Select Committee on European Union Thirty-Fourth Report


8 July 2003

By the Select Committee appointed to consider European Union documents and other matters relating to the European Union.

Ordered to Report

EM5765/03 COM(03) 27 - European Commission Green Paper: Entrepreneurship in Europe



"Entrepreneurship is the mindset and process by which an individual or group identifies and successfully exploits a new idea or opportunity"[1].

The Commission's Green Paper is the most recent of a series of Reports from the European Commission designed to encourage entrepreneurship[2]. In the United Kingdom, the latest of a series of similar papers was that produced by HM Treasury and the Department of Trade and Industry's (DTI) Small Business Service (SBS) in November 2002[3].

The Green Paper argues that enterprise is important because it contributes to job creation, economic growth and competitiveness. Both the European Community and the United Kingdom devote considerable funds each year spread over an extensive range of programmes in support of enterprise—in the region of 13 billion euros at Community level and just under 8 billion pounds in the United Kingdom (counting receipts from the Common Agricultural Policy).

In this Report, we focus on:

  • the importance of setting clear objectives, and monitoring and establishing effective evaluation for such schemes for enterprise support, whether at UK or EU level;
  • the relationship between schemes at European Community level and those at Member State level.

We conclude that:

  • any action plan based on the Green Paper must be preceded by a thorough analysis of the evaluations currently being carried out by the European Commission;
  • all policies proposed should have clear objectives specified in measurable form before the policy is launched
  • all schemes should have both monitoring and evaluation information collection defined and built into the programme design.

The list of Recommendations is given in Chapter 4 on page 16.


1. The Commission's Green Paper: Entrepreneurship in Europe[4] is very wide ranging in its approach to entrepreneurship and entrepreneurship policy. The Commission defines entrepreneurship as the "mindset and process to create and develop economic activity by blending risk-taking, creativity and/or innovation with sound management, within a new or an existing organisation[5]".

2. The Green Paper suggests that entrepreneurship is relevant…

"…for all sectors, technological or traditional, for small and large firms and for different ownership structures, such as family businesses, firms quoted on the stock exchange, social economy enterprises or non-profit driven organisations…[6]"

3. Entrepreneurship contributes to job creation and economic growth and competitiveness, unlocks personal potential and provides a focal point for many local communities. The Member States of the European Union (EU) lag behind the United States of America (USA) in terms of indicators of entrepreneurship such as the desire for self employment and involvement in new start ups. Businesses within the EU appear to grow more slowly after start up than those in the USA.

4. The Green Paper argues that the challenge for the EU is to identify

"the key factors for building a climate in which entrepreneurial initiative and business activity can thrive. Policy measures should seek to boost the Union's level of entrepreneurship, adopting the most appropriate approach for producing more entrepreneurs and for getting more firms to grow[7]".

But it might also be argued that it is in Member States where enterprise and entrepreneurship flourish or not, at the moment, and in the near term.

5. The Commission[8] identifies three key areas of concern for the EU in relation to meeting these challenges and developing an effective policy toward entrepreneurship. These are:

  • bringing down barriers to business growth and development by:
  • improving access to skilled labour;
  • improving access to finance;
  • reducing regulatory burdens;
  • fostering networks.
  • Balancing the risks and rewards of entrepreneurship by:
  • tax breaks;
  • removing the stigma of bankruptcy;
  • making intrapreneurship and spin-offs more attractive for larger businesses, and takeovers of existing businesses more attractive for small firms.
  • Promoting a society that values entrepreneurship by:
  • changed educational curricula;
  • establishing role models.
  • The Green Paper identifies two central issues in addressing these concerns:
  • the need to adopt a coordinated approach to entrepreneurship policy; and
  • the need to learn from best practice in the policy arena[9].

The committee's approach to the green paper

7. In view of the breadth of the Green Paper's definition of entrepreneurship and the scope of the key concerns identified, the Committee decided to adopt a selective and focussed approach.

