Varieties of Capitalism and the Limits of Entrepreneurship Policy: Institutional Reform in Germany s Coordinated Market Economy

Transcription

1 J Ind Compet Trade (2010) 10: DOI /s x Varieties of Capitalism and the Limits of Entrepreneurship Policy: Institutional Reform in Germany s Coordinated Market Economy Alexander Ebner Received: 20 September 2009 / Revised: 9 May 2010 Accepted: 22 June 2010 / Published online: 24 July 2010 # Springer Science+Business Media, LLC 2010 Abstract Recent debates on the comparative institutional advantages of diverse national models of capitalist development tend to differentiate between liberal market economies like the United States dominated by market coordination and coordinated market economies like Germany that highlight nonmarket coordination schemes. Institutional advantages of the liberal type inform reform initiatives in coordinated market economies, involving the domain of entrepreneurship policy. These efforts in the liberal reshaping of coordinated varieties of capitalism by the use of entrepreneurship policy need to be critically assessed. The case of entrepreneurship policy in Germany provides related insights on the prospects of these efforts. It gives evidence for the suggestion that the systemic character and institutional embeddedness of entrepreneurial activity need to be adequately reflected in the design of entrepreneurship policy. Keywords Germany. varieties of capitalism. entrepreneurship policy. national innovation system. institutional reform. coordinated market economy JEL Classification B52. M13. P16. P17. P51 1 Introduction The notion of entrepreneurship policy has become a key motive in policy-related discourses on institutional reforms all over the OECD world. The underlying tendency of perceiving entrepreneurship as a key factor in the promotion of innovation, employment and economic growth is closely related with debates on the comparative institutional advantages of diverse national models of capitalist development. A most influential conceptualization in this regard is the Varieties of Capitalism approach, which differentiates liberal market A. Ebner (*) Professur für Sozialökonomik, Fachbereich Gesellschaftswissenschaften, Goethe-Universität Frankfurt, Frankfurt, Germany a.ebner@soz.uni-frankfurt.de

2 320 J Ind Compet Trade (2010) 10: economies like the United States dominated by market coordination and coordinated market economies like Germany, whose coordination mechanisms leave considerably more space for nonmarket schemes. Coordinated market economies are said to specialize in incremental innovations carried out by large enterprises. Liberal market economies are said to exhibit advantages in radical innovations, which is due to their flexible institutional setting that is conducive to entrepreneurial start-up activities. This competitive advantage of the liberal type informs market-oriented reforms in coordinated market economies. Entrepreneurship policy is usually addressed as a centrepiece of these efforts. Viewed in this setting, the case of Germany provides further insights on the prospects of these efforts. It gives evidence for the fact that the systemic character of entrepreneurial activity and its embedding institutional environment need to be adequately reflected in the design of entrepreneurship policy. Varieties of capitalism come together with varieties of entrepreneurship. Entrepreneurship policy thus needs to be sensitive to the specificities of historically rooted varieties of capitalism with their complex institutional set-up. The following presentation proceeds as follows. The first section sketches a conceptual framework for assessing the rationale of entrepreneurship policy. As the entrepreneurial operations within an economy are embedded in a distinct socio-economic order, so is the articulation of entrepreneurship shaped by institutional complementarities that specify the corresponding varieties of capitalism and their complementary sub-systems, involving the particular systems of innovation. The second section surveys the institutional determinants of Germany s social market economy, addressing key complementarities that are subject to ongoing efforts of institutional reform. This leads to an exploration of the ongoing hybridisation of the German variety of capitalism. The third section highlights the matter of entrepreneurship in the context of the German innovation system, which is viewed as a most relevant subsystem of the German variety of capitalism. Its institutional peculiarities are at the root of further concerns with the foreseeable prospects and limits of entrepreneurship policy in Germany. 2 Theorising on entrepreneurship and innovation: bringing capitalism back in Representing a most influential strand of theorising on entrepreneurship and innovation, Schumpeter s theory of economic development defines innovation as the internal force of discontinuous change, carried out by means of an entrepreneurial introduction of new combinations of productive factors. Crucially, according to Schumpeter, this developmental perspective needs to be specified in institutional terms. First, it applies to the development process of modern capitalism as an economic system, which goes through various historical phases that shape the expression of entrepreneurial activities. Accordingly, the diverse institutional expressions of entrepreneurship in the private sector are a historically-specific feature of modern capitalism. Second, entrepreneurship is also subject to various national influences that reflect a specific institutional environment, involving wide-ranging aspects such as industrial specialisation, social structure, legal order and cultural norms (Schumpeter 1939). In reiterating this Schumpeterian position from an institutionalist perspective, it may be argued that entrepreneurship is embedded in distinct institutional frameworks and knowledge infrastructures, which reflect the opportunity space of a particular socio-economic order (Ebner 2010). The systems of innovation approach provides a most relevant framework for elaborating on this perspective. It examines collective entrepreneurship in the generation and assimilation of innovations within a given territorial setting. In addition to business firms

