The Entrepreneurial Society

International Studies in Entrepreneurship
Mark Sanders
Axel Marx
Mikael Stenkula Editors
The Entrepreneurial
Society
A Reform Strategy for Italy, Germany
and the UK
Volume 44
Series Editors
Zoltan J. Acs, George Mason University, Fairfax, VA, USA
David B. Audretsch, Indiana University, Bloomington, IN, USA
More information about this series at http://www.springer.com/series/6149
Mark Sanders Axel Marx Mikael Stenkula
• •
Editors
The Entrepreneurial Society

A Reform Strategy for Italy, Germany
and the UK
Editors
Mark Sanders Axel Marx
Utrecht School of Economics Leuven Centre for Global
Utrecht University Governance Studies
Utrecht, The Netherlands University of Leuven
Leuven, Belgium
Mikael Stenkula
Research Institute of Industrial Economics
Stockholm, Sweden
ISSN 1572-1922 ISSN 2197-5884 (electronic)

ISBN 978-3-662-61006-0 ISBN 978-3-662-61007-7 (eBook)
https://doi.org/10.1007/978-3-662-61007-7
© The Editor(s) (if applicable) and The Author(s) 2020. 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, adap-
tation, 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 publi-
cation 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, expressed 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.
This Springer imprint is published by the registered company Springer-Verlag GmbH, DE part of
Springer Nature.
The registered company address is: Heidelberger Platz 3, 14197 Berlin, Germany
To Cedric, Merel, Luka and Milo. Look out
for opportunities and have the guts to act on
them.
Foreword
Building Entrepreneurial Societies with a Multidisciplinary

Perspective
The Entrepreneurial Society is always in the making. At the micro level, entre-
preneurial people and organizations develop valuable new combinations, enabled
and constrained by structures at the macro level. This book provides an excellent
overview of how to improve the Entrepreneurial Society in the context of the
European Union, and more particular its member states Italy, Germany and the UK.
Improving the Entrepreneurial Society is a process of trial-and-error. One can go
through this process in the dark or be illuminated by multiple scientific disciplines.
This book, and the FIRES project at large, is a multidisciplinary endeavor that sheds
light from multiple scientific disciplines on the question and challenge of how to
build a more Entrepreneurial Society. It might look like the parable of the blind men
and the elephant, in which each blind man feels part of the animal and creates his
own version of reality from that limited experience and perspective. The FIRES
consortium has been able to connect the blind men, with teams of scholars from
law, economics, history, economic geography and innovation studies. This has
delivered insights into the process of improving the Entrepreneurial Society and a
diagnostic toolkit to uncover the key institutions of entrepreneurial societies. The
proposed improvement process provides seven steps to achieve the ultimate aim of
inclusive, innovative and sustainable growth. With this book, we will have the best
starting point available to start and guide this journey!
Prof. Dr. Erik Stam

Dean, Utrecht University School of Economics
Utrecht, The Netherlands
vii
Preface
This book marks the end of a three-year intense collaboration among some 40
excellent scientists and colleagues from nine institutes in as many countries. As not
all their names appear in the author lists of the chapters in this book, we want to
thank them here for all their patience, insights and discussions. We also extend our
gratitude to many guests and partners that got involved at some stage in our project
and Prashanth and Ruth at Springer Publishers in creating this book. Also, it would
not have been possible to make this project a success without the support of
Mischa, Martina and Mike at the LEG research support office, our project officer at
the European Commission, Danilla Conte and the Commission’s reviewers during
the project. It was a great ride for all of us.
Utrecht, The Netherlands Mark Sanders

Stockholm, Sweden Mikael Stenkula
Leuven, Belgium Axel Marx
December 2019
ix
Acknowledgements
The editors thank Elisa Terragno Bogliaccini for research assistance and Erik Stam
and participants of the workshop of September 5–6, 2019, in Utrecht for useful
comments on the draft chapters. Mark Sanders thanks Montpellier Business School
for their kind hospitality while drafting the manuscript during his sabbatical in the
first half of 2019, and Mikael Stenkula gratefully acknowledges financial support
from Jan Wallanders och Tom Hedelius stiftelse and from the Marianne and Marcus
Wallenberg Foundation. Finally, financial support for open access publication of
this book was provided by the European Commission under the Horizon 2020
project Financial and Institutional Reforms for the Entrepreneurial Society (FIRES),
Grant Agreement Number 649378.
xi
Contents
1 Seven Steps Toward Inclusive, Innovative, and Sustainable

Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mark Sanders, Axel Marx and Mikael Stenkula
Part I Historical Roots, Ecosystem Assessment, Firm Formation

Processes and Legal Competences
2 A Historical Perspective on the Evolution of Finance, Knowledge,
and Labor Market Institutions in Europe . . . . . . . . . . . . . . . . . . . . . 9
Selin Dilli
3 Economic Impact Assessment of Entrepreneurship Policies
with the GMR-Europe Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Attila Varga, László Szerb, Tamás Sebestyén and Norbert Szabó
4 On the Institutional Foundations of the Varieties
of Entrepreneurship in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Andrea M. Herrmann
5 Towards an Entrepreneurial Society: What Can the European
Union Contribute? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Axel Marx
Part II Country Studies

6 A Reform Strategy for Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Mark Sanders, Mikael Stenkula, Luca Grilli, Andrea M. Herrmann,
Gresa Latifi, Balázs Páger, László Szerb
and Elisa Terragno Bogliaccini
7 A Reform Strategy for Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Mark Sanders, Mikael Stenkula, Michael Fritsch,
Andrea M. Herrmann, Gresa Latifi, Balázs Páger, László Szerb,
Elisa Terragno Bogliaccini and Michael Wyrwich
xiii
xiv Contents
8 A Reform Strategy for the UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Mark Sanders, Mikael Stenkula, James Dunstan, Saul Estrin,
Andrea M. Herrmann, Balázs Páger, László Szerb
9 What We Have Learned and How We May Proceed . . . . . . . . . . . . 247
Contributors
Selin Dilli Department of History and Art History, Utrecht University, Utrecht,
The Netherlands
James Dunstan Utrecht School of Economics, Utrecht University, Utrecht,
The Netherlands
Saul Estrin Department of Management, London School of Economics, London,
England, UK
Michael Fritsch Friedrich Schiller University of Jena, Jena, Germany
Luca Grilli Department of Management Economics and Industrial Engineering,
Politecnico di Milano, Milan, Italy
Andrea M. Herrmann Innovation Studies, Copernicus Institute of Sustainable
Development, Utrecht University, Utrecht, The Netherlands
Gresa Latifi TUM School of Management, Technical University of Munich,
Munich, Germany
Axel Marx Leuven Centre for Global Governance Studies, University of Leuven,
Leuven, Belgium
Balázs Páger Department of Management Science, University of Pécs, Pécs,
Hungary
Mark Sanders Utrecht School of Economics, Utrecht University, Utrecht,
The Netherlands
Tamás Sebestyén Regional Innovation and Entrepreneurship Research Center,
MTA-PTE Innovation and Economic Growth Research Group, University of Pécs,
Pécs, Hungary
Mikael Stenkula Research Institute of Industrial Economics, Stockholm, Sweden
xv
xvi Contributors
Norbert Szabó Regional Innovation and Entrepreneurship Research Center,

Pécs, Hungary
László Szerb Regional Innovation and Entrepreneurship Research Center,
Pécs, Hungary;
Department of Management Science, University of Pécs, Pécs, Hungary
Elisa Terragno Bogliaccini Utrecht School of Economics, Utrecht University,
Utrecht, The Netherlands
Attila Varga Regional Innovation and Entrepreneurship Research Center,
Pécs, Hungary
Michael Wyrwich Faculty of Economics and Business, University of Groningen,
Groningen, The Netherlands
Chapter 1
Seven Steps Toward Inclusive,
Innovative, and Sustainable Growth
Abstract In this chapter, the editors introduce and motivate the approach in this
volume. Although this volume brings together contributions from different authors,
the chapters all flow directly from the work that was done in the European H2020
research project Financial and Institutional Reforms for the Entrepreneurial Society
that was conducted between 2015 and 2018. The first four chapters present and
illustrate the multidisciplinary tools that fill the diagnostic toolkit developed in the
project. Then three chapters illustrate how these tools can be usefully applied in
different institutional contexts in the European Union, namely in Italy, Germany,
and the UK.
Keywords Entrepreneurship · Entrepreneurship policy
1.1 Introduction
A good 50 years after its birth, the European Union is, arguably, in a serious midlife
crisis. The global financial crash of 2007–2008 plunged several member states in a
prolonged recession and the Syrian crisis strained already troubled relationships in the
European family. With the Brexit referendum, the rise of Alternative für Deutschland,
populist movements in Spain, Italy, and Greece and the revolt of the Gilets Jaunes
in France, it is fair to conclude that Europe is losing its appeal among a vocal and
perhaps growing share of European citizens. We believe that this decade of discontent
is rooted in feelings of injustice and of being confronted with decisions and their
consequences, rather than being involved in them. The solution in a globalizing
M. Sanders (B)
Utrecht School of Economics, Utrecht University, Utrecht, The Netherlands
e-mail: m.w.j.l.sanders@uu.nl
A. Marx
Leuven Centre for Global Governance Studies, University of Leuven, Leuven, Belgium
e-mail: axel.marx@kuleuven.be
M. Stenkula
Research Institute of Industrial Economics, Stockholm, Sweden
e-mail: mikael.stenkula@ifn.se
© The Author(s) 2020 1
M. Sanders et al. (eds.), The Entrepreneurial Society, International Studies
in Entrepreneurship 44, https://doi.org/10.1007/978-3-662-61007-7_1
2 M. Sanders et al.
world, however, is not a retreat to the nation-state. Europe needs to deliver on its
initial promise of providing security, well-being, and opportunity for all European
citizens. We believe that doing so is also our best chance of restoring Europe on the
path to innovative, inclusive, and sustainable growth.
Between 2015 and 2018, some 40 researchers in 9 institutions and countries
across Europe have worked on the Horizon2020 project Financial and Institutional
Reforms for the Entrepreneurial Society (FIRES; www.projectfires.eu). The chief
aim of FIRES was to translate the insights of some three decades of entrepreneurship
research into actionable institutional reform proposals. In the project, a strategy was
formulated to bring inclusive, sustainable, and innovative growth back to the Euro-
pean Union by reforming Europe’s institutions to promote a more open, contestable
Entrepreneurial Society. This book, together with its companion volume published
as The Entrepreneurial Society: A Reform Agenda for the European Union, presents
the core results of this project in a comprehensive way.
In the companion volume, FIRES-researchers Niklas Elert, Magnus Henrekson
and Mark Sanders introduced and motivated 50 proposals for reform in six key areas
of policy making (Elert et al. 2019). These six areas go well beyond the areas that
policymakers traditionally associate with entrepreneurship policy. They give us a
list of possibly useful interventions that would have to be implemented at different
levels in the European Union. In recognition of the complexity of multilayered policy
competencies in the European Union, the authors carefully analyzed the relevant
policy-making institutions and their legal and political competencies on the six areas
of policy making identified in that volume.
Inevitably, however, these proposals are general and motivated from a broad base
of evidence and scientific debate. The resulting menu of options, therefore, should
still not be interpreted as a blueprint for a reform strategy that will work in all EU
Member States and regions. It would be naive and possibly even damaging to imple-
ment all reforms in all regions across the very diverse entrepreneurial ecosystems of
the European Union. Each region and state has its specific history and institutional
trajectory, and we have therefore always stressed the need for tailoring reforms to
local needs and conditions.
In this volume, we collect, present, and illustrate the application of the tools we
have developed to do so. Before one can decide what reforms are most suitable in any
given context, one needs to distinguish the deep rooted from the more reformable
institutions in a region and identify the strengths, weaknesses, and bottlenecks in
Europe’s entrepreneurial ecosystems. Doing so requires a multidisciplinary approach
and the tools illustrated in this volume therefore build on such diverse disciplines as
history, geography, economics, and law.
1 Seven Steps Toward Inclusive, Innovative, and Sustainable Growth 3
1.2 The FIRES Seven-Step Procedure
In our project, we presented a seven-step approach to formulating an effective reform

strategy:
• Step 1: Assess the most salient features of the institutions of a country or region
and trace their historical roots.
• Step 2: Assess the strengths and weaknesses of the institutions and flag the
bottlenecks in the entrepreneurial ecosystem using structured data analysis.
• Step 3: Identify, using careful primary data collection among entrepreneurial indi-
viduals, the most salient features characterizing the start-up process and the barriers
that entrepreneurs face.
• Step 4: Map the results of Steps 2 and 3 onto a menu of evidence-based policy
interventions to identify suitable interventions for the region or country under
investigation.
• Step 5: In light of the historical analysis under Step 1, fit the proposed reforms to
the existing local, regional, and national institutional setup.
• Step 6: Identify the relevant policymakers and procedures, i.e., who should change
what and in what order for the reform strategy to achieve the greatest chance of
success.
• Step 7: Experiment, evaluate, and learn—and return to Step 1 for the next iteration.
With a menu of options and corresponding attribution to the adequate policy
making levels in place, we can use this seven-step approach, to formulate an effective
reform strategy tailored to the needs of a specific country or region. The book before
you shows how to prioritize and adjust the broad, evidence-based menu of reforms
presented in Elert et al. (2019) to the specific Member States across Europe.
1.3 Book Outline
In Part One of this volume, consisting of four chapters, we discuss how we addressed
Steps 1–3 in the FIRES project. This part of the book sets the stage and illustrates
how the FIRES-toolbox can be used to diagnose weaknesses in an entrepreneurial
ecosystem and select reforms to strengthen them. In the three chapters that make up
Part Two of this book, we apply these tools and go through the cycle from Steps 1 to
6 for three countries—Italy, Germany and the UK—representing three rather distinct
institutional clusters in the European Union. As we cannot actually implement the
proposed policies to execute Step 7, this step is outside the scope of this book, but
how this is to be done responsibly is briefly discussed in our conclusion.
In Chap. 2, Selin Dilli illustrates the importance of historical research in Step 1
for institutions shaping the allocation of labor, knowledge, and finance in Europe.
Historical research shows that the differences in these institutions are often the result
of long-term historical processes. A reform strategy can only be successful if it builds
on these historical foundations. Using the Varieties of Capitalism (VoC) framework,
4 M. Sanders et al.
the chapter provides insight into the different patterns of institutional change and its
implications for different forms of entrepreneurial activity across European countries.
The historical approach presented in Chap. 2 constitutes the first step in designing a
tailored reform strategy.
In Chap. 3, Attila Varga, László Szerb, Tamás Sebestyén and Norbert Szabó present
the Regional Entrepreneurship and Development Index (REDI) methodology for
assessing the quality of the entrepreneurial ecosystem at the regional level in step 2.
In this chapter, the authors also show how improvements in the ecosystem generate
macroeconomic impacts in a Geographic Macro Regional (GMR) model simula-
tion. The focus of the analysis here is more on the cross-sectional and geographical
dimension. The simulations communicate an important message to policy makers by
demonstrating that the impact of reforms will vary across regions and countries in
Europe, creating a tension between the level at which policies can be implemented
and where they generate positive or negative impacts.
In Chap. 4, Andrea M. Herrmann illustrates how “varieties of entrepreneurial
ecosystems” form distinct institutional constellations that facilitate different types
of entrepreneurship. More specifically, she stressed that slow-growing incrementally
innovative ventures constitute a distinct type of entrepreneurship next to radically
innovative, high-growth entrepreneurship. This reveals a second potential tension in
formulating reform proposals that build on existing strengths or rather strengthen
existing weaknesses. These findings invite policy makers to target entrepreneurial
support measures more specifically to their economy’s institutional environment and
carefully consider institutional complementarities that exist in different varieties of
entrepreneurial ecosystems.
To conclude Part One of this volume, Axel Marx presents a legal analysis of
European entrepreneurship policy in Chap. 5. In this chapter, he elaborates on how
European policy making should be affected when implementing reforms. Chang-
ing the institutional environment responsible for the quality of the entrepreneurial
ecosystem will require changes on multiple levels. The chapter shows that fostering
entrepreneurship will require a multi-level approach with a strong focus on the level
of EU Member States.
In Chap. 6, representing the first chapter of Part Two, Mark Sanders, Mikael
Stenkula, and co-authors outline a reform strategy to promote a more entrepreneurial
society in Italy, classified as a Mixed or Mediterranean Market Economy (MME).
Italy historically boasts a vibrant entrepreneurial economy of locally embedded,
often family-owned small- and medium-sized firms. But the Italian entrepreneurial
ecosystem has a bureaucratic business environment that feeds back into low lev-
els of productivity and ambition in entrepreneurship. To address the problem, Italy
could reform its educational system to promote a more experimental attitude and
reduce the bureaucratic business environment and recruitment culture that stifles
ambitious entrepreneurs. For Italy, important tensions arise between the tendency
for entrepreneurial venturing to concentrate in already well-off regions and creating
opportunities for all Italians.
1 Seven Steps Toward Inclusive, Innovative, and Sustainable Growth 5
Mark Sanders, Mikael Stenkula, and co-authors follow up in Chap. 7 with a reform
strategy to promote a more entrepreneurial society in Germany. Germany can be clas-
sified as a coordinated market economy (CME) and is historically characterized by
a strong and regionally embedded Mittelstand and an economy where high produc-
tivity growth is driven by on-the-job learning and firm-specific skill accumulation.
Germany’s entrepreneurial talent could be encouraged to take on more risk. The edu-
cation system could promote creativity, and a more equal playing field between new
and incumbent ventures in attracting finance, labor, and knowledge could be created.
For Germany, an important tension exists between supporting its traditional incre-
mentally innovative Mittelstand and channeling resources into somewhat riskier and
radically innovative ventures to also push out the global technology frontier.
In Chap. 8, Mark Sanders, Mikael Stenkula, and co-authors finally present a reform
strategy to promote an entrepreneurial society in the UK. The UK is typically classi-
fied as a liberal market economy (LME) and has a deregulated environment, flexible
labor markets, well-funded elite universities, and strong protection of intellectual
property rights. The UK should aim at strengthening the workforce’s knowledge
base and talent pool as well as the capital base. It furthermore is advisable to open
opportunities for not only starting but also for growing, perhaps less radically inno-
vative, firms in all regions in the UK. For the UK, both the geographical and the
variety of entrepreneurship tension will require careful consideration in designing
and evaluating our proposed reforms.
The country case studies in Chaps. 6–8 are substantially shortened and reworked
versions of the country reports that were submitted as reports to the European Com-
mission and published earlier on www.projectfires.eu, where the reader can also find
the policy briefs and a report on the policy round tables that were organized around
them in the spring of 2018 in Rome, Berlin, and London, respectively. For the purpose
of this book, this material has been merged and significantly revised and updated.
We conclude this volume with Chap. 9, where the editors of the book sum up
the main points concerning theory, method, and policy proposals. The editors also
elaborate on tensions that exist between the chapters.
Reference
Elert N, Henrekson M, Sanders M (2019) The entrepreneurial society: a reform strategy for the
European Union. Springer, Berlin
6 M. Sanders et al.
Open Access This chapter 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 chapter are included in the chapter’s Creative
Commons license, unless indicated otherwise in a credit line to the material. If material is not
included in the chapter’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.
Part I
Historical Roots, Ecosystem Assessment,
Firm Formation Processes
and Legal Competences
Chapter 2
A Historical Perspective on the Evolution
of Finance, Knowledge, and Labor
Market Institutions in Europe
Selin Dilli
Abstract Both policymakers and academics offer various strategies concerning

institutions on how to stimulate entrepreneurial activity in Europe. However,
historical evidence shows that the cross-national differences in these institutions are
the result of long-term historical processes. A successful entrepreneurial strategy
would therefore benefit from looking at the past to build and improve current
institutions in the future. To provide such a historical insight, this chapter aims
to answer the question: How and to what extent have the institutional factors
relevant to entrepreneurial activity evolved over time? It discusses the changes in
the financial, knowledge, and labor institutions over the twentieth century across
European countries to be able to distinguish between institutions that are dynamic and
those that are slowly changing. Using the Varieties of Capitalism (VoC) framework, it
provides insight into the different patterns of institutional change and the implications
of this change for the different forms of entrepreneurial activity across European
countries. The historical approach presented in this chapter thus contributes to
the development of more diversified and better-informed policy tools to stimulate
entrepreneurship.
Keywords Entrepreneurship · Varieties of Capitalism · National institutions ·

Institutional complementarities
2.1 Introduction
A widely acknowledged explanation for the difference in terms of entrepreneurship

outcomes between the USA and Europe, as well as across countries around the
world, is institutions (Bruton et al. 2010). Institutions are defined as the formal
The author gratefully acknowledges funding from the European Union’s Horizon 2020 research
and innovation program under grant agreement No 649378. Thanks to Axel Marx, Mark Sanders,
and Mikael Stenkula for comments on earlier drafts of this chapter.
S. Dilli (B)
Department of History and Art History, Utrecht University, Utrecht, The Netherlands
e-mail: s.dilli@uu.nl

10 S. Dilli
and informal sets of rules which shape individuals’ preferences and behavior (North
1990), which promote or hamper entrepreneurial activity via the reduction or increase
of uncertainty and costs (Baumol 1990). The starting point in the FIRES project is
that the institutions in finance, knowledge, and labor markets are key institutions in
shaping entrepreneurial activity. This chapter aims to provide a historical perspective
on the evolution of these institutions to be able to identify those that are more
rapidly changing versus ones that persist over time. This is important information
for policymakers aiming to build up institutions for a more entrepreneurial society.
In our earlier works, using the Varieties of Capitalism (henceforth VoC) framework
(Dilli et al. 2018; Dilli and Westerhuis 2018a; Dilli and Westerhuis 2018b; Dilli
2019), we showed that the variations in the finance, labor, and knowledge institutions
and their complementarities explain the differences both in terms of the level and
type of entrepreneurial activity across European countries today. The VoC literature
proposes a more holistic approach to institutions. Rather than focusing on single
institutions, this holistic approach to finance, labor, and knowledge institutions
identifies four institutional constellations characterizing Europe (Amable 2003; Hall
and Soskice 2001; Dilli et al. 2018). The first one is the liberal market economies
(LMEs), exemplified with the USA and UK, where institutions support market-
based solutions. On the other side of the spectrum are coordinated market economies
(CMEs), such as Germany, where institutions provide social security and stimulate
coordination among firms, governments, and other agents in the market economy
such as the labor unions. A third cluster, the Mediterranean Market Economies
(MMEs), composed of Italy, Spain, Greece, and Portugal, are characterized by a larger
state and governmental regulation. A last cluster is the Eastern Market Economies
(EMEs) that have an institutional setup to attract multinational companies.
In Dilli et al. (2018), we established that these four institutional constellations
are also relevant to explain the diversity of entrepreneurship in Europe. For instance,
in the Eastern European countries there is little protection of minority investors,
high minimum capital requirements, little facilitation of venture capital, and a
recovery rate favoring creditors over shareholders. In the UK, there are low minimum
capital requirements, institutions that facilitate the availability of venture capital,
and institutions that privilege shareholders in case of corporate failure by limiting
the chances of creditors to recover their investments. In terms of labor market
regulations, the Eastern countries and the UK have weak employment protection
contrary to the Mediterranean countries where there are strong regulations against
firing employees. The governmental transfers to research and development are much
higher in the Northwestern European countries compared to the South and Eastern
European countries. These cross-national differences in the combination with these
institutional factors explain why fewer people are willing to start a new business in the
Northwestern European countries compared to the South and East but those who do
tend to engage in high-growth innovative sectors. Herrmann (2020) provides a more
in-depth discussion of the relevance of the VoC framework for the entrepreneurship
literature and our previous findings on this topic.
To stimulate entrepreneurial activity, the European Commission (2013) has
identified more flexible labor market institutions, investment in higher education,
2 A Historical Perspective on the Evolution of Finance … 11
and better access to finance via regulatory burden reductions as strategies in the
Entrepreneurship 2020 Action Plan. Yet, such one-size-fit-all policy tools are unlikely
to be successful in Europe. With the establishment of the European Union, there was
an expectation of convergence among the Member States. However, comparative
studies on the effect of Europeanization have not found strong empirical evidence
for such convergence (See Bürzel 1999 for a review). The VoC literature argues
against convergence toward a single institutional model in Europe. According to
this school of thought, this is because the institutional arrangements of European
countries have evolved differently into complex systems of interdependent and
complementary institutions over time, which are difficult to change (Hall and Thelen
2009). Another argument against convergence is rooted in history. The literature
on path dependency suggests that the institutional legacies of the past limit the
range of current possibilities and/or options in institutional innovation (Nielson et al.
1995, p. 6). Historical conditions are thus important in determining the current-day
institutional setup as well as socioeconomic outcomes. In this chapter, the focus will
be on the latter: the influence of the past in understanding the current institutional
diversity and outcomes for entrepreneurship in the dimensions of finance, knowledge,
and labor across Europe.
Newly emerging social science literature demonstrates that the historical setting
has set in motion divergent evolutionary paths, leading to the deeply entrenched
differences in economic, institutional, social, and political outcomes today (see Nunn,
2009, for a review). For instance, Duranton et al. (2009) show that European regions
with historically weak family ties perform better in terms of economic growth, adopt
better to sectoral shifts, and have a higher educational attainment today. Alesina et al.
(2010) find that stringent labor market regulations persist over time despite being
economically inefficient due to their deep roots in the historical family structure.
Galor and Ozak (2016) find that pre-industrial agro-climatic characteristics have a
culturally embodied impact on the economic behavior of countries such as technology
adoption, education, and saving today. In the entrepreneurship literature, the deep
historical roots as an explanation for the regional and cross-country differences have
started to receive attention too. In the case of Germany, for example, Fritsch and
Wyrwich (2017) demonstrate that regions with higher levels of self-employment in
the 1920s also have higher levels of new business formation today. Nevertheless, the
evidence in this strand of literature is largely based on cross-national comparisons,
regressing one point in time in the past on a current outcome.
Historians have criticized such cross-country comparisons as it assumes limited
change over time and treats countries as being less advantaged in the institutional
and development conditions since they first appeared in history (Frankema and
Weijenburg 2012). This is a strong assumption to make, as the evidence from
historical studies on the persistence and change in historical conditions is rather
mixed. On the one hand, historical studies that focus on informal institutions (i.e.,
norms and values), such as the family systems, the co-residence patterns, and
inheritance practices, argue that these institutions experienced limited change since
the Middle Ages (Todd 1985; Reher 1998). On the other hand, there are historical
studies showing that formal institutions including democratic rule, tax regulation, and
12 S. Dilli
social security spending as well as economic conditions such as globalization and

distribution of the economic sectors have changed dramatically over time (Lindert
2004; Broadberry 2010). Considering the VoC framework, the debate on whether
countries experience a shift between institutional constellations continues to this
date (see Hall and Thelen 2009). For instance, according to Sluyterman (2015),
the Netherlands has shown liberal market economy characteristics at the beginning
and the end of the twentieth century, whereas from the Second World War up to
the eighties, it had characteristics of a coordinated market economy and arguably
returned to the liberal market since. According to De Goey and Van Gerwen (2008),
this shift can also explain why there were more entrepreneurs in the beginning and
at the end of the twentieth century in the Netherlands than in the 1950s.
To be able to distinguish between persistent and more dynamic institutions and
to evaluate whether and how the institutional constellations described in the VoC
literature have evolved over time, this chapter focuses on the historical trends in
financial, knowledge, and labor market institutions. Thus, it aims to provide insight
into which institutions are more challenging to alter via policy tools. The starting
point of this chapter is to include a historical discussion on those institutions, which
we found to be crucial for entrepreneurship in Dilli et al. (2018) and Dilli (2019). In
order to provide a discussion at the European level in all three institutional aspects
in the given scope of this chapter, the discussion of indicators in each dimension has
been limited. Here, the availability of time-series data and historical sources mainly
determine the choice of indicators and the time coverage presented.
This means that the indicators of finance, knowledge, and labor presented here do
not always directly capture the institutional setup in terms of the rules and regulations
but are outcomes that are result of the institutional setup and play a central role in
entrepreneurial activity. For instance, in the case of finance, the focus is on banks and
family, which remain the largest formal and informal sources of financial resources
for entrepreneurs in Europe, respectively (OECD 2013).
For knowledge, I present the historical patterns in tertiary education, and research
and development, both of which are contributors to higher entrepreneurial activity,
business survival, firm growth, or the firm’s return on investment (see Van Der Sluis
et al. 2008 for a review). Sanders et al. (2020a, b, c) provide a more qualitative analysis
of underlying knowledge institutions (e.g., universities, patent systems, etc.) for these
two outcomes for Italy, Germany, and the UK, respectively.
On labor institutions, the discussion will be on three dimensions: the regulation of
labor markets, wage-setting institutions, and social security systems that are crucial
for entrepreneurial activity (Henrekson 2014; Dilli 2019). In terms of time coverage,
the focus is mainly on the twentieth century when it is possible to demonstrate the
evolution based on quantitative information. However, when possible, a historical
discussion going back to the late Middle Ages is included based on secondary
literature; thus, the time coverage varies within each subsection. In the country choice,
both historical data availability and the four VoC typologies play a role.
This chapter is structured as follows: first finance, second knowledge, and third
labor institutions are discussed in subsections in the following order: first I describe
the diversity in current institutions and their relevance for entrepreneurship today,
and then I discuss the historical trends in the underlying institutions. The last
section concludes with the relevance of the historical analysis of institutions and
its implications for the entrepreneurship literature.
2.2 Finance1
The availability of financing options is crucial in all stages and for all types of
entrepreneurial activity: in seeing an opportunity to start a firm, growing a business,
and engaging in innovation (Dilli et al. 2018). Among the various sources of
financing, banks remain the largest financial intermediaries in all European countries,
although their importance varies significantly across countries (OECD 2013; 2015).
The share of the nonbank instruments, such as factoring, crowdfunding, private
equity, and venture capital, remains relatively small in Europe in comparison to the
USA with the notable exception of the UK. For instance, between 1995 and 2010,
total European venture capital investment has been, on average, approximately only
one-third of the volume in the USA (OECD 2013). Informal financing tools are
an important source of capital for entrepreneurs too (OECD 2013). These informal
financing options via investors, such as private individuals/business angels and a
network of friends, family, and foolhardy investors, provide financing directly to
unquoted companies to which they may or may not have a family connection (Szerb
et al. 2007). Again, across Europe, differences are present in relative importance of
these informal sources to fund entrepreneurs. For instance, in Dilli and Westerhuis
(2018a), using the Global Entrepreneurship Monitor (2011), we show that today
business angels invest more in close family and relatives in the Eastern and
Mediterranean countries (with the exception of Portugal) than in the Northwestern
countries. Nevertheless, such trends provide only a snapshot of the current situation.
To a historian, they raise the question when banks started to play such a central role
for entrepreneurs in Europe and whether their role has changed over time. Another
question is whether, given the large historical differences in the family systems (Todd
1985), family can indeed be an alternative financing tool in all the European countries.
Below I discuss the historical evolution of the banking system and family systems
to address these questions.
1 This section is taken from the working paper version of Dilli and Westerhuis (2018a). The section
on banks (Section 2.2.1) mainly relies on the input by Gerarda Westerhuis in Dilli and Westerhuis
(2018a). For an extended version of the finance section please see: https://projectfires.eu/wp-content/
uploads/2018/02/D2.4-REVISED.pdf.
14 S. Dilli
2.2.1 Evolution of the Formal Financial Tools

for Entrepreneurs: Banks
The historical roots of the banking system can be traced back to the fourteenth century.
Although private banks had long provided a mix of commercial and investment
services to their customers, the term “universal bank” is usually reserved for the
large incorporated financial institutions that emerged in Europe during the second
half of the nineteenth century (Cull et al. 2006). Therefore, I will focus here on
the period from the late nineteenth century onwards as this covers the period of the
emergence of the diverse modern banking system that characterizes most European
countries today.
The size of the banks has been linked with the availability of bank credit for
entrepreneurship. Small banks have traditionally been important lenders to small
firms because small banks have a comparative advantage in relationship lending.
Accordingly, the importance of and access to bank credit fell as banks became larger
and banking got more concentrated over time (World Bank 2013). According to this
view, small banks are better than large banks at relationship lending that depends on
“soft” information. Large banks, in contrast, specialize in transaction lending to more
mature firms where less discretion is involved (Black and Strahan 2002, p. 2808).
In many European countries, large financial conglomerates have emerged over time
that are perceived as less willing to finance SMEs in general and entrepreneurship
in particular.
In many European countries, the banking landscape had been much more diverse
than it is currently. Small, locally embedded credit institutions played an important
role in introducing innovations and providing financing to firms and sectors that were
overlooked by the larger financial institutions (Wadhwani 2016, p. 192). In some
countries (e.g., the Netherlands, UK), this diversity has almost vanished, whereas
in others (e.g., Germany), it continues to play an important role in the financial
system. At the end of the nineteenth century, these differences between banking
systems across European countries started to emerge. In particular, with the Second
Industrial Revolution and the emergence of large-scale firms, the increased demand
for capital led to the emergence of large commercial banks (Westerhuis 2016). In
many countries, these big banks replaced relationship banking that was present prior
to the nineteenth century with impersonal transaction banking. In the UK, many
local banks that were typically small, private institutions, and limited by law to no
more than six partners, played a crucial role in funding local industries during the
first industrial revolution (Cull et al. 2006). During the interwar period, UK banking
became more concentrated and less competitive. Provincial banks were taken over by
large London-based banks, which preferred higher liquidity ratios. This reduced the
supply of funds for the industrial clients, in particular the smaller and younger ones. A
similar pattern is also visible in the Netherlands. While prior to the twentieth century,
regional banks played an important role in financing (new) businesses, around 1910
a process of concentration set in the Netherlands, which created five big banks that
would dominate the scene by 1925 (Jonker 1997). An alternative for their clients was
offered via market solutions such as stockbrokers and private investors (Cull et al.
2006). This pattern corresponds well with the LME’s institutional structure, which
stimulates market-oriented solutions (Hall and Soskice 2001).
In contrast, in Germany, a typical CME, and in Italy and France, classified as
MMEs, the banking system remained relatively more fragmented and the state
intervened by creating public and semipublic (i.e., cooperatives) lending institutions.
These public, semipublic, and regional banks specialized in segments of the market
reducing information asymmetries (Carnavali 2005). This type of banking structure
lowered assessment and monitoring costs due to long-term relations between
lenders and borrowers. The governmental intervention corresponds with the type
of institutional structure of the CMEs identified in the VoC literature that stimulates
coordination between different agents of the economy. The disadvantage was that
these banks were less able to diversify and spread risks (Carnavali 2005).
In Germany, for instance, cooperatives emerged in the nineteenth century in
response to the failure of existing lenders to give credit to small retailers and rural
populations. The cooperatives were owned and controlled by their members and
granted loans to members who might lack access to credit at the large financial
institutions (Wadhwani 2016). Around the First World War credit cooperatives
together with commercial banks and savings banks formed the core of the German
banking system (Deeg 1999). The cooperative model spread across Europe since the
second half of the nineteenth century. In Italy, it became a very important part of the
financial system as well (Carnevali 2005). In contrast, in the UK and USA, typical
LME economies, the credit cooperatives were established relatively late. In these
contexts, commercial banks were already providing financial services to the working
and rural people, whereas large corporates acquired capital through well-developed
capital markets.
In Germany, cooperatives and savings banks2 developed close links with local
business. Although in the literature the focus is often on the big banks from Berlin,
in Germany many small business owners, artisans, and shopkeepers banked in local
and regional banks (Carnevali 2005, p. 46). These small regional banks met fierce
opposition from the commercial banks, and it was this conflict that “shaped the
state’s response toward competition between different types of banks, ensuring the
permanence of segmentation” (Carnevali 2005, p. 196). In Germany, the state played
an important role in mediating between different types of banks. It was an active
political choice to protect the SMEs and their local economies. In contrast, savings
banks in the UK, created in the 1810s, for example, were not allowed to lend for
commercial purposes by law.
In the 1950s and 1960s, the long-term finance of small businesses in Germany
was made available via savings and cooperative banks, ensured by strong competition
and state regulation. Regulation provided incentives for the saving and cooperative
banks to grant SMEs long-term credits, where these banks operated in a limited
market and their success depended on the economic welfare of their region. In their
2 Savingbanks emerged in the late eighteenth century in order to provide possibilities for working
and poor people to save for periods of need due to illness, unemployment, or retirement.
16 S. Dilli
charters, it was stated that pursuing profits was important but only as a means to
other goals. Savings banks were mandated with the promotion of the local economy,
and cooperative banks had to serve the interests of their members (Carnevali 2005).
In Italy, the banking system was decentralized to strengthen local banks after
the Second World War. The government wanted to create local financial channels
(decentralized capitalism) to act as a counterbalance to the power of the large private
business groups. Decentralization and a segmented banking system were seen as
elements that would increase stability, whereas a concentrated banking system was
perceived as a factor that would hinder economic growth (Carnevali 2005, p. 177).
The diverse financial landscape of the 1930s with various types and sizes of financial
intermediaries was defended as a guarantee for the diffusion of credit. As a result,
regulations were reshaped in order to reduce banking competition and protect the
small- and medium-sized banks from the larger national ones (Carnevali 2005,
p. 178). The awareness of policymakers, that SMEs had disadvantages in access
to market finance, contributed to the introduction of financial subsidies as part of
national industrial policy (Spadavecchia 2005). Of the various countries discussed
here, the Italian banking system has been the most regulated and subsidized with the
aim to promote the development of small firms. From the mid-1970s, however, the
decentralized banking system was increasingly being questioned. As a result, many
territorial restrictions were abolished as well as controls over interest rates, leading
to the mergers of banks in the 1990s.
In contrast to Germany, industrialization in France occurred in a political context
of a unified nation-state, with strong central government. Although large French firms
established themselves between 1918 and 1930, SMEs remained a very important
part of the economy (Lescure 1999). Due to agreements to fix prices and quotas,
there were hardly incentives for firms to merge into bigger conglomerates in this
period (Carnevali 2005). Due to active government interference, the banking structure
remained more diverse in France than in the UK in the nineteenth century. During
the Great Depression of the 1930s, many local and regional banks had to close, and
after the Second World War, a process of concentration dominated the banking sector
in which the regional and local banks merged into national ones. Four large deposit
banks were nationalized after 1945. In 1957, 22 regional banks and 158 local banks
were left. The local banks had a strong hold over the local market. The greater role
of the state in France was also reflected in the role of public and semipublic banks
in stimulating investments after the Second World War (Carnevali 2005).
The process of liberalization and harmonization in Europe that eventually led to
the monetary union caused concentration to rise in banking across the Eurozone.
This is visible in Fig. 2.1. The (three) firm concentration ratio is the percentage of
all banking system assets accounted for by the biggest three banks in a country.
For the majority of CME countries, the combination of a few large commercial
banks and a broad base of small, local banks resulted in a C-3 ratio of well above
50% (e.g., Switzerland, Austria, Germany, Netherlands). This also applies to the
Nordic CME countries Denmark, Finland, and Sweden. An interesting case is the
UK banking system, which was rather less concentrated in 1993 with C-3 ratio of
29% increasing to 56% in 2003. Overall, in the clear majority of the 19 EU countries,
Fig. 2.1 Percentage of all banking system assets by the biggest three banks in a country. Source
World Bank (2013)
the largest banks dominated the banking industry 20 years ago and continue to do so
today.
While historical studies show that prior to the twentieth century, the regional
small-sized banks seemed to play a role in funding the small-sized businesses across
Europe, and there is still no consensus on the extent to which this diverse banking
structure in the cases of France, Italy, or Germany provided advantages in solving
finance problems for small businesses. On the one hand, Carnevali (2005) stresses
comparative advantages of these regional banks in Italy, France, and Germany
after the Second World War compared to the much more consolidated banking
system in the UK. On the other hand, the limited historical evidence shows that the
number of firms that could take advantage of the banks’ combination of investment
commercial banking services in Germany was quite small (Cull et al. 2006).
According to Cull et al. (2006), instead SMEs mostly relied on local intermediaries
and private initiatives, which ranged from notaries to family borrowing in France to
the cooperatives in Germany (Cull et al. 2006, p. 3028). In the next section, I evaluate
the role private initiatives, in particular family lending, as an alternative source of
financing for entrepreneurs and link the current differences in family lending to
historical family systems.
2.2.2 Alternative Source of Finance: The Family
Historical studies show that entrepreneurs had alternatives to banks as sources of

funding (van Zanden et al. 2012; Gelderblom 2011). These historical alternatives
were available in the form of retained earnings, family capital, investment from
wealthy entrepreneurs, and short-term loans (Westerhuis 2016). However, the
availability and type of financial sources differed substantially across Europe. For
18 S. Dilli
instance, Cull et al. (2006) show that in the case of UK and the Netherlands domestic
capital markets and governmental bonds provided an important source of exchange
and finance for businesses, whereas this option was much more limited in the
case of the Southern European countries such as Spain and Portugal. Historically,
family has also been a crucial source of finance for businesses, though its relevance
differed substantially across Europe (Cull et al. 2006). In this section, I argue that
the differences in the historical family systems have likely influenced the variation
in the family borrowing across Europe and continue to do so today.
Family members are assumed to be important providers of financial resources
(Bygrave et al. 2003). This is because financial capital from family members has
important advantages such as lower transaction costs (Au and Kwan 2009), favorable
interest and payback requirements, and availability when other sources are not
available (Steier 2003). Especially when the firm requires more time to provide
returns, family may provide a better lending possibility to the entrepreneur than
formal financing options (Arregle et al. 2015). Bygrave and Reynolds (2005) argue
that the level of social obligations individuals feel toward their family members shape
the willingness of the lender to lend money to the family member (supply side) and
the willingness of the borrower to borrow from a family member (demand side).
One can expect that in contexts where family ties are stronger (family has priority
over the individual), both the willingness to lend and borrow from a family member
would be higher, and as a result, the level of family lending would be higher.
Demographer Reher (1998), using census data, showed that strong family ties
characterize the Mediterranean countries, whereas weaker family ties (the individual
has priority over family) characterize the Northwestern European countries. This
pattern seems to correspond with the cross-national differences in the European
context in terms of lending behavior to family members by business angels today.
In the Eastern European and the Mediterranean countries, business angels seem to
invest more often in family members than in other European countries despite the
unfavorable financial institutional environment. In the Northern European countries,
on the other hand, the investment of business angels and borrowing behavior from
the family remain limited. Sweden and Belgium, depicted as having weaker family
ties, are the exceptions, which outperform the rest of the European countries in
terms of their share of business angel investment in family businesses (see Dilli
and Westerhuis 2018a for an illustration of these trends). An explanation for these
contradictory cases could be attributed to the overall supply of business angels due to
the favorable institutional context such as tax cuts for family lending (Au and Ding
2011; OECD 2015).
One of the core explanations as to why Northwestern European countries have
much weaker family ties compared to the Eastern and Southern European countries
has been linked with the historical differences in the living arrangements of family
members, having long-term effects on the norms and values regarding the importance
of the family due to the generational transfer of these norms (Reher 1998). According
to demographic historians, Hajnal’s St. Petersburg–Trieste line separates the Central
and Northwestern European territories (Scandinavia, the UK, the Low Countries,
much of Germany and Austria) from the Eastern and the Mediterranean in terms of
co-residence practices and has been present for centuries (Reher 1998; Todd 1985).
For instance, the study of Reher (1998) shows that from at least the late Middle Ages
until the second half of the nineteenth century, it was common in rural England and
in the Low Countries for young adults to leave their parental households at a young
age to work as agricultural servants in other households. On the other hand, in the
Southern European societies even though there were servants in both rural and urban
settings, it affected only a small part of the young population in rural areas (Reher
1998). These differences in the family systems have arguably been the result of the
differences in the agricultural practices, the timing of the Neolithic revolution and
geographical factors (Todd 2011).
These historical family arrangements are possibly linked with the long-term
development of different forms of (private) financing options for entrepreneurs across
European regions. The scarce historical evidence from the late Middle Ages and
Early Modern Europe shows that in this period, private lending, even that via the
family members, was already formalized in the Low Countries. Van Zanden et al.
(2012) demonstrate that in the fifteenth and sixteenth centuries, properties were used
as collateral on a large scale, and that interest rates on both small and large loans
were relatively low (about 6%). As a result, many households owned financial assets
and/or debts, and the degree of financial sophistication was relatively high.
Similarly, Gelderblom and Jonker (2004) show that deposits and bonds were
common among businessmen and entrepreneurs as a tool to borrow already in
sixteenth century Netherlands. Thus, formal institutions as well as the availability
of investors due to deep domestic markets as a result of the international trade at the
time stimulated lending both from family and non-family members in this period.
This resulted in access to credit for a larger share of the population compared to the
Southern European countries. The presence of weak family ties might have created
the necessity to regulate the lending behavior more formally in the North. On the other
hand, while financial historians show that Italian city-states were crucial financial
centers in the fifteenth and sixteenth centuries, wealth was mainly concentrated in the
hands of a small group of merchants and family businesses and lending again played
a central role. The lack of historical data, however, does not allow us to provide
insight into how family lending has changed over time across different European
countries.
Nevertheless, past and present cross-country differences in family lending
behavior and family funding can provide a feasible alternative to formal financing
options especially in the Mediterranean and the Eastern European countries given
their strong family ties. This can be done by following the Belgian example. In
Belgium, anyone who grants a loan to an entrepreneur as a friend, acquaintance, or
family member receives an annual tax discount of 2.5% of the value of the loan.
If the enterprise is unable to repay the loan, the lender gets 30% of the amount
owed back via a one-off tax credit in the context of the “win-win lending” scheme
(OECD 2015). This change in the policy seems to have helped with increasing the
availability of finance to entrepreneurs in Belgium, and its implementation might
be less costly in the Southern European countries where family members are more
willingly to invest in family members. An important implication of weak family
20 S. Dilli
systems in the Northwestern European countries is that policies should prioritize

targeting improvement of the formal financial institutions rather than family lending.
However, as both the case of Belgium and the historical evidence highlight, family
lending can still provide an alternative in these countries, even if there might be need
for more formal regulation and incentives introduced by the government to support
family lending.
A more general conclusion on the financial institutions is that while the banking
system has experienced rapid change since the late nineteenth century, family systems
as an informal institution persisted over time. Supporting small-scale banks and more
formalized private lending options such as equity finance therefore might be a better
option to pursue in the CME economies, whereas in the MMEs and EMEs, stimulating
informal lending options via friends and family would be easier to implement. Of
course, the analysis in this chapter is descriptive in nature and serves only as a first
attempt to argue how a historical perspective can potentially help in formulating
reform strategies to stimulate entrepreneurship. More in-depth historical analysis
is advised when formulating strategies for a specific region or country and general
conclusions based on the analysis presented here should be approached with caution.
2.3 Knowledge
The country case studies in Sanders et al. (2020a, b, c) discuss universities and
the patent system as the underlying institutions for knowledge creation. In this
chapter, I focus instead on outcome variables of these more fundamental institutions
of (1) educational attainment in tertiary level and the gender differences therein
and (2) research and development, which explain the different levels and types
of entrepreneurial activity across Europe (Dilli and Westerhuis 2018b; Dilli et al.
2018). These two indicators can be seen as more direct measures of the knowledge
outcomes. I focus on these two measures as they have been commonly used in the VoC
literature to capture the knowledge dimension, and there is historical and comparable
quantitative data that allows me to evaluate how these two dimensions evolved over
time across European countries.
Formal education at the university level is important for entrepreneurial
activity. For instance, both the individual entrepreneur’s education and the regional
and national educational attainment have been shown to be strong drivers of
entrepreneurs’ decision to start a business and grow their business and the economic
sector in which they engage (see Dilli and Westerhuis 2018b for a review of the
literature). At the societal level, while the educational level of consumers may shape
the demand function for an entrepreneur’s venture output, the educational level of
employees may affect the entrepreneur’s venture productivity and thereby shape his
or her supply function (Millán et al. 2014).
Next to formal education, knowledge-driven innovation is frequently considered
as the outcome of research and development (R&D) activities and the general
concern that firms may underinvest in R&D has resulted in government policies
and programs such as favorable fiscal treatment and R&D subsidies (Coad and
Rao 2010). In addition to the scientific knowledge generated by the private
sector, entrepreneurial ventures may therefore also acquire the necessary scientific
knowledge by participating in, or benefitting from, public R&D programs that lead
to new commercial opportunities (Dilli et al. 2018, p. 7).
2.3.1 Educational Attainment
The VoC literature highlights differences across industrialized economies in terms

of how they organize their educational system. For instance, LMEs stimulate general
education, as the flexibility in the labor market and transition between jobs require
general skills (as discussed in Herrmann 2020). Figure 2.2 shows the trends in years
of education at the tertiary level across a selected number of countries over the
twentieth century. The USA, a typical LME, already starts outperforming the rest
of the European countries in the beginning of the twentieth century and tertiary
education takes off in the second half of the twentieth century.
The next best performers are the UK (another typical LME) and the Netherlands,
which show characteristics of an LME in the beginning and the end of twentieth
century (Sluyterman 2015). Germany, a coordinated market economy (CME),
performs moderately compared to the LMEs, and progress is visible especially from
Fig. 2.2 Educational attainment in tertiary level (age group 25–64). Notes The figure is based on
the Lee and Lee (2016) dataset. The Europe + USA average includes the 19 European countries
included in the database
22 S. Dilli
the 1960s onwards. Poland, an Eastern Market Economy, and Italy, a Mediterranean
Market Economy, have the lowest attainment in tertiary education among the
European countries. Despite the fact that these two countries also witnessed increases
in tertiary education since the 1960s, especially in Italy, this progress has been slower
compared to the other European countries. The fact that the LME economies perform
highest in the tertiary educational attainment compared to the others thus supports the
line of reasoning in the VoC framework that the LMEs have a comparative advantage
in general education, whereas CMEs focus more on vocational training.3
Dilli and Westerhuis (2018b) also looked at the role of gender differences in
educational attainment to explain the gender differences in entrepreneurial activity.
We showed that women are less likely to engage in all three stages of entrepreneurial
activity across Europe (perceived opportunities to start a business, the knowledge
intensiveness of the sector in which they start their business, and their growth
aspirations), and that education is one of the explanations for this gap. Figure 2.3
displays the ratio of women to men in tertiary education. While a score below 1
indicates women are underrepresented, 1 would indicate gender equality and a value
Fig. 2.3 Gender gap in educational attainment in tertiary level (age group 25–64). Source Lee and
Lee (2016)
3 Animportant note here is that the educational attainment at tertiary level compares only cross-
country differences in terms of quantity and does not provide information on the quality of education,
which is hard to capture historically and across space.
above 1 means women are overrepresented in education. Figure 2.3 shows a slightly
different picture than Fig. 2.2 in terms of gender differences in tertiary education.
The USA, an LME economy, is the pioneer in closing the gender gap in tertiary
education where equality between men and women is achieved as far back as in the
1940s. However, a reversal is visible between 1940s and 1980s, and in the post-1980
period, the gender gap closes again. The USA context highlights that the progress
toward gender equality is not linear (Goldin 1995). The UK, also an LME, witnesses
progress toward gender equality by the beginning of the twentieth century. From the
1960 onwards, the gap between men and women at tertiary education really starts to
close, and in 1985, equality is reached. In Poland, an EME, the gender gap in tertiary
education narrowed in the 1990s and women are even outperforming men since the
mid-1990s. A similar trend is visible in Italy. While many of the other European
countries also achieved equality in tertiary education during the 1990s, Germany
stands out as an exception where the size of the gender gap is largest and only a slow
convergence to gender equality is visible from the 1970s onwards.
When the gender differences in field of subjects at the university level are
considered, a different picture emerges. This has implications for entrepreneurial
activity. In recent years, cross-national differences in entrepreneurship have been
attributed to the differences in education, more particularly gender differences in
science, technology, engineering, and mathematics (STEM) fields (OECD 2016a). To
the extent that entrepreneurial ventures come up with radically new innovations, they
are typically based on technological inventions developed by scientifically oriented
workforces (Dilli et al. 2018). In Dilli and Westerhuis (2018b), we provided empirical
evidence on the evolution of the gender differences in STEM subjects at the tertiary
level since 1970s, which showed that the gender gap in science education is negatively
correlated with entrepreneurial activity.
In Dilli and Westerhuis (2018b), we demonstrate that there is a clear increase
in educational attainment in science subjects in all the four VoC clusters since the
1990s with LME countries having the highest level followed by MMEs, CMEs, and
EMEs, respectively. However, despite the increase in the share of the population
in science subjects, this did not translate into higher gender equality. Instead, all
VoC categories show a decrease in the share of women in science subjects since
the mid-1990s. The only exception being the 1970s when women in LMEs became
relatively more inclined toward science subjects at the tertiary level. Interestingly,
while in the period before the 1990s, the size of the gender gap is largest in CMEs,
followed by LMEs and MMEs, and EMEs, a convergence toward gender inequality
in science subjects is visible. A sharp decline is particularly visible in EMEs after
the collapse of the Soviet Union. An explanation for this increasing gap can be
partly due to the change in women’s choices to follow careers in other fields such as
health and engineering. Thus, we suggest that closing the gender gap in science
can be beneficial for knowledge intensive sectors and high-growth aspirational
entrepreneurship especially in the institutional environments that are also favorable
for women such as in the Nordic CME countries.
24 S. Dilli
2.3.2 Research and Development
The differences across the institutional constellations described in the VoC are also
visible in terms of R&D expenditures. Figure 2.4 highlights that the differences
among European countries have been present at least since the 1980s. Considering the
share of government expenditure in research and development, both Germany and the
USA have the largest public investment compared to the other European countries for
almost the entire period of 1980 and 2010, followed by France. While the Netherlands
and UK show moderate levels of investment in research and development, Italy
and Poland have the lowest. In addition, the share of governmental expenditure in
research and development remained rather constant over time. A similar trend in
terms of cross-country differences is visible when a second indicator of research and
development, researchers per capita is considered. While in the UK, the government
plays a limited role in supporting research and innovation (in line with the LME
typology), it is among the top performers in terms of the number of researchers.
This could be attributed to the academic system of the UK that does not only offer
sophisticated scientific training, but also attracts high numbers of immigrant scientists
(Dilli et al. 2018).
Over time, as the number of researchers has increased substantially across
European countries, this progress has been especially limited in the case of Italy and
Poland. Overall, the increase in the share of population following science subjects at
the tertiary level might be one of the drivers of this general increase over time. Thus,
for Poland and Italy, stimulating research and development activity via governmental
expenditure and stimulating at the tertiary level to follow science subjects might be
tools to support entrepreneurship. Another alternative could also be attracting highly
skilled migrants with a science background to increase the number of researchers.
Fig. 2.4 Research and development, 1980–2010. Source OECD (2019)

This section illustrated that there have been rapid improvements both in
educational attainment and in number of researchers over the second half of the
twentieth century. This implies that reforms addressed toward implementation in
the field of education, and research might have impact in the short run. However,
in pursuing such reforms, it is also important to recognize the differences between
CMEs and LMEs in terms of vocational versus general training, as vocational training
in the CMEs has also been successful in supporting innovative entrepreneurial
activity (Dilli et al. 2018), although arguably, in a more incremental nature (see,
e.g., Herrmann 2020).
2.4 Labor Market Institutions
As mentioned in the introduction, the relevant labor market institutions for

entrepreneurship are: (1) regulation of labor markets, (2) wage setting institutions,
and (3) social security systems (Henrekson 2014; Elert et al. 2019). These institutions
were also in focus in the FIRES project (see Dilli 2019, for an empirical test
of this link). The flexibility in hiring and firing employees, as well as the
extent of the availability of social security, would shape the decision making
of entrepreneurs to start and grow their businesses. Centralized wage setting
institutions and strong labor unions can discourage entrepreneurship by introducing
standard compensation policies for wage labor that closely tie wages to observed
characteristics such as seniority and education. Such institutions would discourage
innovative entrepreneurship. In terms of social security arrangements, generous
unemployment benefit schemes and other social benefits may decrease incentives
and increase perceptions of the risk involved in establishing a business (Henrekson
2014; Dilli 2019). But many of these institutions have deep historical roots. The
discussion below therefore focuses on the historically evolved differences between
the USA and European countries in these three pillars as well as how they have
changed over the twentieth century to develop a historical understanding of the
cross-national differences in labor market institutions characterizing Europe today.
2.4.1 Labor Market Regulations
Labor market institutions in Europe are less flexible compared to those in the USA
(Siebert 1997). For example, the USA stands out as the least regulated country
based on indicators for dismissals of individual workers on permanent contracts.
The success of the USA in terms of entrepreneurial activity has been attributed to
less regulated labor market institutions. Among the European countries, however,
there is a large variation in the extent to which labor market regulations are stringent.
Similar to the USA context, the UK have fairly unrestrictive individual dismissal
regulations. By contrast, regulations in France and Germany are far stricter than the
26 S. Dilli
OECD average (Scarpetta 2014: 3). These differences were also highlighted in the
VoC literature. Labor markets have been deregulated with relatively unrestrictive
individual dismissal regulations in LME economies such as UK and the USA. Since
1990, EMEs also tend to have more flexible labor market regulations compared to the
Nordic countries and the continental European countries, such as the Netherlands,
Germany, and Belgium, characterized by a moderate employment protection. In the
MMEs, notably France, Italy, and Spain, it is far more difficult to dismiss employees,
especially from public service, compared to the other contexts (Dilli 2019). Some of
these cross-national differences characterizing Europe today can be traced back in
the past of these economies.
The twentieth century witnessed an important move towards flexibility in labor
market institutions across Europe. But the extent of this change differs across
European countries. This is visible in the study of Aleksynska and Schmidt (2014),
which sheds light on the current-day differences in labor market institutions by
looking at the origin and evolution of these labor market regulations for a selected
number of European countries. Some of the rules on employment protection, such
as prohibited grounds for dismissals, have roots going back as far as the late
nineteenth century (Aleksynska and Schmidt 2014). Such labor protection laws often
emerged to address the social consequences of early industrialization. The issues of
equity and equality, dignity and decent incomes, set the scene for emerging national
frameworks of regulating work and work relationships. France was the first country to
regulate unemployment insurance, fixed-term contracts, and compensation for unfair
dismissal in 1890. Greece and Italy pioneered generous notice periods and severance
pay. Spain was the first country to explicitly regulate the use and the termination
of fixed-term contracts with respective provisions put in place in 1926. These three
Mediterranean economies also introduced regulations similar to France on the notice
period and regulations on fixed contracts during the 1920s. These economies are
known to have more stringent labor market regulations to this day. In Portugal, in
contrast to the other Mediterranean economies, many of the rules on unemployment
and employment protection were only introduced in the late 1960s and early 1970s,
whereas in the UK, the rules on employment protection legislation developed mainly
in the second half of the twentieth century (Aleksynska and Schmidt 2014).
In the second half of the century, there is more systematic evidence available on
the differences between countries in terms of the employment protection legislation
(EPL). This allows me to trace the change in labor market regulations over time
in a comparative way. The OECD has developed the EPL index—a commonly
used indicator to capture the regulation of the labor markets—based on 21 items
such as laws protecting workers with regular contracts, those affecting workers with
fixed−term (temporary) contracts or contracts with temporary work agencies, and
regulations applying specifically to collective dismissals.4 A higher score on the
4 More information on the method of OEC in constructing the EPL index and the latest version of
the index can be accessed at https://www.oecd.org/els/emp/oecdindicatorsofemploymentprotection.
htm.
Fig. 2.5 Employment protection legislation (EPL), since 1950. Source Allard (2005)
index indicates stricter labor market regulations. Allard (2005) extends this EPL
index back to 1950. Using his information, Fig. 2.5 displays the differences across a
selected number of European countries and the USA since 1950.
According to Fig. 2.5, in the 1950s, the labor market was relatively unregulated
compared to today though the cross-sectional differences between the cluster of
countries were already visible in the mid-50s. The typical LME countries, UK and
USA, had the lowest employment protection by far throughout this period. Starting
from the 1970s onwards, the regulations on employment protection started to become
stricter in many countries (e.g., Germany, France). During this period, the EPL
increased in the UK as well, though it still remained the least regulated European
country. This is because in the 1960s and 1970s, a number of legislations (i.e., the
Contracts of Employment Act 1963 and the Industrial Relations Act 1971) were
introduced to protect employees against unfair dismissals in the UK. The CMEs
Germany and the Netherlands (as well as France, which can either be classified in the
Coordinated or in the Mixed Market category) show moderate levels of employment
protection. In the early 1970s, however, Germany introduced further legislation to
increase employment protection reaching levels similar to Italy.
The late 1970s and beginning of the 1980s witnessed deregulation of the labor
market in a number of countries. A deregulation process is visible in the UK, from the
late 1970s onwards followed by the Netherlands, and Germany in the late 1980s and
early 1990s. In the early 1980s, economic deregulation was the principal labor market
policy of the Thatcher government. During the Thatcher government, a significant
28 S. Dilli
amount of legislation (i.e., Employment Acts of 1980, 1982, and 1988) was passed,
turning back the individual employee rights introduced in the 1960s and 1970s
(Capon 2004). In Germany, the major step relaxing the conditions concerning fixed-
term employment contracts was the introduction of the Employment Promotion Act
(Beschäftigungsförderungsgesetz) in 1985 (Schettkat 2002).5 It is also important to
note that in all the European countries, the number of temporary contracts noticeably
increased in the 1990s (Amable 2003). Labor market liberalization over the 1990s
effectively shows that the bulk of the adjustment was borne by temporary contracts.
The decline in employment protection for that group is especially remarkable in Italy.
While employment protection for regular contracts seems to have been fairly stable
over time, the EPL showed clear reductions for temporary workers over the same
period. Nevertheless, the extent of this deregulation process differed substantially
across the European societies and is reflected in the cross-national differences in the
labor market institutions.
2.4.2 Wage Setting Institutions
In FIRES, in order to capture the wage setting institutions relevant for entrepreneurial
activity, we looked at trade union density, the level of wage bargaining (coordination),
and governmental intervention in the wage bargaining process (see Dilli 2019 for a
discussion on the relevance of these dimensions for different forms of entrepreneurial
activity and Sanders et al. 2020a, b, c in this volume for applications). For
instance, decentralized and individualized wage setting has been argued to encourage
mobility and risk-taking and would therefore support (potential) high-growth firms
(Henrekson 2014).
Figure 2.6 shows the cross-national differences in trade union density, defined
as the membership as a proportion of all wage and salary earners since 1955 in a
selected number of countries (Visser 2013).6 Figure 2.6 shows that a large variation
exists in terms of trade union density between countries.
The low unionization rate of France is remarkably low (an average of 14% for
the entire period), given the capability of trade unions to mobilize their members for
mass action (e.g., strikes), and their influence on government policy. For instance, in
France the government has withdrawn its plans for a new employment contract for
young workers in 2006, while in 2010 there were massive demonstrations between
September and October protesting against the government’s pension reform plans
(Fulton 2013). Thus, in terms of union density, France shows much lower levels
5 The law provided unconditional freedom for the conclusion of fixed-term contracts up to 18 months
in duration (Schettkat 2002).

