NEWS FLASH June 22, 1999

Culture and the Entrepreneurial Climate
A new 10-country study attempts to pinpoint factors that make startups thrive or starve

What makes one country's economy rock and another's stagnate? Could be the climate for small business, a 10-country study suggests. With an eye to the remarkable eight-year U.S. expansion and its entrepreneurial culture -- the Global Entrepreneurship Monitor (GEM) looked at the other Group of Seven industrial countries, plus Finland, Denmark, and Israel to see if there was any apparent correlation between growth and the entrepreneurial climate there, too.

The results of the two-year study were inconclusive, but tantalizing, say its authors, who hope governments will use the June 21 report as a base for small-business-friendly policies. Sure enough, European countries with sluggish economies -- France and Germany, notably -- proved inhospitable places for small business. But Israel -- which the study oddly ranked as a high-growth country though its economy this year and last has done no better than France's current annualized rate of about 2.1% -- is a dynamo of small-business creation. Michael Hay of London Business School and a director of the study insists this is only a "snapshot," adding that he hopes follow-up work will show a "stronger" relationship between gross domestic product growth and entrepreneurial activity.

The U.S., Canada, and Israel were the hottest places for startups, the study showed, while Finland, Japan, and France were the coldest places to launch a new company. Researchers from London Business School, Babson College, and the Kauffman Center for Entrepreneurial Research surveyed more than 10,000 people and discovered that 8.4 out of every 100 adults in the U.S. were founding a company or doing so for their employers. The rate was 6.8% in Canada and 5.4% in Israel. Only 1.8% of French adults start companies, 1.4% of Finns, and 1.5% of Japanese.

"IT'S A BIG DEAL." What accounts for the different rates? Cultural attitudes, demographics, and perception of opportunity. Surprisingly, regulations, subsidized loans, and taxes had little impact. Babson-based GEM project coordinator Paul Reynolds says in the U.S., "if someone tries to start up a new business, it's no big deal. In Europe, it is a big deal. Theyre putting their entire social credibility on the line."

The report notes that Germans frown upon trying to become rich -- or risking bankruptcy -- classic rewards and risks of the entrepreneurial spirit. In France, social pressure to join large institutions discourages those who strike out on their own. Moreover, government programs designed to encourage small business do more harm than good, those surveyed said. In Japan, respondents said entrepreneurship simply isn't considered a legitimate career, and those who try it and fail are unlikely to have another go at it. The power structure in those countries conspires against the entrepreneur, notes Reynolds. France, Germany, and Japan have fought for "thousands of years over who will control the wealth of the country, with an assumption that the wealth is constant," he explains. "The leaders run the show."

On the other hand, in Israel, the value placed on personal independence and government policies to transfer defense technology to the civilian economy have created a particularly dynamic high-tech sector that has attracted considerable foreign investment.

IMMIGRANT POWER. And while more men start new businesses than women in all 10 countries studied, women make up a higher percentage of the workforce in countries that are more entrepreneurial. Population growth and immigration also foster opportunity. "Whats unique is that all three of [the top] countries have been created by people moving into them," Reynolds adds.

Each country involved in the study will release individual reports over the summer. GEM researchers expect the next study to be released in September, 2000. The 10 countries surveyed this year are signed on for the next round, but Hay promises more countries, specifically "a couple from South America, Central and Eastern Europe, and one or two more in Asia." If the entrepreneurial boom in the hot-growth countries doesn't last, it'll be a snapshot of entrepreneurs ducking for cover.

By Mica Schneider and Julia Lichtblau in New York

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