3 J Ind Compet Trade (2010) 10: as a principal terrain for innovation, further elements such as R&D and education are taken to the fore as components of institutional networks in the private and public sector that contribute to the introduction of new technologies. Industrial structures and the institutional set-up of an economy determine the shape and performance of innovation systems, which articulate a specific entrepreneurial potential (Freeman 2002; Lundvall et al. 2002). Government, law and culture delineate an institutional arena on the national level, which affects the intensity and direction of technological innovation (Lundvall 1992; Nelson and Rosenberg 1993). In globalization, however, national settings are confronted with a reconfiguration towards international openness and market dynamics, which invokes a hybridisation of innovation systems (Galli and Teubal 1997; Freeman and Soete 1997). The linkages among the co-evolving sub-systems of the national economy thus become key factors in the developmental process. Indeed, the innovative capacity of a national innovation system reflects specialization patterns and related competitive advantages that are based on variations in interlinked factor conditions such as skilled human resources, efficient R&D endowments and a financial system that supplies venture capital (Furman et al. 2002). In terms of the Porterian competitive advantage of nations, national economies will excel in those industries, which mirror competitive advantages that are rooted in historically evolving institutional capacities, as reflected by technological and organisational skills. For instance, financial systems based on capital markets stand out in promoting radical technological innovation by means of providing risk capital. Bank-based financial systems tend to support long-term investment in intangible assets such as workforce training (Porter 1990). A reconsideration of these characteristics allows for stylizing distinct types of national innovation systems. Patel and Pavitt distinguish myopic and dynamic innovation systems. The United States stand for a myopic innovation system with short-term market orientation. Investment in technology is said to be exclusively oriented towards existing demand, framed by an organisational setting that separates financial and technical competence. Historically, Germany has been standing for the less market-driven, rather long-range oriented type of the dynamic innovation system. Learning processes and other intangible assets are said to be considered as key arguments in investment decisions, which points to training and education programmes that sustain industrial learning (Patel and Pavitt 1994). However, such an exploration of comparative innovation patterns may benefit enormously from going back to Schumpeter s original concerns with the institutional specifics of the capitalist process. This requires a further broadening of the analytical perspective, which needs to account for both the national varieties and cross-national commonalities of the capitalist order. Such a perspective involves an exploration of the institutional tension, which might arise from the developmental dynamics of change and the maintenance of systemic coherence (Streeck 2009; Jackson and Deeg 2008; Hübner 2009). Bringing the political economy of capitalism back in to the theory of entrepreneurship and innovation is thus the primary task at hand with far reaching implications for the analysis of entrepreneurship policy. Indeed, current efforts in comparative institutional analysis highlight the diversity of national models of capitalist development and the institutional foundations of their innovation patterns. A most influential conceptualization in this regard is the Varieties of Capitalism approach, which aims at a firm-centred analysis of micro-behaviour in the exploration of national types of capitalist development approached in terms of the institutional foundations of competitive advantage, which are set to determine firm strategies. These include the systems of finance, corporate governance, industrial relations, education and training, and inter-firm relations. In this institutional context, firms face

4 322 J Ind Compet Trade (2010) 10: coordination problems in their relationships with other firms and agents that are reflected by the prevalent level of transaction costs (Hall and Soskice 2001). Two varieties of capitalism are differentiated ideal typically: & & Liberal market economies with a dominant pattern of market coordination through investment in transferable assets. Coordinated market economies with a dominant pattern of strategic coordination through investment in specific assets. These dichotomised ideal types are outlined in Table 1. Liberal economies such as the United States share the market-oriented characteristics of short-term orientated company finance, deregulated labour markets, general education, and strong inter-company competition. In coordinated economies such as Germany, the strategic behaviour of firms is coordinated to a much larger extent through nonmarket mechanisms, basically characterized by long-term company finance, cooperative industrial relations, high levels of firm-specific vocational training, and inter-firm cooperation in technology and standardization, framed by industry associations. Liberal market economies exhibit advantages in radical innovations, due to their flexible institutional setting that is more conducive to entrepreneurial start-ups with their need for venture capital. Coordinated market economies tend to specialize in incremental innovations within stable organizational settings, based on endowments with skilled manual workers, long-term capital investments, and cooperative labour relations. Crucially, these capitalist varieties specialise in industrial areas that complement their particular institutional advantages. As there is no single-best model achievable and as the gradual character of path dependent institutional change excludes options of isomorphic convergence, the diversity of capitalist models prevails. Still, the liberal model may prove to be supreme in times of rapid technological change (Hall and Soskice 2001: 38 41, Soskice 1994; Boyer 2003). In this view, the systemic dynamism of institutional stability and change is fuelled by the impact of complementarities among the major institutional subsystems of the capitalist varieties. This scenario implies that each set of institutions depends on others sets in order to function effectively. In the words of Hall and Soskice: It suggests that nations with a particular type of coordination in one sphere of the economy should tend to develop complementary practices in other spheres as well (Hall and Soskice 2001: 18). This phenomenon is caused by positive feedback effects: One set of institutions is said to be Table 1 Varieties of capitalism (Hall and Soskice 2001) Subsystems Liberal market economies Coordinated market economies Corporate governance Industrial relations Education and training Intercompany relations Short-term financial resources with publicly assessable market monitoring Market-oriented capital-labour relations with competitive wage setting Investment in general skills and human capital Competitive standardisation and market-based technology transfer Country example United States Germany Source: Adapted from Hall and Soskice (2001) Long-term financial resources with relational and reputational monitoring Cooperative capital-labour relations with bargained moderation in wage setting Sunk investment in firm- and industryspecific skills and human capital Commonly promoted standards and cooperative technology transfer