Technology-based Firms

8. We decided to emphasise entrepreneurship in the technology-based sectors. This is in keeping with the key role attributed to technology-based firms in promoting the attainment of the EU Lisbon Council objective of making the Union the leading knowledge-based economy in the world[10], and the similar emphasis in UK government policy (HM Treasury/SBS 2002, DTI/HM Treasury /DFES 2002).


9. The Committee chose to investigate policy issues relevant to the barriers to growth in existing firms and the link with productivity growth rather than policy towards start-up issues. This is in keeping with the outcome of recent work by the Organisation for Economic Cooperation and Development (OECD) on the respective contribution to overall productivity growth and competitiveness of start up, exit and productivity growth in existing firms[11]. This recent programme of comparative international research (OECD 2003) covers the largest OECD economies for the periods 1987-92 and 1992-97.

10. Productivity growth in any period for the total number of firms in a state can be broken down into:

  • productivity growth within firms that survive;
  • reallocation of output between high and low productivity firms that survive;
  • the impact of new entry through business formation; and
  • the impact of exit through failure and acquisition.

11. The OECD research shows that these components vary across countries and industries but that the dominant component in labour productivity growth in both manufacturing and services is that driven by businesses which survive. Thus, the share of overall productivity growth accounted for by such businesses ranged between 55% and 95% in the 1980s and 1990s. This component was most dominant in France, Germany and the USA. Industries with high exit rates tend also to have high entry rates. Exiting firms are usually low productivity firms so there is a positive 'batting average' effect caused by their departure, average productivity rises because the worst firms drop out. Entering firms in contrast have the opposite effect. They are also typically below average in productivity performance so adding them to the business population lowers average productivity. The net effect of these two forces in practice is to raise productivity. That is to say, the effect of exits dominates the effect of entry. This net effect, sometimes called the 'churning' effect, accounts for 20%-40% of labour productivity growth in the OECD samples. This rate of churning is similar across the USA and the European countries. Reallocation of activity amongst existing firms is usually less important than the other three forces[12].

New Entrants and Survival Rates

12. New entrants come and go with much less impact on productivity than improvements in surviving firms[13]. Most strikingly the new entry component for the United States is large and negative because they have relatively low productivity, and the new entrants are smaller relative to the mean size of existing firms. Moreover, their survival rates appear to be lower. On the other hand those that survive grow faster in the USA than in Europe.

13. This analysis implies that it is not new start up and entry per se but the subsequent survival and competitive expansion of new entrants that is important for economic growth. A focus on barriers to growth in businesses after they have entered the market is, therefore, as important, or more important, than the generation of more new entrants. The Committee sought to focus on the growth of firms in the market including what is known as 'intrapreneurship' in established firms rather than on new entrants or on small and medium size firms (SME)s in particular. However, in written evidence to the Committee, the Parliamentary Under-Secretary of State for Small Business and Export Control commented that

"although intrapreneurship exists in the UK, most examples of it occur within companies and so go unrecorded and unobserved……. There are no specific government support measures or policies to promote intrapreneurship[14]".

Barriers to Growth

14. In considering barriers to growth in existing firms, the Committee noted the emphasis in the Green Paper upon both human and financial capital barriers. It also noted the growing evidence emphasising barriers arising from skill shortages in management and in the labour force, particularly in relation to innovation, and in technology-based sectors[15]. In view of the emphasis frequently placed on financial constraints, the Committee was surprised to learn from the evidence it received from Government, academic research and industry witnesses that (in general terms) this factor appeared to be decreasing in significance[16]. We therefore sought to investigate both the financial and human capital barriers to enterprise.

Co-ordination and Evaluation

15. The Committee accepted as a premiss to its inquiry the two central concerns raised in the Green Paper: the need to adopt a coordinated approach to entrepreneurship policy; and the need to learn from best practice. We found it helpful to focus on these two concerns. In particular, in attempting to ascertain best practice, we have been concerned to understand the evaluation methods used to identify those policies which met their objectives and those which did not.

This Report

16. Chapter 2 examines small business policy in the EU and in the UK. Chapter 3 focuses on co-ordination and evaluation of existing support for entrepreneurship and examines the evidence of witnesses. Chapter 4 presents the Committee's recommendations.