6 While union density does not reflect the strength of the labor unions (as visible in the case of France
which has a very low union density but very strong labor unions in terms of wage bargaining), union
density is the only indicator to my knowledge that is available historically over time and across the
contexts and to have been commonly linked with entrepreneurship outcomes (see Dilli 2019).
Fig. 2.6 Trade union density, 1970–2010. Source Visser (2013)
compared to Germany, for example. The trade unionization in the USA, a liberal
market economy, is also one of the lowest in Fig. 2.6, whereas the level of union
density in the UK is higher than in the CMEs (e.g., Germany) and the MMEs. The
CME and the MME countries are close to the average of overall European in terms
of trade union density.
Turning to trends in trade union density over time, during the early postwar
period, Western trade union movements grew in membership and achieved an
institutionalized role in industrial relations and politics, especially in the CMEs.
However, in recent decades, trade unions have seen their membership decline in
many countries as they came increasingly under pressure due to social, economic,
and political changes. The decline in unionization began in the 1960s in the USA,
spread to France after the mid-70s, and was then observed in the Netherlands
and the UK (corresponding with the Thatcher years as well) in the late 1970s.
With the wave of social protest in the late 1960s, unions targeted social groups
such as white-collar, female, and often part-time employees. Some unions were
more successful in recruiting members than others. The Italian unions, for instance,
enjoyed spectacular post-1968 growth after partially successful attempts to reunite
the politically fragmented union movements (Ebbinghaus and Visser 1999). The same
period witnessed an increase in unionism in Sweden (see also Visser 2013), but the
downward trend continued in other countries. Especially from the mid-90s onwards,
there has been a second round of decline in trade unionization observable in many
European countries. Arguably, due to the different degrees to which unions were able
30 S. Dilli
Fig. 2.7 Level of wage bargaining. Source Visser (2013)
to maintain coverage in wage bargaining, these changes in trade union density did
not lead to a convergence between the European countries and the cross-sectional
differences remain rather stable over time.
Figure 2.7 reveals the large variation in terms of centralization of wage bargaining
process both between countries and over time. Hall and Soskice (2001) argue
that in CMEs, the wage bargaining would be more centralized (i.e., involving
governments, businesses and labor unions together and agreements would be made
across industries) compared to the liberal market economies. Figure 2.7 shows
support for this view. While there was industry-level bargaining in the UK historically,
since 1980, there have been no centralizing forces. A similar decentralized wage
bargaining system has been in place in the USA. The EMEs show similar patterns to
the UK with firm or local level bargaining. In the Scandinavian countries, there has
been a shift from a centralized wage arrangement to a more sectorial bargaining model
during the 1980s. In Germany, Austria, and Switzerland, industry-level bargaining
has been the dominant form. In the Netherlands, until the 1980s, there was a mix
between central level negotiations with industry bargaining in which there were
frequent government interventions. After the 1980s, the bargaining mostly took
place between employers and trade unions though during the 2009–10 recession,
the government committed to support financially to reducing temporary working
hours (Visser 2013). Among the MMEs, industry-level bargaining seems to be more
commonly practiced. While Spain first had central bargaining during the 1970s, it
moved to industrial level bargaining during the 1980s. Overall, there seems to be
a convergence toward industrial level wage bargaining in Europe since the 1980s,
except in Belgium, which counters the trend by moving to a more centralized wage
bargaining system over the same period. So, although wage bargaining institutions
change over decades, there is no tendency for convergence and the differences
between countries in terms of wage bargaining process persist.
2.4.3 Social Security
With regard to social security, we studied the relevance of social spending together
with illness, unemployment and pension minimum replacement rates for their
relevance for entrepreneurial activity (Dilli 2019). These three show some nuanced
differences, but here it will suffice to focus on the historical evolution of social
spending with pension minimum replacement rates.
While cross-national differences in terms of social security arrangements are
clearly visible today, social security was limited prior to the twentieth century
everywhere around the world. During the eighteenth century, there were two forms
of tax based social spending, namely poor relief and public schools, which made
up at most three percent of GDP in social welfare (Lindert 2004). Still, important
differences across societies in terms of social security arrangements are already
visible in this period. While the Netherlands and the UK historically led in poverty
relief, the USA and Germany led in public schooling. With the extension of suffrage
in many countries after the First World War, public spending on welfare started to
expand in the world and the modern welfare state emerged with extensive coverage
including subsidized healthcare, education, housing, childcare, and old-age pensions
emerged (Lindert 2004). The Great Depression of 1929 and economic crisis in the
late 1970s were particularly important turning points in the European countries.
They gave rise to the role of government in providing security such as in terms of
unemployment insurance and introduction of minimum wage laws (Blanchard 2002;
Visser 2013); though, a large variation is visible in the national strategies of European
countries in terms of government’s support in providing security (e.g., Siebert 1997).
Despite the general rise in social spending and social security arrangements over
the twentieth century, progress toward social welfare regimes has not resulted in a
convergence among the European countries.
Figure 2.8 presents the trends in total social spending as the percentage of GDP.
While France, Germany, and Italy are characterized with the highest social spending
in total, the USA has the lowest followed by the Netherlands and the UK. A significant
decline in social spending is visible during the 1980s, followed by an increase during
the 1990s almost in most selected European countries. Italy has caught up with the
CMEs like Germany, with relatively large social expenditure. Poland, EME, on the
other hand shows a moderate level of social spending, which first rose rapidly but
declined in the post-Soviet period. Perhaps the most striking decline in total spending
is in the case of the Netherlands, where social security reforms in the early 1980s
have driven a sustained decline from about 23 to 17% of GDP, eventually even
undercutting levels in the USA.
32 S. Dilli
Fig. 2.8 Total social spending, 1980–2012. Source OECD (2016b)
Figure 2.9 presents the trends in the minimum pension replacement rates from the
1970s onwards, referring to public pension or equivalent benefit for which a person
without working or pension contribution history is entitled. While countries like the
Netherlands and France show minimum pension replacement rates high above the
European average, the minimum replacement rate in the USA is close to the European
average. The USA and the UK, typical LMEs, have lower pension replacement rates
than France or the Netherlands, but higher than Germany or Poland. Moreover, some
change in the minimum replacement rates7 is visible in a number of countries. For
instance, from the mid-1980s onwards, minimum replacement rates have declined
in the Netherlands. On contrary, the same period has witnessed an increase in Italy
where the minimum pension replacement rate starts at the lowest level but catches
up with countries such as the USA (see also the discussion in Kuitto et al. 2012).
Overall, this section highlights that there have been various changes in the
fields of employment protection legislation, centralization of wage bargaining and
social security over the twentieth century. Labor market institutions, therefore, do
seem rather flexible. Still, despite these changes, the extent to which European
countries experienced change has been different from each other and we do not
find convergence in labor market institutions. For instance, while an increase in
employment protection legislation is visible in many European countries (such as in
Germany, Italy, France) up until the 1980s, these regulations became more flexible
7 This indicator is calculated for a fictive average production worker in manufacturing sector who
is 40 years old and has been working for the 20 years preceding the loss of income or the benefit
period.
Fig. 2.9 Minimum pension replacement rates, 1971–2011. Source Scruggs et al. (2014)
in the case of Germany and Italy after the 1980s. Overall, a convergence toward
more industry-level bargaining process is visible in Central European countries. It
is therefore important to study the history of labor market institutions and carefully
tailor reform proposals to the local and national context.
2.5 Conclusion and Discussion
In the FIRES project, using the Varieties of Capitalism framework, we presented

how the different institutional constellations with regard to finance, knowledge, and
labor market institutions support different forms of entrepreneurial activity (Dilli
et al. 2019; also discussed in Elert et al. 2019 and Herrmann 2020). This chapter
provides a long-term perspective on the historical evolution of such institutions. By
using a historical perspective, the aim of this chapter is to distinguish between those
institutions that change over time versus those that are more resistant to change. This
enables us to identify which institutions can be more easily altered versus which are
hard to change via policy tools. Overall, while change is visible in all three institutions
over the twentieth century, the VoC typology is relevant in understanding the extent
and the direction of the institutional change European countries have experienced.
34 S. Dilli
A historical perspective on the financial institutions with a focus on the banking

structure in Europe indicates that banks were more diversified in the past than
today and provided different possibilities for entrepreneurs to have access to finance.
Historically, rather than getting finance from large banks, the challenges in accessing
finance were solved in many cases through local and private initiatives. Today
in Europe, Eastern and Mediterranean economies face the largest constraints in
financial institutions (Dilli et al. 2018). Given the historically strong family ties
in these contexts, stimulating informal family funding can provide an alternative
source of finance. In the Northwestern European countries, the introduction of more
small-scale formal funding options, which were historically an important source of
finance for entrepreneurs, can be an alternative solution. In Germany, for instance,
cooperatives historically were an important source of finance for entrepreneurs. Such
organizational forms can provide alternative sources of formal finance especially in
continental European countries. Moreover, platform-based financial intermediation
such as through crowdfunding and Fintech are modern-day examples of such
institutions.
In terms of knowledge institutions, the LME economies have a clear advantage in
tertiary level educational attainment, which stimulates general education compared
to occupation and firm specific training in the CMEs. In terms of research and
development, the continental European economies are performing as well as the LME
economies, but potentially with a slightly different focus. This chapter illustrates that
the differences in the knowledge outcomes, which have been highlighted in the VoC
framework, have been visible already in the beginning of the twentieth century.
The twentieth century also witnessed important progress in closing the gender gap
in tertiary education, but the gap remains in STEM education today and presents
a challenge for women’s involvement in more innovative entrepreneurial activity
(Dilli and Westerhuis 2018b). In the case of the UK, the academic environment
has managed to attract researchers from abroad. Continental European economies
compensate by stimulating research and development via governmental expenditures
such as in the case of Germany. This may provide an alternative for contexts where
research and development remain limited.
The historical cross-national differences in labor market institutions also change
noticeably on the surface, but there is also clear path dependence and deeply
rooted elements that clearly persist over time. The LMEs, for instance, always
had the least regulated labor market institutions, whereas the tightly regulated labor
market institutions have been characteristic for the Mediterranean and the continental
economies over the same period. Therefore, from a historical viewpoint, deregulation
in labor market institutions to stimulate entrepreneurship would likely face challenges
in contexts where labor markets were historically tightly regulated. Overall, the
historical analysis shows that elements of the institutional framework in Europe
have deep roots that should be carefully considered when contemplating reforms. In
line with this conclusion, in Sanders et al. (2020a, b, c), an objective is to let careful
historical analysis precede the formulation of reform proposals.
References
Aleksynska M, Schmidt A (2014) A chronology of employment protection legislation in some

selected European countries. Working paper. Accessed on 15 Nov 2015. http://www.ilo.org/
travail/whatwedo/publications/WCMS_324647/lang–en/index.htm
Alesina A, Giuliano P (2010) The power of the family. J Econ Growth 15(2):93–125
Allard GJ (2005) Measuring job security over time: in search of a historical indicator for EPL
(Employment Protection Legislation). SSRN Scholarly Paper. Social Science Research Network,
Rochester, NY. Accessed on 17 Dec 2015. http://papers.ssrn.com/abstract=1016327
Amable B (2003) The diversity of modern capitalism. Oxford University Press, Oxford
Arregle JL, Batjargal B, Hitt MA, Webb JW, Miller T, Tsui AS (2015) Family ties in entrepreneurs’
social networks and new venture growth. Entrep Theory Pract 39(2):313–344
Au K, Ding ZJ (2011) Institutional influence on love money: informal investment to family,
friends, strangers across countries. In: Family business association annual conference,
Perth. http://www.fambiz.org.au/wp-content/uploads/Institutional-Influence-on-Love-Money-
Informal-Investment-to-Family-Friends-and-Strangersacross-Countries-Professor-Kevin-Au-
and-Zhujun-Ding.pdf
Au K, Kwan HK (2009) Start-up capital and Chinese entrepreneurs: the role of family. Entrep
Theory Pract 33:889–908
Baumol WJ (1990) Entrepreneurship: productive, unproductive, and destructive. J Polit Econ
98(5):893–921
Black SE, Strahan PE (2002) Entrepreneurship and bank credit availability. J Financ 57(6):2807–
2833
Blanchard O (2002) Designing labor market institutions, Working Paper. Accessed on 19 Jan 2016.
http://economics.mit.edu/files/664
Broadberry S (ed) (2010) The Cambridge economic history of modern Europe, volume 2: 1870 to
the present. Cambridge University Press, New York
Bruton GD, Ahlstrom D, Li HL (2010) Institutional theory and entrepreneurship: where are we now
and where do we need to move in the future? Entrep Theory Pract 34(3):421–440
Bürzel TA (1999) Towards convergence in Europe? institutional adaptation to Europeanization in
Germany and Spain. J Common Mark Stud 37(4):573–596
Bygrave W, Hay M, Ng E, Reynolds P (2003) Executive forum: a study of informal investing in 29
nations composing the global entrepreneurship monitor. Ventur Cap 5(2):101–116
Bygrave WD, Reynolds PD (2005) Who finances start-ups in the USA? a comprehensive study of
informal investors, 1999–2003. Frontiers of Entrepreneurship Research
Capon C (2004) Understanding organizational context: inside and outside organizations. Pearson
Education
Carnevali F (2005) Europe’s advantage: banks and small firms in Britain, France, Germany, and
Italy since 1918. Oxford University Press, Oxford, New York
Coad A, Rao R (2010) R&D and firm growth rate variance. Econ Bull 30(1):702–708
Cull R, Davis LE, Lamoreaux NR, Rosenthal JL (2006) Historical financing of small-and medium-
size enterprises. J Bank Finance 30(11):3017–3042
de Goey F, van Gerwen JL (2008) Entrepreneurs in Netherlands (ondernemers in Nederland:
varieties in ondernemen. Boom, Amsterdam
Deeg RE (1999) Finance capitalism unveiled: banks and the German political economy. University
of Michigan Press, Ann Arbor
Dilli S, Westerhuis G (2018a) A historical perspective on the varieties of institutions, Finance
and entrepreneurship. Available at: https://projectfires.eu/wp-content/uploads/2018/05/d2.2-
combined-parts-23-n.pdf
Dilli S, Westerhuis G (2018b) How Institutions and gender differences in education shape
entrepreneurial activity: a cross-national perspective. Small Bus Econ 51(2): 371–92
Dilli S (2019) The diversity of labor market institutions and entrepreneurship. Socio-Econ Rev.
Online first
36 S. Dilli
Dilli S, Elert N, Herrmann AM (2018) Varieties of entrepreneurship: exploring the institutional

foundations of different entrepreneurship types through ‘varieties-of-capitalism’ arguments.
Small Bus Econ 51(2):1–28
Duranton G, Andres Rodriguez-Pose A, Sandall R (2009) Family types and the persistence of
regional disparities in Europe. Econ Geogr 85(1):23–47
Ebbinghaus B, Visser J (1999) When institutions matter: union growth and decline in Western
Europe, 1950–1995. Eur Sociol Rev 15(2):135–158
European union. International studies in Entrepreneurship. Springer, Berlin Heidelberg
European Commission (2013) Entrepreneurship 2020 action plan: reigniting the entrepreneurial
spirit in Europe, Brussels, Commission of the European Communities
Frankema E, Van Waijenburg M (2012) Structural impediments to African growth? new evidence
from real wages in British Africa, 1880–1965. J Econ Hist 72(4):895–926
Fritsch M, Wyrwich M (2017) The effect of entrepreneurship for economic development—an
empirical analysis using regional entrepreneurship culture. J Econ Geogr 17:157–189
Fulton L (2013) Worker representation in Europe. Labour Research Department and ETUI.
Produced with the assistance of the SEEurope Network. Accessed on 17 June 2019. http://www.
workerparticipation.eu/National-Industrial-Relations/Across-Europe/Trade-Unions2
Galor O, Ozak Ö (2016) The agricultural origins of time preference. Am Econ Rev 106(10):3064–
3103
Gelderblom OC (2011) Entrepreneurs in the Dutch golden age. In: Baumol W, Landes D, Mokyr J
(eds) The invention of enterprise. Entrepreneurship from ancient Mesopotamia to modern times,
Princeton UP, Princeton, pp 156–182 (p 27)
Gelderblom O, Jonker J (2004) Completing a financial revolution: the finance of the Dutch East
India trade and the rise of the Amsterdam capital market, 1595–1612. J Econ Hist 64(3):641–672
Global Entrepreneurship Monitor (2011) Global Report. Babson College, Babson Park
Goldin C (1995) Investment in women’s human capital and economic development. University of
Chicago Press, Chicago
Greif A (2006) Family structure, institutions, and growth: the origins and implications of western
corporations. Am Econ Rev 96(2):308–312
Hall PA, Soskice DW (2001) An introduction to varieties of capitalism. In: Hall PA, Soskice DW
(eds) Varieties of capitalism—the institutional foundations of comparative advantage. Oxford
University Press, Oxford, pp 1–68
Hall PA, Thelen K (2009) Institutional change in varieties of capitalism. Socio-Econ Rev 7(1):7–34
Henrekson M (2014) How labor market institutions affect job creation and productivity
growth, IZA World of Labor. http://wol.iza.org/articles/how-labor-market-institutions-affect-job-
creation-and-productivity-growth/long
Herrmann A (2020) Chapter 4. On the institutional foundations of the varieties of entrepreneurship
in Europe. In: Sanders M, Marx A, Stenkula M (eds) The entrepreneurial society. Springer, Berlin
Heidelberg
Jonker J (1997) The alternative road to modernity: banking and currency, 1814–1914. In: Hart MT,
Jonker J, Zanden J (eds) A financial history of the Netherlands, Cambridge University Press,
Cambridge, pp 94–123
Kuitto K, John D, Düpont N (2012) Welfare policy institutions in the enlarged EU—
convergence, divergence or persistence? Greifswald Comparative Politics Working paper
No. 1/2012. Accessed on 17 July 2019. https://www.researchgate.net/publication/309291706_
Welfare_policy_institutions_in_the_enlarged_EU_-_convergence_divergence_or_persistence
Lee JW, Lee H (2016) Human capital in the long run. J Dev Econ 122:147–169
Lescure M (1999) Small-and medium-size industrial enterprises in France, 1900–1975. In: Odaka
K, Sawai M (eds) Small firms, large concerns: the development of small business in comparative
perspective. Oxford University Press, Oxford, pp 140–167
Lindert PH (2004) Growing public: social spending and economic growth since the eighteenth
century. Cambridge University Press
Millán JM, Congregado E, Román C, van Praag M, van Stel A (2014) The value of an educated
population for an individual’s entrepreneurship success. Journal of Business Venturing 29(5):612–
632
Nielson K, Jessop B, Hausner J (1995) Institutional change in post-socialism. In: Hausner J, Jessop
B, Nielsen K (eds) Strategic choice and path-dependency in post-socialism: institutional dynamics
in the transformation process. Edward Elgar, Hants, UK
North DC (1990) Institutions, institutional change and economic performance. Cambridge
University Press, Cambridge
Nunn N (2009) The importance of history for economic development. Annu Rev Econ 1(1):65–92
OECD (2013) Alternative financing instruments for SMEs and entrepreneurs: the case of mezzanine
finance. OECD Publishing, Paris
OECD (2015) Financing SMEs and entrepreneurs 2015 An OECD scoreboard: an OECD
scoreboard. OECD Publishing, Paris
OECD (2016a) The missing entrepreneurs 2015 (p. 2015). OECD Publishing, Paris. http://www.
oecd-ilibrary.org/content/book/9789264226418-en
OECD (2016b) Total social spending, 1980–2012 (indicator). Accessed on 05 June 2016. https://
www.oecd.org/social/expenditure.htm
OECD (2019) Gross domestic spending on R&D (indicator). https://doi.org/10.1787/d8b068b4-en
Accessed on 01 July 2019
Reher DS (1998) Family ties in Western Europe: persistent contrasts. Popul Dev Rev 24(2):203–234
Sanders M, Stenkula M, Grilli L, Herrmann AM, Latifi G, Páger B, Szerb L, Terragno Bogliaccini E
(2020a) A Reform Strategy for Italy. In: Sanders M, Marx A, Stenkula M (eds) The entrepreneurial
society. Springer, Berlin Heidelberg
Sanders M, Stenkula M, Fritsch M, Herrmann AM, Latifi G, Páger B, Szerb L, Terragno Bogliaccini
E, Wyrwich M (2020b) A Reform Strategy for Germany. In: Sanders M, Marx A, Stenkula M
(eds) The entrepreneurial society. Springer, Berlin Heidelberg
Sanders M, Stenkula M, Dunstan J, Estrin S, Herrmann AM, Páger B, Szerb L, Terragno Bogliaccini
E (2020c) A Reform Strategy for the UK. In: Sanders M, Marx A, Stenkula M (eds) The
entrepreneurial society. Springer, Berlin Heidelberg
Scarpetta S (2014) Employment protection, IZA World of Labor, pp. 1–10. http://wol.iza.org/
articles/employment-protection.pdf
Schettkat R (2002) Regulation in the Dutch and German economies at the root of unemployment?
SCEPA working paper series. SCEPA’s main areas of research are macroeconomic policy,
inequality and poverty, and globalization. Schwartz Center for Economic Policy Analysis
(SCEPA), The New School. Accessed on 20 Dec 2015. https://ideas.repec.org/p/epa/cepawp/
2002-05.html
Scruggs L, Jahn D, Kuitto K (2014) Comparative welfare entitlements dataset 2. Version 2014−03.
University of Connecticut & University of Greiswald
Siebert H (1997) Labor market rigidities: at the root of unemployment in Europe. J Econ Perspect
11(3):37–54
Sluyterman K (ed) (2015) Varieties of capitalism and business history: the Dutch case. Routledge,
London and New York
Spadavecchia A (2005) Surviving under the shelter of government subsidies or ‘avoiding disaster’?
new evidence from Italian industrial districts, 1971–91, Working Papers 5011, Economic History
Society
Steier L (2003) Variants of agency contracts in family-financed ventures as a continuum of familial
altruistic and market rationalities. J Bus Ventur 18(5):597–618
Szerb L, Terjesen S, Rappai G (2007) Seeding new ventures—greenthumbs and fertile fields:
individual and environmental drivers of informal investment. Ventur Cap 9(4):257–284
Todd E (1985) The explanation of ideology: family structures and social system. Basil Blackwell,
Oxford
Todd E (2011) L’origine des systèmes familiaux, Tome 1: L’Eurasie. Gallimard, Paris
38 S. Dilli
Van Sluis J, Van Praag M, Vijverberg W (2008) Education and entrepreneurship selection and
performance: a review of the empirical literature. J Econ Surv 22(5):795–841
Van Zanden JL, Zuijderduijn J, De Moor T (2012) Small is beautiful: the efficiency of credit markets
in the late medieval Holland. Eur Rev Econ Hist 16:3–22
Visser J (2013) Wage bargaining institutions—from Crisis to Crisis. European economy—economic
paper. Directorate general economic and financial affairs (DG ECFIN), European Commission.
Accessed on 8 Feb 2016. https://ideas.repec.org/p/euf/ecopap/0488.html
Wadhwani RD (2016) Small-scale credit institutions. In: Cassis Y, Grossman RS, Schenk CR (eds)
The Oxford handbook of banking and financial history. Oxford University Press, Oxford, pp
191–216
Westerhuis G (2016) Commercial banking: changing interactions between banks, markets, industry
and state. In: Cassis Y, Grossman RS, Schenk CR (eds) The Oxford handbook of banking and
financial history. Oxford University Press, Oxford, pp 110–163
World Bank (2013) Global financial development database. Accessed on 15 March 2017. http://
www.worldbank.org/en/publication/gfdr/data/global-financial-developmentdatabase
Chapter 3
Economic Impact Assessment
of Entrepreneurship Policies
with the GMR-Europe Model
Attila Varga, László Szerb, Tamás Sebestyén and Norbert Szabó
Abstract This chapter introduces the most recent version of the geographic macro
and regional (GMR) Europe model. The model estimates the economic impacts of
policies that aim at improving the quality of entrepreneurship ecosystems. As such,
GMR-Europe is the first available economic impact assessment model that estimates
the effects of entrepreneurship policies on several economic variables like productiv-
ity, GDP, employment, and wages. To measure the quality of regional entrepreneurial
ecosystems, GMR-Europe integrates the Regional Entrepreneurship and Develop-
ment Index (REDI) into its structure. In addition to introducing the GMR-Europe
This study was financed by the Financial and Institutional Reforms for an Entrepreneurial Society
(FIRES) that has received funding from the EU’s Horizon 2020 research and innovation program
under grant agreement No. 649378 and by the European Union and Hungary co-financed by the
European Social Fund through the project EFOP-3.6.2-16-2017-00017, titled “Sustainable, intelli-
gent and inclusive regional and city models”. The research has been conducted as part of the National
Excellence in Higher Education Program in Hungary (reference number of the contract: 20765-
3/2018/FEKUTSTRAT). The authors of this chapter are indebted to the following colleagues for
their invaluable assistance: Gallusz Abaligeti and Dániel Kehl, for their contribution to the empirical
calibration of the TFP model equations, Anna Csajkás and Richárd Farkas for their assistance in
data collection, data preparation and contribution to estimations and Péter Járosi, whose previous
engagement in model development and continuous assistance through this work is an inevitable
part of the present model setup. Laszlo Szerb and Attila Varga also gratefully acknowledge sup-
port from the National Scientific Research Fund of Hungary (OTKA/NKFI grant no. 120289 titled
Entrepreneurship and Competitiveness investigations in Hungary based on the Global Entrepreneur-
ship Monitor surveys 2017–2019). Thanks to Andrea Herrmann for comments on earlier drafts of
this chapter.
A. Varga (B) · L. Szerb · T. Sebestyén · N. Szabó

Regional Innovation and Entrepreneurship Research Center, MTA-PTE Innovation and Economic
Growth Research Group, University of Pécs, Pécs, Hungary
e-mail: vargaa@ktk.pte.hu
L. Szerb
e-mail: szerb.laszlo@ktk.pte.hu
T. Sebestyén
e-mail: sebestyent@ktk.pte.hu
N. Szabó
e-mail: szabon@ktk.pte.hu

40 A. Varga et al.
model, we provide simulations illustrating the capabilities of the model by provid-

ing estimates of the economic impacts of policies designed to improve the quality
of entrepreneurial ecosystems. The analysis communicates an important message
for policymakers demonstrating that the impacts of entrepreneurship policies vary
across regions and countries in Europe depending on several territorial features.
Keywords Entrepreneurship policy · Entrepreneurial ecosystems · Economic

growth · GMR models · REDI · Regional development
3.1 Introduction
Recently published papers report a positive influence of entrepreneurship on eco-

nomic growth. Lafuente et al. (2016) emphasize that efficiency at the national level
is largely supported by a healthy system of entrepreneurship. This finding gets addi-
tional support in a cross-country study of Acs et al. (2017), which concludes that
entrepreneurship triggers productivity. Prieger et al. (2016) and Lafuente et al. (2019)
test the entrepreneurship-growth nexus and find that national entrepreneurial ecosys-
tems positively and significantly influence economic growth in developing countries.
In Szerb et al. (2018), the entrepreneurship ecosystem influences gross value added
and employment growth positively in 125 European Union regions.
Despite the fact that evidence on a positive nexus between entrepreneurship and
growth is increasing, the extent to which given policy interventions (e.g., the sup-
port of entrepreneurial culture or increased financial support to entrepreneurs) affect
economic growth is still not known. Furthermore, it is still not clear to what extent
entrepreneurship policy is comparable with traditionally applied instruments like
R&D or human capital promotion. How would a policy combining entrepreneurship
promotion and those traditional instruments affect economic growth? The relevant
answers to these queries can only be found by applying specifically constructed
economic impact models.
Economic impact estimation provides important information about the likely
effects of policy interventions on national or regional economic performance. Policy
impacts may be calculated ex-ante (in the design phase) and ex-post (after interven-
tions have been implemented). Economic models are commonly used instruments
of impact evaluation. The QUEST (Ratto et al. 2009) and the HERMIN (Bradley
2006) models have been the most frequently used tools of European Cohesion Pol-
icy impact assessment, whereas the REMI model (Treyz et al. 1992) is a widely
applied instrument of regional policy evaluation in the USA.
However, the economic impact models mentioned above estimate policy impacts
either at the macroeconomic (national) or at the regional (sub-national) levels. It is
argued that in order to appropriately account for policy effects, economic impact
models should represent both (i.e., the regional and the national) dimensions (Varga
2017a). As many development policy interventions are regionally targeted, a suit-
able economic impact model to estimate their effects should incorporate the regional
3 Economic Impact Assessment of Entrepreneurship … 41
dimension. Interregional interactions (trade, migration, technology spillovers) are

also necessarily involved, as they tend to significantly affect the target region as well
as other territories connected to it. Understanding the extent to which some relevant
supra-regional units (i.e., the country or the European Union) are affected by regional
level interventions may become very relevant in policy design and ex-post policy eval-
uations. This supports the involvement of the macroeconomic dimension in the model
framework. Moreover, interventions at the national and supra-national levels (e.g.,
monetary or fiscal policies) significantly influence the environment within which
regions develop, providing a further argument for the integration of macroeconomic
and regional dimensions in development policy impact evaluation models.
With combined multi-regional/macro models, the economic impacts of different
development scenarios become comparable at regional and supra-regional levels.
Geographic, macro and regional (GMR) models integrate such geographic dimen-
sions. Therefore, in this chapter, we apply the recently extended GMR-Europe model
(Varga et al. 2018) in entrepreneurship policy impact estimations.
Nevertheless, at least two major challenges have to be solved in order to suc-
cessfully estimate the growth effects of entrepreneurship policy with an economic
impact model. The first is measuring the changes in the entrepreneurial ecosystem
in relation to different interventions that aim to promote it. To date, there exists only
one measure of this kind, the recently developed Regional Entrepreneurship and
Development Index (REDI) (Szerb et al. 2017). The other challenge is integrating
entrepreneurship into an economic impact model to estimate the economic effects of
entrepreneurship policy at the relevant spatial scales. To respond to this second chal-
lenge, we integrated REDI into the framework of the GMR-Europe policy impact
model (Varga et al. 2019). As a result, the most recent version of GMR models
became the first available tool to estimate the economic impacts of entrepreneurship
policies.
This chapter introduces the REDI in Section Two and the GMR-Europe model in
Section Three. For readers who are interested in the technical details of the model,
Varga et al. (2018) provide more information. To illustrate the capabilities of the
GMR-Europe model in the impact estimations of entrepreneurship policies, we
present a counterfactual analysis in the fourth section of this chapter. In these sim-
ulations, we assume that the quality of the entrepreneurial ecosystem gets the same
relative increase in every NUTS2 region of Europe. The analysis communicates an
important message for policymakers demonstrating that the economic impacts of
entrepreneurship policies (measured by the change in GDP) vary across regions and
countries in Europe depending on several territorial features. The chapter concludes
with a summary section.
42 A. Varga et al.
3.2 Measuring Regional Entrepreneurship Ecosystems:

The REDI Model
In order to examine the effect of entrepreneurship on any performance indicators like

productivity, economic growth, or development, one needs clear definitions, proper
measurement units, and a suitable model which supports the analysis. Currently,
there is no agreement among entrepreneurship scholars on any of these preconditions
(Landström and Harirchi 2018).
According to Wennekers and Thurik (1999), entrepreneurship is an ill-defined
concept, while others view it as eclectic (Audretsch et al. 2015); it is difficult to
find even a minimum agreement on how to frame the phenomenon (Shane and Ven-
takaraman 2000). Yet, a distinctive feature of entrepreneurship is its focus on the
individual as opposed to firms or markets. Some identify entrepreneurs based on
specific psychological traits (Baum et al. 2014), others associate it with new venture
creation (Gartner 1985), and some with its economic and societal effects (Baumol
1996).
Entrepreneurship is used by many different disciplines (Low and MacMillan 1988;
Parker 2018). Here, we follow mainly the approach of economics by examining how
entrepreneurship affects the economic output from the measurement perspective (Acs
et al. 2014). Some believe that entrepreneurial attitudes such as preferences for self-
employment, assertiveness toward entrepreneurs and entrepreneurial careers, and
perceptions of entrepreneurial skills play an important role in the startup process
and, ultimately, in economic growth. However, attitudes are not actions, and the
exploration of the mechanism that leads attitudes into action and economic growth
has not been unveiled and understood (Autio et al. 2013).
A popular approach is to identify entrepreneurship with some output measures
like the startup rate or the Global Entrepreneurship Monitor (GEM) total-early-
stage entrepreneurial activity ratio. The drawback of the output view is that it mixes
very different measures where all can have varying effects on economic outcomes
(Nightingale and Coad 2014; Vivarelli 2013). Moreover, entrepreneurial outputs and
their composition vary over development (Naudé 2010; Liñán and Fernandez-Serrano
2014).
Since the seminal work of Baumol (1996), we know that the effect of entrepreneur-
ship is regulated by its context. Framework measures like the World Bank Doing
Business or the Index of Economic Freedom aim to quantify the effect of the widely
interpreted institutions1 on entrepreneurship outputs, albeit better institutions are not
directly linked to some entrepreneurial actions. While the maturity of the institutions
is closely correlated with long-term economic development, their predictive power
on growth or productivity is only partially understood (Acs et al. 2014). Besides,
institutions are geographically bounded and place-based; many of them are effective
and worth measuring in a smaller territorial unit than a country (Qian et al. 2013).
1 We interpret institutions as formal and informal institutions that shape entrepreneurial attitudes of
the population, the abilities of the entrepreneurs, and aspirations of startups.

In the 2010s, a new research direction, the entrepreneurship ecosystem (EE)

approach emerged focusing on the systemic (framework) conditions that lead to the
occurrence of potentially high impact entrepreneurial output—so-called fast-growing
gazelles (Malecki 2018; Stam 2015). While EE is still in a very early stage of devel-
opment as a scientific concept, its approach is useful for examining the economic
effect of entrepreneurship (Alvedalemn and Boschma 2017). Szerb et al. (2018)
characterize the basic features of EE as (1) the clear distinction of entrepreneurial
environment and entrepreneurial outputs, whereby (2) the performance of the EE
depends on the systemic interaction between institutions and various players, (3)
agglomeration economies, networking, and spillover effects are the basic features
and mechanisms of the ecosystems, and (4) ecosystems are very different resulting
from a path-dependent development process with forward and backward linkages.
There is an agreement among advocates of EE that each entrepreneurial ecosys-
tem is unique, and the replication of successful examples is not possible. Some
even believe that EEs are so unique that it is impossible to measure them. Conse-
quently, EEs should be examined by individual case studies and their development
strategy should be unique, place-, and case-based (Spigel 2017). Partially contra-
dicting to this approach, we believe that there are some common elements of EEs
and that a common measurement can be a useful tool for tailor-made policy recom-
mendations. At present, there exists only one tool, the Regional Entrepreneurship
and Development Index (REDI), which provides a measure of EE for a mix of 125
NUTS1 and NUTS2 European Union regions (Szerb et al. 2017). REDI is a regional
version of the well-known Global Entrepreneurship Index (GEI) defining the sys-
tem of entrepreneurship (SE) as “… the dynamic, institutionally embedded interac-
tion between entrepreneurial attitudes, ability, and aspirations, by individuals, which
drives the allocation of resources through the creation and operation of new ventures”
(Acs et al. 2014, p. 119). REDI is a measure of a very complex and multidimensional
quality of the entrepreneurship ecosystem. As compared to GEI, REDI is not simply
a more precise, but also a more appropriate measure of EE because it incorporates a
different set of institutional variables reflecting the regional forces of agglomeration,
connectivity, and clustering that interact with individual entrepreneurial features.
In what follows, we provide an outline of the REDI index. For more details on the
technical aspects of REDI construction, we refer to a detailed technical report (Szerb
et al. 2017). The composition of REDI follows the common composite indicator
building methodology with three exceptions (Joint Research Centre of the European
Commission 2008). First, the construction of some variables includes some agglom-
eration effects. Second, we use the equalization of the averages methodology to
equalize the marginal effects of the potential policy steps. Third, we use the penalty
for bottleneck method to identify the optimal combination of the fourteen pillars. We
follow a six-level index-building methodology starting from (1) 60 sub-indicators,
then (2) creating 44 indicators, followed by (3) calculating 28 variables, (4) 14 pil-
lars, (5) three sub-indices, and finally (6) the single REDI super-index (for details
see Szerb et al. 2017).
44 A. Varga et al.
The three sub-indices of attitudes (ATT), abilities (ABT), and aspiration (ASP)
constitute the entrepreneurship super-index, which is called REDI. All three sub-
indices contain four or five pillars, which can be interpreted as quasi-independent
building blocks of this entrepreneurship index. Each of the 14 pillars is the result of
the multiplication of an individual variable and an associated institutional variable.
In this case, institutional variables can be viewed as particular (region level) weights
of the individual variables. Table 3.1 provides a detailed picture of the sub-indices.
Unlike other EE approaches, REDI clearly defines how the different elements are
interrelated. REDI elements can have an additive (indicator level) or a multiplicative
(variable level) influence on the system performance. The novelty of this method
is that it portrays the entrepreneurial disparities among EU regions and provides
country and regional level, tailor-made public policy suggestions to improve the
level of entrepreneurship and optimize resource allocation over the different pillars
of entrepreneurship.
Entrepreneurship is defined as the interaction of entrepreneurial attitudes, abilities,
and aspirations. The penalty for bottleneck (PFB) methodology is developed for
measuring and quantifying these interactions (Rappai and Szerb 2011). A bottleneck
is defined as the worst performing element, the weakest link, or binding constraint in
the system. With respect to entrepreneurship, we define a bottleneck as a shortage, or
the lowest level of a particular entrepreneurial pillar as compared to other pillars. The
sub-indices are composed of four or five components, defined as pillars that should
be adjusted in a way that takes this notion of balance into account. After normalizing
the scores of all the pillars, the value of each pillar in a region is penalized by
linking it to the score of the pillar with the weakest performance in that region.
This simulates the notion of a bottleneck, and if the weakest pillar were improved,
the particular sub-index and ultimately the whole REDI would likewise show a
material improvement. On the contrary, improving a relatively high pillar value will
presumably enhance only the value of the pillar itself and cause a much smaller
increase of the whole REDI. Summarizing the REDI technique intuitively, it is an
index that combines information from many variables at the individual and regional
level, assumes that institutions complement individual action (multiplicative), while
for the total score the least performing elements weight more than the best ones, and
finally a well-balanced ecosystem without bottlenecks scores higher.
This notion of bottlenecks is important for policy purposes. Our model suggests
that attitudes, ability, and aspiration interact, and if they are out of balance, productive
entrepreneurship is inhibited. REDI has the capacity to demonstrate how resource
allocation can be optimized along the 14 pillars to improve the REDI score and,
ultimately, the regional entrepreneurship system performance. Moreover, the sys-
temic combination of the pillars influences the effectiveness of the ecosystem. An
improvement in the weakest pillar would produce an increase in the overall REDI
score. An EE with a homogeneous pillar configuration is viewed to be optimal (Szerb
et al. 2017). The Appendix provides a concise description of the REDI methodology.
Tables 3.2 and 3.3 below provide regional REDI values and country REDI scores
based on population-weighted average REDI scores.
Table 3.1 Structure of the Regional Entrepreneurship and Development Index

Sub-indices Pillars Variables
(individual/institutional)
Regional Entrepreneurial Opportunity Opportunity recognition
Entrepreneurship Attitudes perception Market agglomeration
and Development Sub-index
Index Startup skills Skill perception
Quality of education
Risk acceptance Risk perception
Business risk
Networking Know entrepreneurs
Social capital
Cultural support Carrier status
Open society
Entrepreneurial Opportunity startup Opportunity motivation
Abilities Business environment
Sub-index
Technology Adoption Technology level
Absorptive capacity
Human capital Educational level
Education and training
Competition Competitors
Business strategy
Entrepreneurial Product innovation New product
Aspiration Technology transfer
Sub-index
Process innovation New technology
Technology
Development
High growth Gazelle
Clustering
Internationalization Export
Connectivity
Risk capital Informal investment
Financial Institutions
Source Authors’ own compilation
Table 3.3 shows, perhaps surprisingly, that Ireland leads, but the top ten com-
prise all the usual suspects in North-western Europe. This table, however, also hides
significant regional variation within these countries. As Table 3.2 shows, with some
interesting exceptions, the best performing entrepreneurial ecosystems in Europe are
typically found in densely populated urban centers in the North and North-western
parts of Europe. Stockholm, Helsinki, London, Paris, Amsterdam, and Berlin are all
Table 3.2 REDI values and ranks in the 125 EU regions (2012–2014)
46
Rank Region name REDI Rank Region name REDI Rank Region name REDI
1 Stockholm 78.3 43 North West (UK) 50.4 85 Illes Balears 34.3
2 Hovedstaden 76.6 44 Région wallonne 50.3 86 Region Pólnocno-Zachodni 34.2
3 London 75.5 45 Niedersachsen 50.3 87 Region Pólnocny 33.7
4 Southern and Eastern 71.3 46 Zahodna Slovenija 50.0 88 Centro (IT) 33.5
5 Île de France 70.8 47 Schleswig-Holstein 49.8 89 Nord-Ovest 33.5
6 Helsinki-Uusimaa 70.0 48 Westösterreich 49.0 90 Andalucía 33.2
7 South East (UK) 69.6 49 Länsi-Suomi 48.9 91 Lithuania 32.8
8 Hamburg 69.5 50 Sjalland 48.4 92 Cantabria 32.7
9 Sydsverige 65.8 51 Lisboa 48.1 93 Centro (PT) 32.7
10 West-Nederland 63.5 52 Südösterreich 47.6 94 Nord-Est 32.6
11 Bruxelles/Brussels 63.2 53 Ouest (FR) 46.6 95 Aragón 31.9
12 Berlin 62.4 54 Nord-Pas-de-Calais 46.4 96 Region Wschodni 31.8
13 South West (UK) 62.3 55 Småland med öarna 45.6 97 Közép-Magyarország 31.1
14 Baden-Württemberg 62.0 56 Est (FR) 45.5 98 Principado de Asturias 30.3
15 Syddanmark 61.6 57 Norra Mellansverige 45.5 99 Macroregiunea trei 29.9
16 Bayern 60.6 58 Méditerranée 45.4 100 Galicia 29.5
17 Scotland 60.5 59 Estonia 45.3 101 Región de Murcia 29.3
18 Border, Midland and Western 60.4 60 Rheinland-Pfalz 44.6 102 Canarias (ES) 29.2
19 Östra Mellansverige 59.9 61 North East (UK) 44.3 103 Attiki 28.3
20 Västsverige 59.8 62 Bratislavsky kraj 44.2 104 La Rioja 28.2
21 Hessen 58.9 63 Bassin Parisien 44.1 105 Západné Slovensko 26.7
(continued)
A. Varga et al.
Table 3.2 (continued)
Rank Region name REDI Rank Region name REDI Rank Region name REDI
22 East of England 58.7 64 Pohjois-ja Ita-Suomi 43.2 106 Isole 26.7
23 Center-Est (FR) 58.5 65 Vzhodna Slovenija 43.0 107 Stredné Slovensko 26.5
24 Midtjylland 58.2 66 Region Centralny 43.0 108 Extremadura 26.1
25 East Midlands (UK) 57.9 67 Thüringen 41.1 109 Macroregiunea unu 26.1
26 Zuid-Nederland 57.6 68 Cataluna 40.9 110 Vychodné Slovensko 26.0
27 Bremen 57.1 69 Region Poludniowy 40.5 111 Sud 25.7
28 Ostösterreich 56.9 70 Mecklenburg-Vorpommern 40.2 112 Kontinentalna Hrvatska 25.6
29 Saarland 56.7 71 Mellersta Norrland 39.9 113 Castilla-la Mancha 24.7
30 Nordjylland 56.5 72 País Vasco 38.8 114 Jadranska Hrvatska 23.5
31 Noord-Nederland 55.3 73 Czech Republic 38.8 115 Macroregiunea patru 22.3
32 Northern Ireland (UK) 55.0 74 Sachsen-Anhalt 38.2 116 Voreia Ellada 22.0
33 Nordrhein-Westfalen 54.8 75 Sud-Ouest (FR) 37.6 117 Nyugat-Dunántúl 21.7
3 Economic Impact Assessment of Entrepreneurship …
34 Övre Norrland 54.8 76 Alentejo 37.1 118 Macroregiunea doi 21.4

35 West Midlands (UK) 54.0 77 Latvia 36.7 119 Nisia Aigaiou, Kriti 21.3
36 Etelä-Suomi 52.4 78 Region Poludniowo-Zachodni 36.7 120 Kentriki Ellada 20.0
37 Oost-Nederland 51.8 79 Comunidad Foral de Navarra 36.2 121 Dél-Dunántúl 19.8
38 Yorkshire and The Humber 51.8 80 Algarve 35.4 122 Észak-Magyarország 18.9
39 Vlaams Gewest 51.3 81 Brandenburg 35.1 123 Közép-Dunántúl 18.8
40 Comunidad de Madrid 51.1 82 Comunidad Valenciana 34.9 124 Észak-Alföld 18.2
41 Sachsen 50.5 83 Castilla y León 34.6 125 Dél-Alföld 17.7
42 Wales 50.4 84 Norte 34.3
47
48 A. Varga et al.
Table 3.3 Country-level

Ranking Country REDI 2012–2014 average
REDI values and ranks in the
24 countries (2012–2014) 1. Ireland 64.3
(Based on 2. Denmark 59.0
population-weighted REDI
3. Sweden 58.2
scores)
4. United Kingdom 56.0
5. Netherlands 56.0
6. Finland 52.5
7. Germany 51.1
8. Austria 50.2
9. Belgium 49.1
10. France 7.6
11. Slovenia 44.3
12. Estonia 42.3
13. Portugal 36.3
14. Czech Republic 36.2
15. Poland 34.4
16. Spain 34.1
17. Latvia 33.5
18. Italy 30.0
19. Lithuania 29.9
20. Slovakia 25.4
21. Croatia 23.1
22. Romania 22.0
23. Greece 21.8
24. Hungary 20.7
EU average 42.5
in the top ten of European regions. But the countries scoring high in Table 3.3 also
have regions in the middle range of the regional ranking.
3.3 Integrating Entrepreneurship in the GMR-Europe

Policy Impact Model
The GMR-Europe model is capable of estimating the economic impacts of

entrepreneurship policy. These policies promote entrepreneurial activity which can
contribute to a region’s innovative capacity, eventually leading to technological and
economic development. Economic impact models like the GMR-Europe are then
able to track the widespread effects of the initial interventions. The key link through
which entrepreneurship is integrated into the GMR-Europe model is the REDI intro-
duced above. Entrepreneurship policies are assumed to affect the REDI in separate
regions, while the changes in REDI set in motion the GMR-Europe model simulating
the likely effects of such an exogenous improvement in the regional entrepreneurial
ecosystems.
3.3.1 General Features of GMR Models
Models frequently applied in development policy analysis are neither geographic nor
regional. They either follow the tradition of macro econometric modeling (like the
HERMIN model—ESRI 2002), the tradition of macro Computable General Equilib-
rium (CGE) modeling (like the ECOMOD model—Bayar 2007), or the most recently
developed Dynamic Stochastic General Equilibrium (DSGE) approach (QUEST
III—Ratto et al. 2009). They also bear the common attribute of national-level spa-
tial aggregation. The novel feature of the GMR approach is that it incorporates
geographic effects (e.g., agglomeration, interregional trade, migration) while both
macro and regional impacts of policies are simulated.
Geography plays a critical role in the effectiveness of development policies for
at least four major reasons. First, interventions are implemented at a certain point
in space, and their impacts might spill over to proximate locations to a consider-
able extent. Second, the initial impacts could be significantly amplified or reduced
by short-run (static) agglomeration effects. Third, cumulative long-run processes,
resulting from labor and capital migration, may further amplify or reduce the initial
impacts in the region resulting in a change of the spatial structure of the economy
(dynamic agglomeration effects). Fourth, as a consequence of the above effects, dif-
ferent spatial patterns of interventions might result in significantly different growth
and convergence/divergence patterns.
“Regions” are spatial reference points in the GMR approach. They are sub-
national spatial units ideally at that level of geographic aggregation which is appro-
priate to capture proximity relations in innovation. Besides intraregional interactions,
the model captures interregional connections such as knowledge flows expand-
ing over regional borders (scientific networking or spatially mediated spillovers),
interregional trade, and migration of production factors.
The “macro” level is also important when the impact of policies is modeled:
fiscal and monetary policy, national regulations, or various international effects
are all potentially relevant factors when calculating these impacts. As a result, the
model system simulates the effects of policy interventions both at the regional and
macroeconomic level. Depending on the question of interest, the macroeconomic
level in the GMR-Europe model can be considered as national economies, the whole
coverage of EU countries within the model, or both. With this approach, different
scenarios can be compared on the basis of their impacts on economic growth and
interregional convergence.
50 A. Varga et al.
The GMR framework is rooted in different traditions of economics (Varga 2006).

While modeling the spatial patterns of knowledge flows and the role of agglomeration
in knowledge transfers, it incorporates insights and methodologies developed in the
geography of innovation field (e.g., Anselin et al. 1997; Varga 2000). Interregional
trade and migration linkages and dynamic agglomeration effects are modeled with
an empirical general equilibrium model in the tradition of new economic geogra-
phy (e.g., Krugman 1991; Fujita et al. 1999). Specific macroeconomic theories are
followed while modeling macro level impacts.
GMR models reflect the challenges of incorporating regional, geographic, and
macroeconomic dimensions in development policy impact modeling by structuring
the system around the mutual interactions of three sub-models: the Total Factor Pro-
ductivity (TFP), Spatial Computable General Equilibrium (SCGE), and macroeco-
nomic (MACRO) model blocks. Following this approach, the macroeconomic block
of GMR-Europe calculates policy impacts at the aggregated (international, EU) level
while the 181 NUTS2-level regional blocks provide results at the regional level.
Some policy interventions, such as changes in international trade, tax regulations,
or income subsidies, can be modeled in the macroeconomic block via policy shocks
affecting specific macroeconomic variables. However, many other policy instruments
apply to the regional level, stimulating the regional base of economic growth such as
investment support, infrastructure building, human capital development, R&D subsi-
dies, promotion of (intra- and interregional) knowledge flows, and entrepreneurship,
which is the main focus of this chapter. These interventions are modeled in the
regional model blocks and interact endogenously with the macroeconomic part. In
the following sub-section, we zoom in on the mechanisms of these latter policies.
3.3.2 GMR Model Blocks
The GMR framework is built around three interconnected model blocks: the TFP
block which is responsible for simulating changes in regional productivity levels, the
SCGE block which ensures a cross-regional equilibrium and provides estimations
for region-level economic variables like output and employment, and finally the
MACRO block which provides the dynamics of economic variables and simulates
aggregate level effects of policy interventions.
3.3.2.1 The TFP Model Block
TFP is one of the most important variables in GMR-Europe. It represents the main
point through which different aspects of innovation, and innovation policy inter-
ventions in particular, interact with other parts of the model. The TFP block serves
as the point in the GMR system where different driving factors behind innovation,
especially entrepreneurial activity, are modeled. Then, in line with the traditions in
economic modeling, the impact of these factors is implemented in the MACRO and
Fig. 3.1 Schematic structure of the TFP block. Source Authors’ own compilation
SCGE blocks through one technology variable, generally referred to as total factor
productivity, or TFP.
Figure 3.1 illustrates the setup of the TFP block in GMR-Europe. TFP is the final
variable which transfers impacts generated in the TFP block over to the other parts
of the model, namely the SCGE block and the MACRO block. However, the main
role of the TFP block is to provide a sophisticated background for determining TFP
and implement innovation-oriented policy interventions, including those targeting
entrepreneurship.
The TFP block is based on the knowledge production function approach, where
new knowledge, represented by patent applications in our model setup, is produced
using knowledge production factors, namely R&D efforts and labor (employment),
as well as already existing knowledge which is represented by national patent stock
(knowledge creation and TFP are directly modeled at the regional level). In addition
to this standard approach, we also include the role of knowledge available through
interregional networks, using the Ego Network Quality index (Sebestyén and Varga
2013) which is assumed to affect the productivity of R&D in knowledge creation
(better network positions lead to higher knowledge output for the same amount of
inputs). New knowledge, in this case patent applications at the regional level, then
feeds back into knowledge creation in a dynamic way by building up the national
patent stock.
TFP is primarily linked to the regional knowledge levels in the model, but two
additional forces are assumed to determine regional TFP. First, the level of human
capital in the region affects TFP and second, a focal element of this setup of the GMR
model, we added the entrepreneurial environment measured by REDI to the model.
52 A. Varga et al.
We assumed REDI to have a positive influence on TFP via enhancing the contribution
of human capital to TFP. This formulation is inspired by the knowledge spillover
theory of entrepreneurship (Acs et al. 2009). As entrepreneurs transfer knowledge
to economic applications, a better entrepreneurial climate in a region intensifies
new firm formation and helps to better exploit the knowledge embodied in human
capital, which eventually leads to increasing total factor productivity. This is the point
where the REDI feeds into the GMR-Europe model; productive entrepreneurship is
measured by the REDI, and policy interventions that improve the entrepreneurial
ecosystem are assumed to affect this variable which then sets in motion the TFP
block, inducing changes in regional productivity levels as well as economic activity
in the targeted region and elsewhere.
The TFP block consists of econometrically estimated equations. First, the patent
equation describes how certain variables depicted in Fig. 3.1 affect regional patenting:

log PATt,r = α + β1 log PATSCKNt−1,N + β2 log EMPt−1,r

+ β3 log RD_TOTALt−1,r

+ β4 log RD_TOTALt−1,r log ENQFPt−1,r + εt,rPAT
(3.1)
Patents on the left-hand side are measured by EPO patent applications (PAT),
national patent stock is the cumulative number of patents at the country level
(PATSCKN), research and development efforts are proxied with R&D expenditures
(RD_TOTAL), employment is captured by the total level of employment in the region
(EMP), and network quality is measured with the ENQ index (Sebestyén and Varga
2013), calculated over the network of Framework Program partnerships between
regions (ENQFP). The patent equation (Eq. 3.1) potentially contains endogeneity
through network formation, employment, and R&D as these factors may be shaped
by patenting in a region just as well as shaping it. We designed the equations with a
one period (year) lag in order to overcome this problem to a certain extent.
Second, the TFP equation describes how certain variables (as shown in Fig. 3.1)
affect regional productivity:

log TFPt,r = α + β1 log PATSCKRt−1,r + β2 log HUMCAPt−1,r

+ β3 log HUMCAPt−1,r REDIt−1,r + εt,r
TFP
(3.2)
In this equation, accumulated knowledge is measured by the cumulative number

of patents in the region (PATSCKR), while the level of human capital at the regional
level is proxied by the population (between age 25 and 64) with tertiary education
attainment (HUMCAP). To model the influence of entrepreneurship on TFP, human
capital interacts with the quality of the entrepreneurial ecosystem in the equation.2
2 It could be argued that a reasonable alternative of the TFP equation would be a specification where
REDI interacts with the regional patent stock. However, there is a very important distinction between
the two forms of knowledge (human capital and accumulated knowledge stock) in the Romerian
knowledge production function framework, and this distinction is followed in our specifications
The quality of the entrepreneurial ecosystem is measured by the REDI.3 The TFP on
the left-hand side is estimated using a standard production function approach with
capital and labor.
After estimating the two equations of the TFP block, we have a system of equations
which is able to simulate the effects of different interventions affecting research and
development, human capital, networking, or the entrepreneurial climate on regional
TFP. One drawback of this system is that the estimated coefficients which drive these
impacts are common across all regions in the model, reflecting average tendencies
in the sample of regions. However, one may argue that due to the large differences
in the development level as well as the sociocultural and institutional context of
European regions, mechanisms through which different interventions affect regional
productivities differ largely across regions. We control for these differences in two
ways. First, in both equations, the interaction terms render the respective marginal
effects of R&D, human capital, network quality, and entrepreneurship development
level region-specific. Second, we augment this heterogeneity with a specific cali-
bration process through which region-specific parameters are calculated through an
optimization process to improve model fit. This second method is discussed briefly
below.
Given the observed data, we fit linear trends on these data points for all variables,
except regional and national patent stocks (the former is directly given by the patent
equation and the latter is calculated by summing up regional patent stocks in every
period). After trend fitting, we extrapolate the trend for out-of-sample years. These
trends constitute the baseline of the TFP block. After extrapolating trend values for
all variables in the TFP block, we perform the regressions on these data points as
well. Coefficients estimated on the historical data and coefficients estimated on the
trend data closely approximate each other.
The coefficients estimated on the trend data constitute the basis of region-specific
parameter calibrations in the next step. The aim of the calibration is to find region-
specific values for selected parameters, which improve the overall fit of the model.
After a careful selection procedure among several model versions, three coefficients
of the TFP block, namely the constant term and the coefficient of employment in
the patent equation (parameters α and β2 ) and the constant term in the TFP equation
of the equations in the TFP block (Romer 1990). The stock of patents represents accumulated
knowledge that is available in the region for potential economic applications, whereas human
capital refers to knowledge which is actually present in the region being embodied in qualified
labor. Therefore, the stock of knowledge plays a passive role in technology development, whereas
human capital is the one that contributes actively to regional productivity improvements. In our
formulation of the TFP equation, this role is enhanced by the quality of the regional entrepreneurial
ecosystem. With a higher quality of this ecosystem, the same level of human capital contributes to a
more intensive increase in TFP via more active involvement of human capital in new firm formation.
3 As described in Sect. 3.2, the REDI is a complex index that accounts for several features of the
entrepreneurial ecosystem. Due to this complexity, some of the variables that appear in the GMR
model also play a role in the REDI. However, these variables are interactive with several others, and
throughout the pillar system, the correlation of the REDI super-index with any single component
variable is small.
54 A. Varga et al.
(parameter α), are calibrated.4 As a result of this calibration process, we are presented
with region-specific parameter values for the listed three parameters of the TFP block
which improve the fit of the TFP block equations and retain the average tendencies
represented by the trend-based estimation. In this way, we obtain region-specific
mechanisms built in the TFP block with respect to the effects of right-hand side
variables on patenting activity and the productivity of the regions.
3.3.2.2 The SCGE Model Block5
The SCGE model block draws on regional productivity changes and then simulates
the likely impacts of these changes on regional economic variables like output, prices,
wages, and employment. SCGE models add the spatial dimension to the (usually
a-spatial) CGE models. Economic units are regions, which are interconnected by
trade flows and migration. The most important feature of this block is that it takes
into account interactions across regions through the trade of goods and services as
well as the mobility of production factors. Also, transportation costs are explicitly
accounted for and positive and/or negative agglomeration effects are also part of the
model structure.
The model distinguishes between short-run and long-run equilibria. In the short
run, markets are in equilibrium within and across all regions. However, this does
not necessarily mean that the whole regional system has reached a balanced situa-
tion. In the long run, differences in utility levels across regions induce labor migra-
tion, followed by the migration of capital, leading to a long-run spatial equilibrium
where interregional utility differences are eliminated. Although possible in princi-
ple, this equilibrium is hardly reached within the applied simulation horizon, leaving
considerable gaps in utility levels in the simulated outcomes.
3.3.2.3 The MACRO Model Block
The macroeconomic block of the GMR approach serves two purposes. First, this is
the point, where aggregate relationships and policies, such as exchange rate toward
the rest of the world, inflation, monetary, and fiscal policy, can be handled. Second,
4 This results in an optimization procedure where the objective function is the sum of the follow-
ing five elements: (1) Mean average percentage error of the regional patent application variable
(average percentage deviation of simulated PATi,t values from the trend values). (2) Mean aver-
age percentage error of the TFP variable (average percentage deviation of simulated TFPi,t values
from the trend values). (3) Mean average percentage error of the average calibrated region-specific
constant terms in the patent equation (average percentage deviation of calibrated constant terms
from the trend-based estimated values). (4) Mean average percentage error of the average calibrated
region-specific coefficient of employment in the patent equation (average percentage deviation of
calibrated coefficients from the trend-based estimated values). (5) Mean average percentage error
of the average calibrated region-specific constant terms in the TFP equation (average percentage
deviation of calibrated constant terms from the trend-based estimated values).
5 This section reiterates a short passage that was published in Varga et al. (2018).
it provides dynamics to the otherwise static SCGE block. In the latter, regional
productivity, labor, and capital stocks are exogenous. The TFP block provides the
dynamics of regional productivity levels, but in order to account for the possible
employment and investment effects of the simulated policies, we need to provide
dynamics for labor and capital stocks of the regions. This is performed by the MACRO
block, which provides an aggregate estimation of the likely employment and capital
stock impacts of the simulated policies, and are then broken down to the regions in
function of the regional productivity growth rates.
The macroeconomic block of GMR-Europe calculates policy impacts at the EU
and national level while the 181-region NUTS2-level TFP and SCGE blocks provide
results at the regional level. The model calculates the policy impacts on various
economic variables such as GDP, employment, investment, prices at the regional,
national, and aggregate European levels.
The macroeconomic block is a standard, large-scale Dynamic, Stochastic, Gen-
eral Equilibrium (DSGE) model. We apply the QUEST III model developed by the
European Commission for the Euro area and re-estimated it with additional coun-
tries to cover the same set of regions as those represented in the other two model
blocks. Therefore, the set of countries include the Euro-countries and some Eastern
European countries that are not part of the monetary union. The description of the
original model can be found in Ratto et al. (2009), while the re-estimated version is
described in Varga et al. (2018).
3.3.3 Impact Mechanisms in the GMR Model
The three mutually connected model blocks are depicted in Fig. 3.2. Without inter-
ventions, the TFP growth rate is assumed to follow an exogenous and identical
steady state growth rate in every region, and the economy grows on a balanced
growth path primarily driven by the MACRO block. If any exogenous shocks are
fed into the model, it leaves this balanced growth path, and we can examine how the
policy-induced shocks affect the path of the economy compared to the steady state
path.
Given its setup, the GMR-Europe model is able to handle several types of policy
interventions, as shown on the left-hand side of Fig. 3.2. Different macroeconomic
policies, such as inflation targeting, other aspects of monetary policy, general fiscal
expansion, and different tax-related policies, are applied at the macro level, directly
affecting the MACRO block, while their effects spill over to other model parts as
well. Other policies apply at the regional level. These may include investment support
or public infrastructure development, which directly affects the (private or public)
capital stock in specific regions. Through the interconnected model setup, these
interventions then affect economic activity in other regions as well. Finally, there are
policies which directly affect the TFP block. These are interventions which have an
effect on regional productivity, like supporting education, R&D, network formation,
56 A. Varga et al.
Fig. 3.2 Regional and macroeconomic impacts of the main policy variables in the GMR-Europe
model. Numbers refer to the steps of the impact mechanism of policy interventions. Source Authors’
own compilation
or entrepreneurial activity. These interventions affect regional TFP as described in

Fig. 3.1, and then these effects spill over to other parts of the model.
As the present chapter focuses on policy interventions related to entrepreneurial
activity, we provide a more detailed account of the policies affecting regional TFP.
The following steps, augmented by the numbers in Fig. 3.2, help keeping track of
the adjustment process initiated by policy interventions targeting entrepreneurship,
R&D, education, or network formation, all affecting regional TFP in the first place.
1. Resulting from R&D, entrepreneurship- and network-related interventions as
well as human capital and physical infrastructure investments (which increase
public capital and eventually impact the level of TPF as well), regional Total
Factor Productivity changes/increases (link 1 in the figure);
2. Changing TFP induces changes in quantities and prices of output and production
factors in the short run (link 2a) while in the long run (following the mechanisms
described above) the impact on in-migration of production factors implies further
changes in TFP not only in the region where the interventions happen but also
in regions which are connected by trade and factor migration (link 2b);
3. Induced by the increasing productivity, private investments increase expanding
regional private capital which causes further changes in regional variables (out-
put, prices, wages, prices, TFP, etc.) in the SCGE model block. The impact of
private investment support affects the MACRO model also via increased private
capital (link 3, within the SCGE block);
4. For every year, changes in TFP are aggregated to the national level, which
increases TFP in the MACRO model as time-specific shocks (link 4).
The macroeconomic model calculates the changes in all affected variables
at the national level;
5. Changes in employment and investment calculated in the MACRO block are
distributed over the regions following the spatial pattern of TFP impacts (link 5);
6. The SCGE model runs again with the new employment and capital values to
calculate short-run and long-run equilibrium values of the affected variables
(links 3, 2a, and 2b are used again);
7. The process described in steps 5 and 6 continues until aggregate values of
regional variables calculated in the SCGE model get sufficiently close (less
than 10−10 percentage deviation) to their corresponding values calculated in the
MACRO model. This solution ensures consistent simulation results across the
different model blocks. Also, our experience shows that convergence is always
achieved and within a very limited number of iterations.
3.4 Policy Simulations
The following simulations illustrate the potential use of the GMR-Europe model in
evaluating reforms which aim to strengthen the entrepreneurial society. In principle,
it would be possible to simulate the effects of a differentiated and tailored strategy to
improve regional entrepreneurial ecosystems as, for example, presented in Chaps. 5–
7 in this volume (Sanders et al. 2020a, b, c). In this chapter, the aim is to illustrate
how our model setup works, and we therefore focus on how a common shock to the
REDI score would be transmitted in the GMR framework. Results show that there are
differences in the extent to which an equi-proportional increase in the REDI scores
affects regional productivities. Moreover, the dynamic feedback mechanisms within
the model generate diverse paths for regional output levels in response to such a
shock.
3.4.1 Simulation Setup
In the simulation presented below, we track the effects of an exogenous increase in

the REDI in all regions. More formally, we follow the strategy below:
1. We take the baseline REDI scores of the model. The base year is 2012, and
the baseline of the TFP block goes along empirically fitted trends from 2012
to 2031, which means that in the baseline model runs, the REDI score of every
region proceeds along a trend line derived from the observed data;
58 A. Varga et al.
2. For every region, we then calculate the average of the baseline REDI scores over
the simulation years (2012–2031) and define 1% of these average scores as a
policy intervention (technically an exogenous shock to the model);
3. This 1% improvement is applied to the REDI in every region in a way that the
REDI is increased from its baseline value to a 5% higher value through the first
5 years of the simulation (2012–2016). Note that after five years the value of the
REDI does not change meaning that the annual improvements in REDI result in
a permanent positive effect on the quality of EE in every NUTS2 region;
4. Every region receives this 1% annual improvement in the REDI, and we trace
their effect on regional TFP and GDP levels as well as aggregate country-level
versions of these variables.
Of course, focusing on the REDI provides a bird-eye view on entrepreneurial poli-
cies. We can interpret the idea behind these simulations as follows: What is the eco-
nomic impact of a five percent improvement of the entrepreneurial climate/ecosystem
in each region over a five-year period? We use this counterfactual simulation as a first
approximation and for illustrative purposes, but emphasize that the detailed structure
of the REDI allows the model to account for more detailed approaches in this respect.
Overall, these simulations reflect the potential effects of policies which are capable
of improving the entrepreneurial ecosystem of a region by adjusting either of the
pillars behind the REDI. It is important to underline that the equality of the shocks
(in percentage terms) implies regional divergence in our simulations. The impact of a
REDI shock depends most importantly on the size of the REDI (i.e., the development
level of the regional entrepreneurial ecosystem) and on the size of human capital in
the region. Therefore, many highly entrepreneurial regions with strong human capital
gain more from the shock than their less developed counterparts. One should realize
that the same percentage increase in the REDI score cannot be the consequence of
regionally balanced policy interventions, and, indeed, the improvement of the quality
of the ecosystem in more entrepreneurial places probably requires more effort than
in less developed regions.
3.4.2 Simulation Results
Although the model is capable of tracking many regional and aggregate level vari-
ables, we focus on the effect of the REDI improvement on total factor productivity
(TFP) and GDP. In both cases, we present the percentage deviation of the simulated
TFP/GDP values after the applied interventions from their baseline levels. As a result,
the diagrams reflect the percentage impact of these policies, or, to what extent would
TFP and GDP be higher/lower as a result of the policy intervention, compared to the
no intervention (business as usual) case.
In Fig. 3.3, we summarize the country-level results of the simulations. On the
left-hand side, the country-level impacts are shown for TFP, while on the right-
hand side the time averages of the GDP impacts are depicted for countries. The
Fig. 3.3 Country-level impacts of 1% annual shocks over a five-year period to REDI on TFP and
GDP. Source Authors’ own compilation
horizontal lines show the EU-average impacts. The graphic shows that a 1% annual
improvement in the entrepreneurial climate over 5 years in every region leads to
a 2% increase in TFP and productivity on average (EU level). The GDP impact
is slightly higher, but the productivity and GDP effects go hand in hand. This is
not surprising, as in the simulations, the shock has its effect through enhancing
regional productivity. Figure 3.3 also shows that the positive development in the
entrepreneurial environment of regions positively affects the productivity levels in
all countries. However, there are differences in the magnitude of this effect. While
Ireland benefits the most from this policy, Hungary seems to be performing worst
in this respect. This corresponds with the initial ranking of regions and countries in
Tables 3.2 and 3.3.
In the dynamic analysis of policy impacts, we zoom in on the mechanisms in
the case of four countries representing the four types of capitalism: Ireland (a Lib-
eral Market Economy), Germany (a Coordinated Market Economy), Hungary (an
Eastern Market Economy), and Italy (a Mediterranean Market Economy). Although,
GDP impacts follow the TFP impacts quite closely, as seen from Fig. 3.4, there are
considerable qualitative differences in the time path of the effects. In some countries,
although the overall effect of the policy is positive, after the “lifting” power of the
policy (first 5 years) phases out, the impacts tend to decrease compared to the peak
year. This effect is due to the complex mechanisms within the GMR model where
Fig. 3.4 Dynamics of impacts of annual 1% shocks over a five-year period to REDI on TFP and
GDP in the selected countries. Source Authors’ own compilation
60 A. Varga et al.
productivity growth and the resulting economic development affect and feed back to
that of other regions through trade and factor mobility. These feedback mechanisms
may result in out-migration or capital flight which negatively affects the growth of
some regions.
In order to better understand the impact mechanism behind these results, it is
useful to distinguish all steps of the mechanism. First, the impact of the initial REDI
improvement has a one-year lag on TFP and GDP changes. Thus, interventions
between 2012 and 2016 have direct productivity and economic effects between 2013
and 2017. Second, the initial level of entrepreneurship is a defining factor in the
changes in productivity since the same increase of the REDI index in entrepreneuri-
ally developed regions means a much higher absolute change in the REDI and a
similarly higher productivity change as a consequence. Third, the direct short-run
GDP and TFP impacts are heavily dependent on the level of human capital endow-
ment in regions. Regions with higher levels of human capital are capable of taking
more productivity and economic advantage from a higher-quality entrepreneurial
ecosystem. If the levels of entrepreneurship and human capital stock are large in
a region, the short-run economic impacts are large as well. In Fig. 3.4, this means
that the slope of the curves is higher than the EU average during the 5 years of the
interventions. Fourth, some other aspects, such as investment, have to be considered
in the long run. The direct impacts of REDI last until 2017 since after 2016 there is no
further improvement in the entrepreneurial ecosystem. However, economic impacts
are still observed in years that follow. We especially experience further increase of
growth in 2018. This indirect impact is caused by the increased capital stock due to
the additional investment that is possible as a result of increased income and saving
caused by the positive effects of entrepreneurship development policy, since there is
a two-year time lag between REDI changes and the effects of investment decisions.
As a result of improvements in the entrepreneurial ecosystem, income changes in the
next period and as a result of this change in income investment will increase, result-
ing in a larger capital stock available for production two years later. Finally, human
capital accumulation also affects the results in the long run (after the interventions),
as it follows different trends in the regions.
After 2018, the path of GDP and TFP changes less rapidly. In many countries,
these paths are stabilizing to a long-run growth path. However, some countries are
able to further increase their growth rate even in the long run, while others lose
some of the initial gains of entrepreneurship policy. The long-run growth paths are
influenced by many factors, but productivity is still a key variable in this process
which is heavily influenced by the changes in human capital stock. Countries that
are characterized by a high rate of human capital accumulation can grow faster in the
long run than the average. In contrast, low human capital accumulation reduces the
growth rate in the long run, and those countries might face a slowing growth path.
These effects are further influenced by interregional migration and changes in trade
as well.
In addition, the interplay between the growth and substitution effects of TFP
improvement might play a role in regional GDP impacts. In cases when demand
for output does not increase, firms might use less inputs resulting from productivity
improvement. As a result of that some regions might lose some of their employment
in the long run. Thus, even if a region experiences an improvement in TFP, it does
not necessarily mean that the region will grow faster than others with less impressive
TFP growth.
As shown in Fig. 3.4, Ireland is capable of benefitting most from the REDI
improvements, in terms of TFP and GDP. Ireland is characterized by the highest level
of REDI among the countries in the model, thus in absolute terms, the Irish shock will
be the largest as well. This is accompanied by a relatively high level (significantly
higher than average) of human capital. These two factors and the description of the
impact mechanism above can explain why Ireland’s TFP and GDP increase so much
under the five years of the intervention. In the long run, Ireland has one of the high-
est rates of human capital accumulation, which drives the long-run impacts after the
interventions. All these factors contribute to the predicted success of entrepreneurship
development policy in Ireland.
Germany also gains much from the improvement of the REDI scores. The initial
levels of REDI and human capital are somewhat smaller than in case of Ireland. Thus
the growth of productivity and GDP under the first 5 years is lower but still above
the other two less developed countries. In the long run, we have shown that human
capital accumulation drives economic growth. The German path clearly illustrates
that slow human capital accumulation is not enough to maintain the initial economic
impacts of the shock.
At the same time, Italy and Hungary have similar, lower-level growth paths.
Although Italy has a higher level of initial REDI, this advantage is partially com-
pensated by the higher average regional human capital stock in Hungary. As a con-
sequence, in the first five years, Italy grows only slightly faster than Hungary. In the
long run, both the Hungarian and Italian paths approach the German growth path due
to the higher level of human capital accumulation. Again, the Italian accumulation is
slightly higher than the Hungarian one, so a small gap can be found in the long-run
economic development paths of these countries.
Migration also contributes to the determination of these growth paths. While
Germany is capable of attracting new labor force in the short run due to its high growth
potential in the first five years, Hungary and Italy lose some of their labor forces.
This effect, however, is weakened significantly in the long run when the German
growth advantage disappears, and Hungary and Italy catch up. As mentioned before,
Ireland has the highest level of capital accumulation, thus economic and productivity
impacts are further increased in the long run which, as a consequence, generates more
immigration strengthening the positive effects.
At the regional level, the same impact mechanism drives the economic effects,
but in that case the differences are more pronounced since the national impacts
can be interpreted as a weighted average of the regional effects. Thus, by looking
at the regional impacts, one can have a much more detailed picture of the spatial
effects of entrepreneurship policies. Figure 3.5 shows the regional breakdown of the
simulated impacts. As can be seen, GDP impacts (on the right-hand side) follow the
productivity impacts (on the left-hand side), but there are considerable differences
between regions. In most of the cases, we see that central, more developed regions
62 A. Varga et al.
Fig. 3.5 Regional impacts of 1% annual REDI shocks over a five-year period on regional TFP and
GDP levels. Source Authors’ own compilation
(Ireland, southern Germany, northern regions, capital cities, French regions) gain
more from the improvement in REDI. The complex interaction mechanisms in the
GMR model are visible at the regional level, marked by significant differences in
regional impacts and especially in favor of central regions. Due to their economic
weight, these regions are able to attract production factors in the long run, eventually
implying improvements in less developed regions. However, we can also see that
in the long run, improving the entrepreneurial ecosystem can be successful in less
developed regions, as some Polish, Greek, and some parts of Romania are able to
catch up.
Turning our attention to the regions of the four selected countries, we can identify
strong regional differences in the effectiveness of entrepreneurship policies. First,
since Ireland consists only of one region in our model, we cannot give a more detailed
analysis of spatial economic impacts. As described previously, entrepreneurship
policy is extremely effective in Ireland both in the short and the long run.
In Germany, we see that the less developed, eastern part gains the least in eco-
nomic and productivity improvement. This is due to the fact that the majority of these
regions are characterized by low initial REDI scores and low human capital accu-
mulation. Even in the slowly growing areas, central places like Berlin are capable
of growing around the EU average thanks to the concentration of human capital and
entrepreneurial activities (REDI).
The southern, more developed part of the country is mainly characterized by
a developed entrepreneurship ecosystem (high REDI) and with some variation, and
exceptions, the majority of regions has high level and accumulation of human capital
(in some regions only one of these factors are given), which makes them very suc-
cessful in terms of economic impacts. However, some regions are not able to translate
all of the productivity changes into GDP growth since other factors play a significant
role. For example, in Stuttgart, productivity improvements might substitute for labor
which can mitigate the growth potential to some extent.
Regions in the countries located in the East of the EU are more diverse. In general,
they all excel at some determining factors of the policy, but they do not excel in all of
them which means that they are not able to generate exceptionally high productivity
and economic growth. In some cases, judging the factors behind regional growth
changes can be straightforward since all the influencing factors contribute to growth
in the same direction. In Hungary, which has a highly concentrated spatial structure,
Budapest is characterized by the highest level of both human capital and REDI. As
a consequence, this region is the most potent in terms of the short-run impacts. In
the long run, both human capital accumulation and the substitution effect must be
considered. In the case of Budapest, accumulation is also the highest in the country
which increases the growth path of Budapest in the long run. This growth is only
slightly reduced by the substitution effect described above. Still our result suggests
that the TFP effect is slightly below the EU average, while the GDP effect is around
the EU average. Outside the capital, however, due to the lack of foundations, we see
only limited potential of entrepreneurial development policies.
Finally, Italy has a traditionally divided spatial economic structure. We find again
that the core regions can benefit the most from entrepreneurial policies. This concerns
mainly northern Italian regions (like Lombardy and the capital with some neighbor-
ing regions). If we look behind these results, we can state that northern, developed
regions benefit from both the high level of human capital and entrepreneurship, while
regions around the capital are less developed in terms of entrepreneurship, but still
concentrate a high stock of human capital. Compared to EU averages, however, these
nationally high values are not high enough to provide the basis for significant eco-
nomic growth at the EU level. Our simulations also show that southern regions that
are far from the capital have a low chance of benefitting significantly from these
policies due to their low level of development, both in terms of entrepreneurship and
human capital.
3.5 Conclusions
Policy interventions and their impacts have always been in the center of interest. Over
the decades, economists have developed various tools to estimate the ex-ante impact
as well as to evaluate the ex-post effects of policy interventions. Simple econometric
regression models are able to test the significance of a policy instrument based on the
ceteris paribus assumption. However, these uniform suggestions neglect the likely
diverse effects of policy interventions as well as the potential complex impact of a
particular policy element on other influential factors. Simultaneous regressions could
handle the complex effect of closely related factors. However, the one-size-fits-all
policy recommendations remain an open issue.
Many entrepreneurship scholars believe that improving the entrepreneurial
ecosystem contributes positively to economic growth, development, job creation, and
64 A. Varga et al.
productivity. However, empirical studies report contradicting impacts depending on

the definition of entrepreneurship, the level of development, the unit of analysis, and
modeling strategy, just to mention the most important factors. Most of these studies
rely on regression-based methodologies by assuming a universal and homogenous
impact of entrepreneurship policies. In this chapter, we used the REDI to simulate
the impact of improving the entrepreneurship ecosystem of regions in 24 countries
of the European Union. REDI is a composite indicator that combines the individ-
ual and the institutional factors of entrepreneurship into fourteen pillars and three
sub-indices. Two analytical tools, the average equalization and the penalty for bot-
tleneck techniques serve to identify region-based bottlenecks in the entrepreneurial
ecosystem.
We have incorporated REDI into the recently extended GMR-Europe model
to test the effects of improving the entrepreneurial ecosystem on TFP and GDP
levels. Unlike regression-based methods, GMR-Europe builds on spatial patterns of
dynamic agglomeration and spillover effects. GMR-Europe has three parts, the Total
Factor Productivity (TFP), the Spatial Computable General Equilibrium (SCGE), and
the macroeconomic (MACRO) model blocks. REDI, our measure for entrepreneurial
ecosystem quality, is the part of the TFP block influencing regional productiv-
ity through interaction with human capital. The TFP block is able to simulate
region-specific impacts of policy interventions like R&D support, development in
human capital, entrepreneurship, or innovation networks on regional productivity.
The macroeconomic block calculates policy impacts at the overall EU and national
levels, while the 181-region NUTS2-level TFP and SCGE blocks provide results at
the regional level. The model calculates the impact on various economic variables
such as GDP, employment or prices at the regional, national, and aggregate European
levels.
This chapter zoomed in on the impacts of improving the entrepreneurial ecosystem
at the regional level. Our simulations were based on a 1% annual improvement
of the REDI score in every region over a five-year period. The impacts of these
improvements were tracked on regional and aggregate TFP and GDP levels. On
average, a 1% annual improvement over the five-year period leads to an average 2%
increase both in GDP and in TFP, while GDP impact is slightly larger. However, the
magnitude of the impact varies significantly across countries while regional impacts
are even more dispersed. In part because of the way we set up our simulation, but these
differences are also due to the complex mechanisms within the GMR model where
productivity growth and the resulting economic development affect and feed back
to other regions through trade and factor mobility. These feedback mechanisms may
result in out-migration or capital outflows that can have negative effects on the growth
of some regions. Our simulation results suggest that it is the more developed, central
regions that benefit the most from REDI improvements, such as policy interventions
targeting the entrepreneurial ecosystem.
Like any other simulation exercise, our analysis has its limitations. First, we have
not yet explored the full richness of the REDI in our simulation. To illustrate how pol-
icy analysis could work with the combination of REDI and GMR modeling, we chose
to implement a uniform exogenous 1% annual shock to REDI in all regions. Future
research could easily go into more detail and simulate more specific and realistic
interventions. REDI-based policy recommendations are built on the so-called sys-
tem failure improvement that is an analogy to classical public policy aiming to correct
market failures. That is, policymakers could target policies at improving the weakest
link in the regional ecosystem, giving them endogenous REDI improvements that can
then be simulated as was shown. In Chaps. 5–7 in this volume (Sanders et al. 2020a,
b, c), we illustrate how REDI can be used to diagnose and inform a reform strategy
for Italy, Germany, and the UK, respectively. The GMR simulations in this chapter
have shown that such tailored reforms are likely to cause heterogeneous effects across
regions. A limitation of the REDI is that the interventions that can be studied under
the proposed framework remain limited to those that affect aspects of the ecosystem
represented in the REDI. We believe the processes and mechanisms in the GMR are
important to consider, and the present model setup can generate testable hypotheses.
Future research could rigorously and empirically test the assumed structures and
specifications in the REDI-extended GMR model.
Appendix: The REDI Calculation Method
In constructing the index, we followed eight steps:

1. The selection of variables: We start with the variables that come directly from
the original sources for each region involved in the analysis. The variables can
be at the individual level (personal or business) that are coming from the GEM
Adult Population Survey or the institutional/environmental level that are coming
from various other sources. Altogether, we have data for a mix of 125 NUTS1
and NUTS2 regions.
2. The construction of the pillars: We calculate all pillars from the variables using
the interaction variable method, that is, by multiplying the individual variable
with the proper institutional variable. This results in pillar values for all the 125
EU regions.
z i, j = INDi, j ∗ INSi, j (3.3)
for all j = 1, …, k, the number of individual and institutional variables

INDi, j is the original score value for region i and variable j individual variable
INSi, j is the original score value for region i and variable j institutional variable
z i, j is the original pillar value for region i and pillar j.
3. Normalization: Pillars values were first normalized to a range from 0 to 1 by

using the distance methodology:
z i, j
xi, j = (3.4)
maxz i, j
66 A. Varga et al.
for all j = 1, …, k, the number of pillars

where xi, j is the normalized score value for region i and pillar j
z i, j is the pillar value for region i and pillar j
max z i, j is the maximum value for pillar j.
4. Capping: All index building is based on a benchmarking principle. In our case,

we selected the 95-percentile score adjustment meaning that any observed values
higher than the 95-percentile are lowered to the 95-percentile.
5. Average pillar adjustment: The different averages of the normalized values of

the pillars imply that reaching the same pillar values requires different efforts and
inputs. Since we want to apply REDI for public policy purposes, the additional
inputs for the marginal improvement of the pillar values should be the same for
all pillars. Therefore, we need a transformation to equalize the average values
of the components. Equation 3.5 shows the calculation of the average value of
pillar:
n
xi, j
xj = i=1
(3.5)
n
We want to transform the xi, j values such that the potential minimum value is 0
and the maximum value is 1:
yi, j = xi,k j (3.6)
where k is the “strength of adjustment,” the kth moment of X j is exactly the

needed average, ȳ j . We have to find the root of the following equation for

n
xi,k j − n ȳ j = 0 (3.7)
i=1
It can be seen, based on previous conditions and derivatives, that the function
is decreasing and convex, meaning it can be quickly solved using the well-
known Newton–Raphson method with an initial guess of 0. After obtaining k,
the computations are straightforward. Note that if
x̄ j < ȳ j k < 1
x̄ j = ȳ j k = 1
x̄ j > ȳ j k > 1
that is k be thought of as the strength (and direction) of adjustment.
6. Penalizing: After these transformations, the penalty for bottleneck (PFB)

methodology was used to create pillar adjusted PFB values. We define our penalty
function as follows:

h (i), j = min y(i), j + 1 − e−( y(i) j −min y(i), j ) (3.8)
where h i, j is the modified, post-penalty value of pillar j in region i

yi, j is the normalized value of index component j in region i
ymin is the lowest value of yi, j for region i
i = 1, … n = the number of regions
j = 1, …, m = the number of pillars.
The penalizing feature reflects the belief that the entrepreneurial performance of
each region is mainly determined by its weakest component(s), and all other pil-
lars with higher values cannot exploit their full potential because of the existence
of bottleneck in their system of entrepreneurship.
7. Sub-index calculation: The pillars are the basic building blocks of the sub-
index. There are three: entrepreneurial attitudes, entrepreneurial abilities, and
entrepreneurial aspirations. The value of a sub-index for any region is the penalty
weighted average of its average equalized pillars for that sub-index multiplied by
100. The maximum value of the sub-indices is 100 and the potential minimum is
0, both of which reflect the relative position of a region in a particular sub-index.

5
ATTi = 100 h i, j (3.9a)
j=1

9
ABTi = 100 h i, j (3.9b)
j=6

14
ASPi = 100 h i, j (3.9c)
j=10
where h i, j is the modified, post-penalty value of pillar j in region i

i = 1, …, n = the number of regions
j = 1, …, 14 = the number of pillars.
8. REDI score calculation: The super-index, the REDI, is the simple average
of the three sub-indices. Since 100 represents the theoretically available limit,
the GEDI points can also be interpreted as a measure of the efficiency of the
entrepreneurship inputs
1
REDIi = (ATTi + ABTi + ASPi ) (3.10)
3
where REDIi is the Regional Entrepreneurship and Development Index score of
region i
i = 1, 2, …, n = the number of regions.
68 A. Varga et al.
From the policy perspective, REDI methodology has two key features. The first
is the average equalization methodology (Point 5) that is designed to equalize
the marginal effects of the additional inputs over the average of 14 pillars while
keeping all the values in the [0,1] range. This means that after transformation,
below average (0.49) pillar values increased (Opportunity Perception, Network-
ing, Technology Absorption, Human Capital and Finance) and all the other pillar
values decreased. Consequently, improving the originally below average pillar
value requires a smaller absolute increase of additional inputs as compared to
the originally higher average pillar value where a larger increase is necessary for
the same marginal improvement.
References
Acs ZJ, Audretsch DB, Braunerhjelm P, Carlsson B (2009) The knowledge spillover theory of
entrepreneurship. Small Bus Econ 32:15–30
Acs ZJ, Autio E, Szerb L (2014) National systems of entrepreneurship: measurement issues and
policy implications. Res Policy 43:476–494. https://doi.org/10.1016/j.respol.2013.08.016
Acs Z, Estrin S, Mickiewicz T, Szerb L (2017) Institutions, entrepreneurship and growth: the role
of national entrepreneurial ecosystems. Small Bus Econ (Forthcoming)
Alvedalen J, Boschma R (2017) A critical review of entrepreneurial ecosystems research: towards
a future research agenda. Eur Plan Stud 25:887–903. https://doi.org/10.1080/09654313.2017.
1299694
Anselin L, Varga A, Acs Z (1997) Local geographic spillovers between university research and high
technology innovations. J Urban Econ. 42(3):422–448
Audretsch DB, Kuratko DF, Link AN (2015) Making sense of the elusive paradigm of entrepreneur-
ship. Small Bus Econ 45(4):703–712
Autio E, Pathak S, Wennberg K (2013) Consequences of cultural practices for entrepreneurial
behaviors. J Int Bus Stud 44(4):334–362
Baum JR, Frese M, Baron RA (2014) Born to be an entrepreneur? Revisiting the personality
approach to entrepreneurship. In: The psychology of entrepreneurship. Psychology Press, pp
73–98
Baumol WJ (1996) Entrepreneurship: productive, unproductive, and destructive. J Bus Ventur
11(1):3–22
Bayar A (2007) Simulation of R&D investment scenarios and calibration of the impact on a set of
multi-country models. European Commission DG JRC Institute for Prospective Technological
Studies (IPTS)
Bradley J (2006) Evaluating the impact of european union cohesion policy in less-developed
countries and regions. Reg Stud 40:189–199
ESRI (2002) An examination of the ex-post macroeconomic impacts of CSF 1994–1999 on
Objective 1 countries and regions
Fujita M, Krugman PR, Venables AJ (1999) The spatial economy: cities, regions and international
trade. Wiley Online Library
Gartner WB (1985) A conceptual framework for describing the phenomenon of new venture
creation. Acad Manag Rev 10(4):696–706
Joint Research Centre-European Commission (2008) Handbook on constructing composite indica-
tors: methodology and user guide. OECD publishing
Krugman P (1991) Increasing returns and economic geography. J Polit Econ 99(3):483–499. https://
doi.org/10.2307/2937739
Lafuente E, Szerb L, Acs ZJ (2016) Country level efficiency and national systems of entrepreneur-
ship: a data envelopment analysis approach. J Technol Transfer 41(6):1260–1283
Lafuente E, Acs Z, Sanders M, Szerb L (2019) The global technology frontier: productivity growth
and the relevance of Kirznerian and Schumpeterian entrepreneurship. Small Bus Econ 1–26.
Online https://doi.org/10.1007/s11187-019-00140-1
Landström H, Harirchi G (2018) The social structure of entrepreneurship as a scientific field. Res
Policy 47(3):650–662
Liñán F, Fernandez-Serrano J (2014) National culture, entrepreneurship and economic development:
different patterns across the European Union. Small Bus Econ 42(4):685–701
Low MB, MacMillan IC (1988) Entrepreneurship: past research and future challenges. J Manag
14(2):139–161
Malecki EJ (2018) Entrepreneurship and entrepreneurial ecosystems. Geography Compass. Online
access, pp 1–21. https://doi.org/10.1111/gec3.12359
Naudé W (2010) Entrepreneurship, developing countries, and development economics: new
approaches and insights. Small Bus Econ 34(1):1
Nightingale P, Coad A (2014) Muppets and gazelles: political and methodological biases in
entrepreneurship research. Ind Corp Change 23:113–143. https://doi.org/10.1093/icc/dtt057
Parker SC (2018) The economics of entrepreneurship. Cambridge University Press
Prieger JE, Bampoky C, Blanco LR, Liu A (2016) Economic growth and the optimal level of
entrepreneurship. World Dev 82:95–109
Qian H, Acs ZJ, Stough RR (2013) Regional systems of entrepreneurship: the nexus of human
capital, knowledge and new firm formation. J Econ Geogr 13:559–587. https://doi.org/10.1093/
jeg/lbs009
Rappai G, Szerb L (2011) Összetett indexek készítése új módon: a szűk keresztmetszetekért történő
büntetés módszere. PTE KRTI Műhelytenulmányok 2011/1
Ratto M, Roeger W, in’t Veld J (2009) QUEST III: an estimated open-economy DSGE model of
the euro area with fiscal and monetary policy. Econ Model 26:222–233
Romer P (1990) Endogenous technological change. J Polit Econ 98:71–102
Sanders M, Stenkula M, Grilli L, Herrmann AM, Latifi G, Páger B, Szerb L, Terragno Bogliaccini E
(2020a) A Reform Strategy for Italy. In: Sanders M, Marx A, Stenkula M (eds) The entrepreneurial
society. Springer, Berlin Heidelberg
Sanders M, Stenkula M, Fritsch M, Herrmann AM, Latifi G, Páger B, Szerb L, Terragno Bogliaccini
E, Wyrwich M (2020b) A Reform Strategy for Germany. In: Sanders M, Marx A, Stenkula M
(eds) The entrepreneurial society. Springer, Berlin Heidelberg
Sanders M, Stenkula M, Dunstan J, Estrin S, Herrmann AM, Páger B, Szerb L, Terragno Bogli-
accini E (2020c) A Reform Strategy for the UK. In: Sanders M, Marx A, Stenkula M (eds) The
entrepreneurial society. Springer, Berlin Heidelberg
Schalk H, Varga A (2004) The economic effects of EU community support framework interventions.
An Ex-ante Impact Analysis with EcoRET, A Macroeconomic Model For Hungary. Center of
Applied Economic Research Münster (CAWM), University of Münster
Sebestyén T, Varga A (2013) Research productivity and the quality of interregional knowledge
networks. Ann Reg Sci 51:155–189
Shane S, Venkataraman S (2000) The promise of entrepreneurship as a field of research. Acad
Manag Rev 25(1):217–226
Spigel B (2017) The relational organization of entrepreneurial ecosystems. Entrepreneurship Theory
Pract 41(1):49–72
Stam E (2015) Entrepreneurial ecosystems and regional policy: a sympathetic critique. Eur Plan
Stud 23:1759–1769. https://doi.org/10.1080/09654313.2015.1061484
Szerb L, Vörös Zs, Komlósi É, Acs ZJ, Páger B, Ortega-Argilés R, Abaligeti G (2017) The new
regional entrepreneurship and development index: structure, data and description of methodology.
Unpublished manuscript
70 A. Varga et al.
Szerb LE, Lafuente K Horváth, Páger B (2018) The relevance of quantity and quality entrepreneur-
ship for regional performance: the moderating role of the entrepreneurial ecosystem. Reg Stud .
https://doi.org/10.1080/00343404.2018.1510481
Treyz G, Rickman D, Shao G (1992) The REMI economic-demographic forecasting and simulation
model. Int Reg Sci Rev 14:221–253
Varga A (2000) Local academic knowledge transfers and the concentration of economic activity. J
Reg Sci 40(2):289–309
Varga A (2006) The spatial dimension of innovation and growth: empirical research
methodology and policy analysis. Eur Plan Stud 14(9):1171–1186. https://doi.org/10.1080/
09654310600933298
Varga A (2007) GMR-Hungary: a complex macro-regional model for the analysis of development
policy impacts on the Hungarian economy. PTE KTK KRTI Working Papers (2007/4)
Varga A (2017a) Geographical macro and regional impact modeling. In: Jackson R, Schaeffer P
(eds) Regional research frontiers, advances in spatial science, vol 2, pp 49–58. https://doi.org/10.
1007/978-3-319-50590-9_3
Varga A (2017b) Place-based, spatially blind, or both? Challenges in estimating the impacts of
modern development policies: the case of the GMR policy impact modeling approach. Int Reg
Sci Rev 40:12–37. https://doi.org/10.1177/0160017615571587
Varga A, Baypinar M (2016) Economic impact assessment of alternative European neighborhood
policy (ENP) options with the application of the GMR-Turkey model. Ann Reg Sci 56:153–176
Varga A, Sebestyén T, Szabó N, Szerb L (2018) Economic Impact assessment of Entrepreneurship
policies with the GMR-Europe Model. FIRES Project Report D4.6, 2018.04.06
Varga A, Sebestyén T, Szabó N, Szerb L (2019) Estimating the economic impacts of knowledge
network and entrepreneurship development in smart specialization policy. Reg Stud. https://doi.
org/10.1080/00343404.2018.1527026
Vivarelli M (2013) Is entrepreneurship necessarily good? Microeconomic evidence from developed
and developing countries. Ind Corp Change 22:1453–1495. https://doi.org/10.1093/icc/dtt005
Wennekers S, Thurik R (1999) Linking entrepreneurship and economic growth. Small Bus Econ
13(1):27–56
Chapter 4
On the Institutional Foundations
of the Varieties of Entrepreneurship
in Europe
Andrea M. Herrmann
Abstract For decades, research into the link between national institutions and
entrepreneurship has been characterized by three shortcomings: First, clear-cut con-
cepts of institutions are rare. Second, a parsimonious understanding of how a few core
institutions influence entrepreneurship is missing. Third, scholars often ignore that
incrementally innovative ventures constitute a distinct (and under-researched) type
of entrepreneurship next to the (over-researched) form of radically innovative, high-
growth or high-tech entrepreneurship. This chapter seeks to illustrate how the appli-
cation of the “Varieties-of-Capitalism” (VoC) reasoning does not only enable focused
rather than eclectic analyses of institutional influences on entrepreneurship but also
reveals the institutionally induced equifinality of the varieties of entrepreneurship
across Europe. These insights invite future entrepreneurship research to move away
from the ideology that displays radically innovative entrepreneurship as, by far,
the most desirable form of entrepreneurship. This finding also invites policymak-
ers to target entrepreneurial support measures more specifically to their economy’s
institutional environment.
Keywords Entrepreneurship · Varieties-of-Capitalism · National institutions ·

Institutional complementarities
This chapter summarizes some of the core findings of Work Package 5 of the FIRES research
project (https://projectfires.eu), which received funding from the European Union’s Horizon 2020
research and innovation program under grant agreement No 649378. The theoretical foundations
for this work package published earlier in Herrmann (2019) were reiterated—largely verbatim—in
Sects. 4.1 and 4.2. While Sects. 4.1 and 4.2 are therefore no original work, the remainder of the
chapter is original work to the extent that it provides a systematic overview over how this argument
is based on a set of papers that have been published or are under review, in (Dilli et al. 2018; Held
et al. 2018; Held et al. 2018a, b; Held 2019). I thank Selin Dilli for comments on earlier drafts of
this chapter.
A. M. Herrmann (B)
Innovation Studies, Copernicus Institute of Sustainable Development, Utrecht University, Utrecht,
The Netherlands
e-mail: A.M.Herrmann@uu.nl

72 A. M. Herrmann
4.1 Introduction
Over the past two decades, the Varieties-of-Capitalism (VoC) literature, going back to
the work of Hall and Soskice (2001a), has become a widely applied framework in the
political sciences, in political economy and economic sociology alike. In a nutshell,
the VoC literature illustrates that different national institutions governing labor and
financial markets as well as inter-organizational collaborations facilitate different
types of corporate innovation. While the VoC framework has been developed mostly
through studies of incumbent firms, its reasoning is also applicable to new ventures.
National institutions are likely to lead also new ventures to develop business ideas of
different innovativeness. To put it differently, given that incumbent firms were found
to compete on different types of innovations and thus, in different market segments
between countries, it is reasonable to assume that many firms have chosen these
competitive strategies from their inception as new ventures.
However, until the beginning of the H2020 project Financial and Institutional
Reforms for an Entrepreneurial Society in Europe (FIRES), the VoC framework
has hardly been applied in entrepreneurship research (for exceptions, see Ebner
2010; van der Walt 2010).1 To be clear, the entrepreneurship literature illustrates that
entrepreneurs are driven by different motives and reasons, and have diverse aspi-
rations and growth ambitions (for example, Cooper and Artz 1995; Wiklund et al.
2003). Accordingly, the literature acknowledges that different forms of entrepreneur-
ship exist, ranging from solo self-employment over small family businesses to high-
growth gazelle ventures (see also Delmar et al. 2003; Henrekson and Stenkula 2016;
Vivarelli 2013). The Global Entrepreneurship Monitor, by far the most comprehen-
sive dataset on entrepreneurship forms across the world, also shows that entrepreneur-
ship takes different forms between countries. However, systematic research into insti-
tutional reasons, as laid out by the VoC literature, for how and why entrepreneurship
between countries may differ in its innovation focus remained underdeveloped until
the start of the FIRES project.
This research gap has arguably (see Herrmann 2019) persisted because of a strong
focus on radically innovative—that is “technology-intensive” (OECD 1998), “R&D-
intensive” (Schreyer 2000), or “knowledge-intensive” (Delmar et al. 2003)—ven-
tures. This focus can be theoretically motivated by their high-growth potential and
empirically because these ventures have been shown to generate a disproportion-
ately high share of employment (see also Amat and Perramon 2010; Davidson and
Segerstrom 1998; Hölzl 2009; OECD 2002; Shane 2009). Radically innovative ven-
tures typically develop goods and services based on new technologies, leading to
strong corporate growth on the one hand and a higher risk of failure on the other.
Examples of such radically innovative ventures have emerged particularly frequently
in Silicon Valley which, in turn, has led to an idolization of this radically innovative,
1 The reason why the VoC framework has hardly been applied in business and management research
today seems straightforward: The core proponents of the VoC arguments, as well as their followers,
are political scientists (Peter Hall, Kathleen Thelen), political economists (David Soskice), and
sociologists (Wolfgang Streeck) rather than business and management scholars.
4 On the Institutional Foundations of the Varieties … 73
“Silicon Valley” entrepreneurship. Newspapers have reported with high frequency

about the heroic efforts and outstanding success of Silicon Valley entrepreneurs, and
even mainstream movies have been made about the start-up stories of Apple and
Facebook. Because attention and impact have accrued to studies of extraordinary
rather than every-day phenomena, scientific research has paid inordinate attention
to the funding and other needs, along with the impact of radically innovative ven-
tures (see, for example, Henrekson and Johansson 2010; Shane 2009). And as a
consequence, policymakers across Europe explicitly or implicitly aim to facilitate
high-growth (“Silicon Valley”) entrepreneurship (Commission 2010; OECD 2002;
see also Hölzl 2009; Mason and Brown 2013).
This focus on radically innovative entrepreneurship is problematic for various
reasons. First, it conveys the impression that less innovative types of entrepreneurship
are second-best as they grow less rapidly (see, for example, Amat and Perramon
2010; Davidson and Segerstrom 1998; Hölzl 2009; OECD 1998, 2002; Schreyer
2000). This reasoning is flawed as recent studies show that high employment growth
is not only generated by highly innovative start-ups but also by more established
firms of at least five years (Anyadike-Danes et al. 2009) and with an average age
of 25 years (Acs et al. 2008a). Furthermore, a recent study of the German ministry
of economic affairs finds that “high-growth ventures can also shrink again as well.
A high-growth venture (…) is thus no guarantee for sustained employment growth
but constitutes a temporary phenomenon” (BMWi 2012, p. 42; see also Daunfeldt
and Halvarsson 2015). Second, the focus on radically innovative entrepreneurship
is also problematic because it neglects the comparative institutional advantages that
continental European economies offer to incrementally innovative start-up firms.
As laid out in detail below, the institutional environment of regulated economies
makes it easier for entrepreneurs to establish incrementally rather than radically
innovative ventures. Third, incrementally innovative ventures grow at a lower but
more sustainable rate than their radically innovative counterparts (Herrmann 2008,
Chap. 5). If successful, radically innovative ventures typically yield higher returns
than incrementally innovative ventures. But the chances of becoming successful
are decisively lower for radically than for incrementally innovative ventures. Last
but not least, radically innovative ventures occur much less frequently than their
incrementally innovative counterparts, even in the USA. While most new ventures
are not innovative across economies, among those that are, incremental innovation is
the rule and radical innovation is the exception (see Baumol 2002, 2004; Henrekson
and Sanadaji 2014, p. 1760; Nightingale and Coad 2014).
In several studies, whose most important results are reported in Sect. 4.3 of this
chapter, we show how a core set of distinct national institutions facilitates the devel-
opment of different types of entrepreneurial innovation across Europe. These studies
do not only explain why radically innovative ventures develop more frequently in
Anglo-Saxon economies. They also illustrate why incrementally innovative ventures
are more common in Northern Europe, while new ventures reproducing goods and
services at lower costs are particularly frequent in Southern and Eastern European
economies. Importantly, the insights gained from these studies may motivate future
research to move away from its focus on radically innovative entrepreneurship as
74 A. M. Herrmann
the most desirable entrepreneurship type. Overall, the studies below (see Sect. 4.3)
thus illustrate how a better understanding of the varieties of entrepreneurship in
Europe can lead to a more balanced understanding of the possibilities and needs—
or rather the difficulties and needless efforts—to equally foster radically innovative
entrepreneurship in Continental Europe.
To illustrate how the VoC reasoning offers a more balanced understanding of
the link between distinct national institutions and different types of entrepreneurial
innovativeness, I first review the core arguments of the VoC literature on a coun-
try’s institutional foundations in Sect. 4.2. Section 4.3 then provides an overview
of four FIRES studies that show how different institutional frameworks induce dif-
ferent types of entrepreneurial venturing across Europe. Section 4.4 illustrates the
implications that result for researchers and policymakers from these findings.
4.2 Theoretical Foundations
Importantly, the VoC arguments on how a distinct set of institutions support different
types of corporate innovativeness have, until the start of the FIRES project, been
empirically tested on the basis of incumbent firms (Hall and Soskice 2001a; Hancké
et al. 2007; Casper 2007; Herrmann 2008). We therefore begin with the question
of whether these arguments are equally applicable to nascent ventures. To answer
this question, we first develop a theoretical framework that could explain which
institutions are core to the development of (different types of) entrepreneurship, and
why.
Starting with the work of Stinchcombe (1965), the entrepreneurship literature
investigating how institutions influence entrepreneurship gained momentum in the
early 1990s. Its contributors arrived at the conclusion that institutions “matter”
because they structure economic payoffs which influence entrepreneurial efforts
and activities (Calcagno and Sobel 2014; Baumol 1990; Murphy et al. 1990; Sobel
2008). While the literature agrees that both formal and informal institutions incen-
tivize individual behavior (North 1990), thereby influencing the extent and character
of an economy’s entrepreneurial activity (Acs et al. 2008b; Stenholm et al. 2013;
Urbano and Alvarez 2014), it also—often implicitly—focuses on the institutional
drivers of radically innovative entrepreneurship. The formal institutions were found
to be beneficial for “productive,” “high-growth” entrepreneurship and include law
and order, contract enforcement, competition policy, trade policies, tax codes, social
insurance systems, employment protection legislation, capital market regulation, as
well as the protection of private property (Bjørnskov and Foss 2013; Hall and Jones
1999; Henrekson and Johansson 2009). Informal institutions supporting growth-
oriented entrepreneurship include individualism, social capital, trust, and power dis-
tance (Hechavarria and Reynolds 2009; Taylor and Wilson 2012). In short, the liter-
ature suggests that differences in entrepreneurship between countries or regions can,
inter alia, be explained by a broad diversity of institutions (Case and Harris 2012;
Stam 2014; World Economic Forum 2013).
This literature on institutions and entrepreneurship suffers from three problems.

First, a clear-cut concept of institutions is missing. Second, a parsimonious under-
standing of whether and how a few core institutions facilitate different types of
entrepreneurship is not provided. Third, the literature focuses on explaining how
different types of institutions foster “high-growth” or “high-impact” entrepreneur-
ship (Davidsson and Henrekson 2002; Henrekson 2005; Henrekson and Johansson
2009). While this leads to a focus on “technology-intensive” (OECD 1998), “R&D-
intensive” (Schreyer 2000), or “knowledge-intensive” (Delmar et al. 2003) ventures,
incrementally innovative ventures, their needs, and institutional drivers tend to be
overlooked.
The VoC literature makes it possible to address these three problems. First, taking
the perspective of historical institutionalism and in line with North (1990, p. 3),
the VoC literature clearly defines institutions as “… formalized rules that may be
enforced by calling upon a third party” (Streeck and Thelen 2005, p. 10). Institutions
thus are the written or verbally agreed rules of the game which lead to a systematic
behavior of actors—individuals and organizations, such as entrepreneurs and their
ventures. Compared to rational-choice institutionalism, the VoC literature thus takes
a broader perspective, including informal institutions that develop on the basis of
less formal agreements than written rules (such as laws or contracts). At the same
time, the VoC literature, in line with Ostrom (1990), focuses on those institutions that
provide capacities for deliberation, the exchange of information, monitoring, and the
enforcement of agreements (Hall and Soskice 2001a, pp. 9–12). In this regard, the
VoC literature has a more focused understanding than sociological institutionalism:
While shared understandings (such as norms, values, and culture) provide the basis
for the development of (informal) institutions, the latter “… must be reaffirmed
periodically by appropriate historical experience” (Hall and Soskice 2001a, p. 14),
in order to remain viable as rules upon which third parties can be called.2
Second, the VoC literature offers a parsimonious theoretical framework to iden-
tify a core of institutions which influence any business activity (Hall and Soskice
2001b). To this end, the VoC literature draws on the insights of economic theory
(Milgrom and Roberts 1992; Teece and Pisano 1998; Williamson 1985), as well
as the resource-dependence view (Pfeffer and Salancik 1978), which illustrate that
three types of resources are essential for any business to operate: labor, finance, and
know-how. These resources are considered as most important because firms can only
secure them after solving a collective action problem with external economic actors,
namely their workforces, financiers, and R&D partners. Institutions channeling the
resources between firms and their workforces, financiers, and R&D partners can
therefore offer comparative advantages and are thus considered to be economically
most influential. Accordingly, the VoC literature illustrates how education-related
together with labor-market institutions, finance-related institutions, and institutions
governing inter-organizational collaborations are shaped differently between coun-
tries, and it explains how these institutional constellations together lead to different,
2 For a more in-depth understanding of how different schools of thought differ from each other in
their understanding of institutions, see (Koelble 1995; Hall and Taylor 1996).
76 A. M. Herrmann
complementary institutional environments on the one hand and to different types of

corporate behavior on the other.
Third, based on these theoretical considerations, the VoC literature convincingly
argues that incrementally innovative firms are institutionally supported by a reg-
ulated environment. To illustrate this point, the VoC literature (Hall and Soskice
2001a) compares the regulated institutional environment of the Northern European
countries, the so-called “Coordinated Market Economies” (CMEs), to the deregu-
lated institutional environment of the Anglo-Saxon countries, or the “Liberal Market
Economies” (LMEs). In doing so, the VoC scholars often illustrate their reasoning at
the examples of Germany, which they consider the most typical CME, and the UK
or USA, which are considered particularly typical LMEs. Later contributors to the
VoC literature questioned the dichotomous distinction between CMEs and LMEs as
they identified additional, particularly typical institutional constellations of country
groups, most notably Mediterranean Market Economies (MMEs) and Eastern Mar-
ket Economies (EMEs) (for example Amable 2003; Hancké et al. 2007; Schneider
and Paunescu 2012).
Based on these distinctions, I here summarize our FIRES studies which illustrate
that radically innovative entrepreneurship is facilitated by a deregulated institutional
environment (that is typical for Anglo-Saxon economies), whereas regulated insti-
tutional constellations (typical of Northern European countries) facilitate incremen-
tally innovative forms of entrepreneurship. The over-regulated or rapidly liberalized
institutional environment of Southern and Eastern European economies, respectively,
facilitate reproductive entrepreneurship based on the imitation of existing business
ideas. Applying the VoC reasoning to new ventures explains why high-growth, radi-
cally innovative entrepreneurship develops particularly frequently in the deregulated
institutional environments of LMEs, including the Anglo-Saxon economics such as
the USA, UK, and Ireland.
Beginning with labor, the VoC literature highlights the free-riding problem related
to the training of specifically skilled workforces (Dencker et al. 2009; Hall and
Soskice 2001b). Given that the education and training system of LMEs tends not to
be coordinated via a country-wide dialog between the social partners, sophisticated
industry-wide job classifications that could serve as a basis for training workforces
do not exist. Workforces therefore acquire a versatile skill set which they can use in
different work environments. Upon completion of education trajectories, the flexible
labor-market institutions of LMEs further strengthen the general skills of workforces.
Short notice periods, dismissal without substantial reasons, and weak work councils
imply that workforces are faced with hire-and-fire at short notice and change jobs
frequently. Workers therefore acquire general skills that are useful for, and thus
adequately rewarded by, all firms needing a certain business function. Importantly,
such general skills imply that workers are particularly imaginative (thanks to the
different work environments they have seen in different firms) and flexible as they
are used to adapt to new corporate environments. Radically innovative firms, in
turn, do not only require the capacity to imagine completely new business ideas but
are also characterized by rapid changes. Flexible workforces with general skills are
thus particularly well equipped to develop radical innovations. In sum, the flexible
education and labor-market institutions of LMEs thus facilitate the development of

radically innovative ventures as they equip workforces with general skills (see also
Herrmann and Peine 2011).
In addition to labor-market institutions, also those institutions governing the access
to venture finance facilitate the development of radically innovative ventures in
LMEs. The VoC literature shows that institutions differ in how they address the
principal-agent problem related to the provision of shareholder capital (Hall and
Soskice 2001b; Kenyon and Vitols 2004; Vitols 2001). To be willing to invest, share-
holders need to be assured that their funds are used in the most efficient way by
the firm’s management. In LMEs, supervisory boards overlooking the activities and
decisions of the management board of directors do not exist. While shareholders
directly elect corporate managers, they have little or no systematic insight into, or
control over, managerial investment decisions via a supervisory board. Consequently,
managers have unilateral power to take major strategic and financial decisions, while
shareholders can monitor the soundness of managerial decisions only through the
development of equity prices at the stock market. This, in turn, drives managers to
maximize returns on investment by engaging in high-risk, radical innovation projects.
Radically innovative start-ups are therefore a particularly attractive investment option
for venture capitalists. Venture capital investments into start-up firms are furthermore
facilitated by the private pension systems of LMEs, which imply that comparatively
high sums destined to build up future pensions are invested inter alia in venture
capital firms. Accordingly, the pension and corporate governance systems of LMEs
facilitate the development of radically innovative ventures.
The VoC literature furthermore highlights how solutions to hold-up problems,
related to inter-organizational development of know-how, facilitates the emergence
of radically innovative ventures (Hall and Soskice 2001b; Tate 2001; Teubner 2001).
Start-up firms often engage in R&D collaborations with other organizations, such
as research labs, universities, or suppliers, in order to jointly develop new products
or services (Lundvall 1992; Tate 2001, pp. 444–446). But such joint developments
also bear the risk of hold-up. The latter occurs whenever two or more actors try to
appropriate the intellectual property (IP) developed by their cooperation partner(s)
without having contributed proportionally to the knowledge development (see Klein
1996; Rogerson 1992, p. 777). Institutions governing inter-firm collaborations influ-
ence the ways in which companies can protect themselves against such IP drift or
theft, depending on how institutions facilitate the enforcement of R&D contracts
between collaboration partners (Tate 2001; Teubner 2001). In LMEs, the case-by-
case decisions of lay juries or judges make the outcome of lawsuits unpredictable.
Consequently, start-up firms often shy away from approaching courts to have the
contractual obligations of their R&D collaboration partners enforced. This, in turn,
does not only discourage firms to engage in large-scale R&D cooperation where the
risk of hold-up is simply higher, but it also stimulates fierce competition between
potential collaboration partners, which is at the basis of radical innovation.
While these VoC arguments explain why radically innovative ventures occur with
particular frequency in the Anglo-Saxon LMEs (most notably in the USA and the
UK), the VoC literature also explains why the regulated institutional environment
78 A. M. Herrmann
of the Northern European CMEs (in particular, that of Germany) facilitates the
development of incrementally innovative ventures.
With regard to labor skills, the VoC literature highlights how workforces in CMEs
tend to acquire company-specific rather than general skills (Hall and Soskice 2001b).
The acquisition of company-specific skills is essentially induced by regulated labor-
market institutions which prohibit the hiring-and-firing of employees at will. Unless
they fall under exempt regulations, such as start-up companies of less than 10 employ-
ees, ventures can only dismiss employees for limited reasons, after respecting specific
notice periods and involving the ventures’ work councils. Often, temporary forms of
employment can also be strongly protected with the intention to gear them toward per-
manent employment (Dencker et al. 2009). Given that these institutions tie employees
to the same firm for a long time period, employees in CMEs tend to have in-depth
firm-specific knowledge and long-standing relationships with their firms’ suppli-
ers. Such firm-specific skills enable workforces in CMEs to autonomously propose
and develop improvements which translate into incremental innovations and high-
quality products. At the same time, given their focus on just one (or a few) corporate
environments, workforces with firm-specific skills lack the imaginative capacity and
adaptiveness arising from frequent job changes. While workforces with firm-specific
skills are thus less likely to come up with radically innovative ideas, they are partic-
ularly well equipped for developing incremental innovations (Herrmann and Peine
2011).
In addition, the pension and corporate governance systems of CMEs, institu-
tionalizing the access of ventures to finance, tend to facilitate the development of
incrementally innovative ventures (Hall and Soskice 2001b; Kenyon and Vitols 2004;
Vitols 2001). Venture capital tends to be scarce in CMEs especially when the public
pension system is a pay-as-you-go scheme. In these systems, such as in Germany,
the pension provisions paid in by the current working population are directly redis-
tributed by the state to the retirees and not invested into profit-yielding projects,
let alone venture capital funds.
Once limited liability ventures reach a certain size, a supervisory board typically
needs to be established including employees as well as shareholder representatives.
Given that the supervisory board needs to agree to major strategic investment deci-
sions of the board of directors, managers have no unilateral decision-making power.
On the one hand, this makes it difficult to rapidly invest into, or divest from, new
business units, which is often necessary for radical innovations. On the other hand,
shareholders with insights into, and a say about, how their funds are to be used are
typically less interested in maximizing returns on investment in the short run. This is
particularly true whenever members of supervisory boards represent large corporate
stakeholders, such as the firm’s “house banks” or suppliers. In these cases, the board
members are often reluctant to agree that “their” venture engages in high-risk projects
(even if these promise high returns) because radically innovative businesses are also
more likely to fail. Supervisory board members thus tend to have a preference for
the firm to engage in incrementally innovative projects because the latter typically
have more stable and predictable (albeit lower) returns in the long run.
Furthermore, the hold-up problem related to joint know-how development with

R&D partners is overcome by the code-based legal system of CMEs in general and
Germany in particular (Hall and Soskice 2001b; Tate 2001; Teubner 2001). Because
of the clearly defined conditions for IP infringements, the outcome of lawsuits is
better predictable. Contractual obligations of R&D collaborations can therefore be
enforced in a straightforward manner, which limits the risks of uncompensated IP
appropriation by a collaboration partner. Additionally, if supported by the fairly
reliable and efficient legal system, start-up firms in CMEs have a higher propensity
to engage in R&D collaborations on a large scale (Herrmann 2008, Chap. 4). This, in
turn, facilitates incremental product improvements rather than radical innovations.
Given that they are either all deregulated (LMEs) or regulated (CMEs), the institu-
tions governing labor, financial, and supplier–producer relations in LMEs and CMEs
are complementary, which implies that “… the presence (or efficiency) of one [institu-
tion] increases the returns from (or efficiency) of the other” (Hall and Soskice 2001b,
p. 17). For example, the complementary availability of generally skilled workforces
and easily accessible venture capital makes it disproportionately easier for nascent
ventures to be radically innovative than this would be the case if the skill sets of
national workforces had been geared toward firm-specific skills—even if venture
capital was available—and the other way around.
Importantly, the institutional environment in Mediterranean and Eastern European
economies are often not complementary. Consequently, nascent ventures typically
lack the types or combinations of labor skills and financial resources that facilitate
radical or incremental innovation. This, in turn, can explain why a particularly high
share of new ventures in these economies is focused on reproducing goods or services
at lower costs rather than developing radical or incremental innovations.
Due to their recent histories of extensive state intervention, firms in Mediterranean
Market Economies (MMEs) have built specific capabilities of non-market coordi-
nation in the sphere of corporate finance. Given that venture capital from national
investors is hardly available and that external shareholders are not well protected,
venture funding is often provided by family members, friends, and acquaintances of
the entrepreneur (Herrmann 2008, Chap. 3). While new ventures thus have access to
small funding amounts, they have difficulties in acquiring larger funds from institu-
tional investors which, in turn, are needed for developing incrementally or radically
innovative products.
While MMEs are characterized by moderate levels of social protection and high
public expenditure for poverty alleviation and pensions, national expenditures for
education are limited. Together with a fragmented social dialog and stifling labor-
market regulation, which makes dismissals of employees close to impossible, new
ventures are reluctant to hire employees (Hall and Soskice 2001b). The human
resources of new ventures are thus often very limited which, in turn, makes any
kind of innovation difficult and rather leads firms to focus on the reproduction of
products and services, which does not require a broader skill basis.
Together with a fragmented and unreliable judicial system that makes recourse to
legal action in case of IP conflicts difficult, this gives firms in MMEs a comparative
advantage in low-cost reproduction—with the exception of some niche markets, such
80 A. M. Herrmann
as furniture or fashion, where, for example, Italian firms compete on incremental

innovations and design (Molina and Rhodes 2007).
Contrary to CMEs, employers in Eastern Market Economies (EMEs) are not will-
ing to bear the additional costs of on-the-job training for inexperienced young work-
ers. This, in turn, leads to a shortage of specifically skilled labor in EME ventures.
But given that labor markets were rapidly deregulated in EMEs (with the exception
of Slovenia) after the fall of the wall, workforces are comparatively mobile which,
like in the LMEs, facilitates the acquisition of general skills.
Regarding financial markets, foreign direct investment is among the most impor-
tant sources of capital. Domestic bank lending, the second most important source
of finance, is dominated by transnational companies (Hancké et al. 2007; Nölke and
Vliegenthart 2009).
Together with a less reliable judicial system, this gives EMEs a comparative insti-
tutional advantage in the assembly and production of relatively complex and durable
consumer goods. These comparative advantages are based on national institutions
which combine low labor costs and a skilled population with substantial knowledge
of medium-level technologies and the availability of foreign direct investment.
To conclude, the institutional environment of LMEs can be expected to facil-
itate the development of radically innovative ventures, CME institutions lead
entrepreneurs to rather set up incrementally innovative ventures, whereas the insti-
tutional framework of MMEs and EMEs facilitates, slightly different types of,
reproductive entrepreneurship.
4.3 Empirical Evidence
To test the empirical applicability of these theoretical arguments, we proceeded in

three steps. In the first step (Dilli et al. 2018, pp. 293–309), we assessed whether the
entrepreneurship-related institutions of the EU member states indeed form distinct
institutional families. To this end, we operationalized the environment of overall 21
Western economies with regard to those labor-, finance-, and R&D-related institu-
tions that, according to the VoC literature, are most influential on entrepreneurial
innovativeness (Dilli et al. 2018, pp. 301–304). For each country, we determined the
availability of workforces with general entrepreneurial skills on the basis of over-
all six OECD and GEM indicators.3 We furthermore measured the availability of
venture finance by institutional investors with the help of four Eurostat and World
3 To measure the extent of highly and generally skilled workforces, these indicators report (for each
country): (i) the share of population with tertiary education, (ii) the percentage of researchers, and
(iii) the amount of R&D transfers to entrepreneurial ventures, as well as (iv) the stringency of
regular employment protection legislation, (v) the stringency of temporary employment protection,
and (vi) the social spending on start-up incentives.
Bank indicators.4 Finally, we identified the reliability of supplier–producer collabo-

rations on the basis of five World Bank indicators.5 This data was available for 20
EU countries as well as the USA.6
Having operationalized the institutional environment of these 21 countries, we
wondered whether countries cluster into distinct groups on the basis of these insti-
tutions. In other words, which countries resemble—and respectively differ from—
each other with regard to their entrepreneurship-relevant institutions? To answer this
question, we run cluster analyses on the basis of all 15 aforementioned institutional
indicators, which were measured at the country level and, depending on data avail-
ability, as the average of the 2004–2014 time span.7 The results of these cluster
analyses are depicted in Fig. 4.1.
We find that the clustering corresponds remarkably well to the institutional fami-
lies identified in the VoC literature. Accordingly, we find that countries form distinct
families with regard to their finance-, labor-, and R&D-related institutions governing
entrepreneurship. Importantly, the institutions we studied go far beyond the classical
VoC institutions, as they influence the ease or difficulty with which entrepreneurial
ventures, rather than incumbent firms, can acquire different types of finance, labor,
and know-how. This makes it surprising that the country groups we identify are
basically identical to the ones discussed in the VoC literature.
In line with the VoC literature, we called the different varieties of entrepreneurial
capitalism which we identified LMEs, CMEs, MMEs, and EMEs. LMEs include the
Anglo-Saxon economies (Ireland, the UK, and the USA) with permissive financial-
market institutions and deregulated labor markets comprising scientific education
systems teaching workforces general skills, as well as reliable legal systems gov-
erning inter-firm collaborations. In contrast, CMEs (including Austria, Germany,
the Netherlands, Switzerland, Belgium, Norway, Denmark, Sweden, and Finland)
are characterized by less permissive financial-market institutions, well-regulated
labor markets based on vocational education systems that teach specific skills to
workforces, and reliable legal systems supporting inter-firm collaborations. MMEs
4 These indicators capture the influence of institutional investors on nascent ventures by reporting the
extent (i) of protection of minority interests, (ii) of minimum capital requirements, (iii) of venture
capital investments, and (iv) of recovery rates in case of venture failure.
5 These indicators measure the reliability of legal procedures in case of lawsuits related to sup-
plier–producer collaborations by capturing the extent (i) of enforcing contracts, (ii) of judicial
independence, (iii) of impartial courts, (iv) of the protection of property rights, and (v) of the
integrity of the legal system.
6 More precisely, the countries covered include Austria, Belgium, Czech Republic, Denmark,
Finland, France, Germany, Hungary, Ireland, Italy, the Netherlands, Norway, Poland, Portugal,
Slovakia, Slovenia, Spain, Sweden, Switzerland, the UK, and the USA.
7 In order to identify possible changes that may have taken place in the countries’ institutional
environments over time, we also split our data into two groups: the periods of 2004–2009 and
of 2009–2014, respectively. Importantly, though our separate analyses for these two time periods
revealed that no major institutional changes have taken place, the results are very similar between
the two periods. We therefore used the average of the 2004–2014 time span in the analyses and
results presented below.
82 A. M. Herrmann
Fig. 4.1 Country families with similar entrepreneurship-relevant institutions. Source Dilli et al.
(2018)
(including Italy, Spain, Portugal, and France), in turn, are characterized by con-
straining financial and labor-market institutions including education systems that
mostly teach basic skills to workforces, and, with the exception of France, less
reliable legal systems that make inter-firm collaborations difficult. Finally, EMEs
(including Poland, the Slovak Republic, the Czech Republic, Hungary, and Slovenia)
are characterized by constraining financial-market institutions, well-regulated labor
markets based on education systems that mostly teach basic skills, and unreliable
legal systems that hamper inter-firm collaborations. In short, varieties-of-capitalism
similar to the ones described in the VoC literature for established firms can be
identified for nascent ventures with regard to those national institutions governing
entrepreneurship.
We assessed the impact of these distinct varieties of entrepreneurship-related insti-
tutions on entrepreneurship in the second step (Dilli et al. 2018, pp. 309–320). Based
on the VoC reasoning about the impact of institutions on entrepreneurial innovative-
ness, we would expect to find an above-average share of radically innovative ventures
in LMEs, an elevated proportion of incrementally innovative ventures in CMEs, and
a plurality of imitative ventures in MMEs and EMEs. We assessed these hypotheses
on the basis of several regression analyses. Taking the technology intensity of indus-
tries as indicator of entrepreneurial innovativeness, these analyses tested whether
specific types of entrepreneurship (e.g., venture creation in technology-intense or,
respectively, in less technology-intense industries) are particularly frequent in LMEs,
CMEs, MMEs, and EMEs, respectively.
Overall, our regression analyses lend support to the idea that the institutional
constellations of LMEs, CMEs, MMEs, and EMEs support different types of
entrepreneurship (Dilli et al. 2018, pp. 309–314). While these analyses can only
establish correlations, not causalities, it is noteworthy that entrepreneurs in LMEs
outperform their counterparts in other economies in the extent to which they found
radically innovative, high-tech ventures which also grow fast. Entrepreneurs in CMEs
often develop incrementally innovative ventures. That is, they create more high- and
medium-tech ventures than entrepreneurs in EMEs and MMEs but also more low-
tech ventures than their counterparts in LMEs, whereby these ventures are overall
characterized by lower but sustainable growth. In contrast, entrepreneurs in EMEs
specialize in less innovative product imitations. Accordingly, they are outperformed
by entrepreneurs in both LMEs and CMEs in setting up high-tech ventures. However,
EME entrepreneurs are decisively better in setting up medium- and low-tech ven-
tures than their counterparts in CMEs and MMEs alike. Importantly, though, these
ventures show little growth. Finally, innovative entrepreneurship is least developed
in MMEs. Accordingly, MME entrepreneurs hardly set up any high-tech or medium-
tech ventures compared to their counterparts in all other economies. At the same
time, entrepreneurs in MMEs do outperform entrepreneurs in all other economies
in the extent to which they set up low-tech ventures, whereby these ventures hardly
show any growth.
Having established that distinct institutional constellations correlate with different
types of entrepreneurship across Europe, we asked in a third step whether, and if so
how, venture creation processes differ between countries. To this end, we collected a
unique dataset of venture creation activities. More concretely, this dataset traces—on
a monthly basis—the activities that nascent ventures undertake during their start-up
period in order (1) to build up the necessary human resources, (2) to acquire funding,
and (3) to develop product-related know-how. Based on optimal matching techniques,
we analyzed—with a specific focus on country-specific differences—how ventures
approach any of these three components of the start-up process. In short, our findings
are presented below:
(1) Beginning with human resources, two separate studies (Held 2019; Held et al.
2018) investigate how labor-market institutions influence the composition of
start-up teams in nascent ventures. The influence of the institutional setting
comes particularly to the fore in the first study, which analyzes the circum-
stances in which part-time entrepreneurs, who worked for the nascent venture
less than 30 h per week, transition to full-time entrepreneurship (Held 2019).
Interestingly, and in line with the expectations of the VoC literature, Held finds
that part-time entrepreneurs in CMEs, such as Germany, are significantly less
likely to transition to full-time entrepreneurship than those in LMEs, such as
the UK and the USA, presumably because, in case of venture failure, it is par-
ticularly difficult in CMEs to regain a responsible position as a well-paid and
well-insured employee. The study highlights that national labor-market institu-
tions do not only elicit the emergence of a dominant type of entrepreneurship
(Dilli et al. 2018) but also specific entry choices by the entrepreneur herself.
84 A. M. Herrmann
Having analyzed the entry processes of individual entrepreneurs, we investi-

gate team formation processes at the venture level in an additional study (Held
et al. 2018). To this end, we employ a definition of the venture team that goes
beyond the founders involved in the creation of the venture and encompasses
employees and external service providers. As a result of this broader conceptu-
alization of team formation (in line with Cardon and Stevens 2004; Koch et al.
2013), our study discerns overall seven distinct approaches toward team forma-
tion. More concretely, the study does not only describe these seven-team forma-
tion processes with regard to the founder team but also uncovers the existence of
distinct approaches to the hiring of employees and service providers. It further-
more shows that significant interaction takes place between the approaches to
these three components of the venture team. While an additionality effect exists
between founder team size and the hiring of employees, we observe substitution
effects between the hiring of employees and service providers. Interestingly, the
reliance on service providers is especially prevalent among nascent ventures in
coordinated market economies. This finding is in line with the expectation of the
VoC literature that entrepreneurs in CMEs are more reluctant to hire employ-
ees because dismissal at short notice is difficult which, in turn, elicits only low
venture growth (Dilli et al. 2018). As such, our findings confirm that the VoC
reasoning, originally developed in the context of established firms (Estevez-Abe
et al. 2001; Hall and Soskice 2001b), also applies to nascent ventures—at least
with regards to aspects of the team formation.
(2) In another study (Held et al. 2018a), we find that nascent ventures follow one
of seven distinct processes of funding acquisition. The majority of ventures
follows one of the two processes that fit the expectations formulated in the
financial bootstrapping literature: these nascent ventures rely almost exclusively
on the funding of their founders (Winborg and Landström 2001), but a small
yet significant number of ventures deviates from this process. These ventures
acquire funding from other sources than their founders. The type of funding
a venture acquires correlates with various venture characteristics such as the
type of good that it develops, the product’s novelty, venture size, industry, as
well as its institutional context. With regard to the latter, we find that ventures
in countries with a higher stock market capitalization, such as the UK and the
USA, are less likely to seek debt finance. This, in turn, lends empirical support
to the VoC idea that the availability of institutional (venture) capital influences
the financial sources into which ventures tap to finance their endeavors.
(3) Finally, we find in a third study that nascent ventures in LMEs are less likely to
engage in R&D collaborations with external partners, such as universities and
laboratories, than nascent ventures in CMEs (Held et al. 2018b). This, in turn,
supports the VoC idea presented above that nascent ventures are more careful
to engage in external R&D collaborations whenever the institutions governing
inter-firm collaborations make the outcome of lawsuits in case of disagreement
of the collaborating partners less predictable.
Taken together, these studies lend support to the theoretical arguments that a dis-
tinct set of national finance-, labor-, and R&D-related institutions correlates with the
development of different types of entrepreneurial innovativeness across the European
Union. While the deregulated institutional environment of Anglo-Saxon economies
implies that an above-average share of radically innovative ventures is founded in
LMEs, an elevated proportion of incrementally innovative ventures is set up in CMEs,
while a plurality of imitative ventures is founded in MMEs and EMEs.
4.4 Implications for Entrepreneurship Research

and Policymaking
In light of this empirical evidence supporting the VoC argument that distinct institu-
tional constellations facilitate different types of entrepreneurship, which implications
arise for entrepreneurship research and policymaking?
As we have argued elsewhere (Herrmann 2019; Dilli et al. 2018), entrepreneur-
ship research would first of all benefit from assuming a more parsimonious approach
toward investigating the link between institutions and entrepreneurship. The work of
Dilli (forthcoming) offers a useful example in this regard. One of the major insights
resulting from the VoC framework is that economic actors in different institutional
environments need to behave differently in order to achieve the same outcome. And
as a corollary, if economic actors across national institutions behave alike, this behav-
ior tends to result in different outcomes. To give an example, ventures that go public
in order to raise funds for increasing their R&D activities are likely to become rad-
ically innovative in the USA and incrementally innovative in Germany. Germany’s
corporate governance and education systems as well as the regulated labor market
imply that the resources for radical innovations are less available and, hence, more
expensive. This makes radically innovative entrepreneurship in Germany consid-
erably more difficult while facilitating incrementally innovative entrepreneurship.
Germany’s entrepreneurs thus need to behave differently from their USA and UK
counterparts if they want to achieve the same outcomes. Meanwhile, start-ups in the
UK have difficulties recruiting and retaining specifically skilled workers to grow their
businesses into export champions, as this arguably requires a disciplined and loyal
workforce that is harder to attain in LMEs. If British and German founders behave
alike, they will achieve different outcomes, while different behaviors are required to
achieve the same outcome. Research into such questions of institutionally induced
equifinality can offer a novel approach to investigating the link between institutions,
entrepreneurial behavior, and outcomes.
The entrepreneurship literature can furthermore benefit from the finding that
entrepreneurship types diffused in one institutional environment do not serve as a
role model for entrepreneurship in other institutional environments. To put it bluntly,
Silicon Valley cannot be a role model for the Continental European economies
because of their institutional differences. But neither is Baden-Württemberg, known
86 A. M. Herrmann
for its incrementally innovative firms, a suitable role model for the Midlands.
Such insights force the entrepreneurship literature to acknowledge that different
institutional constellations allow for different types of entrepreneurship to flourish.
This also has important implications for policymaking. The VoC framework high-
lights that institutional constellations which are at the same time conducive to radi-
cally innovative, high-tech entrepreneurship and incrementally innovative, medium-
tech entrepreneurship do not exist and may in fact be impossible to create. Policymak-
ers are therefore faced with a trade-off and the question about which entrepreneur-
ship type to facilitate. Of course, as laid out in the final chapters of this volume
(Sanders et al. 2020a, b, c), policymakers can design individual policy measures to
stimulate those types of entrepreneurship that are currently less supported by their
national institutional environment. But historically grown institutional complemen-
tarities imply that one has to make a choice whether to support radical, incremental,
or imitative innovation.
Policymakers should be aware of these trade-offs and carefully consider the inter-
play of institutions. While labor protection has a negative impact on the development
of radically innovative, high-tech entrepreneurship, it stimulates the development of
incrementally innovative, medium-tech entrepreneurship. Germany, for example, is
characterized by a lively start-up scene in this area (see Dilli et al. 2018; Herrmann
2019; Pahnke and Welter 2019). Finally, one should keep in mind that the regula-
tion or deregulation of labor and financial markets has broader societal implications
that may be undesirable. To give just some examples: strong wage inequalities and
increasing disparities between the rich and the poor, as well as systematic underin-
surance against the risks of disability, old-age poverty, and illness that seem to come
with LMEs’ deregulated labor markets. Similarly, high capital market volatility and
risky investments go hand in hand with deregulated financial markets. From the
above research, one can conclude that a one-size-fits-all institutional constellation
that stimulates radically and incrementally innovative and imitative entrepreneur-
ship while facilitating social cohesion does not exist and cannot be created. There
is no blueprint. The best policymakers can hope to do is experiment with small
improvements, carefully assessing their policies’ impacts as they go along.
References
Acs ZJ, Desai S, Hessels J (2008b) Entrepreneurship, economic development, and institutions.
Amable B (2003) The diversity of modern capitalism. Oxford University Press, Oxford
Amat O, Perramon J (2010) Gazelle companies: growth drivers and an evolution analysis. Universitat
Pompeu Fabra, Working Paper 1244
Anyadike-Danes M, Bonner K, Hart K, Mason C (2009) Measuring business growth: high-growth
firms and their contribution to employment in the UK. NESTA, London
Baumol WJ (1990) Entrepreneurship: productive, unproductive, and destructive. J Polit Econ
98(5):893–921
Baumol WJ (2002) Entrepreneurship, innovation and growth: the David-Goliath symbiosis. J