5 J Ind Compet Trade (2010) 10: complementary to another when its presence raises the returns available from the other (Hall and Gingrich 2009: 136). Put differently, the complementarity of institutions implies that the presence of one institution increases the efficiency of the other one (Amable 2003: 6). Accordingly, when institutions facilitate market coordination in one domain, these patterns of coordination will support similar forms of coordination in other domains as well. For instance, short-term finance requires low barriers to market entry and exit, thus it exhibits an institutional fit with flexible industrial relations systems. In formal terms, complementarities may be defined as constellations where the difference in utility between two alternative institutions, say U(x ) U(x ) increases for all actors in domain X, whenz rather than z prevails in domain Z, and vice versa. If the additional conditions of supermodularity exists, x and z (as well as x and z ) complementeach other and constitute alternative equilibrium combinations. This logic of complementarities implies a functional interdependence among institutions across different domains. Accordingly, suboptimal arrangements may persist beyond systemic optimality considerations (Aoki 2001). An important implication of this view on complementarities is that viable policy changes must be compatible with existing institutional patterns, that is, they must be incentive compatible with the coordination mechanisms of the prevailing political-economic system and its particular bent towards market- or non-market coordination. It follows that the dynamism of institutional change is predicted to be incremental, for it needs to contain a wider array of linkages among the institutional subsystems. Complementarities are thus viewed as key components in the evolution of capitalist varieties and this implies that they also shape the institutional architecture of national innovation systems, which may be viewed as subsystems of the capitalist varieties (Hübner 2009; Ebner 1999; Amable et al. 1997). Accordingly, institutional complementarities resemble historically variable constellations among sub-systems with varying degrees of coherence (Amable 2003; Mayntz 2006). Moreover, there is no functional determinism in the notion of complementarities due to the different rationales and actor constellations of the interacting subsystems, which promote the persistence of institutional diversity in capitalist development (Boyer 2005). The endemic uncertainty concerning the functional relationships among complementary institutional sub-systems resembles the dynamics of evolving complex systems, involving trial-and-error search for local fitness, path dependence and multiple equilibria beyond optimality considerations (Hölzl 2006). Thus, the economic performance of actually existing varieties of capitalism may be most adequately explored in the conceptual terms of evolutionary considerations (Hodgson 1996). Implications for a conceptual assessment of institutional change are straightforward: instead of radical alterations of the actually existing varieties of capitalism, a wide scope for institutional hybridization may take place, which changes the quality of complementarities by adding new institutional components (Jackson and Deeg 2006). On a conceptual level, speaking of hybridization implies dealing with deviations from empirically grounded ideal types and thus allows for an understanding of capitalist diversity in terms of institutional recombination and change (Crouch 2005). Institutional change in varieties of capitalism, however, is to be perceived as a subtle political process that is covered by the temporary stability of formal institutional regimes. At this point, state-market relations as well as the organisational pattern of interest groups have a major role to play (Hancké et al. 2007). This applies well to recent liberalization efforts in coordinated market economies, which may be approached as a general trend of disembedding market forces by legal-political means, yet on different national pathways and confronted by distinct social counter-movements, to put it in Polanyian terms (Streeck and Thelen 2005). The complex features of the underlying

