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A REVIEW OF ENTREPRENEURSHIP IN EUROPE: ENTREPRENEURIAL AMBITIONS, INSTITUTIONAL CHANGE, QUALITY ENTREPRENEURSHIP AND THE POTENTIAL OF SOCIAL PROTECTION

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Abstract

Entrepreneurship has the potential to drive economic development and social advancement. The European Commission implemented entrepreneurship policy as a pragmatic response to its economic and social challenges, especially after the 2008 financial crisis. Institutional changes to promote entrepreneurship and enable individuals to directly contribute to economic growth, job creation and society were introduced to create an entrepreneurial Europe. This study undertakes a systematic review to examine the implications of entrepreneurship policy within Europe. Examining and understanding the impacts of entrepreneurship policy and institutional changes are particularly relevant because of the billions of Euros invested and the impacts on the working lives of European citizens. By examining a broad range of existing literature, the study finds that the entrepreneurial Europe envisioned by policymakers has not been fully realised. Instead, entrepreneurship activity has skewed towards poor quality, necessity entrepreneurship. The European institutional context has also shifted away from the social model on which it was founded, increasing the exposure of European workers to social risks. To promote sustainable growth, wellbeing and well-functioning labour markets, researchers and policymakers are reconsidering the role of social protection. Social protection also has the potential to promote quality entrepreneurship. Based on the review of literature, seven testable propositions about how social protection can promote quality entrepreneurship have been developed for future empirical testing. This study advances knowledge in entrepreneurship research and contributes to debates in policymaking and practice. It also provides a sound basis for subsequent empirical research. https://jyx.jyu.fi/handle/123456789/75105
A REVIEW OF ENTREPRENEURSHIP IN EUROPE:
ENTREPRENEURIAL AMBITIONS, INSTITUTIONAL
CHANGE, QUALITY ENTREPRENEURSHIP AND THE
POTENTIAL OF SOCIAL PROTECTION
Jyväskylä University School
of Business and Economics
Master’s thesis
2021
Author: Sepideh Roshan Talbot
Discipline: International Business and Entrepreneurship
Supervisor: Juha Kansikas
A PERSONAL NOTE
Writing this Master’s thesis has been a gargantuan undertaking consolidating
the findings of an extensive literature review covering entrepreneurship policy,
economics and practice, has been a challenging but rewarding journey.
Thank you to all those around the world who supported me. Thank you also to
the University of Jyväskylä for the gift of further study to explore my
intellectual curiosity in a way which I hope adds scholarly and practical value
to issues that effect us all issues related to the world of work, economic
prosperity and balancing economic and social models.
Finally, this thesis is dedicated to Justin for his undying love and support.
Sepideh Roshan Talbot
March, 2021
ABSTRACT
UNIVERSITY OF JYVÄSKYLÄ
Author
Sepideh Roshan Talbot
Title of study
A review of entrepreneurship in Europe: Entrepreneurial ambitions, institutional
change, quality entrepreneurship and the potential of social protection.
Discipline
International Business and Entrepreneurship
Type of work
Master’s thesis
Time (month/year)
March/ 2021
Number of pages
155
Abstract
Entrepreneurship has the potential to drive economic development and social
advancement. The European Commission implemented entrepreneurship policy as a
pragmatic response to its economic and social challenges, especially after the 2008
financial crisis. Institutional changes to promote entrepreneurship and enable
individuals to directly contribute to economic growth, job creation and society were
introduced to create an entrepreneurial Europe.
This study undertakes a systematic review to examine the implications of
entrepreneurship policy within Europe. Examining and understanding the impacts of
entrepreneurship policy and institutional changes are particularly relevant because of
the billions of Euros invested and the impacts on the working lives of European citizens.
By examining a broad range of existing literature, the study finds that the
entrepreneurial Europe envisioned by policymakers has not been fully realised. Instead,
entrepreneurship activity has skewed towards poor quality, necessity entrepreneurship.
The European institutional context has also shifted away from the social model on which
it was founded, increasing the exposure of European workers to social risks. To promote
sustainable growth, wellbeing and well-functioning labour markets, researchers and
policymakers are reconsidering the role of social protection. Social protection also has
the potential to promote quality entrepreneurship. Based on the review of literature,
seven testable propositions about how social protection can promote quality
entrepreneurship have been developed for future empirical testing.
This study advances knowledge in entrepreneurship research and contributes to debates
in policymaking and practice. It also provides a sound basis for subsequent empirical
research.
Keywords
Entrepreneurship policy; Europe; Institutions; Necessity entrepreneurship; Quality
entrepreneurship; Social protection.
Location Jyväskylä University Library
TABLES
TABLE 1 Percentage of literature drawn from top five entrepreneurship
journals.......................................................................................................................... 14
TABLE 2 Summary of propositions.........................................................................122
3
CONTENTS
ABSTRACT ..................................................................................................................... 4!
TABLES ........................................................................................................................... 5!
1!INTRODUCTION ................................................................................................ 5!
2!METHOD .............................................................................................................. 9!
3!AN ENTREPRENEURIAL EUROPE ............................................................... 16!
3.1!Entrepreneurship policy ........................................................................... 18!
3.2!Objective of entrepreneurship policy ..................................................... 20!
3.2.1!New venture creation ..................................................................... 22!
3.2.2!Form of new venture ...................................................................... 24!
4!THE ROLE OF INSTITUTIONS ....................................................................... 26!
4.1!The economic perspective of institutional theory ................................ 27!
4.2!Institutions and entrepreneurship policy .............................................. 29!
4.3!Organisations and institutional change ................................................. 33!
4.4!Promoting entrepreneurship in Europe ................................................. 34!
4.4.1!Initiatives promoting entrepreneurship ....................................... 35!
4.4.2!Freedom to be entrepreneurial ...................................................... 41!
4.4.3!The pull and push of entrepreneurship ....................................... 44!
5!OUTCOMES OF ENTREPRENEURSHIP POLICY ....................................... 46!
5.1!Effectiveness of entrepreneurship policy .............................................. 48!
5.2!Unintended consequences ....................................................................... 53!
6!RETHINKING ENTREPRENEURSHIP POLICY .......................................... 60!
6.1!Identifying Europe’s entrepreneurs ....................................................... 61!
6.2!Terminological ambiguity ........................................................................ 61!
6.2.1!New standards for working life .................................................... 64!
6.2.2!The rise of solo entrepreneurship ................................................. 67!
7!QUALITY ENTREPRENEURSHIP .................................................................. 69!
7.1!Defining quality entrepreneurship ......................................................... 70!
7.2!Quality: The contentious allure of innovation ...................................... 72!
7.3!Quality: Opportunity for growth and prosperity ................................. 77!
7.4!A brief reflection and way forward ........................................................ 79!
8!CONTEXTUALISING ENTREPRENEURSHIP POLICY ............................. 81!
8.1!The incompatibility of a US-approach to entrepreneurship ............... 81!
8.2!A European-centric approach to entrepreneurship ............................. 84!
9!SOCIAL PROTECTION IN EUROPE .............................................................. 87!
