Abstract
In the wake of the Covid-19 crisis, the European Union must regain lost ground and create more favorable conditions for inclusive and sustainable economic growth. The best way to achieve this goal is by increasing the Union’s innovativeness. This effort requires extensive and broad-based institutional reforms aimed at strengthening the incentives for entrepreneurship. Innovative entrepreneurship requires collaborations with numerous agents that provide those skills and resources that the entrepreneur is lacking: inventors, key personnel, demanding customers, and early and later-stage financiers. Based on this ecosystem perspective, we propose reforms in the following six broad areas: (i) the rule of law and property rights, (ii) taxation, (iii) savings and finance, (iv) labor market regulations and social security, (v) entry and exit barriers in product markets, and (vi) human capital for entrepreneurship. The reforms would likely strengthen Europe’s innovation capacity at a time when it is needed more than ever.
Contribution written for the 2022 volume of the book series Interdisciplinary European Studies, edited by Antonina Bakardjieva Engelbrekt, Per Ekman, Anna Michalski, and Lars Oxelheim (Cham, CH: Palgrave Macmillan).
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Notes
- 1.
Bold in the original.
- 2.
The development of the steam engine nicely illustrates the difference between an invention and an innovation: The first prototype was invented as early as the first century BCE in Alexandria, Ptolemaic Egypt.
- 3.
According to Hébert and Link (2006), there are at least twelve different definitions of entrepreneurship.
- 4.
In Schumpeterian terms, innovation is the creation of new combinations, generally of (old and new) knowledge, resulting in a new product, a new method of production, the opening of a new market, the conquest of a new source of supply, or the carrying out of a new organization or industry (Schumpeter, 1934 [1911], p. 66).
- 5.
This is not to deny that there are motives other than monetary gain to be an entrepreneur. Many entrepreneurs have an intrinsic desire to produce a valued good or service and to outcompete other entrepreneurs (Baumol, 2002). However, the pursuit of economic gain has a central function even in this case as the accumulation of net assets is a necessary means for an entrepreneur who wants to expand and attain a leading position in the marketplace. It also serves as the yardstick for comparing how successful one’s business is relative to others.
- 6.
To the extent that economic actors can compensate for weaknesses in these institutions, they will do so by undertaking more activity off-the-books; as a result, member countries that perform poorly in these respects have larger underground economies (Schneider, 2015). In Bulgaria and Romania, the shadow economy is approximately 30 percent of official GDP, while in Northern European countries, the proportion is less than half of that. Shadow economy activity creates unfair competition for firms that adhere to rules and regulations. Because firms in the shadow economy do not benefit from the division of labor and specialization of collaborative innovation blocs to the same extent as formal firms, they are unlikely to grow large.
- 7.
Intellectual property rights illustrate this tradeoff quite well: If protection is too weak, incentives to generate new knowledge are impaired, but if protection is too strong, this will hinder the knowledge flow necessary in a technologically advanced economy.
- 8.
See, e.g., Henrekson and Sanandaji (2016) for a survey of the evidence.
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We thank Glenn Nielsen for valuable comments and the Marianne and Marcus Wallenberg Foundation and the Jan Wallander and Tom Hedelius Foundation for financial support.
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Elert, N., Henrekson, M. (2022). Improved Framework Conditions for a More Entrepreneurial, Innovative and Resilient EU. In: Bakardjieva Engelbrekt, A., Ekman, P., Michalski, A., Oxelheim, L. (eds) Routes to a Resilient European Union. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-93165-0_2
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