6 324 J Ind Compet Trade (2010) 10: political process generate manifold unintended consequences through complex interactions. Thus, there is no unequivocal move to the market but rather an undetermined search process in the face of pressing socio-economic problems (Hall and Thelen 2009: ). The tendency of an institutional hybridisation based on liberalisation measures is well exemplified by recent debates on the rise of an entrepreneurial economy all over the OECD world, reiterating the discourse on the crisis of coordinated market economies in times of rapidly changing techno-economic paradigms. The corresponding call for institutional reform pinpoints the micro-foundations of innovation, in particular the role of new business ventures in structural change. As a matter of fact, major impulses for employment creation and income growth in the OECD world during the recent decade have been generated by start-up enterprises of diverse scale and scope, which are set apart from the operations of large corporations in global production and service networks. Some countries cope with these tendencies better than others, as exemplified by the advent of biotechnology as an industrial fields marked with outstanding start-up activities, which seem to be predominantly successful in the context of liberal market economies (Casper and Murray 2004). From a varieties of capitalism perspective one may expect liberal market economies to exhibit a major institutional advantage, whereas coordinated market economies would face reform challenges in line with their reliance on non-market coordination mechanisms. Obviously, the logic of the entrepreneurial economy, as outlined by Audretsch and others, comes to resemble the key characteristics of the liberal market economy in the varieties of capitalism perspective. Yet the explanatory range of the concept of the entrepreneurial economy is associated with the more general level of a productive paradigm. In this manner, the entrepreneurial economy with its start-up dynamics is set to replace the Post- War model of a managed economy with its large business organisations. Features of this allegedly emerging entrepreneurial economy are as follows (Audretsch 2007; Audretsch and Thurik 2000): & & & & & the defining logic of the market process, the commercial role of knowledge, the industrial dynamics of business start-ups, the developmental impact of radical innovation, the policy role of civil society. All of this is said to be well represented by the performance profile of the U.S. economy since the Reagan era of the 1980s. It provides a model of entrepreneurial dynamism that counters the bureaucratised setting of coordinated market economies with their prevalence of large and inflexible business organisations (Acs and Stough 2008). Yet something is to be added to this historical prototype, namely the matter of the knowledge-based economy, which provides the resources for entrepreneurial innovations. According to Audretsch s knowledge spillover theory of entrepreneurship, national differences in entrepreneurial performance reflect knowledge-related institutional contexts. Those which are rich in the generation and diffusion of new ideas will also generate more entrepreneurial opportunities, resulting in a higher level of start-up activity, given adequate endowments with venture capital and other market-related context factors that are especially relevant on the regional level of development (Audretsch 2007; Audretsch et al. 2006). In supporting this developmental tendency, a new policy approach is emerging which aims at the support of the creation and commercialization of knowledge by promoting new firms that combine technological novelty and organizational dynamism in the emerging knowledge-based economy (Hart 2003). Originally conceptualised and implemented in the

7 J Ind Compet Trade (2010) 10: United States, entrepreneurship policy encompasses multiple levels of activity in a multidimensional structure of systemic linkages, ranging from individuals to enterprise organisations, and to clusters or networks. Related policy instruments thus transcend the fields of industrial policy, as they address taxation, immigration, or education, as well as more interventionist instruments such as public resources for finance or training (Audretsch et al. 2007). The question is, however, what kind of entrepreneurship policy is desirable in the context of coordinated market economies. The caveat of institutional specificity with its insistence on the systemic limits of policy interventions applies also in this case. The requirement of incentive compatibility implies that merely transplanting a policy concept from a liberal market economy into a coordinated variety of capitalism will not work. Most prominently, prevailing complementarities will obstruct such a redesign of the economic system, leading to inefficiencies and other unintended consequences. This aspect is aggravated by the fact that the relevant institutional environment in explaining different patterns of entrepreneurship involves not only skills and motivations that stem from technological and legal infrastructures but also collectively shared cultural values which frame institutional complementarities on the level of ideologies and interpretations (Ebner 2009; Lundström and Stevenson 2005). Indeed, those social structures, which are a most indispensable element of innovation processes, need to be perceived as culturally entrenched in norms and values that shape the underlying entrepreneurial efforts (Lundvall 1992; Ebner 1999). Also, the emergence of political coalitions for institutional change mirrors both social interests and cultural norms, which contribute to the actual orientation of entrepreneurship policy and its fit with the socio-economic environment (Bruff 2008). The case of institutional hybridisation in the German political economy thus provides a most informative example for the ensuing prospects and limits of this novel kind of policy. 3 Institutional change in the German variety of capitalism: towards an entrepreneurial economy? The German economy has been Europe s export-oriented growth motor ever since the Post-War era, elevating its social market economy to the status of an international role model that combines competitive openness with an extensive welfare state. From a historical point of view, the roots of these developments may be traced in the catch-up growth of the German Empire in the last quarter of the nineteenth century, which was already based on major efforts in education, research and innovation. Indeed, both the modern research university and the science-based firm originated during the late 19th century in Germany. They formed the backbone of an industrial system that enabled Germany to overtake British technological leadership in key industries such as synthetic dyes quite rapidly (Murmann 2003; Keck 1993). After World War II, the Western German economic miracle of the 1950s made the Federal Republic an export-oriented economic power in the world economy, home-base of major multinational enterprises and homemarket of competitive industries such as electronics, pharmaceuticals and automotives. Framed by the Atlantic golden age of growth, this development trajectory depended also on a favourable international economic environment with expanding trade in the context of the Bretton Woods exchange-rate regime (Eichengreen 2007). The corresponding production model underlines the non-fordist specificity of German industry regarding small business networks, quality production and social corporatism. The concept of flexible specialisation, as put forward by Piore and Sabel, addresses a sectoral