Entrepreneurial Fin 7(2):1–10
Baumol WJ (2004) Entrepreneurial enterprises, large established firms and other components of
the free-market growth machine. Small Bus Econ 23(1):9–21
Bjørnskov C, Foss NJ (2013) How strategic entrepreneurship and the institutional context drive
economic growth. Strateg Entrepreneurship J 7(1):50–69
BMWi (2012). Studie über schnell wachsende Jungunternehmen (Gazellen). Bundesministerium
für Wirtschaft und Technologie, Berlin
Calcagno PT, Sobel RS (2014) Regulatory costs on entrepreneurship and establishment employment
size. Small Bus Econ 42(3):541–559
Cardon MS, Stevens CE (2004) Managing human resources in small organizations: what do we
know? Hum Resour Manag Rev 14:295–323
Case S, Harris D (2012) The startup uprising: eighteen months of the startup America Parternship.
Ewing Marion Kauffman Foundation, pp 1–49
Casper S (2007) Creating Silicon Valley in Europe: public policy towards new technology industries.
Oxford University Press, Oxford
Commission E (2010) Europe 2020: a strategy for smart, sustainable and inclusive growth:
communication from the commission. European Commission, Brussels
Cooper AC, Artz KW (1995) Determinants of satisfaction for entrepreneurs. J Bus Ventur 10(6):439–
457
Daunfeldt S-O, Halvarsson D (2015) Are high-growth firms one-hit wonders? Evidence from
Sweden. Small Bus Econ 44(2):361–383
Davidson C, Segerstrom P (1998) R&D subsidies and economic growth. RAND J Econ 29(3):548–
577
Davidsson P, Henrekson M (2002) Determinants of the prevalance of start-ups and high-growth
firms. Small Bus Econ 19(2):81–104
Delmar F, Davidsson P, Gartner WB (2003) Arriving at the high-growth firm. J Bus Ventur
18(2):189–216
Dencker JC, Gruber M, Shah SK (2009) Individual and opportunity factors influencing job creation
in new firms. Acad Manag J 52(6):1125–1147
Dilli S (forthcoming) The diversity of labor market institutions and entrepreneurship. Socio-Econ
Rev
Dilli S, Elert N, Herrmann AM (2018) Varieties of entrepreneurship: exploring the institutional foun-
dations of different entrepreneurship types through ‘Varieties-of-Capitalism’ arguments. Small
Bus Econ 51(2):293–320
Ebner A (2010) Varieties of capitalism and the limits of entrepreneurship policy: institutional reform
in Germany’s coordinated market economy. J Ind Competition Trade 10(3–4):319–341
Estevez-Abe M, Iversen T, Soskice DW (2001) Social protection and the formation of skills: a
reinterpretation of the welfare state. Varieties of capitalism—the institutional foundations of
comparative advantage. Oxford, Oxford University Press, pp 145–183
Hall RE, Jones CI (1999) Why do some countries produce so much more output per worker than
others? Q J Econ 114(1):83–116
Hall P, Soskice DW (2001a) Varieties of capitalism. Oxford University Press, Oxford
Hall PA, Soskice DW (2001b) An introduction to varieties of capitalism. Varieties of capitalism—
the institutional foundations of comparative advantage. In Hall PA, Soskice DW (eds) Oxford
Hall P, Taylor RCR (1996) Political science and the three new institutionalisms (and the subsequent
debate between the authors and Hay and Wincott in Political Studies, 1998, 46, 951–962). Polit
Stud 44:936–957
Hancké B, Rhodes M, Thatcher M (eds) (2007) Beyond varieties of capitalism. Oxford University
Press, Oxford
Hechavarria DM, Reynolds PD (2009) Cultural norms & business start-ups: the impact of national
values on opportunity and necessity entrepreneurs. Int Entrepreneurship Manag J 5(4):417–437
88 A. M. Herrmann
Held L (2019) Part-time entrepreneurship: the role of institutions, venture and individual charac-
teristics in entry and transition choices. Unravelling the patterns in venture creation processes.
Ph.D. thesis. Utrecht University, Utrecht, pp 25–55
Held L, Herrmann AM, van Mossel A (2018) Team formation processes in new ventures. Small
Bus Econ 51(2):441–464
Held L, Herrmann AM, Polzin F (2018a) Follow the money: the funding acquisition process
of nascent ventures. Horizon 2020 Project on “Financial and Institutional Reforms for an
Entrepreneurial Society” (FIRES),Workpackage 5, Deliverable 5.1; currently under review. Avail-
able in Held L (2019) Unravelling the patterns in venture creation processes. Ph.D. thesis. Utrecht
University, Utrecht, pp 91–122
Held L, Herrmann AM, Storz C (2018b) Whom do nascent ventures search for? Variance of link-
age formation activities during new roduct development processes. Horizon 2020 Project on
“Financial and Institutional Reforms for an Entrepreneurial Society” (FIRES), Workpackage 5,
Deliverable 5.1; currently under review. Available in Held L (2019) Unravelling the patterns in
venture creation processes. Ph.D. thesis. Utrecht University, Utrecht, pp 123–150
Henrekson M (2005) Entrepreneurship: a weak link in the welfare state? Ind Corp Change
14(3):437–467
Henrekson M, Johansson D (2009) Competencies and institutions fostering high-growth firms.
Found Trends Entrepreneurship 5(1):1–80
Henrekson M, Johansson D (2010) Gazelles as job creators: a survey and interpretation of the
evidence. Small Bus Econ 35(2):227–244
Henrekson M, Sanadaji T (2014) Small business activity does not measure entrepreneurship. PNAS
111(5):1760–1765
Henrekson M, Stenkula M (2016) Understanding entrepreneurship – definition, function, and policy.
Lund, Studentlitteratur
Herrmann AM (2008) One political economy, one competitive strategy? Comparing pharmaceutical
firms in Germany, Italy, and the UK. Oxford University Press, Oxford
Herrmann AM (2019) A plea for varieties of entrepreneurship. Small Bus Econ 52(2):331–343
Herrmann AM, Peine A (2011) When ‘national innovation system’ meet ‘varieties of capitalism’
arguments on labour qualifications: on the skill types and scientific knowledge needed for radical
and incremental product innovations. Res Policy 40(5):687–701
Hölzl W (2009) Is the R&D behaviour of fast-growing SMEs different? Evidence from CIS III data
for 16 countries. Small Bus Econ 33(1):59–75
Kenyon T, Vitols S (2004) Corporate governance in Germany and the United States: key chal-
lenges for the transatlantic business community. AICGS Policy Report. American Institute for
Contemporary German Studies, Washington
Klein B (1996) Why hold-ups: the self-enforcing range of contractual relationships. Econ Inquiry
XXXIV(July):444–463
Koch A, Späth J, Strotmann H (2013) The role of employees for post-entry firm growth. Small Bus
Econ 41(3):733–755
Koelble TA (1995) The new institutionalism in political science and sociology. Comp Polit
27(2):231–243
Lundvall B-A (1992) National systems of innovation—towards a theory of innovation and interactive
learning. Pinter Publishers, London
Mason C, Brown R (2013) Creating good public policy to support high-growth firms. Small Bus
Econ 40(2):211–225
Milgrom PR, Roberts J (1992) Economics, organization and management. Prentice Hall, Englewood
Cliffs
Molina O, Rhodes M (2007) The political economy of adjustment in mixed market economies:
a study of Spain and Italy. In: Hancké B, Rhodes M, Thatcher M (eds) Beyond varieties of
capitalism. Oxford University Press, Oxford, pp 223–252
Murphy KM, Shleifer A, Vishny RW (1990) The allocation of talent: implications for growth. Q J
Econ 106(2):503–530
Nightingale P, Coad A (2014) Muppets and gazelles: political and methodological biases in
entrepreneurship research. Ind Corp Change 23(1):113–143
Nölke A, Vliegenthart A (2009) Enlarging the varieties of capitalism: the emergence of dependent
market economies in East Central Europe. World Polit 61(4):670–702
North DC (1990) Institutions, institutional change and economic performance. Cambridge
University Press, Cambridge
OECD (1998) Technology, productivity and job creation. Best policy practices. OECD Publishing,
Paris
OECD (2002) High-growth SMEs and employment. Organisation for Economic Co-operation and
Development, Paris
Ostrom E (1990) Governing the commons: the evolution of institutions for collective action.
Cambridge University Press, New York
Pahnke A, Welter F (2019) The German Mittelstand: Antithesis to the Silicon Valley entrepreneur-
ship model? Small Bus Econ 52(2):345–358
Acs Z, Parsons, W., Spencer Tracy LJ (2008a) High-impact firms: gazelles revisited. Study prepared
for the U.S. Small Business Administration, Office of Advocacy, Washington D.C.
Pfeffer J, Salancik GR (1978) The external control of organizations: a resource dependence
perspective. Harper and Row, New York, NY
Rogerson WP (1992) Contractual solutions to the hold-up problem. Rev Econ Stud (59):777–794
Schneider MR, Paunescu M (2012) Changing varieties of capitalism and revealed comparative
advantages from 1990 to 2005: a test of the Hall and Soskice claims. Socio-Econ Rev 10(4):731–
753
Schreyer P (2000) High-growth firms and employment. OECD Publishing, Paris
Shane S (2009) Why encouraging more people to become entrepreneurs is bad public policy. Small
Bus Econ 33(2):141–149
Sobel RS (2008) Testing Baumol: institutional quality and the productivity of entrepreneurship. J
Bus Ventur 23(6):641–655
Sanders M, Stenkula M, Grilli L, Herrmann A, Latifi G, Pager B, Szerb L, Terragno BE (2020a) A
reform strategy for Italy. In: Marx A, Sanders M, Stenkula M (eds) The entrepreneurial society.
Reform strategies for Italy, Germany and the UK. Springer, Berlin
Sanders M, Stenkula M, Dunstan J, Estrin S, Herrmann A, Pager B, Szerb L, Terragno BE (2020b)
A reform strategy for the UK. In: Marx A, Sanders M, Stenkula M (eds) The entrepreneurial
society. Reform strategies for Italy, Germany and the UK. Springer, Berlin
Sanders M, Stenkula M, Fritsch M, Herrmann A, Latifi G, Pager B, Szerb L, Terragno BE, Wyrwich
M (2020c) A reform strategy for Germany. In: Marx A, Sanders M, Stenkula M (eds) The
entrepreneurial society. Reform strategies for Italy, Germany and the UK. Springer, Berlin
Stam E (2014) The Dutch entrepreneurial ecosystem. SSRN Electron J
Stenholm P, Acs ZJ, Wuebker R (2013) Exploring country-level institutional arrangements on the
rate and type of entrepreneurial activity. J Bus Ventur 28(1):176–193
Stinchcombe AL (1965) Social structure and organizations. In: March JG (ed) Handbook of
organizations. Rand McNally, Chicago, pp 142–193
Streeck W, Thelen K (2005) Introduction: institutional change in advanced political economies.
In: Streeck W, Thelen K (eds) Beyond continuity: institutional change in advanced political
economies. Oxford University Press, Oxford, pp 1–39
Tate J (2001) National varieties of standardization. In: Hall PA, Soskice DW (eds) Varieties of
capitalism—the institutional foundations of comparative advantage. Oxford University Press,
Oxford, pp 442–473
Taylor MZ, Wilson S (2012) Does culture still matter? The effects of individualism on national
innovation rates. J Bus Ventur 27(2):234–247
Teece DJ, Pisano G (1998) The dynamic capabilities of firms. In: Dosi G, Teece DJ, Chytry J (eds)
Oxford University Press, Oxford, pp 193–212
90 A. M. Herrmann
Teubner G (2001) Legal irritants: how unifying law ends up in new divergences. In: Hall PA, Soskice
DW (eds) Varieties of capitalism—the Institutional foundations of comparative advantage. Oxford
Urbano D, Alvarez C (2014) Institutional dimensions and entrepreneurial activity: an international
study. Small Bus Econ 42(4):703–716
van der Walt J (2010) Entrepreneurship and the varieties of capitalism paradigm. Working Paper
No. 10-10, Mercatus Center at George Mason University
Vitols S (2001) Varieties of corporate governance: comparing Germany and the UK. In: Hall PA, Sos-
kice DW (eds) Varieties of capitalism—the institutional foundations of comparative advantage.
Oxford University Press, Oxford, pp 337–360
Vivarelli M (2013) Is entrepreneurship necessarily good? Microeconomic evidence from developed
and developing countries. Ind Corp Change 22(6):1453–1495
Wiklund J, Davidsson P, Delmar F (2003) What do they think and feel about growth? An expectancy-
value approach to small business managers’ attitudes toward growth. Entrepreneurship Theory
Pract 27(3):247–270
Williamson OE (1985) The economic institutions of capitalism: firms, markets, relational contract-
ing. Free Press, New York
Winborg J, Landström H (2001) Financial bootstrapping in small businesses: examining small
business managers’ resource acquisition behaviors. J Bus Ventur 16(3):235–254
World Economic Forum (2013) Entrepreneurial ecosystems around the globe and company growth
dynamics. World Economic Forum, Davos
Chapter 5
Towards an Entrepreneurial Society:
What Can the European Union
Contribute?
Axel Marx
Abstract The European Union (EU) is a political system involving multiple levels
of governance. Changing the institutional environment responsible for the quality
of the entrepreneurial ecosystem will require changes on multiple levels. However,
each level is not of equal importance. For some policy areas, the EU level is the
most important level of policy-making, and for other policy areas other levels of
governance are more important. This chapter will make clear that several institutions
which might be reformed in the context of creating a more entrepreneurial society fall
under the ‘shared’ or ‘supporting’ competence category of EU policy-making. This
implies that the centre of gravity for institutional reform remains firmly on the level
of the EU Member States or on the level of sub-national regions. The chapter shows
that fostering entrepreneurship will require a multi-level approach with a strong focus
on the level of EU Member States.
Keywords Entrepreneurship policy · European Union · Multi-level governance ·

Subsidiarity
JEL Classifications L26 · L5
5.1 Introduction
The European Union (EU) is a political system involving multiple levels of gov-
ernance. Changing the institutional environment responsible for the quality of the
entrepreneurial ecosystem will require changes on multiple levels. However, each
level is not of equal importance. For some policy areas, such as trade policy the EU
level is the most important level of policy-making since the EU has an ‘exclusive’
The author thanks Philip De Man, Ward Munters and Andrei Suse-Gavril for research assistance.
This chapter is based on joint FIRES reports. Thanks to Mark Sanders, Mikael Stenkula, László
Szerb and Attila Varga for comments on earlier drafts of this chapter.
A. Marx (B)

92 A. Marx
competence to make policy. For other policy areas, other levels of governance might
be more important. This chapter will make clear that several institutions which might
be reformed in the context of creating a more entrepreneurial society fall under the
‘shared’ or ‘supporting’ competence category of EU policy-making. This implies
that the centre of gravity for institutional reform remains firmly on the level of the
EU Member States (EU MS) or on the level of sub-national regions (especially in
federal states).
In order to illustrate the prominence of EU MS and the more limited scope for
institutional reform on the EU level, this chapter will first discuss the importance
of the principle of subsidiarity in EU policy-making. Next, the division of compe-
tence within the EU with regard to policy areas relevant to entrepreneurship will
be discussed. The chapter will then proceed by discussing the current EU policy
towards entrepreneurship and introduces the main objectives and instruments of
EU entrepreneurship policy to show where the EU can make a contribution. The
chapter ends with a discussion and summary which clearly shows that fostering
entrepreneurship will require a multi-level approach with a strong focus on the level
of EU MS.
5.2 Reforms Towards an Entrepreneurial Society in the EU
To propose reforms for an entrepreneurial society in Europe, one needs to understand

that policy within the European Union requires a multi-level approach (Marks et al.
1996). Policy is made on the European, national, regional and local level. However,
not all levels are equally relevant to each policy area. The importance of a governance
level is determined by multiple factors and is enshrined in national and European
Union law.
EU law is guided by a set of general principles by which the lawfulness of admin-
istrative and legislative measures of the EU is assessed. A number of these princi-
ples have been singled out as particularly important in relation to policies to pro-
mote entrepreneurship and competitiveness, namely the principles of subsidiarity,
proportionality and better regulation (Juncker 2014a, b, p. 2).
Of the above principles, the principle of subsidiarity is of crucial importance
for determining the potential reach, ambit and ambition of EU initiatives to reform
the institutional basis of the EU’s approach to entrepreneurship. As the previous
Commission President Juncker noted, “we should leave action to the EU MS where
they are more legitimate and better equipped to give effective policy responses at
national, regional or local level” (Juncker 2014a, p. 2). Before going over the specific
types of competences that determine the EU’s powers in the different policy areas,
we should therefore briefly go over the meaning and importance of the principle of
subsidiarity.
The principle of subsidiarity has been defined in general EU primary law and case
law, and in the existing policy documents on entrepreneurship in particular. Article
5 Treaty of the European Union (TEU) stipulates that the use of Union competences
5 Towards an Entrepreneurial Society: What Can the European … 93
is governed by the principles of subsidiarity and proportionality (Article 5.1 TEU).

These principles are the logical complements to the fact that the limits of EU are
governed by the principle of conferral, where powers are voluntarily conferred to
the EU by its Member States through international treaties and can hence only be
exercised by the EU within these limits and in order to achieve the goals set out
therein.
Competences that have not been conferred upon the EU in its constitutive treaties
rest with the EU MS (Article 5.2 TEU). The principle of conferral hence places
strict limitations on the policy areas in which the EU may act, but also on the types
of actions that may be initiated by the EU in those areas where it is, in principle,
competent to act. For example, fiscal measures may not be taken by the EU as part
of the industrial policy to promote the regulatory environment in which SMEs in
Europe can operate, though industrial policy is a (supporting) competence of the
EU.1
Specifically, the principle of subsidiarity means that the EU shall, in those policy
areas that do not fall within the exclusive competence (see below) of the EU, “act
only if and in so far as the objectives of the proposed action cannot be sufficiently
achieved by the EU MS, either at central level or at regional and local level, but can
rather, by reason of the scale or effects of the proposed action, be better achieved at
Union level” (Article 5.3 TEU). As the EU competences on entrepreneurship policy
are almost solely either shared or supporting (see below), respect for the principle of
subsidiarity is of utmost importance in all proposals aiming to reform the European
entrepreneurial society.
A critical corollary to the principle of subsidiarity is the principle of proportion-
ality, which stipulates that the content and form of EU actions shall not exceed what
is necessary to achieve the objectives of the Union’s treaties (Article 5.4 TEU). The
legal and policy implications of both principles are explained in more detail in a
separate protocol to the TEU and Treaty on the Functioning of the European Union
(TFEU), setting out the conditions to ensure respect for the principles by the institu-
tions of the EU and the procedure to be followed by the national parliaments of the
EU MS when verifying compliance at Union level. EU MS as well as the Committee
of the Regions (CoR) may bring actions on grounds of infringement of the principle
of subsidiarity against such legislative acts as for the adoption of which the TFEU
requires that the CoR be consulted (Art. 8 Protocol No 2; for a discussion, see Schmitt
et al. 2014).
The principles of subsidiarity and proportionality are informed by a concern that
the EU shall not act unnecessarily in policy areas where the conferral of competences
by EU MS to the EU has consciously been restricted, for a number of reasons,
for example because regional and local conditions vary to such an extent across
Europe that central EU regulation is considered to be sub-optimal. The current Union
approach to entrepreneurship is one such policy area, guided by considerations of
neutrality and born of the necessity to allow the regional differences in Europe to
take effect, which render it undesirable, overly time-consuming and impractical to
1 EU tax decisions can only be taken in very limited instances.

94 A. Marx
implement centralized EU legislation using a top-down approach (De Man et al.

2015).
The importance of national and regional differences in entrepreneurship is illus-
trated by several chapters in this book. The great diversity in the national and local
environments in which entrepreneurs operate, as well as the nature of enterprises
and entrepreneurs themselves, informs the long-standing approach by the EU to
policies addressing the needs of entrepreneurs as requiring fully recognition of this
diversity and, hence, respect for the principle of subsidiarity (European Commission
2008a, p. 2). In order to implement the ambitious agenda for reinvigorating the Euro-
pean economy through entrepreneurship and SMEs, the Commission’s approach (see
below) is therefore based on “a genuine political partnership between the EU and
EU MS that respects the principles of subsidiarity and proportionality” (European
Commission 2008a, p. 4).
5.3 Division of Competence
The distribution of powers, or competences, between the EU level of governance

and the Member State level is governed by the TEU and the TFEU. The EU can
take a particular action—whether legislative, administrative or in the nature of soft
law (e.g. recommendations)—only to the extent that EU MS granted it the relevant
competence by way of a treaty provision. According to the ‘principle of conferral’,
enshrined in Article 5(2) of the TEU, “the Union shall act only within the limits of the
competences conferred upon it by the EU MS in the Treaties to attain the objective set
out therein”. Article 5(2) further clarifies that “competences not conferred upon the
Union in the Treaties remain with the Member States” (see also Article 4(1) TEU).
The competences conferred upon the Union are classified into three principal
categories: (1) exclusive competences; (2) shared competences; and (3) competences
to carry out actions to support, coordinate or supplement the actions of the EU MS.
First, there is the exclusive competence. Article 3 of the TFEU grants the EU exclusive
competence with respect to the following matters: the customs union; competition
law necessary for the functioning of the internal market; the monetary policy of the
Eurozone; the conservation of marine biological resources under the common fishery
policy; and the common commercial policy. It should be noted that the list of areas
covered by exclusive competence is exhaustive. Where a matter falls within the EU’s
exclusive competence, it is only the EU that can legislate or adopt legally binding
acts with respect to that matter, in principle to the exclusion of Member State action.
In the areas of shared competence, both the EU and the EU MS are entitled to
regulate, however not at the same time. The EU enjoys a right of pre-emption over
EU MS when it comes to the exercise of shared competences. Pursuant to Article
2(2) TFEU, a Member State may take action in an area of shared competence only
to the extent that the Union has not exercised its competence in that area. In other
words, if an area is regulated at the EU level, the EU MS must abstain from also
regulating that area at national level. EU MS may, nonetheless, regulate aspects of
the area that are not addressed by the EU legislation.2 In addition, where EU action
takes the form of minimum harmonization—that is, the EU act established minimum
requirements—EU MS may enact legislation setting stricter requirements (Craig and
de Búrca 2015, p. 85). Nonetheless, the EU MS will regain their right of exercising
a shared competence, to the extent that the Union has ceased to exercise that com-
petence, for instance by repealing EU legislation covering the relevant area.3 Article
4(2) of TFEU provides that the EU shares competences with the EU MS “in the
following principal areas” (emphasis added): internal market; social policy, for the
aspects defined in the TFEU; economic, social and territorial cohesion; agriculture
and fisheries, excluding the conservation of the marine biological resources; envi-
ronment; consumer protection; transport; trans-European networks; energy; area of
freedom, security and justice; and common safety concerns in public health matters,
for the aspects defined the TFEU. Several of these policy areas are relevant in the
context of institutional reform for a more entrepreneurial society.
Finally, there are competences to coordinate, support or supplement the EU MS’
actions. Article 6 of the TFEU provides that “the Union shall have competence
to carry out action to support, coordinate or supplement actions of the Member
States” (emphasis added). The following areas are covered by such competences:
protection and improvement of human health; industry; culture; tourism; education,
vocational training, youth and sport; civil protection; and administrative cooperation.
The competences belonging to this category are the weakest among the three principal
categories of competences. EU MS retain their power to regulate these policy areas
at the national level. As clarified by Article 2(5) of the TFEU, the Union’s exercise
of its competences in these areas does not supersede the EU MS’ competences. The
same provision also stipulates that “[l]egally binding acts of the Union adopted on
the basis of the provisions of the Treaties relating to these areas shall not entail
harmonization of Member state’s laws or regulations” (emphasis added). Hence,
harmonization in these areas is quite clearly excluded. Also, this list of policy areas
contains several policy areas which are of crucial importance for institutional reform
for a more entrepreneurial society.
Table 5.1 summarizes the type of competence for some of the key policy areas for
institutional reform. The table confirms that, while most of the legal bases invoked
by the EU institutions to act towards entrepreneurial reform are shared, the key
competences of industrial policy, education, training and youth are supporting, and
the shared competence of employment is mainly of a coordinating nature.
For the shared competences listed in Table 5.1, the regulatory room remaining
for the EU MS is usually dependent on the extent to which the EU has exercised its
powers in that same field. For some policy areas such as research and technological
development, EU action will not preclude the EU MS from exercising their (parallel)
competences (see De Man et al. 2016).
Suggestions for reforming the entrepreneurial society in Europe need to take into
account the legal nature of the competences of the EU in the main policy areas for
2 Protocol No. 25, to the TEU and TFEU, on the Exercise of Shared Competences.
3 Declaration No. 18 in relation to the delimitation of competences, attached to the Treaty of Lisbon.
96 A. Marx
Table 5.1 Division of competences related to ecosystem of entrepreneurial society

Legal basis (TFEU) Policy area Competence
79 Immigration Shared
114 Internal market (approximation of Shared
laws)
145–150 (and 9) Employment Shared (emphasis on coordination
in Art. 5 TFEU)
151–157 Social policy Shared (for the aspects defined in
the TFEU)
162–164 European Social Fund Shared (social policy)
165–166 Education, vocational training and Supporting
youth
172 Trans-European networks Shared
173 Industrial policy Supporting
174–178 Economic, social and territorial Shared
cohesion
179–188 Research and technological Shared (though EU action will not
development preclude parallel national actions)
195 Tourism Supporting
212 Economic, financial and technical Shared
cooperation with third countries
entrepreneurship policy, as well as the requirements following the general principles

of subsidiarity and proportionality in areas of shared and supporting competences.
The specific implications of these types of competences and principles on the vertical
division of powers between the EU and its Member States are illustrated by the
addressees of the recommendations for reform in the key Commission documents
outlining the current approach to entrepreneurship (see also Table 5.2). Even if the
proposals by Elert et al. (2019) may wish to suggest a departure from this approach,
the recommendations remain relevant for they reveal the legal limitations to an EU-
centralized approach to entrepreneurial reform. Let us now delve deeper into the
specific policy actions taken by the EU in the area of entrepreneurship policy.
5.4 EU Entrepreneurship Policy
The starting point for the entrepreneurship policy as being implemented by the current
incarnation of the European Commission is the Small Business Act (SBA) adopted
in 2008 (European Commission 2008a). It builds on the framework and concepts
elaborated in the 2005 Community Lisbon Programme for a Modern SME Policy
(European Commission 2005b).4 In 2010, the Commission labelled the SBA “the
main instrument for promoting SMEs’ competitiveness and entrepreneurship within
the Single Market and beyond” (European Commission 2010b, p. 13). The act and the
continued relevance it holds for the realization of the broader entrepreneurship policy
of the EU demonstrate the pivotal importance of the SME concept as an anchoring
point for most initiatives for entrepreneurial reform. Most concrete initiatives taken
today for reforming the entrepreneurial society in Europe involve SMEs, even if
the societal actors addressed can also include students and employees. Considering
the role of the SME notion as one of the basic anchoring points for EU policy to
promote entrepreneurship, it is useful to recall the Union’s definition of what a small-
and medium-sized enterprise entails. The category of micro-, small- and medium-
sized enterprises (SMEs) includes those enterprises that employ fewer than 250
persons, with an annual turnover not exceeding e50 million and/or an annual balance
sheet total not exceeding e43 million.5 The importance of SMEs for the European
economy has long been recognized by the European Commission. It was only with
the adoption of the SBA that ‘Entrepreneurship’ became one of the main tools for
promoting the competitiveness of European SMEs and an overarching notion for a
number of diverging yet interrelated initiatives at EU and Member State level. The
Commission page for the SBA links to a definition of the term ‘entrepreneurship’,
which is conceived as “an individual’s ability to turn ideas into action. It includes
creativity, innovation, risk taking, ability to plan and manage projects in order to
achieve objectives”.6
Building on the European Charter for Small Enterprises7 and the 2006 European
Council conclusions detailing the relaunched Lisbon strategy for jobs and growth
(Presidency Conclusions 2006), the 2008 SBA compiles four priority areas and
10 principles that should guide the conception and implementation of policies for
SMEs, at both EU and Member State levels. The four priority areas were promoting
entrepreneurship, lessen the regulatory burden, provide access to finance and provide
access to markets through internationalization. The 10 principles are: (1) education
and training for entrepreneurship; (2) efficient bankruptcy procedures and second
chance for entrepreneurs; (3) institutional and regulatory framework for SME policy-
making; (4) operational environment for business creation; (5) support services for
SMEs and public procurement; (6) access to finance for SMEs; (7) supporting SMEs
to benefit from Euro-Mediterranean networks and partnerships; (8) enterprise skills
and innovation; (9) SMEs in a green economy; and (10) internationalization of SMEs.
4 The EU entrepreneurship policy is very focused on supporting SMEs. This is a narrow interpretation
of entrepreneurship policy which has been criticized by several economists.

5 SME’s are defined in Commission Recommendation of 6 May 2003 concerning the definition
of micro-, small- and medium-sized enterprises, https://eur-lex.europa.eu/legal-content/EN/TXT/
PDF/?uri=CELEX:32003H0361&from=EN.
6 Definition taken from http://ec.europa.eu/growth/smes/promoting-entrepreneurship/index_en.
htm.
7 European Charter for Small Enterprises, endorsed at the Feira European Council on 19 and 20
June 2000. The Charter recognized entrepreneurship as “a valuable and productive life skill, at all
levels of responsibility” (p. 8).
98 A. Marx
An important consideration for the identification of the 10 principles was the

need to create an environment in which entrepreneurship is rewarded. According
to the SBA, the notion of entrepreneurship is considered essential to “bring added
value at EU level, create a level playing field for SMEs and improve the legal and
administrative environment throughout the EU” (European Commission 2008a, p. 4).
Both EU and EU MS are therefore required to foster entrepreneurial interest and
talent, devoting particular attention to young people and women, and simplify the
conditions for business transfers (European Commission 2008a, p. 5).
The four priority areas of the SBA were further developed in later EU policy docu-
ments as (i) encompassing the facilitation of SMEs’ access to finance; (ii) facilitating
their access to markets; (iii) reducing the administrative burden for SMEs; and (iv)
promoting entrepreneurship (European Commission 2015). A number of intensive
rounds of pubic consultation initiated after the adoption of the SBA centred on these
four policy areas, as did the follow-up process of the Commission for implementing
the act (European Commission 2009b). The fourth priority to promote entrepreneur-
ship as such received rather little attention in the implementation rounds, however,
as illustrated by its conspicuous absence from the SBA Action Plan adopted by the
Council in 2008 (Council of the European Union 2008b). Nevertheless, this follow-
up process resulted in a comprehensive review of the SBA in 2011, which took stock
of the progress made by the EU and the EU MS in realizing the main principles
of the 2008 Act and promoting entrepreneurship. Noting that EU MS could still do
more in this respect, the 2011 Review of the SBA also identified good practices for
stimulating the implementation of the ten principles (European Commission 2011b,
pp. 19–24).
The SBA is governed by a dedicated performance review mechanism and a spe-
cialized organizational structure for monitoring compliance at Member State level,
headed by the network of SMEs (Muller et al. 2014). Moreover, the Think Small
First principle of the SBA has been implemented as a key factor for determining the
score of legislative proposals of the EU in the so-called SME test. To this day, these
mechanisms and actors remain central to the EU’s approach to entrepreneurship.
Continuing down the road of the 2008 SBA, the Europe 2020 Strategy for smart,
sustainable and inclusive growth was developed in 2010 in an attempt to address
the structural weaknesses in the economic and social fabric of the EU laid bare by
the 2007–2008 financial crisis (European Commission 2010a). To catalyse progress
in each of the three objectives for a (1) smart, (2) sustainable and (3) inclusive
growth, the 2020 Strategy formulated seven flagship initiatives focusing inter alia
on innovation, youth employment, the digital economy and a reinvigorated industrial
policy.
Taken together, these seven initiatives significantly broaden the ambit and ambi-
tions of the Europe 2020 Strategy as compared to the 2008 SBA. Stressing the need
to take action in a wide variety of policy areas, the 2010 document noted that “[a]ll
EU policies, instruments and legal acts, as well as financial instruments, should be
mobilised to pursue the strategy’s objectives” (European Commission 2010a, pp. 5–
6). Still, the approach advocated by the 2020 Strategy is largely in line with the prior-
ities of the SBA. Moreover, one of the main goals of the strategy is to improve access
to the single market for SMEs, which was one of the four priority areas of the SBA.
In that respect, the Commission notes that “[e]ntrepreneurship must be developed by
concrete policy initiatives, including a simplification of company law (bankruptcy
procedures, private company statute, etc.), and initiatives allowing entrepreneurs to
restart after failed businesses” (European Commission 2010b, p. 13).
Six of the seven flagship initiatives that make up the Europe 2020 Strategy explic-
itly refer to SMEs, highlighting the overall importance of the strategy for the stimula-
tion of an entrepreneurial culture in Europe (COSME Regulation, Para. (1)). Indeed,
several of the Europe 2020 flagship initiatives touch upon crucial aspects of Europe’s
policy for SMEs and entrepreneurial inclusion.
Building on previous initiatives, the 2010 Integrated Industrial Policy represents
the most comprehensive attempt on behalf of the European Commission to draw
up such a policy in support of entrepreneurship in Europe (European Commission
2010c). Reiterating the fundamental importance of SMEs for the economy of the EU,
the 2010 document is clear in its statement that the promotion of the creation, growth
and internationalization of SMEs should be at the core of the Union’s integrated
industrial policy (European Commission 2010c). In pursuit of this central objective,
the industrial policy gives a detailed overview of the variety of policy areas in which
action should be undertaken by the EU and its Member States in the coming years.
Most of these areas had already been identified in the 2008 SBA and under the various
flagship initiatives of the Europe 2020 Strategy. They concern both cross-sector
and sector-specific initiatives and include, most prominently, improving framework
conditions for industry, facilitating businesses’ access to finance and reducing the
mismatch between skills currently taught and those that are required for Europe’s
industry (European Commission 2014, p. 18).
The SBA, Europe 2020 and Integrated Industrial Policy Commission documents,
taken together, are cited as the most important policy documents on which the current
Competitiveness of Enterprises and SMEs (COSME) Regulation is built (COSME
Regulation paras (1)–(4)). Adopted by the Council and the European Parliament
on the basis of Articles 173 and 195 TFEU, the COSME Regulation establishes
a Programme for the Competitiveness of enterprises and small- and medium-sized
enterprises for the current 7-year period (2014–2020). It is the immediate successor
to the Competitiveness and Innovation Programme (CIP) that ran from 2007 to 2013.
Like COSME, the CIP was primarily geared towards supporting innovative SMEs
and entrepreneurs by improving their access to markets, support services and finance,
mainly through facilitating the access to risk capital (European Commission 2005a,
b, pp. 6–7). For that purpose, the CIP established a specific Entrepreneurship and
Innovation Programme that set out EU actions to support, encourage and promote:
access to finance for the start-up and growth of SMEs and investment in innovation
activities; the creation of an environment favourable to SME cooperation, particu-
larly in the field of cross-border cooperation; all forms of innovation in enterprises
including eco-innovation; entrepreneurship and innovation culture; enterprise and
innovation-related economic and administrative reform (COSME Regulation, Arts.
2.2.a and 10.2).
100 A. Marx
COSME is a key initiative to implement several flagship initiatives of the Europe

2020 Strategy, in particular through actions for realizing the objective of smart,
sustainable and inclusive growth, with a clear focus on employment (Art. 3 (4)
COSME Regulation). It does so in accordance with the overarching principles and
priorities identified in the SBA and industrial policy documents, and in policy areas
almost indistinguishable from those listed in the CIP Decision, though with a less
visible focus on innovation as a goal in and of itself. The COSME programme
represents the most comprehensive legal initiative at EU level to address all relevant
policy areas of the Union’s approach to stimulating entrepreneurship, both as a means
for competitiveness and as a direct aim of the regulation. It is the only EU initiative
currently in effect that focuses specifically on SMEs (COSME Regulation, Para.
(21)).
The COSME programme aims to put into place the necessary institutional and
policy arrangements for creating the conditions for achieving sustainable growth of
enterprises, in particular SMEs (COSME Regulation, Para. (10)). One of the means
of achieving a more competitive society in a sustainable manner is to take actions
that directly address the need for a more entrepreneurial culture in Europe. Hence,
the regulation not only recognizes that the EU MS and the EU need to work together
to create a favourable business environment, but also notes that SME competitive-
ness is affected by “the relatively weak entrepreneurial spirit in the Union” (COSME
Regulation, Para. (22)). Particular reference is made in that regard to the requirement
to address all situations that entrepreneurs may face and all stages in the life of an
enterprise, “including start-up, growth, transfer and bankruptcy (second chance)”.
Other priority areas are the promotion of entrepreneurship education, as well as “co-
herence and consistency enhancing measures such as benchmarking and exchanges
of good practices” (COSME Regulation, Para. (22)).
With particular attention to SMEs, the COSME programme aims to contribute to
two closely intertwined objectives, both directly and indirectly aimed at promoting
a more entrepreneurial culture in Europe, namely strengthening the competitiveness
and sustainability of the Union’s enterprises, particularly SMEs, and encouraging
entrepreneurial culture which promotes the creation and growth of SMEs (COSME
Regulation, Art. 3 (1)).
The overview so far demonstrated that the EU has for some time now recognized
the importance of taking action in the area of entrepreneurship policy. It long lacked
a concerted policy basis for elaborating a comprehensive approach to create a more
entrepreneurial society in Europe. This changed in 2013 with the adoption of the
Entrepreneurship 2020 Action Plan ‘Reigniting the entrepreneurial spirit in Europe’
(European Commission 2013). The Action Plan was announced in the 2012 Com-
mission Communication on a ‘Stronger European Industry for Growth’ as a policy
tool to improve the framework conditions and support measures for entrepreneurship
on the EU level and level of EU MS (European Commission 2012b, p. 18). Table 5.2
presents the Action Plan and which actor should take which type of action with regard
to specific policy initiatives.
The central role of the Entrepreneurship 2020 Action Plan is illustrated by the
Commission’s intention to conceive it as the “blueprint for decisive joint action
to unleash Europe’s entrepreneurial potential, to remove existing obstacles and to

revolutionize the culture of entrepreneurship in Europe” (European Commission
2013, p. 5). It explicitly builds on the Europe 2020 agenda, the 2008/2011 SBA
and the Integrated Industrial Policy to formulate a comprehensive response to the
question of how to increase levels of enthusiasm among Europeans for going down
a more entrepreneurial career path.
The 2020 Action Plan proposes three areas for immediate intervention that sub-
stantively overlap with the policy areas identified in the COSME programme and
SBA agenda, though with a more outspoken focus on education and training. These
areas reflect many of the preoccupations and priority concerns identified in the FIRES
project related to employment, knowledge and financial institutions:
1. Entrepreneurial education and training to support growth and business creation;
2. Strengthening framework conditions for entrepreneurs by removing existing
structural barriers and supporting them in crucial phases of the business lifecycle;
and
3. Dynamizing the culture of entrepreneurship in Europe: nurturing the new
generation of entrepreneurs.
While these areas have been singled out as subject to ‘immediate intervention’,
they relate to policy areas and actions that have been a long time in the making, and
fit in with a spate of legislative initiatives at EU level started over the course of the
past decade. The connection between regulatory simplification and the promotion of
entrepreneurship (areas 2 and 3 above), in particular, has been front and centre of the
EU answer to the recent financial crises. This follows from the 2008 European Eco-
nomic Recovery Plan, which focused on removing administrative burdens for start-
ups and micro-enterprises as a means of helping more people to become entrepreneurs
(European Commission 2008b). The 2009 Action Programme for Reducing Admin-
istrative Burdens in the EU also pays attention to the particularities of EU legislative
impact on SMEs (European Commission 2009a). Since 2011, it has been standard
Commission policy to exempt micro-enterprises from EU legislation when possi-
ble or to introduce special regimes in order to minimize regulatory burden on these
businesses (European Commission 2011b).
As noted in the previous section, these different initiatives need to be imple-
mented on several levels of governance ranging from the European to the local. At
the EU level, the Commission is the central actor in developing and executing the
EU’s entrepreneurship policy. However, given the wide ranges of different policy
areas and priority areas in the different instruments, many departments (DGs) of
the Commission need to work together to realize the overarching objectives of the
entrepreneurship policy. Some DGs are undoubtedly more important than others. The
key DG for entrepreneurship is DG GROW, responsible for internal market, indus-
try, entrepreneurship and SMEs. Its pivotal role is confirmed in the Entrepreneurship
2020 Action Plan, which notes that “This Action plan and its key actions will be fol-
lowed up by the Commission through the competitiveness and industrial policy and
the Small Business Act governance mechanisms, including in their external dimen-
sion with the candidate, potential candidate and neighborhood countries” (European
102 A. Marx
Commission 2013, p. 28). Besides DG GROW, several other DGs are involved in
implementing the entrepreneurship policy (for a detailed description, see De Man
et al. 2015).
5.5 Discussion
The above discussion makes clear that in the context of the European Union fostering
institutional change towards a more entrepreneurial society involves different actors
and institutions on different levels of governance. In this context, there is a strong
emphasis on subsidiarity and most of the policy leverage to foster an entrepreneurial
society is on the level of an EU MS or even a lower level of governance (see also
chapter by Varga et al. 2020).
The Europe 2020 Strategy underscores the vital importance of subsidiarity and
ensuring comprehensive cooperation with national, regional and local authorities in
all forms and capacities in order to make progress in realizing the objective of smart,
sustainable and inclusive growth. As such, according to the Europe 2020 Strategy, EU
MS are invited to work together by increasing their exchange of policy information
of good practices (European Commission 2010a, p. 29). Further, the strategy also
stresses the role of the European Parliament, not only in its capacity as co-legislator
to implement Europe 2020, but also as a ‘driving force’ for mobilizing EU MS, both
their citizens and their national parliaments (European Commission 2010a, p. 29).
Finally, the monitoring process set up by the European Commission for overseeing the
implementation of the strategy relies heavily on country-specific progress reports,
which also detail the progress made by the sub-national (regional) units of those
countries. This emphasis on EU MS can be read in two directions. On the one
hand, it can be read in the sense that the diversity of entrepreneurial environments
between EU MS and their regions is invoked as a key consideration warranting a
strict application of the principles of subsidiarity and proportionality in developing
an entrepreneurship policy. On the other hand, it can also be read as an indicator of
the urgent need for a more closely coordinated approach to entrepreneurial reform.
Also, the 2013 COSME Regulation reiterates the need to respect the fundamental
principle of subsidiarity. The COSME Regulation emphasizes that the subsidiarity
principle will inform the subsequent actions that can and should be included in the
work programme of the Commission when implementing this regulation. The Coun-
cil and Parliament are keen to emphasize the priority consideration for executing the
COSME programme as being that “[t]he Union’s actions should be coherent, con-
sistent and complementary to the EU MS’ financial instruments for SMEs, provide
a leverage effect and avoid creating market distortion, in accordance with [relevant
regulations]. The entities entrusted with the implementation of the actions should
ensure additionality and avoid double financing through Union resources” (COSME
Regulation, Para (15)).
The key mechanism for reaching the objective of facilitating access to capital
for SMEs and entrepreneurs, the European Fund for Strategic Investment (EFSI), is
also fundamentally guided by concerns for subsidiarity. Rather than underscoring

what the EU cannot do, however, the reference to the principle of subsidiarity is
phrased positively as a justification for a European initiative. As such, the European
Parliament and the Council note that the objectives of the 2015 EFSI Regulation
“cannot, as far as financial constraints to investment are concerned, be sufficiently
achieved by the EU MS by reason of the disparities in their fiscal capacity to finance
investment but can rather, by reason of its scale and effects, be better achieved at
Union level, the Union may adopt measures, in accordance with the principle of
subsidiarity as set out in Article 5 TEU”(EFSI Regulation, Para (63)).
The text of the COSME and EFSI Regulations makes it clear that, even in those
policy areas and with respect to those initiatives central to the EU approach to
entrepreneurship, subsidiarity considerations keep the focus squarely on actions and
activities of EU MS.
The application of the principle of subsidiarity and the inherent multi-level nature
of entrepreneurship policy with a strong focus on the national, regional and local level
is illustrated in Table 5.2. By giving a detailed overview of the recommendations in
this Action Plan by policy area and type of action, Table 5.2 is revelatory for the
lengths the Commission thinks the EU and its Member States can and/or should
go in order to reform the entrepreneurial society in Europe. The table provides a
complete overview of the complexity of EU entrepreneurship policy identifying the
different levels of policy-making involved and the different actors involved on the
European level. It should be noted that the broad policy areas identified by the Action
Plan correspond on a more aggregate level to the policy areas and recommendations
identified in the FIRES project (Elert et al. 2019) policy areas such as taxation, capital
provision, education, etc. In other words, there is quite a lot of overlap and consensus
on what needs to be reformed.
Table 5.2 illustrates that institutional reform for an entrepreneurial society is
pursued on multiple levels. It recognizes the need for a consolidated approach
involving both the EU institutions and the EU MS to comprehensively reform the
entrepreneurial education, environment and mindset of European citizens and busi-
nesses. Out of the 86 proposals for reform, 40% or 46.5% are directed to the European
Commission, while the remaining 46% or 53.5% address the EU MS at national,
regional or local level. If a quick quantitative analysis hence shows that, though bal-
anced on the whole, a small majority of the actions for entrepreneurial reform should
be taken by EU MS, a more qualitative approach reveals that the vertical distribution
of responsibility for instigating entrepreneurial reform is skewed a lot more strongly
towards the level of EU MS. It is at this level that more fundamental institutional
reforms should be pursued.
For those areas such as education and industrial policy, where the EU has a sup-
porting competence, the table confirms that proposals for Union activity remain
limited to actions that support, coordinate or supplement the actions of the EU MS.
Overall, out of the 40 proposals addressed by the European Commission to the EU,
no less than 29% or 72.5% take the form of actions aiming to support national,
regional and local initiatives, coordinate of national actors, exchange best practices
across the Union, disseminate information and study possible future actions at EU or
Table 5.2 E2020 Action Plan addressees
104
Action pillar Recommendation Area Action Addressee

Entrepreneurial education and training to support growth and business creation
Develop pan-European Education Coordination/best practice EU
learning initiative exchange
Reinforce cooperation with Education Coordination/best practice EU
Member States to assess exchange
introduction of
entrepreneurship education
in each country
Establish guidance Education/training Support/promote EU (+OECD)
framework to encourage
development of
entrepreneurial schools and
VET institutions
Promote recognition and Education/training Support/promote EU
validation of entrepreneurial
learning in
informal/non-formal
learning environment
Disseminate entrepreneurial Education Coordination/best practice EU
university guidance exchange
framework, promote
framework and facilitate
exchange between
universities
(continued)
A. Marx
Endorse successful Education/SMEs Support/promote EU
mechanisms of
university-driven business
creation
Embed key competence of Education/training Legislative Member States
entrepreneurship into
curricula of primary,
secondary, vocational,
higher and adult education
Give young people Education Policy/legislative Member States
opportunity to have
entrepreneurial experience
before end of education
Boost entrepreneurial Training Initiate EU funding Member States
training for young people
and adults in education by
means of structural fund
resources in line with
national job plan
Promote entrepreneurial Education Support/promote Member States
5 Towards an Entrepreneurial Society: What Can the European …
learning modules for young

people participating in
national youth guarantee
schemes
(continued)
105
106
Create an environment where entrepreneurs can flourish and grow

Better access to Finance programmes aimed SMEs/finance Funding EU
finance at developing market for
microfinance in Europe
Facilitate direct access of SMEs/finance Legislative/funding EU
SMEs to capital market
through development of an
EU regime for SME growth
markets
Assess need of amending SMEs/finance/taxation Legislative Member States
national financial legislation
and simplifying tax
legislation to facilitate
alternative forms of
financing for start-ups and
SMEs
Make use of structural SMEs/finance Initiate EU funding Member States
funds’ resources to set up
microfinance support
schemes
Utilize full potential under SMEs/finance/agriculture Initiate EU funding Member States
the European Agricultural
Fund for Rural Development
(EAFRD)
(continued)
A. Marx
Supporting new Identify and promote SMEs/taxation Best practice exchange EU
businesses in crucial Member States best
phases of their practices to create more
lifecycle and help entrepreneur-friendly fiscal
them grow environment
Support cooperation SMEs Support EU
between clusters and
business networks
Support networking and SMEs/energy Support/best practice exchange EU
exchange of best practice
between agencies running
schemes on resource
efficiency for SMEs
Reinforce enterprise Europe SMEs Coordination/support/information EU
network partnership with
hosting organizations, single
points of contact and all
SME support organizations
by informing, encouraging
and providing assistance
Revise rules prohibiting Internal market Legislative EU

certain misleading
marketing practices
(continued)
107
108
Unlock full potential of Internal market/ICT Legislative EU

digital single market for
SMEs by tackling existing
barriers to cross-border
online business
Continue development of SMEs/training Coordination EU
Erasmus for young
entrepreneur programme
Encourage exchanges of SMEs Promote EU
young entrepreneurs
between EU and third
countries
Help Member States develop Education/training Support/capacity-building EU
integrated support schemes
through capacity-building
seminars financed by ESF
technical assistance
Continue to develop your SMEs Coordination EU
Europe business portal
Make national tax SMEs/taxation Legislative/policy Member States
administration environment
more favourable to early
stage business
(continued)
A. Marx
Promote tax coordination to SMEs/taxation Legislative/coordination Member States
ensure that inconsistencies
in tax treatment do not lead
to double taxation or other
harmful tax practices
Reassess corporate income SMES/taxation Legislative Member States
tax regimes to consider
extending the statute of
limitation of losses and
deductions
Implementing option offered SMEs/taxation Legislative Member States
for small businesses of cash
accounting scheme for VAT
Adopt necessary measures to SMEs/R&D Legislative/policy Member States
support commercialization
of innovation, research and
development projects
Consider option for owners SMEs/employment Legislative Member States
of new enterprises to request
possible adjustments of
payment schedules for social

contributions
Take full advantage of SMEs/finance/agriculture Initiate EU funding Member States
EAFRD
(continued)
109
110
Unleashing new Foster knowledge base on SMEs/ICT Coordination/support/best EU

business major market trends and practice exchange/study
opportunities in the innovative business models
digital age to facilitate dialogue and
lead to a shared agenda for
action
Raise awareness through SMEs/ICT Coordination/information EU
Europe-wide information
campaign for entrepreneurs
and SMEs on benefits from
new digital evolutions
Facilitate networking to SMEs/ICT/training Support EU
support new business ideas
for training, advice and
coaching on how to do
business in the digital age
Launch specific actions for SMEs/ICT/training Coordination EU
Web entrepreneurs such as
platforms for mentoring and
skill-building
Strengthen competences and SMEs/ICT/training Coordination EU
skills by intensifying e-skills
actions for managerial and
entrepreneurial skills to
address new technological
and markets
(continued)
A. Marx
Reinforce national or SMEs/ICT/finance Support/funding Member States
regional support for digital
and Web start-ups and foster
alternative financing for
early stage technology
start-ups
Promote access for SMEs/ICT Support/promote Member States
entrepreneurs to open data
and big data compiled in
public or industry-backed
programmes
Support talented SMEs Support/promote Member States
entrepreneurs by
encouraging bright
graduates to begin a career
in start-ups
Support adoption of ongoing SMEs/ICT Legislative/policy Member States
policy initiatives such as the
data protection reform and
the proposal for a common
European sales law

Ensure the best use of SMEs/ICT Initiate EU funding Member States
European funds for Web and
digital entrepreneurship
(continued)
111
112
Easier business Develop guidelines on most SMEs Coordination/best practice EU

transfers effective programmes and exchange
best practices to make
business transfers easier
through expert working
groups with Member States
Improve legal, SMEs/taxation Legislative Member States
administrative and tax
provisions for transfers of
business
Use existing European funds SMEs Initiate EU funding Member States
according to their applicable
rules and priorities to
support SME transfers
Improve information and SMEs Information Member States
advice services for business
transfers
Effectively publicize SMEs Information Member States
business transfer platforms
and marketplaces and launch
campaigns to raise
awareness
Review tax regulation with SMEs/taxation Legislative Member States
respect to impact on
liquidity of SME in case of
succession of ownership
(continued)
A. Marx
Second chances for Launch public consultation SMEs Consultation/study EU
honest bankrupts to invite views from
stakeholder on issues related
to European approach to
business failure and
insolvency
Reduce discharge time and SMEs Legislative Member States
debt settlement for honest
entrepreneurs after
bankruptcy
Offer support services to SMEs Support/information Member States
businesses for early
restructuring, advice to
prevent bankruptcies and
support for SMEs to
restructure and relaunch
Provide advisory services to SMEs/training Support Member States
bankrupt entrepreneurs and
develop programmes for
‘second starters’ for
mentoring, training and

business networking
Regulatory burden: Vigorously pursue reduction SMEs Legislative EU
clearer and simpler of regulatory burden in EU
rules proposed legislation
(continued)
113
114
Review and revise EU SMEs Legislative EU

regulation to reduce
unnecessary or excessive
burden in areas identified as
‘top ten most burdensome’
Propose legislation SMEs/internal market Legislative EU
abolishing burdensome
authentication requirements
for SMEs wanting to
conduct cross-border
business
Set up working group to SMEs Study EU
assess needs of liberal
profession entrepreneurs
regarding issues of
simplification,
internationalization or
access to finance
Monitor progress via points SMEs/internal market Monitor/promote EU
of single contact under
services directive and
encourage Member States to
take more business-oriented
approach
(continued)
A. Marx
Assist business with a view SMEs/internal market/employment Support EU
to ensuring that they can
effectively access and make
use of SOLVIT platform to
deal with issues of EU rights
Reduce time for licensing SMEs Legislative Member States
and other authorizations
necessary to start a business
activity to one month
Fully implement European SMEs Legislative/best practice Member States
code of best practices exchange
facilitating SMEs’ access to
public procurement
Modernize labour markets SMEs/employment Legislative Member States
by simplifying employment
legislation and developing
flexible working
arrangements
Extend the points of single SMEs Support/coordination Member States
contact to more economic
activities and make them

more user-friendly
(continued)
115
116
Set up one-stop shops for SMEs Coordination/information Member States

entrepreneurs to bring
together all business support
services including
mentoring, facilitation and
advice
Role models and reaching out to specific groups
Entrepreneurs as role Establish Europe-wide EU Education Information EU
models entrepreneurship day for
students in their last year of
secondary education
Step up entrepreneurship Entrepreneurship Promote Member States
promotion activities and
appoint known
entrepreneurs as national
entrepreneurship
ambassadors
Take into account variety of Entrepreneurship/education/training/social Promote/policy Member States
business models and legal affairs
statuses in national or local
business support schemes,
and develop social
and training
(continued)
A. Marx
Women Create Europe-wide online Inclusion/education/training Coordination/best practice EU
mentoring, advisory, exchange
educational and business
networking platform for
women entrepreneurs to
promote exchange of best
practices
Design and implement Inclusion Promote/policy Member States
national strategies for
women’s entrepreneurship
Collect Inclusion Information Member States
gender-disaggregated data
and produce annual updates
on state of women
entrepreneurs nationally
Continue and expand Inclusion Promote Member States
existing networks of female
entrepreneurship
ambassadors and mentors
for women entrepreneurs
Implement policies enabling Inclusion Initiate EU funding Member States

women to achieve adequate
work-life balance, by taking
full advantage of support
options under EAFRD,
ERDF and ESF
(continued)
117
118
Seniors Help exchange best Inclusion/training Best practice exchange EU

practices helping senior
executives and entrepreneurs
to mentor new entrepreneurs
Foster senior entrepreneurs Inclusion/training Promote Member States
interested in transferring
know-how to new
entrepreneurs and match
senior entrepreneurs with
inexperienced entrepreneurs
Ensure that participation of Inclusion Legislative Member States
senior entrepreneurs and
retired executives in projects
is compatible with their
pension prospects
Migrant Propose policy initiatives to Migration Policy EU
entrepreneurs attract migrant entrepreneurs
and to facilitate
entrepreneurship among
migrants
Propose legislation aimed at Migration Legislative EU
removing legal obstacles to
establishment of businesses
and giving qualified
immigrant entrepreneurs a
stable permit
(continued)
A. Marx
Remove legal obstacles to Migration Legislative Member States
establishment of businesses
by legal migrant
entrepreneurs by giving
them stable permits
Facilitate access to Migration Information Member States
information and networking
for migrant entrepreneurs
and prospective migrant
entrepreneurs
Unemployed, in Launch future microfinance Employment/inclusion/finance Funding EU
particular young facility under the
people programme for social
change and innovation to
target vulnerable groups
Use ESF to provide Employment/inclusion/social affairs Funding EU
technical assistance to set up
support schemes for young
business starters and social
entrepreneurs
Organize microfinance and Employment/inclusion/social Study EU

social entrepreneurship affairs/finance
stakeholders’ forum
Analyse situation of Employment/inclusion Study EU (with OECD)
entrepreneurship for the
unemployed
(continued)
119
120
Analyse results of study on Employment/inclusion Study/information EU

contribution of public
employment services to job
creation, and organize
dissemination event
Connect public employment Employment/inclusion Support/coordination Member States
services with business
support services and
(micro)finance providers to
help unemployed find their
way into entrepreneurship
Design business training Employment/inclusion/training Policy/legislative Member States
programmes for out-of-work
youngsters on basis of
clearly defined stages
Launch active labour market Employment/inclusion Funding Member States
programmes that provide
financial support to all
unemployed people for
starting a business
Establish and run Employment/inclusion/education Best practice exchange/policy Member States
schemes to enable
unemployed to (re-)enter
business life as
entrepreneurs based on
successful models from
Member States
A. Marx
Member State level. This is in line with the instructions of the European Parliament
and the Council in the 2013 COSME Regulation for EU initiatives in each of the four
priority areas identified in the programme, which consistently ask the Commission
to ‘support’ actions which aim to facilitate and improve access to finance for SMEs
in their start-up, growth and transfer phases; to continue improving the competitive-
ness and access to markets of SMEs; to improve the framework conditions for the
competitiveness and sustainability of SMEs; and to promote entrepreneurship and
an entrepreneurial culture (COSME Regulation Arts. 8,9, 11 and 12).
The supporting nature of the activities of the EU is particularly apparent for those
areas covered by Action Pillars 1 and 3 of the E2020 Plan concerning education
and training, and the promotion of entrepreneurship and social inclusion of certain
demographic groups. The second pillar of the Action Plan, based largely on the
Union’s industrial policy competence, proposes more legislative actions and the
setting up of dedicated funding mechanisms. These proposals are largely confined
to actions that aim to facilitate access to finance for SMEs. However, as we have
seen, the most prominent of the measures adopted in this area so far also relied on
legal bases for shared competences in other policy areas such as economic, social
and territorial cohesion, research and technological development, and trans-European
networks. Likewise, it appears that, where cross-border competitiveness is addressed
as a factor that can improve the regulatory environment of entrepreneurs, the EU-
shared powers regarding the functioning of internal market offer more leeway, which
translates into more assertive legislative action.
5.6 Conclusion
This chapter makes clear that policies towards promoting entrepreneurship have
become more prominent on the agenda of the European Union. It was also one of
the key policy areas of the Juncker Commission. As a result, several regulatory and
financial initiatives have been taken on the level of the EU. However, as the EU
recognizes as well, promoting entrepreneurship entails reforms in many different
policy areas. This was also the starting point of the FIRES project. Making changes
in these different policy areas is difficult due to the complex nature of policy-making
competences in the EU. Some policies can only be changed on the level of the EU
(exclusive competence of the EU), while most others fall under shared competence
or the competence of the EU MS. In addition, the principle of subsidiarity requires
that policy reform should be approached on the appropriate level, including the local
and regional level.
Given the historical evolution of (national) entrepreneurial ecosystems and the
institutional frameworks that shape them, the EU MS need to be in the driver’s seat
in terms of institutional reform for a more entrepreneurial society. The European
Commission has legally committed to helping and supporting them as well as coor-
dinate their efforts, but reforms for an entrepreneurial society remain decidedly a
responsibility of EU MS. The possibilities and limitations for institutional reform on
the level of EU MS are analysed and discussed in other chapters of this volume.
122 A. Marx
References
Council of the European Union (2008a) Council conclusions on think small first—a small business
act for Europe of 1/2 Dec 2008
Council of the European Union (2008b) Council action plan for a small business act for Europe,
annexed to the council conclusions on think small first—a small business act for Europe of 1/2
Dec 2008
Craig P, de Búrca G (2015) EU law: text, cases and materials, 6th edn. Oxford University Press,
p. 85
De Man P, Munters W, Marx A (2015) EU enterpreneurial policy. Report for FIRES Project
De Man P, Munters W, Marx A (2016) EU entrepreneurial policy. Report for FIRES Project, pp. 200
European Union. Springer Verlag
European Commission (2005a) Common actions for growth and employment: the community
Lisbon program, 20 July 2005, COM (2005) 330 final
European Commission (2005b) Implementing the community Lisbon program—modern SME
policy for growth and employment, 10 Nov 2005, COM (2005) 551 final
European Commission (2008a) Think small first—a small business act for Europe, 25 June 2008,
COM (2008) 394 final
European Commission (2008b) A European economic recovery plan, 26 Nov 2008, COM (2008)
800 final
European Commission (2009a) Action program for reducing administrative burdens in the EU
sectoral reduction plans and 2009 actions, 22 Oct 2009, COM (2009) 544 final
European Commission (2009b) Report on the implementation of the SBA, s.d., COM (2009) 680
European Commission (2010a) Europe 2020—a strategy for smart, sustainable and inclusive
growth, 3 March 2010, COM (2010) 2020
European Commission (2010b) Toward a single market act—for a highly competitive social market
economy: 50 proposals for improving our work, business and exchanges with one another, 11
Nov 2010, COM (2010) 608 final/2
European Commission (2010c) An Integrated Industrial Policy for the globalisation era—putting
competitiveness and sustainability at centre stage, s.d., COM (2010) 614
European Commission (2011b) Minimizing regulatory burden for SMEs—adapting EU regulation
to the needs of micro-enterprises, 23 Nov 2011, COM (2011) 803 final
European Commission (2012b) A stronger European industry for growth and economic recovery—
industrial policy communication update, 10 Oct 2012, COM (2012) 582 final
European Commission (2013) Entrepreneurship 2020 action plan—reigniting the entrepreneurial
spirit in Europe, 9 Jan 2013, COM (2012) 795 final
European Commission (2014) For a European industrial renaissance, s.d., COM (2014) 14/2
European Commission (2015) Report on the public consultation on the new SME policy, 2015, at
http://ec.europa.eu/growth/tools-databases/newsroom/cf/itemdetail.cfm?item_id=7744
Juncker JC (2014a) Mission letter to Jyrki Katainen, Vice-President for jobs, growth, invest-
ment and competitiveness, 1 November 2014, at https://ec.europa.eu/commission/sites/cwt/files/
commissioner_mission_letters/katainen_en.pdf
Juncker JC (2014b) A new start for Europe: my agenda for jobs, growth, fairness and democratic
change—political guidelines for the next European commission, 15 July 2014, at http://www.
eesc.europa.eu/resources/docs/jean-claude-juncker—political-guidelines.pdf
Marks G, Hooghe L, Blank K (1996) European integration since the 1980s: state-centric versus
multi-level governance. J Comm Market Stud 34:343–378
Muller P, Gagliardi D, Caliandro C, Bohn NU, Klitou D (2014) Annual report on European
SMEs 2013/2014—a partial and fragile recovery, July 2014, at http://ec.europa.eu/DocsRoom/
documents/16121/attachments/1/translations/en/renditions/native
Presidency Conclusions (2006) Brussels European council of 23–24 March 2006
Schmitt P, Ruys T, Marx A, in consultation with Jeffery C, Swenden W, Pamphilis N, Gaweda B

(2014) Involvement of regional parliaments, regional assemblies and other relevant stakeholders
in the subsidiarity early warning system of the Lisbon treaty, pp. 274. Committee of the Regions,
Brussel
Varga A, Szerb L, Sebestyén T, Szabó N (2020) Economic impact assessment of entrepreneur-
ship policies with the GMR-Europe model. In: Marx A, Sanders M, Stenkula M (eds) The
Part II
Country Studies
Chapter 6
A Reform Strategy for Italy
Mark Sanders, Mikael Stenkula, Luca Grilli, Andrea M. Herrmann,

Gresa Latifi, Balázs Páger, László Szerb and Elisa Terragno Bogliaccini
Abstract In this chapter, we outline a reform strategy to promote an entrepreneurial

society in Italy. From a Varieties-of-Capitalism perspective, Italy has been classified
as a Mixed or Mediterranean Market Economy. It boasts a vibrant entrepreneurial
economy of locally embedded, often family-owned small- and medium-sized firms
All authors acknowledge financial support from the European Union’s Horizon 2020 research
and innovation program under grant agreement No 649378. László Szerb and Balázs Páger also
acknowledge support from the National Scientific Research Fund of Hungary (OTKA/NKFI grant
no. 120289, titled as Entrepreneurship and Competitiveness investigations in Hungary based
on the Global Entrepreneurship Monitor surveys 2017–2019). Mikael Stenkula also gratefully
acknowledges financial support from Jan Wallanders och Tom Hedelius stiftelse and from the
Marianne and Marcus Wallenberg Foundation.
M. Sanders (B) · E. Terragno Bogliaccini

E. Terragno Bogliaccini
e-mail: e.m.terragnobogliaccini@uu.nl
M. Stenkula
L. Grilli
Department of Management Economics and Industrial Engineering,
Politecnico di Milano, Milan, Italy
e-mail: luca.grilli@polimi.it
A. M. Herrmann
Copernicus Institute of Sustainable Development, Utrecht University, Utrecht, The Netherlands
G. Latifi
TUM School of Management, Technical University of Munich, Munich, Germany
e-mail: gresa.latifi@tum.de
B. Páger · L. Szerb
e-mail: pagerb@rkk.hu
128 M. Sanders et al.
that make up a major share of its economy. The main bottlenecks in the Italian
entrepreneurial ecosystem are low ambition levels, the lack of skills and education
flowing into entrepreneurial ventures, and a bureaucratically encumbered, non-
meritocratic, business environment that feeds back into a low familiarity with
ambitious entrepreneurship. Italy could strengthen its entrepreneurial ecosystem
in several areas, ranging from boosting human capital investments to reducing the
clientelism in the business environment and recruitment culture. This would open
up more opportunities for the young and talented, eager to engage in productive and
innovative venturing in Italy.
Keywords Italy · Entrepreneurship · Varieties-of-capitalism · Entrepreneurial

ecosystem · Entrepreneurship policy
6.1 Step 1: Historical Roots of Institutions and Recent