9.1!Social protection and entrepreneurship ................................................. 89!
9.2!Access to social protection for Europe’s entrepreneurs ...................... 95!
9.3!Protecting income-producing activity .................................................. 100!
10!THE POTENTIAL OF SOCIAL PROTECTION ........................................... 102!
10.1!Social protection and quality entrepreneurship ................................. 106!
4
10.1.1!Reducing opportunity cost ...................................................... 109!
10.1.2!Investing in serial entrepreneurship ...................................... 113!
10.1.3!Removing wealth and income constraints ............................ 118!
11!CONCLUSIONS ............................................................................................... 121!
11.1!Limitations and future research ............................................................ 123!
REFERENCES ............................................................................................................. 125!
APPENDIX A ............................................................................................................. 151!
5
1 INTRODUCTION
After the global recession in the 1990s, interest in entrepreneurship as a solution
to economic and social challenges gained traction. International organisations
such as the Organisation for Economic Cooperation and Development (OECD),
and the European Commission, as well as the academic community became
drawn to entrepreneurship’s potential (Lundström & Stevenson, 2005). As
evidence of entrepreneurship as a driver of economic growth, job creation and
competitiveness accumulated (e.g. Acs, 2006; Audretsch, 2003; Audretsch &
Keilbach, 2004; Carree & Thurik, 2008; Parker, 2009; Thurik, Carree, van Stel &
Audretsch, 2008) the European Commission’s interest in entrepreneurship
strengthened.
In 2013, the European Commission released its Entrepreneurship 2020
Action Plan (European Commission, 2013). The Entrepreneurship 2020 Action
Plan evolved from the Lisbon Strategy (see European Parliament, 2000) and was
developed to fulfil Europe’s1 entrepreneurial ambitions (European Commission,
2015). Institutional change was considered necessary to promote
entrepreneurship. Institutions are the formal and informal rules which guide
behaviour (North, 1990) and institutional arrangements have been found to
influence entrepreneurship activity (e.g. Acs, Audretsch, Lehmann & Licht,
2016b; Baumol, 1990; McMullen, Bagby & Palich, 2008).
Using a systematic review methodology, this study contributes to
developing knowledge about entrepreneurship in Europe and its implications
by bringing together a broad range of relevant literature. This study first
provides the background to the way in which entrepreneurship policy emerged
in Europe, as well as its main objective (section three). Identifying the objective
of entrepreneurship policy is important in measuring its effectiveness. Existing
literature highlights that the ambiguity surrounding the definition of
“entrepreneurship” makes it difficult to identify entrepreneurship policy and its
objective, because this ambiguity feeds into how the policy is defined and
formed (e.g. Smallbone, 2016). By considering the process of entrepreneurship,
research suggests that entrepreneurship policy aims to increase the supply of
entrepreneurs and the creation of new ventures. Section four, discusses the role
of institutions in influencing behaviour and how changes to Europe’s formal
and informal rules intended to promote entrepreneurship activity to citizens.
Changes to Europe’s institutional context were made with the expectation of
increasing venture creation by providing access to finance, labour market
reforms, changes to tax regimes and education campaigns.
1 References to Europe mean the European Union before Brexit, when the United Kingdom
officially left the Europan Union in 2020, unless otherwise stated (i.e. EU28).
6
The outcomes of entrepreneurship policy is examined in section five.
Examining implications of policy is not only the domain of practitioners
researchers are also encouraged to explore the implications of policy and
related actions (Antony, Klarl & Lehmann, 2017), especially over the longer
term (Giraudo, Giudici & Grilli, 2019). In their highly influential work, Zahra &
Wright (2011) encourages entrepreneurship researchers to shape, guide and
even provoke policy discussions. This study is partly motivated by these
appeals for researchers to contribute to policymaking.
The review of literature reveals that the effectiveness of entrepreneurship
policy in producing the economic and social benefits sought by European
Union policymakers has been limited. Entrepreneurship policy has not
significantly increased entrepreneurship activity and has skewed
entrepreneurship activity towards ventures which contribute little to economic
or social prosperity (Spasova, Bouget, Ghailani & Vanhercke, 2019; Mühlböck,
Warmuth, Holienka & Kittel, 2018). There are various contributing factors,
especially active labour market reforms which promote entrepreneurship to
unemployed individuals. The ambiguity in the definition of “entrepreneur”,
and the way European policymakers treat individuals working outside of
standard employment arrangements was also influenced the composition of
Europe’s entrepreneurs. The literature suggests that promoting quality, rather
than more entrepreneurship (e.g. Shane, 2009) can create greater benefits to the
economy and society. Quality entrepreneurship is examined in section six. The
literature reveals broad consensus that quality entrepreneurship is defined with
reference to productive entrepreneurship (Baumol, 1990). While a measure of
productive entrepreneurship remains contentious, opportunity
entrepreneurship as a proxy for productive entrepreneurship is gaining
scholarly legitimacy (Chowdhury, Audretsch & Belitski, 2019; Mohammadi
Khyareh, 2017).
As the implications of entrepreneurship policy in Europe come to light,
what has become apparent from the literature is the need for alternative
approaches to promoting quality entrepreneurship. Section seven, discusses the
importance of framing policy and undertaking institutional change with
reference to the European context. Much of the research influencing Europe’s
existing entrepreneurship policy relies on underlying assumptions, theories and
concepts dominated by Anglo-Saxon academics (mainly from the UK, USA and
Canada), and contains specific research traditions, ideologies and assumptions
that differ from those in Europe (Meyer, Libaers, Thijs, Grant, Glänzel &
Debackere, 2014). The European context is founded on a social model, where
citizens are protected against social risks (e.g. poverty, old age, unemployment,
sickness and disability). In particular, a fundamental component of Europe’s
social model, social protection for workers, aims to remove the negative
impacts of temporary or permanent loss of income (Eurofound, 2017; Spasova,
Bouget, Ghailani & Vanhercke, 2017).
The dominant, US-centric approach to entrepreneurship research and
policymaking characterises social protection and welfare states elements
inherent in Europe’s social model as barriers and disincentives to
entrepreneurship (e.g. Aidis, Estrin & Mickiewicz, 2012; Hessels, van Gelderen
7
& Thurik, 2008; Parker, 2009; Parker & Robson, 2004; Wennekers, van Stel,
Thurik & Reynolds, 2005). Section eight examines the role of context in
entrepreneurship research and policymaking. The review of literature suggests
that applying a US-style approach to promoting entrepreneurship in the
European context may have contributed to the lack of effective policy outcomes,
and institutional changes over the last decade which have put the European
economy, working life and social model at risk (e.g. European Commission,
2018; Spasova et al., 2019). The impact on Europe’s entrepreneurial ambitions
are particularly relevant and of interest because the effects of the approach to
entrepreneurship policy taken, impact the working age population.