8 326 J Ind Compet Trade (2010) 10: production model in industries like steel, chemicals, machine tools and automobiles. Its adaptive flexibility to rapid shifts in demand is based on a skilled workforce, cooperative industrial relations, and high levels of social compensation (Piore and Sable 1984; Lane 1988). In related terms, coping with the relationship between industrial relations and technological change in Germany, Sorge und Streeck have suggested the notion of diversified quality production as a representation of competitive advantages in the specialised production of high quality manufactured goods. Again, the adaptive flexibility of this production system and the integrative role of the workforce in industrial relations are decisive (Sorge and Streeck 1988; Streeck 1997). This production regime of the Germany variety of capitalism coincides with the integrative ideology of the social market economy. The underlying ordo-liberal credo of German economic policy associated the competitive order of the market system, which should promote entrepreneurial dynamics through competition-promoting policies, with institutional pillars such as religion-based community orientation that should confront the disruptive effects of socio-cultural rationalisation. This normative position would be executed by a strong state with a level of policy competence fit to reject the demands of special interest groups (Watrin 1998; Rieter and Schmolz 1993). The notion of the social market economy portrays the ordo-liberal model as an order of social reconciliation, settled in the historical context of Post-War Germany with its diverse political and ideological factions. An enlightened Catholic social philosophy with its principles of social balance and subsidiarity was to be combined with the Protestant ethos of entrepreneurship and communal cooperation, social democratic concerns for social security, and liberal principles of civic progress in liberty. This social market economy should facilitate a third way beyond liberal capitalism and state socialism (Ebner 2006; Manow 2001). Both the qualityorientation and flexibility of the German production model, which required the social integration of a well-trained workforce, were framed by the ideological setting of a neocorporatist consensus democracy that would provide the political backbone for the international competitiveness of German industries (Abelshauser 2004). Framed by these conditions, the key complementarities in the German coordinated market economy evolved on the basis of systemic linkages among the following subsystems between the 1950s and 1980s (Hall and Soskice 2001: 28): & & & & Corporate governance: permitting the flow of long-term financial resources with reputational monitoring as a non-market coordination mechanism in the financial sector. Industrial relations: permitting cooperative capital-labour relations with strategic bargaining and situational moderation in centralised wage setting as exercised by employer associations and labour unions. Education and training: permitting sunk investment in firm- and industry-specific types of skills and human capital, organised in an encompassing framework that involves selfgoverning business associations. Intercompany relations: permitting the non-market diffusion of common standards and practices that support a cooperative mode of inter-firm technology transfer. These complementarities have served as pillars of Germany s managed economy, as Audretsch and others would have it. The corresponding pattern of managerial organisation in large business firms and dense inter-form networks has been held together by centralised stakeholder supervision, often coordinated by major banks in a likewise centralised financial sector. The basic rationale of this system of non-market coordination involved comprehensive institutional constraints regarding entrepreneurial risk-taking in favour of

9 J Ind Compet Trade (2010) 10: more consensual patterns of activity both in the business domain as well as in politics (Kitschelt and Streeck 2004). Given the competitive advantages of its production regime, Germany moved rather unhampered through the international stagflation phase of the 1970s by flexibly adapting its production regime, especially the mechanisms of wage coordination. Even the liberalconservative power shift that came with the Kohl government in 1982 did not imply a political-economic break with non-market coordination (Hall 2007: 60 63). However, since the 1990s, unemployment, growth stagnation and the fiscal burdens of reunification have exercised further pressures for institutional reform, highlighting an institutional sclerosis of the German system that was aggravated by the adverse impact of international macroeconomic policy conditions, in particular by the Maastricht Treaty criteria (Vitols 2006). The actual situation is somewhat paradoxical. Germany is the production base for almost one quarter of the European GDP and one of the world s most decisive exportoriented economies with a competitive industrial base that produces almost one third of its GDP exclusively for an export volume, which amounts to 10% of world exports. Yet Germany is also ridden with persistent structural problems in the areas of unemployment and economic growth, reflecting aggregate demand problems that are feeding back on deficits in public budgets and welfare systems (Carlin and Soskice 2009). On the supplyside, then, a manifest lack in start-up activities completes the critical picture, which substantiates the thesis that the German production regime remains biased against entrepreneurial start-ups (Heinze 2004). Given these qualifications, the entrepreneurship gap of the German economy remains obvious: the percentage of owners and managers of business firms relative to the labour force moved from a mere 7% during the 1970s and 1980s to only 9% during the 1990s and 2000s. This minor increase in the rate of entrepreneurship separates the German development profile markedly from other OECD economies (Freytag and Thurik 2007). It is no surprise that the World Bank s global ranking of the institutional environment of entrepreneurship puts Germany only on rank 25, lagging behind major OECD members like United States, Great Britain,orJapan.WhileGermanscoresare above average in legal aspects such as contract enforcement, it underperforms most prominently regarding the ease of starting and closing a business firm (World Bank 2009). A survey of the German performance in the Global Entrepreneurship Monitor reveals a similar state of affairs. Germany takes an outstanding position in the infrastructure for public subsidies, yet it is only on a middle level in finance, regulation and taxation with even worse ranks regarding the entrepreneurial culture and preferences for business start-ups (Böth and Scott 2007). More specifically, as put forward in the Global Entrepreneurship Monitor, the German institutional environment for entrepreneurship contains strengths in physical infrastructure, policy support for business start-ups, and legal enforcement of property rights. Most pressing weaknesses include bureaucratic regulations for new business ventures and restricted market entry, lack of entrepreneurial business training in the education system, and the marginal role of entrepreneurship in the hegemonic set of social values. Measured in its total early-stage set of entrepreneurial activity, Germany takes one of the lowest ranks in start-up activity among the OECD countries. Also, German start-ups contain a relatively high degree of necessity-driven entrepreneurs, who are not after business opportunities but lack employment alternatives an aspect, which may contribute to a less viable market performance (Brixy et al. 2009). The matter of complementarities addresses these issues reasonably well, as empirical evidence suggests that actual entrepreneurship is decisively determined by institutional factors such as taxation and regulation (Audretsch et al. 2006;