Policies
6.1.1 North and South—A Short History of Italy
Italy has only been a unified state since 1861 and has been a bicameral parliamentary
democracy under the current constitution since 1948. But Italy has a long and rich
history that influenced and permeated areas well beyond its geographical boundaries.
The Italian city-states of the Renaissance saw the rise of banking and the principles
of Roman Civil Law persist in continental European legal traditions. In many ways,
the deep-rooted institutions in Italy are the deep-rooted institutions in large parts of
Europe. Foremost among these, the Catholic Church in Rome left a deep imprint.
During the Middle Ages, the Catholic Church (The Church) was promoting
corporatism to pacify the conflicts of interests between aristocracy, farmers, and
trade through the various sponsored function-based groups and institutions including
universities, guilds of artisans and craftspeople, and other professional associations.
The establishment of a system that relies on guilds involved the allocation of power
to regulate trade and prices to guilds (Wiarda 1997).
This role of the Church was also evident during industrialization. While workers
asserted their rights, the Church supported them on the one hand, but also fiercely
opposed communism on the other. Nowadays, the Catholic Church in Italy is
characterized by widespread worship throughout Italy and is still very much alive
in Italy through institutions such as schools, hospitals, nursery schools, rest homes,
shelters for the chronically ill and the handicapped, special institutions for education
and retraining, and publishing, to give just some examples (Garelli 2007). Italy
is the nation with the highest level of baptized Catholics, at 97% (55 million) of
the population (Garelli 2007). The Church has provided Italy with a long-standing
L. Szerb
6 A Reform Strategy for Italy 129
tradition of charity, still actively promotes an inclusive, family-based corporatist

model of economic governance, and is an important factor in cementing social
cohesion in Italy.
But although Italians throughout the country share this Catholic heritage, there is
also the sharp divide between North and South, known as the “Italian Mezzogiorno”
(Ichino and Maggi 2000). This division of Italy dates to the sixth century, with the
fall of Rome in 568, and persists to this day. In the middle of the eighteenth century,
the country was organized into seven separate states: The Kingdom of Sardinia (with
Piedmont and Liguria), the Kingdom of the Two Sicilies, the Papal State (Lazio,
Umbria, the Marches, and parts of Emilia and Romagna), Lombardy-Veneto which
was under Austrian rule, controlled directly from Vienna, and the Grand Duchy of
Tuscany and the duchies of Parma and Modena that were dependent on the Habsburg
scions (Barbagallo 2001). The Mezzogiorno extends from Abruzzo and the southern
parts of Lazio down, includes Sicily, and often Sardinia is also considered part of
Italy’s South. Only in 1860, with the Italian Risorgimento, was the territory brought
together into a single politically organized community (Barbagallo 2001). But even
today, some would claim that Italy was never truly one country and geography, and the
lack of infrastructure continues to widen the economic and social divide (Barbagallo
2001). Policies to address this have met limited success.
The Cassa del Mezzogiorno, or the “Fund for the South,” created in the early
1950 to encourage economic growth and industrialization in the Southern part of the
country (Baum et al. 1990), largely failed because of administrative ineffectiveness
(D’Attorre 1987). The public work projects and the jobs it funded were either short-
term or highly inadequate, and the fund was criticized for promoting “large-scale
capital-intensive projects” that required administrative capacities largely absent in
the South (Bohlen 1996). Instead of convergence, institutional failure ended up
promoting the Mafia in the South, while the North was growing (Spooner 1984).
According to Graubard and Cavazza (1974), the ineffectiveness of public
administration in Italy was mainly related to the so-called clientelismo—a sort of
political patronage allowing certain groups of citizens to connect to politicians
through special laws and a system of kickbacks offered to public officers for
influencing public decisions. The signs of a diminished tolerance toward corruption
in Italian society appeared especially in the 1980s (Cazzola 1988). The fight against
public bribery and corruption took shape in the Mani Pulite (“Clean hands”)
judicial investigation into political corruption held in the early 1990s and led to
the disappearance of many political parties and to the end of the so-called “First
Republic.” But while these improvements at the national level have been hopeful,
corruption and organized crime organizations have not been wiped out and at times
heavily encumber economic activity (e.g., D’onza et al. 2017; Spanò et al. 2016,
2017; Allini et al. 2017).
Today, the regional divide is still obvious in the quality of institutions such as
schools, public administrations, hospitals, and large private corporations (Ichino and
Maggi 2000; Viesti 2016). Even the judicial system, which is the backbone of a
modern state, works differently in the Northern and Southern part of Italy. In the
South, to get a ruling in civil cases still takes much more time than in the North,
even though the legal system and the career paths for judges have essentially been
the same in both parts of the country for 150 years now (Tabellini 2010).
This gap between the two regions, in fact, requires policy makers to bear in mind
that any reform strategy proposed for the North should not blindly be suggested
for Italy’s South and vice versa. Historically, economically, and institutionally, Italy
often constitutes two distinct regions rather than one country with some regional
heterogeneity. Thus, Italy probably needs different policy interventions in its two
regions, building on the deep-rooted institutional frameworks inherited from the
past. In what follows, we, therefore, discuss how institutions for the creation and
diffusion of knowledge, the allocation of finance and labor have evolved in Italy.
6.1.2 Institutions for Knowledge Creation and Diffusion
In modern economies, the institutions for knowledge creation and diffusion are
largely concentrated in the academic system of education and research and the
system of intellectual property rights. These institutions, notably universities and
patent systems, both have their historical roots in Europe and in fact in renaissance
Italy.
6.1.2.1 Universities
Italian universities rank among the oldest in the world. The University of Bologna
is the oldest recognized university, established in 1088 (Università di Bologna n.d.).
Other Italian universities that have obtained the official status of university institutions
early in the Middle Ages include Padua, Naples, Rome, Perugia, Pisa, and Florence
(Simonini 1954). Universities initially emerged as institutes where theology, law, and
philosophy were taught, and their histories comprise a long struggle to keep external
influences from clerical and secular authorities out and conquering and protecting
scholarly and academic freedom. Today, Italian universities are typically very broad
institutions of academic research, which are publicly funded, while both universities
and professors enjoy high levels of autonomy and focus on academic knowledge
creation and diffusion.
There are two important technical universities in Italy which first appeared at
the end of the nineteenth century. The oldest technical university in Italy is based
in Torino and was established in 1859 under the name Scuola di Applicazione
per gli Ingegneri (Technical School for Engineers). In 1906, it transformed into
what today is known as Politecnico di Torino. Its creation coincided with the new
era of industrialization that put the focus on Electrotechnics and Building Science
(Politecnico di Torino n.d.). Today, this university strives to enhance technological
and scientific research capabilities and integrate them into a higher education
framework (Statute of Politecnico di Torino 2011).
The other important technical university of the country, the Politechnico di Milano,
was founded only 4 years later in 1863. Its original name was Regio Instituto
Tecnico Superiore (“Royal Higher Technical Institute”) and the only majors that
were taught were Civil and Industrial Engineering. In 1987, the school expanded
to regional campuses of Como (1987) and Lecco (1989), and regional facilities in
Cremona (1991), Mantova (1994), and Piacenza (1997) (Politecnico di Milano n.d.).
Importantly, both technical universities were founded in the North at the time when
industrialization took off in Italy.1
Complementing the formal academic teaching and research institutes, Italy
recently also invested in the creation of science parks. In these parks, firms and
academic research are physically located close to one another to facilitate knowledge
spillovers and cement the links between research and commerce. According to The
Bank of Italy survey of 2012 on Science and Technology Parks, there was a boom in
the number of science parks in the 1990s. Some 25 were founded at a rate of up to
three per year over a period of about 25 years (Liberati et al. 2016).
There were important first-mover advantages in this area. For example, the
regional government of Turin, focused on policies promoting initiatives such as
incubators and science parks early on and today we see two highly regarded Science
and Technology Parks, the Environment Park, and the Bio-Industry Park (Salvador
2010) in Turin. The Politecnico di Milano was also an early mover in this domain,
and today, its incubator “Polihub” is considered excellent, and ranked as the third
best university incubator in the World Top University Business Incubator Ranking
2017/2018 by the Association UBI Global.
In recent years, Italian universities and Polytechnics have also increasingly started
to teach entrepreneurship and engage in technology transfer in order to generate
spin-offs. Yet, the literature considers entrepreneurship education in Italy still as
“immature” (Iacobucci and Micozzi 2012).
In conclusion, Italian universities and Polytechnics have a proud history and
tradition to build on, but they face challenges preparing for their emerging role
in the modern knowledge-based economy. The curriculum and didactic approaches
would probably benefit from modernization, but deeply entrenched interests and
hard-won academic freedom imply that this is hard to engineer top-down. Instead,
the Italian academic system would have to accept a more engaged role in society and
be convinced that it is also in their interest to make the transition to a system of more
modern, entrepreneurial universities that adopt evidence-based methods and focus
more on engaging academic research with societal challenges.
1 Two more universities have been awarded the label Politecnico. Politecnico di Bari is in the capital
city of the Apulia region, established in 1990 (Politecnico di Bari n.d.), and the University of
Ancona changed its name to Università Politecnica delle Marche and was recognized as a technical
university in 2003 (Politecnica delle Marche 2017). These institutions are based in the South and
Middle of the country, respectively, and were founded to become important actors in the respective
local industrial ecosystems. To date, however, they do still not play the role the older schools play
in the Northern economic system.
6.1.2.2 The Patent System
The use of patents as an institution to encourage knowledge production and its

diffusion is relatively old and, in fact, it was in Italy where the first real patents
appeared. There is a lot of discussion among historians whether Florence or Venice
was the first to grant patent rights on innovations, but Italy led the way. There was
strong and systematic interest of the Venetian Republic in promoting inventions long
before 1400, but it was the city of Florence which recorded Filippo Brunelleschi as
the first patentee in 1421. He was granted an exclusive right of 3 years to use his
invention—a barge with hoisting gear for marble—protected from potential imitators.
The patent stated clearly that all those that would replicate the invented device should
be burned at the stake (Frumkin 1945).
This first patent, however, was still very ad hoc. The first more general system of
intellectual property rights protection was adopted by the Venetian Senate on March
19, 1474. The decree called upon every person who invented ingenious devices to first
disclose their invention to Provveditori di Comun. Doing so would benefit inventors
by protecting them for 10 years (Long 1991). The Statute is clear on several things
that still characterize patents today. The decree mentions the originality of the work
as a substantial ingredient in the way of getting a patent, industrial applicability, and
the exclusive right to exploit the invention for 10 years. One of the early Venetian
patent receivers was Galileo Galilei for his invention of a “Mechanism for Raising
Irrigation Water to Fields” in 1594 (Maynard 1980). With the foundation of the
Kingdom of Italy in 1861, the country implemented a national patent law, similar
to that in most industrialized economies (Moradei 2009) and Italian legislation on
intellectual property has since evolved considerably. Today’s Italian patent law has
been revised following the patent provisions of the 1995 Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS). The patent does not substantially
differ from its initial form, but the width, breadth, and extent of patent protection
have changed substantially over time.
The debate on patent protection is not new to Italy. According to Sirilli (1986),
the rise of technical and scientific development and the role of economists in the
acknowledgement of patents as an incentive for innovation (e.g., Schmookler 1966;
Scherer 1965), have both driven the debate. Textbook economics claims that without
patent rights, inventors would have no incentives to produce valuable knowledge.
But Sirilli (1986) shows that for Italian inventors who applied for a patent, three-
quarters of the respondents admitted that the absence of patent protection would
not have prevented them from pursuing the invention. Also in Italy, patents serve a
useful purpose in keeping track of and building a public registry of useful inventions,
but it is especially the commercially applicable ones that should be registered and
protected from imitation. Thus, like in many industrialized countries, there is much
debate about the usefulness of patents and the application of strict rules of protection
of intellectual property as they are applied today (e.g., Panunzi 2012; Boldrin and
Levine 2008).
6.1.3 Development of Financial Institutions
Italy is a well-known example of a bank-based economy, and it is of great relevance

for understanding entrepreneurship in Italy to summarize its historical development
and the culture that prevails in these financial institutions. Modern banking has
its roots in Italy. In fact, the rise of banking system dates back to Medieval and
Renaissance Italy and originated in the prosperous and rich cities of Florence,
Venice, and Genoa (Hoggson 2007). The Bardi and Peruzzi families led banking
in fourteenth century Florence, expanding with new branches in many other parts of
Europe (Hoggson 2007).
In the fifteenth century, the de Medici bank, which was established in 1397 by
Giovanni de Medici in Florence (Goldthwaite 1995), made a distinguished imprint
in the development of banking and became the most important financial institution
in Europe in the fifteenth century (The Economist 1999). The de Medici bank grew
into the most international bank of Italy and for decades was a highly respected bank
in Europe (De Roover 1999). It used its massive network to a degree that it attracted
and maintained the Vatican as its largest client and until 1434, more than half of the
bank’s revenues flowed through the Rome “branch,” which accompanied the pope
on his travels. The strong ties with Rome and the Vatican brought the bank enormous
influence on customers and the Church itself (The Economist 1999).
In the period between 1527 and 1572, important banking family groups such as
the Grimaldi, Spinola, Pallavicino, Doria, Pinelli, and Lomellini rose as big players
in banking during the sixteenth century (Duggan 2013; MacDonald and Gastmann
2000). Banking in the Renaissance, and thereafter, was very much a family business
and it mainly catered to the needs of rich merchants who wanted to settle large
transactions over increasing distances and needed sophisticated products, such as
insurance for cargoes at sea, trade credit, and currency exchange services.
Throughout the centuries, Italy became home to many other banks. The Banca
Monte dei Paschi di Siena, for example, has been operating continuously since 1472
(Boland 2009). The Economist (2017) noted that this bank is the oldest surviving bank
in the world and saving it from bankruptcy in 2013 could thus almost be considered
a matter of conservation of cultural heritage.
The first publicly held Italian bank that looked somewhat like a modern bank,
taking deposits and giving loans, was established in Milan in 1894. Gradually then,
small industrialists and a rising middle class created demand for and supply of what
we now consider to be traditional banking services. Many of these banks are also
still operating today and typically served society for centuries (Hertner 2016). The
role of these banks in Italy was particularly relevant in the industrialization and
modernization of agriculture in Europe after World War I. As shown by the seminal
work of Gerschenkron (1962), banks were important in Europe, where financial
markets were less developed than in the UK and USA but industrialization was more
advanced than in others, such as Eastern Europe and Russia. This gave banks a vital
role in the industrialization process as the financier of modern industry (Sylla 2002).
The banking system in Italy went through several reforms in the twentieth
century. The Bank Law of 1936 is an example that reformed the whole banking
sector by putting financial intermediaries into different categories depending on their
credit activities. The law also limited the linkages between industry and financial
institutions to alleviate possible conflicts of interest. Another reform, put in place
in 1993, aimed at increasing privatization of the banking system and expanding the
range of activities of banks. Until about 2004, there was some consolidation in the
Italian banking sector but despite this M&A activity, concentration ran counter to
the global trend. Even if there were fewer banks in 2004 (800) than in 1985 (1,100),
the market share of the five largest banks dropped over this period (Goddard et al.
2007; Coccorese 2013), implying that consolidation took place among smaller banks
whereas competition increased at the top.
European legislation, such as the 2004 New EU take-over Directive, implemented
to integrate European financial markets have stimulated further consolidation in
banking (ECB 2017). But Italy’s banking system still has many small, diverse,
relationship-based cooperative banks that support its SMEs also in times of crisis
(Castellani 2018). If the banking sector continues to consolidate, however, as in the
Netherlands or the UK, Italy risks losing its system of small, diverse and arms-length
relationship banking, and credit will be allocated more to real estate (mortgages)
and traded financial assets (Goddard et al. 2007; ECB 2017). This would harm the
entrepreneurial ecosystem and reduce the access to finance for Italian entrepreneurs.
Despite the recent improvements, many Italian banks still struggle with significant
bad debt overhang and a limited ability to finance new projects (Beccalli and
Girardone 2016). Current mandatory reserve and equity ratios are insufficient. When
banking made its biggest contributions to Italy’s development, leverage was much
lower, and banks could shoulder losses better. To justify financing experimental
venturing with bank credit, banks, therefore, should be recapitalized.
6.1.4 Labor Institutions
Concerning its labor market institutions, Italy is commonly grouped with other
Mediterranean countries such as Spain, Portugal, and Greece. Despite important
differences, these countries are all characterized by labor markets with high
employment protection and low social security. Union bargaining coverage is often
extended and trade unions control large parts of the labor market without being
representative of large parts of the workforce (Dilli et al. 2016; Hassel 2014). These
institutions formed largely when Italy became a unified state and industrialization
fueled the organization of labor in the early twentieth century. Italy’s welfare state
dates back to the aftermath of World War II, and both labor and social security
regulations were frequently reformed even since the 2008 global financial crisis.
6.1.4.1 Employment Protection
Dismissals were first regulated in Italy in 1966. Any unfair dismissal obliges
employers to either hire back workers or pay compensation based on individuals’
experience and firm size (Boeri and Jimeno 2005). For workers with less than two
and a half years of tenure, the compensation ranged between 5 and 8 months, and
for those with between two and a half and 20 years of tenure, the compensation
varied from 5 to 12 months. The above regulation applied to firms with more than
60 employees while those with less had to pay half the severance pay (Boeri and
Jimeno 2005). In 1970, the Statuto dei Lavoratori obliged firms with more than 15
employees to hire back workers and pay their foregone earnings in case of unfair
dismissals while firms with less than 15 employees were totally exempted (Leonardi
and Pica 2006).
Historically, Italy was considered one of the strictest countries in terms of
employment protection legislation (Lazear 1990; Bertola 1990; Nicoletti et al. 1999).
As these arrangements proved to represent a barrier to entrepreneurship in general
(Golpe et al. 2008) and to ambitious entrepreneurship in particular (Henrekson et al.
2010), important reforms were introduced in 2003 with the Biagi reform (Cirillo
et al. 2017) and more recently with the Monti-Fornero reforms of 2012 and the “Jobs
Act” of 2014 (Tiraboschi 2012; Carinci 2015). These reforms moved Italy’s labor
market firmly in the direction of the flexicurity camp.
The most significant modifications include the easing of dismissal regulation,
more emphasis on active labor market policies and a new supervising national
authority to enhance coordination among public and private actors (Raulli 2017).
More generally, Italy has followed the Danish flexicurity recipe and decided to move
from security of employees and jobs to security of income and work. In general, such
reforms could support a more entrepreneurial society in Italy, but a careful evaluation
of these reforms will have to show how they perform in the Italian context.
6.1.4.2 Wage Bargaining
Regarding the wage setting institutions, this is based on the tripartite agreement of
July 23, 1993. Italy has an industry-wide bargaining model, applied at the national
level (Eurofound 2009). As Calmfors and Driffill (1988) have shown, such a system
of wage bargaining tends to increase wage pressure, which in turn may result in
high long-run unemployment. Specifically, for entrepreneurs, such national coverage
implies that vested interest parties can directly influence a major cost component for
any (new) employer in their sector.
More importantly, these vested interest parties will also negotiate additional job-
related rights and entitlements that have limited portability across industries, are easy
for incumbents to administer, but put a large burden on new ventures. Trade unions,
for example, negotiate the terms of pensions, sickness and maternity leave, working
hours per week, month and year, leave, and education on the job. In the Italian
corporatist tradition employers, state and workers will negotiate in relative harmony
(Regini 1997), but Italy also has a strong history of class struggle and communism
(Kertzer 1980), making unions more militant and willing to strike for their rights
than in other Continental European countries. They share this labor militancy with
the Mediterranean countries, although in recent decades, strikes are declining and
labor relations seem to become more harmonious (Gall 1999).
Alternatively, one can interpret this as trade unions becoming less powerful and
representative as organization rates decline in new industries. As unions typically
protect the position of their (long-term employed) members, their decline would level
the playing field for more entrepreneurial employers, but reforms in this area should
respect the tradition of paying “decent wages for decent jobs” not to clash with other
important aspects of the Italian institutional framework.
6.1.4.3 Social Security
Social security is typically less developed in Italy compared to other European

countries, but compared to the rest of the Mediterranean countries, it is probably one
of the most developed. Social insurance was first introduced between 1898 (work
injuries) and 1919 (old age, invalidity and unemployment). In the period 1945–1975,
the Italian welfare state was expanded significantly (Ferrera 2005). A generous state-
funded pension, universal health care, constitutionally guaranteed unemployment
benefits, and social security benefits were put in place and typically funded on a
pay-as-you-go basis.
These systems have all been built up after World War II and thus have a relatively
short history. Still, some rights are considered inalienable and the pay-as-you-
go financing implies that current generations have paid for social security and
entitlements they were (implicitly) promised would also be available for them in
the future. Reforming such systems can, therefore, be politically complicated. In the
1980s and 1990s and more recently after the financial crisis, we have seen significant
reforms in this domain. This suggests that social security is probably not a deeply
rooted institution and reforms can be proposed to promote more entrepreneurship.
But such reforms should not simply lower protection and security and rather make
entitlements and rights more portable across jobs and industries.
6.1.5 Recent Entrepreneurship Policies in Italy
6.1.5.1 Innovative SMEs
In the 1990s, Italy was still highly dominated by small businesses. More than 99%
of active firms employed less than 50 employees and less than 3,000 firms employed
more than 250 employees (Unioncamere 2005). Increasingly, more attention was
paid to SMEs by industrial policy, especially that concerning innovation, which was
usually thought to be of sole concern to larger firms. In addition, improvements
in the bureaucratic structure of state-aid-provision entities created a more “SME-

friendly” environment. It is relevant to note that, at the national level, systems of
support have favored process innovation rather than product innovation (Rolfo and
Calabrese 2003).
At the end of the 1990s, the Ministry for University and Scientific Research
introduced the research program “Road Map for Italy.” The program covered 300
SMEs and found that typically Italian entrepreneurs play a very proactive role in the
management of their firms. Consequently, it is the background and competence of
the entrepreneur that largely determines the ultimate success of the firm. The lack
of specialization, networking, and teambuilding also has big consequences for the
technological culture of SMEs in Italy (Rolfo and Calabrese 2003).
The Environmental Concessions law around 2000 established a tax relief system
for SMEs that make environmental investments. As a lot of energy and resource-
saving equipment and investments would fall under this legislation, the program gives
Italian SMEs an incentive to develop sustainable business practices and develop new
competitive advantages in doing so.
6.1.5.2 Entrepreneurship and Entrepreneurship Policy

after the Recent Financial Crisis
The Italian response to the financial crisis of 2009 was focused on strengthening
its innovative SME sector and initially even on increasing spending to maintain
investment in innovation and R&D. In 2009, Italy was one of the first EU countries
to approve the European Commission’s 2008 Small Business Act (SBA) proposal
and adopted it domestically. The approval of this program allowed for the immediate
mandatory and continuous monitoring of SME policies and for the arrangement of
“one law a year” regarding small firms (Ministero dello Sviluppo Economico n.d.).
Some of the interventions under the SBA included:
• Law 185/2008, proposed to guarantee the integrity of credit and avoid any charges
to businesses;
• Law 29/2009-2, adopted to facilitate access to credit by introducing, the “Tremonti
Bond,” through which the banks can grant loans to businesses;
• Law 78/2009 (‘Manovra anti-crisi’), passed to promote the reinvestment of profits
in capital goods;
• Law 99/2009 (‘Legge Sviluppo’), providing a broad mandate to the government to
reorganize regulatory obligations for companies;
• “Unique Communication” launched in 2009 giving the possibility for starting a
business by sending a single communication to the Chamber of Commerce;
• Law 82/2009 establishing an 80 million euro facility for product and/or process
innovations replacing or eliminating chemical substances.
Other initiatives regarding the sustained growth of SMEs included: a fund for
competition and innovation; a fund for rescue and restructuring of businesses in
difficulty; a fund for districts and business networks; measures for the automobile
sector, domestic appliances, furniture, and apparel; the National Innovation Fund
(for patents); the Made in Italy Fund (for internationalization); and various fiscal
initiatives (Ministero dello Sviluppo Economico 2009).
More specific attention to entrepreneurship followed shortly after. The Program
Restart Italia! was launched in 2012 to reshape the Italian entrepreneurial
environment in order to promote economic growth and employment. Overall
the project envisioned outcomes such as the development of innovation and
entrepreneurship culture, social mobility, transparency, and meritocracy as well as
the attraction of foreign factors of production.
Arguably, the most significant result of the implementation of the Restart Italia!
program was the newly recognized status of start-ups—as innovative enterprises
of high technological value—when it was introduced into the Italian legal system.
The resulting “Law 221/2012” (the so-called Italian Start-up Act) is an organic and
coherent policy for which public support for innovative entrepreneurship represents
a new way of thinking about industrial policymaking (Ministero dello Sviluppo
Economico 2012).
In 2014, Italy introduced the Start-up Visa (ISV) program facilitating self-
employment visas to non-EU citizens who were interested in launching an innovative
start-up in Italy. The initiative was composed of a novel procedure which was
characterized by being “fast-track”—never taking more than 30 days to be issued—
and being centralized, digitized, bilingual, and free of charge. The committee
evaluating the applications has been formed by the presidents of five key associations
of the Italian innovation ecosystem, including business angel firms, university
incubators, and others.
Several policy initiatives followed. Among the most important was the national
Plan Industria 4.0 which became effective in 2017. The plan was designed for firms
operating in the manufacturing sector and intended as “a great deed of trust from
the government to enterprise.” The program is to be applied without—or as few as
possible—constraints by bureaucratic processes or subjected to territorial or sectorial
selection and invests in all stages of the life cycle of firms, particularly focusing on
investment support in the digitalization of production, the development of employee
productivity, the training of applicable skills and the development of new products
and procedures (Ministero dello Sviluppo Economico 2017).
These programs have of course been evaluated, but it is difficult to ascertain
their true impact. It would also take us beyond the scope of this chapter to attempt
an assessment here. In short, in recent years, policy attention for SMEs and later
entrepreneurial venturing has risen considerably in Italy and the financial and Euro
crisis have strengthened the call to reform. However, in Italy there is also a political
backlash, and reformists should take care to emphasize and ensure the inclusive
character of reforms toward an entrepreneurial society, creating more and better
opportunities for challengers, not lining the pockets of incumbents in business and
politics.
6.1.6 Conclusions
In conclusion, we can take away a few important lessons from the above. First,
Italy has a long history of supporting a vibrant entrepreneurial economy of locally
embedded, often family-owned small- and medium-sized firms that make up the
overwhelming majority of its economy. The Italian ecosystem was supported by
banks, patents, and universities early on and industrialization, especially in the North,
brought deep rooted but modern financial, labor, and knowledge institutions to Italy.
From more recent policy initiatives, we may tentatively conclude that national
policy makers in Italy have recognized the importance of supporting Italy’s
Entrepreneurial Society. Moreover, we note that recent policy initiatives seem well-
informed and well-targeted. Policy makers try to reduce the regulatory burden and
remove undue barriers to new initiatives. Policies are more general and targeted
at entrepreneurial venturing in general, and are not specifically directed toward
sectoral, geographic or size-related barriers. Building on its unique history, Italy
is well-positioned to promote more entrepreneurship in its economy in both North
and South. In our next steps, we will use quantitative and qualitative information to
identify what factors are holding Italian entrepreneurs back.
6.2 Step 2: Data Analysis with REDI for Italy
6.2.1 Italy’s International Position
To get a first impression of Italy’s relative performance as an entrepreneurial

ecosystem, we turn to the Regional Entrepreneurship and Development Index
(REDI). For calculating the country scores of the REDI index, we used the population-
weighted REDI scores. Out of the 24 countries, Italy ranks 18th with 30.0 points
(Table 3.3, in Varga et al. 2020). This score is significantly lower than other developed
countries, and also the EU average, lagging well behind the United Kingdom,
Germany, and even some newly assessed countries like Estonia, Slovenia, and the
Czech Republic.
The REDI is composed of 14 underlying pillars that together make up 3 sub-
indices: Entrepreneurial Attitudes, Abilities, and Aspirations (Acs et al. 2014; Szerb
et al. 2017, 2019). Figure 6.1 gives us a first glance at how Italy is performing relative
to the UK, Germany, and the EU average on these 14 pillars. From Fig. 6.1, we can
see that Italy is performing below the European Union average on almost all aspects
of the entrepreneurial ecosystem that the REDI methodology covers.
The scores on the 14 pillars are markedly low for “Human Capital,” “Opportunity
Start-up,” and “High Growth,” but overall, the Italian entrepreneurial ecosystem
needs strengthening on almost all fronts. Italy scores above the European average (and
even above Germany and the United Kingdom) on “Product Innovation” and “Process
Innovation”. These high scores indicate that Italy’s long tradition of industrial policies
to support innovative SMEs (see above) have paid off. But the Italian ecosystem
Fig. 6.1 Radar-plot REDI comparison Germany–Italy–UK and EU-average. Source Authors’ own
compilation
remains weak in the sub-index Entrepreneurial Attitudes (upper right pillars 1–5) and
in Entrepreneurial Abilities (lower pillars 6–9). Even on Entrepreneurial Aspirations,
it scores low because of the large imbalances between the pillars in the upper left
side of the radar-plot (pillars 10–14).
The underlying algorithm in the REDI puts a penalty on bottlenecks in the
ecosystem (Acs et al. 2014; Szerb et al. 2017), such that a rounder radar-plot
scores higher than a more erratic one, and policy interventions should be aimed
at alleviating bottlenecks with priority. As we have indicated, however, the national
average potentially hides a lot of regional heterogeneity. We, therefore, focus in on
Italy’s main regions next.
6.2.2 A More Detailed Regional Quick Scan
If we zoom in on the regional level, in Fig. 6.2 and Table 6.1, we see that all Italian
regions score between 25.7 and 33.5, with the Southern regions significantly lagging
the Center and North, as expected.2
2 The
numbers are index numbers ranging from 0 (worst) to 100 (best) across all 125 European
NUTS2/3 regions for 2012–2014.
Fig. 6.2 REDI map of Italian regions. Source Authors’ own compilation
Table 6.1 REDI-scores Italy

Region REDI-scores 2012–2014
Nord-Ovest 33.5
Nord-Est 32.6
Centro 33.5
Sud 25.7
Isole 26.7
Table 6.2 Weakest points per region

Region Weakest pillars Weakest variables
Nord-Ovest 5, 6, 8, 12 Open Society, Business Environment, Educational Level,
Gazelle
Nord-Est 2, 4, 8, 14 Skill Perception, Know Entrepreneurs, Educational Level,
Informal Investment
Centro 5, 6, 8, 12 Open Society, Business Environment, Educational Level,
Gazelle
Sud 5, 6, 8, 12 Open Society, Business Environment, Educational Level,
Clustering
Isole 5, 6, 8, 12 Open Society, Business Environment, Educational Level,
Clustering
Without going into too much detail in this chapter,3 the intuition behind each
of the pillars is that data on individual entrepreneurial agency, obtained from the
Global Entrepreneurship Monitor adult population survey data, is combined with
relevant institutional quality indicators from a wide variety of reputed international
institutions, such as World Bank, Freedom House and OECD. The index then builds
on the assumption that institutions and individual agency are complements (Acs
et al. 2014; Acs and Szerb 2009). That is, high levels of, for example, Opportunity
Perception in a low-quality institutional environment, will contribute little. Likewise,
low Opportunity Perception in a high-quality institutional environment is also a sign
of weakness in the entrepreneurial ecosystem.
To improve the score on a given pillar, policies and reforms should seek to improve
the weakest link and then aim to increase both institutional quality and individual
agency together. Especially because of the latter, the menu of effective interventions
is not limited to improving the scores on the institutional quality indices alone. The
same logic is then also imposed on the individual pillars that make up the three
sub-indices: Entrepreneurial Attitudes, Abilities, and Aspirations.
The good news for Italy and its regions, based on these analyses, is that with
small improvements in its weakest pillars, large improvements in the ecosystem
can be expected. Moreover, from Table 6.2, we can see that, although the overall
scores are lower in the Southern regions, the weaknesses in the Southern and
Northern ecosystems seem largely concentrated in the same pillars and variables.
This implies that national policy and reform programs addressing these weaknesses,
will strengthen entrepreneurial society throughout the country and Table 6.2 gives us
a clear sense of the priorities. National level policies to promote pillars 5 “Cultural
Support,” 6 “Opportunity Start-up,” 8 “Human Capital,” and 12 “High Growth” are
likely to benefit Entrepreneurial Aspirations, Abilities, and Attitudes throughout the
territory.
3 We refer interested readers to Acs et al. (2014) and Szerb et al. (2017, 2019) for further details.
Improvements in these aspects would address some of the most prominent

bottlenecks in the system in all regions of Italy. The recent labor market reforms
as proposed under the recent Jobs Act, can, for example, prove to be beneficial
in removing the penalty on growth that is present in many firm size-related social
security and labor market protection provisions. It will probably take some time
for such reforms and interventions to show up in the index, as the numbers will
only change when people respond to the new situation by starting more ambitious
and successful firms. But such fundamental reforms are what we suggest should
be preferred over more direct but less fundamental policies that would boost the
indicator directly, but superficially.
For Human Capital, both Educational Level and Training warrant attention,
whereas for Opportunity Start-up, it is especially the poor quality of the Business
Environment that keeps the pillar down. Italian entrepreneurs seem to see
opportunities but are held back by deficient human capital supply and a daunting
bureaucracy in starting up new ventures. To address these weaknesses, targeted
interventions to improve the business environment will be needed, whereas reforms
in the educational system are also advised. Not because the Italian education system
does not deliver high-quality graduates, but because that quality currently does not
seem to flow to the entrepreneurial ventures that need them.
In the Entrepreneurial Attitudes, the pillar on Networking is weak due to low
scores on both Social Capital and Know Entrepreneur, whereas the Cultural Support
pillar is weakened by the low system wide score on Open Society that negates the
relatively high score for Career Status. The Start-up Skills are low in North-East
mainly due to low quality of education. It is not straightforward to come up with
reforms that improve these aspects, but we make some suggestions below.
6.2.3 Overall Conclusions of the REDI Analysis
Our reading of the data above reveals that, in all Italian regions and the country as
a whole, the main bottlenecks in the entrepreneurial ecosystem are low ambition
levels (High Growth), the lack of skills and education (Human Capital), and an
entangled business environment (Opportunity Start-up) that feeds back into a low
familiarity with ambitious entrepreneurship and a rather closed culture (Networking
and Cultural Support).
Generally, it is dangerous, to rely exclusively on data and aggregate indices, even
if they are composed of a broad set of sub-indicators and disaggregated as much
as the data might allow. It is always important to complement a data-based quick
scan with historical analysis, common sense, and more qualitative information to
contextualize and complete the diagnosis. Only after triangulating the results above
with the historical analysis, literature review, expert judgment, and more qualitative
survey results below, we can map the diagnosis onto our menu of interventions to
propose tailored reforms for Italy.
6.3 Step 3: Triangulating History, Data, and Survey Results
6.3.1 Venture Creation Processes in Italy
We assessed the ways in which the Italian institutional ecosystem influences

entrepreneurial activities from two different perspectives, namely a static one,
based on multiannual averages, and a process-oriented perspective (Herrmann
2020, this volume). The results obtained from both types of analyses are highly
complementary. Our static analyses indicate that entrepreneurs in Italy are less likely
than entrepreneurs in coordinated or liberal market economies to create radically or
incrementally innovative ventures. Instead, Italy’s entrepreneurs have a tendency to
set up ventures based on the replication of existing technologies (Dilli et al. 2018;
Herrmann 2019).
The dynamic analyses, in turn, provide insights into how the institutional
environment influences different aspects of the venture creation process. With regard
to human capital, we find that national labor market institutions affect the employment
choices of entrepreneurs in Italy (Held 2019). In view of the benefits and security
that employees enjoy in dependent employment, Italy’s founders are more likely
than their counterparts in the UK or the USA to start a venture in part-time rather
than in full-time. Italian part-time founders, however, are more likely to transition to
full-time entrepreneurship than their German equivalents (Held 2019).
Similarly, the institutional ecosystem also influences the process of finance
acquisition (Held et al. 2018a). Given that stock market capitalization in Italy is low
while debt finance to start-up firms is limited, venture founders in Italy very often
need to finance the initial stages of venture creation with their personal funds as well
as the funding provided by their family or friends. Finally, the propensity of nascent
ventures to engage in R&D collaborations with external partners (universities and
labs) also seems to be institutionally influenced. Given that it takes years to obtain
a ruling, legal action is typically not perceived as a means of recourse in case of IP
conflicts with collaboration partners. This may be the reason why nascent ventures
in Italy are more reluctant to engage in R&D projects with external partners than
their counterparts in Germany (Held et al. 2018b).
Taken together, these studies lend support to the argument that Italy’s
distinct finance-, labor-, and R&D-related institutions influence the decisions of
entrepreneurs with regard to the business ideas they develop as well as the process
they follow to set up their ventures. This leads to the question how entrepreneurs
in Italy experience their institutional environment when setting-up a venture: Which
aspects are constraining them? And what could policy makers do to facilitate venture
creation in Italy?
6.3.2 Regulatory Barriers to Entrepreneurship in Italy
To examine regulatory barriers to entrepreneurship, we conducted a survey with 133

Italian founders between 2017 and 2018 (Herrmann et al. 2018). Table 6.3 provides
an overview of the answers to the question: “Which regulatory requirements did you
perceive as major obstacles during venture creation?”.
Contrary to their German and British counterparts, venture founders in Italy
frequently mentioned that they had encountered regulatory obstacles. The, by far,
most frequent obstacle, encountered in almost 14.5% of cases, were bureaucratic
procedures that made venture creation unnecessarily long and time consuming. Some
respondents (3%) specifically mentioned the obligation to go through a notary when
registering a new company and the complexity of the existing laws and specific
procedures for setting-up a Società a Responsabilità Limitata (s.r.l.), a limited
liability company. All these administrative procedures mean quite substantial implicit
and explicit costs for a start-up.
Next to these bureaucratic constraints, the respondents also mentioned several
financial hurdles as obstacles to venture creation, namely the taxes to be paid
(5.3% of all responses), difficulties to obtain finance (5.3%), and legal initial capital
requirements (2.3%). Accordingly, our survey highlights that, together with the
costs arising from heavy bureaucratic requirements, nascent ventures in Italy face
financing constraints. This finding did not stand out that much in the above REDI
analysis. But earlier research also indicated that the absence of a vibrant angel
Table 6.3 Results survey on regulatory obstacles in Italy

Which regulatory requirements did you perceive as major obstacles Times mentioned In %
during venture creation?
None 28 21.1
Does not answer question 15 11.3
Difficulties with bureaucratic procedures 19 14.3
Taxes 7 5.3
Difficulties with obtaining finance 7 5.3
Lacking clarity regarding regulations 5 3.8
Constantly changing regulatory environment 5 3.8
Safety regulations 5 3.8
Legal requirements to involve a notary 4 3.0
Legal initial capital requirements 3 2.3
Specific requirements related to energy sector 3 2.3
Note
1. Based on interviews with 133 founders mentioning 133 obstacles (more than one obstacle could
be mentioned)
2. Only obstacles mentioned three times or more are reported in the table
and VC investment community might be linked to unfavorable fiscal circumstances

(Henrekson and Sanandadji 2017), tight regulation on institutional investors, and
difficulties in making smooth and profitable exits in secondary markets (e.g., Bottazzi
and Da Rin 2002).
A third major block of obstacles refers to unclear regulation and frequent
regulatory changes. Taken together, a lack of clarity regarding regulation, as well
as a constantly changing regulatory environment and specific safety regulations
were mentioned in almost 12% of responses, while specific requirements related
to the energy sector were mentioned as regulatory obstacles in an additional 2.3%
of responses. Together, these answers indicate the detrimental effect of unclear
and frequently changing rules and regulation, echoing the REDI conclusion that
bureaucracy is a complicating factor in Italy.
Overall, the answers show a relevant lack of institutional support, most importantly
in the form of heavy bureaucratic procedures, financial constraints, and unsteady
regulation. This indicates that the aforementioned policies have thus far not (fully)
succeeded in facilitating entrepreneurship in Italy.
6.3.3 Founders’ Suggestions for Reforms in Italy
In the same survey, we also asked founders the following: “In your view, what can
policy makers do to facilitate venture creation?”. An overview of the answers to these
questions is given in Table 6.4. Almost every founder had at least one suggestion of
how venture creation could be facilitated by the government. The suggestions often
mirror the obstacles encountered during venture creation. Accordingly, measures
to alleviate bureaucracy and facilitate access to finance are listed amongst the top
priorities by the founders. The respondents suggested to facilitate venture creation by
reducing bureaucracy in almost 18% of all cases, to simplify bureaucratic procedures
through online tools in more than 4% of responses, and to eliminate the need for a
notary or to provide a notary in, together, almost 4% of cases.
Next to that, some broader suggestions were made about how to facilitate the
formalities related to venture creation, namely an easier availability or accessibility
of information about how to start a business (almost 5%) and better guidance of how
to proceed when setting-up a new venture (slightly more than 3%). Taken together,
suggestions related to facilitating administrative formalities amount to one third of all
suggestions made, which illustrates the potential of this area for policy improvements.
In order to alleviate the financial constraints on nascent ventures, the respondents
suggested to reduce taxes for small businesses (in more than 8% of all answers),
to facilitate access to financial capital (almost 14% of responses), and to establish
procedures to better detect which ventures are seeking investment (1.6% of all
responses). Finance-related policy improvements make up a quarter of all policy
suggestions, thus constituting another area of substantial concern.
While founders also followed-up on the third group of obstacles encountered by
suggesting that constant policy changes should be avoided, this suggestion was made
Table 6.4 Results survey on suggested policies in Italy

In your view, what could policy makers do to facilitate venture Times mentioned In %
creation?
Nothing 3 1.6
Reduce bureaucracy 34 17.7
Facilitate financing for small businesses 26 13.5
Reduce tax rates for small businesses 16 8.3
Provide incentives for hiring people 13 6.8
Provide better training to people for starting businesses 9 4.7
Provide better information about how to start a business 9 4.7
Reduce time and difficulty of bureaucracy through online procedure 8 4.2
Provide guidance 6 3.1
Eliminate the need to have a notary for registration 4 2.1
Provide notary 3 1.6
Help market start-ups 3 1.6
Provide better networking opportunities 3 1.6
Avoid constant policy changes 3 1.6
Establish procedures to better detect whom to fund 3 1.6
Provide accountant 3 1.6
Note
1. Based on interviews with 133 founders mentioning 192 suggestions (more than one suggestion
could be mentioned)
2. Only suggestions mentioned three times or more are reported in the table
in 1.6% of cases. The third major block of policy recommendations, therefore, does
not relate to more stable policies. Instead, it refers to facilitating access to human
capital. Accordingly, founders suggested in almost 7% of their answers that policy
makers should provide incentives for hiring people, in almost 5% of cases that people
should be better trained in entrepreneurial skills, and in almost 2% of cases that an
accountant should be provided to nascent ventures.
Finally, and unrelated to the hurdles they reported above, some founders also see
a role for the government in helping to market the products/services of start-ups
(1.6%) and to provide networking opportunities (1.6%).
Overall, we, thus, find general support for the weaknesses identified in the above
historical and quantitative analyses. Most importantly, Italy’s founders point to the
tedious bureaucratic processes as a major obstacle and, accordingly, for policy
improvements. At a more general level, these suggestions can be interpreted as
an invitation to move away from a non-transparent and heavy toward a leaner
way of establishing new ventures. In addition, the call for easier access to human
and financial capital reflects the insights gained from our analyses of the previous
sections. Founders are signaling a lack of information and training and call for a
more stable policy environment. We interpret this as general support for a more
fundamental reform approach that creates the institutional support for those providing
such services and knowledge.
6.3.4 Conclusions
In sum, the survey has confirmed most of the weaknesses identified in Sect. 6.2, but
also provided some interesting additional insights. For example, the need to create a
stable institutional framework that is above all transparent and clear is information
that is hard to gather from quantitative data alone. The survey was, therefore, useful
in nuancing some of the previous results.
Yet, when asked for the most important barriers encountered and possible policy
remedies, founders—rather obviously—mention those points which they met in their
personal experiences. While there certainly is valuable information in this experience,
it is important to base policy recommendations on a broader basis by combining
personal experiences with information of encompassing datasets. Taken together,
the triangulation of our historical, quantitative and qualitative information for Italy
reveals sufficient information to draw up a tentative diagnosis and turn to treatments.
6.4 Step 4: Mapping onto the FIRES-Reform Proposals
In the previous sections, we have considered the history of Italy, used an advanced
diagnostic tool to scan for her most urgent problems, and asked founders how they
felt and what they believed would be good treatments. Based on all this information,
we can come to a diagnosis and map that diagnosis onto the menu of treatments
developed in Elert et al. (2019) to propose a course of action that best fits the patient.
Italy has a long and proud history. Many of the institutions that shape an
entrepreneurial society today have their roots in Italy. Italy has seen the birth of
modern banking, invented intellectual property rights protection, and boasts the oldest
surviving universities in the world. Consequently, Italy features a highly innovative
small- and medium-sized entrepreneurial sector that competes at the global level.
Innovative entrepreneurship has deep historical roots in Italy.
But time has progressed while the quality of the Italian entrepreneurial ecosystem
seems to have eroded. The Italian data show quite serious weaknesses and importantly
significant imbalances across the pillars that make up the REDI. Italy still performs
quite well on innovation and technology absorption, but this is not complemented by a
supportive culture, networks, and human capital. To face the challenges of the future,
Italy will have to build on its historical strengths but should urgently address these
bottlenecks. Fortunately, our regional analysis has shown that the same weaknesses
hold back entrepreneurship across the country, despite significant and lasting overall
level effects between regions in the North and Center, and the South. This implies
that Italy can strengthen its entrepreneurial ecosystem in all regions by boosting
human capital investments and, more importantly, opening up opportunities for the
young and talented to engage in productive and innovative venturing across Italy.
In the recent crisis, but also before, Italy has experienced an exodus of talent. It
seems there are more opportunities abroad than at home and young Italians are
entrepreneurial enough to go after them.
Of those that stayed and started up ventures in Italy, we heard complaints
about cumbersome bureaucracy resulting in lacking growth ambitions and stunted
economic dynamics. Our survey among Italian founders also revealed that complexity
of the tax system, an inefficient judicial system, and cumbersome bureaucratic
requirements add to the uncertainties that entrepreneurs already face and put a break
on venture creation.
Taking this diagnosis to our menu of policy interventions and reform proposals
in the companion volume of this book (Elert et al. 2019), we have selected what
we believe to be fifteen suitable interventions for Italy. They are listed in Table 6.5.
In Column 1, we find the number under which they were presented in Elert et al.
(2019). Column 2 lists the policy area and 3 the proposal, where Column 4 gives our
motivation for the case of Italy tying it in with the analysis presented above.
The first proposal (1) resulted from the discussions we have had with Italian
founders in our surveys and was confirmed in a literature search. The need for
simplicity, transparency, and predictability is high in any business venture, but
certainly important in entrepreneurial ones where technical and market uncertainty
is already high. Adding legal, bureaucratic, and fiscal uncertainties and complexities
to this mix is not productive.
The set of fiscal and financial reform proposals (6, 8, 13 and 19) aim to eliminate
that uncertainty in the tax sphere, and at the same time leave more financial
resources in the hands of the people who can invest it in small amounts and in
more experimental ventures at arm’s length. When combined with investment in
a reliable ICT infrastructure that can support the emergence of platform-based
finance, this may prove a powerful push toward the decentralization of entrepreneurial
finance. Still, we chose to focus first on setting the framework conditions for such a
strategy to work. Proposal 19, instead, aims to strengthen Italy’s traditionally diverse,
decentralized, and deeply rooted system of local banking, that would also benefit from
intermediating more privately held and managed wealth.
The proposals referring to Italian labor market institutions (23, 25, 27 and 31)
all aim to mobilize labor across regions, sectors, and jobs, while at the same time
maintaining a social security level that people are by now accustomed to in Italy.
This balancing act involves making social security entitlements less conditional and
more portable, while reducing job protection and barriers to job mobility.
Reducing barriers to new business formation (32) is a direct and obvious proposal
in light of our aim to promote a more entrepreneurial society in Italy. New ventures
typically come in the form of new businesses and organizations that need to be
established also formally before they can reach their full potential. At the same time,
we propose (40) to also carefully monitor these new firms and collect and disseminate
the knowledge that is gained, even, or perhaps especially, when new businesses fail.
Table 6.5 FIRES-reform proposals for Italya

No. Policy area Proposal Italy
1 The rule of law Strengthen monitoring and It takes too long to settle
enforcement mechanisms to commercial disputes in civil
improve and safeguard the cases. This creates uncertainty
performance of all member and works in the advantage of
states on rule of law, protection large, established, and
of property rights, and incumbent firms. An
government effectiveness. entrepreneurial society needs
fast, predictable, and clear legal
proceedings to thrive. A lot has
been done, but more is needed
still.
6 Corporate income taxation Eliminate discrepancies between This is a general advice we
statutory and effective corporate would give to the European
income tax rates. Commission that also applies to
Italy. Founders in Italy complain
about taxes but more than their
level, their complexity and
unpredictability make growing a
firm unattractive. Simplification
and transparency are more
important than lowering the
levels and granting tax complex
exemptions and deductions.
8 Dividend and capital taxation Countries should aim for low A tax system benefits from an
dividend and capital gains tax occasional cleaning-up.
rates with few exceptions and Simplicity and transparency
few (opaque) concessionary should be the goal, not
schemes. necessarily reducing rates for
targeted groups. But at an overall
tax pressure of 64% against
40.8% in Europe, Italy should
also reduce taxes, especially on
the sources of income that matter
most to new ventures and their
financiers.
13 Private wealth Allow for more wealth to Italy has a strong family-based
accumulate and remain in private tradition. This creates
hands and make it possible, easy opportunities also for financing
and attractive to invest such ventures, especially in their early
wealth in entrepreneurial stages. Italy could consider
ventures. banking on extended family ties
to increase the flow of financial
resources into entrepreneurship.
The Anglo-Saxon Angel and VC
model may be less appropriate in
the Italian context, given the lack
of skills and incompatibility with
its deep-rooted informal
institutions.
(continued)

19 Banks Increase the mandatory equity Italy still has a rather diverse and
ratio in banking gradually to locally embedded banking
10–15% to allow them to take on system. This can be an asset in
more risk responsibly in their the entrepreneurial society, but
lending portfolios. these small, local banks are
increasingly brought under
European rules and supervision
made for large, system banks.
By requiring higher equity in
banks, they can justifiably
engage in riskier but also in the
long run more productive
lending, while diversity ensures
stability in the system.
23 Employment protection Relax the stringency of Italy has already implemented
employment protection some fundamental reforms in the
legislation for permanent labor market in recent years. In
contracts. part, this was done under
pressure of the financial and
Euro crisis and external
creditors. The general direction
of these reforms was the right
one, but more can be done.
Specifically, the “reinstatement”
provision in employment
protection is often mentioned as
a burden on small and young
firms. In reforming its labor
markets, Italy should not forget
that of the Mixed Market
Economies it is actually closest
to the Coordinated Market
Economies and should seek to
combine individual flexibility
with reliable social security.
25 Employment protection Lift the legal enforceability of Specifically, for Italy, this
confidentiality agreements proposal should be understood in
between employers and their light of the overall argument for
employees. investment in mobility and
reducing barriers for switching
jobs, industries and occupations.
This will create opportunities for
the young and talented to remain
actively engaged in Italy and
reduce the brain drain to the rest
of Europe and the world.
(continued)

27 Social security Carefully consider the impact of It is tempting for governments
flexicurity reforms on young with tight budgets to have
firms and do not force them to employers pick up the bill for
take on excessive risks and their employees’ training,
burdens. mobility and social security.
This, however, tends to reduce
mobility and strengthens the
insider–outsider effect. On the
labor demand side, such
schemes work in (relative) favor
of large firms and block young
firms’ expansion. This keeps
youth unemployment up and
pushes also educated Italian
youngsters to leave the country.
31 Active labor market policy Establish or strengthen training In a more flexible labor market,
programs to prepare workers for more flexible and mobile
new occupations. employees are key. Italy will not
be isolated from technological
and economic trends and
flexibility is needed to engage
opportunities and exit declining
jobs, industries and trades. We
propose Italy invests in the
flexibility of its workforce. To
the extent that people
underinvest in their own
flexibility due to behavioral
biases and information
asymmetries, public
interventions and finance can be
justified.
32 Entry barriers Excessive barriers to new Key in this proposal is the word
business formation and new “excessive.” Founders in Italy
entry should be lifted where report quite a wide variety of
possible. bureaucratic and administrative
barriers to starting up a venture
in Italy. Some of these barriers
may serve a valid purpose, but
simplicity, transparency and
predictability are essential. Data
shows Italian SMEs spend 52%
more time dealing with
bureaucracy than their European
competitors and WEF ranks
Italy 44th on doing business
index. There is a lot of room for
improvement.
(continued)

40 Insolvency Setup publicly funded Creating a real hub, rich in
“entrepreneurial knowledge events, infrastructure, and
observatories” where knowledge networking between teams could
accumulated in the be useful for the Italian
entrepreneurial process is entrepreneurial ecosystems. This
collected, curated and freely involves concentration. Today
diffused. Milan (14.7%), Rome (8.5%)
and Turin (4.7%) have less than
30% of the total number of
start-ups. Our research has
shown how geographical
proximity is important for
success. It is a tough choice, but
it would be useful to invest in a
start-up capital (Milan) that can
perform a national function.
41 Education system Reforms in primary and Italy’s educational system can be
secondary education should characterised as traditional. The
provide pupils with a solid and state sets the curriculum,
coherent knowledge base and provides uniform tests, and most
promote initiative, creativity and children attend public schools.
a willingness to experiment. The curriculum is demanding,
geared toward cognitive skills
and textbook based, leaving little
room for creativity and diversity.
Italy considers its educational
system of high quality, but
making pupils work hard is not
the same as teaching them useful
skills. Countries ranking high
on, e.g., the WEF, OECD and
EU rankings, such as Finland
and Norway have less homework
and formal testing and more
autonomy for highly trained and
well-paid professional teachers.
Italy should consider reforms in
that direction.
42 Education system Promote STEM education and Italy ranks 20 out of 27 EU
English as a (mandatory) second countries plus Turkey when it
language early on and then comes to knowledge of English
throughout educational career. as a second language. This is a
handicap when Italy seeks to
compete at the EU or global
level. Italy scores around rank 30
out of 80 in the OECD
PISA-scores on Math and
Science behind countries like the
Czech Republic and Luxemburg,
while on STEM topics Italy has
EU average levels of enrollment,
but high levels of dropout. The
situation can be improved by
reforming curricula in primary
and secondary education and
ensure that sufficient vocational
tertiary educational options exist
in Italy.
(continued)

44 Universities/Entrepreneurial The link between universities Many Italian universities started
clusters and external stakeholders should offering courses focused on
be strengthened by encouraging entrepreneurship. Courses
universities to stimulate usually taught by a researcher
entrepreneurial initiatives and with no work experience outside
university spin-offs. academia, and no experience in
start-ups. The average
curriculum therefore deals with
writing business plans and how
to get financing. Italy lacks a
start-up culture and those trying
to provide it have no hands-on
experience. This is not easy to
address, but a good start would
be to promote the involvement of
entrepreneurs in (academic)
curricula and opening up
universities to external
stakeholders.
45 Universities/Entrepreneurial Both the EU and its member For the Italian context, it is
clusters states should create healthy, important to open up its
well-funded, academic academic institutions. Many
institutions that allow Europe’s reforms have already been
most talented academics to undertaken, but most in a time of
pursue their research interests. aging, financial constraints, and
budget cuts. With vested
interests and gilded contracts
hard to reform, the rate at which
Italian academic institutions
open up for competition and
meritocracy is slow. It makes
little sense to spend a lot of
money on institutions before
such structural issues have been
addressed. Unfortunately, the
(poor) students, not the aging
staff is driven out.

a Numbered as in Elert et al. (2019)
Finally, we propose Italy should consider urgent reforms to its educational system
(41, 42, 44 and 45) to ensure its young and talented are better prepared for a future
in a more entrepreneurial Italy. This starts in primary schools and even earlier,
with a reorientation on creativity and experimentation, whereas English proficiency
and STEM topics will prepare Italian youths for a future in a globalized and
technologically rapidly changing economy. Meanwhile, Italy’s established academic
institutions should open up to the world outside of academia, preferably from a
genuine position of scholarly curiosity and interest, rather than driven by financial
and policy incentives.
The proposals, individually and in combination, aim to strengthen the knowledge

base and talent pool from which Italian entrepreneurs can draw and aim to open
opportunities for not only starting but also growing firms in all regions in Italy. All
Italian regions stand to benefit from these interventions. However, the fact that density
and clustering tend to promote the quality and impact of entrepreneurial venturing
will imply that the same policy improvements benefit the already prosperous regions
most. Still, that should not stop policymakers from pursuing these interventions as
it is the Italian citizens, not its regions per se that governments should care about.
Creating opportunities for Italian entrepreneurs in a few entrepreneurial hotspots is
better than not creating such opportunities at all, also for people living in regions that
do not have such hotspots.
Of course, these proposals will need a much more detailed discussion and form the
starting point, not the final word on the policy agenda. Moreover, even if adopted, our
proposals all require careful implementation and evaluation to complete the 7-step
policy cycle presented in Chap. 1 of this volume. But based on our analysis of the
situation, we proposed Italy consider this set of interventions to build up its strengths
and restore health to its ailing entrepreneurial ecosystem. To conclude this chapter,
we now turn to the discussion of these proposals in their proper policy context.
6.5 Step 5: the FIRES-Reform Proposals in Light

of the Countries’ Historical, Geographical
and Institutional Context
To put our proposed reform program in its proper context, it is important to discuss
the diagnosis and proposed treatments with experts in the field. In this case that is
Italian policy makers that are active in the field every day. Moreover, given the wide
diversity of policy areas involved, it is important to not only discuss this with policy
makers that are active in “entrepreneurship policy” in the narrow sense. Our approach
emphasizes the importance of reforming institutions that determine the allocation of
financial, labor, and knowledge resources to entrepreneurial activity in the broadest
and most inclusive sense of the word. Broadening the scope was motivated by the
fact that entrepreneurship policy in the narrow sense has been around for some three
decades or more, also in Italy, and to date has achieved only limited success.
Because of its breadth, our reform agenda inevitably cuts across many policy areas,
traditionally less associated with entrepreneurship policy, including, for example,
wealth taxation, financial and labor market regulation, social security, and science
policy. As the institutions in these areas have evolved historically and policy makers
in these areas pursue different, equally relevant, public policy priorities, the challenge
is to discuss the proposed agenda in sufficient depth, but with a sufficiently diverse
group of policy makers and practitioners. Policies and institutions in these different
areas overlap and interact in ways that affect the quality and performance of the
entrepreneurial ecosystem (Stam 2015, 2018). The challenge is to not only propose
policies and reforms that will strengthen the ecosystem, but to do it in such a way
that other important policy priorities are also achieved.
In order to receive a first round of feedback on the proposals for Italy presented in
Table 6.5, a policy round table was held at the CDP Group (Cassa Depositi e Prestiti)
in Rome on March 5, 2018. This step can be seen as an attempt to allow our patient,
or perhaps more accurately, her team of medical specialists, intimately familiar with
our patient, to give feedback about our diagnosis and proposed treatments. What
proposals would this team endorse, question or maybe want to drop?
In this policy round table, the diagnosis presented above was broadly shared
among the participants. The group included representatives from the Bank of Italy,
the OECD, UNCTAD and the Italian Ministry of Economic Development (Sanders
and Grilli 2018). Participants recognized the encumbered bureaucracy and inflexible
educational system as well as the long-standing North–South divide and issues of
effective and high-quality governance. There was general consensus that universities
could function as catalysts by playing a more important role in supporting financial
education and putting entrepreneurship at the center of the stage. Another important
deficiency in the Italian entrepreneurial ecosystem is the shortage of dedicated
networking events. Italy has many, small, high-quality centers of excellence, but
they lack mass and local governments could act to improve this situation. Participants
added that it is also important to improve attitudes toward risk taking and reduce the
cultural stigma arising from failure.
Given the background and natural inclinations of the host institution, there was
perhaps a slight bias in the selection of participants and emphasis on financial
policies and institutions in Italy, even when these issues did not stand out as the main
bottleneck in Italy in our diagnosis. This fact was recognized in the group, but as many
were interested in and actively involved in financial policy making, the issue was
still on the table. Concerning financing issues and venture capital, it was mentioned
that the small VC industry may not only be a result of insufficient demand for this
type of capital. It may also stem from the VC lack of competencies and a shortage of
professional skills in this area. Crowdfunding platforms providing an alternative route
to financing scale ups and exits, may fit well with the Italian tradition of family-based
share holdings and finance and preserve an orientation on long-run value creation.
There were also weaknesses that were not mentioned in our analysis so far
but were deemed important. Public procurement and the governance of the public
administration were considered to be the most prominent problems by many
participants. Too many ministries and public bodies are responsible for too many
parts of a too complex puzzle. In addition, there is a problem with the quality of
governance in general and of innovation and entrepreneurship policy specifically
due to an aged workforce with outdated skills in the public sector—only 40% of
Italian civil servants hold a university degree and the share of central government
employees below the age of 35 is just 2.2%. High levels of job protection in civil
service make it difficult to change these numbers, but it is evidently a problem when
young and dynamic entrepreneurs have to deal with an ossified and outdated civil
service.
Finally, all participants stressed the need to implement policies to promote

the formation and strengthening of industrial districts. The benefits of knowledge
spillovers, agglomeration, and scale can only be realized in specialized districts. The
resulting geographical heterogeneity should not be politically opposed but rather
be managed and accomodated. Consequently, there was a great attention from all
stakeholders for the geographical dimension that is considered crucial for triggering
virtuous dynamics in the Italian entrepreneurial ecosystems.
6.6 Conclusions
This chapter on Italy illustrates the FIRES-approach to formulating a tailored

institutional reform strategy to promote a more entrepreneurial society in Europe.
It shows how the tools, discussed and introduced in the first part of this
volume, have been used to systematically analyze the situation in Italy. After
carefully analyzing Italy’s historically rooted institutional foundations, this chapter
triangulated historical, qualitative, and quantitative information to identify Italy’s
strengths and weaknesses. Based on this diagnosis the most relevant proposals were
then selected from the menu of policy interventions and reform proposals in the
companion volume of this book (Elert et al. 2019).
We conclude that many of the institutions that shape an entrepreneurial society
have their roots in Italy. Italy has seen the birth of modern banking, invented
intellectual property rights protection, and has the oldest universities in the world.
Even today, Italy boasts a highly innovative small- and medium-sized entrepreneurial
sector that competes on quality at the global level.
Italy could strengthen its entrepreneurial ecosystem in the area of boosting human
capital investments and more importantly, opening up opportunities for the young
and talented to engage in productive and innovative venturing in Italy. In the recent
crisis Italy has seen an exodus of talent. This diaspora perhaps had benefits in the
past. It created demand for Italian products abroad and served as an alternative for
high domestic unemployment. But with an aging and shrinking population, such an
exodus is a bad sign that suggests there are more opportunities abroad than at home.
When those that do stay and start-up ventures then complain about cumbersome
bureaucracy resulting in lacking growth ambitions and stunted economic dynamics,
there is a clear reason to act.
The chapter discussed proposals concerning the legal system, the mobility of
talent, and the regulatory burden for new firms. It also discussed reforms of the tax
and educational system and presented suggestions about how to improve the flow
of financial resources into experimenting firms. The proposals, individually and in
combination, aim to strengthen the knowledge base and talent pool from which Italian
entrepreneurs can draw and aim to open opportunities for not only starting but also
growing firms in all regions in Italy. Both North and South stand to benefit from these
interventions. Of course, these proposals will need a much more detailed discussion
and only form the starting point, not the final word in the policy debate. Moreover,
even if eventually adopted, our proposals all require careful implementation and
evaluation to complete the FIRES Seven Step cycle.
References
policy implications. Res Policy 43(3):476–494. https://doi.org/10.1016/j.respol.2013.08.016
Acs ZJ, Szerb L (2009) The global entrepreneurship index (GEINDEX). Found Trends Entrep
5(5):341–435. https://doi.org/10.1561/0300000027
Allini A, Ferri L, Maffei M, Zampella A (2017) The effect of perceived corruption on entrepreneurial
intention: evidence from Italy. Int Bus Res 10(6):75–86
Barbagallo F (2001) Italy: the idea and the reality of the nation. J Mod Ital Stud 6(3):388–401
Baum CF, Munro JM, Schachter G (1990) Structural change and economic development in Southern
Italy. J Dev Stud 27(1):54–71
Beccalli E, Girardone C (2016) Banking in Italy. In: Beck T, Casu B (eds) The Palgrave handbook
of European banking. Palgrave Macmillan, London, pp 521–540
Bertola G (1990) Job security, employment and wages. Eur Econ Rev 34(4):851–879
Boeri T, Jimeno JF (2005) The effects of employment protection: learning from variable
enforcement. Eur Econ Rev 49(8):2057–2077
Bohlen C (1996) North-South divide in Italy: a problem for Europe, too. New York
Times. Retrieved from: http://www.nytimes.com/1996/11/15/world/north-south-divide-in-italy-
a-problem-for-europe-too.html
Boland V (2009) Modern dilemma for world’s oldest bank. Financial Times, June 12. Retrieved
from: https://www.ft.com/content/a034542e-5771-11de-8c47-00144feabdc0
Boldrin M, Levine DK (2008) Against intellectual monopoly. Cambridge University Press,
Cambridge
Bottazzi L, Da Rin M (2002) Venture capital in Europe and the financing of innovative companies.
Economic policy 17(34):229–270
Calmfors L, Driffill J (1988) Bargaining structure, corporatism and macroeconomic performance.
Economic policy 3(6):13–61
Carinci F (2015) Labour law and industrial relations in Italy: update to the jobs act (no. 183-2014).
IPSOA/Wolters Kluwers, Milano
Castellani D (2018) Mortgage-backed securitization and SME lending during the financial and
economic crisis: evidence from the Italian cooperative banking system. Econ Notes 47(1):187–
222
Cazzola F (1988) Della corruzione. Il Mulino, Bologna
Cirillo V, Fana M, Guarascio D (2017) Labour market reforms in Italy: evaluating the effects of the
jobs act. Econ Polit 34(2):211–232
Coccorese P (2013) Assessing the competitive conditions in the Italian banking system: some
empirical evidence. PSL Q Rev 51(205):171–191
D’Attore PP (1987) Italian reconstruction and “depressed areas”: the Marshall plan in the
Mezzogiorno. Center for European studies working paper series no. 11. Harvard University
De Roover R (1999) The rise and decline of the Medici bank: 1397–1494. Beard Books, New York
Dilli S, Elert N, Herrmann AM (2018) Varieties of entrepreneurship. Exploring the institutional
foundations of different entrepreneurship types through ‘varieties-of-capitalism’ arguments.
Special issue on “financial and institutional reforms for an entrepreneurial society.” Small Bus
Econ, 51(2):293–320
Dilli S, Henrekson M, Westerhuis G (2016) The institutional evolution of labour market institutions
in Europe and entrepreneurship. Retrieved from https://projectfires.eu/wp-content/uploads/2017/
09/D2.5-The-Institutional-Evolution-of-Labour-Market.pdf
D’Onza G, Brotini F, Zarone V (2017) Disclosure on measures to prevent corruption risks: a study
of Italian local governments. Int J Public Adm 40(7):612–624
Duggan C (2013) A concise history of Italy. Cambridge University Press, Cambridge
ECB (2017) Report on financial structures 2017. ECB, Frankfurt
Economist (1999) Those Medici. Retrieved from http://www.economist.com/node/347333
Economist (2017) Italy’s fourth-biggest bank returns to the stock market. Retrieved from https://
www.economist.com/news/finance-and-economics/21730672-shares-bailed-out-bank-start-
trading-again-italys-fourth-biggest-bank
Eurofound (2009) Italy: ‘wage formation’. Retrieved from https://www.eurofound.europa.
eu/observatories/eurwork/comparative-information/national-contributions/italy/italy-wage-
formation
Ferrera M (2005) Welfare states and social safety nets in Southern Europe: an introduction. In:
Ferrera M (ed) Welfare state reform in southern Europe: fighting poverty and social exclusion in
Greece, Italy, Spain and Portugal. Routledge, London, pp 1–24
Frumkin M (1945) The origin of patents. J Pat Off Soc 27(3):143–149
Gall G (1999) A review of strike activity in Western Europe at the end of the second millennium.
Empl Relat 21(4):357–377
Garelli F (2007) The public relevance of the church and Catholicism in Italy. J Mod Ital Stud
12(1):8–36
Gerschenkron A (1962) Economic backwardness in historical perspective: a book of essays. Belknap
Press of Harvard University Press, Cambridge, MA
Goddard J, Molyneux P, Wilson JO, Tavakoli M (2007) European banking: an overview. J Bank
Finance 31(7):1911–1935
Goldthwaite RA (1995) Banks, palaces and entrepreneurs in renaissance Florence. Variorum,
Aldershot
Golpe AA, Millán JM, Román C (2008) Labor market institutions and entrepreneurship. In:
Congregado E (ed) Measuring entrepreneurship: building a statistical system. Springer, New
York, NY, pp 279–296
Graubard SR, Cavazza FL (1974) Il caso italiano. Garzanti, Milano
Hassel A (2014) Adjustments in the Eurozone: varieties of capitalism and the crisis in Southern
Europe. LSE Europe in question discussion paper series no. 76/2014
Held L (2019) Part-time entrepreneurship: the role of institutions, venture and individual
characteristics in entry and transition choices. In: Held L (ed) Unravelling the patterns in venture
creation processes, Ph.D. thesis. Utrecht University, Utrecht, pp 25–55
Entrepreneurial Society” (FIRES), Workpackage 5, Deliverable 5.1; currently under review. Also
available in Held L (2019) Unravelling the patterns in venture creation processes. Ph.D. thesis.
Utrecht University, Utrecht, pp 91–122
Held L, Herrmann AM, Storz C (2018b) Whom do nascent ventures search for? Variance of
linkage formation activities during new product development processes. Horizon 2020 Project on
Deliverable 5.1; currently under review. Also available in Held L (2019) Unravelling the patterns
in venture creation processes. Ph.D. thesis. Utrecht University, Utrecht, pp 123–150
Herrmann AM (2019) A plea for varieties of entrepreneurship. Special issue on “entrepreneurship
in context.” Small Bus Econ 52(2):331–343
Herrman AM (2020) On the institutional foundations of the varieties of entrepreneurship in Europe.
In: Sanders M, Marx A, Stenkula M (eds) The entrepreneurial society. Reform strategies for Italy,
Germany and the UK. Springer, Berlin
Herrmann AM, Fischer B, Held L (2018) Internationally comparative dataset on start-up processes
and their institutional foundations in Germany, Italy, the UK and the US, 1–17. Retrieved from
https://projectfires.eu/wp-content/uploads/2018/10/d5.1-combined-complete.pdf
Henrekson M, Johansson D, Stenkula M (2010) Taxation, labor market policy and high-impact
entrepreneurship. J Ind Compet Trade 10(3–4):275–296
Henrekson M, Sanandaji T (2017) Stock option taxation: a missing piece of European innovation
policy? Retrieved from http://www.projectfires.eu/wp-content/uploads/2017/09/Complete-D5.9-
submission.pdf
Hertner P (2016) Starting from scratch? The beginnings of Banca Commerciale Italiana: 1893–
1894. In: Hofmann C, Müller M (eds) History of financial institutions: essays on the history of
European finance, 1800–1950. Routledge, New York, NY, pp 13–38
Hoggson NF (2007) Banking through the ages: from the Romans to the Medicis, from the Dutch
to the Rothschilds. Cosimo Inc., New York, NY
Iacobucci D, Micozzi A (2012) Entrepreneurship education in Italian universities: trend, situation
and opportunities. Education+Training 54(8/9):673–696
Ichino A, Maggi G (2000) Work environment and individual background: explaining regional
shirking differentials in a large Italian firm. Q J Econ 115(3):1057–1090
Kertzer DI (1980) Comrades and Christians: religion and political struggle in communist Italy.
Cambridge University Press, Cambridge
Lazear EP (1990) Job security provisions and employment. Q J Econ 105(3):699–726
Leonardi M, Pica G (2006) Effects of employment protection legislation on wages: a regression
discontinuity approach. University of Milan, Mimeo
Liberati D, Marinucci M, Tanzi GM (2016) Science and technology parks in Italy: main features
and analysis of their effects on the firms hosted. J Technol Transfer 41(4):694–729
Long PO (1991) Invention, authorship, “intellectual property,” and the origin of patents: notes
toward a conceptual history. Technol Cult 32(4):846–884
MacDonald SB, Gastmann AL (2000) A history of credit and power in the Western world.
Transaction Publishers, London
Maynard JT (1980) Understanding chemical patents. A guide for the inventor. Anal Chem
52(6):660A–660A
Ministero dello Sviluppo Economico (n.d.) Small business act. Retrieved from http://www.
sviluppoeconomico.gov.it/index.php/it/impresa/piccole-e-medie-imprese/small-business-act
Ministero dello Sviluppo Economico (2009) Small business act: le iniziative in materia di sostegno
alle pmi nell’europa A 27. Retrieved from http://www.sviluppoeconomico.gov.it/images/stories/
recuperi/Notizie/SBA27_2009.pdf
Ministero dello Sviluppo Economico (2012) Restart Italia! Report of the task force on startups set
up by the ministry of economic development
Ministero dello Sviluppo Economico (2017) Italia start-up visa hub, 4th quarter report. Summary
of the main findings, 31 Dec 2017
Moradei G (2009) Patent information in Italy. World Pat Inf 31(1):19–31
Nicoletti G, Scarpetta S, Boylaud O (1999) Summary indicators of product market regulation with
and extension to employment protection legislation. OECD working paper no. 226
Panunzi F (2012) Contro il monopolio sulla proprietà intelletuale. Lavoce. Retrieved from http://
www.lavoce.info/archives/27450/contro-il-monopolio-sulla-proprieta-intellettuale/
Politecnico di Bari (n.d.) History. Retrieved from http://www.en.poliba.it/university/history
Politecnica delle Marche (2017) Historical highlights: the origins. Retrieved from http://www.
univpm.it/Entra/Informations_about_University/Historical_Highlights
Politecnico di Milano (n.d.) Towards the present. Retrieved from https://www.polimi.it/en/
university/history/towards-the-present/
Politecnico di Torino (n.d.) History. Retrieved from https://www.polito.it/ateneo/storia/index.php?
lang=en
Raulli L (2017) Transformation of the Italian labor market under the Renzi government: explaining
the shift to flexicurity. Master Thesis, Ludwig-Maximilians-Universität, München
Regini M (1997) Still engaging in corporatism? Recent Italian experience in comparative

perspective. Eur J Ind Relat 3(3):259–278
Rolfo S, Calabrese G (2003) Traditional SMEs and innovation: the role of the industrial policy in
Italy. Entrep Reg Dev 15(3):253–271
Salvador E (2010) Are science parks and incubators good “brand names” for spin-offs? The case
study of Turin. J Technol Transf 36(2):203–232
Sanders M, Grilli L (2018) Policy Roundtable Report. Retrieved from https://projectfires.eu/wp-
content/uploads/2018/05/d5.12-roundtable-report-italy.pdf
Scherer FM (1965) Firm size, market structure, opportunity, and the output of patented inventions.
Am Econ Rev 55(5):1097–1125
Schmookler J (1966) Invention und economic growth. Harvard University Press, Cambridge, MA
Simonini R (1954) The universities of Italy. Bull Am Assoc Univ Profr (1915–1955) 40(4):563–592
Sirilli G (1986) The researcher in Italy: a profession in search of recognition. Res Policy 15(6):329–
337
Spanò R, Ferri L, Fiondella C, Maffei M (2017) Accountability and reporting in the fight against
corruption: preliminary evidences from the Italian setting. Int J Bus Manag 12(4):1–9
Spanò R, Paola ND, Caldarelli A, Vona R (2016) Accountants’ hybridization and juridification: a
critical reflection on the fight against organized crime. Public Money Manag 36(6):441–446
Spooner DJ (1984) The southern problem, the Neapolitan problem and Italian regional policy. Geogr
J 150(1):11–26
Stud 23(9):1759–1769
Stam E (2018) Measuring entrepreneurial ecosystems. In: O’Connor A, Stam E, Sussan F, Audretsch
DB (eds) Entrepreneurial ecosystems. Springer, Cham, pp 173–197
Statute of Politecnico di Torino (2011) Retrieved from https://www.swas.polito.it/services/docuff/
default.asp?id_documento_padre = 10358
Sylla R (2002) The role of the banks. In: Sylla R, Toniolo G (eds) Patterns of European
industrialisation: the nineteenth century. Routledge, New York, NY, pp 45–63
Szerb L, Lafuente E, Horváth K, Páger B (2019) The relevance of quantity and quality
entrepreneurship for regional performance: the moderating role of the entrepreneurial ecosystem.
Reg Stud 53(9):1308–1320. https://doi.org/10.1080/00343404.2018.1510481
Szerb L, Vörös Z, Komlósi É, Acs ZJ, Páger B, Rappai G (2017) The regional entrepreneurship
and development index: structure, data, methodology and policy applications. Retrieved from
http://www.projectfires.eu/wp-content/uploads/2018/07/d4.4-the-regional-entrepreneurship-
and-development-index_-structure-data-methodology-and-policy-applications.pdf
Tabellini G (2010) Culture and institutions: economic development in the regions of Europe. J Eur
Econ Assoc 8(4):677–716
Tiraboschi M (2012) Italian labour law after the so-called Monti-Fornero reform (law no. 92/2012).
E-J Int Comp Labour Stud 1(3–4):47–86
Unioncamere (2005) Le nuove imprese in Italia 1998–2002—Osservatorio Unioncamere sulla
demografia delle imprese. FrancoAngeli, Milan
Universita di Bologna (n.d.) The numbers of history. Retrieved from http://www.unibo.it/en/
university/who-we-are/our-history/the-numbers-of-history
Varga A, Szerb L, Sebestyén T, Szabó N (2020) Economic impact assessment of entrepreneurship
policies with the GMR-Europe model. In: Sanders M, Marx A, Stenkula M (eds) The
Viesti G (2016) Fondazione Res. Università in declino. Un’indagine sugli atenei da Nord a Sud.
Donzelli, Rome
Wiarda HJ (1997) Corporatism and comparative politics: the other great “ism”. M.E., Sharpe,
Armonk, NY
Chapter 7
A Reform Strategy for Germany
Mark Sanders, Mikael Stenkula, Michael Fritsch, Andrea M. Herrmann,

Gresa Latifi, Balázs Páger, László Szerb, Elisa Terragno Bogliaccini
and Michael Wyrwich
Abstract In this chapter, we outline a reform strategy to promote a more

entrepreneurial society in Germany. Germany has developed a successful model
of capitalism in which high productivity growth is driven by on-the-job learning and
firm-specific skill accumulation. The economy is rooted in a strong and regionally
no. 120289 titled as Entrepreneurship and Competitiveness investigations in Hungary based on the
Global Entrepreneurship Monitor surveys 2017–2019). Mikael Stenkula also gratefully acknowl-
edges financial support from Jan Wallanders och Tom Hedelius stiftelse and from the Marianne and
Marcus Wallenberg Foundation.
M. Sanders (B) · E. Terragno Bogliaccini

M. Stenkula
M. Fritsch
Friedrich Schiller University of Jena, Jena, Germany
e-mail: m.fritsch@uni-jena.de
A. M. Herrmann
G. Latifi
TUM School of Management, Technical University of Munich, Munich, Germany
e-mail: gresa.latifi@tum.de
L. Szerb
embedded Mittelstand, which supports an export-oriented industry mainly based on

incremental innovations, but which is less conducive to more radical innovation. We,
therefore, suggest a reform agenda for Germany that encourages more entrepreneurial
experimentation with the aim of facilitating radical innovation, both in incumbent
and new firms. Germany’s entrepreneurial talent should be encouraged to take on
more risk, the education system could promote initiative, creativity and a willingness
to experiment, and a more equal playing field between dependent employment and
self-employment/employer could be created.
Keywords Germany · Entrepreneurship · Varieties of Capitalism · Entrepreneurial


Policies
7.1.1 United, Divided, Reunited—A Short History

of Germany
In the centuries following the rule of Charlemagne (800–814), countries such as

France, Spain, England, and Habsburg Austria developed into centralized states. In
contrast, the so-called Holy Roman Empire of German Nation became increasingly
fragmented because rulers had to “buy” the loyalty of kings, princes, and dukes
within the empire. Between the emergence of Martin Luther’s critique of the Church
in Rome (1517) and the Thirty Years’ War (1618–1648), many German states, mostly
in the North and Center, adopted the new Protestant faith while others, more South-
ern and Western parts of Germany, remained Catholic (Cantoni 2012).1 Religious
tensions erupted in a civil war and devastated many of the German states. When the
Treaty of Westphalia ended the Thirty Years’ War in 1648, the area that we know as
Germany today was comprised of hundreds of sovereign kingdoms, principalities,
and dukedoms.
This fragmentation lasted until the (second) German Empire was established in
1871 (Falck et al. 2011; Chickering 2014) by the Prussian chancellor Otto von Bis-
marck. The immediate years after the formation of Germany are historically remem-
bered as the Gründerzeit (start-up boom/founding era), as the country went through
a process of economic expansion, quickly followed by the first wave of bankruptcies
M. Wyrwich
Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands
e-mail: m.wyrwich@rug.nl
1 This has implications for entrepreneurship today. Nunziata and Rocco (2018) show that Protestants
in Germany have a stronger entrepreneurial intention than Catholics under certain conditions.
7 A Reform Strategy for Germany 165
known as the Gründerkrach (Uebele and Ritschl 2009; Burhop 2011). Germany inte-
grated and industrialized rapidly until World War I. But Germany inherited a distinct
regional variation that left traces to this day (Tipton 1976; Gutberlet 2014).2
The Great War imposed an enormous burden in lives lost and resources wasted.
Due to the massive reparation payments imposed in the Versailles Treaty, Germany
had a hard time recovering (Broadberry and Harrison 2005).3 Hyperinflation left a
lasting imprint on the German psyche in 1923 and the economic situation worsened
after a few years of economic stability in the mid-1920s. The crash of 1929 and
the following Great Depression led to massive unemployment, to the breakdown of
leading banks in 1931 (James 1981; Kopper 2011), and fueled the rise of the Nazi
movement. The economic system of the Nazi regime that seized power in 1933 was
based on autarky (self-sufficiency) and the pursuit of central planning principles
(Barkai 1988). Their policy strengthened a trend toward concentration and carteliza-
tion of the economy that was already observable since the late nineteenth century
(Reckendrees 2003). In a time of slumping (export) demand, the fiscal expansion
caused by the Nazi rearmament and public infrastructure worked and resulted in
economic recovery and much needed employment, whereas autarky kept Germany
relatively isolated from further shocks from abroad.
World War II led, however, to a total destruction of the German economy in the
1940s and fueled a second hyperinflation. Upon defeat, Germany was occupied by the
Allied Powers (USA, UK, France, and Soviet Union) and lost one-third of its territory
in the East to Poland and Russia. In 1949, the country was split into two separate
states, namely the Federal Republic of Germany (FRG or West Germany), which
became a Western-style market economy, and the German Democratic Republic
(GDR or East Germany), a Soviet-style centrally planned economy. The Iron Curtain
divided Germany for more than 40 years and the two German states evolved in
distinctly different directions.
The economy of West Germany prospered in the 1950s and early 1960s, a period
referred to as economic miracle (Wirtschaftswunder). East Germany, meanwhile,
had to cope with a massive loss of economic activity as businesses relocated assets
and activities, while some 1.3 million, mostly educated and entrepreneurial, people
fled to West Germany (e.g., Hefele 1998; Falck et al. 2013) from 1950 until the
Berlin Wall was erected in 1961. The East German economy also had to cope with
massive war reparations to the Soviet Union which amounted to about 23% of the pre-
war gross national product (Lieberman 1996). The West-German economy instead
benefitted from the Marshall plan and global monetary stability under the Bretton
Woods system, security assurances under the NATO-treaty, and trade liberalization
under GATT.
2 Some German regions, for example, long retained a primogeniture inheritance system, where in
other parts inheritances were shared equally among all (male) children. This led to large estates and
landed nobility in some, and a rural, entrepreneurial class in other regions.
3 The severity of the impact of these reparations is, however, somewhat disputed in the literature
(see, e.g., Hantke and Spoerer 2010).

