Feb 14 2014

Entrepreneurship in Southern Europe: Symptom or Solution to the Euro Crisis?

 By Stefan Bauchowitz

Against ample discouraging evidence, expressions of false optimism occasionally enter into the debate on the Euro crisis. As an example of such optimism, a previous post on this blog by Mark Esposito voiced high hopes for entrepreneurialism in Southern Europe. Unfortunately, the confidence in entrepreneurship is misplaced, because the symptom is being mistaken for a cure.

First, while there are indeed high rates of entrepreneurship Southern Europe, it is of the wrong kind.

Entrepreneurship has long been recognised as an important factor in generating economic growth[1], but the post gets the roots of Greece’s (not so new) entrepreneurship wrong. Where there are few employment possibilities people will have to become entrepreneurs – but these are subsistence entrepreneurs, which are quite distinct from the holy grail of transformational entrepreneurs found in the more dynamic economies.[2]

Subsistence entrepreneurs engage in basic economic activity that rarely go beyond meeting the entrepreneur’s own needs. By contrast, transformational entrepreneurs tend to create larger enterprises, and provide employment opportunities for others. To be sure, there’s nothing wrong about subsistence entrepreneurs – they do contribute to a large part of economic activity in developing and transition economies. However, this type of entrepreneurship will not solve the Euro Crisis or “ignite the beginning of a new dynamism.”

Rather than relying on the assumption that domestic capital formation is a sign of the great things to come, let’s look at some actual data. Data from the Global Entrepreneurship Monitor show that in Greece, about 30% of entrepreneurs are subsistence entrepreneurs. Only about 20% of new entrepreneurs in Greece, Spain, and Italy believe that that they will employ more than 5 people within 5 years. Only about 13% of Greek entrepreneurs think that it is a good idea to start a business where they live.

Screen Shot 2014-02-14 at 10.31.45

This subsistence entrepreneurship is also in part to blame for the high number of working hours that Esposito sees as a sign of the Greek economy’s potential. Although a source of pride for some, it reveals inefficiency more than anything else. Countries with a large number of hours worked per employee tend to be those that are less efficient. What’s worse, since 2009, Greeks had to work longer hours while labour productivity decreased. Moreover, in an economy with a share of self-employed as large as Greece’s (31.9% in 2012) – often as farmers or shop-keepers – working hours tend to be longer (see here and here).

Screen Shot 2014-02-14 at 10.34.58

If anything, there are too many of these enterprises in Europe’s south. A quick look at employment data helps. The following graph shows that, in 2007, just over 58% of employed Greeks worked in firms with fewer than 10 employees. The situation in Italy, Portugal and Spain is similar, though somewhat less pronounced.

There are few medium-sized companies in these countries, which would indicate that most entrepreneurs do not make it to the transformational stage – not least because they are not “true”, i.e. growth and innovation-oriented entrepreneurs (see here and [3]). The entrepreneurship we witness in Europe’s South may help people to cope with the crisis, but it is at best a band-aid rather than a solution to the eurocrisis.

Screen Shot 2014-02-14 at 10.36.33

Second, despite this entrepreneurialism the conditions for small businesses to survive and expand in Southern Europe’s economies are far from ideal.

Esposito assumes that private investment is a sign of entrepreneurial spirit – however, while a surge in entrepreneurship would indeed be reflected in domestic capital formation, an increase in capital formation is not necessarily a sign of entrepreneurship, much less so as an indicator of dynamism in times of crisis, as the data cited are 5 years old.

Unfortunately, the OECD does not provide data on entrepreneurship in Greece, but since Esposito urges us to look south, here are some data on enterprise formation in Spain, Italy and Portugal. Here, the picture is somewhat less clear-cut, but with the exception of Portugal and the UK (and ignoring bankruptcies), entrepreneurship is actually declining. The euro crisis has not enabled entrepreneurialism.