Social protection is once again being recognised as a productive factor
(European Commission, 2016) with the potential to promote entrepreneurship,
sustainable growth, individual wellbeing and well-functioning labour markets
(European Commission, 2017a). Social protection in Europe is considered in
section nine, and its potential to promote quality entrepreneurship is examined
in section 10. Based on the literature review, seven proposition are developed to
help guide future empirical research and policy linking social protection with
the promotion of quality entrepreneurship in Europe. A conclusion, limitations
and suggestions for future research are discussed in section 11.
A systematic literature review methodology was adopted to provide a
robust overview of entrepreneurship in Europe by linking theoretical research
and empirical findings from a variety of sources (Tranfield, Denyer & Smart,
2003). Taking stock of current knowledge provides useful insights to both
researchers and policymakers. In doing so, this study aims to answer calls for
contextualised research and advance knowledge about entrepreneurship’s
inherently, complex interaction between economic and social life (Welter, 2011;
Zahra & Wright, 2011). Contextualisation can also aide in developing context-
specific policy proposals (Foss, Henry, Ahl & Mikalsen, 2019). There are calls
for research to explore how the social protection system can support
entrepreneurs in a context where institutions are promoting entrepreneurship
(Caraher & Reuter, 2017) as well as research that provides greater
understanding of the link between institutions and entrepreneurship quality
(e.g. Urbano, Aparicio & Audretsch, 2019).
Therefore, this study responds to recommendations to improve
understanding about the relationship between institutions and
entrepreneurship (Bjørnskov & Foss, 2016; Boudreaux & Nikolaev, 2019;
Urbano et al., 2019). Such research can instigate meaningful policy debates
about institutional change and complementarities within a specific context
(Caliendo, Ku!nn & Weissenberger, 2020; Hipp, Bernhardt & Allmendinger,
2015; Valdez & Richardson, 2013). Entrepreneurship scholars are also being
increasingly asked to widen their perspective (Economidou, Grilli, Henrekson
& Sanders, 2018; Pahnke & Welter, 2019; Zahra, Wright & Abdelgawad, 2014;
Zahra & Wright, 2016), juxtapose theoretical modelling with reality (Fayolle,
Landstrom, Gartner & Berglund, 2016; Su, Zhai & Karlsson, 2017) and provide
more systematic, policy-relevant research (Audretsch, Colombelli, Grilli, Minola
& Rasmussen, 2020; Block, Fisch & van Praag, 2017). Policymakers and
researchers are encouraged to consider social implications of macroeconomic
8
policies due to rising inequalities, especially within Europe (Istituto per la
Ricerca Sociale, 2016; OECD & European Union, 2017). The extensive,
systematic literature review undertaken in this study attempts to respond to
these calls and opportunities to improve understanding of entrepreneurship
and policy-related matters.
Moreover, this study contributes to calls for researchers to reconsider the
implicit assumption that entrepreneurship is intrinsically beneficial and to focus
on evidence-driven entrepreneurship policy research which considers specific
mechanisms that can support all entrepreneurs (Wiklund, Wright & Zahra,
2019). Finally, the seven propositions developed as a result of the review are
expected to initiate debate and further research about a new institutional
arrangement which has the potential to promote quality entrepreneurship. It
questions the link between Europe’s social model with economic and social
outcomes, as well as how entrepreneurship research and policy have evolved in
Europe. The following section explains the methodology adopted in more detail.
9
2 METHOD
“All types of review should be systematic...You will encounter many definitions
for literature reviews, but you will find that the word ‘systematic’ often features
as a critical element within the description of a literature review”
(Booth, Sutton & Papaioannou, 2016, 2)
This study has adopted a literature review methodology to examine existing
literature and assess whether entrepreneurship policy has been effective in
producing the economic and social benefits sought by European Union
policymakers. The review has also informed the development of seven
propositions for future empirical testing. Review methodologies are considered
suitable and valuable for integrating a large body of research and analysing it to
advance knowledge for a variety of academic output ranging from published
works in reputable academic journals (Palmatier, Houston & Hulland, 2018) to
theses and dissertations (Booth et al., 2016). A literature review methodology is
appropriate for this study because it seeks to collate and synthesise a diverse
body of existing literature which has already adeptly examined the complexities
inherent in entrepreneurship, so as to explore the linkages within sometimes
disparate and contradictory findings, provide fresh insights with possible
practical implications, and generate avenues for future research (Palmatier et al.,
2018; Tranfield et al., 2003).
While this study may question and reflect on the normative ideas
underlying entrepreneurship (Fayolle et al., 2016) it is not primarily focused on
analysing specific concepts,2 critiquing particular narratives and methodologies,
or establishing a new theoretical framework. The primary objective of the study
and its methodological approach is to answer the question of whether policy
decisions and actions have been effective (Booth et al. 2016). In doing so, it seeks
to contribute to academic knowledge, policy and practice (Tranfield et al., 2003).
A meaningful literature review with appropriate coverage of an issue
requires a robust process for identifying and collecting existing research (see
Cooper, 1998). Historically, management research, where entrepreneurship has
strong theoretical roots (e.g. Bruton, Ahlstrom & Li, 2010), has experienced
particular challenges in establishing robust approaches to gathering relevant
literature for review, largely because of its interdisciplinary and fragmented
nature (Briner & Denyer, 2012; Denyer & Tranfield, 2009). The seminal work of
2 While this study does discuss conceptual issues, there is no intention to categorise and describe
concepts relevant to entrepreneurship research and their relationships to each other. The discussion of
concepts (e.g. definition of entrepreneur) is used to provide some context around the difficulties of
examining the effectiveness of entrepreneurship policy, and the implications for the economy and society.
10
Tranfield et al. (2003) contends that applying the principles of systematic review
can produce high quality research with both academic and practical significance.
They argue that “[i]ncreasing the precision of a reliable evidence base [so] that
policymakers and practitioners can make more sensitive judgements is the
ultimate aim of the application of systematic review procedures to management
research” (Tranfield et al., 2003, 219).
A systematic review is principally a replicable, scientific and transparent
process which outlines the way in which a researcher has gathered and
analysed research findings. It can reduce bias and facilitate appropriate
exploration and development of ideas for policy, practice and future research
(Booth et al., 2016; Denyer & Tranfield, 2009; Tranfield et al., 2003). It goes
beyond an ad hoc data mining activity or a simple description of findings. The
practice of systematic review originates from the medical field and entails strict
adherence to highly rigorous and prescriptive protocols (see Moher, Shamseer,
Clarke, Ghersi, et al., 2015). Denyer & Tranfield (2009) compares medical and
management research, positing that their intrinsic differences mean simply
applying medical notions and protocols to management and organisational
studies is inappropriate. Most notably, research in management and the social
sciences relies on professional judgment and interpretation which is
incongruent with strict adherence to the systematic review protocols
established within the medical field.
In any areas of research, carrying out a systematic review is challenging.
The term “systematic review” is ambiguous and no standard definition in either
medical (Moher et al., 2015) or management research (Fisch, & Block, 2018)
exists. To encourage greater adoption of the systematic review methodology,
influential researchers on the subject have attempted to clarify what a
systematic review entails within the context of management research. Denyer &
Tranfield (2009, 671) states that a systematic review as a “specific methodology
that locates existing studies, selects and evaluates contributions, analyses and
synthesizes data, and reports the evidence in such a way that allows reasonably
clear conclusions to be reached about what is and is not known...[and should be
regarded] as a self-contained research project...that explores a clearly specified
question, usually derived from a policy or practice problem, using existing
studies...[with] distinct and exacting principles”.