17. This report is based on an inquiry conducted by Sub-Committee B (Energy, Industry and Transport). The membership of the Sub-Committee is given in Appendix 1. The Call for Evidence is set out in Appendix 2. Appendix 4 contains a summary of the main features of the Commission's Green Paper.

18. We are grateful to the witnesses who submitted written evidence and for those who gave oral evidence. The list of witnesses is given in Appendix 3, the names of those giving oral evidence are marked by an asterisk. We also thank our Specialist Adviser, Professor Alan Hughes of the Centre for Business Research, University of Cambridge, for his counsel and help in drafting this report.

1   HM Treasury/SPS "Enterprise Britain: a modern approach to meeting the enterprise challenge" HMSO London, November 2002. Back

2   Report from the Commission to the Council and the European Parliament on the implementation of the European Charter for Small Enterprises COM(2003), 21 Final; Thinking Small in an enlarging Britain, 5748/02 COM(2003) 26 Final; Report on the implementation of the European Charter for Small Enterprises in the candidate countries: accession to the EU ADD1 SEC(2003) 57; Creating an entrepreneurial Europe: the activities of the European for Small and Medium Sized Enterprises (SMEs) ADD2 SEC(2003) 58; the SME Envoy: an active interface between the Commission and the SME Community ADD3 SEC(2003) 60. Back

3   "Enterprise Britain: a modern approach to meeting the enterprise challenge". HSMO London November 2002. Back

4   (CEC 2003f) Back

5   (CEC 2003f p.6) Back

6   (CEC 2003f p.6) Back

7   (CEC 2003f p.9) Back

8   Green Paper (pp 22ff) Back

9   A fuller summary of the Green Paper's main arguments and conclusions on the way forward for EU policy is presented in Appendix 4 to this report.  Back

10   (CEC 2003b) Back

11   The next section draws upon Hughes (2003) and OECD (2003) Back

12   The Committee's emphasis upon productivity impacts and upon impacts arising from different aspects of the competitive process was echoed in oral and supplementary written evidence to the Committee by the DTI. This evidence emphasised the extent to which productivity would play a key role in future support policy objectives and also referred to the importance of considering the relative roles played by exit entry and growth of productivity in survivors. (DTI Oral evidence (Q205), DTI Supplementary written evidence pages 63-65) Back

13   On average in the OECD sample about 20% of firms in any year are new but only 40-50% survive for 7 years. Moreover, entry frequently has a negative direct effect. The negative effect of entry arises essentially from the low productivity performance of new firms compared with incumbents. A positive new entry impact is unusual with Netherlands and Italy notable in this respect. New entry plays a more positive role in high tech sectors and over longer periods. The prospects for innovative new entry may therefore be sector/technology specific and be stronger the longer the period they have to work themselves out (OECD 2003). Back

14   Written Evidence E/02-03/B177 9th April 2003 para 21. But see also QQ 48-54 and Q195. Back

15   The EU-wide results from the 2nd Harmonised EU Community Innovation Survey reported that SMEs' experiencing constraints were more likely than large innovative enterprises to cite high innovation costs, difficulties of access to finance and the cost of compliance with regulation as the principal factors holding back innovation projects. Moreover, over 2/3 of EU SMEs cited skill shortages as an innovation problem (Cosh and Hughes (2001)). In the EU innovation barometer survey firms in all countries except the Netherlands cited human resources as the main unsatisfied need for innovation (EU (2002). Similar patterns emerge from the regular panel survey of the UK SME sector carried out by the Centre for Business Research (CBR) in Cambridge covering the period 1991 to 2002. In the UK case hi-tech firms and innovators were generally more likely than conventional and non-innovating firms to feel constrained by a lack of management, marketing, and sales skills. The effect was especially noticeable in high-tech and innovative service firms. (Cosh and Hughes 2002, 2003) Back

16   See for example HM Treasury/Small Business Service (2003) p 7ff. But see also Q104 and Q123, CBI's written evidence, para 8, (page 97) and One Northeast's written evidence (page 100). Back

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