting more international capital, regulatory/tax incentives, hands-on help by corporates, and a better hand-off from universities into the private economy.
ACUS: The European Commission has introduced a “Entrepreneurship 2020 Action Plan.” In addition to creating a “culture of entrepreneurship,” what do you consider vital to foster entrepreneurship in Europe?
Neil: Of course, culture alone is not enough to get the step-change in entrepreneurial activity envisioned by the EU. Entrepreneurs need access to capital to scale their businesses beyond the venture stage. Conservative investors like pension funds typically see such investments as too risky. Investors with higher risk appetite, looking for higher yields, can be reluctant to invest behind scaling SMEs because they don’t see the market opportunity with sluggish European growth, creating a negative loop. Lack of growth capital pushes European start-ups to strive for revenue before scale, so we naturally see slower growing businesses in Europe. Incidentally, this is an area where Brexit gives me some concern because London is by far in the lead in Europe as the home to private growth capital.
The EU’s action plan has useful vision, and the fruition of that vision will depend on substantive actions taken in its pursuit. That requires improving current regulatory concerns—I mentioned bankruptcy and would also note the need for more flexible labor laws.
The EU also needs to look at what’s next though because innovation and entrepreneurship are always about change. I’d encourage them to think carefully about the relationship between the digital policy agenda and entrepreneurship. European nations successfully led industrialization and have built successful service sectors, but the current wave of change is around digitalization. IT has already transformed communications and finance, and now it is doing the same in manufacturing, services, and retail. That means that entrepreneurial small- and mid-sized companies will be even more important for job creation as automation displaces workers. But, it also creates an opportunity for new companies. Economy-wide digitalization will spur creation of a new generation of tech-enabled giants enabled by big data and processing power. Europe can’t afford to miss that tech wave.
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