Simpler definitions of systematic review also exist. Briner & Denyer
(2012, 112) argues that within management research, a systematic review
“simply means that reviewers follow an appropriate (but not standardized or
rigid) design and that they communicate what they have done”. Similarly,
Palmatier et al. (2018) suggests that systematic review refers to a methodical
assessment and comparison of relevant, published literature without
quantitative assessment. Fisch, & Block (2018, 103, Footnote 1). In broad terms, a
systematic review “refers to all literature reviews that follow a systematic,
transparent, and reproducible process for identifying academic literature about
a clearly defined topic or research question”. The production of credible,
trustworthy and useful research primarily relies on methodological
transparency and robustness (Aguinis, Ramani & Alabduljader, 2018).
11
Therefore, a systematic review of literature in management research is
considered to be a quality controlled, coherent and replicable method of
collecting and analysing prior research, and not particularly focused on one
specific, strict protocol. In line with precedence already set within management
research, this study has adopted a systematic review approach without
adherence to the specific and strict protocols established in medical research. In
addition, similar to other systematic reviews within management, a meta-
analysis was not undertaken because the heterogeneity of the way
entrepreneurship is defined and researched prevents it (Tranfield et al., 2003).
Consistent with the principles of systematic review, the process adopted in this
study can assist with developing an understanding of the issues, considering
different perspectives and providing suggestions for making progress towards
a possible solution in the future (Denyer & Tranfield, 2009).
In line with the seminal work of Tranfield et al. (2003), this study
planned the review by considering the availability of a sufficient number of
relevant studies and by taking a cross-disciplinary perspective. An initial key
word search was used to determine the scope of relevant literature. The key
word “entrepreneurship” was used to search the University of Jyväskylä (JYU)
library international e-material (e.g. journals, books) database to identify the
number of English-language, peer reviewed, full text, published articles
available. The search returned 347,822 results encompassing subjects such as
economics, business, education, gender and labour economics. When the word
“policy” was added, 105,235 results appeared. The results returned literature
related to various subjects such as political science, public policy and economic
growth. Due to the volume of literature it was clear that sufficient research
exists for the review methodology to be of value (Palmatier et al., 2018). Search
terms also returned results published in prominent entrepreneurship journals
(e.g. Entrepreneurship: Theory and Practice, Journal of Business Venturing,
Small Business Economics), suggesting that research related to these key words
are valued by high-ranking, entrepreneurship journals.
When examining policy and practice, bias in research and agenda can be
mitigated when attention is paid to a broader source of knowledge, including
those from policymakers and practitioners (Tranfield et al., 2003). Considering a
broad range of sources assists in reducing publication bias in entrepreneurship
research and provides access to views that challenge dominant assertions or
assumptions (O'Boyle Jr., Rutherford & Banks, 2014). As an area of research
matures, researchers are encouraged to take a multidisciplinary view relying on
established approaches to challenge, critique and self-reflect about the
assumptions, myths and politics underlying entrepreneurship (Fayolle et al.,
2016). Taking a multidisciplinary view is more challenging than one would
expect. Being interdisciplinary in nature, entrepreneurship has been examined
by various fields (Carlsson, Braunerhjelm, Mckelvey, Olofsson, Persson &
Ylinenpää, 2013) but multidisciplinary interchange has historically been limited
(Zahra & Wright, 2011). For instance, while entrepreneurship overlaps
economic and social life, the vast quantities of entrepreneurship research
remains largely segmented into the mainstream economic and management
12
disciplines (Campbell & Mitchell, 2012). Other disciplines tend to examine
entrepreneurship from their own particular perspectives (see Audretsch, 2003).
As the researcher’s familiarity with the topic grew, the following search
terms were used to identify other relevant literature: “opportunity
entrepreneurship”, “necessity entrepreneurship”, “quality entrepreneurship”
“institutional theory” and “social protection”. These search terms were linked
to titles, abstracts, and keywords and where relevant, the contents of journal
volumes or issues in which articles appeared. The particular search terms
focused on the macro-level outcomes of policy decisions and actions rather than
detailed exploration of other topics within entrepreneurship, such as specific
individual traits (e.g. age, family size, level of education), pedagogical
approaches to entrepreneurship education, specific types of entrepreneurship
(e.g. social entrepreneurship, family-run ventures), formation of entrepreneurial
ecosystems or entrepreneurship in developing nations.3 Further exploration
revealed recurrent studies and policy documents being cited within and across
various studies from both entrepreneurship and related fields. Recurring
citations led to bibliographical searches to find original literature and seminal
works. Such a flexible and iterative systematic review process was time-
consuming but is encouraged because it identifies influential and best quality
works, allowing the researcher to develop their understanding of the topic in a
creative and less biased way (Denyer & Tranfield, 2009; Tranfield et al., 2003).
Therefore, the scope of the literature extends beyond academic journals
within entrepreneurship to mitigate the risk of taking too narrow a perspective
and to facilitate pursuit of a holistic understanding of entrepreneurship in
Europe. Guidance from researchers also helped to identify seminal and
influential works to provide a valuable starting point, given the large number of
search results returned. Literature searches extended to the European
Commission documents, the internet (e.g. Google scholar) and personal
requests for information from academics4.
Literature included in the review are those published in peer reviewed
journals, seminal works, papers authored by recognised experts (e.g. Zoltan J.
Acs), published by highly regarded sources (e.g. European Commission,
International Labour Organisation), influential with numerous citations5 and
published textbooks. Relevant literature has been taken from the most
prominent entrepreneurship journals because of their high impact factor
Small Business Economics, Entrepreneurship, Theory and Practice, Journal of
Business Venturing, Journal of Small Business Management, Entrepreneurship
3 Although such topics may be touched upon, when relevant, to establishing background and
context of the issues discussed in this study.
4 For example, at later stages in the process, when relevant literature was not accessible from the
JYU database direct requests to scholars were made.
5 As per Google Scholar (www.scholar.google.fi/) and when referenced repeatedly in other
relevant studies.
13
and Regional Development (see Foss et al., 2019). Total literature reviewed was
not solely from top journals because sometimes alternative views are not
presented (Aguinis et al., 2018). For this study, documents and reports by
policymakers are particularly important. Not only do they communicate policy
choices but policy documents and reports are outside the influence and control
of commercial, academic publishers (Briner & Denyer, 2012). In addition, to
broaden the perspective taken in this study, studies using qualitative and
quantitative methodologies, review studies, theoretical and empirical works, as
well as critiques were included. Studies were selected because they were either
forming theory or shaping understanding of entrepreneurship and policy
implications. In consideration of the European context, research using European
data was specifically sought out. Reading the abstracts, conclusions and data
source helped determine whether the literature was relevant to the research
question and European context.