Trends in entrepreneurship also diverged strongly. In the aftermath of the oil price
shock of 1973, West Germany developed from a managed to a more entrepreneurial
society, with self-employment rising to 10–12% in 1989. In East Germany, in
contrast, there were several waves of expropriation driving down the rate of
self-employment to 1.8% at the time of reunification (Wyrwich 2012).
The biggest challenge after reunification was the integration of the economic
structures of the former East Germany into the market economy system (Hall and
Ludwig 1995; Burda and Hunt 2001). There was a massive surge in start-up activity in
the early 1990s and the self-employment rate in the former East Germany approached
the Western level around the year 2005. At the same time, almost none of the Eastern
companies that existed in 1989 were still active in the market in 2000 (Fritsch et al.
2014). Despite this massive transition and rapid convergence in self-employment,
striking economic differences between both parts of the country remain until today.
After a period of converging productivity levels in the first years after transition,
a productivity gap of 30% still persists since the late 1990s. Massive migration
and brain drain to Western Germany came to a halt only recently, and the legacy
of the socialist past continues to affect people’s inclinations, attitudes, principles,
and behavior.4 This legacy will last but perhaps not all of it is necessarily a barrier
to growth and prosperity (former East Germany has, for example, higher female
participation rates and smaller gender gaps in wages and incomes).
In conclusion, both the North-East, South-West divide between Protestants and
Catholics in the seventeenth and the East-West divide between socialists and cap-
italists in the twentieth century are important to understand the fractionalization
and regional heterogeneity of Germany today. Germany’s federal political structure
accommodates and consolidates this heterogeneity and helps explain the decentral-
ized character of its entrepreneurial ecosystem(s). These deep-rooted institutional
features are manifest in the institutions that govern the flow of knowledge, finance,
and labor to existing and new firms alike. We discuss these in the sections below.
The institutions that govern the generation and flow of knowledge to businesses
in general and to entrepreneurial ventures in particular are founded in the educa-
tional system and the institutions doing basic and applied research. The system
for registering and commercially exploiting knowledge then also deserves special
mention.
4 See for example Alesina and Fuchs-Schündeln (2007), Brosig-Koch et al. (2011), Bauernschuster
and Rainer (2012), Bauernschuster et al. (2012), Corneo and Grüner (2002), Fuchs-Schündeln and
Schündeln (2005, 2009), and Ockenfels and Weimann (1999).
The first medieval universities emerged in Germany after the end of the Papal Schism
in 1386 with the University of Heidelberg opening in the very same year (Cantoni
and Yuchtman 2014). The political fragmentation of Germany at the time implied
that a lot of universities were set up in smaller cities which are not necessarily big
economic or administrative agglomerations today. Examples, apart from Heidelberg,
are the universities in Rostock (1419), Greifswald (1456), and Tübingen (1477), but
also the University in Marburg (1527), which was the first Protestant university in
the world, and the University of Jena (1558). There were several further universities
founded before the onset of industrialization where, like all “medieval” universities,
their curriculum consisted of Greek and Latin classics and was focused on the study
of the Bible. The art of reading, writing, rhetoric, and logic were important fields
while ability and utility played a minor role. Universities’ traditional tasks were to
collect, codify, and teach general knowledge (Carlsson et al. 2009), not to develop
any new or useful knowledge.
As a response to the rapid growth of the demand for scientific research and edu-
cation (Carlsson et al. 2009; Drucker 1998) in the nineteenth century, Germany also
saw a wave of universities founded with a technical focus and the adjustment of
curricula in already existing universities. The first higher education institutions with
a technical focus in Germany were founded in Karlsruhe and Dresden in the early
nineteenth century, while the first natural science faculty opened at the University
of Tübingen in 1863. Furthermore, there were several technical colleges, known as
Polytechnische Hochschulen that were upgraded into technical universities around
the year 1900. The main political force behind this process was the German Associa-
tion of Engineers (Verband Deutscher Ingenieure, VDI).5 All technical colleges that
became technical universities were located in the capital cities of the federal states
(König 2006; Manegold 1989). Again, the federal tradition of Germany implied that
such universities were established in smaller cities and not necessarily in places that
are the largest agglomerations today. In 1900, there were technical universities in
Berlin and Munich but also in Karlsruhe, Dresden, Hannover, Stuttgart, Aachen,
Darmstadt, and Braunschweig.
Today, there are many more technical universities in Germany. They represent a
specific type of higher education institution that has relatively strong links to (often
local) industry. Recent empirical evidence suggests that the entrepreneurial capacity
of technical universities is not necessarily higher than that of “classical” universities
(Goethner and Wyrwich 2019). But places close to, or even hosting, a technical uni-
versity that was already present in the year 1900 have a higher level of entrepreneur-
ship in high-tech industries (Audretsch and Lehmann 2005a, b; Fritsch and Wyrwich
2018). As many universities were founded in smaller places, this partly explains why
5 The main aim of the initiatives to upgrade technical colleges was to overcome the lower social
status of engineers as compared to university graduates. Moreover, upgrading technical colleges to
technical universities was regarded an important means for improving the education of engineers
(König 2006).
in Germany these smaller places (e.g., rural Baden-Württemberg) prosper today, even
though they lack the agglomeration advantages that are found to be supportive for
entrepreneurship and innovation in countries such as the USA (Glaeser 2011).
In the twentieth century, as was the case in most developed countries, there was
a massive expansion of tertiary education in Germany. Therefore, there is no region
without a significant university or university of applied science with a focus on edu-
cating people for the local labor market (e.g., Jaeger and Kopper 2014).6 Moreover,
the twentieth century saw the proliferation of scientific research institutes and the
emergence of networks like the Kaiser Wilhelm Society (1911), the Max Planck Soci-
ety (1948), and the Fraunhofer Society (1949). Their substantial (public) resources
were aimed at further developing basic research with an explicit mandate to also
disseminate this knowledge to industry (Gibbons et al. 1994; Beise and Stahl 1999).
These networks have now grown into important pillars of Germany’s knowledge
infrastructure. As for most technical universities, however, the focus in these institu-
tions has long been on serving the needs of large, industrial, incumbent firms. Initia-
tives to foster entrepreneurship at universities or research institutes did not exist until
the late 1990s when the EXIST program was initiated in a few pilot universities.
The EXIST program followed a dual strategy. One building block was support-
ing universities in developing start-up culture at their institutions, while the other
was providing direct assistance for individuals and start-up projects. In support of
those activities, universities received a grant from the German Federal Ministry of
Economics and Technology over a three-year period (e.g., Kulicke 2014). Although
there have not yet been rigorous evaluations, the pilot in Berlin was considered a
success, has gone through several revisions and extensions, and is still in operation
today (Becker et al. 2011; EXIST 2019).
In conclusion, the German university and educational system mirror its regional
decentralization, given that the federal states are responsible for education policy.
There are also joint initiatives where the lead is at the federal level. The most famous
program is the so-called excellence initiative that was initiated in 2006. Recent evi-
dence suggests that this program was successful in concentrating excellent research.
It also promoted collaborations between universities and the non-university research
sector. However, it has not caused massive changes to the overall German research
system (e.g., Möller et al. 2016). Moreover, a strong tradition of internships and
vocational education provides German firms and entrepreneurs with a well-trained
and educated workforce at the local level. In contrast to the Anglo-Saxon countries,
however, the German university system faces challenges developing into research-
oriented universities (Baker and Lenhardt 2008). Universities are mostly teaching-
oriented and made universally accessible at low costs for students. This implies,
however, that universities are tightly financed out of (state level) tax revenue and
have a hard time attracting and retaining (global research) talent. As a consequence,
differences in the quality of education and research between German universities are
6 A university of applied sciences (UAS), also known as a vocational university or Fachhochschule,
is an institution of higher education that grants professional degrees and is generally more focused
on vocational education and applied research.
much less pronounced than in other countries such as France, the UK, or the US. A
large part of top-level research takes place outside of the universities in industry and
endowed research institutes such as those of the Max Planck Society.
Germany has had regional patent systems since the eighteenth century (Harhoff
and Hoisl 2007). The first Central German patent office was established in 1877,
some six years after Germany became a state. The Imperial Patent Office (Kaiser-
liches Patentamt) provided uniform protection for discoveries in the German Empire.
Patents were based on uniform principles and were effective for the entire territory
of the German Empire. In the first 13 years of the patent law, there were between
4,000 and 5,000 patents granted per year. This number increased to 10,000 before
1906, and around 13,000 after that of which more than 10% were long-living patents
(Burhop 2010). During the separation of the country after World War II, two patent-
ing agencies coexisted, but after reunification, Germany merged them into a single
patent institution again.
There have been several changes to patent law over the last 120 years. One of
the important recent reforms was the Arbeitnehmererfindergesetz in 2001, which
was a Bayh–Dole Act-like change in the German patenting system to increase the
commercialization of scientific research. The results of this measure, however, are
rather mixed (Von Proff et al. 2012; Czarnitzki et al. 2016). Without going into
detail on the issue, this can be seen as an example where transferring legal insti-
tutions to another context leads to different, perhaps unexpected, outcomes. The
USA universities, for which the Bayh–Dole Act was written, operated under a dif-
ferent institutional setting and consequently responded very differently than those in
Germany. The Arbeitnehmererfindergesetz was perhaps less effective because of the
already strong practice of technology transfer from academia to the corporate sector
in Germany (Grimpe and Fier 2010). To achieve more commercial exploitation of
public research, reforms will have to be better tailored to the German context. The
problem with such tailored approaches, however, is that intellectual property rights
protection has developed into an international issue. That is not a reason for Germany
not to speak out. As a leading industrial nation with a lot of intellectual property at
stake, Germany’s voice in European and international negotiations governing intel-
lectual property carries significant weight and will be heeded. It is in the interest of
Germany to push for reforms that ensure a solid protection of industrial innovations
but also ensures continued access to the more generic types of knowledge (e.g., gene
sequencing) that industrial innovation builds upon.
The financial system in Germany is characterized by a complex network of finan-

cial intermediaries and a, rather dominant, three-pillar banking sector. The three
sets of banks comprise the private banking sector (publicly traded and held banks
like Deutsche Bank and Commerzbank), the mutual or cooperative credit unions
(Genossenschaften), and the system of public banks consisting of local savings-and-
loan banks (Sparkassen) and the federal state banks (Landesbanken), respectively.
The federal state banks fulfill wholesale banking services to the savings-and-loan
banks, such as taking the role of regional clearing houses for liquidity and transfer
liquidity from those banks with an excess liquidity to members with less. Hence,
these financial institutions already have a system of joint liability like in a banking
union (Hackethal 2004).7
Again, this situation has evolved historically. The roots of the German banking
system can be traced to the Fugger family in Renaissance Augsburg (1367). The
oldest, still operating bank in Germany is the Berenberg Bank founded in 1590.
The fine-grained network of local banks in Germany today has its origins in the
late eighteenth century (Allen and Gale 2000; Kindleberger 2015). During the nine-
teenth century, savings banks spread across the country. They played a decisive role
in financing the industrialization of Germany. The first credit unions originated in
the mid-nineteenth century. The focus of these cooperatives was on traders, shop
owners, and artisans or they were set up in rural areas to serve the needs of agrarian
communities. Credit cooperatives were widespread in nineteenth-century Germany
and by 1914 the ca. 19,000 credit cooperatives had issued around 7% of all banking
liabilities. Guinanne (2001) explains their success from their ability to make use
of superior information and their capacity to impose cheap but effective sanctions
on potential defaulters. These characteristics presumably permitted credit unions to
lend to clients to whom commercial banks typically did not provide credits and also
to develop loan terms closer to the needs of the borrowers (Flögel 2018; Flögel and
Gärtner 2018).
Today, there are still 423 savings banks and 1,116 cooperative credit unions. Sav-
ings banks and credit unions typically foster close and long-term relationships with
their local clients, particularly the small and medium-sized companies in which they
often have seats on the corporate supervisory board (Herrmann 2020). The savings
banks and cooperative banks provide about two-thirds of all lending to Mittelstand
companies and 43% of lending to all companies and households (Audretsch and
Lehmann 2016). Therefore, savings banks and credit unions are an important build-
ing block for the success of the German Mittelstand.8 When it comes to innovative
7 Inaddition, the federal state banks secure market funding by issuing bonds. They are also inter-
nationally operating wholesale and investment banks. Therefore, they follow a business model
different from savings banks.
8 Although there is no “official” definition of the Mittelstand, one can say that it comprises firms with
between 50 and not much more than 500 employees where the owner is involved in the management
or at least in strategic decisions (Pahnke and Welter 2018). Hence, the Mittelstand is part of the
new start-ups, however, banks are typically more hesitant to invest. Innovative start-
ups, also in Germany, have to rely on venture capital to finance capital-intensive
high-risk projects. Empirical evidence shows that the market for venture capital in
Germany is functioning relatively well (Fritsch and Schilder 2008, 2012). It remains
much smaller in size and scope than in the Anglo-Saxon world, but this is arguably
not a supply but a demand issue (Herrmann 2020).9
The German financial system, with its many small and locally well-connected
banks serving many SMEs across the country, has coevolved with the German econ-
omy. It serves the needs of the decentralized, export-oriented, and industrial economy
of organically growing medium-sized industrial firms and Mittelstand. Typically,
thanks to their cooperation on corporate governance boards, such firms have long-
standing relationships with their banks that use the relationship and trust as collateral
and security for credit.
In conclusion, despite some important challenges in flagship banks like the
Deutsche Bank and the Commerzbank, the German financial system remains quite
decentralized and still has a significant share of small-scale relationship banking.
Thereby, it can finance incremental innovation in existing firms but is perhaps a less
favorable environment for more radical innovation by new entrants as it supplies little
capital in the form of equity to newcomers. The financial system thus consolidates
Germany’s conservatism, while underpinning its competitive strength in high-quality
incremental innovation.
The labor force in Germany is generally well trained and very productive, justifying
high wage incomes while maintaining a strong international competitive position.
Strong vocational education combined with on-the-job training promotes the accu-
mulation of firm-specific human capital in Germany’s small and medium-sized high-
tech industrial sector (Herrmann 2020). Consensus-oriented labor relations support
moderate wage growth while firm-specific human capital investments yield high
productivity growth (e.g., Soskice 1990). German export-oriented firms thus remain
competitive in global markets with high quality, high value-added products and ser-
vices. But this peace and high level of investment are based on generous social secu-
rity and stringent labor protection. It is important to realize that these institutions
have long historical roots and coevolved with the German economy into highly com-
plementary and interconnecting institutions that support its traditional competitive
strength.
SME sector. Many firms of the Mittelstand are family entities that have been passed on within the
family for several generations.
9 German entrepreneurs have been found to be reluctant to give up control rights and therefore
prefer organic growth and private ownership over a heavy reliance on external equity finance. One
could argue that this has also led to a regulatory framework that makes this type of investment less
attractive (see, e.g., Fiedler and Hellman 2001; Franzke et al. 2003).
The German system of employment protection obtained its modern form during
the period of the German miracle (Wirtschaftswunder) in the 1950s and 1960s in
the Federal Republic of Germany. This was the golden era of the so-called Nor-
malarbeitsverhältnis (standard employment relationship) which describes a depen-
dent, permanent full-time job with strict dismissal protection, a full integration into
status-protecting social insurance and collectively set wages at a relatively high level
(Eichhorst and Marx 2011).
The West German system implied high wages for insiders but also led to under-
utilization of the labor force, which is reflected, for example, by low labor force
participation of women and a male-breadwinner family model. Such a system comes
under pressure when women push into the labor market (Esping-Andersen 2002),
especially after German reunification where about 90% of all women in working age
were full-time employees in the former East Germany (Maier 1993).10 This system
gave industrial producers a strong incentive to invest in productivity growth, but
high wages and non-wage labor costs proved less suitable for developing a modern,
labor-intensive service sector (Eichhorst and Marx 2011). Moreover, demographic
changes put a heavy burden on the economy to finance the generous pension system.
Reforms were deemed necessary to increase the utilization of all labor resources.
The change in the labor market structure, however, did not come along with a
systematic flexibilization of the rigid Normalarbeitsverhältnis. Rather, a second-
tier labor market consisting of atypical and much less protected employment (e.g.,
part-time work, marginal employment) emerged. Streeck (1997) argues that this
pattern is explained by the German manufacturing system that is based on “diversified
quality production.” This model requires labor with highly specialized skills and
enables workforces—thanks to their long-standing experience within one firm—to
come up with incremental innovations and improvements that translate into high-
quality products and specialization in niche markets. Tight employment protection
incentivizes employees to invest in the necessary firm-specific skills, which would
otherwise become sunk costs in case of a job loss (Herrmann 2020).11
In the mid-1990s, the firm size threshold for dismissal protection was raised from
5 to 10 employees (Eichhorst and Marx 2011), and Bauernschuster (2013) found
a positive effect on hiring by small firms of this reform. The duality between well-
protected insiders and precariously employed outsiders in the labor market, however,
persists in larger firms and the new threshold still represents a penalty on employment
growth.
10 There is still an East-West gap in terms of female labor force participation in the year 2015.
However, recent analyses show that only about 40% of that difference can be attributed to the effect
of the socialist system (Wyrwich 2017). The rest is due to other factors.
11 This explanation is perfectly in line with basic human capital theory (Becker 1964). See Hall and
Soskice (2001) for further explanations on the relationship between employment regulation and
incremental versus radical innovation.
The relatively high wage costs in Germany are also institutionalized in a system of
collective wage bargaining. Unions played an important role in the first decades after
World War II in West Germany and wages were collectively set (Soskice 1990).12
There was some modest flexibilization in collective bargaining (e.g., single enterprise
exceptions, the introduction of working time accounts) since the 1980s. With reuni-
fication, the West-German model was extended to the East and the system remained
relatively stable for standard employment contracts (Eichhorst and Marx 2011; Dust-
mann et al. 2014). Despite low and declining union membership, in the 2000s, still,
some 60–70% of all employees were covered by collective agreements and such
coverage still implied significant wage premia (Kohaut and Schnabel 2007; Burda
et al. 2008; Fitzenberger et al. 2013; Kluge and Weber 2018). The contrast between
marginal workers in precarious employment and the well-protected and covered
insiders has increased in recent decades (Brady and Biegert 2017). Entrepreneurs
have more or less equal access to the latter pool of labor, but face high wage and
non-wage labor costs when recruiting from the high-quality segments. A potentially
important recent development is the broadly supported introduction of a minimum
wage in 2015 of at that time EUR 8.50/h (Burda 2016).13 Its effect on the flow of
labor resources to entrepreneurship is unclear and not yet empirically investigated.
Social security also has a long tradition in Germany. The introduction of social
insurance dates back to an initiative by von Bismarck in the 1880s, which implied
the implementation of the first social security net in the world. The Compulsory
Health Insurance Act of 1883 can be regarded as the starting point of this system.
This was followed by the Accident Insurance Act (1884) and the Disability/Old-
age Pension System Act (1891). Arguably, the build-up of a social security system
enabled von Bismarck to pacify the threat of class struggle and create loyalty to
the new state (Rimlinger 1968; Pflanze 2014). The German social security system
around this time became a blueprint for Germany’s current health system and was a
role model for many insurance systems in other countries (Abrams 2007; Weichlein
2011; Bauernschuster et al. 2019).
The social insurance system underwent several reforms and extensions since the
1880s. Unemployment insurance was introduced in 1927. Finally, care insurance was
set up in 1995. The current pension system is based on a reform in 1957 and follows a
pay-as-you-go defined-benefit design. There are also state-supported private pension
schemes. These were introduced in the early 2000s to make up for the demographic
12 The wage agreements are negotiated at the sector level between labor unions and employers’
associations. The negotiations are at the regional level (so-called Tarifbezirk).

13 There have been sector-based minimum wages already in the 2000s. In the West-German
construction sector, a minimum wage became effective in 1997.

transition that implies fewer contributors in the pay-as-you-go scheme face a growing
number of retired people.
A significant reform of the unemployment insurance was associated with the
“Agenda 2010.” It was a shift from policies that were rather generous toward an
approach with stricter job search monitoring, harsher sanctioning of unemploy-
ment provisions, and a reduction in the duration of job training. Another element
of the reform was to combine the earnings-related and means-tested unemployment
assistance with the social assistance (Sozialhilfe) into a new support system called
Arbeitslosengeld II. This transfer can be regarded as a step toward a more universal
minimum income support scheme (Eichhorst and Marx 2011). The regulation also
came with new active labor market policy tools to promote start-ups by the unem-
ployed (Ich AG/“Me Inc.”). The evidence on the success of these measures to date
is mixed (Zöllner et al. 2018). While some do succeed in leaving the program and
generate an income, most of these start-ups are not very innovative and have low
growth potential.
7.1.5 Recent Entrepreneurship Policies in Germany
7.1.5.1 Entrepreneurship in Divided Germany: 1945–1989
Before reunification, the post-war “German model” can be described as a rather dis-
tinctive kind of capitalist economy that was governed by national social institutions
yielding high international competitiveness despite high wages and low dispersion
with respect to inequality of incomes and living standards (Streeck 1997). A defin-
ing feature of the German model is the existence of the Mittelstand. Audretsch
and Lehmann (2016) argue that Mittelstand firms represent a sort of “main street
entrepreneurship” of decades-old, family-owned firms with strong linkages and
social ties to their local communities, including banks. These firms attract and retain
specifically skilled employees, for example, by local apprentice programs. They also
often have close ties with local banks providing them with financial resources. These
ties are legally in the form of loans and credit, but long relations and trust enable
firms to also approach banks for financing intrapreneurial ventures and innovative
projects. Their products are successful in niche markets.
Public policy strongly promoted the German SMEs (including the Mittelstand)
in the post-war period. The state-owned Kreditanstalt für Wiederaufbau (KfW) pro-
vided finance for the development of technological capabilities of SMEs (e.g., long-
term investment loans as well as working capital loans). The KfW measures can be
regarded as small business but to a much lesser extent as entrepreneurship policies.
Policy programs directly targeted at start-ups played a rather minor role in the policy
menu in the post-war decades.
In contrast, in socialist East Germany, Mittelstand and entrepreneurship were
dubbed a bourgeois anachronism (Fritsch and Wyrwich 2016, p. 263). There were
many outright anti-entrepreneurship policies, such as the massive expropriation of all
private industrial firms in 1972. Private business ownership was very much confined
to small craft enterprises and private shops in East Germany and self-employment fell
from 20.4% in 1955 to 1.8% in 1989 (Pickel 1992; Wyrwich 2012). Consequently,
the Mittelstand had largely disappeared in the East by 1989 (Fritsch et al. 2014).
7.1.5.2 Entrepreneurship and Entrepreneurship Policy

after Unification
In the 1990s, the self-employment rates were steadily increasing in West Germany,
partly reflecting the increased role of service but also the fundamental shift toward
a more entrepreneurial society. In East Germany, the level of self-employment
converged to Western levels and reached parity around the year 2005 (Welter
2007a; Fritsch et al. 2014). Interestingly, in areas that had already a high level
of entrepreneurship in the pre-socialist period, the entrepreneurial catch-up was
particularly pronounced (Wyrwich 2012; Fritsch and Wyrwich 2014).
Despite convergence in the numbers, however, East German businesses tend to be
much smaller, even 20 years after reunification. One reason is their comparatively
low levels of productivity and much lower survival rates (Fackler 2014). There are
several explanations for this weakness of East German companies, ranging from unfa-
vorable economic framework conditions to lacking managerial and entrepreneurial
skills among East German entrepreneurs (Wyrwich 2013). Furthermore, East Ger-
man businesses tend to have a strong focus on regional markets and their export
orientation is rather low (IWH 2010; Mattes et al. 2015).
In an attempt to also support start-ups in East and West, the KfW began creating
programs, such as the Eigenkapitalhilfe-Programm which consisted of subordinated
capital for (young) entrepreneurs. In 2010, the Bundesministerium für Wirtschaft
und Energie (BMWi) implemented INVEST —Zuschuss für Wagniskapital and the
Mikromezzaninfonds-Deutschland to strengthen and develop the entrepreneurial
culture of Germany. The former provides a subsidy of 20% for venture capital,
whereas the latter provides specific support for unemployed persons, women, or
migrants in creative industries (Audretsch et al. 2007). Bøggild et al. (2011) show
that these programs yielded both an increase in competitiveness and innovativeness
for subsidized start-ups as well as generated positive employment effects. Overall,
BMWi-policy initiatives include the provision of information on self-employment
(e.g., by participating in the Gründerwoche Deutschland), special measures to
strengthen interest in entrepreneurship in the education system, and the improve-
ment of the financing options available for innovative start-ups. Under the umbrella
of the Gründerland Deutschland Initiative, the BMWi also provides an online
portal to make all information available to the public and provides young ICT
entrepreneurs with means for a stay in innovative regions such as Silicon Valley
under the German Accelerator program.14
In addition to these federal initiatives, the German Länder (states) are also quite
active in developing entrepreneurship promotion programs at the regional level (Wel-
ter 2007b). In East Germany, such initiatives often relied massively on European
Structural Funds which were relatively generous in view of the low GDP per capita
of the East German Länder. It is noteworthy that there is a huge heterogeneity across
the Länder in promoting entrepreneurship. It is particularly Bavaria in West Ger-
many and Saxony in East Germany that developed multifaceted programs to promote
innovative entrepreneurship (Fritsch et al. 2010, 2015).
Finally, at the local level, some municipalities and districts focus on the develop-
ment of the entrepreneurial culture within their region. Here, the main players include
business associations, chambers of commerce, economic development departments,
and business development agencies. An example for local funding initiatives is the
GÖBI-fonds (Göttinger Fonds für örtliche Beschäftigungsinitiativen). Established
in 1997, it constitutes one of the first cases of public–private collaboration at the
regional level, where banking institutions were involved. Targeting unemployed and
young entrepreneurs, the Fonds was organized in such a way that the banks would
provide the funding, while the regional government would bear 50% of the default
risk and (thus) would subsidize the interest rate.
Although the three levels of policy regulation aim at closely integrating their
respective instruments, inconsistencies and incoherence across these levels are a real
danger. For example, most state programs do not consider part-time entrepreneur-
ship to be desirable, arguing that this type of entrepreneurship tends to contribute
little to economic and employment growth, whereas at the federal level, part-time
entrepreneurship is supported and recognized as a potential first step to full-time
self-employment and eventual business formation.
These programs have of course been evaluated, but it is difficult to ascertain their
true impact. It would also take us beyond the scope of this chapter to attempt an
assessment here. At this point, we can conclude that Germany’s policy makers at
various levels are clearly highly interested in promoting a more adventurous and
radically innovative form of entrepreneurial venturing.
7.1.6 Conclusions
Germany’s turbulent history of division and unification had a big impact on the coun-
try, its institutions and inhabitants. After World War II, the entire country experienced
an institutional reset: while informal institutions persisted, East and West Germany
set off on diverging trajectories on formal institutions.
14 There have been further measures within the framework of the Gründerland Deutschland Initiative
that are not active in 2018 anymore. For example, the Gründerwettbewerb—IKT Innovative which
consisted of a contest for young entrepreneurs in the ICT industry.
The West developed its own unique model of capitalism, with moderate wage
growth, high productivity growth driven by on-the-job learning, and firm-specific
skill accumulation. This supported an export-oriented industry built on the his-
toric legacy of strongly regionally embedded Mittelstand, financed by a region-
ally branched bank-based financial system, also fueled by science and knowledge
developed in technical universities as well as institutes.
In the East, meanwhile, the socialist doctrine led to the destruction of the Mittel-
stand, while massive migration to the West before the building of the Wall contributed
to depriving East Germany of a significant part of its entrepreneurial talent. Impor-
tantly, the experiment with central planning failed and the East German economy
collapsed, whereas the West grew into the economic powerhouse of Europe.
Now, at 30 years after reunification and in spite of enormous efforts, the
socioeconomic gap between East and West Germany has still not been bridged
(Canova and Ravn 2000; Lindner 2017; Mertes 2018; Verheyen 2018). Against
this backdrop, it is impossible to treat Germany as a blank canvas. Hence, we
suggest policies and reforms that fit its historical heritage, consider its federal
character and multi-level governance, and build on Germany’s strengths in order
to address weaknesses within the German entrepreneurial ecosystem. To iden-
tify these weaknesses, the next section turns to the present and examines current
data.
7.2 Step 2: Data Analysis with REDI for Germany
7.2.1 Germany’s International Position
To get a first impression of Germany’s relative performance as an entrepreneurial

ecosystem, we turn to the Regional Entrepreneurship and Development Index
(REDI). For calculating an overall country score, we used the population weighted
regional REDI-scores. Out of the 24 EU countries for which we have this regional
data, Germany ranks seventh with 51.1 points between Finland and Austria, behind
Ireland, the Scandinavian countries, The Netherlands, and the UK, but ahead of
France and all the Southern and Central European countries (Table 3.3, Varga et al.
2020). This implies that the German competitive position in the European Union is
supported by its strong, regionally embedded Mittelstand and incremental innova-
tion system (Audretsch and Lehmann 2016). To identify where reforms would help
to improve its performance, however, we need to delve a little deeper into where the
entrepreneurial ecosystem in Germany could be improved.
The REDI is composed of 14 underlying pillars that together make up three
subindices, namely (1) Entrepreneurial Attitudes, (2) Entrepreneurial Abilities, and
(3) Entrepreneurial Aspirations (Acs et al. 2014; Szerb et al. 2017, 2019). Figure 7.1
gives us a first glance at how Germany is performing relative to the UK, Italy, and the
EU average on these 14 pillars. The data show that Germany overall performs better
compilation
than the EU average and only slightly underperforms the EU average on four pillars,
namely “Risk Acceptance,” “Human Capital,” and, perhaps surprisingly, “Product,”
and “Process Innovation.”
The underlying algorithm in the REDI puts a penalty on bottlenecks in the ecosys-
tem (Acs et al. 2014; Szerb et al. 2017), such that a rounder radar-plot scores higher
than a more erratic one. This reflects the intuition that all pillars in the index are com-
plementary and the ecosystem is only as effective as its weakest link. To increase the
REDI-score and improve the ecosystem performance, policy interventions should
therefore be aimed at alleviating bottlenecks with priority. For Germany, and based
on the data, one would conclude that improving the “Risk Acceptance,” “Human
Capital,” “Product Innovation,” and “Process Innovation” pillars is most urgent.
A national-level analysis, however, will hide a lot of regional heterogeneity. Bottle-

necks in Hamburg and Berlin may well prove to be very different from the bottle-
necks in Brandenburg and Hessen. Before we draw too strong a conclusion on how
to improve the German entrepreneurial ecosystem, let us therefore zoom in at the

regional level.
In Fig. 7.2 and Table 7.1, we observe that there is quite some variation among
German regions. The REDI-scores range between 35 (Brandenburg) and 70 (Ham-
burg).15 The map and table illustrate that even at this low spatial resolution, the
aggregated REDI-scores capture quite a bit of the regional heterogeneity.
Without going into technical details in this chapter, the intuition behind each of
the pillars is that data on individual entrepreneurial agency (taken from the Global
Entrepreneurship Monitor adult population survey data) are combined with relevant
institutional quality indicators (taken from a wide variety of reputed international
Fig. 7.2 REDI map of German NUTS2/3 regions. Source Authors’ own compilation
15 The
Table 7.1 REDI-scores

Germany
Baden-Württemberg 62.0
Bayern 60.6
Berlin 62.4
Brandenburg 35.1
Bremen 57.1
Hamburg 69.5
Hessen 58.9
Mecklenburg-Vorpommern 40.2
Niedersachsen 50.3
Nordrhein-Westfalen 54.8
Rheinland-Pfalz 44.6
Saarland 56.7
Sachsen 50.5
Sachsen-Anhalt 38.2
Schleswig-Holstein 49.8
Thüringen 41.1
institutions, such as the World Bank, Freedom House, and OECD).16 The index then
builds on the assumption that institutions and individual agency are complements
(Acs and Szerb 2009; Acs et al. 2014). That is, for example, high levels of Opportunity
Perception in a low-quality institutional environment will contribute little. Likewise,
low Opportunity Perception in a high-quality institutional environment is also a sign
of weakness in the entrepreneurial ecosystem. To improve the score on a given pillar,
policies and reforms should seek to improve the weakest link and then aim to increase
both institutional quality and individual agency together. Especially because of the
latter, the menu of effective interventions is not limited to improving the scores
on the institutional quality indices alone. The same logic is then also imposed on
the individual pillars that make up the three subindices: Attitudes, Abilities, and
Aspirations.
For all the Länder, we have identified those three pillars that are holding back the
respective Land most. We then compared the Länder and identified the most common
weak spots in regional ecosystems. The results, presented in Table 7.2, provide some
clear-cut insights.
Across the best and the weakest entrepreneurial ecosystems in Germany, bot-
tlenecks seem to arise most frequently with regard to Business Risk, which will
reduce the score on Risk Acceptance and thereby Entrepreneurial Attitudes. On
Entrepreneurial Abilities, the overall scores are decreased by low Human Capital
16 We refer interested readers to Szerb et al. (2017) and the technical annex to Acs and Szerb (2016)
for further details.


Hamburg 3, 8, 11 Business Risk, Education and Training, and
New Technology
Schleswig-Holstein 3, 8, 10 Business Risk, Education and Training, and
New Product
Bremen 3, 8, 13 Business Risk, Education and Training, and
Exports
Niedersachsen 3, 7, 10 Business Risk, Technology Level, and New
Product
Nordrhein-Westphalen 3, 8, 11 Business Risk, Education and Training, and
New Technology
Rheinland-Pfaltz 3, 8, 10 Business Risk, Education and Training,
Educational Level, and New Product
Hessen 3, 8, 10 Business Risk, Education and Training, and
New Product
Saarland 3, 8, 11 Business Risk, Risk Perception, Education and
Training, and New Technology
Baden-Württemberg 3, 8, 10 Business Risk, Education and Training, and
New Product
Bayern 3, 8, 10 Business Risk, Education and Training, and
New Product
Thüringen 1, 8, 11 Market Agglomeration, Education and
Training, Educational Level, and New
Technology
Sachsen-Anhalt 1, 8, 10 Market Agglomeration, Education and
Training, and New Product
Sachsen 3, 8, 10 Business Risk, Risk Perception, Education and
Training, and New Product
Brandenburg 3, 7, 10 Business Risk, Technology Level, and New
Product
Berlin 3, 8, 10 Business Risk, Education and Training, and
New Product
Mecklenburg-Vorpommern 1, 8, 14 Market Agglomeration, Education and
Training, and Informal Investment
scores due to a lack of Education and Training, whereas a lack of New Product or
New Technology in Product or Process Innovation generally holds back the overall
performance on Entrepreneurial Aspirations. Despite significant heterogeneity across
the German Länder, there certainly seems to be room for national-level interventions
and reforms in these areas.
At the regional level, the Länder may well add specific interventions to strengthen
specific regional weaknesses and bottlenecks, given in particular that it does not seem
necessary to equally develop all pillars in all regions.
Our interpretation of the data above reveals that in all German Länder, and the country
as a whole, the main bottlenecks in the entrepreneurial ecosystem are a limited will-
ingness to take risk (Business Risk), an education system that can be improved (Edu-
cation and Training), and a lack of radical innovation (New Products and Technology)
that feeds back into a low familiarity with ambitious entrepreneurship.
As the simulation exercises in Varga et al. (2020) have shown, improving the scores
on REDI in Germany would have positive effects on productivity and well-being in all
regions, even if some would benefit more than others. At this point, however, it is not
quite clear exactly how one could go about engineering such an improvement in the
German entrepreneurial ecosystems. We know it is the bottlenecks that hold down
scores, and consequently, improving on those is probably the most cost-effective
way of improving the system as a whole. But a lot of research remains to be done on
how exactly policy interventions and reforms would affect the various variables and
pillars underlying REDI.
Moreover, it is not advised to draw conclusions exclusively on the basis of data
and aggregate indices, even if they are composed of a broad set of sub-indicators.
It is not yet clear from the data exactly what could be done to improve the situation
or how interventions could be made to fit local specificities. Only after triangulating
the results above with the historical analysis, literature review, expert judgment, and
qualitative survey results below, we can map propose tailored reforms for Germany.
7.3.1 Venture Creation Processes in Germany
As illustrated in Herrmann (2020), we assessed the impact of Germany’s institutional

ecosystem upon entrepreneurial activities from both a static perspective (based on
multiannual averages) and from a process-oriented perspective. Both sets of analy-
ses provide similar and complementary results. The static analyses confirmed that
entrepreneurs in Germany have a tendency to set up incrementally innovative ven-
tures rather than to develop ventures based on radically innovative technologies or
the imitation of existing business ideas (Dilli et al. 2018; Herrmann 2019).
The dynamic analyses, in turn, revealed how Germany’s institutional environment
influences different aspects of the venture creation process. With regard to human
capital, we find that entrepreneurs in Germany, who begin to set up their ventures in
part-time, are less likely to transition to full-time entrepreneurship than their counter-
parts in the UK or the USA. The reason seems related to Germany’s regulated labor
market which, in case of venture failure, makes it rather difficult for entrepreneurs
to obtain a position in dependent employment. Entrepreneurs are reluctant to give
up dependent employment and set up their ventures in part-time (Held 2019). In
addition, entrepreneurs in Germany are unwilling or unable to hire employees and
rather engage external service providers in order to access qualified labor (Held et al.
2018c).
With regard to the process of finance acquisition, Held et al. (2018a) find that
various venture characteristics influence the type of funding which nascent venture
acquire first and, respectively, most. These characteristics include the type of good
that a venture develops, its product’s novelty, size, industry, but also its institutional
environment. With regard to the latter, Germany’s entrepreneurs are particularly
likely to make up for a low stock market capitalization by seeking debt finance,
making use of the well-developed banking system instead (Held et al. 2018a).
Finally, we also find that nascent ventures in Germany are more likely to engage in
R&D collaborations with external partners, such as universities and labs, than nascent
ventures in the UK or the USA. The reason for this seems to be that nascent ventures
are reluctant to engage in joint R&D projects whenever the institutions governing
inter-firm collaborations make the outcome of lawsuits in case of IP conflicts rather
unpredictable (Held et al. 2018b).
Taken together, these studies suggest that Germany’s distinct finance, labor, and
R&D-related institutions lead entrepreneurs to focus on incrementally innovative
business ideas.
7.3.2 Regulatory Barriers to Entrepreneurship in Germany
To examine regulatory barriers to entrepreneurship, we conducted interviews with

313 founders in Germany, between 2015 and 2018. Table 7.3 provides an overview of
the answers given to the question: “Which regulatory requirements did you perceive
as major obstacles during venture creation?” coded to also compare the answers
across countries. The table suggests that an important number of German founders
did not feel constrained by regulatory barriers. Among those regulatory obstacles
that were mentioned most, founders often pointed to difficulties with various aspects
of administrative processes. With regard to the acquisition of labor, capital, or knowl-
edge, only very few founders pointed to the problem of “high taxes” which, in turn,
might indicate that founders considered financial constraints less important.
These findings are overall in line with the REDI analysis which indeed indicated
that regulatory barriers were not the most pressing problem. In contrast, other sources
and rankings, such as the World Bank’s Doing Business Index (World Bank 2018a),
mention regulatory barriers to starting up as a matter of concern in Germany. Part of
the answer to this paradox could be that regulatory barriers are significant in Germany
Table 7.3 Results survey on regulatory obstacles in Germany

None 130 41.0
Stringent environmental regulations 18 5.7
Regulatory requirements for buildings 12 3.8
Bureaucracy in general 11 3.5
Legal requirements for approval 10 3.2
Onerous requirements for documentation 10 3.2
Tax laws in general 8 2.5
Legal requirement to be member of IHK 7 2.2
Lengthy approval process 5 1.6
Registration procedure 5 1.6
Difficulties with obtaining finance 5 1.6
Employment regulations which hamper ability to hire employees 5 1.6
High taxes in early phases of venture creation 4 1.3
Legal initial capital requirements 4 1.3
Difficulties with transition of legal form 3 0.9
Insecurity about details of law 3 0.9
Note
be mentioned)
but perceived to be justified and unproblematic by the founders that actually overcame
them. Moreover, strict regulation, provided it is clear and fair, can also prevent the
entry of less viable and low-quality entrepreneurs (Stenholm et al. 2013).
When looking at the top-10 obstacles more closely, we see that founders confirm
the problem of a cumbersome bureaucracy. But only some (<5%) mention bureau-
cracy and complicated legal and regulatory requirements as a real obstacle to start a
firm. From our survey, we thus get the impression that barriers to entry in Germany
could be alleviated by reducing the administrative requirements for venture creation.
That is confirmed by the fact that Germany ranks 113 out of 190 in the World Bank
(2018a) Doing Business Index on “ease of starting a firm.”
7.3.3 Founders’ Suggestions for Reforms in Germany
In the same survey, founders were also asked: “What can policy makers do to facilitate
venture creation?”. An overview of the answers to this question is listed in Table 7.4.
While an important share of the founders interviewed still thinks that policy makers
cannot facilitate venture creation, the most common suggestions point to measures
of financial support. This is remarkable in light of the fact that financial barriers
were rarely mentioned as a regulatory obstacle. Similarly, financial constraints do
not come out very strongly in the data analyses of Sect. 7.2 nor in the historical
analysis of Sect. 7.1.
Two other suggestions stand out. In slightly different wordings, the founders
suggest a simplification of procedures, which in itself need not make regulations
less tight, only more transparent and easier to follow. And, again, in different
ways, they argue that the government could promote venture creation by allow-
ing founders to benefit more from the venture they create. Although, not strongly
and perfectly, Germany’s founders clearly identified some of the same weaknesses in
the entrepreneurial ecosystem that our above data analysis revealed. Recall that the
weaknesses of the REDI analysis revealed a low score on the pillars “Risk Accep-
tance,” “Education and Training,” and “Product Innovation.” The founders’ sugges-
tions about better networking opportunities, the stimulation of a more entrepreneurial
culture, and general need for more support resonate with those weaknesses, but
the founders did not mention a lack of knowledge, absorptive capacity, or a lack
of new product and process technology. The latter might be explained by survival
bias in sampling, such that the surveyed founders may find themselves in a vibrant
entrepreneurial scene and perceive a strong ecosystem where only external con-
straints hold venturing back. Interestingly, the survey reveals founders’ frustration
with the regulatory framework and bureaucracy that the REDI-analysis is ill equipped
to reveal.
Rather unsurprisingly, the policies suggested are all action-oriented, whereby
financial instruments are typically top-of-mind, also for founders. This may explain
the high share of recommendations that suggest to supporting start-ups and new ven-
tures financially—even though capital did not seem to be a major barrier to venturing
in Germany in the REDI analysis. Those founders signaling a lack of information
and training and calling for a more stable policy environment can be interpreted in
support of a more fundamental reform approach that creates institutional support for
those providing such services and knowledge.
When calling for lower taxation and higher financial support for founders, we
should of course be very cautious. Nobody likes to pay taxes, and founders are
no exception. Still, perhaps founders’ complaints are not unjustified in this case.
Even if Germany’s founders strongly benefit from a public-funded infrastructure—
including, for example, a well-developed transportation system, public incubators,
and entrepreneurial support programs like the EXIST initiative—the level of taxation
and social security contributions out of total profits is estimated to be about 50%
(World Bank 2018a) in Germany, and on “paying taxes” Germany ranks 41 out of
Table 7.4 Results survey on suggested policies in Germany

creation?
Nothing 37 9.5
Provide competent advice to people starting businesses 24 6.2
Improve situation specific to energy sector 23 5.9
Simplify tax laws 12 3.1
Clear regulations 10 2.6
More flexible tax law adjustable to liquidity of start-up 10 2.6
Reduce costs 9 2.3
Financial benefits for founder 9 2.3
Facilitate procedures for approval 8 2.1
Create feeling of support for entrepreneurs 5 1.3
Abolish compulsory membership in IHK 5 1.3
Reduce initial capital requirement 4 1.0
Offset risk of starting business 4 1.0
Simplify regulatory requirements for buildings 4 1.0
Simplify venture creation process 3 0.8
Create entrepreneurial culture 3 0.8
Adjust tax system to encompass start-ups 3 0.8
Ease environmental regulations 3 0.8
Note
could be mentioned)
190. Concerning financial support for founders, there are already quite a lot of public
programs for entrepreneurship and it is doubtful whether even more support would
be helpful.
7.3.4 Conclusions
The analysis in this section confirms some, but not all of the weaknesses identified
in the REDI analysis completed in Step 2. Moreover, it provides some revealing
additional insights, for example, the need to create a stable regulatory framework,
and the suggestion that overall taxation on new ventures is perhaps too high. Such
information is hard to gather from quantitative data or historical analyses. The more
qualitative analysis presented in this step was therefore useful to complement the
results obtained in Sects. 7.1 and 7.2. But given the limited perspective that most
founders have, the proposed interventions typically fall in the “inform, deregulate,
subsidize-more and tax-less” approach that has characterized entrepreneurship poli-
cies around the world already for decades. When asked for the most important bar-
riers and additional policy measures, it is only logical that founders would mention
those barriers and proposals that they perceived as most important in their personal
experiences and direct environment. There certainly is valuable information in that
experience. But as a guide to policy, this is not sufficient, as is an approach based on
history or aggregate data only. The true value of this information is revealed when
combined with information from other sources. Together, the insights gained from
triangulating our historical, quantitative, and qualitative information on Germany
now reveal enough information to formulate a “diagnosis” for Germany and propose
our “treatments.”
Formulating a reform strategy to strengthen the entrepreneurial ecosystem is similar

to treating a patient. In the previous sections, we have considered the medical history
of the patient, used advanced diagnostic tools to scan for her health problems, and
asked the patient how they feel and what they believe would be a good treatment.
Based on this information, we can now come up with a diagnosis and map this
diagnosis onto the menu of available treatments in order to propose a treatment that
fits the patient.
In general, Germany boasts a strong entrepreneurial ecosystem. Like in most other
countries, there are hotbeds of entrepreneurship in major cities alongside more rural
regions. The geographic resolution of our data reveals that Germany’s entrepreneurial
talent and resources arguably tend to cluster in its major cities. But given that these
cities are themselves spread across the country, this is also the case for entrepreneur-
ship in Germany. Our quantitative data analyses suggested a large regional hetero-
geneity in entrepreneurial ecosystem performance, whereas for the country as a whole
or the regions affected, this does not necessarily constitute a problem.
The results from the surveys do not suffer from this problem and confirm that
the challenges and bottlenecks in the German ecosystem are indeed not formidable.
Founders suggested that regulation makes the founding of new ventures difficult,
especially in green tech and renewable energy sectors. This is confirmed in Ger-
many’s rankings on traditional indicators like self-employment and firm formation,
especially in high-tech sectors. These show that Germany is lagging in an inter-
national comparison. But these concerns do not seem to be overly problematic.
Importantly, founders did not complain about a lack of funding, skilled personnel,
or knowledge. The data analysis does however reveal that German entrepreneurship
is less risk seeking than in the Anglo-Saxon world. New ventures in Germany score
comparatively low in radically new products and technology as well as in risk accep-
tance. Moreover, the rates of self-employment and start-up activity in Germany have
been declining and this might be worrisome to a country that is already scoring low
on these indicators. Incremental innovation is routine in German industry, but the
pillars related to more radical innovation seem the weakest links in an otherwise well
developed and functional entrepreneurial ecosystem. This diagnosis roughly holds
for the country as a whole and the individual Länder separately.
Admittedly, though, it is not easy to change all these aspects together. German
preferences for well-designed and (over)engineered solutions, an emphasis on qual-
ity over price and a dislike for disruptive technologies that might challenge incum-
bent firms and unsettle long-grown business relations, are deeply entrenched in the
German culture. Furthermore, these even constitute the core of a carefully built and
cherished “made in Germany” brand and reputation. It is thus important not to advise
our “German patient” to become a person they are not and do not want to become.
Still, a little more adventurous spirit would not hurt and more likely improve Ger-
many’s position vis-a-vis the competition from East-Asian tiger economies that rival
its industrial and engineering dominance. Hence, making it easier to start (and end) a
venture and supporting radically innovative entrepreneurship financially could go a
long way in improving the entrepreneurial ecosystem in the country and its Länder.
Taking these general prescriptions to the menu of policy interventions and reform
proposals in the companion volume of this book (Elert et al. 2019), we have selected
fifteen suitable interventions for Germany. They are listed in Table 7.5. In Column 1,
we find the number under which they were presented in Elert et al. (2019). Column 2
lists the title and Column 3 the proposal, whereas Column 4 gives a brief motivation
for the case of Germany tying in with the analysis presented above.
The first proposal (2) refers to intellectual property. We think it is in the interest of
the German entrepreneurial society that access to knowledge remains open. Germany
is traditionally strong in developing generic knowledge into specific products and
services, and IP protection should protect the latter, not the former. But as IP is
beyond the competencies of even national authorities, our proposal here is to be
Table 7.5 The FIRES-reform proposals for Germanya

No. Policy area Proposal Germany
2 Intellectual property Limit the breadth, width, and span This is an international issue, but it
of patent protection to cover would certainly help if Germany
working prototypes and were to advocate this at the
market-ready innovations only for a appropriate levels, because
short period of time and permit Germany is an important player in
economic actors to infringe upon this field. It may, at first sight, go
patents that have not been against the interests of a country
commercialized. that patents a lot. But this will
stimulate commercialization also in
Germany.
9 Wealth taxation Harmonize and reduce taxes on The transfer of wealth across
private wealth, private wealth generations, especially in the form
transfers and inheritance if of business assets, is a major issue
productively invested. in the family-firm dominated
Mittelstand in Germany (Ellul
et al. 2010; Getz and Peterszen
2004). By reducing taxation on
private wealth transfers, the
transition of ownership across
generations is easier and this also
frees up more so-called triple-F
finance in Germany.
17 VC Reduce barriers to the sale, Germany does not seem to suffer
acquisition, and IPO of VC-funded from a direct lack of VC funds, but
start-ups to facilitate profitable the market remains small because
exits. of low demand. We propose to
stimulate this market by
strengthening the pull-factors as
direct subsidies in these
circumstances will only cause too
much cheap money chasing too few
projects.
19 Banks Increase the mandatory equity ratio European and international
in banking gradually to 10–15% to minimum standards are applied in
allow them to take on more risk Germany, but allow for rather low
responsibly in their lending reserves and high leverage.
portfolios. Deutsche Bank was branded the
worlds’ riskiest bank by the USA
FDIC in 2016 (Hofbauer et al.
2017; Moshinsky 2016). Financing
entrepreneurship simply requires
more loss-absorbing capacity in
banking.
21 FinTech Implement a light-touch regulatory German crowdfunding regulation
regime for equity crowdfunding introduced in 2015 is relatively
and peer-to-business lending. conservative. The arguments are all
about stability. We would
encourage experimentation with
this new form of finance under tight
supervision, but loose regulation.
(continued)

23 Employment protection Relax the stringency of Germany ranks fourth for
employment protection legislation permanent and forty-fourth for
for permanent contracts. temporary contracts protection in
the OECD ranking. The gap is
huge. Some labor protection is
needed to maintain the high levels
of firm-specific human capital (e.g.,
Hall and Soskice 2001), but that
cannot justify the gap with
temporary workers. The way
forward would be to close the gap
by bringing protection for
permanent contracts down where
responsible, and award temporary
work more protection where
needed to level the playing field.
27 Social security Carefully consider the impact of Many of the flexicurity reforms
flexicurity reforms on young firms tend to put administrative or
and do not force them to take on financial burdens and risks on firms
excessive risks and burdens. that work as a deterrent to hire
and/or as a penalty on growth. In
reforming the labor market, policy
makers should take a dynamic view
of entrepreneurship and realize that
successful firms need to grow.
29 Social security Ensure full portability of social Labor market mobility in Germany
security entitlements by making is relatively low. It seems that in
them independent of tenure at a Germany this is also due to the
specific employer. “orderly” educational system that
sets people on a very predictable
career path. Linking social security
entitlements to jobs is perhaps a
consequence as much as a cause but
it is a good place to start.
31 Active labor market policy Establish or strengthen training Labor market mobility in Germany
programs to prepare workers for is relatively low. On-the-job
new occupations. training for mobility has to be
publicly funded or funded by
employees as we cannot expect
employers (let alone start-ups) to
invest in mobility.
32 Entry barriers Excessive barriers to new business The survey above clearly indicates
formation and new entry should be founders think bureaucracy and
lifted where possible. regulation are a barrier to business
formation and the Doing Business
Index of the World Bank (World
Bank 2018b) ranks Germany 113
out of 190 in ease of starting a
business. Compared to Georgia, at
20% below the global frontier and
not improving as fast (World Bank
2018c).
(continued)

37 ICT Invest in excellent, open-access Providing such an infrastructure
digital infrastructure for European would promote scaling of new
citizens and businesses. digital ventures and high-tech
services (Baller et al. 2016).
Germany ranks 15 out of 139 in the
Networked Readiness Index, down
from 13 and below the Nordics and
UK. As this is a fertile ground for
new firm formation, Germany
could invest here to promote a more
adventurous entrepreneurial
ecosystem without jeopardizing
upsetting its existing routine
innovation paradigm in
manufacturing. Strong
improvements could also be made
to the digitalization of public
administration.
39 Insolvency Insolvency regulation should This proposal ties in with the
protect ventures that are inherently Business Risk Acceptance and Fear
healthy and promising and allow of Failure, but this necessarily is a
for a quick and ex-ante transparent long run intervention. Only by
liquidation of those that are not. signaling strongly to society that
failure in business is acceptable,
can cultural attitudes gradually
become more supportive. German
bankruptcy law seems overly
stringent.
41 Education system Reforms in primary and secondary If we combine German
education should provide pupils performance on PISA scores and
with a solid and coherent low scores on education and
knowledge base and promote training plus need for more risk
initiative, creativity and a acceptance in the REDI-data
willingness to experiment. analysis, it is clear that also in the
educational system reforms are
desirable. The government has put
quite a few programs in place in the
2000s already and reform fatigue
may be an issue, but a focus on
creativity and out-of-the-box
thinking remains urgent (Rothman
2017). This proposal is of course
complicated by the fact that
educational policy in Germany is
largely a competence of the federal
states.
(continued)

45 Universities Both the EU and its member states For Germany, this should be
should create healthy, well-funded, interpreted as a call for increasing
academic institutions that allow the public funding for universities
Europe’s most talented academics in particular. These institutions
to pursue their research interests. have a strong educational focus in
Germany as it is and spending per
student has declined (Füller 2017)
to e9,000 per students which is less
than the OECD average of
e10,400. Underinvesting in
academic teaching and basic
research jeopardizes the knowledge
base in the long run. Again, federal
state and national politicians need
to closely collaborate to address
this issue in Germany.
48 Innovation policy Develop highly competitive Germany’s unique legacy of a
programs encouraging small decentralized, innovative, and
businesses to engage research and well-funded Mittelstand gives it a
development with the potential for unique strength to build on. If its
commercialization. Mittelstand firms can be engaged
in somewhat more risky innovation,
Germany can strengthen and
maintain its competitive position in
the world in a way that will be hard
to copy in other places.
a Numbered as in Elert et al. (2019)
interpreted as a suggestion to raise the issue at the appropriate governing bodies and
treaty negotiations.
The proposals in taxation and financial regulation (9, 17, 19, and 21) lie clearly
within national competencies. They serve the dual purpose of mobilizing more capital
for riskier, perhaps more radically innovative ventures and increasing the financial
rewards for such venturing and investing in it. Here, we propose a different approach
than the founders, whom in our survey called for more public funding and financial
support. Instead, we believe that mobilizing the so-called triple-F finance by family,
friends and fools, can be promoted by allowing for more wealth to accumulate and
be transferred among private individuals.
Proposals on social security and labor market regulation (23, 27, 29, and 31) all aim
to mobilize Germany’s most knowledgeable and valuable employees. Portability of
social security entitlements across jobs, sectors, and labor market statuses will reduce
the lock-in of skilled labor in gilded jobs and reduce the barriers for employers. Also,
this portability creates a level playing field for start-ups on the demand side and for
marginalized groups on the supply side of the labor market. This will make growth
in Germany more inclusive and equitable as well as more innovative.
A third group of proposals (32, 37, and 39) intends to improve the regulatory
situation for start-ups and founders both at the start and possibly the end of their
venture, as well as strengthen the digital infrastructure of Germany. The latter is an

essential and vital infrastructure for platform-based services that account for most
spectacular new firm formation in the world today.
Finally, a group of proposals (41, 45, and 48) suggests reforms to make Ger-
many’s strong knowledge generation sector more open to entrepreneurs penetrating
the knowledge filter (Acs and Plummer 2005), and particularly for more radical ideas.
The promotion of creativity and experimental mindsets in primary and secondary
education will support this shift in the long run. Policies to support innovation in
SMEs will have to be designed in close cooperation with knowledge-intensive firms
in Germany, whereas greater investment in higher education and basic research is a
proven recipe for improving the quality of life in the long run.
The proposals individually and in combination aim not only at making German
entrepreneurs more adventurous and change their environment in ways that such
adventures are rewarded more if successful and punished less if a failure. In addition,
the proposals focus more directly on allowing these more adventurous entrepreneurs
to start a venture with less administrative hurdles and to grow them with capital,
labor, and knowledge for which they can compete on a more level playing field.
These reforms would have to be implemented while keeping sensible and important
regulations in place to screen out business models that add no social value.
It is likely that, even though all German Länder stand to benefit from these inter-
ventions, the fact that density and clustering tend to promote the quality and impact of
entrepreneurial venturing will imply that the same policy improvements will benefit
already prosperous cities and regions most. Still, that should not stop policy makers
from pursuing these interventions as it is the well-being of German citizens, not the
GRP of its administrative units per se, that the national government should primar-
ily care about. In addition, Germany has effective automatic transfer schemes that
will help maintain a high quality of life throughout the country, even if the available
entrepreneurial resources are attracted to, and deployed in, only parts of the territory.
7.5 Step 5: The FIRES-Reform Proposals in Light

of the Countries’ Historical, Geographical,
To put our proposed reform program in context, it is important to discuss the diagnosis
and proposed treatments with experts in the field. Moreover, given the wide diversity
of policy areas involved, it is important to not only discuss this with policy makers that
are active in “entrepreneurship policy” in the narrow sense. Our approach emphasizes
the importance of reforming institutions that determine the allocation of financial,
labor, and knowledge resources to entrepreneurial activity in the broadest and most
inclusive sense of the word. Entrepreneurship policy, in the narrow sense, has been in
place for more than three decades and, to date, seems to have achieved only limited
success.
Because of its breadth, our reform agenda inevitably cuts across many policy areas
traditionally less associated with entrepreneurship policy, including wealth taxation,
financial and labor market regulation, social security, and science policy. Policies
and institutions in these different areas overlap and interact in ways that affect the
quality and performance of the entrepreneurial ecosystem (Stam 2015, 2018). As
the institutions in these areas have evolved historically and policy makers in these
areas pursue different, equally relevant public policy priorities, the challenge is to
discuss the proposed agenda in sufficient depth and with a sufficiently diverse group
of policy makers and practitioners. The challenge is to not only propose policies
and reforms that will strengthen the ecosystem, but to do it in such a way that other
important policy priorities are also achieved.
In order to receive the first round of feedback on the proposals for Germany
presented in Table 7.5, a policy round table was held at the Bundesministerium
für Wirtschaft und Energie in Berlin on April 24, 2018. This step can be seen as
an attempt to allow our patient, or perhaps more accurately, their team of medical
specialists, intimately familiar with our patient, to give feedback about our diagnosis
and proposed treatments. What proposals does this team endorse, question, or propose
to drop?
Several participants stressed that cultural aspects and attitudes are important fac-
tors affecting the entrepreneurial activity in Germany. Discussing monetary issues,
such as the size and distribution of certain items of EU’s, Germany’s, or the Bun-
desländer’s budget, will only be of limited use if one does not see how this fits into
the institutional and cultural patterns of Germany.
The participants also agreed that institutions like high employment protection
and entrepreneurship-inhibiting insolvency laws increase the risks involved with
entrepreneurial failure and the stakeholders also meant that institutional reforms that
decrease the personal risks of failure might have an effect on individuals’ risk attitude.
The relatively high-risk aversion in Germany is not innate and can be altered, even
if it might take some time.
Supporting business angels might work to reduce market failure in the seed stage.
The idea to subsidize the investors and not the firms was regarded as a fruitful strategy.
However, some participants questioned the idea that capital access was an important
bottleneck and others claimed that angel investment has no detectable effect on firm
productivity and development. Supporting the VC industry might have an effect on
the entrepreneurial culture and the risk attitude among potential entrepreneurs in
society. It was also critically discussed whether tight regulation truly is a bottleneck
for start-ups.
Some proponents argued that the size threshold of the SME definition that EU
uses should be increased to include more Mittelstand firms as well. Even if these
firms are not SMEs by the today’s definition, they operate under similar organizational
routines, managerial practices, and firm behavior. Even if this issue was not a specific
proposal, participants pointed out that this would imply that a given budget has to be
distributed among more firms or that the budget must increase substantially to avoid
that resources are diluted.
7.6 Conclusions
This chapter on Germany presents the FIRES-approach to formulating a tailored

institutional reform strategy to promote a more entrepreneurial society in Europe. It
illustrates how one could systematically analyze the situation before selecting and
proposing reforms within this area. After carefully analyzing Germany’s historically
rooted institutional foundations, this chapter triangulated the historical, qualitative,
and quantitative information to identify Germany’s strengths and weaknesses. Based
on this diagnosis, the most relevant proposals are selected from the menu of pol-
icy interventions and reform proposals developed in more detail in the companion
volume of this book (Elert et al. 2019).
Due to its unique history, the German entrepreneurial landscape is probably the
most decentralized and regionally diffused in all of Europe. This is reflected to this day
in a spatial structure with a comparatively low level of concentration of economic
power in the capital region and with economically strong clusters in the Länder
capitals and other large cities around the country. Germany is home to centuries-old
universities and also developed a strong system of non-university research institutes.
Germany’s financial system is unique with its locally embedded public bank system
which supports Germany’s Mittelstand of decentralized export-oriented medium-
sized industrial firms across the country. The labor market is characterized by a model
of consensual and coordinated decision making between employers and employees
that facilitates and promotes high investments in firm-specific human capital.
Germany has developed its own unique model of capitalism and represents the
core of the continental European model with a coordinated market economy. The
reunification between West and East Germany in 1990 started an economic process
that is arguably still ongoing. The socialist doctrine had drained East Germany of its
entrepreneurial talent and the structure of Mittelstand vanished.
Germany today has, however, a rather unbalanced entrepreneurial ecosystem. It
excels in competition and technology absorption, but these strengths are negated by
lacking performance on human capital. Germany lags only slightly relative to the
EU average on human capital and risk acceptance and scores low in Entrepreneurial
Attitudes. The main bottlenecks in the entrepreneurial ecosystem are a limited will-
ingness to take risk, an educational system that could aim for more creativity and
experimentation and a lack of radical innovation that feeds back into a low famil-
iarity with ambitious entrepreneurship and a rather closed and conservative business
culture.
This chapter discusses proposals concerning taxation and financial regulations as
well as ideas about how to improve the regulatory situation for start-ups and founders.
Germany also needs to strengthen the digital infrastructure and the knowledge
generation sector in addition to supporting innovation in SMEs.
The main message for Germany is that the German institutions could allow for
more experimentation and somewhat more radical innovation by strengthening the
educational system in that direction and considering creating a more equal playing
field between dependent employment and self-employment/employer when it comes
to labor protection and social security. While this should not go at the cost of carefully
built-up competitive strengths, Germany could afford to become more adventurous.
The proposals individually and in combination aim to reward German entrepreneurs
more if successful and punish them less if they fail.
Of course, these proposals will need a much more detailed discussion and form
the starting point, and not the final word on the policy debate. Moreover, even if
adopted, our proposals all require careful implementation and evaluation to complete
the seven-step policy cycle presented in Chap. 1 of this volume.
References
Abrams L (2007) Bismarck and the German Empire: 1871–1918. Routledge, London
Acs ZJ, Plummer LA (2005) Penetrating the “knowledge filter” in regional economies. Ann Reg
Sci 39(3):439–456
Acs ZJ, Szerb L (2009) The global entrepreneurship index (GEINDEX). Found Trends
Entrepreneurship 5(5):341–435
Acs Z, Szerb L (2016) Extension of GEDI indicators. FIRES Report D4.1. Retrieved from https://
www.projectfires.eu/wp-content/uploads/2016/03/D4.1-Report-on-Extention-of-the-GEDI-
indicator.pdf
Alesina A, Fuchs-Schündeln N (2007) Good-bye Lenin (or not?): the effect of communism on
people’s preferences. Am Econ Rev 97(4):1507–1528
Allen F, Gale D (2000) Comparing financial systems. MIT press, Cambridge, MA
Audretsch DB, Grilo I, Thurik R (2007) Entrepreneurship policies in Germany: from small business
to entrepreneurship policy. Handbook of research on entrepreneurship policy. Edward Elgar
Publishing Inc, Cheltenham, UK, pp 47–50
Audretsch DB, Lehmann EE (2005a) Does the knowledge spillover theory of entrepreneurship hold
for regions? Res Policy 34(8):1191–1202
Audretsch DB, Lehmann EE (2005b) Do university policies make a difference? Res Policy
34(3):343–347
Audretsch DB, Lehmann EE (2016) The seven secrets of Germany: economic resilience in an era
of global turbulence. Oxford University Press, Oxford
Baker D, Lenhardt G (2008) The institutional crisis of the German research university. High Educ
Policy 21(1):49–64
Baller S, Dutta S, Lanvin B (eds) (2016) The global information technology report 2016 innovating
in the digital economy. World Economic Forum, Geneva. Retrieved from: http://reports.weforum.
org/global-information-technology-report-2016
Barkai A (1988) Das Wirtschaftssystem des Nationalsozialismus: Ideologie, Theorie, Politik. 1933–
1945. Fischer-Taschenbuch-Verlag, Frankfurt am Main
Bauernschuster S (2013) Dismissal protection and small firms’ hirings: evidence from a policy
reform. Small Bus Econ 40(2):293–307
Bauernschuster S, Driva A, Hornung E (2019) Bismarck’s health insurance and the mortality decline.
J Eur Econ Assoc (Forthcoming)
Bauernschuster S, Falck O, Gold R, Heblich S (2012) The shadows of the socialist past: Lack of
self-reliance hinders entrepreneurship. Eur J Polit Econ 28(4):485–497
Bauernschuster S, Rainer H (2012) Political regimes and the family: how sex-role attitudes continue
to differ in reunified Germany. J Popul Econ 25(1):5–27
Becker C, Grebe T, Lübbers T (2011) Evaluation der Fördermaßnahmen „EXIST-

