SPRINGER BRIEFS IN ECONOMICS Niklas Elert Magnus Henrekson Mikael Stenkula Institutional Reform for Innovation and Entrepreneurship An Agenda for Europe SpringerBriefs in Economics More information about this series at http://www.springer.com/series/8876 Niklas Elert Magnus Henrekson (cid:129) Mikael Stenkula Institutional Reform for Innovation and Entrepreneurship An Agenda for Europe Niklas Elert Mikael Stenkula Research Institute of Industrial Economics Research Institute of Industrial Economics Stockholm Stockholm Sweden Sweden MagnusHenrekson Research Institute of Industrial Economics Stockholm Sweden ISSN 2191-5504 ISSN 2191-5512 (electronic) SpringerBriefs inEconomics ISBN978-3-319-55091-6 ISBN978-3-319-55092-3 (eBook) DOI 10.1007/978-3-319-55092-3 LibraryofCongressControlNumber:2017933437 ©TheEditor(s)(ifapplicable)andTheAuthor(s)2017.Thisbookisanopenaccesspublication 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,distributionandreproductioninanymediumorformat,aslongasyougiveappropriatecreditto the originalauthor(s)and the source, providealink tothe CreativeCommonslicense andindicate if changesweremade. 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The publisher remains neutral with regard to jurisdictionalclaimsinpublishedmapsandinstitutionalaffiliations. Printedonacid-freepaper ThisSpringerimprintispublishedbySpringerNature TheregisteredcompanyisSpringerInternationalPublishingAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Acknowledgements WethankMarkSandersandMichaelFritschforusefulcommentsandsuggestions, and Charlotta Olofsson for skillful research assistance. ThisstudywaswrittenaspartoftheprojectFinancialandInstitutionalReforms for an Entrepreneurial Society (FIRES) that has received funding from the EU’s Horizon 2020 research and innovation programme under grant agreement No. 649378. We also gratefully acknowledge financial support from the Jan Wallander and Tom Hedelius Foundation, from the Marianne and Marcus Wallenberg Foundation and from Stiftelsen Millenium. v Contents 1 Introduction: Europe’s Innovation Emergency. .... .... ..... .... 1 References.. .... .... .... ..... .... .... .... .... .... ..... .... 6 2 Innovation, Entrepreneurship and the Complementary Skill Structure.. .... .... ..... .... .... .... .... .... ..... .... 9 2.1 Entrepreneurship in Europe—A First Glance .... .... ..... .... 10 2.2 The Entrepreneurial Ecosystem: The Requisite Complementary Skill Structure... .... .... .... .... ..... .... 14 2.3 Diverse Capitalisms in the European Union. .... .... ..... .... 18 References.. .... .... .... ..... .... .... .... .... .... ..... .... 20 3 Innovation and Entrepreneurship in the European Union—A Reform Agenda ..... .... .... .... .... .... ..... .... 25 3.1 The Rule of Law and Protection of Property Rights... ..... .... 26 3.1.1 Preamble. .... ..... .... .... .... .... .... ..... .... 26 3.1.2 Reform Agenda..... .... .... .... .... .... ..... .... 27 3.2 Taxation... .... .... ..... .... .... .... .... .... ..... .... 29 3.2.1 Preamble. .... ..... .... .... .... .... .... ..... .... 29 3.2.2 Reform Agenda..... .... .... .... .... .... ..... .... 32 3.3 Regulations Governing Savings, Capital and Finance.. ..... .... 38 3.3.1 Preamble. .... ..... .... .... .... .... .... ..... .... 38 3.3.2 Reform Agenda..... .... .... .... .... .... ..... .... 40 3.4 The Organization of Labor Markets and Social Insurance Systems ... ..... .... .... .... .... .... ..... .... 43 3.4.1 Preamble. .... ..... .... .... .... .... .... ..... .... 43 3.4.2 Reform Agenda..... .... .... .... .... .... ..... .... 45 3.5 Regulation of Goods and Service Markets .. .... .... ..... .... 50 3.5.1 Preamble. .... ..... .... .... .... .... .... ..... .... 50 3.5.2 Reform Agenda..... .... .... .... .... .... ..... .... 52 vii viii Contents 3.6 Bankruptcy Law and Insolvency Regulation. .... .... ..... .... 55 3.6.1 Preamble. .... ..... .... .... .... .... .... ..... .... 55 3.6.2 Reform Agenda..... .... .... .... .... .... ..... .... 56 3.7 R&D, Commercialization and Knowledge Spillovers.. ..... .... 58 3.7.1 Preamble. .... ..... .... .... .... .... .... ..... .... 58 3.7.2 Reform Agenda..... .... .... .... .... .... ..... .... 59 3.8 Incentives for Human Capital Investment... .... .... ..... .... 62 3.8.1 Preamble. .... ..... .... .... .... .... .... ..... .... 62 3.8.2 Reform Agenda..... .... .... .... .... .... ..... .... 65 3.9 Informal Institutions.. ..... .... .... .... .... .... ..... .... 