Leading thought in entrepreneurship from the London Business School community

Building an Entrepreneurial Europe

A very important question that only few people want to ask: what kind of a future the next generations will face? According to a recent study, for the first time in human history, younger people are now enjoying a lower standard of living than their parents in advanced economies.[1] On top of that, their job prospects are changing dramatically. With the introduction of computers and the Internet, there are already fewer and fewer positions around, in particular, the knowledge-based white collar jobs. [2] If information technologies have been unforgiving in eliminating jobs, the rise and rise of robots and artificial intelligence (AI) would likely be merciless to the job markets.

Fundamentally, we can lift the living standard in two ways. One is to raise productivity, something that technologies have been very good at. Another is to create more job opportunities. And the single best way to do so is to support the creation of lots of new companies that need to hire in order to grow.

It is therefore more important than ever to build an Entrepreneurial Europe.

Surely, it is possible to argue that this is where the general trend to is taking us anyway – just observe that fact that more and more start-ups are coming to the scene, for example, in the US and China. In this respect, Europe cannot be that far behind. Yet, this may not be the case. To start with, business dynamism in the US is actually decreasing as entrepreneurship in the country has been on a steady decline in recent years.[3] In China, a lot of the latest technologies are developed by large corporations with close ties to its government.

Just hiring, no firing

Europe has its own challenges, so much so they are suffocating new business creation. Just observe the rigidity of labour law in some of the countries. It is very difficult to lay off employees in Spain. France’s labour code contains some 3,500 pages. Complex and favouritism labour law not only make it expensive to hire new workers, they also discourage the creation of new businesses.

Money, money, money

Access to capital is another issue. At first glance, there is more money made available to the small and medium sized enterprises (SMEs) in Europe than in the US: in 2013, Europe is estimated to have provided €926 billion to SMEs, almost double that of US’s €571 billion.[4] Yet, despite a larger amount of money available, these businesses in Europe are still struggling to gain access to capital. The reason: Europe mostly relies on debt-financing whereas venture capital funding is far more common in the US.

In our recent book, we, together with Xavier Rolet, CEO of the London Stock Exchange, argue that such shortage of risk capital and diversity of funding sources will continue to hamper the creation of innovative young firms.[5] Very often, entrepreneurs lack the right assets that could be used as collaterals, making it prohibitively expensive, if at all possible, to borrow,. In fact, the reliance on debt-financing can affect the “mood” in capital provision: while shareholders of a new business would care more about the upside gains from its success, lenders, by contrast, focus mostly on the downside risk. The latter often concerns far more about a borrower’s ability to service the interest and to survive long enough to repay the loan than whether it could turn out to be a runaway business success.

Revamping education

Building an entrepreneurial Europe also requires us to rethink our education systems. Every year the learning speed of AI goes up by a hundredfold. Yet, we have schools that are still based on the format founded 250 years ago, which follows a factory line model. It is designed to train an army of administrators, not a nation of innovators. Higher education that is based on examinations by subjects organised in silos do not necessarily get young people to be more entrepreneurial. What is increasingly needed in a world that is becoming more and more automated to be able to work in a collaborative manner, to solve complex problems and to manage both people and robots. Cognitive skills such as empathy, communication and the ability to connect people as well as emotional intelligence are set to play an ever more critical role. In a business environment in which large corporations are trimming down in size and the so-called “gig economy” is expanding, promoting these skills can encourage the entrepreneurship that our societies need.

Entrepreneurship: An equaliser

Making Europe more entrepreneurial has another benefit: it can likely help reduce inequality and improve inclusion. At the moment, many good jobs often go to the more privileged. In Britain, for instance, a recent study shows that top employers recruit from only about 20 – effectively the top 20 – out of more than 115 universities in the country. The report further points out that 65 per cent of the respondents surveyed think “who you know” is more important than “what you know”.[6] Despite its epic motto, “liberté, égalité, fraternité”, Corporate France is ran by graduates of the “Grandes Écoles” and “Polytechniques”.[7] Strong emphasis on previous work experience and schooling tend to favour those people who have strong ties with prestigious employers and who can afford private education. Good job opportunities rarely cascade down to the lower echelon of our societies. Given the right conditions, people from all backgrounds – natives and immigrants alike – can start their own businesses, hence enabling themselves to ascend on the economic and social ladders.

To us and to our next generations

New thinking and policies are both needed to clear out major obstacles that block Europe to become more entrepreneurial. Relaxing labour law, improving funding diversities and the use of risk capital and overhauling education to provide the right skills are all the right steps forward. As an increasing number of activities are automated, making our societies more entrepreneurial is likely to be one of the most effective ways to prepare our next generations – and ourselves – for the brave new world.

 

Terence Tse (Associate Professor of Finance, London campus of ESCP Europe Business School), Mark Esposito (Harvard University, Division of Continuing Education) and Danny Goh (Founder & Commercial Director, Nexus Frontier Tech) co-authored this article. Consent for republishing was given by the authors.




[1]Mckinsey Global Institute (2016)Poorer than their Parents? A New Perspective on Income Inequality, July

[2]Goos, Maarten, Manning, Alan and Salomons, Anna (2014) "Explaining Job Polarization: Routine-Biased Technological Change and Offshoring," American Economic Review, 104(8): 2509-26

[3]Haltiwanger, Johnm, Hathaway, Ian, and Miranda, Javier (2014) Declining Business Dynamism in the U.S. High-Technology Sector, Ewing Marion Kauffman Foundation, February

[4]Association for Financial Markets in Europe and BCG (2015) Bridging the Gap: Investor Views on Europe and US Capital Markets and How They Drive Investment and Economic Growth, February

[5]Tse, Terence and Esposito, Mark (2017) Understanding How the Future Unfolds: Using DRIVE to Harness the Power of Today's Megatrends, Lioncrest Publishing

[6]Social Mobility and Child Poverty Commission and Social Mobility Commission (2014) Elitist Britain?

[7]Gumbel, Peter (2013) Élite Academy: Enquête sur la France Malade de ses Grandes Écoles, Denoël Impact

Author: Danny Goh

Danny is a serial entrepreneur and an early stage investor. He is the Founder and Commercial Director of Nexus Frontier Tech, an AI advisory business to assist CEO and board members of different organisations to build innovative businesses taking full advantage of artificial intelligence technology.

View full profile...

Add new comment

CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
Image CAPTCHA
Enter the characters shown in the image.
By submitting this form, you accept the Mollom privacy policy.