Gründerstipendium“ und „EXIST-Forschungstransfer“. Studie im Auftrag des Bundesministeri-
ums für Wirtschaft und Technologie. Gesellschaft für Innovationsforschung und Beratung mbH,
Berlin
Becker G (1964) Human capital: a theoretical and empirical analysis, with special reference to
education. University of Chicago Press, Chicago
Beise M, Stahl H (1999) Public research and industrial innovations in Germany. Res Policy
28(4):397–422
Bøggild N, Heyn L, Käser-Erdtracht J, Richter TJ, Wallau F, Werner A, Zinke G (2011) Evaluierung
der ERP-Programme—Endbericht. Rambøll Management Consulting, Hamburg
Brady D, Biegert T (2017) The rise of precarious employment in Germany. In: Kalleberg A, Vallas
S (eds) Precarious work. Emerald Publishing Limited, Bingley, pp 245–271
Broadberry S, Harrison M (2005) The economics of World War I. Cambridge University Press,
Cambridge
Brosig-Koch J, Helbach C, Ockenfels A, Weimann J (2011) Still different after all these years:
solidarity behavior in East and West Germany. J Public Econ 95(11–12):1373–1376
Burda M (2016) The German labour market “miracle”, an assessment. SFB 649 Discussion Paper
2016-005
Burda M, Fitzenberger B, Lembke A, Vogel T (2008) Unionization, stochastic dominance, and
compression of the wage distribution: evidence from Germany. SFB 649 Discussion Paper 2008-
041
Burda M, Hunt J (2001) From reunification to economic integration: Productivity and the labor
market in Eastern Germany. Brookings Pap Econ Act 32(2):1–92
Burhop C (2010) The transfer of patents in imperial Germany. J Econ Hist 70(4):921–939
Burhop C (2011) Wirtschaftsgeschichte des Kaiserreichs, 1871–1918. Vandenhoeck and Ruprecht,
Göttingen
Canova F, Ravn MO (2000) The macroeconomic effects of German unification: real adjustments
and the welfare state. Rev Econ Dyn 3(3):423–460
Cantoni D (2012) Adopting a new religion: the case of Protestantism in 16th century Germany.
Econ J 122:502–531
Cantoni D, Yuchtman N (2014) Medieval universities, legal institutions, and the commercial
revolution. Q J Econ 129(2):823–887
Carlsson B, Acs ZJ, Audretsch DB, Braunerhjelm P (2009) Knowledge creation, entrepreneurship,
and economic growth: a historical review. Ind Corp Change 18(6):1193–1229
Chickering R (2014) Imperial Germany and the Great War, 1914–1918. Cambridge University
Press, Cambridge, UK
Corneo G, Grüner HP (2002) Individual preferences for political redistribution. J Pub Econ
83(1):83–107
Czarnitzki D, Doherr T, Hussinger K, Schliessler P, Toole A (2016) Knowledge creates markets: the
influence of entrepreneurial support and patent rights on academic entrepreneurship. Eur Econ
Rev 86:131–146
foundations of different entrepreneurship types through ‘Varieties-of-Capitalism’ arguments.
Special Issue on “financial and institutional reforms for an entrepreneurial society.” Small Bus
Econ 51(2):293–320
Drucker PF (1998) From capitalism to knowledge society. In: Dale N (ed) The knowledge economy.
Butterworth-Heinemann, Boston, pp 15–34
Dustmann C, Fitzenberger B, Schönberg U, Spitz-Oener A (2014) From sick man of Europe to
economic superstar: Germany’s resurgent economy. J Econ Perspect 28(1):167–188
Eichhorst W, Marx P (2011) Reforming German labour market institutions: a dual path to flexibility.
J Eur Soc Policy 21(1):73–87
Ellul A, Pagano M, Panunzi F (2010) Inheritance law and investment in family firms. Am Econ Rev
100(5):2414–2450
Esping-Andersen G (2002) A new gender contract. In: Esping-Andersen G (ed) Why we need a
new welfare state. Oxford University Press, Oxford, pp 68–95
Exist (2019) EXIST Start-up Germany. Retrieved from: https://www.exist.de/EN/Network/EXIST-
Start-up-Germany/content.html
Fackler D (2014) Establishment survival in East and West Germany: a comparative analysis.
Schmollers Jahrb 134:183–208
Falck O, Fritsch M, Heblich S (2011) The phantom of the opera: cultural amenities, human capital,
and regional economic growth. Labour Econ 18(6):755–766
Falck O, Günther C, Heblich S, Kerr WR (2013) From Russia with love: the impact of relocated
firms on incumbent survival. J Econ Geogr 13(3):419–449
Fiedler MO, Hellmann T (2001) Against all odds: the late but rapid development of the German
venture capital industry. J Private Equity 4(4):31–45
Fitzenberger B, Kohn K, Lembcke AC (2013) Union density and varieties of coverage: the anatomy
of union wage effects in Germany. ILR Rev 66(1):169–197
Flögel F (2018) Distance and modern banks’ lending to SMEs: ethnographic insights from a
comparison of regional and large banks in Germany. J Econ Geogr 18(1):35–57
Flögel F, Gärtner S (2018) The banking systems of Germany, the United Kingdom and Spain from
a spatial perspective: The German case. Gelsenkirchen: Institute for Work and Technology (IAT)
(IAT Discussion Paper, No. 18/04)
Franzke SA, Grohs S, Laux C (2003) Initial public offerings and venture capital in Germany. CFS
Working Paper No. 2003/26
Fritsch M, Bublitz E, Sorgner A, Wyrwich M (2014) How much of a socialist legacy? The re-
emergence of entrepreneurship in the East German transformation to a market economy. Small
Bus Econ 43(2):427–446
Fritsch M, Noseleit F, Slavtchev V, Wyrwich M (2010) Innovative Gründungen und ihre Bedeutung
für den Standort Thüringen. Studie im Auftrag des Thüringer Ministeriums für Bildung, Wis-
senschaft und Kultur sowie der Stiftung für Technologie, Innovation und Forschung Thüringen
(STIFT). Friedrich-Schiller-Universität, Jena
Fritsch M, Schilder D (2008) Does venture capital Investment really require spatial proximity? An
empirical investigation. Environ Planning A 40(9):2114–2131
Fritsch M, Schilder D (2012) The regional supply of venture capital—can syndication overcome
bottlenecks? Econ Geogr 88(1):59–76
Fritsch M, Sorgner A, Wyrwich M, Zöllner M (2015) Entwicklung und Perspektiven der Förderung
innovativer Gründungen im Freistaat Thüringen. Studie im Auftrag der Stiftung für Technologie,
Innovation und Forschung Thüringen (STIFT) sowie des Thüringer Ministeriums für Wirtschaft,
Wissenschaft und digitale Gesellschaft. Friedrich-Schiller-Universität, Jena
Fritsch M, Wyrwich M (2014) The long persistence of regional levels of entrepreneurship: Germany,
1925–2005. Reg Stud 48(6):955–973
Fritsch M, Wyrwich M (2016) Entrepreneurship in the East German transition process: lessons for
the Korean Peninsula. Hist Soc Res 41(3):256–280
Fritsch M, Wyrwich M (2018) Regional knowledge, entrepreneurial culture and innovative start-ups
over time and space—an empirical investigation. Small Bus Econ 51(2):337–353
Fuchs-Schündeln N, Schündeln M (2005) Precautionary savings and self-selection: evidence from
the german reunification “experiment”. Q J Econ 120(3):1085–1120
Fuchs-Schündeln N, Schündeln M (2009) Who stays, who goes, who returns? Econ Transit
17(4):703–738
Füller C (2017) Educational expenditure: More money for schools and universities. Munich: Goethe
Institute. Retrieved from https://www.goethe.de/en/kul/wis/20925479.html on 16-04-2018
Getz D, Petersen T (2004) Identifying industry-specific barriers to inheritance in small family
businesses. Family Bus Rev 17(3):259–276
Gibbons M, Limoges C, Nowotny H, Schwartzman S, Scott P, Trow M (1994) The new production
of knowledge: the dynamics of science and research in contemporary societies. Sage, Thousand
Oaks, CA
Glaeser E (2011) Triumph of the city: how our greatest invention makes us richer, smarter, greener,
healthier, and happier. Penguin Social Science, New York
Goethner M, Wyrwich M (2019) Cross-faculty proximity and academic entrepreneurship: the role
of business schools. J Technol Transf (Forthcoming)
Grimpe C, Fier H (2010) Informal university technology transfer: a comparison between the United
States and Germany. J Technol Transf 35(6):637–650
Guinanne T (2001) Cooperatives as information machines: German rural credit cooperatives, 1883–
1914. J Econ Hist 61(2):366–389
Gutberlet T (2014) Mechanization and the spatial distribution of industries in the German empire,
1875 to 1907. Econ Hist Rev 67(2):463–491
Hackethal A (2004) German banks and banking structure. In: Krahnen JP, Schmidt RH (eds) The
German financial system. Oxford University Press, Oxford, pp 71–105
Hall JB, Ludwig U (1995) German unification and the “market adoption” hypothesis. Camb J Econ
19(4):491–507
Hall PA, Soskice D (2001) Varieties of capitalism: the institutional foundations of comparative
advantage. Oxford University Press, Oxford
Hantke M, Spoerer M (2010) The imposed gift of Versailles: the fiscal effects of restricting the size
of Germany’s armed forces, 1924–9. Econ Hist Rev 63(4):849–864
Harhoff D, Hoisl K (2007) Institutionalized incentives for ingenuity—Patent value and the German
Employees’ Inventions Act. Res Policy 36(8):1143–1162
Hefele P (1998) Die Verlagerung von Industrie- und Dienstleistungsunternehmen aus der SBZ/DDR
nach Westdeutschland: unter besonderer Berücksichtigung Bayerns (1945–1961). Volume 4 of
Beiträge zur Unternehmensgeschichte. Franz Steiner Verlag, Stuttgart
Held L (2019) Part-time entrepreneurship: the role of institutions, venture and individual character-
istics in entry and transition choices. In: Held L (ed) Unravelling the patterns in venture creation
processes, Ph.D. thesis. Utrecht University, Utrecht, pp 25–55
age formation activities during new product development processes. Horizon 2020 Project on
Held L, Herrmann AM, van Mossel A (2018c) Team formation processes in new ventures. Special
Issue on “Financial and Institutional Reforms for an Entrepreneurial Society.” Small Bus Econ
51(2):441–464
Herrmann AM (2019) A plea for varieties of entrepreneurship. Special Issue on “Entrepreneurship
in Context.” Small Bus Econ 52(2):331–343
Herrman AM (2020) On the institutional foundations of the varieties of entrepreneurship in Europe.
Hofbauer G, Klimontowicz M, Nocoń A (2017) The changes in capital structure of selected bank-
ing markets as a result of new regulations. In: Proceedings of the 14th international scientific
conference European financial systems 2017. Masaryk University, Brno, pp. 222–229
IWH (2010) Ostdeutschlands Transformation seit 1990. Im Spiegel wirtschaftlicher und sozialer
Indikatoren, 2nd edn. Institut für Wirtschaftsforschung (IWH), Halle
Jaeger A, Kopper J (2014) Third mission potential in higher education: measuring the regional focus
of different types of HEIs. Rev Reg Res 34(2):95–108
James A (1981) State, industry and depression in Weimar Germany. Hist J 24(1):231–241
Kindleberger CP (2015) A financial history of Western Europe. Routledge, London
Kluge J, Weber M (2018) Decomposing the German East-West wage gap. Econ Transit 26(1):91–125
Kohaut S, Schnabel C (2007) Tarifliche Öffnungsklauseln: Verbreitung, Inanspruchnahme und
Bedeutung. Sozialer Fortschritt 56(2):33–40
König W (2006) Vom Staatsdiener zum Industrieangestellten: Die Ingenieure in Frankreich und
Deutschland 1750–1945. In: Kaiser W, König W (eds) Geschichte des Ingenieurs. Carl Hanser,
Munich, pp 179–231
Kopper C (2011) New perspectives on the 1931 banking crisis in Germany and Central Europe. Bus
Hist 53(2):216–229
Kulicke M (2014) 15 Years of EXIST “University-based start-up programmes”. Development
of the EXIST funding programme between 1998 and 2013. Fraunhofer-Institut für Systemund
Innovationsforschung, Karlsruhe
Liberman P (1996) Does conquest pay? The exploitation of occupied industrial societies. Princeton
University Press, Princeton, NJ
Lindner A (2017) German unification: macroeconomic consequences for the country. In: Heinemann
F, Klüh U, Watzka S (eds) Monetary policy, financial crises, and the macroeconomy. Springer,
Cham, pp 239–263
Maier F (1993) The labour market for women and employment perspectives in the aftermath of
German unification. Camb J Econ 17(3):267–280
Manegold KH (1989) Geschichte der Technischen Hochschulen. In: Boehm L, Schönbeck C (eds)
Technik und Bildung. VDI Verlag, Düsseldorf, pp 204–234
Mattes A, Arnold M, Eickelpasch A, Fritsch M, Schiersch A (2015) Kleinteiligkeit der ostdeutschen
Wirtschaft – Gibt es spezifische Wachstumshemmnisse für die Bildung größerer Unternehmen-
seinheiten? Final project report submitted to the German Ministry of the Interior. DIW econ,
Berlin
Mertes M (ed) (2018) In search of Germany. Routledge, London
Möller T, Schmidt M, Hornbostel S (2016) Assessing the effects of the German excellence initiative
with bibliometric methods. Scientometrics 109(3):2217–2239
Moshinksy B (2016) Meet the riskiest bank in the world. Business Insider Netherlands. Retrieved
from https://www.businessinsider.nl/fdic-report-on-leverage-ratio-names-deutschebank-as-
riskiest-2016-9/?international=true&r=UK on 16-04-2018
Nunziata L, Rocco L (2018) The Protestant ethic and entrepreneurship: evidence from religious
minorities in the former Holy Roman Empire. Eur J Polit Econ 51:27–43
Ockenfels A, Weimann J (1999) Types and patterns: an experimental East-West-German comparison
of cooperation and solidarity. J Pub Econ 71(2):275–287
Pahnke A, Welter F (2018) The German Mittelstand: antithesis to Silicon Valley entrepreneurship?
Pflanze O (2014) Bismarck and the development of Germany. The period of consolidation, 1871–
1880, vol II. Princeton University Press, Princeton, NJ
Pickel A (1992) Radical transitions: the survival and revival of entrepreneurship. Westview Press,
Boulder
Reckendrees A (2003) From cartel regulation to monopolistic control? The founding of the German
‘steel trust’ in 1926 and its effect on market regulation. Bus Hist 45(3):22–51
Rimlinger GV (1968) Social change and social security in Germany. J Hum Resour 3(4):409–421
Rothman B (2017) After the shock: the German education system in 2017. National Center on Edu-
cation and The Economy. Retrieved from http://ncee.org/2017/09/after-the-shockt-he-german-
education-system-in-2017/ on 16-04-2018
Soskice D (1990) Wage determination: the hanging role of institutions in advanced industrialized
countries. Oxford Rev Econ Policy 6(4):36–61
Stud 23(9):1759–1769
Stenholm P, Acs ZJ, Wuebker R (2013) Exploring country-level institutional arrangements on the
rate and type of entrepreneurial activity. J Bus Ventur 28(1):176–193
Streeck W (1997) German capitalism: does it exist? Can it survive? New Polit Econ 2(2):237–256
Szerb L, Lafuente E, Horváth K, Páger B (2019) The relevance of quantity and quality entrepreneur-
ship for regional performance: the moderating role of the entrepreneurial ecosystem. Reg Stud
53(9):1308–1320. https://doi.org/10.1080/00343404.2018.1510481
Szerb L, Vörös Z, Komlósi É, Acs ZJ, Páger B, Rappai G (2017) The regional entrepreneurship
and development index: structure, data, methodology and policy applications. Retrieved from
http://www.projectfires.eu/wp-content/uploads/2018/07/d4.4-the-regional-entrepreneurship-
and-development-index_-structure-data-methodology-and-policy-applications.pdf
Tipton F (1976) Regional variations in the economic development of Germany during the nineteenth
century. Wesleyan University Press, Middletown, CT
Uebele M, Ritschl A (2009) Stock markets and business cycle co movement in Germany before
World War I: evidence from spectral analysis. J Macroecon 31(1):35–57
Varga A, Szerb L, Sebestyén T, Szabó N (2020) Economic impact assessment of entrepreneur-
ship policies with the GMR-Europe model. In: Sanders M, Marx A, Stenkula M (eds) The
entrepreneurial society. Reform strategies for Italy, Germany and the UK, Springer, Berlin
Verheyen D (2018) The German question. Routledge, London
Von Proff S, Buenstorf G, Hummel M (2012) University patenting in Germany before and after
2002: what role did the professors’ privilege play? Ind Innov 19(1):23–44
Weichlein S (2011) Nation state, conflict resolution and culture war, 1850–1878. In: Smith HW (ed)
The Oxford handbook of modern German history. Oxford University Press, Oxford, pp 281–306
Welter F (2007a) Entrepreneurship in West and East Germany. Int J Entrepreneurship Small Bus
4(2):97–109
Welter F (2007b) Book review of Deutsche Gründungsregionen, edited by Rolf Sternberg,
Berlin/Münster: Lit Verlag. Raumforschung und Raumordnung 65(2):163–164
World Bank (2018a) Doing Business 2018: reforming to create jobs. International Bank for
Reconstruction and Development and World Bank, Washington, DC
World Bank (2018b) Economy rankings. Doing Business: Measuring Business Regulations. World
Bank, Washington, DC
World Bank (2018c) Distance to frontier. Doing Business: Measuring Business Regulations. World
Bank, Washington, DC
Wyrwich M (2012) Regional entrepreneurial heritage in a socialist and a post-socialist economy.
Econ Geogr 88(4):423–445
Wyrwich M (2013) Can socioeconomic heritage produce a lost generation with regard to
entrepreneurship? J Bus Ventur 28(5):667–682
Wyrwich M (2017) Women and the labour market in East and West Germany: socialist legacy and
pre-socialist tradition. Jena Economic Research Paper 2017–015. Friedrich Schiller University,
Jena
Zöllner M, Fritsch M, Wyrwich M (2018) An evaluation of German active labour market policies:
a review of the empirical evidence. J Entrepreneurship Pub Policy 7(4): 377–410
Chapter 8
A Reform Strategy for the UK
Mark Sanders, Mikael Stenkula, James Dunstan, Saul Estrin,

Andrea M. Herrmann, Balázs Páger, László Szerb
Abstract In this chapter we outline a reform strategy to promote an entrepreneurial

society in the UK. To put it in the words of the Varieties of Capitalism framework,
the UK today represents a distinct liberal market economy with a deregulated envi-
ronment, flexible labor markets, well-funded elite universities, and strong protection
of intellectual property rights. Overall, the entrepreneurial ecosystem is supportive,
but bottlenecks remain regarding radical innovation, export orientation, and informal
investment. To address these shortcomings, the UK should aim at strengthening the
no. 120289, titled as Entrepreneurship and Competitiveness investigations in Hungary based on the
Global Entrepreneurship Monitor surveys 2017–2019). Mikael Stenkula also gratefully acknowl-
edges financial support from Jan Wallanders och Tom Hedelius stiftelse and from the Marianne and
Marcus Wallenberg Foundation.
M. Sanders (B) · J. Dunstan · E. Terragno Bogliaccini

M. Stenkula
S. Estrin
Department of Management, London School of Economics, London, England, UK
e-mail: s.estrin@lse.ac.uk
A. M. Herrmann
L. Szerb

workforce’s knowledge base and talent pool as well as the capital base from which
UK entrepreneurs can draw. It furthermore is advisable to open opportunities for not
only starting but also growing innovative firms in all regions in the UK.
Keywords UK · Entrepreneurship · Varieties of Capitalism · Entrepreneurial


Policies
8.1.1 Global Empire and Splendid Isolation—A Short

History of the UK
In its current form, the UK of Great Britain and Northern Ireland has existed since
the partition of Ireland as an independent country in 1922. But, of course, British
history has much deeper roots. The British Isles were raided, invaded, occupied, and
settled from the mainland frequently in the early middle ages. But since the invasion
of William the Conqueror in 1066, the British Isles have not experienced further
foreign occupation. Still, it took a long time for the country to unify. The seventeenth
century saw the English Civil War (1642–1651) and the Glorious Revolution (1688).
With the Acts of Union of 1707 England, Wales and Scotland formed the UK of
Great Britain and with the Acts of Union of 1800 the Kingdom of Ireland joined.
In the seventeenth century, the UK started to rise as a naval superpower and built
up a colonial empire that spanned the globe. The first British Empire (1583–1783)
established Britain as a global power but ended with the loss of the Thirteen Colonies
in the American Revolution. The Second Empire (1783–1815) saw the exploration of
the Pacific and the rise and fall of Napoleon. The defeat of the latter at Waterloo left
Britain without serious challengers and ushered in the Pax Britannica during which
the UK was the unrivaled global superpower until the Great War of 1914–1918. In
this imperial century, the British Empire expanded into Africa, India, and Asia. And
through its dominance in global trade, finance and diplomacy the UK effectively
ruled the world, while at home the Industrial Revolution turned Northern England
into the workshop and London into the financial capital of the world.
With the unification of Germany, the opening up of Japan and the end of the civil
war in the USA, however, new rivals to the UK’s dominance rose toward the end of
the nineteenth century. With the defeat of Germany and its allies in the Great War, the
British Empire saw its last territorial expansion, which reached its peak in 1921. The
Great War, however, had weakened the UK and boosted the confidence of colonial
elites. Independence movements in India and Ireland and later the rest of the empire
ushered in a gradual decline, while Britain’s rivals rapidly industrialized and caught
up militarily and economically.
8 A Reform Strategy for the UK 205
In World War II, the UK and its allies defeated Nazi Germany and Imperial
Japan, but its days of unrivaled global dominance were over. The UK had to repo-
sition itself in the new world order, while the age of empire left a strong economic
and geographical imprint on the country. The London area had developed into an
economic, administrative, and cultural powerhouse, far bigger than the UK alone
could have supported (Parkinson et al. 2006), whereas the Industrial Revolution had
brought prosperity to the northern regions, but also left them struggling with the loss
of the empire and its markets.
Therefore, by the 1980s, an economic policy focused on specific areas or zones was
implemented by the Thatcher government. The focus of the program was to incen-
tivize inward investment to areas experiencing severe economic problems (Potter
and Moore 2000). The Regional Development Agencies Act of 1998 then divided
England into nine regions, each with its own Regional Development Agency funded
by six different government departments, as well as EU funds (Richardson 2011).
But different regions in the UK started from very uneven starting points. Former
industrial centers such as Swansea and Middlesbrough had to divest from traditional
industries in the wake of globalization, whereas the British cities such as Cambridge,
Oxford, and Reading all lacked such industrial heritage (NESTA 2008).
In terms of entrepreneurship, the levels in the UK have historically varied sub-
stantially across regions and localities and with different effects. With London
as the administrative, financial, and political center of the Empire, a lot of the
entrepreneurial talent and resources from all over the country migrated to that area.
This pattern was further reinforced when globalization and international competition
devastated the economy in the Northern industrial districts. A long history of political
unity implies that the formal institutions have largely been built at the national level
and are uniform across the country. But the economic geography of the British Isles
and its diverse informal institutional make-up imply that entrepreneurship functions
vary in different parts of the country. Mueller et al. (2008), for example, found that,
for Great Britain as a whole, new firm formation had a positive effect on employment
growth. Yet this effect was much smaller in Scotland and Wales and even negative
for the lower quartile regions. This all suggests that we should not take the London
area to be representative of the UK and carefully consider the heterogeneity that is
hidden in aggregated data. The needs and opportunities of London are not those of
Scotland and the other way around. Therefore, a one-size-fit-all reform approach to
the UK is not advised and a regionally diversified approach is needed.
Against the backdrop of this rich history, Britain developed the institutions that
currently define its entrepreneurial ecosystems. To establish and maintain its global
Empire, the UK set up institutions that mobilized financial, human, and knowledge
resources at an unprecedented scale, whereas the loss of the empire enforced an
institutional adjustment process that arguably is still ongoing. Still, the most relevant
institutions supporting entrepreneurship in the UK have deep roots. In what fol-
lows, we focus on its institutions for knowledge creation and diffusion, its financial
institutions, and its labor markets. We then proceed to an overview of recent policy
programs and initiatives to support entrepreneurship.
Institutions for knowledge generation and diffusion are largely concentrated in a

country’s academic system of education and research and its system of intellectual
property rights. In this section, we will discuss the nature and historical roots of each
in the UK.
The UK has a long history of higher education, beginning in the city of Oxford from
the year 1096 (University of Oxford n.d.) and followed a century later by Cambridge
in 1209 (University of Cambridge n.d.). In the fifteenth century, St Andrews, Glasgow,
and Aberdeen—the first three Scottish universities—were founded by Papal Bull, and
a century later the University of Edinburgh was established in 1583 by Royal Charter
(University of Edinburgh n.d.). These six universities are classified as the “ancient
universities” (established before 1800), with the classification sometimes stretched
to include Durham University (Bathmaker et al. 2016).
In the nineteenth century, a major expansion of higher education occurred in the
UK. St. David’s College, Lampeter (Wales), and King’s and University College of
the University of London were awarded university status by Royal Charter (British
Council n.d.), and the University of London was established as a secular alternative
to Oxford and Cambridge (University of London n.d.). The need for a more local-
ized higher education system (Barnes 1996) and a desire to increase education of
the applied sciences (Heyck 2012) resulted in the founding of the civic universi-
ties (or, “redbricks”) in Manchester, Leeds, Liverpool, Sheffield, Birmingham, and
other industrial Victorian cities. Simultaneously, the ancient universities of Oxford
and Cambridge introduced new curricula and relaxed admission requirements (Scott
2014a).
Socio-economic trends fueled by technological innovation, cheaper transporta-
tion, and the emergence of the knowledge economy put education high on the policy
agenda (Clarke 2001; Ashton and Green 1996). But while the Scottish universities
had historically lower tuition fees and living expenses, English universities before
the twentieth century remained accessible only to the wealthy as a result of the
laissez-faire principles of Victorian Britain (Anderson 2016). This paradigm radi-
cally changed following the infamous Robbins Report of 1963, which specified 178
recommendations for the higher education system focusing on greatly expanding the
number of students in tertiary education (Moser 1988). One year prior to the report,
the 1962 Education Act had already introduced state funding for full-time higher
education (domestic) students in order to equalize educational opportunity and bring
higher education to the masses (Wilson 1997).
The 1960s also saw the establishment of The Polytechnics (Henkel and Kogan
1993). Following Anthony Crosland’s 1965 speech advocating the establishment of
two parallel systems of higher education (Taylor 2003), these polytechnic institutions
arose through the merger of colleges of technology, commerce, and art (later, includ-
ing colleges of education) and were committed to the application of knowledge. They
offered an alternative form of education to that of traditional universities by over-
coming the traditional dichotomy between theory and practice (Brosan 1972). This
created what is now referred to as the “binary divide” in UK higher education that
lasted for over a quarter of a century (Pratt 1997). The essential difference between the
two educational systems being that polytechnics continued to be controlled by local
education authorities, as opposed to the greater autonomy which the older colleges
enjoyed (Scott 2014b). In 1992, the binary divide ended, and the “new” polytechnics
became universities (Cranfield and Taylor 2008).
In 1985, universities were finally given the rights to exploit their own innovations,
which led to the spreading of science parks around universities in the UK. By 1993,
almost every university in the UK had its own science park, providing a business
environment for almost 1,200 firms and 20,000 employees (Storey and Tether 1998).
The presence of entrepreneurship “in the classroom” is a more recent phenomenon,
and as recently as the 1990s, only a handful of higher education institutes pro-
vided a serious opportunity for enterprise/entrepreneurial education (Hannon 2005).
Responding to the Lambert Review of Business-University Collaboration, the gov-
ernment announced the Science and Innovation Investment Framework in 2004,
cementing business-university collaboration within the portfolio of UK universities
(Wilson 2012).
In conclusion, British universities and higher education deliver high-quality
research and degrees and compete for the best and brightest at the global level.
Relatively high tuition fees notwithstanding, UK universities attract students, PhDs,
and staff from around the world, and these contribute to an excellent and world-class
scientific research infrastructure. The relative weaknesses in the UK educational sys-
tem, however, are the missing middle. Compared to countries like Italy or Germany
(Sanders et al. 2020a, b) or Japan and China in Asia, the quality of vocational edu-
cation is lacking due to a weak apprenticeship system and low engagement with
employers (OECD 2015). Moreover, there is hardly a culture of lifelong learning or
applied vocational education. This leads to over-education at the high general skills
levels, and a mismatch and under-education at the low vocational skills (e.g., Green
et al. 2016; Machin and Vignoles 2018). This affects the level of human capital in
the UK labor supply that is needed to grow the knowledge-intensive ventures that
emerge out of the knowledge created in its excellent research institutions.
In the British context, patents originated in the form of “letters patent” during Eliz-
abethan England. These were essentially royal privileges granting monopoly power
to the introducers of new techniques (WIPO n.d.a). However, this system came to
be abused by the monarchy whose royal favors were perceived as privileges grant-
ing selective monopolies. Consequently, judicial pressure and public outcry forced
intellectual property to be regulated under common law. The Statute of Monopolies
enacted in 1623 made all monopolies illegal except for those “… made of the sole
working or making of any manner of new manufactures within this Realm to the true
and first inventor” (Statute of Monopolies 1623). While this was by no means the
first form of patent protection for inventors, it is historically important for instilling
the principle that only “the true and first inventor” owns the rights to a monopoly
patent (Machlup and Penrose 1950).
The patent system established in 1623 remained in place for another two centuries
and evolved through the work of lawyers and judges in courts without government
regulation (IPO 2014a). This initial laissez-faire approach to patent law meant no
examination was required to acquire an English patent, only its registration. The
establishment of intellectual property rights was a fitting precursor to the Industrial
Revolution in the eighteenth and nineteenth centuries. It is important to note that the
British patent system, while present, actually provided weak and erratic protection
to inventors (MacLeod 1988).
By the mid-eighteenth century, growing criticisms with the patent system included
being too costly, as well as it being almost impossible to specify an invention in
any such way that would satisfy the courts (Robinson 1972). Consequently, the
significance of the British patent system prior to the Patent Law Amendment Act
of 1852 remains debated (MacLeod and Nuvolari 2006). Mokyr (2005) concludes
that in this period, innovation and industrialization were not held back by limited
intellectual property protection.
In essence, the reform of 1852 made two main changes to the prior patent system.
Firstly, legal fees were greatly reduced, and secondly, it implemented a single patent
for the UK (Dutton 1984). However, costs were still relatively high, but the 1883
Patents Act reduced patent filing fees by another 84% (Nicholas 2014).
Patent law in recent times can be mainly derived from the Patent Act of 1902,
which required patent examiners to construct an extensive archive of prior specifica-
tions. By 1907, all recorded patent specifications had been classified, with the first
documented patent dating back to the year 1617 (IPO 2014b).1 The 1977 Patents Act
applied more stringent novelty tests to patents, while also implementing the Euro-
pean Patent Convention of 1973 and the Patent Co-operation Treaty of 1970 (WIPO
n.d.b). The UK is still signatory to these treaties and will remain so after Brexit,
making intellectual property rights in the UK a matter of international negotiations.
The skepticism toward monopolies—such as expressed in the Act from 1623
mentioned above—may be one reason for the fact that British firms, unlike their
German counterparts, are less inclined to engage in large-scale collaborations within
the framework of over-arching industry associations (Herrmann 2020). Given that
large-scale collaboration is discouraged, British firms lack an important tool, via
industry-wide coordinated associations, to access a broad knowledge base (Tate 2001;
Teubner 2001).
1 Patent No. 1 of 1617 granted to Rathburn and Burges for “Engraving and Printing Maps, Plans
&co.”
Banking in the UK began during the seventeenth century. The Bank of England
was founded by Royal Charter in 1694 and was primarily used to fund the war effort
against France (Bank of England n.d.). The Bank of Scotland was established one year
later in 1695 following an act made by the Parliament of Scotland providing a legal
monopoly on banking (Lloyds Banking Group n.d.). It initially fulfilled a different
role to its English counterpart, acting mainly to develop Scotland’s business and trade
with England and the Low Countries. In 1696, the Bank of Scotland became the first
European commercial bank to successfully issue a paper currency (BBC 2008). When
its legal monopoly ended in 1716, the Royal Bank of Scotland was chartered in 1727,
creating a historic rivalry between the two Scottish banks (White 1992). The Bank of
Scotland’s monopoly ended much earlier than the Bank of England’s. Scotland then
enjoyed a significant expansion in banking services and by the end of the century
had one of the most developed banking sectors in Europe (Collins 2012). The Royal
Bank of Scotland even invented the overdraft (BBC 2009).2
From 1709 onwards, the Bank of England was the only bank allowed to operate
on a joint-stock basis (Ferguson 2009). The next big leap in the history of UK
banking was the Bank Charter Act of 1844 (Bank of England n.d.), which restricted
the issuance of banknotes solely to the Bank of England. With restrictions on joint-
stock banking lifted by 1858, corporate branch deposit banking developed in the UK
(Newton and Cottrell 1998) and large commercial banks such as Lloyds (1884) and
Barclays (1896) began to emerge. On the eve of the World War I, residents’ deposits
in British banks totaled almost £1.2 billion, with a total bank-note circulation of only
£45.5 million (Ferguson 2009). UK SME finance was left predominantly to the big
four modern banks—Barclays PLC , HSBC Holdings PLC, Lloyds Banking Group
PLC, and Royal Bank of Scotland Group PLC—who still hold 78% of the SME
market and 95 percent in the case of Scotland (Han et al. 2012).
In 1945, the Industrial and Commercial Finance Corporation was created (3i
Group n.d.) via a political decision to increase funding availability for SMEs. By
then, larger banks and the London Stock exchange mainly focused on overseas com-
merce (Merlin-Jones 2010) so no “readily accessible channel, corresponding to the
new issue market for larger firms, through which the small industrialist can raise
long-term funds” existed (Radcliffe Committee on the Working of the Monetary
System cited in Merlin-Jones 2010, p. 5). In addition, the National Research Devel-
opment Corporation, founded in 1948, and the National Enterprise Board, conceived
by the Labour government in 1973, acted to provide loans to small firms to improve
R&D and boost innovation (Rothwell 1985). The inauguration of the Thatcher
government in the 1980s brought the reduction of corporate and personal taxes to
encourage greater entrepreneurship, alongside the new Business Expansion Scheme
which offered up to £40,000 in tax relief to individuals investing in non-public UK
2 Thebank allowed William Hog, a merchant, to take £1,000—the equivalent of £63,664 today—
more out of his account than he had in it.
companies (Mason and Harrison 1989). Over the 1990s and early 2000s, liberal-
ization and globalization implied that the UK financial system grew in number and
became more concentrated in terms of market participants and geographically. The
financial sector in the UK today is extremely concentrated in (the City of) London,
where all superlatives still apply. The UK boasts the biggest currency, commodities,
stock and asset markets in Europe and serves as a global financial center rivaling New
York and Tokyo. But the skyscrapers of the city are not primarily in the business of
financing SMEs and/or innovative young ventures. The UK has a significant venture
capital market and new initiatives in platform-based FinTech innovation benefit from
a sensible and benign regulatory regime, but the financial crisis of 2007 hit London
perhaps hardest of all and revealed vulnerabilities in the strong reliance on global
financial asset trading.
In conclusion, the financing of small-scale experimental ventures may not be
the biggest activity in the London City, but the sheer size of UK financial markets
still implies that entrepreneurs face little financial constraints in the UK. Moreover,
financial regulation in the UK is arguably more flexible than in the Euro-Area, as
UK financial regulators take a tougher stance on incumbent banks’ interests while
leaving more space for new, platform-based alternative intermediation services.
The labor force in the UK is typically not very loyal to the employer because that
loyalty is often not reciprocated (Herrmann 2020). At the lower end of the spectrum,
wages are low and jobs are insecure, making investment in firm-specific human
capital a risky strategy for UK workers (OECD 2019). This implies it is easy to
start a venture, but much harder to grow one into a global competitor as the latter
implies accumulating also tacit and firm-specific knowledge on product, market, and
process (e.g., Thirkell and Dau 1998). As in other countries, the existing equilibrium
in labor relations in the UK has deep historical roots that can be traced in the history
of employment protection, wage bargaining, and social security.
Labor relations in the UK (and in fact the Anglo-Saxon world) have always been
rather conflicting. Due to laws such as the Masters and Servants Acts of 1823 and
1867, disobedient workers could be punished for a criminal offense (Woods 1982;
Choi 2010). British labor law only gradually turned in favor of the workers in the
early twentieth century (e.g., the Old Age Pension Act of 1908 and the National
Insurance Act of 1911).
In 1963, the Contracts of Employment Act introduced statutory protection from
termination of employment and protection of wages (Brown et al. 2000), with sub-
sequent acts addressing race (Race Relations Act 1965) and gender (Equal Pay Act
1970) related inequalities. High unemployment and large losses in nationalized indus-
tries wreaked havoc in the public sector budget, and the Thatcher years in the 1980s
saw a decade of legislation to break union power and liberalize labor markets. The
2002 Employment Act was implemented and essentially shifted the responsibility
of enforcement of employment rights from public tribunals to private management-
controlled procedures, giving more weight to the competitiveness of the employer
than the welfare of the individual (Hepple and Morris 2002; Hepple 2002). The
reforms in labor protection of recent decades have brought the UK back to a position
in which low wages and low employment protection create high uncertainty for and,
consequently, low loyalty of employees for their employer. The flexibility of the
labor market implies it is easy to hire employees, but the lack of investment in firm-
specific human capital and employability makes it hard to accumulate firm-specific
knowledge and retain brains. For this reason, it is easy to start a venture in the UK,
but very hard to grow that venture into a globally competitive firm of significant size.
In the UK, wage-bargaining institutions go back far in history and were formed
out of conflict between the aristocratic landowners and skilled peasants and artisans
of England. One of the earliest pieces of legislation, which came about after the
breakout of the black death, was the “Ordinance of Laborers” legislation of 1349 that
implemented a series of labor regulations and price controls to mitigate the problems
of labor shortages after the plague (Craig 2007). Building on this legislation, the
Elizabethan Statute of Artificers of 1563 prohibited conspiracies to raise wages and
the first worker’s associations formed in response to the legislation (Woodward 1980).
Unions in Britain had effectively been repressed by the aristocracy and large
employers (Curthoys 2004). By 1824, unions became partly legalized due to the
repeal of the combination laws (Shawl 1954).3 But it was not until the repeal of the
Masters and Servants Act (1867) and the Trade Union Act (1871) that there was a
positive step toward establishing more harmonious relations between the unions and
the courts (Kahn-Freund 1944).
The relationship between employers and the employed during the nineteenth cen-
tury remained one of conflict, where the interests of both parties were at odds. The
proposals set forth by the Whitley Committee led to the establishment of the coun-
try’s first Joint Industrial Council in 1918 (Clegg et al. 1985). But this was short-lived
and, following the deterioration of laborers’ power due to postwar unemployment, the
state abandoned its support for co-management and consultation (Lewchuk 1984).
The mid-1970s saw the turmoil of UK recession as a result of the oil crisis in 1973
and the decline of traditional British industries. This culminated in the “winter of
discontent” 1978–79, where 1.5 million public sector workers took part in Britain’s
largest single day of industrial action since the general strike of 1926 (Hay 2010). In
3 The combination acts of 1799 and 1800 were the embodiment of Parliament’s conversion to a
laissez-faire policy, removing protection of labor conditions up until their repeal in 1824.
1980, Thatcher’s government abolished the statutory procedure that allowed inde-
pendent trade unions to seek official recognition and British employers were no
longer legally required to bargain with the unions (Towers 1989). Thus, the 1980s
and 1990s saw a dramatic decline in trade union power and a decentralization of
collective bargaining (Wooden and Sloan 1998).
In 1999, the New Labour government under Tony Blair passed the National Mini-
mum Wage Regulations which set a minimum wage of £3.00 per hour for 18–21-year-
olds and £3.60 per hour for anyone older. The wage floor improved the conditions
for “outsiders,” such as those employed in small businesses (Morris et al. 2005), but
also increased the operating costs of smaller firms (Rusly et al. 2017).
Liberalized laissez-faire wage formation in the UK has arguably depressed wages
by lowering union bargaining power, and the UK saw significant wage diversion
between strong (insider educated white managerial jobs) and weak (outsider unedu-
cated minority female manual) jobs in the 1990s and polarization in the 2000s (Goos
et al. 2009, 2014). Labor market polarization has led to widening income inequality
and reduced incentives for medium-level human capital investment at school and on
the job.
The earliest underpinnings of a modern welfare state in the UK can be traced back
to the sixteenth and seventeenth centuries with the Act for the Relief of the Poor
in 1597 and the Poor Relief Act of 1601 (Birtles 1999). The modern welfare state
in the UK arose after the landslide victory of the Liberal government in 1906. It
introduced the concept of national health and unemployment insurance in the 1911
National Insurance Act (Feld 2011). The Beveridge Report of 1941 influenced one of
the most radical changes in British history by establishing three main principles for
postwar policy development: the introduction of family allowances, a National Health
Service, and state maintenance of full employment in order to maintain funding for
such social provisions (Whiteside 2014). The centuries’ old poor laws were replaced
by the National Assistance Act of 1948 (Spicker 2014), and in that same year, the
Attlee Labour government launched the National Health Service that is still operating
today (NHS n.d.).
By the 1980s, the Thatcher government introduced various measures to shift
social security into an enterprise incentivizing framework. The government for exam-
ple implemented an Enterprise Allowance Scheme, which gave individuals direct
transfers of between £40 and £100 per week for their first year of self-employment
(Cowling and Mitchell 1997).
In conclusion, the UK labor institutions have always been, but certainly since
the Thatcher Era, tilted in favor of employers. This creates great labor mobility and
flexibility on the one hand, but arguably low mutual loyalty, and rather militant
labor relations on the other. This results in a labor market in which it is easy to hire
and fire workers, but hard to find committed employees that will invest in firms’
specific human capital and are willing to go the extra mile and make sacrifices for
their colleagues or employers. Moreover, in such a constellation the incentives and

rewards for accumulating capital are high, whereas the incentives and rewards for
accumulating skills are not. In the end, this entrenches wage and wealth inequality,
creating strong incentives to start but few opportunities to grow successful new
businesses.
8.1.5 Recent Entrepreneurship Policies in the UK
In our analysis of recent entrepreneurship policy initiatives in the UK, we consider

the four priorities of public policy—deregulation, access to finance, innovation, and
enterprise culture (based on a framework by Huggins and Williams 2009)—that have
guided policy initiatives since the early 1980s.
8.1.5.1 (De)regulation
Since the 1980s, UK governments of all signatures were actively working to make
regulation better for businesses (Ashmore 1988). This started with the 1985 and
1986 White Papers “Lifting the Burden” and “Building Businesses … Not Barriers.”
In 1997, the government established the Better Regulation Task Force to advise
the government how to reduce unnecessary burdens of regulation. Government also
focused on lifting regulation for small firms specifically with the “Think Small First”
campaign.
In 2011, the government introduced the Micro-Business Moratorium—a freeze
on new regulation for start-ups and companies with fewer than 10 employees. It then
applied a “one-in, one-out” rule for UK business regulation in 2012, and following a
political logic, the rule was changed into “one-in, two-out” in 2013 and “one-in, three-
out” in 2016. Regulation of business is, however, not a matter of quantity, but rather
of quality, including transparency. More interesting initiatives in recent years develop
sensible regulation in a more interactive way. Entrepreneurs need regulatory stability
rather than ongoing changes. Frequent changes of regulation may be detrimental for
the development of the firms, a view supported by the survey of British founders
presented in Sect. 8.3.4
The deregulation doctrine is still very much alive today. In 2015, the Parliament
passed the Small Business, Enterprise and Employment Act, requiring the govern-
ment of the day to publish a “Business Impact Target”. Social security burdens for
especially small employers were reduced in 2014, when the government introduced
the Employment Allowance for all businesses and charities and since 2016 allows
start-ups and SMEs to employ four workers without paying any social security con-
tributions. The policy has not yet been evaluated on its effects and can be expected
4 This is particularly true for the renewable energy sector in UK (Leendertse 2017).
to promote the creation of new but hamper the growth of successful businesses in
the UK.
8.1.5.2 Access to Finance
In the early 1990s, the government started supporting the development of informal
venture capital. The Business Expansion Scheme, which was implemented in 1983,
was replaced in 1993 by the Enterprise Investment Scheme. This scheme provided
both front-end and capital gains’ tax relief on investments made directly in qualifying
unquoted companies, strengthening incentives for business angels (Mason et al. 2010,
p. 47). Furthermore, the Financial Services and Markets Act (UK Government 2000)
created the opportunity for unquoted firms to raise equity and allowing investors to
obtain certification without going through an authorized institution (Mason 2009).
The government then set up the Business Finance Partnership, increasing lending
to small- and medium-sized businesses and the Enterprise Capital Funds, provid-
ing venture capital investment for early stage, innovative small- and medium-sized
businesses with high growth potential (UK Government 2015).
With these incentives in place, a vibrant angel and venture capital sector developed
(Wiltbank 2009; Mason et al. 2010), and the creation of co-investment funds to
match private investments with public funds enabled business angels to increase the
availability of finance for new ventures (Mason 2009, p. 548). In November 2011,
the Business Angel Co-Investment Fund was launched, investing with syndicates of
business angels in SMEs.
Hence, the successive governments in the UK first allowed a private business
angel and venture capital market to emerge and then also channeled public funds to
SMEs and start-ups through these channels, thereby avoiding the problem of having
to pick winners or write extensive protocols to administer subsidies and grants.
Considerable efforts were also made to get banks to lend to SMEs (UK Govern-
ment 2015). For example, in 2009, the Enterprise Finance Guarantee was initiated,
allowing banks to offer small businesses a normal, secured commercial loan. In early
2011, the Bank Appeal Process, which allowed SMEs to appeal against a bank’s
decision to decline a loan, was also launched. More than 9,000 businesses used the
process, resulting in £42 millions of further lending. But although this can be con-
sidered a success of the appeals process, it also signals that banks in the UK have
not been very keen on financing SMEs.
Nevertheless, in July 2012, with support from the government, the Bank of Eng-
land (BoE) launched Funding for Lending, allowing banks and building societies to
borrow from the BoE at cheaper than market rates for 4 years. In 2014, the Department
for Business, Innovation and Skills established the British Business Bank, manag-
ing all government programs that help smaller businesses to access finance. In the
first quarter of 2018, the Funding for Lending program was discontinued as it was
predestined to (Pike 2017). But it was also discontinued after it was shown to have
a great detrimental effect on the savings in high-street banks, as interest rates fell by
two-thirds in January 2017 (Jones 2018).
In conclusion, tax and other policy initiatives have given formal UK financial
markets a great boost in recent decades. The UK now has the largest VC and angel
investment market in Europe, and London, arguably, remains the financial capital of
the world. But the flow of finance to SMEs and start-ups, especially in their earliest
stages of growth remains limited, especially outside London.
8.1.5.3 Innovation
For decades, the UK governments tried to improve the translation of knowledge

into products and services. In 2001, the government launched the Small Busi-
ness Research Initiative with the aim to increase the demand for R&D from
high-technology SMEs. In addition, the Knowledge-Transfer Partnerships helped
entrepreneurs access expertise and skills for growth by connecting them with aca-
demic institutions. Following the recommendations of the Lambert Review (HM
Treasury 2003), the UK government began to promote knowledge transfer between
universities and businesses by rewarding universities for activities that enhanced
collaboration. In 2004, the government established the Technology Strategy Board
and launched the Science City Program in several cities to also attract investors to
strong, science-based assets. In 2007, the UK Innovation Agency launched Innovate
UK that was complemented with several capital funds which supported innovative
businesses and university innovation (HM Treasury 2010). The Business-University
Collaboration and the Business-Research Council Collaboration initiatives of 2009
and the Gateway to Research launched in 2013 all aimed to improve the flow of
information between ventures and research. Finally, University Enterprise Zones
were launched in 2014, where Bradford, Bristol, Liverpool, and Nottingham won
the bids and started pilots that ran till 2017 and a new round of funding for 2019 has
been announced (UK Government n.d.).
To improve adult literacy and numeracy, the Skills for Life strategy was initiated
in 2001 (HM Treasury 2009). The National Skills Academy Programme was then
launched in 2005 to train specialists and the Train to Gain program and designed
to improve skill deficiencies (HM Treasury 2006). The program was discontinued
in 2010, however, after it was recognized that “…it [was] simply paying for training
that would have happened anyway” (Brennan 2010).
In short, the British government over the past decades has implemented many
initiatives to try and strengthen the collaboration between its world-class scientific
institutions and its business sector, but with mixed success. These programs have
been evaluated elsewhere, but it is difficult to ascertain their impact. It would take
us beyond the scope of this chapter to attempt an assessment here.
8.1.5.4 Enterprise Culture
The UK government seems to have encouraged an entrepreneurial culture through

awards starting decades ago. For example, The Queen’s Awards for Enterprise is
prestigious awards for businesses and individuals in the UK since 1965. The Enter-
prise Act of 2002 made bankruptcy law more forgiving, recognizing that not all of
the bankruptcies are the result of misconduct and irresponsibility (Walters 2005).
The Davies Review (Davies 2002) argued that the best way to make the culture more
entrepreneurial was through the educational system. In 2004, the government estab-
lished the National Council for Graduate Entrepreneurship to promote a culture of
entrepreneurship in higher education and launched the initiative Enterprising Britain,
which since 2005 is an annual competition.
Teaching pupils to be entrepreneurial, however, is not the same as teaching them
about entrepreneurship. The government therefore shifted focus with the aim to
foster a more entrepreneurial youth. They launched Inspiring the future, where young
entrepreneurs are volunteering to go into schools to talk about running their own
business, Enterprise Village which supports teachers to set up and develop a school-
based business, and the Premier League Enterprise Academy model which enabled
football clubs to develop enterprise in young people, concentrating in deprived areas.
The government also funded the development of Student-led Enterprise Societies.
Their main activity was working together with local firms to get loans for student
support and launching start-ups. The Global Entrepreneurship Week is, further, an
annual event to help young people learn about the range of support programs available
to entrepreneurs in the UK.
Besides awards, support, and events, the UK government encouraged
entrepreneurship through Enterprise Zones, established since 2012. These Enterprise
Zones are designated areas across England that provide tax breaks and government
support. Initiatives to improve access to information and counseling are all part of a
big umbrella campaign called Great Business, under which the government launched
the Business in You Campaign with the aim to help people understand how they can
start and run their own business.
In conclusion, subsequent UK governments have always had an interest in and
developed (national) initiatives to promote an entrepreneurial mindset and culture
throughout the UK.
8.1.6 Brexit and the LSE Growth Commission Report (2017)
In discussing the current situation in the UK, it would be incomplete not to discuss the
issue of Brexit. Although the exact relationship of the UK with the European Union
after Brexit remains unclear at the time of writing this book (January 2020), the
LSE Growth Commission (2017) has published a noteworthy report on the growth
prospects of the post-Brexit UK. The Commission reports some progress on the
recommendations made in its 2013 prequel (mainly on increasing competition and
investment in long-term assets and SMEs) but, interestingly, now calls for a tax and
minimum wage system that is neutral with regard to forms of employment to promote
lifelong learning and adaptable skills in light of rapid technological changes. Coupled
with a new system of tax breaks for skills investment and better endowed technical
education, this should make British workers more resilient in future labor markets
while supplying British entrepreneurs with the much-needed skilled labor force.
For the financial sector, the Commission suggests maintaining the links to EU
markets by developing a substitute for the financial services “passport” while also
diversifying its portfolio. The latter should be done by building new links to emerging
markets and tapping into domestic markets by widening SME access to bond markets
and boosting equity tax relief schemes for investors in SMEs. If at the same time
smart regulation would make the banking market more competitive while supporting
the emerging FinTech sector, the private financial markets can be an asset, not a
liability for the British economy. To complement the private sector, the Commission
advised the government to strengthen the British Business Bank, to establish a new
infrastructure bank, and to fill the funding gaps the private market will not fill.
Finally, the Commission challenges the UK’s industrial strategy, stating that two-
thirds of the workforce are now employed in sectors where productivity is below
average. The Commission therefore recommends the government to establish a new
framework in order to pursue six key priorities, namely:
1. Skill shortages;
2. Low productivity sectors;
3. Small firms (less obstacles in terms of taxes and regulations);
4. Universities and private sector collaboration;
5. City-growth policies (support locally);
6. Growth, environment, and well-being.
The analysis of the Commission also largely supports the proposals we present
below. Still, our focus on entrepreneurship and the entrepreneurial ecosystem has
led us to identify slightly different bottlenecks. Furthermore, a more historical and
regionally differentiated approach leads us to focus our proposals on making the UK
ecosystem more diversified and inclusive, while de-emphasizing the more traditional
UK strategies of further SME deregulation, putting a strong focus on (global) finance
and linking academic research to the private sector.
8.1.7 Conclusions
In conclusion, the UK has an eventful history that shaped its institutions in a unique
way. The British Isles were not invaded from outside since 1066, but saw centuries
of internal conflict before the country unified in the seventeenth and rose to unrivaled
global supremacy in the nineteenth century. In the twentieth century, however, this
unrivaled position was challenged and the UK, like any other nation going forward,
will have to compete in an increasingly global marketplace with innovative and
efficient competitors for the favor of consumers across the globe.
During the Thatcher years of the 1980s, the UK developed into a distinct liberal
market economy (Hall and Soskice 2001) with a deregulated business environment,
flexible labor markets, well-funded elite universities, and strong protection of intel-
lectual property rights. In such a system, however, low labor protection arguably
reduces incentives to invest and accumulate (firm-specific) human capital. Policies
based on further deregulation and stronger market competition will not be able to
address this weakness. In line with the LSE Commission on Growth (2017), we thus
argue, below, that the UK needs to start paying more attention to its collective physi-
cal, digital, and financial infrastructures—factors that entrepreneurs need to succeed
in global markets. A well-educated, loyal labor force, and excellent infrastructure are
essential for ventures to grow into sustainable and globally competitive businesses.
If, as a corollary, the UK entrepreneurial ecosystem can also become more inclu-
sive—regionally, and across income groups and wealth levels—this may turn out to
be vital for the long-run sociopolitical sustainability of the UK model.
8.2 Step 2: Data Analysis with REDI for the UK
8.2.1 UK’s International Position
For calculating country scores of the Regional Entrepreneurship and Development

Index (REDI), we used the population-weighted REDI-scores. Out of 24 European
countries, the UK then ranks 4th with 56.0 points behind Ireland, Denmark, and
Sweden (Table 3.3, Varga et al. 2020). The REDI ranking for the UK is quite con-
sistent with other more commonly used indicators. The UK continues to be in top
10 in terms of “Ease of Doing Business” on the World Bank Doing Business report,
ranking 7th out of 190 economies in the 2017–18 report.
The LSE Growth Commission (2017) identified human capital, especially among
low wage employees, as a key weakness. Their report suggested leveling the playing
field, now tilted in favor of self-employed, to promote long-term employment and on-
the-job training in the UK. Again, this contrasts specifically with Germany, where
permanent contracts enjoy very strong labor protection and on-the-job training is
very strong. Clearly, the UK and Germany have developed different models, as the
Varieties of Capitalism literature already suggested. In the same way as in Germany,
the strengths of the UK model typically imply its weaknesses.
To address the UK’s weaknesses, the LSE Growth Commission (2017) advocates,
among other things, the implementation of a more directive industrial policy to shape
future markets and negotiating new trade deals with the EU and USA to ensure
London’s bank and service-oriented dominance after Brexit. We believe the success
of both these policy approaches depends to a large extent on factors beyond UK
control and therefore represent high-risk strategies. The only certainty the UK has
is that a lot of things will change, and the country must brace for a major shock.
We would therefore argue that diversification and flexibility are the best defense and
propose that a more vibrant, agile, and flexible entrepreneurial society will be able
to cope with such uncertainty and change.
The UK’s entrepreneurial ecosystem, though performing well in international

comparison, also has its bottlenecks. The UK is known to suffer from the so-called
European paradox (EC 1995). That is, on innovation scoreboards, the UK consis-
tently ranks high (Schwanen and Wyonch 2018), but it seems the UK has problems
commercializing that knowledge and bringing new technology to global markets.
As the latter is the role that Schumpeter (1911) and, more recently, the knowledge
spillover theory of entrepreneurship (Acs et al. 2009, 2013) foresee for entrepreneurs,
this suggests there must be weaknesses in the entrepreneurial ecosystem that more
traditional indicators and indices fail to identify. Figure 8.1 gives us a first glance at
how the UK is performing relative to Germany, Italy, and the EU average on the 14
pillars identified in the REDI (Acs et al. 2014; Szerb et al. 2017, 2019).
It is clear from the graph that the UK entrepreneurial ecosystem is strong on almost
all pillars and outperforms the Italian ecosystem on all but two pillars, “Product Inno-
vation” and “Risk Capital.” In the former pillar, the Italian ecosystem benefits from its
strong emphasis and specialization in small-scale manufacturing industries, whereas
the UK economy is much more characterized by services, where product innovation
is simply harder to observe. The UK also outperforms the EU and Germany on sev-
eral pillars, especially when it comes to Entrepreneurial Attitudes (pillars 1–5 in the
figure) and Entrepreneurial Ability (6–9).
1. Opportunity Perception
1.0
14. Risk Capital 2. Startup Skills
0.9
0.8
0.7
13. Internationalization 3. Risk Acceptance
0.6
0.5
0.4
0.3
12. High Growth 0.2 4. Networking
0.1
0.0
11. Process Innovation 5. Cultural Support
10. Product Innovation 6. Opportunity Startup
9. Competition 7. Technology Absorption
8. Human Capital
Germany Italy United Kingdom EU
compilation
Concerning Entrepreneurial Aspirations (10–14), Germany and even occasionally

the EU as a whole outperform the UK. These include the outcomes and availabil-
ity of financial and knowledge resources, where it seems that the British ecosystem
could benefit from reforms. This confirms the above-mentioned Growth Commis-
sion’s analysis that it is the final step from invention to innovation and economic
growth where the UK ecosystem has (relative) weaknesses. The data show that the
UK performs at or above the EU average on almost all pillars and only underper-
forms in comparison with the EU average on three pillars: “Product Innovation,”
“Internationalization” and, perhaps surprisingly at first glance, “Risk Capital.”
The underperformance on the pillar “Risk Capital” is mainly driven by large
regional variations (see also Sect. 8.2.2), where many remote regions (e.g., in northern
England) have very low values. In the central parts of UK, the financial system
works better. Still, in this low score, we see a long-term challenge for the British
governments since the early 1970s (HMSO 1971, 1979) is confirmed. These sources
argue that paradoxically, as a result of strong formal financial markets for equity and
VC capital, the funding gap for ventures that cannot gain access to these channels
(and typically rely on less abundant informal finance) is more pronounced.
A national-level analysis may well hide a lot of regional heterogeneity. Bottlenecks in

London may well prove to be very different from the bottlenecks in the West Midlands
and Northern Ireland. Moreover, even the regional level hides relevant heterogeneity,
as for example well-performing Cambridge lies in a much weaker East of England.
With that caveat in mind and before we draw too strong a conclusion on how to
improve the UK entrepreneurial ecosystem, let us therefore zoom in at the regional
level.
The regional scores in the UK in Fig. 8.2 and Table 8.1 range from a globally
highly competitive 75.5 for London, which after Stockholm and Copenhagen is third
among 125 European regions, to scores as low as 44.3 in the North East, ranking at
61.5 These regions compare in Europe to Rheinland-Pfalz in Germany or the Bassin
Parisien (the region around Île de France) in France. The map and table illustrate
that even at this low spatial resolution, the aggregated REDI scores capture quite a
bit of the regional heterogeneity.
A more regional-level analysis also seems appropriate as sociopolitical ramifica-
tions of Brexit may well reverse the trend toward more centralized policy making
in the UK. Brexit will imply the UK no longer needs strong central representation
on behalf of all regions in Brussels, whereas UK regions will now assert themselves
more in London. The Brexit vote uncovered important differences across regions
that reflect economic realities as well. Investing in a more resilient entrepreneurial
5 The
Fig. 8.2 REDI map of UK’s regions. Source Authors’ own compilation
ecosystem that generates inclusive and innovative growth across the Kingdom may
well prove an important strategy to prevent further tensions.
Table 8.2 shows the weakest pillars in the REDI index across all UK regions. The
analysis shows that the pillars are all concentrated in the 10–14 range, with only
a few exceptions. Despite the large range between the best and worst performing
entrepreneurial ecosystems in the UK, therefore, it is possible to implement policies
and propose reforms that will strengthen all ecosystems alike. The frequent appear-
ance of pillars 7, 10, and 11 suggests a bottleneck in the transfer of knowledge from
basic and applied research to commercial activity, as in the aforementioned so-called
Table 8.1 REDI-score UK

North East England 44.3
North West England 50.4
Yorkshire and The Humber 51.8
East Midlands 57.9
West Midlands 54.0
East of England 58.7
London 75.5
South East England 69.6
South West England 62.3
Wales 50.4
Scotland 60.5
Northern Ireland 55.0