Unless it met the inclusion criteria above and provided significant
contribution to understanding the issues, literature was rejected if it was not
directly related to the research question (e.g. it related specifically to running
family businesses, microfinance), had few or no citations, appeared in popular
press (e.g. newspapers, magazines) or was published in very low ranking
journals.6 To incorporate the latest knowledge and consider emerging issues
surrounding the implications of entrepreneurship policy. Research over 10
years was excluded unless they made a significant contribution to the topic or
was considered relevant to answering the research question (e.g. seminal and
influential works, reports by policymakers).7 Wiklund et al. (2019, 427) argues
that “impactful entrepreneurship research usually surfaces questions with long-
term horizons”. Taking a longer term horizon with this review aims to cover as
much relevant literature as possible to holistically understanding the field,
challenges and developments. This approach was used to limit the risk of
overlooking important contributions which may add to the background and
understandings underpinning the issues explored in this study.
Greater coverage and diversity in relevant literature increases the quality
of the work. However, seeking an exhaustive list of citations can also be
counter-productive for identifying the central outcomes and developing
propositions with practical relevance (Cooper, 1998; Tranfield et al., 2003).
6 For instance, 2018 IDEAS journal ranking below one were not included and 2019 SCImago
Journal Rank (SJR) (https://www.scimagojr.com) with ranked in the botton 10% for all journals and in
their respective fields were not included unless studies were cited often in other important literature. In
this case, judgement was used about suitability and value.
7 For instance, the influential book Parker (2009) is a first edition. The second edition was
published in 2018 and printed in the United Kingdom by Clays, St Ives plc. It has over 1,500 citations.
The researcher was unable to access this second edition but refers to the 2009 edition. To compensate,
newer studies have been identified in this study and used to complement foundational knowledge in 2009
which has remained influential to more recent findings. In fact, Parker (2009) was identified as influential
and the publication was sought out from bibliographical searches.
14
Instead, reliance on representative findings and seminal works can be sufficient
as resource, time and other constraints can make such coverage, prohibitive
(Booth et al., 2016; Cooper, 1998). Given time and resource constraints,
judgement was made as to which articles were representative. In addition,
given the specific focus on the study of entrepreneurship, while a broad range
of relevant literature was examined, one third of the literature was drawn from
the top five entrepreneurship research journals (see Table 1). Entrepreneurship
journals significantly influenced the literature review but were balanced by
literature from a wide variety of other research areas and sources examining
entrepreneurship and policy-related issues.
TABLE 1 Percentage of literature drawn from top five entrepreneurship
journals
Journal title
No. of papers
% of total
sample
Small Business Economics*
83
21
Entrepreneurship Theory and Practice
32
8
Entrepreneurship and Regional Development
7
2
Journal of Small Business Management
5
1
Journal of Business Venturing
4
1
Other – entrepreneurship journals
49
12
Other – European Union communications
and reports related to entrepreneurship
27
7
Other – non-entrepreneurship journals (e.g.
peer reviewed journals in other disciplines,
textbooks, international policy
communications and reports)
191
48
TOTAL
398
100
Total high impact entrepreneurship journals = 131 (33%)
Total entrepreneurship journals = 180 (45%)
* The majority of entrepreneurship research came from Small Business Economics because it tends to focus on practical
aspects of entrepreneurship, including policy and outcomes.
Synthesis is a generic term referring to the way in which the literature gathered
on a particular topic or research question is summarised, integrated and
discussed (Tranfield et al., 2003). Synthesising individual findings, reconciling
conflicting evidence and drawing conclusions are integral for comprehensive
understanding of a subject by academics and practitioners (Palmatier et al.,
2018). The findings of this review are synthesised using an interpretative
approach which links themes across seminal and influential studies. This
approach goes beyond passively summarising findings and seeks to provide
new insights, challenges to the status quo as well as bases for future research
and a basis from which to inform policy (Denyer & Tranfield, 2009; Tranfield et
15
al., 2003). Interpretative synthesis is appropriate for examining and broadening
understanding about the effectiveness of complex interventions using a variety
of studies, including both qualitative and quantitative studies (Briner & Denyer,
2012; Booth et al., 2016). This is a common approach in management studies,
used to link a diverse range of studies to provide insights which may not be
clear by examining studies in isolation (Denyer & Tranfield, 2009).
In terms of presenting the outcomes of the review, the influential work of
Booth et al. (2016) argues that a study examining the effectiveness of policy
decisions and actions using a mix of qualitative and quantitative studies, the
result of a systematic search and review is presented in a narrative-style format
(as opposed to tabular or graphical). This method of reporting allows the
researcher to help unfold the story of what is known about the topic and
provides a basis for recommendations. Accordingly, this study is
predominantly structured chronologically to present the reader with the
necessary background to entrepreneurship research and policy, build on this
understanding to evaluate and examine the implications of entrepreneurship
policy, and provide possible ways forward. This structure also reflects the
iterative nature of the review, understanding of the implications of
entrepreneurship policy and how the accumulation of knowledge unfolds.
Finally, the extensive nature of systematic reviews can often disrupt
established ideas or taken for granted assumptions (Briner & Denyer, 2012).
This may be reflected in the discussions and seven propositions identified from
reviewing relevant literature. Propositions, rather than hypotheses, have been
developed because there is no empirical testing in this study. Instead, this study
has drawn from and links multiple sources of research, provides a robust
foundation for understanding how entrepreneurship policy has developed in
Europe and a strong basis for subsequent empirical testing to advance
entrepreneurship research, and inform policy and practice (Tranfield et al.,
2003). The next section provides the background to entrepreneurship policy
within Europe, including its appeal, definition and objective.
16
3 AN ENTREPRENEURIAL EUROPE
“...new and young enterprises represent a key ingredient in creating a job-rich
recovery in Europe”
(European Commission, 2013, 27)
Entrepreneurship is a multifaceted concept that relies on the economic and
creative potential of individuals to drive progress. This section begins by
exploring the appeal of entrepreneurship to policymakers faced with economic
and social challenges since at least the 1990s. In his 1912 seminal work, the
economist Joseph A. Schumpeter introduced the idea that entrepreneurship is
central to economic growth and development (Schumpeter, 1912). He argued
that the intrinsic creativity of entrepreneurs enables them to combine resources
in ways which produce innovations. These innovations manifest in new
products, methods of production, markets and resources which satisfy the
needs of consumers and disrupt the status quo (Schumpeter, 1912; Schumpeter,
1934). A resurgence of Schumpeter’s theory began in the late 1970s and by the
late 1990s, policymakers and researchers became increasingly interested in
entrepreneurship and its potential (Landström, 2008; Lundström & Stevenson,
2005; Meyer et al., 2014), particularly in relation to economic and individual
advancement (Carlsson et al., 2013).
