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To Encourage Small Business, Learn from Europe

It probably won't surprise you to learn 61 percent of Americans say they would prefer self-employment to working for someone else, a higher share than in 25 European countries, according to the most recent data available from the EU Flash Eurobarometer Entrepreneurship Survey. But it will likely surprise you to learn small business is a bigger part of the economy of most European nations than our own. Could American policymakers learn anything about improving small business support from Europe, which the media tell us is a place of high taxes, exorbitant public-sector spending, and, lately, poor economic management? Based on the data, I say yes.

Despite the rhetoric extolling small business in this country, the small-company share of the U.S. economy has been gradually shrinking. Big Business's share of employment now accounts for 50.4 percent of private-sector jobs, as compared with 45.5 percent in 1988. Similarly, Big Business's share of revenue was higher in 2007 than it was in 1997, according to the latest available data from the Small Business Administration.

The rate at which Americans have been founding small businesses has also been falling. Between 1998 and 2009, the number of self-employed people, the per capita rate at which new employer businesses are established, and the number of establishments created per thousand people have all declined. Currently, small business accounts for less of total economic activity in the U.S. than in many European nations. The latest available data from the Organization for Economic Cooperation and Development show that in 2008 the self-employment rate in 25 European countries was higher than in the U.S. and was lower only in tiny Luxembourg. The OECD also finds 22 of these countries have a larger share of businesses with fewer than 250 employees than the U.S.

What's Different in Europe

So what's different in Europe that might account for the better relative performance of small business? First, taxes are lower. After Japan, the U.S. has the next highest corporate tax rate among industrialized nations and a higher rate than all of Europe. Compared with some countries, the gap is huge. Ireland's corporate rate is less than one-third the combined state and federal rate in the U.S. Rates in Poland, Iceland, and Slovakia are less than half of ours. Personal taxes, which affect small businesses set up as sole proprietorships and subchapter S corporations, are also higher in the U.S. than in much of Europe.

It isn't just taxes where the Europeans have better policies for small business than we do. The OECD reports that, in 2008, 10 European countries had lower regulatory barriers to entrepreneurship than the U.S. and 12 had higher barriers. Moreover, between 1998 and 2008, 13 European countries reduced these barriers more than the U.S. and only six reduced them less.

Europe also appears to be a better place for small business owners who need access to working capital and money to finance expansion. The 2010 Global Competitiveness Report from the World Economic Forum shows that small business loans are easier to obtain in nine European countries than they are in the U.S. Similar patterns can be seen for equity financing of high-potential ventures.

Finally, Europe has a more positive view of entrepreneurs' contribution to the economy. Data from the Global Entrepreneurship Monitor show that residents of 14 European nations are more likely than Americans to believe that "entrepreneurship is the basis for wealth creation, benefiting us all," while residents in only 11 European nations are less likely.

In short, small business's share of the U.S. economy is slowly shrinking and is less significant than in many European economies. Despite our rhetoric about the importance of small business in America, many European nations have a better approach to encouraging small business than we do. Their lower taxes, lower regulatory barriers, greater access to capital, and more positive beliefs in the value of small business suggest our policymakers should learn about encouraging small business from their counterparts across the pond.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.

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