10 328 J Ind Compet Trade (2010) 10: Audretsch and Thurik 2000). Besides, when it comes to the business failure rate, German scores are only on EU25 average, which underlines the lack of market viability (European Commission 2007b). In a global comparison, the liberal model of the United States does significantly better in terms of entrepreneurial activity than any European economy. By viewing the establishment of entrepreneurial start-ups as a distinct process, the Flash Eurobarometer data highlight European weaknesses in the planning phase of considering yet giving up an entrepreneurial venture (Grillo and Thurik 2008). Apart from the impact of institutional infrastructures on the realisation of entrepreneurial projects, further differences in social preferences for entrepreneurial business start-ups may be taken to the fore. Flash Eurobarometer data from 2007 indicate that the preference for employee status has remained unchanged in both the EU25 and EU15 since 2004 with 50% and 51%, respectively. In contrast to that, a remarkably high proportion of the U.S. sample prefers self-employment with a ratio of 61% that has not changed since 2004 (European Commission 2007a: 6). In the German case these differences are even more obvious. Being an employee in Germany is valued higher throughout the 2000s than being self-employed with shares of 54% to 41% in 2007 (European Commission 2007a: 7). Table 2 illustrates the German position in the social valuation of self-employment: the dominant preference for being an employee is above EU25 average, on par with France, and significantly higher than the UK, whereas the United States stand out with a dominant preference for self-employment. Similar patterns hold for the relative strength of the desire to become self-employed, as depicted in Table 3. Obviously, differences in production regimes and institutional frameworks feed back on social preferences for entrepreneurial self-employment. A further significant cross-national difference, which also points at complementarities between the education system and the preference for entrepreneurship is echoed by individual assessments of the role of school education in furthering entrepreneurial interests to start a new business. While Germany is way below the EU25 average, the United States show the most favourable position once again well before the UK, which is marked as the major liberal variety of capitalism in Europe (European Commission 2007a: 79-80). However, also certain commonalities of capitalism are in place. For example, the social status of entrepreneurs does not differ significantly between Europe and the United States. Also, individual motives to become an employee or self-employed as well as the raking of finance as primary hindrance of entrepreneurship highlight similarities (European Commission 2007a: 12, 38, 52). In this context of cross-national differences, the German policy discourse is preoccupied with an infusion of entrepreneurial elements into the economy, a program that is put forward under the label of flexibilization to safeguard international competitiveness, thus promoting institutional changes that are currently transforming Germany s social market Table 2 International comparison: choice of employment status (2007, %) Being an employee Being self-employed None of these Not available EU Germany France UK USA Source: European Commission (2007a: 9)

11 J Ind Compet Trade (2010) 10: Table 3 International comparison: desire to become self-employed (2007, %) Self-employment very/rather desirable Self-employment undesirable/ not desirable at all Not available EU Germany France UK USA Source: European Commission (2007a: 44) economy into an institutional hybrid whose actual shape is not yet clear. In this clash of cultures of production regimes, which confronts the German model with the hegemonic position of the liberal market economy of the United States, economic problems are usually attributed to sclerotic weaknesses of cooperative coordination (Abelshauser 2003). Indeed, for the major currents of the German reform discourse, the matter of entrepreneurship policy equals liberalisation efforts that aim at transplanting elements of liberal market economies into the setting of the German coordinated market economy. Yet the most pressing problem of unemployment may not necessarily be an indicator of an institutional failure of the German variety of capitalism, which would herald a complete overhaul of the involved subsystems. Instead, it may result from a distorted structuration of the workforce due to rapid industrial restructuring, as less-skilled Fordist workforce segments remain unemployable in a high-skill Post-Fordist production regime. The international competitiveness of the latter may speak for the persistence of institutional advantages in the German brand of non-market coordination (Abelshauser 2006). Accordingly, a key question is whether a specific brand of entrepreneurship policy that would be set apart from liberal connotations could combine the strengths of non-market coordination with efforts in promoting the innovation profile of the German economy while confronting its economic problems. Major segments of the reform discourse push for a strengthening of market coordination, which is said to be more conducive to the requirements of capital accumulation. The corresponding reconfiguration of the coordination environment of business firms pinpoints the key complementarities of the German variety of capitalism. This involves not only the drive for market-oriented corporate governance and the introduction of markets for corporate control, but also the reduction of private sector initiatives in firm-specific education and training, which is reflected by a crisis of the apprenticeship system. Reform efforts that aim at more flexibility in wage setting and labour regulations with an emphasis on the productivity of firms also highlight a wide-reaching reconfiguration of the German brand of corporatism. Both social partners are subject to decreasing organizational capacity, which does not only allow for an adaptation of firm-level wages to volatile local conditions, but also implies a fragmentation of interest groups in labour relations an aspect that may lead to an intensification of distributional conflicts, although the institutional arrangement of co-determination, which gives the unions a strong standing in the supervisory boards and worker s councils of large firms, remains firmly in place. Similar patterns of persistence and change in non-market coordination apply to the German financial system with its traditionally bank-based governance procedures in capital allocation. Although it has opened up for capital markets, it still differs markedly from British or US-American types of market-based financial systems, as reflected by the

