SPEECH/02/49
Speech by Romano Prodi
President of the European Commission
« For a new European
entrepreneurship »
to the Instituto de Empresa
Madrid, 7 February 2002
I am truly honoured to be awarded the title of MBA Honoris Causa by Instituto de
Empresa. I am especially pleased because the Instituto plays such an important
role in promoting the entrepreneurial and venture management culture in Spain. I
fully appreciate that the school has been one of the European, and even world,
leaders in the field of entrepreneurship since the creation of the Department of
Entrepreneurial Studies nearly 20 years ago. This is reflected by the participation of
the Instituto de Empresa in the prestigious Global Entrepreneurship Monitor
program, which brings together the world’s best scholars in entrepreneurship to
study the complex relationship between entrepreneurship and economic growth.
As noted recently by Zoltan Acs and David Audretsch, two leading academics in the
field, who recently received the International Award for Entrepreneurship and Small
Business Research, the role of entrepreneurship has changed dramatically over the
past half century. During the post-WWII period, the role of entrepreneurship
seemed to be fading away. Today, what is going on in business points to a major
reversal: the rebirth of the entrepreneur. And I share the view expressed by many
observers that, the dotcom crash notwithstanding, there is every reason to believe
that this new age of enterprise will not fade away again in the near future.
In the 1960s and 1970s, it seemed for a while that industry would soon become
concentrated in the hands of a few giant companies. Many felt that global
economies scale would result inevitably in the disappearance of small and medium
enterprises, unless they were highly specialised.
While some expressed fear, many adopted a benign view concerning increased
industrial concentration. Not only was the large corporation thought to have superior
efficiency, but it was also regarded as the engine of technological change and
innovative activity. This view largely reflected the attitude expressed by Schumpeter
in 1942 in his classic Capitalism, Socialism and Democracy. There, Schumpeter
argued that: “What we have got to accept is that large-scale enterprise has come to
be the most powerful engine of progress.”
In Europe, many opinion leaders feared not so much the trend towards giant
corporations as the fact that Europe risked being left behind by the United States.
Spurred by writings such as Servan-Schreiber’s The American Challenge, European
industrial policy sought to create super-firms large enough to compete with those in
the United States.
The trend reversal and the unbundling of giant corporations started in the 1980s as
a result of international competition, technological change and government policy.
Once again, however, American corporations seemed to adapt faster than their
European counterparts to the new trend.
In an influential paper published in the mid-1980s, my old friend and fellow industrial
economist Alexis Jacquemin was an early critic of the industrial policy of the 1960s.
Together with Paul Geroski, he argued that the new super-firms did not give rise to
a new competitive efficiency in Europe. In fact, by creating a group of firms with
sufficient market power considerably sheltered from the forces of market selection,
“the policy may have left Europe with a population of sleepy industrial giants” ill
equipped to initiate and respond to economic changes.
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During the 1980s and 1990s, European policy largely succeeded in reinforcing the
competitive market process in which European firms operate. Thanks to the single
market programme and a vigorous anti-trust and merger policy, entry barriers in
Europe’s industrial markets have come down. In addition, the forces of globalisation
and technological change have also added great competitive pressure on European
corporations.
While competition on and among existing European firms has no doubt increased
as result of globalisation, technological change and European policies, Europe still
lags behind in the creation of new firms, namely entrepreneurship.
Our lacunae in the field of entrepreneurship need to be taken seriously because
there is mounting evidence that the key to economic growth and productivity
improvements lies in the entrepreneurial capacity of an economy. For instance,
recent research by David Audretsch and Roy Thurik for the OECD finds that
increases in entrepreneurial activity tend to result in higher subsequent growth rates
and a reduction of unemployment.
Entrepreneurship is a dynamic and complex phenomenon. The coexistence of
different approaches drawing on disciplines as diverse as economics, psychology,
sociology, anthropology or regional science bear witness of its richness and
intricacy.
The very nature of entrepreneurship makes it difficult to quantify. Some studies use
survey data to measure the proportion of individuals trying to start a new business
or having just started one. Others focus instead on the proportion of selfemployment in the active population, on the declared preference for selfemployment, or on the relative share of economic activity accounted for by small
firms.