To the European Commission, entrepreneurship is considered “a
powerful driver of economic growth and job creation” (European Commission,
2013, 3). The expectation is that the potential economic value entrepreneurship
can create can also accrue unlimited benefits to society. Increased interest in
entrepreneurship happened to coincide with persistent economic problems in
Europe and the OECD (Audretsch & Thurik, 2000). In the 1990s, Europe’s slow
growth and high unemployment was so pervasive it was given its own term:
“Eurosclerosis” (Baumol, Litan & Schramm, 2007). In response to the persistent
economic challenges and their associated social consequences, policymakers
turned to entrepreneurship as a viable solution (Bradley & Klein, 2016;
Lundström & Stevenson, 2005; Mühlböck et al., 2018; OECD/ European Union,
2017; Smallbone, 2016;).
In 2000, the Lisbon Strategy outlined a co-ordinated effort to position
entrepreneurship as a cornerstone to economic growth and job creation in
Europe (European Parliament, 2000). In 2004, the European Commission
released its agenda for entrepreneurship, emphasising the importance of new
venture creation (European Commission, 2004). What was clearly emerging was
a commitment to develop and implement structural changes and reforms to
fulfil Europe’s entrepreneurial ambitions (Baumol et al., 2007; European
Commission, 2015).
The 2008 financial crisis, or the Great Recession, laid bare Europe’s deep
structural weaknesses. The Great Recession not only stalled but in some cases
reversed economic growth and social advancement within Europe. To illustrate,
in the immediate aftermath of 2008, the European Union recorded a 4 per cent
drop in Gross Domestic Product (GDP) and unemployment stood at 10 per cent,
17
or 23 million people (European Commission, 2010). Unemployment climbed to
a peak of 11.4 per cent in 2013 (Eurostat, 2018; Eurostat, 2020; OECD/European
Union, 2017). The challenges to regional economic and social prosperity that
existed before 2008, become more prevalent. The Great Recession is estimated
to have halved the European Union’s growth potential (European Commission,
2010), placing greater pressure on Europe’s long term competitiveness and
controls on rising inequality (European Commission 2010; OECD/European
Union, 2017).
The Great Recession intensified efforts to ignite a recovery through
entrepreneurship. The Lisbon Strategy which was unveiled in 2000 (European
Parliament, 2000) was ratified as the Lisbon Treaty in 2009,8 signifying the
formal commitment by the European Union to promote entrepreneurship. In
2010 the European Commission released its Europe 2020 strategy. This
roadmap for progress outlines the European Commission’s economic and social
priorities. Specific targets include an employment rate of at least 75 per cent for
the population aged 20 to 64 years, investment in research and development
(R&D) to reach 3 per cent of GDP and reducing the risk of poverty for 20
million people (European Commission, 2010). Since releasing the Europe 2020
strategy, Member States have been encouraged to promote entrepreneurship
and its viability as a career option to their citizens. The Small Business Act,9 for
example, was conceived to provide a framework and co-ordinated approach to
formulating and implementing “SME-friendly” policies (European Commission,
2008; European Commission, 2011).
Momentum towards an entrepreneurial Europe increased further in 2012
with the introduction of the Entrepreneurship 2020 Action Plan (European
Commission, 2013) which attempted to bifurcate entrepreneurship from small
business activity and give prominence to entrepreneurship policy. As the
blueprint for joint action, the Entrepreneurship 2020 Action Plan was a clear
and explicit commitment to foster Europe's entrepreneurial potential. It
introduced initiatives to remove institutional barriers to entry, including
educational initiatives and increasing the appeal of entrepreneurship (European
Commission, 2013). The expectation was that through entrepreneurship,
individuals would contribute directly to macro-level outcomes such as
economic growth, employment and social cohesion. Members States were asked
to recognise “entrepreneurs as creators of jobs and prosperity” (European
Commission, 2013, 27). Determined to encourage entrepreneurship, Eurostat,
the statistical office of the European Commission, began actively monitoring
8 Source: https://en.wikipedia.org/wiki/Ratification_of_the_Treaty_of_Lisbon (Retrieved
09.09.2019).
9 Although the Small Business Act contains legislative proposals, it is not itself a legal
instrument and the use of the term “Act” has been added as a symbolic gesture to represent its political
significance (European Commission, 2008). It is a set of 10 principles which guide policy formulation
and implementation by the European Union and its Member States.
18
Member States against targets set out in the Europe 2020 strategy and
Entrepreneurship 2020 Action Plan.
Expecting a link between entrepreneurship and growth is not wholly
unfounded. The seminal work of Wennekers & Thurik (1999) constructed a
framework suggesting that more entrepreneurs would be economically
beneficial. In both North America and Western Europe, there was evidence that
entrepreneurship has contributed to economic and social development since the
1970s (see Audretsch, 2003). Specifically in Europe, empirical evidence suggests
that activities of new rather than established firms were a source of regional
economic growth in Germany in the 1990s (Audretsch & Fritsch, 2003;
Audretsch & Keilbach, 2004).
Therefore, the European Commission’s decision to invest in creating an
entrepreneurial Europe to overcome economic and social challenges can be
considered a rational and pragmatic decision. The potential benefits of
entrepreneurship stimulated various initiatives and interventions under the
remit of entrepreneurship policy, embedding entrepreneurship as an important
element of economic and social life. The next section defines entrepreneurship
policy and clarifies its main objective. Providing clarity around what is meant
by entrepreneurship policy helps contextualise this study and allow
examination of its role in Europe.
3.1 Entrepreneurship policy
Creating an entrepreneurial Europe makes identifying entrepreneurship policy
and its objective more than a theoretical or scholarly exercise it has political,
economic and social significance. In their recent analysis of entrepreneurship
policy focused on innovative entrepreneurship, (Audretsch et al. (2020)
highlights the value of recognising the role of policy in determining
entrepreneurial outcomes. Entrepreneurship policy is intrinsically linked with
entrepreneurship research because it relies on theories established by
researchers that “serve as signposts that tell us what is important, why it is
important, what determines this importance, and what outcomes should be
expected” (Zahra, 2007, 444).
Therefore, a starting point for defining entrepreneurship policy is to
consider what is involved in the study of entrepreneurship. As a standalone
research topic, entrepreneurship is a relatively new research field (Carlsson et
al., 2013; Kuratko, 2006; Landström, 2008). It began gaining attention as a
specialised and autonomous research theme in the 1970s and 1980s, but in the
1990s the rise of the knowledge economy fuelled by technological innovations,
globalisation and recession, propelled it onto the global political and research
agenda (Landström, 2008). Historically, entrepreneurship research was part of a
broad remit allocated to social and behavioural scientists. As a result of its
interdisciplinary nature, various academic fields such as management,
economics and psychology, have examined entrepreneurship from their own
19
particular perspective (Audretsch, 2003; Bruton et al., 2010; Campbell &
Mitchell, 2012; Carlsson et al., 2013; Lundström & Stevenson, 2005).