71 3.9.1 Preamble. .... ..... .... .... .... .... .... ..... .... 71 3.9.2 Reform Agenda..... .... .... .... .... .... ..... .... 72 3.10 Summary and Conclusions: Institutions Nurturing a More Entrepreneurial Europe... .... .... .... .... ..... .... 74 References.. .... .... .... ..... .... .... .... .... .... ..... .... 77 4 Summary and Conclusions..... .... .... .... .... .... ..... .... 87 References.. .... .... .... ..... .... .... .... .... .... ..... .... 91 Appendix. .... .... .... .... ..... .... .... .... .... .... ..... .... 93 References.... .... .... .... ..... .... .... .... .... .... ..... .... 101 Executive Summary TheEuropeanUnionsuffersfromaninnovationdeficit,whichmustberemediedif theEUistoimprovethequalityoflifeofitscitizensandremaincompetitiveinthe globalmarketplace.Inordertodoso,moreproductiveentrepreneurshipisrequired. We analyze how Europe’s institutional framework conditions could become more supportive of entrepreneurship and innovation, and outline a reform strategy to achievethisobjective.Tobeviable,thestrategyemphasizesthelargecross-country differences across the union. Each EU member state has evolved its particular bundle of institutions, many of which are complementary to one another. If these complexities are not acknowledged, well-intended reforms may become unpre- dictable or even detrimental to entrepreneurship and economic development. Chapter 2 provides a theoretical foundation to help identify the areas where the need for reform is the greatest. The theories of the experimentally organized economy and of entrepreneurial ecosystems are used to identify six competencies, inadditionto that oftheentrepreneur, that arenecessary for ideas to begenerated, identified, selected, and commercialized. The competencies are those of inventors, professional managers, competent employees, venture capitalists, actors in sec- ondary markets, anddemandingcustomers.Importantly,nooneisincharge ofthe ecosystem’s skill structure, which limits what can be achieved through top-down reform. We also draw on the varieties of capitalism literature, which identifies institutional complementarities as an important driver of the persistent institutional differences acrosspolities. Theexistenceofinstitutionalcomplementaritiesimplies that viable policy changes must be compatible with existing institutional patterns and that a specific change will have effects that extend throughout the institutional system. As such, they help explain both gridlocks and cascading changes. InChap.3,wediscusstheinstitutionsthatthepreviousliteratureidentifiesasthe most relevant for nurturing the activities of entrepreneurs and other actors in the ecosystem’s skill structure. Overall, we discuss nine areas: (i) the rule of law and the protection of property rights; (ii) the tax system; (iii) regulations governing savings, capital and finance; (iv) the organization of labor markets and social insurance systems; (v) regulations governing goods and service markets; (vi) reg- ulations governing bankruptcy and insolvency; (vii) R&D, commercialization and ix x ExecutiveSummary knowledge spillovers; (viii) human capital investments; and (ix) informal institu- tions.Althoughourstartingpointisthatsomeinstitutionsorinstitutionalformsare simply the most propitious for entrepreneurship and economic growth, we com- plement this first-best perspective with insights offered by the perspectives dis- cussed in Chap. 2, and clarify the extent to which policies and institutions interact with and reinforce one another. In the fourth and final chapter we summarize the study and present our main conclusions. To make the European Union more entrepreneurial to promote inno- vation and economic growth we propose a reform strategy with respect to the aforementioned nine areas, which we consider to be the most pertinent institutions and policies in order to foster a productive entrepreneurial economy. Overall, the proposedinstitutionalchangesmoveinaliberalizingdirection,butweacknowledge that one-size-fits-all policy reforms aimed at freer markets will not necessarily be successful. Instead, a successful reform strategy must consider country differences that affect the viability of reform. Nevertheless, policymakers must not lose sight of the long-term goal of institutional liberalization to promote entrepreneurship, innovation,andgrowth.Hopefully,thisworkinspiresbothconfidenceandhumility regarding Europe’s innovation future.