12 330 J Ind Compet Trade (2010) 10: marginal role of German markets for corporate control. In consequence, the infamous Deutschland AG with its industry-finance linkages that are underpinned by a setting of intermediate institutions remains subject to path dependent alterations with uncertain outcomes (Streeck 2009). The matter of entrepreneurship plays a key role in the German reform discourse, and indeed entrepreneurship policy emerges as a terrain of ongoing controversies on the actual shape and impact of entrepreneurship in the reconstruction of the German variety of capitalism. The actual conditions of entrepreneurship are effectively approached in terms of the prevailing institutional infrastructure. The German trade regime, to begin with, is subject to the rules and regulations of the European Union ever since the Rome Treaties of 1957 installed a Customs Union in Western Europe. Yet the relatively high degree of openness for foreign trade and investment is paralleled by areas of explicit protectionism such as agriculture, accompanied by non-tariff protectionism in emerging or declining industries that are supported by subsidies and other instruments of industrial policy. Selective interventions may have an enabling impact on entrepreneurial start-ups, yet when it comes to rent-seeking their impact clearly results in a misallocation of resources. Moreover, the institutional specificities of the German economy just to mention the coordinating role of both banking sector and labour unions in non-market decision-making may have been responsible for a long-standing underperformance in capital inflows, which is usually interpreted as a key indicator of entrepreneurial opportunities in the trade and investment regime of open economies (Siebert 2005). Entrepreneurial opportunities are also subject to a distinct competition regime, which is shaped by supra-national regulations on the level of the European Union. German Post-War efforts in boosting a competitive regime that reflects market principles have persistently influenced the European policy agenda, resulting in the adoption of regulations for antitrust, mergers, and cartels that resemble concepts rooted in the German ordo-liberal tradition of competition policy (Streit 1998). A key player in Germany s competition regime is the Federal Cartel Office (Bundeskartellamt), which governs the regulations of competition policy in agreement with the European Commission. Next to the matter of business mergers and monopolistic market settings also the infrastructural conditions of competition are subject of its operations, underlining the conceptual primacy of the notion of the dominant position of a firm with all of its various forward and backward linkages in a market. The German Monopolies Commission (Monopolkommission), made up of selected representatives of academia and business, parallels these concerns with its reports and recommendations. Still, the practice of German competition policy is typically filled with exemptions from the rules. For instance, mergers that lead to market dominance may be legal when they are in line with R&D synergies. Also, the executive may provide a ministerial permit (Ministererlaubnis) in the case of mergers that have been rejected by the Monopolies Commission although they seem to benefit the economy at large. Obviously, this poses a major problem for entrepreneurial market entry, an aspect that is also prevalent on the European policy level (Motta 2004; Kühn 1997). Furthermore, when it comes to market entry for start-ups as a key issue of market competition, the public regulations of market entry as well as the system of taxation may be taken into account. For instance, the reported time for starting a business in Germany is unfavourably settled on EU average, whereas the liberal market economy of the UK fares much better (European Commission 2009a: 190). Thus, it has been argued that Germany s low rate of start-ups could be ascribed to constraining bureaucratic procedures, which also include the cost of establishing a new venture. Capital requirements for establishing a limited-liability company in Germany, for example, are among the highest within the