Seminal works such as Baumol (1990), Lundström & Stevenson (2005),
Shane (2009), Shane & Venkataraman (2000) and Wennekers and Thurik (1999),
helped set boundaries around the study of entrepreneurship. By producing
relevant research and robust theoretical underpinnings, fields of study can gain
academic legitimacy (Wiklund et al., 2019). It was not until the late 2000s that
entrepreneurship gained some legitimacy as an academic field of study (Meyer
et al., 2014). Challenges to legitimacy still linger, such a lack of attention to
robust theorising (Zahra, 2007), questions about relevance to policy and practice
(Wiklund et al., 2019; Zahra & Wright, 2011) and evidence of publication bias
which has raised concerns that views which challenge dominant assertions may
be overlooked (see O'Boyle Jr. et al. 2014).
Moreover, entrepreneurship research also remains disparate and lacks
consensus (e.g. Audretsch et al. 2020; Henrekson & Sanandaji, 2020). When
attempting to consolidate multiple strands of entrepreneurship research,
Audretsch, Kuratko & Link (2015) likened their task as being confronted with a
“jungle’’ because of the multiple theories about what constitutes
entrepreneurship and the way it is studied. One of the biggest challenges for
entrepreneurship research is the how “entrepreneur” is defined (see section six,
below, for a more detailed discussion). Any ambiguity surrounding
entrepreneurship can also feed into policy and the policy making process
(Arshed, 2017; Smallbone, 2016).
Consequently, there is little consensus about what specifically constitutes
entrepreneurship policy, especially when there is the possibility of other public
policies impacting entrepreneurship activity (Ahmad & Seymour, 2008;
Audretsch, 2003; Dennis Jr, 2011a; Dennis Jr, 2011b; Lundström & Stevenson,
2005; Smallbone, 2016). For example, policies focused on commercialisation of
innovations (e.g. R&D tax cuts or other incentives) are expected to induce
competition, trigger consumer demand and create quality jobs this process
may indirectly impact entrepreneurship activity even if it is not the sole
purpose of the policy (McCann & Ortega-Argilés 2016; Smallbone 2016). In this
case, initiatives unrelated to entrepreneurship become wrongly attributed to it.
Ambiguity about what constitutes entrepreneurship policy make it difficult to
properly assess the effectiveness of related interventions and monitor the
investment of public funds (Ahmad & Seymour, 2008; Lundström & Stevenson,
2005; Lundström, Vikström, Fink, Meuleman, Głodek, Storey & Kroksgård, 2014;
Smallbone, 2016).
Research suggests that one useful approach to identifying
entrepreneurship policy is to distinguish between policy intended to support
existing businesses and those intended to support new business activity (e.g.
Lundström et al., 2014; Smallbone, 2016). Yet, even this simple differentiation
can be complicated because entrepreneurship policy has evolved from
initiatives targeting small-and-medium enterprises (SMEs) (Lundström &
Stevenson, 2005; Audretsch, 2003). For example, by 2000 Finland shifted its
focus to individuals as potential entrepreneurs and reframed its SME policies
into entrepreneurship policies (Heinonen & Hytti, 2016; Heinonen, Hytti &
20
Cooney, 2010). The European Commission’s own entrepreneurship policies
have been subsumed within broader industrial policy initiatives under the
subject of enterprise (European Commission, 2014). In light of the above, the
next section will seek to define entrepreneurship policy by focusing on its main
objective.
3.2 Objective of entrepreneurship policy
Establishing boundaries around what constitutes entrepreneurship policy is a
valuable exercise at the very least, it can assist researchers and policymakers
ring-fence specific interventions and evaluate them against stated goals and
priorities (Dennis Jr, 2011b; McCann & Ortega-Argilés, 2016; Smallbone, 2016).
Leading authorities in entrepreneurship policy research, Anders Lundström
and Lois A. Stevenson have produced seminal research which has significantly
influenced how entrepreneurship policy and its objective are conceptualised.10
Lundström & Stevenson (2005, 51) posits that “[t]he main objective of
entrepreneurship policy is to stimulate higher levels of entrepreneurial activity
by influencing a greater supply of new entrepreneurs”. More recently,
Lundström et al. (2014, 941) states that the objective of entrepreneurship policy
is, “to promote the creation of new enterprises”. The differentiating factor of
entrepreneurship policy from other, related policies is the focus on creating
something new, or something that does not yet exist, to life.
Researchers also suggest that it is useful to consider the entrepreneurial
process to help identify entrepreneurship policy and its objective (Heinonen &
Hytti, 2016; Lundström & Stevenson, 2005; Shane, 2012).11 The most recognised
entrepreneurial process is described by Lundström & Stevenson (2005) and
involves the following steps: (i) awareness; (ii) pre-start-up (nascent); (iii) start-
up; (iv) early post-start-up; and (v) maintenance and expansion.12 For this
entrepreneurship process to unfold, entrepreneurship policy works to
encourage individuals to “consider entrepreneurship as a viable option,
actually move into the nascent stage of taking actions to start a business and
then proceed into the entry and early stages of the business” (Lundström &
Stevenson, 2005, 47). The general consensus is that the process of
10 Lundström and Stevenson first examined entrepreneurship policy on an international scale in
research completed in 2001 and are the leading authorities in this area.
11 For a more detailed discussion of the various conceptualisation and theories regarding the
entrepreneurial process, see Moroz & Hindle (2012).
12 Sometimes, the awareness and pre-start phase are combined (e.g. Reynolds et al., 2005). Also,
while new ventures can undergo a process of maintenance and expansion (i.e. process (v), above) because
the new venture must operate for a period of time before it is considered viable and scalable, policies
focused on managing, rearranging or growing existing or larger businesses are considered as being related
to SMEs policy not entrepreneurship policy (Lundström & Stevenson, 2005).
21
entrepreneurship is inherently about change (Audretsch, 2003; Schumpeter,
1934) observed by the creation of new ventures and new economic activity
(Baumol et al., 2007; Carlsson et al., 2013; Reynolds, Bosma, Autio, Hunt, De
Bono, Servais, Lopez-Garcia & Chin, 2005; Wiklund, Davidsson, Audretsch &
Karlsson, 2011).
A long established theoretical view within entrepreneurship research
contends that entrepreneurship is of value to the economy and society only
when action is taken. That is, value is created when individuals identify
opportunities, intend to take action and then take the necessary actions required
to create an actual venture (Audretsch & Keilbach, 2004; McMullen & Shepherd,
2006; Nikolaev, Boudreaux & Palich, 2018). In principle, entrepreneurship
policy can be considered primarily a behavioural concept concerned with
prioritising and directing human capital towards creating something new. The
ideal outcome is the creation of a new business venture which facilitates new
economic activity that contributes to economic and social advancement.
Given the time taken to create, set up and operate a new business
entrepreneurship policy relates to policies targeting young businesses which
are inherently small (Lundström et al., 2014). 13 New ventures are generally
considered those up to three and a half years old with fewer than 250
employees (Lundström & Stevenson, 2005; Reynolds et al., 2005).14 In their
more recent, detailed definition, Lundström et al. (2014, 944) defines
entrepreneurship policy as “[p]olicy measures aimed at individuals who are
interested in starting a business, together with those who are still in a starting
phase procedure, defined as activities during their first 3 years”. Schumpeter
(1934) also emphasises that entrepreneurship is not considered a longer term
state because once a venture become established, the individual’s role morphs
into management of an existing business and transforms into an SME.