North East England 7, 12, 14 Absorptive Capacity and Technology Level,
Clustering and Gazelles, Informal Investment
North West England 10, 13, 14 New Product, Exports, Informal Investment
Yorkshire and the Humber 10, 13, 14 New Product, Exports, Informal Investment
East Midlands 12, 13, 14 Clustering and Gazelles, Exports, Informal
Investment
West Midlands 10, 11, 14 New Product and Technology Transfer,
Technology Development, and New
Technology, Informal Investment
East of England 10, 13, 14 New Product, Exports, Informal Investment
London 10, 11, 14 New Product, Technology Development and
New Technology, Informal Investment
South East England 10, 12, 13 New Product, Gazelles, Exports
South West England 10, 11, 14 New Product, New Technology, Exports
Wales 7, 10, 11 Absorptive Capacity and Technology Level,
New Product, Technology Development, and
New Technology
Scotland 10, 13, 14 New Product, Connectivity and Exports,
Informal Investment
Northern Ireland 1, 13, 14 Opportunity Recognition, Connectivity and
Exports, Informal Investment
European Paradox. It reflects the low actual uptake of new product and process tech-
nology in new ventures in the UK. This weakness is pronounced throughout the coun-
try and even the world-class London ecosystem is (relatively) weak in that respect.
This calls for a targeted national approach, where interventions aim to strengthen
exactly that weak link.
The frequent appearance of pillar 13, underpinned with low scores on Exports and
sometimes also Connectivity, suggests UK manufacturing still has difficulty finding
foreign markets and competing in the global marketplace. The strong services’ ori-
entation of, in particular, the London ecosystem can explain why this aspect of the
entrepreneurial ecosystem remains underdeveloped. But although for London this
does not seem to be a big problem, for the more peripheral regions in the UK it may
well be. Moreover, Brexit may adversely affect the competitive position of London
as the financial and business services capital of Europe. Diversification and the devel-
opment of new, more industrially oriented competitive strengths could be a sensible
strategy to try and strengthen these pillars in the UK entrepreneurial ecosystem.
The other pillar that stands out as remarkably and consistently weak across the UK
is pillar 14 “Risk Capital.” Low scores on “Risk Capital” are typically due to very low
levels of informal investment being available and/or accessed. This is compensated
by strong formal markets for equity in early-stage venturing, but business angel
and VC markets have come under criticism for lack of regional, gender, and ethnic
inclusiveness (Bates and Bradford 1992; Mollick and Robb 2016). Well-developed
VC and private equity markets are of course good for the unicorns and gazelles that
make the headlines, but financing the SMEs and start-ups at the base requires smaller
magnitudes that promise only lower returns, making them much less interesting for
VC funds and angel investors.
In Estrin et al. (2018), the authors investigated the potential for equity crowdfund-
ing to play a complementary role in filling the funding gap. But reforms can also be
proposed to strengthen the more traditional informal investment channels. This may
be particularly important to boost access to informal investment, especially in the
periphery.
We believe the UK is doing well in developing crowdfunding as a channel to com-
plement formal financial markets. From Table 8.2, we may conclude that most UK
regions would benefit from reforms and interventions that increase the technologi-
cal sophistication and innovativeness of production and increase the flow of funds
to perhaps dull, but essential small industrial firms that turn new knowledge into
business. In manufacturing, this can give a boost to export performance and global
competitiveness, whereas in services this will stimulate the regional and national
economy.
We agree with the LSE Growth Commission (2017) that policies to level the
playing field between self-employed and employees and to increase incentives for on
the job training are helpful in this respect. The UK’s strength in labor flexibility may
well come at a cost of low loyalty and security for employees that makes investment
in firm-specific human capital, especially at the lower end of the wage distribution,
a less appealing proposition.
Our reading of the data above reveals that in all UK regions and in the country as
a whole, the entrepreneurial ecosystem is strong. But even in the best ecosystem,
there are always pillars that perform relatively weak and bottlenecks remain in a
lack of innovation (New Products and Technology), export orientation (Exports),
and informal investment. It is dangerous, however, to rely exclusively on data and
aggregate indices, even if they are composed of a broad set of sub-indicators. It is
always important to complement a data-based quick scan with common sense and
more qualitative information to contextualize and complete the diagnosis. Only after
triangulating the results above with the historical analysis, literature review, expert
judgement and more qualitative survey results below, we can map the diagnosis onto
our menu of interventions to propose tailored reforms for the UK.
8.3.1 Venture Creation Processes in the UK
As illustrated in Herrmann (2020), we studied in two ways how the British institu-
tional ecosystem influences entrepreneurial activities, namely from a static perspec-
tive (based on multiannual averages) as well as from a process-oriented perspec-
tive. Both kinds of analyses provide similar insights. Our static analyses reveal that
entrepreneurs in the UK are less likely to set up incrementally innovative ventures or
imitate existing business ideas; they rather tend to set up radically innovative ventures
(Dilli et al. 2018; Herrmann 2019).
The dynamic analyses, in turn, illustrate how the British institutional environment
influences different aspects of the venture creation process. With regard to human
capital, we find that national labor market institutions influence the work choices
of entrepreneurs (Held 2019). Whenever labor market flexibility guarantees neither
employment security nor benefits, the risk related to giving-up dependent employ-
ment in order to work full-time on venture creation is limited. Accordingly, part-time
entrepreneurs in liberal market economies, such as the UK, are significantly more
likely to transition to full-time entrepreneurship than their counterparts in coordinated
market economies, such as Germany (Held 2019).
With regard to the process of finance acquisition, we (Held et al. 2018a) find that
various venture characteristics influence the type of funding which nascent venture
acquire first and, respectively, most. These characteristics also include a venture’s
institutional environment. Ventures in countries with a higher stock market capital-
ization (such as the UK) are less likely to seek debt finance. At the same time, a
more limited availability of loans to the private sector also leads nascent ventures to
finance their endeavors through grants.
Finally, we find that nascent ventures in the UK and the USA are less likely to
engage in R&D collaborations with external partners, such as universities and labo-
ratories, than nascent ventures in Germany (Held et al. 2018b). It seems that nascent
ventures are reluctant to engage in joint R&D projects whenever the institutions gov-
erning inter-firm collaborations make the outcome of lawsuits in case of IP conflicts
rather unpredictable.
Taken together, these studies lend support to the argument that the UK’s distinct
finance, labor, and R&D-related institutions influence the decisions of entrepreneurs
with regard to the business ideas they develop as well as the modus operandi they
choose to set up their ventures. This leads to the question how British entrepreneurs
experienced their institutional environment when setting up a venture: Which aspects
are constraining? And what could policy makers do to facilitate venture creation in
the UK?
8.3.2 Regulatory Barriers to Entrepreneurship in UK
To examine regulatory barriers to entrepreneurship, we conducted interviews with

158 founders in the UK between 2016 and 2018. Table 8.3 provides an overview of
the answers given to the question: “Which regulatory requirements did you perceive
as major obstacles during venture creation?” that were coded to compare the answers
also across countries.
The first remarkable result of Table 8.3 is that about every second founder said
that they did not experience any regulatory obstacles. This lends support to our
aforementioned result that it is overall rather easy to start a business in the UK. It
is also in line with the UK rankings in the World Bank’s (2018) Doing Business
reports. A sustained pro-business attitude since the Thatcher years has successfully
reduced costs and regulatory barriers to founding and managing businesses.
Still, some challenges remain. According to a recent poll among business owners
(thus, not only founders), 51% of businesses think that the level of regulation in
the UK is an obstacle to success, whereas 46% of small businesses identified tax
administration as a burdensome area of compliance (NAO 2014). These findings are
confirmed by our survey. Tax legislation, together with stringent data protection laws
and onerous information requirements, was mentioned (each about 5% of all times)
among the most important obstacles to venture creation. This suggests that in the UK,
founders occasionally have difficulties to find the right information and navigate the
complexities of government bureaucracy. It is furthermore noteworthy that unreliable
or very specific regulation was perceived as an obstacle. Accordingly, legal insecurity
as well as legal requirements for approval were perceived as obstacles in, together,
about 8% of all times. Similarly, specific requirements related to the energy sector
(almost 3% of times), stringent environmental regulation (almost 2% of times), and
a constantly changing regulatory environment (almost 2% of times) were mentioned
as important regulatory constraints.
Table 8.3 Results’ survey regulatory obstacles in the UK

None 81 43.8
Data protection laws 10 5.4
Tax legislation 9 4.9
Onerous requirements for documentation 9 4.9
Legal Insecurity 8 4.3
Legal requirements for approval 7 3.8
Pension scheme 5 2.7
High taxes 4 2.2
Employment regulations in general 4 2.2
Difficulties with obtaining government funding 4 2.2
Stringent environmental regulations 3 1.6
Insurance requirements 3 1.6
Note
be mentioned)
Based on these insights, we conclude that it is important for governments to

carefully consider not only the contents of regulations but to also pay attention that
rules and regulation have a long-term perspective. If regulation is changed frequently,
this leads to insecurity among founders as well as business owners.
8.3.3 Founders’ Suggestions for Reforms in the UK
In the same survey, founders were also asked: “What can policy makers do to facilitate
venture creation?”. The answers to this question are listed in Table 8.4.
Interestingly, only a small share of founders (7.2%) opined that policy makers
could not facilitate venture creation. This is a remarkable contrast to the above finding
that about every second founder did not feel constrained by regulatory obstacles. On
the contrary, British founders had numerous suggestions on how policy makers could
facilitate venture creation.
By far, the most common suggestion called for facilitating access to finance for
small businesses (almost 13% of all times mentioned). This is perhaps remarkable,
Table 8.4 Policy recommendations by founders in the UK

creation?
Nothing 19 7.2
Provide competent advice to people starting businesses 9 3.4
Centralize information for starting business 8 3.0
Improve situation specific to energy sector 7 2.6
Remain in EU 6 2.3
Be less inclined toward incumbents 5 1.9
Offset risk of starting business 4 1.5
Improve situation specific to IT sector 4 1.5
Financial benefits for founder 4 1.5
Create feeling of support for entrepreneurs 3 1.1
Note
could be mentioned)
because the UK has a well-developed financial system. The reason for this discrep-
ancy, also discussed in our REDI analysis, is related to the different types of finance
that nascent ventures use. While venture or angel capital is comparatively abundant
in the UK, only radically innovative ventures have access to such high-risk finance.
As pointed out by Herrmann (2020), even in the UK only a small minority (of less
than 10%) of all ventures founded per year are radically innovative. This would imply
that the majority of ventures, pursuing incrementally innovative or imitative business
ideas, need to turn to other financial sources. For these ventures, which also are the
largest part of respondents to our survey, bank- or government-based finance con-
stitutes the most important finance source—next to the founders’ own and informal
funding. We therefore interpret the suggestion of better access to finance as a call for
improving access to bank-based, public, and informal finance.
The second most important suggestion concerns the human resources needed for
venture creation. Almost 9% of responses highlighted that policy makers should
provide better training to people for starting businesses, while almost 5% suggested
to provide incentives for hiring people. Overall, this is in line with our above find-
ings that, in the UK, workers with (firm-) specific skills are comparatively scarce
and difficult to retain. The suggestions of UK founders indicate that the British
workforce would benefit from acquiring not only more specific skills but also more
entrepreneurial knowledge. In addition, policies that facilitate the hiring of skilled
workers may constitute a further measure to provide nascent ventures with the
necessary human capital.
While founders also asked for lower tax rates for small businesses (in almost 6.5%
of cases), they asked in various ways for better and more transparent information
about venture creation. Accordingly, they did not only suggest to reduce bureau-
cracy (in almost 7% of cases) but also to provide better information about how to
start a business (in 6%), to provide competent advice to people starting businesses
(in almost 3.5%), to centralize information for starting businesses (in 3%), and to
provide guidance (in almost 2.5%). Taken together, this indicates that founders have
experienced systematic problems in obtaining the necessary information at the right
time.
Finally, and in line with the regulatory obstacles mentioned above, the founders
interviewed suggested that venture creation would be facilitated by a more reliable
and long-term oriented regulation. Accordingly, they suggested to avoid frequent
policy changes in almost 5% of all times and to remain within the EU in almost 2.5%
of times.
8.3.4 Conclusions
While our founder survey does not confirm all the weaknesses identified in REDI
analyses based on composite indices, it adds several important nuances. It thus adds
complementary information to the results obtained in Sect. 8.2. For example, the
surveys clearly confirm the need for better opportunities for small ventures to obtain
finance. But in addition, founders also highlight the lack of (access to) an appro-
priately skilled workforce. The REDI analysis, in contrast, did not flag this as a
problem, because of its focus on tertiary education. The founders interviewed, how-
ever, agree with the LSE Growth Committee (2017) that vocational education should
be improved and incentives for employing and training workers on the job should be
strengthened.
Next to these aspects, our founder survey also highlights the importance of trans-
parent and easily accessible information about venture creation, as well as stable and
reliable regulation. Given that these aspects are not covered by the REDI data, the sur-
vey offers important complementary insights into how policy makers can still facili-
tate venture creation—even in a comparatively business-friendly environment as the
UK. Founders repeatedly highlighted the importance of clear and reliable information
about venture creation requirements, as well as stable regulation. Whenever founders

are faced with uncertainty because of unclear requirements and frequently changing
regulation, this substantially—and unnecessarily—hinders venture creation.
Taken together, our historical, quantitative and qualitative information for the UK,
though necessarily limited in scope and depth, reveals enough information to now
draw up a diagnosis for the UK and turn to a proposed treatment.
Formulating a reform strategy to strengthen the entrepreneurial ecosystem is similar

to treating a patient. In the previous sections, we have considered the medical history
of the patient, used an advanced diagnostic tool to scan for their health problems,
and asked the patient how they feel and what they believe would be good treatments.
Based on all this information, we can reach a diagnosis, map that diagnosis onto the
menu of available treatments, and propose a treatment that fits the patient.
For the UK, we conclude that its rich and long history has shaped its institutions in a
unique way. And yet, British ventures compete in an increasingly global marketplace
with innovative and efficient competitors for the favor of consumers around the globe.
The UK is therefore well advised to improve its entrepreneurial ecosystem in order
to face that competition.
Since the Thatcher years in the 1980s, the UK has relied on the private sector and
market competition to assert its competitive position in the world, with mixed success.
Its London-based financial sector has developed into one of the most advanced and
developed markets in the world, while waning industries long lingered in the North.
Policies that governments of different political orientation have implemented are
often and still based on the tried and tested UK recipes of further liberalization and
stronger market competition, resulting in the most liberal market economy in Europe
characterized by a liberalized regulatory environment, flexible labor markets, well-
funded elite universities, and strong protection of intellectual property rights. In such
a system, the winner takes all, creating strong incentives to succeed. But low taxes
and minimal social protection also imply high risks of failure, low investment in
human capital, and eroding public infrastructures.
We argue below that the UK needs to start paying more attention to the public
and collective infrastructures that the individual entrepreneur also needs to succeed.
Making the UK entrepreneurial ecosystem more inclusive—regionally as well as
across income groups and wealth classes—may well turn out to be vital to the long-
run sociopolitical sustainability and global competitiveness of the UK model (Piketty
2014; Van Bavel 2016).
The UK boasts a strong entrepreneurial ecosystem in general, but the average
masks some great disparities. London (as well as the corridor from London to Bristol)
is the undisputed hotbed of entrepreneurship alongside lagging rural and old indus-
trial regions. The geographic resolution of our data reveals that UK’s entrepreneurial
talent and resources tend to cluster in London, where returns to such skills and
resources are highest. Quantitative data analysis then suggests large heterogeneity in
entrepreneurial ecosystem performance. While this does not come out as a problem
for the country as a whole, it creates a political divide, as the Brexit vote has clearly
uncovered, for example.
The results from our survey do not reveal this heterogeneity. While they confirm
that the challenges and bottlenecks in their ecosystem are not formidable, they still
point to a lack of funding for small ventures, as well as a lack of skilled person-
nel. This, in turn, supports the insights obtained from the previous historical and
quantitative analyses.
Our data analysis additionally reveals that entrepreneurship in the UK is less suc-
cessful in adopting and commercializing high-tech knowledge developed in academic
institutions and world-class R&D laboratories. New ventures in the UK score (com-
paratively) low in radically new products and technology absorption and its regions
lack risk capital in the form of informal investment. These pillars in the ecosystem,
together with non-transparent information about and frequently changing regulation
of entrepreneurship, seem to be the weakest links in an otherwise business-friendly
entrepreneurial ecosystem. The treatment needed should therefore help to overcome
these weaknesses.
As the UK is to leave the European Union, it may be required to diversify its
economy and regain its position in global markets also as a high-tech industrial
exporter. This will require a well-trained labor force which is also available to nascent
ventures that aim to grow into globally competitive firms. A healthy entrepreneurial
ecosystem will be an asset and interventions to strengthen technology absorption and
informal finance for more mundane and slow-growing industrial SMEs and start-ups
will be beneficial.
Taking these prescriptions to our menu of policy interventions and reform pro-
posals in Part I of this report, we can select the fifteen most suitable interventions.
They are listed in Table 8.5. In Column 1, we find the number under which they are
presented in Elert et al. (2019). Column 2 lists the policy area and 3 the full pro-
posal, where Column 4 gives a brief motivation that links the proposal to the specific
situation in the UK and the analysis presented above.
The first two proposals (2 and 4) refer to intellectual property rights and call for
the UK to experiment and negotiate for less stringent and encompassing IPR. This
may sound counterintuitive and goes against the mainstream thinking that strong IPR
promotes innovation and growth by providing incentives to generate knowledge. In
stakeholder dialogues and discussions, as well as academic research, however, that
conventional wisdom is often turned on its head. Complex legal protection of IPR
serves the interest of large incumbent corporates, who use IPR to maximize their prof-
its. This rarely involves maximizing the generation and diffusion of new knowledge
and technology through commercialization. The British experience in the industrial
revolution, when IPR enforcement was expensive and scant, is a case in point. The
reforms we propose would aim to restore IPR to its original purpose: Give credit to
the inventor, while promoting further incremental innovation and commercialization
by entrepreneurs. By opening up IPR, the UK would create opportunities for less
sophisticated entrepreneurs to compete at the global frontier.
Table 8.5 FIRES-reform proposals for the UKa

No. Policy area Proposal UK
2 Intellectual property Limit the breadth, width, IP is intended to promote the
and span of patent registration, diffusion, and
protection to cover commercial application of new
working prototypes and knowledge and technology. But
market-ready innovations the system is gradually turning
only for a short period of into a system where savvy
time and permit economic lawyers help large corporates to
actors to infringe upon prevent, not promote these
patents that have not been things. To restore the system to
commercialized. its original purpose, the rights of
inventors and infringers need to
be better balanced. You can be
the inventor/discoverer of an idea,
but society only benefits if that
knowledge is commercialized.
4 Intellectual property Introduce and support Open-source patents combine
existing experiments with giving credit to the inventor,
open-source patent keeping a registry of useful
registration. knowledge and opening up that
knowledge base for further
expansion, also through
commercial venturing. The UK
after Brexit will remain a member
of the European Patent Office but
can offer to take the lead in
experiments that will promote
free flows of knowledge in
society.
13 Private wealth Allow for more wealth to This may sound counterintuitive
accumulate and remain in as a policy to promote a more
private hands and make it inclusive entrepreneurial society,
possible, easy, and but small, everyday entrepreneurs
attractive to invest such cannot access the increasingly
wealth in entrepreneurial formalized angel and VC
ventures. markets. Their tickets are too
small and returns too low to
attract such funding. Thus,
triple-F finance is, for now, their
only recourse. This proposal aims
to increase the availability of
such funding. As we want to
promote especially small tickets
and amounts, tax exemptions can
be capped at relatively low
amounts. Small wealth that is
actively invested in small,
triple-F, equity investments
should be treated differently from
large fortunes, passively invested
in global financial markets.
(continued)

18 Banks Ensure that (appropriately Banks in the UK do not disclose
anonymized) credit information about credit they
decision information grant or credit they refuse
becomes publicly (Barclays, 2017). Such
available in the system of information, if adequately
bank loan guarantees for anonymized, however, can be
start-ups. very helpful for other credit
seekers and investors, also
outside the banking sector.
Access to such information
should be supervised by the
government and privacy must be
protected.
19 Banks Increase the mandatory European and international
equity ratio in banking minimum standards are applied
gradually to 10–15 percent in the UK but allow for rather low
to allow them to take on reserves and high leverage. The
more risk responsibly in UK banks are among the largest
their lending portfolios. and highest leveraged banks in
the world, still posing a
considerable risk for the UK
economy while failing to serve
the needs of especially SMEs.
Financing entrepreneurship first
requires more loss absorbing
capacity in banking.
20 Banks Introduce central bank Following the logic of proposal
digital currency to replace 19, the Bank of England can
deposits at commercial reduce the need for strict bank
banks as the dominant supervision on the asset side of
medium of exchange. commercial banks’ balance
sheets after ensuring the stability
of the decidedly public
infrastructure for transactions and
savings. By introducing a central
bank digital currency, there is no
need for guarantees of
commercial banks liquidity and
public deposit insurance that
distorts banks financing costs.
When payments and savings are
secure, banks can once more
invest on behalf of their clients
for own profit, risk, and
responsibility.
(continued)

26 Social security Guarantee equal access to The LSE Growth Commission
welfare state arrangements (2017) argued for a more level
for all, regardless of playing field between employees
tenure in a specific job or and self-employed on the premise
labor market status. that self-employed is currently
favored in the UK labor market.
We believe that in addition, both
employees and self-employed
face risks they cannot self-insure
and that should not be a basis for
competition. Small and risk
ventures can only compete for
employees on a level playing
field when access to welfare state
arrangements is equal for the
important risks across labor
market statuses.
31 Active labor market policy Establish or strengthen Job creation and destruction are
training programs to relatively high in the UK. Small
prepare workers for new firms are disproportionately
occupations. responsible for this (Hijzen et al.
2010). This implies that a more
entrepreneurial society, with
more employment in small- and
medium-sized firms in
experimentation, will imply that
employees need to be equipped
with the skills to transfer between
jobs and employers.
37 ICT Invest in excellent, Infrastructures benefit
open-access digital entrepreneurs and their clients at
infrastructure for home and abroad and represent
European citizens and classic public goods
businesses. characteristics and free rider
problems. Efficient provision of
such public goods is traditionally
a government responsibility that
the UK government should take
up.
(continued)

38 ICT Develop open but The digital revolution is
responsible standards and beginning to change the way we
open regulation for the do business across the board. It
many digital platforms touches the very institutions that
that emerge to facilitate allocate capital, labor, and
peer-to-peer and knowledge in society (Degryse
business-to-business trade, 2016; Ferrari 2016; MacKenzie
services, and finance. 2015; Lin et al. 2009). The UK is
leading in platform-based
financial innovation and is in a
position to set the standards. A
strong infrastructure with clear
and well-designed open standards
should be created to promote
innovation and the creation of
new services and create
opportunities for all to contribute
and participate. Crowdfunding,
crowdsourcing, self-employment,
and open innovation are all
greatly leveraged with digital
technology.
40 Insolvency Set up publicly funded In the UK, there is a relatively
“entrepreneurial high rate of firm formation and
knowledge observatories” failure. This is beneficial and
where knowledge signals a healthy entrepreneurial
accumulated in the ecosystem generating a lot of
entrepreneurial process is variety and selecting quick in a
collected, curated, and tough market environment.
freely diffused. However, this also implies a lot
of knowledge is lost. Incentives
to retain and disclose experiences
of in particular failures are low.
Such knowledge constitutes a
public good.
41 Education system Reforms in primary and The weakness in the UK we
secondary education most try to address is low levels
should provide pupils with of absorptive capacity and
a solid and coherent firm-specific human capital. UK
knowledge base and citizens are willing to start a firm,
promote initiative, but not so much willing to work
creativity, and a for one and invest a lot in its
willingness to experiment. success. Fostering a more
entrepreneurial mindset will in
the long run make jobs in
start-ups and new ventures more
appealing, even for the
non-entrepreneurs.
(continued)

44 Universities/entrepreneurial The link between UK initiatives to form clusters
clusters universities and external around its academic centers of
stakeholders should be excellence can be strengthened
strengthened by and made more inclusive to focus
encouraging universities on team formation and new firm
to stimulate foundation as opposed to
entrepreneurial initiatives licensing and exploiting IP in
and university spinoffs. more traditional ways. It involves
more active engagement of the
universities.
48 Innovation policy Develop highly This should predominantly be
competitive programs done in case of the UK by
encouraging small enhancing the resources of firms
businesses to engage to invest in their personnel and
research and development providing incentives, other than
with the potential for regulation and legal protection, to
commercialization. retain workers and provide stable
employment opportunities for
loyal employees.
50 Innovation policy Institute technology Following LSE Growth
inducement prizes to Commission (2017)’s call for a
further the development of mission-driven industrial policy,
commercially applicable we would propose to shape such
knowledge in especially a policy still in an open way. That
important areas, such as is, the government can direct
climate change. innovation and entrepreneurial
venturing toward societally
relevant challenges, such as
energy transition and circular
business models, but the
government should do so in a way
that selects the best solutions, and
not choose the incumbent firms
that are best positioned to lobby
for subsidies and support. We
think innovation prizes could be a
way to implement such an open
mission-driven industrial
innovation policy.
a Numberedas in Elert et al. (2019)
Proposal 13 aims to increase the levels of informal investment in the UK. Allow-
ing wealth to accumulate should not be understood as an across the board reduc-
tion in wealth or property taxes. Indeed, if our diagnosis calls for a more inclusive
entrepreneurial ecosystem, such a proposal would be strange indeed. We should
therefore add that this proposal is to be interpreted as interventions in the taxation of
wealth that will promote the accumulation of small private fortunes to be invested
in small, everyday entrepreneurial ventures, through good old personal networks,
and modern crowd-based equity and lending platforms. Proposal 18 adds the credit
information that banks typically consider proprietary. By disclosing that information
at least for the publicly guaranteed loans, also the refused ones, private investors that
can take on more risk can pick up on these opportunities to invest.
Proposals 19 and 20 also aim to have free up the banks’ balance sheets for more
risky financing of entrepreneurial and SME venturing. The role of banks in early-stage
entrepreneurial finance is typically absent, but bank credit in the form of personal
loans is an important source of finance for start-ups. Both new ventures in their
growth stage as well as established SMEs would benefit from a banking sector that
can take on more risk and banks on relationships rather than solid collateral and track
records. To allow banks to take that traditional intermediation role (again), they need
to finance their balance sheet with more equity (have more “skin in the game”) and
the savings and transaction money of ordinary people should not be at risk sitting
as a liability in the form of deposits on their balance sheets. This implies that bank
credit will become more expensive, but importantly, more risk tolerant.
Proposals 37, 38, and 40 are very much aligned with the above in strengthening
the infrastructure on which platform-based financial (and other) services operate
and creating central and publicly funded “observatories” that collect, curate, and
disclose relevant and reliable information on entrepreneurial venturing and ventures,
for entrepreneurs but also for (less sophisticated) investors.
Proposals 26, 31, 41, and 44 are directly aimed to promote the flow of talent
into entrepreneurial venturing, specifically in the form of a well-trained and creative
workforce. Proposal 26 creates a level playing field for small, risky ventures as
employers while proposal 31 intends to make Britain’s workers more resilient in the
face of faster changing jobs and labor markets. Employability in a modern economy
depends to a large extent on the ability to learn not just knowledge that was acquired
in school. Therefore, proposal 41 aims to instill creativity and experimentation in
primary and secondary education (with the required tolerance for failure), whereas
proposal 44 continues this line in higher education in support of entrepreneurial
behavior and venturing.
Proposals 48 and 50 then aim to also keep that spirit alive on the work floor, where
the former should be interpreted in the UK context as a way to incentivize small
businesses to also retain and train their employees, strengthening the accumulation
and maintenance of human capital throughout the average British career, while the
latter translates into the government giving direction to innovation, without exerting
direct control.
The intentions of these proposals, individually and in combination, are to make
British entrepreneurs and SMEs more inclined to hire workers and also train them on
the job and maintain their skills. One may conclude that the proposals are insufficient
to create the powerful incentives to invest in on the job training that exist in CMEs,
but at least these proposals take us in the right direction and are consistent with the
historically evolved institutional framework of the UK. Reforms in education aim
to make workers more entrepreneurial while increasing their skills and flexibility,
whereas reforms in the financial system and tax code aim to allow for more private
wealth to accumulate and flow to the SMEs and start-ups that VC and angel investors
have shunned. The interventions proposed do not limit the mobility of resources
in the UK but will help to strengthen regional entrepreneurial ecosystems. Private
wealth and informal investment, as well as training on the job in small- and medium-
sized manufacturing firms, tend to strengthen local and regional ecosystems, without
risking leakage of resources to the center. London, meanwhile, can attract resources
from all around the world and still thrive as the entrepreneurial hotspot of the UK.
It is possible that, even though all regions stand to benefit from such interven-
tions, the fact that density and clustering tend to promote the quality and impact of
entrepreneurial venturing, will imply that the same policy improvements will benefit
London most. Still, that should not stop policy makers from pursuing these inter-
ventions. It is the UK citizens, not its administrative units per se, that the national
government should care about. In addition, the UK has effective automatic transfer
systems in social security and the National Health Service that will help maintain
a high quality of life throughout the country, even if the available entrepreneurial
resources end up being deployed only in parts of the territory.
As a final point, it should also be stressed that policy makers should ensure that
regulation is long-term oriented and does not change frequently, as this will deter
entrepreneurial activities and makes it hard to plan for the future. Information about
the requirements to create ventures could also be made more easily accessible for
potential entrepreneurs and, if possible, of better quality.
Of course, these proposals will need a much more detailed discussion and form the
starting point, not the final word on the policy debate. In this, we join the debate the
LSE Growth Committee’s 2017 report has sparked in UK policy circles. By focusing
on strengthening economic resilience, we believe our interventions’ success depends
a lot less on uncertain political and technological processes the UK cannot hope to
control. Based on our analysis of the situation, we propose the UK considers this set
of interventions to improve and maintain the health of its entrepreneurial ecosystem.
That will be a key asset for the UK, whatever the circumstances.
8.5 Step 5: The FIRES-Reform Proposals in Light

of the Countries’ Historical, Geographical,
To put our proposed reform program in its proper context, it is important to discuss the
diagnosis and proposed treatments with experts in the field. In this case that is British
policy makers that are active in the field. Given the wide diversity of policy areas
involved, it is furthermore important to not only discuss this with policy makers that
are active in “entrepreneurship policy” in a narrow sense. Our approach emphasizes
the importance of reforming institutions that determine the allocation of financial,
labor, and knowledge resources to entrepreneurial activity in the broadest and most
inclusive sense of the word. Entrepreneurship policy in the narrow sense has been
around for some three decades or more and to date has achieved only limited success.
Because of its breadth, our reform agenda inevitably cuts across many policy
areas, traditionally less associated with entrepreneurship policy, including wealth
taxation, financial and labor market regulation, social security, and science policy.
As the institutions in these areas have evolved historically and policy makers in
these areas pursue different, equally relevant public policy priorities, the challenge
is to discuss the proposed agenda in sufficient depth but with a sufficiently diverse
group of policy makers and practitioners. Policies and institutions in these different
areas overlap and interact in ways that affect the quality and performance of the
entrepreneurial ecosystem (Stam 2015, 2018). The challenge is to not only propose
policies and reforms that will strengthen the ecosystem, but to do it in such a way
that other important policy priorities are also achieved.
In order to receive the first round of feedback on the proposals for the UK presented
in Table 8.5, a policy roundtable was held at the London School of Economics on
April 26, 2018. Participants included senior policy makers, consultants, and political
advisors as well as entrepreneurs and suppliers of financial capital. This step can
be seen as an attempt to allow our patient, or perhaps more accurately, her team of
medical specialists, intimately familiar with our patient, to give feedback about our
diagnosis and proposed treatments. What proposals does this team endorse, question
or maybe even want to drop?
The participants agreed that a more proactive government policy making along
the lines of the FIRES-report might be worthwhile considering carefully. However,
policies to reduce failure and accelerate scale-up were proposed as important policies
to generate more entrepreneurship, which some of the participants argued should be
the main focus of the FIRES proposals. The participants also suggested that the notion
of entrepreneurship itself and the meaning of the term was ambiguous, covering a
variety of activities from forming major new companies to providing work for the
socially excluded. It was important to link the policy proposals to the specific form
of entrepreneurship under consideration.
The participants then discussed the proposals on experimenting with or abandon-
ing IP protection laws. IP and patents are one of the few tangible components of an
entrepreneurial project upon which investors can make evaluations. It was suggested
that one could either increase renewal fees of patents or open IP systems to radical
change toward “open source.” This system would then mirror that of, for example,
the culinary industry.
Some major UK issues such as immigration, human capital, and digitalization
were pointed out as having not been sufficiently addressed in the study. The partici-
pants pointed to the importance of developing a dynamic entrepreneurial environment
with a much more inclusive venture capital investment approach.
The participants furthermore expressed deep concern about the geographical con-
centration of entrepreneurial activity in UK, as discussed in the FIRES-report. There
is a visible centralization of the entrepreneurial resources in London which only
attracts a narrow demography and a lack of incentives for people to stay or go back
home to the countryside.
As a final point, the need for developing a benchmark that enables this study to
better evaluate the findings by comparing it to what is happening in the rest of the
world was stressed.
8.6 Conclusions
This chapter on the UK illustrates the FIRES-approach to formulating a tailored

institutional reform strategy to promote a more entrepreneurial society in Europe. It
illustrates how one could systematically analyze the situation before selecting and
proposing reforms within this area. After carefully analyzing the UK’s historically
rooted institutional foundations, this chapter triangulates historical, qualitative, and
quantitative information to identify the UK’s strengths and weaknesses. Based on
this diagnosis, the most relevant proposals are selected from the menu of policy
interventions and reform proposals in the companion volume of this book (Elert
et al. 2019).
The UK’s long and rich history has shaped its institutions in a unique way. The
British Isles rose to unrivaled global supremacy in the nineteenth century, but in
the twentieth century its rivals rapidly caught up. Like any other nation, the UK
has to compete with innovative and efficient competitors for the favor of consumers
across the globe. The UK has developed its distinct Anglo-Saxon model of capitalism
with a relatively business-friendly regulatory environment, highly flexible labor mar-
kets, well-funded universities, and strong protection of intellectual property rights.
At the same time, low labor protection reduces incentives for people to invest and
accumulate (firm-specific) human capital. As a consequence, the UK has relatively
efficient and business-friendly markets, but is also characterized by short-termism
and economic rewards that are not always socially inclusive.
The UK as a whole performs relatively well by EU standards in terms of the
entrepreneurial ecosystem. UK entrepreneurs are not short of spirit, and our survey
suggests they are not held back by stifling bureaucracy (as they are in some EU
countries). Moreover, its formal financial markets are world class.
The chapter discusses proposals concerning intellectual property rights, how to
increase the levels of informal investment as well as how to strengthen the infrastruc-
ture on which platform-based financial services operate. It also discusses reforms to
promote the flow of talent into entrepreneurial venturing and ways to strengthen the
accumulation and maintenance of human capital.
The proposals individually and in combination aim to strengthen the knowledge
base, talent pool, and capital base from which UK entrepreneurs can draw and aim
to open opportunities for not only starting but also growing innovative firms in all
regions in the UK. All regions stand to benefit from these interventions. But by
strengthening informal investment and the skills and resilience of low wage workers,
while fostering a more entrepreneurial spirit throughout, it is likely that all regions—
even peripheral—will benefit. Of course, these proposals will need a much more
detailed discussion and only form the starting point, not the final word in the pol-
icy debate. Moreover, even if eventually adopted, our proposals all require careful
implementation and evaluation to complete the policy cycle.
References
3i Group (n.d.) About us. History. Retrieved from: https://www.3i.com/about-us/history/ on 14-04-

2018
Acs ZJ, Audretsch DB, Lehmann EE (2013) The knowledge spillover theory of entrepreneurship.
Acs ZJ, Braunerhjelm P, Audretsch DB, Carlsson B (2009) The knowledge spillover theory of
entrepreneurship. Small Bus Econ 32(1):15–30
Anderson R (2016) University fees in historical perspective. History and Policy. Policy
Papers. Retrieved from: http://www.historyandpolicy.org/policy-papers/papers/university-fees-
in-historical-perspective on 14-04-2018
Ashmore G (1988) Government and business: reducing red tape. Public Money Manag 8(1):78–81
Ashton DN, Green F (1996) Education, training and the global economy. Edward Elgar Publishing,
Cheltenham, UK
Bank of England (n.d.) About our history. Retrieved from: https://www.bankofengland.co.uk/about/
history on 14-04-2018
Barclays (2017) What factors do lenders consider when making credit decisions? Retrieved from:
https://www.barclays.co.uk/help/credit-rating/lender-decision/ on 16-04-2018
Barnes S (1996) England’s civic universities and the triumph of the Oxbridge Ideal. Hist Educ Q
36(3):271–305
Bates T, Bradford WD (1992) Factors affecting new firm success and their use in venture capital
financing. J Entrepreneurial Fin 2(1):23
Bathmaker A, Ingram N, Abrahams J, Hoare A, Waller R, Bradley H (2016) Higher education,
social class and social mobility: the degree generation. Palgrave MacMillan, London
BBC (2008) Timeline: The Bank of Scotland. Retrieved from: http://news.bbc.co.uk/2/hi/uk_news/
scotland/7620761.stm on 14-04-2018
BBC (2009) The history of payments. Retrieved from: http://news.bbc.co.uk/2/hi/business/
7839823.stm on 14-04-2018
Birtles S (1999) Common land, poor relief and enclosure: the use of manorial resources in fulfilling
parish obligations 1601–1834. Past Present 165(1):74–106
Brennan K (2010) Train to gain is money well spent. The Guardian. Retrieved from:https://www.
theguardian.com/education/2010/apr/06/train-to-gain on 9-04-2018
British Council (n.d.) Higher education system. Retrieved from: https://www.britishcouncil.in/sites/
default/files/higher_education_system_of_uk.pdf on 14-04-2018
Brosan G (1972) The development of polytechnics in the United Kingdom. Paedagogica Europaea
7:41–53
Brown W, Deakin S, Nash D, Oxenbridge S (2000) The employment contract: from collective
procedures to individual rights. Br J Ind Relat 38(4):611–629
Cranfield D, Taylor J (2008) Knowledge management and higher education: case study. Electron J
Knowl Manag 6(2):85–100
Choi WK (2010) Capitalism, unfree labor and colonial doxa: the master and servant act from Britain
to Hong Kong, 1823–1932. J Hist Sociol 23(2):284–315
Clarke T (2001) The knowledge economy. Education+Training 43(4/5):189–196
Clegg HA, Fox A, Thompson AF (1985) A history of British trade unions since 1889: 1911–1933.
Oxford University Press, Oxford
Collins M (2012) Money and banking: a history. Routledge, London
Cowling M, Mitchell P (1997) The self-employment: a study of government policy and the role of
the macroeconomy. Manchester Sch 65(4):427–442
Craig R (2007) The history of employment law in England and Northern Ireland. Business Law,
8th edn. Cengage Learning. Retrieved from: http://cws.cengage.co.uk/abbott8/students/ni_supp/
employ_law/hist_of_employ_law.pdf on 14-04-2018
Curthoys M (2004) Governments, labour, and the law in mid-Victorian Britain: the trade union
legislation of the 1870s. Oxford Historical Monographs. Clarendon Press, Oxford
Davies H (2002) A review of enterprise and the economy in education. HM Treasury, London.
Retrieved from: http://www.readyunlimited.com/wp-content/uploads/2011/09/Davies-Review-
main-doc.pdf on 7-04-2018
Degryse C (2016) Digitalisation of the economy and its impact on labour markets. ETUI Research
Paper—Working Paper 2016.02. Available at SSRN: https://ssrn.com/abstract=2730550 or http://
dx.doi.org/10.2139/ssrn
foundations of different entrepreneurship types through ‘Varieties-of-Capitalism’ arguments.
Special issue on “Financial and institutional reforms for an entrepreneurial society.” Small Bus
Econ 51(2):293–320
Dutton HI (1984) The patent system and inventive activity during the industrial revolution, 1750–
1852. Manchester University Press, Dover, NH
EC (1995) Green paper on innovation. European Commission. Retrieved from: http://europa.eu/
documents/comm/green_papers/pdf/com95_688_en.pdf on 14-04-2018
Estrin S, Gozman D, Khavul S (2018) The evolution and adoption of equity crowdfunding:
entrepreneur and investor entry into a new market. Small Bus Econ 51(2):425–439
Feld F (2011) The welfare state—Never ending reform. BBC History. Retrieved from: http://www.
bbc.co.uk/history/british/modern/field_01.shtml on 14-04-2018
Ferguson N (2009) The ascent of money: a financial history of the world. Penguin, New York
Ferrari R (2016) FinTech impact on retail banking–From a universal banking model to banking ver-
ticalization. In: Chishti S, Barberis J (eds) The FinTech book: the financial technology handbook
for investors, entrepreneurs and visionaries. Wiley, Chichester, pp 248–252
Goos M, Manning A, Salomons A (2009) Job polarization in Europe. Am Econ Rev 99(2):58–63
Goos M, Manning A, Salomons A (2014) Explaining job polarization: routine-biased technological
change and offshoring. Am Econ Rev 104(8):2509–2526
Green F, Felstead A, Gallie D, Henseke G (2016) Skills and work organisation in Britain: a quarter
century of change. J Labour Market Res 49(2):121–132
Hall PA, Soskice D (2001) Varieties of capitalism: the institutional foundations of comparative
advantage. Oxford University Press, Oxford
Han L, Benson A, Chen JJ, Zhang S (2012) The use and impacts of bank support on UK small and
medium-sized enterprises. Int Small Bus J 32(1):61–80
Hannon PD (2005) Philosophies of enterprise and entrepreneurship education and challenges for
higher education in the UK. Int J Entrepreneurship Innov 6(2):105–114
Hay C (2010) Chronicles of a death foretold: the winter of discontent and construction of the crisis
of British Keynesianism. Parliamentary Aff 63(3):446–470
Held L (2019) Part-time entrepreneurship: the role of institutions, venture and individual character-
istics in entry and transition choices. In: Held L (ed) Unravelling the patterns in venture creation
processes. Ph.D. thesis. Utrecht University, Utrecht, pp 25–55
age formation activities during new product development processes. Horizon 2020 Project on
Henkel M, Kogan M (1993) Research training and graduate education. The British macro structure.
In: Clark BR (ed) The research foundations of graduate education: Germany, Britain, France,
United States, Japan. University of California Press, Berkeley, CA, pp 71–114
Hepple B (2002) Social and labour rights in a global context: international and comparative
perspectives. Cambridge University Press, Cambridge
Hepple B, Morris GS (2002) The employment act 2002 and the crisis of individual employment
rights. Ind Law J 31(3):245–269
Herrmann AM (2019) A plea for varieties of entrepreneurship. Special Issue on “Entrepreneurship
in context.” Small Bus Econ 52(2):331–343
Herrmann AM (2020) On the institutional foundations of the varieties of entrepreneurship in Europe.
Heyck TW (2012) The idea of a university in Britain, 1870–1970. Hist Eur Ideas 8(2):205–219
Hijzen A, Upward R, Wright PW (2010) Job creation, job destruction and the role of small firms:
firm-level evidence for the UK. Oxford Bull Econ Stat 72(5):621–647
HM Treasury (2003) Lambert review of business-university collaboration. HM Treasury, London
HM Treasury (2006) Leitch review of skills. Prosperity for all in the global economy—World class
skills. HM Treasury, London
HM Treasury (2009) HM treasury annual innovation report. HM Treasury, London
HM Treasury (2010) HM treasury annual innovation report and accounts. HM Treasury, London
HMSO (1971) Report on committee of enquiry on small firms (Bolton Report), Cmnd 4811. HMSO,
London
HMSO (1979) Interim report on financing of small firms (Wilson Report), Cmnd 7503. HMSO,
London
Huggins R, Williams N (2009) Enterprise and public policy: a review of labour government
intervention in the United Kingdom. Environ Plan C Polit Space 27(1):19–41
Intellectual Property Office (2014a) History of patents: the 18th century. Retrieved from: http://
www.ipo.gov.uk/types/patent/p-about/p-whatis/p-history/p-history-18century.htm
Intellectual Property Office (2014b) History of patents: the 20th century. Retrieved from: http://
webarchive.nationalarchives.gov.uk/20140603131909/ on 14-04-2018
Jones H (2018) Funding for lending scheme: how does it work? Express. Retrieved
from: https://www.express.co.uk/finance/personalfinance/911166/funding-for-lending-scheme-
bank-of-england on 9-04-2018
Kahn-Freund O (1944) The illegality of a trade union. Modern Law Rev 7(40):192–205
Leendertse J (2017) Entrepreneurship in the UK’s renewable energy industry. Background paper
for FIRES WP5, mimeo
Lewchuk WA (1984) The role of the British government in the spread of scientific management
and fordism in the interwar years. J Econ Hist 44(20):355–361
Lin MJJ, Hung SW, Chen CJ (2009) Fostering the determinants of knowledge sharing in professional
virtual communities. Comput Hum Behav 25(4):929–939
Lloyds Banking Group (n.d.) Our heritage. Timeline. 1695–1800. Retrieved from: http://www.
lloydsbankinggroup.com/Our-Group/our-heritage/timeline/1695-1800/ on 14-04-2018
LSE Growth Commission (2017) LSE growth commission report 2017. Retrieved from: http://www.
lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/2017LSEGCReport.
pdf on 14-04-2018
Machin S, Vignoles A (2018) What’s the good of education? The economics of education in the
UK. Princeton University Press, Princeton
Machlup F, Penrose E (1950) The patent controversy in the nineteenth century. J Econ Hist 10(1):1–
29
Mackenzie A (2015) The fintech revolution. London Bus Sch Rev 26(3):50–53
MacLeod C (1988) Inventing the industrial revolution: the English patent system, 1660–1800.
Cambridge University Press, Cambridge
MacLeod C, Nuvolari A (2006) Inventive activities, patents and early industrialization. A synthesis
of research issues. DRUID Working Paper No. 06-28
Mason C (2009) Public policy support for the informal venture capital market in Europe: a critical
review. Int Small Bus J 27(5):536–556
Mason C, Harrison R (1989) Informal venture capital. In: Storey DJ (ed) Small business: critical
perspectives on business and management. Taylor and Francis, New York
Mason C, Jones L, Wells S in collaboration with URS Corp (2010) The city’s role in providing for
the public equity financing SMEs. City of London, London
Merlin-Jones D (2010) The industrial and commercial finance corporation: lessons from the past
for the future. Civitas. Retrieved from: http://www.civitas.org.uk/.pdf on 14-04-2018
Mokyr J (2005) Long-term economic growth and the history of technology. In: Aghion P, Durlauf
S (eds) Handbook of economic growth, vol 1. Elsevier, Amsterdam, pp 1113–1180
Mollick E, Robb A (2016) Democratizing innovation and capital access: the role of crowdfunding.
Calif Manag Rev 58(2):72–87
Morris D, Collier T, Wood G (2005) Effects of minimum wage legislation: some evidence from
small enterprises. Int Small Bus J 23(2):191–209
Moser C (1988) The Robbins report 25 years after—and the future of the Universities. Oxford Rev
Educ 14(1):5–20. Retrieved from: http://www.jstor.org/stable/1050360 on 14-04-2018
Mueller P, van Stel A, Storey DJ (2008) The effects of new firm formation on regional development
over time: the case of Great Britain. Small Bus Econ 30(1):59–71
NAO (2014) Business perceptions survey. Retrieved from https://www.nao.org.uk/report/business-
perceptions-survey-2014/ on 16-04-2018
NESTA (2008) History matters: unlocking innovation in British cities and regions. Policy briefing
HM/26. Retrieved from: https://www.nesta.org.uk/sites/default/files/history_matters.pdf on 14-
04-2018
Newton L, Cottrell PL (1998) Joint-stock banking in the English provinces 1826–1857: to branch
or not to branch? Bus Econ Hist 27(1):115–128
NHS (n.d.) The history of the NHS in England. Retrieved from: https://www.nhs.uk/NHSEngland/
thenhs/nhshistory/Pages/NHShistory1948.aspx on 14-04-2018
Nicholas T (2014) Technology, innovation and economic growth in Britain since 1870. In: Floud R,
Humphries J, Johnson P (eds) The Cambridge economic history of modern Britain. Cambridge
University Press, Cambridge, pp 181–204
OECD (2015) OECD reviews of vocational education and training key messages and country
summaries. OECD, Paris. Retrieved from: http://www.oecd.org/education/skills-beyond-school/
OECD_VET_Key_Messages_and_Country_Summaries_2015.pdf on 14-10-2019
OECD (2019) Average wages. OECD, Paris. Retrieved from: https://data.oecd.org/earnwage/
average-wages.htm#indicator-chart on 14-10-2019
Parkinson M, Champion T, Evans R, Simmie J, et al. (2006) State of the English cities. A research
study. Office of the Deputy Prime Minister, London. Retrieved from: http://image.guardian.co.
uk/sys-files/Politics/documents/2006/03/07/StateoftheEnglishCitiespart1.pdf on 14-10-2019
Pike R (2017) How will the market adapt to the end of funding for lending? Mortgage
solutions. Retrieved from: http://www.mortgagesolutions.co.uk/better-business/2017/08/08/will-
market-adapt-end-funding-lending/ on 9-04-2018
Piketty T (2014) Capitalism in the 21st Century. Harvard University Press, Cambridge, MA
Potter J, Moore B (2000) UK enterprise zones and the attraction of inward investment. Urban Stud
37(8):1279–1312
Pratt J (1997) The polytechnic experiment: 1965–1992. SRHE and Open University Press,
Buckingham. Retrieved from: https://eric.ed.gov/?id=ED415724 on 14-04-2018
Richardson HW (2011) Regional development agencies in England. In: Richardson HW, Bae CHC,
Choe SC (eds) Reshaping regional policy. Edward Elgar Publishing, Cheltenham
Robinson E (1972) James Watt and the law of patents. Technol Cult 13(2):115–139
Rothwell R (1985) Venture finance, small firms and public policy. Res Policy 14(5):253–265
Rusly FH, Talib YYA, Salleh D (2017) The impact of minimum pay implementation on small busi-
nesses operating cost and sustainability: a case of service business. In: SHS web of conferences,
vol 34. EDP Sciences, Les Ulis
Sanders M, Stenkula M, Grilli L, Herrmann A, Latifi G, Pager B, Szerb L, Terragno BE (2020a) A
reform strategy for Italy. In: Sanders M, Marx A, Stenkula M (eds) The entrepreneurial society.
Reform strategies for Italy, Germany and the UK. Springer, Berlin
Sanders M, Stenkula M, Fritsch M, Herrmann A, Latifi G, Pager B, Szerb L, Terragno BE, Wyrwich
M (2020b) A reform strategy for Germany. In: Sanders M, Marx A, Stenkula M (eds) The
Schumpeter J (1911) The theory of economic development. Harvard University Press, Cambridge,
MA
Schwanen D, Wyonch R (2018) Canada’s innovation report card. C.D. Howe Institute e-Brief
273. Retrieved from: https://www.cdhowe.org/public-policy-research/canadas-2018-innovation-
policy-report-card on 16-04-2018
Scott P (2014a) The reform of English higher education: universities in global, national and regional
contexts. Cambridge J Reg, Econ Soc 7(2):217–231
Scott P (2014b) Robbins, the binary policy and mass higher education. High Educ Q 68(2):147–163
Shawl WF (1954) The repeal of the Combination acts 1824–1825. Graduate Student theses,
Dissertations, & Professional Papers. University of Montana
Spicker P (2014) Social policy: theory and practice. Policy Press, Bristol
Stud 23(9):1759–1769
Storey DJ, Tether B (1998) Public policy measures to support new technology-based firms in the
European Union. Res Policy 26(9):1037–1057
Szerb L, Lafuente E, Horváth K, Páger B (2019) The relevance of quantity and quality entrepreneur-
ship for regional performance: the moderating role of the entrepreneurial ecosystem. Reg Stud
53(9):1308–1320. https://doi.org/10.1080/00343404.2018.1510481
Szerb L, Vörös Z, Komlósi É, Acs ZJ, Páger B, Rappai G (2017) The regional entrepreneur-
ship and development index: structure, data, methodology and policy applications. Fires
Report D4.4. Retrived from http://www.projectfires.eu/wp-content/uploads/2018/07/d4.4-the-
regional-entrepreneurship-and-development-index_-structure-data-methodology-and-policy-
applications.pdf
Tate J (2001) National varieties of standardization. In: Hall PA, Soskice D (eds) Varieties of
capitalism. Oxford University Press, Oxford, pp 442–473
Taylor J (2003) Institutional higher education: policy and outcomes since the end of the binary
divide. High Educ Q 57(3):266–293
Teubner G (2001) Legal irritants: how unifying law ends up in new divergences. In: Hall PA, Soskice
DW (eds) Varieties of capitalism—the institutional foundations of comparative advantage. Oxford
Thirkell PC, Dau R (1998) Export performance: success determinants for New Zealand manufac-
turing exporters. Eur J Mark 32(9/10):813–829
Towers B (1989) Running the gauntlet: British trade unions under Thatcher, 1979–1988. Ind Labor
Relat Rev 42(2):163–188
UK Government (n.d.) University Enterprise Zones. Retrieved from: https://www.gov.uk/
government/publications/university-enterprise-zones/university-enterprise-zones on 7-04-2018
UK Government (2000) Financial services and markets act 2000. Retrieved from: https://www.
legislation.gov.uk/ukpga/2000/8/pdfs/ukpga_20000008_en.pdf on 8-04-2018
UK Government (2015) 2010 to 2015 government policy: business enterprise. Retrieved
from: https://www.gov.uk/government/publications/2010-to-2015-government-policy-business-
enterprise/2010-to-2015-government-policy-business-enterprise#appendix-2-encouraging-
private-sector-investment on 4-04-2018
University of Cambridge (n.d.) About the university. Early records. Retrieved from: https://www.
cam.ac.uk/about-the-university/history/early-records on 14-04-2018
University of Edinburgh (n.d.) About. Our history. Retrieved from:https://www.ed.ac.uk/about/our-
history on 14-04-2018
University of London (n.d.) History of University of London. Retrieved from: https://london.ac.uk/
about-us/history-university-london on 14-04-2018
University of Oxford (n.d.) Introduction and history. Retrieved from: https://www.ox.ac.uk/about/
organisation/history?wssl=1 on 14-04-2018
Van Bavel B (2016) The invisible hand? How market economies have emerged and declined since
AD 500. Oxford University Press, Oxford
Varga A, Szerb L, SebestyénT, Szabó N (2020) Economic impact assessment of entrepreneur-
ship policies with the GMR-Europe model. In: Sanders M, Marx A, Stenkula M (eds) The
entrepreneurial society. Reform Strategies for Italy, Germany and the UK. Springer, Berlin
Walters A (2005) Personal insolvency law after the enterprise act – An appraisal. J Corp Law Stud
5(1):65–104
White LH (1992) Competition and currency: essays on free banking and money. NYU Press, New
York
Whiteside N (2014) The Beveridge report and its implementation: a revolutionary project?
Retrieved from: https://www.researchgate.net/publication/286702415_The_Beveridge_Report_
and_Its_Implementation_a_Revolutionary_Project on 14-04-2018
Wilson T (2012) A review of business–university collaboration. HM Government, London.
Retrieved from: http://dera.ioe.ac.uk/13842/1/wilson.pdf on 14-04-2018
Wilson W (1997) Student grants, loans and tuition fees. House of Commons Library Research Paper
No 97/119
Wiltbank (2009) Siding with the angels: business angel investing—promising outcomes and
effective strategies. Research report published by NESTA & BBAA
Wooden M, Sloan J (1998) Industrial relations reform and labour market outcomes: a comparison
of Australia, New Zealand and the United Kingdom. Retrieved from: https://www.rba.gov.au/
publications/confs/1998/pdf/wooden-sloan.pdf on 14-04-2018
Woods DC (1982) The operation of the master and servants act in the black country, 1858–1875.
Midland Hist 7(1):93–115
Woodward D (1980) The Background to the statute of artificers: the genesis of labour policy,
1558–63. Econ Hist Rev New Ser 33(1):32–44
World Bank (2018) Doing business report. Retrieved from: http://www.doingbusiness.org/~/media/
WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf on 7-04-
2018
WIPO (n.d.a) An explanatory note concerning the origins of the United Kingdom intellectual
property legal regime. Retrieved from: http://www.wipo.int/export/sites/www/wipolex/en/notes/
gb.pdf
WIPO (n.d.b) United Kingdom country profile. Retrieved from: http://www.wipo.int/wipolex/en/
details.jsp?id=1623 on 14-04-2018
Chapter 9
What We Have Learned and How We
May Proceed
Abstract In this chapter, the editors conclude this volume and draw the most
important lessons that can be drawn from the FIRES project. The editors highlight
theoretical lessons, methodological innovations, and policy implications.
Keywords Entrepreneurship · Entrepreneurial society · Institutional reforms
This book marks the conclusion of the project “Financial and Institutional Reforms
for the Entrepreneurial Society” (FIRES)—a European Union project launched in
2015 as part of the Horizon 2020 program to restore Europe’s ability to innovate,
grow, and create jobs over the coming decades. By 2015, the mood in Europe was
gloomy. The global financial and ensuing Euro crisis had put severe strains on Euro-
pean solidarity and weakened especially the southern Member States. The ambitious
Lisbon Agenda to make Europe the world’s most innovative continent by 2010 failed
to deliver on its promises. The Brexit vote, the Syrian refugee crisis, the backsliding
rule of law and rise of populist movements in several European Member States and
now the Corona pandemic have strengthened the need for the European Union to
reinvent itself and return Europe on the path to inclusive, sustainable, and innovative
growth. We therefore believe that since its start, the FIRES project has only gained
in importance and urgency.
In the project, we identified the entrepreneurial society as the way forward. The
entrepreneurial society is an open society in which ideas can compete on a level
playing field and challenge the status quo. First described by Schumpeter (1911),
an entrepreneurial society offers opportunity to all and organizes society to support
productive entrepreneurship that will generate innovation, jobs, and growth while
M. Sanders (B)
A. Marx
M. Stenkula
solving the many social and ecological challenges that Europe faces. The Euro-
pean Union (EU) can only (re)assert its place on the global technology frontier by
channeling more of its resources and talent to the small scale, innovative, and, there-
fore, also risky ventures that develop and test solutions for tomorrow, in business
and beyond. In an entrepreneurial society, the institutions are such that produc-
tive entrepreneurial experimentation is both made possible and encouraged. In our
project, we propose seven steps to design, implement, and evaluate reforms that help
develop the entrepreneurial society across Europe.
In the companion volume to this book (Elert et al. 2019), our project identi-
fied 50 proposals for reform in six key areas of policymaking that would support
the mobilization and allocation of human, financial, and knowledge resources for
entrepreneurial activity. In this volume we explicitly recognize the diversity of insti-
tutional arrangements in the EU as well as the multi-level nature of EU policy-
making. An entrepreneurial growth and innovation strategy for the EU cannot be a
“one-size-fits-all” basket of proposals.
To identify the appropriate set of interventions in a given context, careful analysis
is required. Hence, this volume highlighted the diverse and historically deeply rooted
institutional foundations of EU Member States and introduced the tools we devel-
oped for analyzing the entrepreneurial ecosystem before turning to reforms. It has
also introduced a policy analysis of how and at which levels of governance an effec-
tive reform strategy must be formulated in the context of European policymaking.
Developing these tools required a broad, multidisciplinary approach. The project,
including this book, has included thoughts and ideas of scholars from a range of dif-
ferent fields such as history, economics, geography, management, political science
and law.
As the proof of the pudding is in the eating, we then illustrate the practical use-
fulness of our approach by analyzing Italy, Germany, and the UK in depth and
formulate a reform strategy for these countries using our seven-step approach. These
three countries were chosen to broadly represent Europe’s institutional families.1
We draw some important lessons from this exercise. The first is theoretical:
building on the work of Schumpeter (1911), Baumol (1990), and Audretsch and
Thurik (2000, 2001), our project has confirmed that institutions enable or inhibit
the allocation of resources to the challengers of the status quo that drive productive
entrepreneurial venturing. Therefore, to build an entrepreneurial economy and soci-
ety, institutional reforms are required. Our application of historical analysis, however,
has shown that, due to strong path- and interdependencies, not all institutions are so
easily reformed. Echoing the work of Williamson (2000) and new institutional eco-
nomics, we recognize that some institutions are more deeply embedded than others.
Moreover, it is the way institutions actually operate, not how they appear in law or
data, that matters. Consequently, it is the functions that institutions perform, rather
than the specific shape they take in any given context, that should be the focus of
efforts to reform.
1 Inthe Varieties of Capitalism (VoC) terminology they represent European examples of a mixed
(or Mediterranean) market system, a coordinated market and a liberal market, respectively.
9 What We Have Learned and How We May Proceed 249
To make this more concrete, we can look at the example of universities. Based
on cross-sectional and panel data evidence, many have concluded that the pres-
ence of a university promotes knowledge-intensive entrepreneurial venturing in its
direct surroundings. The university campus serves as a hotbed for entrepreneur-
ship. But university knowledge can spill over to economic activity through produc-
tive entrepreneurship in many shapes and forms. The most obvious is perhaps the
campus-based university spinoff through a USA-style tech transfer office on a land-
grant college that was indeed founded with a mission to disseminate knowledge to
business. But that is as much a manifestation of USA history as it is a measure of
knowledge spillovers. In a different, say German or Italian context, where univer-
sities have traditionally fought to minimize or exclude outside influences (e.g., the
Church and the State) in research and curriculum, the same spillover may take the
form of educated graduates joining an off-campus research institute and developing
new ideas in close collaboration with incumbent firms. Given the deep-rooted insti-
tutional context of the German university, perhaps the reform should aim to facilitate
the flow of knowledge from universities to firms via the channels that already exist,
rather than setting up a tech transfer office and copying the USA Bayh–Dole Act in
a context where the institutional framework simply does not support it.
These theoretical lessons have implications for the methods that should be applied
in analyzing the need, scope, and opportunities for institutional reform in any specific
country, region, or locality. As much as can be learned from comparing uniformly
defined indicators and their impacts across regions and countries, doing so implicitly
assumes that the same observed variables reflect the same underlying mechanisms
across regions with potentially very different institutional contexts. Methodologi-
cally, we therefore stress the need to triangulate methods. It is a good start, but
not enough to compare regions on a set of well-defined variables to identify their
weaknesses, strengths, and bottlenecks. Such analyses need to be complemented
with careful historical analysis to understand the specifics of the local, regional, and
national institutional contexts as well as survey-based and qualitative information on
how local entrepreneurial ecosystems function and how they could be improved.
These methodological innovations also have important policy implications. There
are many ways in which an ecosystem can channel resources to (or away from)
productive entrepreneurs. And there are many, potentially highly relevant, comple-
mentarities among these institutions. Proposing a one-size-fit-all reform strategy to
promote the European entrepreneurial society is then beside the point. Bavaria cannot
be(come) Silicon Valley or London, nor should it want to. Instead, the focus should
be on promoting access to resources for challengers of the status quo in all of these
specific institutional contexts.
The lack of a clear and unambiguous policy prescription also implies that policy-
makers have to make some tough choices, as there are inevitable tensions between
the various approaches. First there is the tension between universalist and particu-
larist analysis. The Varieties of Capitalism (VoC) and historical analysis approach in
Chaps. 2 and 4 clearly stress that every constellation of institutions is unique, whereas
the Regional Entrepreneurship and Development Index (REDI) and Geographic,
Macro, and Regional (GMR) modeling approaches of Chap. 3 rely on uniformly
defined, internationally comparable indicators and estimates of average effects to

quantify bottlenecks and predict the impact of alleviating them. On the one hand,
particularists will claim that every economy has to be analyzed separately, and no
general model can be used to analyze the impact of a specific policy, strategy, or
reform. Moreover, one cannot compare economies and extract “best practices” from
one country and expect them to work similarly in another country. On the other
hand, universalists—including most economists—will claim that the basic mecha-
nisms under study are sufficiently similar across contexts, and the relevant diversity
between them can be adequately addressed by including a broad variety of indicators
in the overall index, carefully distinguishing between complements and substitutes
in the ecosystem and controlling for institutional characteristics.
In this book, we do not want to argue the case one way or the other: We firmly
believe that the approaches should complement each other. The entrepreneurial
ecosystem approach (Stam 2015; O’Connor et al. 2018) brings the two approaches
together and proposes universal theoretical concepts to systematize particularistic
empirical data.
A second, perhaps somewhat related tension in our book exists between reforms
that are desirable and those that are feasible. Once universalists and particularists
have agreed on a set of desirable interventions in a specific context, there is always the
reality check of their political and legal feasibility. Policymaking in the EU involves
navigating the complex tangle of treaties, legislation, and agencies that have and give
mandates and competences. The scope for encompassing reforms is often severely
limited by the complexities of policymaking in the EU. Legal competencies are
distributed between the EU and its Member States in a set of treaties that, although
not set in stone, are politically difficult to change. Moreover, the allocation of these
competencies was not arranged with making effective entrepreneurship policy in
mind. The appropriate governance level for each of the 50 reform proposals in Elert
et al. (2019) was identified and provided in that volume. Chapter 5 in this volume
provides an analysis of Europe’s current entrepreneurship policies to illustrate the
complex interwoven structure of actors and competencies involved. Chapter 5 clearly
conveys the message that implementing reforms at the appropriate level may be quite
challenging in the existing legal frameworks. We need to be aware of this tension
and consequently be modest in our expectations but, despite of this, ambitious in our
efforts.
A final, politically highly relevant tension that the work in Chap. 3 and the country
studies force us to address, is the one between the inclusion of people and of regions.
In line with the aim of the Horizon 2020 program, the EU aims for inclusive and
sustainable growth. We understood this to mean, inclusion of citizens. However, the
proposals and reform strategies proposed in this volume are likely to benefit already
prosperous cities and regions the most. Creating more opportunities for more people
implies that people and resources become more footloose and will tend to concen-
trate in places where they can benefit from economies of agglomeration, knowledge
spillovers, and network externalities. Unfortunately, hopeful models predicting an
almost automatic trickle-down effect to the backward regions do not find much sup-
port in the data. This sits uncomfortably with policymakers that are elected and hope
9 What We Have Learned and How We May Proceed 251
to be reelected by a geographically delimited constituency. The flexibility of people

and resources throughout the EU is not likely to spread economic activity and pros-
perity equally across space. In fact, it may drive further divergence between core
and peripheral, urban and rural, regions and countries. Chapters 3, 6, 7, and 8 in this
volume address this issue. It is important to be aware that, even if all citizens benefit,
not all regions in the EU will. In our project, it is the well-being of its people, not the
fate of the politicians representing distinct administrative geographical units that is
the primary concern in our reform proposals. That said, effective automatic transfer
schemes that will help to maintain economic prosperity throughout the EU might be
needed to ensure stable support in the long run.
In conclusion, the FIRES project ended formally on May 31, 2018, but the real
work has only just begun. Policymakers at all levels in the EU now need to carefully
navigate the tensions we discussed above and start experimenting with reforms that
channel resources to challengers in their constituencies. More than a call for a set
of specific reforms, our project is a call for experimentation. Carefully designed and
evidence-based interventions now need to be tested on the ground. We stand ready
to support policymakers who are willing to take up our call to action.
References
Audretsch DB, Thurik AR (2000) Capitalism and democracy in the 21st century: from the managed
to the entrepreneurial economy. J Evol Econ 10(1–2):17–34
Audretsch DB, Thurik AR (2001) What’s new about the new economy? Sources of growth in the
managed and entrepreneurial economies. Ind Corp Change 10(1):267–315
Baumol W (1990) Entrepreneurship: productive, unproductive and destructive. J Polit Econ
98(5):893–921
O’Connor A, Stam E, Sussan F, Audretsch DB (2018) Entrepreneurial ecosystems. Springer, Berlin
Schumpeter J (1911) The theory of economic development. Cambridge University Press, Cam-
bridge, MA
Stud 23(9):1759–1769
Williamson OE (2000) The new institutional economics: taking stock, looking ahead. J Econ Lit
38(3):595–613

The Entrepreneurial Society

Uploaded by

Copyright:

Available Formats

The Entrepreneurial Society

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Entrepreneurial Society

Uploaded by

Copyright:

Available Formats

International Studies in Entrepreneurship

The Entrepreneurial Society

ISSN 1572-1922 ISSN 2197-5884 (electronic)

Building Entrepreneurial Societies with a Multidisciplinary

Prof. Dr. Erik Stam

Utrecht, The Netherlands Mark Sanders

1 Seven Steps Toward Inclusive, Innovative, and Sustainable

Part I Historical Roots, Ecosystem Assessment, Firm Formation

Part II Country Studies

8 A Reform Strategy for the UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Norbert Szabó Regional Innovation and Entrepreneurship Research Center,

Mark Sanders, Axel Marx and Mikael Stenkula

Keywords Entrepreneurship · Entrepreneurship policy

1.2 The FIRES Seven-Step Procedure

In our project, we presented a seven-step approach to formulating an effective reform

1.3 Book Outline

Abstract Both policymakers and academics offer various strategies concerning

Keywords Entrepreneurship · Varieties of Capitalism · National institutions ·

A widely acknowledged explanation for the difference in terms of entrepreneurship

© The Author(s) 2020 9

social security spending as well as economic conditions such as globalization and

2.2.1 Evolution of the Formal Financial Tools

2.2.2 Alternative Source of Finance: The Family

Historical studies show that entrepreneurs had alternatives to banks as sources of

systems in the Northwestern European countries is that policies should prioritize

2.3.1 Educational Attainment

The VoC literature highlights differences across industrialized economies in terms

2.3.2 Research and Development

Fig. 2.4 Research and development, 1980–2010. Source OECD (2019)

2.4 Labor Market Institutions

As mentioned in the introduction, the relevant labor market institutions for

2.4.1 Labor Market Regulations

2.4.2 Wage Setting Institutions

in duration (Schettkat 2002).

Fig. 2.6 Trade union density, 1970–2010. Source Visser (2013)

Fig. 2.7 Level of wage bargaining. Source Visser (2013)

2.4.3 Social Security

Fig. 2.8 Total social spending, 1980–2012. Source OECD (2016b)

2.5 Conclusion and Discussion

In the FIRES project, using the Varieties of Capitalism framework, we presented

A historical perspective on the financial institutions with a focus on the banking

Aleksynska M, Schmidt A (2014) A chronology of employment protection legislation in some

Dilli S, Elert N, Herrmann AM (2018) Varieties of entrepreneurship: exploring the institutional

Attila Varga, László Szerb, Tamás Sebestyén and Norbert Szabó

A. Varga (B) · L. Szerb · T. Sebestyén · N. Szabó

© The Author(s) 2020 39

model, we provide simulations illustrating the capabilities of the model by provid-

Keywords Entrepreneurship policy · Entrepreneurial ecosystems · Economic

Recently published papers report a positive influence of entrepreneurship on eco-

dimension. Interregional interactions (trade, migration, technology spillovers) are

3.2 Measuring Regional Entrepreneurship Ecosystems:

In order to examine the effect of entrepreneurship on any performance indicators like

the population, the abilities of the entrepreneurs, and aspirations of startups.

In the 2010s, a new research direction, the entrepreneurship ecosystem (EE)

Table 3.1 Structure of the Regional Entrepreneurship and Development Index

34 Övre Norrland 54.8 76 Alentejo 37.1 118 Macroregiunea doi 21.4

Table 3.3 Country-level

3.3 Integrating Entrepreneurship in the GMR-Europe

The GMR-Europe model is capable of estimating the economic impacts of

3.3.1 General Features of GMR Models