Whatever the exact definition of entrepreneurship, a useful distinction to be made is
between actual entrepreneurship and latent entrepreneurship, which captures the
willingness to engage in entrepreneurial ventures under “the right” conditions.
According to the most extensive and recent international study, the actual level of
entrepreneurship in the European Union is about half that in the United States. The
2001 Global Entrepreneurship Monitor reports that only 7% of European adults
aged 18 to 64 were in the process of creating or growing new businesses, whereas
the prevalence rate was 12% in the United States.
A similar gap between the European Union and the United States prevails for latent
entrepreneurship. According to survey data collected on behalf of the European
Commission in September 2000, the share of those who, if they could choose,
would decide to be self-employed rather than employees was 50% in the EU, but
70% in the US.
There is little doubt that, on the whole, the European Union lags behind the United
States in entrepreneurship. At the same time, however, one must recognise that the
picture is far more complex than it appears at first glance. Two additional
dimensions must be introduced.
First of all, the European Union is obviously not an homogenous grouping. The
actual level of entrepreneurship varies a great deal across EU countries. According
to the 2001 Global Entrepreneurship Monitor, the percentage of adults who were in
the process of creating or growing new businesses, ranged from less than 5% in
Belgium to more than 10% in Ireland and Italy. Similar differences exist in
entrepreneurial spirits.
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Secondly, even within countries, the level of entrepreneurship varies a great deal
across regions. Take the region of Bologna in Italy, where I have lived and taught
industrial organisation for much of my life. As Michael Porter remarked more than a
decade ago in The Competitive Advantage of Nations, the province of Bologna is a
particularly successful example of several geographical clusters. For instance, the
vast majority of Italian producers of packaging machinery and food processing
machinery are located within the region. Many of the firms located in the so-called
“Packaging Valley” were started either by testers or by designers of packaging
machines. These individuals, typically, spun-off from a limited number of incubator
companies to exploit their technical expertise by starting their own businesses. Their
previous experience allowed these new entrepreneurs to operate in a complex
network of personal ties with other producers, potential clients and innovative
suppliers.
Fortunately, Europe has a long tradition of successful geographical clusters.
Throughout the Union, we have many regions of flourishing industrial
entrepreneurship based on concentrations of rival producers, experienced suppliers
and sophisticated customers. But we need more such clusters, especially in hightech sectors.
Silicon Valley is definitely the most successful cluster of high-technology enterprise
that the world has witnessed in recent decades. As many have pointed out, it was
the combination of local demand with superb engineering and managerial skills on
the part of the leading companies that gave Silicon Valley its head start. This, in
turn, underpinned US domination in most branches of what is now the information
technology industry.
Given the uniqueness of the technological opportunity and the advantages of
getting in first, it was never likely that the Silicon Valley experience would be
repeated elsewhere. Yet, there have been a number of success stories outside the
Valley and even outside the United States. One successful approach has been to
develop capabilities that are complementary rather than competitive with what
Silicon Valley does. Many Asian companies started out as low-cost assemblers of
US products but later developed expertise of their own in the design and
manufacture of products. A somewhat different pattern occurred in Ireland. There
many high-tech companies were founded by local entrepreneurs who had started as
employees in local US subsidiaries. Another, more difficult approach, has been to
develop segments of the IT market that were not already dominated by US
incumbents. This was the strategy followed successfully by Nokia in Finland and
Ericsson in Sweden. Their achievement in mobile telephones helped to create two
vibrant clusters, around Oulu in Finland and Stockholm in Sweden, which have
attracted a large number of start-ups as well as investment from foreign companies.
These examples demonstrate that European regions are capable of developing
new, high-tech clusters.
We see therefore that, in spite of our generally insufficient level of entrepreneurship,
the perspectives are not altogether gloomy in Europe. Indeed, the framework
conditions that influence entrepreneurship are certainly becoming more supportive
inside the Union.
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I would suggest to you, risking of course some generalisation, that there are two
sets of forces that affect the level of entrepreneurial activity in our societies. The
first, and most difficult to influence, concerns the broad socio-cultural environment,
the principles that we instil at home and in the schools to our children and students.
One of the principal obstacles to entrepreneurship in many of our countries
continues to be a high level of risk aversion and a preference for a stable income.
