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Elert Niklas - Institutional Reform for Enhancing Innovation and Entrepreneurship: An Agenda for Europe

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Institutional Reform for Enhancing Innovation and Entrepreneurship: An Agenda for Europe
Author:
Elert Niklas / Henrekson Magnus / Stenkula Mikael
Publisher:
Springer International Publishing
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Books / Politics
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2017
City:
Cham;New York;Europe
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The Author(s) 2017

Niklas Elert , Magnus Henrekson and Mikael Stenkula Institutional Reform for Innovation and Entrepreneurship SpringerBriefs in Economics 10.1007/978-3-319-55092-3_1

1. Introduction: Europes Innovation Emergency

Niklas Elert 1, Magnus Henrekson 1 and Mikael Stenkula 1

(1)

Research Institute of Industrial Economics, Stockholm, Sweden

Magnus Henrekson

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Abstract

The European Union suffers from an innovation deficit, which must be remedied if the EU is to improve the quality of life of its citizens and remain competitive in the global marketplace. In order to do so, more productive entrepreneurship is required. We analyze how Europes institutional framework conditions could become more supportive of entrepreneurship and innovation, and outline a reform strategy to achieve this objective. To be viable, the strategy emphasizes the large cross-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 unpredictable or even detrimental to entrepreneurship and economic development.

Keywords

Deregulation Economic growth Entrepreneurship European Union Innovation Institutional complementarity Institutional reform R&D Varieties of capitalism

In The Moral Consequences of Economic Growth from 2005, Harvard professor Benjamin Friedman has a message that seems even more pertinent today than when the book was first published: economic stagnation is harmful for a societys moral and democratic values. Dire economic times and a lack of economic opportunities contribute to political populism of all colors. Friedmans () seem even more acute. In what follows, we shall argue that innovation is key to improving the prospects for inclusive and encompassing growth across Europe.

Today, the European Union suffers from an acknowledged lack of innovation. A flagship initiative of the Unions well-known 2020 strategy was the so-called Innovation Union, launched with a tone of urgency in 2010: We need to do much better at turning our research into new and better services and products if we are to remain competitive in the global marketplace and improve the quality of life in Europe. We are facing a situation of innovation emergency (European Commission ; see also Fig. A.1 in the Appendix).

Increasing innovation therefore remains an imperative, but the way to achieve it is a larger issue. In our view, the common concept that increased R&D spending is the tool that promotes innovation exposes an overly mechanistic view of how the economy functions. New knowledge and inventions are only the first steps in the innovation and commercialization process, and for increased R&D to translate into economic growth, entrepreneurs must exploit the new knowledge and inventions by introducing new methods of production or new products into the marketplace (Bhid ).

At first glance, the means of achieving this goal are clear from an economists perspective. At least since Baumol (). Entrepreneurs and other actors in the so-called entrepreneurial ecosystem or skill structure are crucially dependent on this environment. In this study, we seek to determine how Europes institutional framework conditions could become more supportive of entrepreneurship and innovation, and outline a reform strategy to achieve this objective.

When political and economic institutions are structured to reward productive entrepreneurial activities (such as starting and expanding firms that provide goods and services that people want) at the expense of non-productive and even destructive activities (such as rent seeking or excessive lobbying), then many researchers argue that more innovation and economic growth will occur, at least in the long run (Mueller and Thomas ). In summary, we propose institutional reforms pertaining to nine broad areas:

(i)
The rule of law and protection of property rights . These are the most fundamental rules of the economic system, and all member states must ensure that they are stable and secure. With regard to intellectual property rights, an important balance must be struck between the interests of investors and the need for knowledge diffusion.
(ii)
Taxation . Many types of taxes affect entrepreneurial decisions. While tax rates should generally be low or moderate, policy makers should strive for simplicity rather than (targeted) concessions, and for a high degree of tax neutrality across owner categories, sources of finance and different types of economic activities.
(iii)
Savings, capital and finance . These institutions should be reformed to support increased private wealth formation and the creation of a dynamic venture capital industry, since these are crucial sources of financing, particularly in the early stages of entrepreneurial projects. As a large share of savings in the economy currently goes into pension funds, it would be helpful to allow at least part of these assets to be invested in entrepreneurial firms and not just in real estate, public stock and bonds.
(iv)
Labor markets and social security . Institutions should facilitate the recruitment of workers with the necessary competencies and reforms should strive to remove onerous labor market regulations. Overly stringent employment regulations may also spur actors in the entrepreneurial ecosystem to devise arrangements that circumvent the regulations, ultimately resulting in the emergence of an underground economy. Furthermore, incentives are best served by government income insurance systems that encourage activation, mobility and risk-taking. Social security institutions should enable the portability of tenure rights and pension plans as well as a full decoupling of health insurance from the current employer, to avoid punishing those individuals who leave tenured employment positions to pursue entrepreneurial projects.
(v)
Regulation of goods and service markets . Preventing market-leading incumbents from unduly exploiting their dominant market positions is essential. Lowered entry barriers are key to this reform area, as is the opening of those parts of the economy that are almost invariably closed to private production, such as healthcare and schooling. Within a well-designed system of public financing, sizeable private production and contestability should be encouraged.
(vi)
Bankruptcy law and insolvency regulation . Entrepreneurial failure provides valuable information to other economic actors. Failed ventures must be discontinued so that their resources can be redirected to more productive uses. Bankruptcy law and insolvency regulation should therefore be relatively generous and allow for a second chance. However, filing for bankruptcy should not be too easy, as that encourages undue exploitation and destructive entrepreneurship, harming creditors and the rest of the community.
(vii)
R&D, commercialization and knowledge spillovers . R&D spending is only an input; for it to translate into economic growth, entrepreneurs must exploit the inventions and created knowledge by introducing new methods of production or new products into the marketplace. Therefore, instead of focusing on quantitative spending goals and targeted R&D support, policy should more generally make it easier to start and grow businesses.
(viii)
Incentives for human capital investment . Policy should strive to create positive incentives for the individual to acquire knowledge and skills, whether through formal or workplace education. Incentives must also be developed by the education system itself to supply such opportunities. In this respect, the U.S. university system seems more responsive to the economic needs of society than European university systems. The U.S. system could be an important role model, as long as due attention is paid to European concerns regarding accessibility and equity.

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