Institutional reform for innovation and entrepreneurship: An agenda for Europe

From left: Thomas Gür, Jeanette Andersson, Håkan Hillefors, Peter Voigt, Anna Maria Corazza Bildt and Magnus Henrekson. Photo by: Bosse Johansson.

“We have an innovation emergency in Europe”, said Magnus Henrekson, Professor IFN. Innovations are all to rarely developed into commercial products. Photo by: Bosse Johansson.

“Innovation requires entrepreneurship for job creation and economic growth” said Magnus Henrekson when presenting the study. He reminded of the fact that there are major differences between the member states – 28 kinds of capitalism. And so reform must be based on each country’s prerequisites.

“We must have a systemic perspective to create a feasible entrepreneurial ecosystem” said Henrekson who, together with his co-authors Niklas Elert and Mikael Stenkula, suggest reforms in nine areas:

1. The rule of law and protection of property rights.

2. Taxation. Tax rates should be low or moderate, policy makers should strive for simplicity rather than (targeted) exceptions and for a high degree of tax neutrality across owner categories, sources of finance, and different types of economic activities.

3. Savings, capital and finance. These institutions should support more private wealth formation.

4. Labor markets and social security. Social security institutions should enable the portability of tenure rights and pension plans, as well as a full decoupling of health insurance from the current employer.

5. Regulation of goods and service markets. Preventing market-leading incumbents from unduly exploiting their dominant market position as well as lowered entry barriers.

6. Bankruptcy law and insolvency regulation should therefore be relatively generous and allow for a “second chance

7. For R&D-spending to translate into economic growth, entrepreneurs must exploit the inventions by introducing new methods of production or new products in the marketplace. Hence, policy should strive to generally make it easier to start and grow businesses.

8. Policy should strive to create incentives that encourage the individual to acquire knowledge and skills. There must also be incentives to supply such opportunities by the education system itself.

9. Informal institutions affect the workings of formal institutions but may also be important for the fostering of entrepreneurship in its own right. The social legitimacy of entrepreneurs is particularly important in this respect.

Implementation is the large European problem, said Anna Maria Corazza Bildt, Member of European Parliament and entrepreneur. "We [politicians] don't foresee how reforms work in real life, for the entrepreneurs". Photo by: Bosse Johansson.

"We still don't have a single well-functioning market" said Corazza Bildt, adding that the solution to this problem is "single market completion". Politics must be about understanding that entrepreneurs are the drivers for growth and jobs, she said. Arguing that the red-green and the liberals [in European Parliament] disproportionately cherish data protection and forget about how this legislation will affect entrepreneurs.

In Sweden we are trying to put a lot of effort into the recently launched "five innovation partnership program". Trying to take a macro perspective on innovation, said Håkan Hillefors, Director and acting Head of the Division for Entrepreneurship Promotion and Simplification, Ministry of Enterprise and Innovation. Photo by: Bosse Johansson.

We want to make sure that it is easy to form, run and close down a business, explained Hillefors. "Because we need all those parts in an entrepreneurship promotional system".  When talking about the EU, Hillefors mentioned the single market completion as the most important task. He argued that the cross-border business in the Union is where the EU members above all can find value. This includes investments across borders. He pointed to three areas where the EU has contributed: Tele market, regulation on venture capital and the increased focus on SME and innovation in regards to EU funding.

 
Peter Voigt, Senior Economist at the Directorate‑General for Economic and Financial Affairs at the European Commission, talking at the seminar in Stockholm. He argued that the European Commission wants to achieve a system approach in regards to entrepreneurship. Photo by: Bosse Johansson.

Peter Voigt, an analyst at the EU Commission, mentioned that the EU's better-regulation framework means that all new regulation "needs to go through an impact assessment where a systemic approach definitely is the vision". The problem with the systematic approach, he said, is that you have so many variables that it's hard to bring all into a framework where you can simulate an outcome. Still, he explained, we are struggling to turn innovation into entrepreneurship, to bring products into the market. We need to see all this together; even the education system is part of a systemic approach. And, said Voigt, I cannot agree more that we need completion of the single market. But remember that the starting point is at the national level. 

Jeanette Andersson, Angel investor, involved in projects developing the early stage venture capital market, argued that for example Almi, giving high risk loans to entrepreneurs, is very important while giving more companies a chance to survive and grow. Photo by: Bosse Johansson.

"Entrepreneurship is not a political process but a process created because there is a cluster, because there is a competence, because there are people that are entrepreneurs that are starting businesses," Andersson explained.  She pointed to the importance of spin-offs from larger companies. Most important is, she said, what the EU can do when it comes to capitalization of companies.