At the same time there is still relatively little acceptance of entrepreneurial success
and failure. Starting a new business after a previous failure is often regarded with
suspicion on our continent. As someone once remarked: “If you start a company in
London or Paris and go bust, you have just ruined your future; do it in Silicon Valey
and you have simply completed your entrepreneurial training.”
Changing the structure of values and motivations in our society is, of course, a longterm task. Part of the task falls on the educational system. All levels of education
should give more importance to entrepreneurial values such as creativity, risk taking
and personal responsibility. An interesting experiment is going on in the
Netherlands. In 2000, the Ministry of Economic Affairs and the Ministry of Education
launched a Commission on Entrepreneurship and Education. Its goal is to ensure
that education plays an active role in the promotion of the entrepreneurial spirit.
The second set of forces that affect the level of entrepreneurship in our societies is
of more immediate nature and, I believe, easier to respond to and to shape. It
concerns the set of rules that govern the framework conditions and the performance
of entrepreneurial activity. These rules can be imminently affected by the decisions
of policy makers. And this is the area where the European institutions have a crucial
role to play.
There is a general consensus among European policy makers that the creation and
growth of new enterprises is crucial for the necessary renewal of Europe’s
economic fabric.
The European Commission plays an important part in this process. By fostering the
break up of old national barriers and the establishment of new common rules, its
economic mission is to foster the construction of a vast and vibrant economic space
supportive of entrepreneurship.
Much has been achieved during the past 10 years.
In 1992, the dream of a single European market became reality. In most product
markets, fragmented national markets have been replaced by truly pan-European
markets. The single market is important not only because it provides greater
opportunity for scale economies, but also because it increases competition. At the
same time, thanks to the diversity of our cultures and tastes, the single market is
not about to become homogenous. This unified, yet diverse, European market
constitutes a tremendous opportunity for entrepreneurs. Competition and diversity
provide an impetus to and a source of innovation, while unity provides a favourable
outlet for new products.
During the past ten years, the Commission has strongly supported the view that an
active competition policy is a crucial complement to a well-functioning single market.
As you know, Europe’s competition policy is designed, first and foremost, to ensure
that the single market yields a maximum of benefits to European consumers. This is
why we have strong rules to protect the market forces against restriction and
distortion by the Members States – e.g. by state aids – and by the established
economic operators.
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But a vigorous competition policy also benefits small and medium-sized enterprises
which are Europe’s major source of innovation and job creation. Given their limited
market power, SMEs are much more likely to be the victims of anti-competitive
behaviour by governments or larger firms than actively engage in anti-competitive
actions themselves. Entrepreneurial SMEs have a particularly strong interest in a
vigorous competition policy. This is because new and growing firms seek to
implement business ideas that often conflict with the interests of powerful incumbent
firms.
Last month, another long-held dream also became reality. With the successful
introduction of notes and coins, the euro has really become “Our Money”. It has
firmly and enthusiastically taken its place as the daily currency in the life of more
than 300 million Europeans.
What a feat! All of us can be proud of this achievement that demonstrates the
capacity of Europe to embrace change.
The single currency has eliminated exchange rate uncertainty inside the euro area.
Remember the instability of exchange rates that took place in Europe in the early
1990s.
I remember painfully how Italy and Spain had to leave the Exchange Rate
Mechanism and were accused of engaging in competitive devaluation. I remember
what this meant for the Single Market and for investment in Europe. Thankfully,
such episodes belong to the past!
The euro has also delivered price stability, especially in countries like Italy and
Spain, which until recently had relatively high inflation rates. Thanks to the
consolidation of public finance accomplished during the run-up to the euro and to
the policy pursued by the European Central Bank, our two countries now enjoy
much lower inflation rates.
The euro is and will remain a stable currency. As the Commission demonstrated
last week, it is fully committed to playing its role in the implementation of the
Stability and Growth Pact, so as to ensure the soundness of public finances and
foster the stability of the euro. You can count on us!
The single market, a vigorous competition policy and the stability brought about by
the euro constitute three crucial assets for the development of entrepreneurship in
Europe. Yet, we have to face the fact that important barriers remain in the way of
our entrepreneurial companies. Allow me to single a few crucial issues.