13 J Ind Compet Trade (2010) 10: European Union. The German tax system is also denounced as an impediment for entrepreneurship. A key criticism is related to the fact that it biased in favour of profits from debt-financed innovations, which aggravates risks of bankruptcy. The low capital endowments and turnover rates of small entrepreneurial businesses makes them most vulnerable to these regulations and ongoing efforts in reducing these tax-related burdens have not been all too successful so far (Harhoff 2008). Institutional reform with a drive for entrepreneurial activation is an outstanding characteristic of the German labour market and social policy regime. The relevance of this area is accentuated by the observation that one third of the German GDP is allocated to social policy issues, financing budgets for social transfers in areas like unemployment benefits, health care provision, and old-age pensions. The combination of labour market policy and social policy has been a fundamental concern since the 1990s, confronting fiscal pressures exercised by persistent unemployment and further aggravated by reunification and demographic change. Related liberalisation efforts since the 1990s may be evaluated as an objective attempt at loosening some non-market coordination mechanisms in order to make the basic system of strategic coordination more viable, as exemplified by the local differentiation of wage coordination and the activation approach in labour market policy. An outstanding component of institutional reform was the establishment of a secondary labour market, characterized by low-wage and part-time jobs that should raise employment in a manner that was more typical for liberal varieties of capitalism and thus deviated from the ideological norms of the social market economy (Hall 2007: 69 71). This orientation became a priority after the failure of neo-corporatist labour market initiatives in the shape of the doomed Bündnis für Arbeit, as the red-green Schröder government began implementing reform proposals of the Hartz Commission. Their key thrust, as bundled in the Agenda 2010 program, was a drive towards the entrepreneurial activation of long-term unemployed by means of material incentives that lower the reservation wage and facilitate an earlier re-entry on the labour market thus leading to a labour market dualism with far reaching social consequences (Czada 2005). The underlying activation approach may be viewed as a distinct version of entrepreneurship policy, which aims at a support of business start-ups. Its rationale hints at a move towards a liberal variety of capitalism, as the systems of unemployment benefits in liberal market economies are market-oriented in providing incentives for pushing transfer-dependent unemployed to become self-employed entrepreneurs who earn a marketgenerated income (Asheim 2009). A key feature of this policy thrust in Germany has been the Ich AG program, which subsidizes the entrepreneurial start-up efforts of unemployed beneficiaries. Obviously, in terms of a distinction between necessity-driven and opportunity-driven entrepreneurs, this program has primarily addressed the former. Its sheer size is remarkable: during the mid-2000s almost half of all start-up activities were subject to related subsidies. Yet its performance has been subject to criticism, given the fact that almost half of the subsidized new ventures have exited the market within 5 years (Block and Sandner 2009). This empirical fact indicates that labour-market incentives are insufficient as policy devices for promoting entrepreneurial initiatives. Accordingly, beyond the normative concerns of the liberalisation discourse that shapes Germen reform efforts, entrepreneurship policy needs to be based on solid conceptual foundations that entail a notion of entrepreneurship which is compatible with the institutional context of the prevailing variety of capitalism. Obviously, varieties of capitalism come together with varieties of entrepreneurship that are embedded in complementary institutional sub-systems. Indeed, when it comes to an assessment of the German situation, the need for reformulating the concept of entrepreneurship becomes

14 332 J Ind Compet Trade (2010) 10: obvious. It needs to go beyond the emphasis on business start-ups, in order to address the actual driving force of capitalist development, namely technological and organisational innovations that are commonly introduced by entrepreneurial start-ups in new industries (Baumol 2004). Widely used entrepreneurship indicators such as the percentage of owners and managers of business firms relative to the labour force tend to overemphasise the issue of self-employment while they neglect innovativeness and competitiveness as entrepreneurial features. For instance, non-liberal types of welfare states tend to develop culturally entrenched institutional incentives in taxation and regulation that may be incompatible with entrepreneurial start-up dynamics (Henrekson 2005). However, the conclusion that nonliberal welfare regimes and a vibrant innovation performance are incompatible is misleading. The issue is more complex: in fact, welfare state expenditures and R&D expenditures may be positively correlated while entrepreneurial activities in the market process cannot be determined by R&D expenditures alone, for they are subject to more comprehensive institutional influences (Heidenreich 2004). Approaching the prospects and limits entrepreneurship policy in Germany thus requires an account of the institutional architecture of the German innovation system conceptually perceived as a subsystem of the German variety of capitalism. 4 Entrepreneurship policy and the restructuring of the German innovation system The domain of industrial policy may be singled out as the closest predecessor of what has only very recently emerged as entrepreneurship policy given the fact that the German brand of SME policy (Mittelstandspolitik) is less concerned with innovative new businesses and more focussed on the general support of established SME for structural purposes. While traditional types of industrial policy have focused on large firms in both sunrise and sunset sectors of the German economy, the most pressing task of modern industrial policy is the promotion of entrepreneurial initiatives on all organizational levels of the economy, regardless of the scale and scope of the involved firms. Indeed, traditional industrial policy has neglected the networks of small and medium-sized enterprises that are a most relevant terrain of employment, training and income generation in Germany s production regime with its regional basis in South-West Germany (Sorge 2006). During the 1990s, the role of entrepreneurial business start-ups in promising new industries has been recognized as a policy issue, leading to initiatives such as the Bio-Regio contest that aimed at the formation of regional innovation networks in biotechnology. In this manner, the entrepreneurial reshaping of industrial policy coincides with a regional and sectoral differentiation of the German innovation system (Heidenreich 2005; Annesley 2004). This is in line with advances in industrial policy that address the regional knowledge base of innovation and industry evolution. Such a knowledge-based industrial policy explicitly highlights the nexus of entrepreneurship and innovation as driving forces of economic growth (Aiginger 2007; Dobrinsky 2009). Entrepreneurship policy in Germany has emerged as a differentiated means for confronting unemployment and growth stagnation in the context of this entrepreneurial and regional reorientation of industrial policy. It aims at the support of viable entrepreneurial start-up ventures and their innovation-oriented, knowledge-based networks, which are most prominently identified in regional constellations (Beckmann 2009). Thus, entrepreneurship policy may be evaluated as a response to the problems of structural change in former industrial core areas that have been suffering from economic decline in both West and East Germany. More specifically, entrepreneurship policy transcends