SpringerBriefs in Economics

SpringerBriefs in Economics

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Niklas Elert Magnus Henrekson Mikael Stenkula Institutional Reform for Innovation and Entrepreneurship An Agenda for Europe

Niklas Elert Research Institute of Industrial Economics Stockholm Sweden Mikael Stenkula Research Institute of Industrial Economics Stockholm Sweden Magnus Henrekson Research Institute of Industrial Economics Stockholm Sweden ISSN 2191-5504 ISSN 2191-5512 (electronic) SpringerBriefs in Economics ISBN 978-3-319-55091-6 ISBN 978-3-319-55092-3 (ebook) DOI 10.1007/978-3-319-55092-3 Library of Congress Control Number: 2017933437 The Editor(s) (if applicable) and The Author(s) 2017. This book is an open access publication Open Access This book is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made. The images or other third party material in this book are included in the book s Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the book s Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgements We thank Mark Sanders and Michael Fritsch for useful comments and suggestions, and Charlotta Olofsson for skillful research assistance. This study was written as part of the project Financial and Institutional Reforms for an Entrepreneurial Society (FIRES) that has received funding from the EU s Horizon 2020 research and innovation programme under grant agreement No. 649378. We also gratefully acknowledge financial support from the Jan Wallander and Tom Hedelius Foundation, from the Marianne and Marcus Wallenberg Foundation and from Stiftelsen Millenium. v

Contents 1 Introduction: Europe s Innovation Emergency... 1 References.... 6 2 Innovation, Entrepreneurship and the Complementary Skill Structure... 9 2.1 Entrepreneurship in Europe A First Glance... 10 2.2 The Entrepreneurial Ecosystem: The Requisite Complementary Skill Structure... 14 2.3 Diverse Capitalisms in the European Union... 18 References.... 20 3 Innovation and Entrepreneurship in the European Union A Reform Agenda... 25 3.1 The Rule of Law and Protection of Property Rights.... 26 3.1.1 Preamble... 26 3.1.2 Reform Agenda.... 27 3.2 Taxation... 29 3.2.1 Preamble... 29 3.2.2 Reform Agenda.... 32 3.3 Regulations Governing Savings, Capital and Finance... 38 3.3.1 Preamble... 38 3.3.2 Reform Agenda.... 40 3.4 The Organization of Labor Markets and Social Insurance Systems... 43 3.4.1 Preamble... 43 3.4.2 Reform Agenda.... 45 3.5 Regulation of Goods and Service Markets... 50 3.5.1 Preamble... 50 3.5.2 Reform Agenda.... 52 vii

viii Contents 3.6 Bankruptcy Law and Insolvency Regulation.... 55 3.6.1 Preamble... 55 3.6.2 Reform Agenda.... 56 3.7 R&D, Commercialization and Knowledge Spillovers... 58 3.7.1 Preamble... 58 3.7.2 Reform Agenda.... 59 3.8 Incentives for Human Capital Investment... 62 3.8.1 Preamble... 62 3.8.2 Reform Agenda.... 65 3.9 Informal Institutions... 71 3.9.1 Preamble... 71 3.9.2 Reform Agenda.... 72 3.10 Summary and Conclusions: Institutions Nurturing a More Entrepreneurial Europe.... 74 References.... 77 4 Summary and Conclusions... 87 References.... 91 Appendix... 93 References... 101

Executive Summary The European Union suffers from an innovation deficit, which must be remedied if the EU is to improve the quality of life of its citizens and remain competitive in the global marketplace. In order to do so, more productive entrepreneurship is required. We analyze how Europe s institutional framework conditions could become more supportive of entrepreneurship and innovation, and outline a reform strategy to achieve this objective. To be viable, the strategy emphasizes the large cross-country differences across the union. Each EU member state has evolved its particular bundle of institutions, many of which are complementary to one another. If these complexities are not acknowledged, well-intended reforms may become unpredictable or even detrimental to entrepreneurship and economic development. Chapter 2 provides a theoretical foundation to help identify the areas where the need for reform is the greatest. The theories of the experimentally organized economy and of entrepreneurial ecosystems are used to identify six competencies, in addition to that of the entrepreneur, that are necessary for ideas to be generated, identified, selected, and commercialized. The competencies are those of inventors, professional managers, competent employees, venture capitalists, actors in secondary markets, and demanding customers. Importantly, no one is in charge of the ecosystem s skill structure, which limits what can be achieved through top-down reform. We also draw on the varieties of capitalism literature, which identifies institutional complementarities as an important driver of the persistent institutional differences across polities. The existence of institutional complementarities implies that viable policy changes must be compatible with existing institutional patterns and that a specific change will have effects that extend throughout the institutional system. As such, they help explain both gridlocks and cascading changes. In Chap. 3, we discuss the institutions that the previous literature identifies as the most relevant for nurturing the activities of entrepreneurs and other actors in the ecosystem s skill structure. Overall, we discuss nine areas: (i) the rule of law and the protection of property rights; (ii) the tax system; (iii) regulations governing savings, capital and finance; (iv) the organization of labor markets and social insurance systems; (v) regulations governing goods and service markets; (vi) regulations governing bankruptcy and insolvency; (vii) R&D, commercialization and ix

x Executive Summary knowledge spillovers; (viii) human capital investments; and (ix) informal institutions. Although our starting point is that some institutions or institutional forms are simply the most propitious for entrepreneurship and economic growth, we complement this first-best perspective with insights offered by the perspectives discussed in Chap. 2, and clarify the extent to which policies and institutions interact with and reinforce one another. In the fourth and final chapter we summarize the study and present our main conclusions. To make the European Union more entrepreneurial to promote innovation and economic growth we propose a reform strategy with respect to the aforementioned nine areas, which we consider to be the most pertinent institutions and policies in order to foster a productive entrepreneurial economy. Overall, the proposed institutional changes move in a liberalizing direction, but we acknowledge that one-size-fits-all policy reforms aimed at freer markets will not necessarily be successful. Instead, a successful reform strategy must consider country differences that affect the viability of reform. Nevertheless, policymakers must not lose sight of the long-term goal of institutional liberalization to promote entrepreneurship, innovation, and growth. Hopefully, this work inspires both confidence and humility regarding Europe s innovation future.