First, there are still far too many barriers to entry for new firms, especially in the field
of services. This is particularly worrisome since services hold the key to job creation
in Europe. Here the comparison with the United States is particularly instructive. In
1975, the employment rate was about 64% in the European Union and 63% in the
United States. By the late 1990s, the US rate reached 74%, while the EU had
slipped to 61%. This differential is entirely explained by higher employment in the
US service sector.
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A recent study involving the World Bank and Rafael La Porta and Andrei Shleifer at
Harvard has looked at the government requirements that entrepreneurs must meet
before starting to operate a business. They found that in many EU countries, an
entrepreneur has to wait more than 50 days and pay more than $4,000 in order to
acquire all the necessary permits. In contrast, an entrepreneur in the United Sates
can finish the process in only 4 days and pay only $200! Fortunately, there are
some good practices inside the EU as well, in particular the UK, Denmark and
Sweden.
Second, the growth of entrepreneurial companies is hampered by the lack of a truly
integrated European capital market. In particular, Europe lags significantly behind
the US in the field of venture capital. In 2000 the share of venture capital in GDP
actually invested was almost 1% compared to only 0.2% in the EU. I need not
expand on the obvious great importance of this source of funds for supporting an
environment of promise for entrepreneurs and businesses. Let me just remind you
of two important experiences.
One concerns the remarkable US economic performance of the 1990s, which
rested on a dynamic interaction between innovation, technology and risk capital.
None of these conditions alone could have been sufficient to strengthen and
support economic growth but together they created the necessary circumstances
for growth.
A second example where the availability of venture capital has been crucial in
America’s leadership is biotechnology. Here, venture capital has provided finance
for academic entrepreneurs, with a significant number of PhDs ending up working
for venture capital firms. Fortunately, European venture capitalists have started to
support small biotechnology firms in recent years.
Another barrier to entrepreneurship that I want to mention is the problem of crossborder diffusion of innovation inside the EU. The Union is particularly strong in
academic and fundamental research, but European researchers and businesses do
not capitalise sufficiently on their expertise in frontier technologies. Part of the
problem lies with the lack of financial market integration and of venture capital. But
the absence of a Community Patent is also a drawback to the take up of innovations
from entrepreneurial companies.
Finally, let me say a word about corporate governance. As you know, one of the key
features of an harmonious company is an efficient and transparent set of rules
governing the behaviour of its managers and shareholders. Unlike the US, Europe
remain highly fragmented in terms of corporate governance. As Fabrizio Barca and
Marco Becht have shown in their recent volume on The Control of Corporate
Europe, the cultural and linguistic diversity of Europe is (almost) matched by its
variety of corporate control arrangements.
Entrepreneurship in Europe would benefit greatly if the rules of corporate
governance were efficient and transparent in all our countries. This does not mean
that the rules have to be the same everywhere. I don’t believe that our knowledge is
sufficient at this stage to decide whether a particular model is superior to another.
We must encourage, therefore, the comparison of the different models of corporate
governance, learn from one another and improve them all together.
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European leaders are well aware of all these important barriers that continue to
hamper the growth of entrepreneurial companies. Two years ago, at the Lisbon
European Council, Heads of State and Governments committed themselves to an
ambitious agenda of reform that includes the removal of those impediments. As you
know, the aim of the Lisbon strategy is to transform Europe into the most dynamic,
knowledge-driven economy in the world by 2010.
The Lisbon target is very ambitious and much needs to be done urgently to secure
that this goal is achieved. The European Commission has set forth its views on the
progress made so far and on the priority for 2002 in a report adopted a few weeks
ago. The Report will be presented next month to the Spring European Council in
Barcelona.
In view of the current conditions, the Commission has identified three priority areas
where the European Council in Barcelona should give a decisive impulse to action.
 The further development of employment policies, with a particular focus on active
labour market reforms.
 Further reforms and investment in key network industries as well as the
acceleration of financial market integration through the institution of the right
regulatory framework.
 Increasing investment in knowledge and pursuing a more integrated approach to
research and innovation.
I strongly believe that this broad-based strategy holds the prospect for
strengthening Europe’s entrepreneurial ambitions and turn them into reality.
Therefore, I will call on Heads of State and Government to reach political agreement
in Barcelona in these areas. I will also call on them to instruct their ministers to
achieve key reforms that are already agreed in principle but still need to be turned
into legislation.
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