Screen Shot 2014-02-14 at 10.38.01

Data source

Lack of access to finance, corruption and overregulation stifle transformational entrepreneurship. According to an EU survey, 32% of Greek entrepreneurs cite access to finance as the most pressing problem facing their ventures.  And even though Greece and other Southern European countries have created more business-friendly environments, Europe’s South still continues to lag behind when it comes to the ease of doing business.

Of course, Germany’s ‘model’ should not be transposed to countries such as Spain or Greece – it is no secret that any reform programmes need to address the local needs and priorities. How exactly these reforms should look like is subject to much debate. But wishful thinking, misinterpretation of data and lack of attention to the context surely don’t make a good starting point.

________________

Stefan Bauchowitz is a researcher at the Department of International Development at the LSE.

Note: This article gives the views of the author, and not the position of the Euro Crisis in the Press blog, nor of the London School of Economics.


[1] Schumpeter, Joseph (1942), Capitalism, Socialism and Democracy

[2] Schoar, Antoinette (2010), The Divide between Subsistence and Transformational Entrepreneurship, in: Lerner, Josh and Scott Stern (eds.), Innovation Policy and the Economy, University of Chicago Press.

[3] Naudé, Wim (2007), Peace, Prosperity and Pro-Growth Entrepreneurship
UNU-WIDER Discussion Paper 2007/2,

Print Friendly, PDF & Email
This entry was posted in Euro, Europe, Greece, Italy, Portugal, Spain and tagged , , , , . Bookmark the permalink.

6 Responses to Entrepreneurship in Southern Europe: Symptom or Solution to the Euro Crisis?

  1. Pingback: Self-employment: going south | Flip Chart Fairy Tales

  2. Pingback: No Country for Young People | Euro Crisis in the Press

  3. Pingback: The lost generation: what is true about the myth… | Euro Crisis in the Press

  4. Pingback: Risks in the Eurozone banking union are high | Euro Crisis in the Press

  5. Mark Esposito says:

    Dear Stefan,

    thanks for having provided a follow up reflection to the topic of “look south” which has captured your attention.
    You may be surprised but I tend to agree with your macroeconomic analysis. All the data you use to articulate your thoughts are well known and published since time, so there is no point of contention with it.

    Where I m a bit surprised is that you have so naively misinterpreted my op-ed.

    Of course long working hours are inefficient in most cases in which we co-relate labor productivity and number of hours. This is a widely accepted argument. And of course most of entrepreneurship in Greece originates out of despair and not out of large funds coming from Venture Capitals. This is another given.
    The point of my article is that, given the context of how Greece has tried to survive to the aftermath of the crisis, we should think of addressing the European crisis from the south, reconciling both policy and private sector on the basis of what can be found on those territories, rather than from Brussels.

    I m arguing that by providing contextual intelligence we can move away from the old school of economic salvation which is tediously offering always the same flawed economic models since years, with no results other than additional debts. The EU approach to Greece echoes a lot what the World Bank used to do with several african republics in the 80’s, providing financial instruments for unintended increased indebtedness.

    If you manage to travel to the country and speak with the numerous hopeful entrepreneurs, you will realize that the region is more economically vibrant than what can be induced by reading data. Again, I m not criticizing the analysis, but I criticize its relevancy to how it can support actionability.

    In a research which will be published shortly, we could find one of the most vibrant technology cluster in Greece, mainly driven and powered by young entrepreneurs.
    Our attention to how we can address the deterioration of the standards of living in Greece cannot continue to be supported by such a plastic macroeconomic analysis, because unfortunately it helps the intellectual debate but not necessarily the bottom up.

    With best wishes

    Mark Esposito

  6. Marcello Caroti says:

    You are tragically right. The increase of self employed people is not a sign of enterpreneurship, it is a sign of desperation. The economy is going so badly and employment opportunities so low that people resort to self employment. The wishful thinking you are complaining about can better be described as self deceit. Or even bad faith.

Comments are closed.