Therefore, in the context of creating an entrepreneurial Europe,
entrepreneurship policy aims to increase the supply of entrepreneurs and the
creation of new entrepreneurial ventures. New economic activity gives rise to
potential for more individuals to generate new economic activity and contribute
directly to economic and social prosperity. How this activity unfolds leads to
questions of whether new venture creation is necessary for entrepreneurship
and what form, if any, these ventures should take. This is the topic of discussion
for the next section.
13 While both entrepreneurship and SME policy can relate to the activities of small ventures,
SME policy is different because it aims to support existing business ventures already in operation
(Lundström & Stevenson, 2005; Smallbone, 2016).
14 Although studies have considered firms with a life of up to five years as new businesses
created by entrepreneurs (e.g. Koski & Pajarinen, 2013).
22
3.2.1 New venture creation
Some researchers argue that new venture creation is not necessary for
entrepreneurship activity. From this perspective, entrepreneurship is associated
with a particular mindset, certain behaviours or ability to exploit profitable
opportunities (e.g. Palmer, Niemand, Stöckmann, Kraus & Kailer, 2019; Rauch,
Wiklund, Lumpkin & Frese, 2009; Shane, 2012; Shane & Venkataraman, 2000;
Shepherd, Patzelt & Haynie, 2010).15 What becomes most important is the
unfolding of entrepreneurial activities (e.g. allocation of resources, management
decisions, strategy, cognition) to meet specific goals (Sarasvathy, 2004). Taking
this view, the vehicle through which entrepreneurial activity unfolds becomes
irrelevant. The focus is on the actions of any entity, whether that be individuals
or existing, multinational corporations (Audretsch et al., 2015).
However, when exploring the impact of entrepreneurship policy,
researchers adopt new venture creation as the most applicable, measurable
outcome of policy interventions and entrepreneurial behaviour (e.g. see Acs,
Åstebro, Audretsch & Robinson, 2016a; Ahmad & Hoffmann, 2008; Ahmad &
Seymour, 2008; Arshed, Carter & Mason, 2014; Lundström et al., 2014;
Lundström & Stevenson, 2005; McCann & Ortega-Argilés, 2016; Smallbone,
2016; Urbano & Alvarez, 2014; Urbano et al., 2019). For the most part, specific
policy directives tend to refer to venture creation in some form. For instance,
when policymakers refer to inclusive entrepreneurship policies, they are
referring to disproportionate limits placed on venture creation by
disadvantaged groups (OECD/ European Union, 2017). While the report
acknowledge that entrepreneurial behaviour can occur within existing
organisational structures the focus is on individuals’ equal opportunity for
creating new, sustainable businesses. Entrepreneurship policies can also
exclusively aim to create new high growth potential ventures (Autioa &
Rannikko, 2016).
Moreover, as a primarily behavioural concept, entrepreneurship policy
also targets individuals as opposed to activities by organisations (Lundström &
Stevenson, 2005; Parker, 2009). 16 Entrepreneurship researchers refer to
entrepreneurial behaviour by individuals within existing businesses as
“intrapreneurship”, while “independent entrepreneurship” occurs through new
venture creation by individuals (Martiarena, 2013; Neessen, Caniëls, Vos & de
Jong, 2019). Entrepreneurship policy-related literature tends to place greater
emphasis on the actions of individuals who have, or will have, some personal
ownership stake in some newly created venture in which they have ownership
or control (Reynolds et al., 2005). Creation of new ventures by individuals is
15 In an even broader perspective on the outcomes of the entrepreneurship process can be
considered as creating new knowledge, forming new institutions and creating new industries (Zahra &
Wright, 2011).
16 Another differentiating factor from SME policy.
23
significant because it provides the means to commercialise ideas and contribute
to economic growth when others, including existing businesses cannot or are
not willing to (Acs, Audretsch, Braunerhjelm & Carlsson, 2012).
A focus on individual action and new venture creation also ties back to
the European Commission’s intent on promoting entrepreneurial careers for
individuals (European Commission, 2013). Even if the broadest conception of
entrepreneurship policy included the creation of new ventures through
intrapreneurship activity, often the decisions such as when and which business
opportunities to pursue, are influenced by a management team, parent
company or wider corporate strategy (Choi & Shepherd, 2004; Ireland, Covin &
Kuratko, 2009). In this case, new venture creation is driven by directives set by
an existing organisation and generally precludes personal ownership in both
financial and psychological terms, and the entrepreneurial careers envisioned
by the European Commission.
Furthermore, linking new venture creation by individuals with
entrepreneurship has an established theoretical tradition which is acceptable
within reputable entrepreneurship research, official statistical data collection
and policymaking practice (e.g. Ahmad & Seymour, 2008; Bjørnskov & Foss,
2008; Bjørnskov & Foss, 2016; Choi & Sheperd, 2004; Dau & Cuervo-Cazurra,
2014; McMullen et al., 2008; Urbano et al., 2019). Venture creation by
individuals also feeds into a predominant measure of entrepreneurship activity.
The Global Entrepreneurship Monitor (GEM) which measures the number of
individuals who start or are in the process of starting new ventures has become
an authoritative data source within entrepreneurship research and policy
documents (Ahmad & Hoffmann, 2008; Bosma & Kelley, 2019; Ramos-
Rodríguez, Martínez-Fierro, Medina-Garrido, & Ruiz-Navarro, 2015).17 While
there are some measurement challenges (e.g. see Parker, 2009) identifying new
venture creation by individuals as the objective of entrepreneurship policy is
appropriate because it is an observable behaviour and measurable outcome.
Quantity-based metrics produce the smallest measurement problems in
entrepreneurship research (Henrekson & Sanandaji, 2020).
Therefore, objective of entrepreneurship policy is considered new
venture creation by individuals, independent of existing organisations. This
perspective relies on an established academic approach which is also consistent
with the European Commission’s position of creating more ventures (European
Commission, 2004). The next section considers what form these new ventures
should take.
17 GEM considers entrepreneurship as an active attempt by individuals at setting up a business as
well as managing a new venture of up to 42 months old (Bosma & Kelley, 2019).
24
3.2.2 Form of new venture
Taking new venture creation as the measurable objective of entrepreneurship
policy, raises the question of what form these new ventures should take. Some
entrepreneurship researcher argue that the form of venture, or organisational
structure, is irrelevant (e.g. Bjørnskov & Foss, 2016; Reynolds, Hay & Camp,
1999; Reynolds, Carter, Gartner & Greene, 2004). A common example is sole
proprietorships where a business venture is created, owned and managed by an
individual who takes responsibility for it. Another is incorporation where the
entrepreneur registers a separate legal entity. Alternatively, in some
jurisdictions new ventures do not require any form of business registration or
formal set up (Autio & Fu, 2015; Eurofound, 2017).
Within Europe and elsewhere, an entrepreneur is considered to be
entitled to earn income and profits for their efforts. The significance of this view
is that, the “entrepreneur enters business and the vehicle does not matter, if it is
a sole trader, an establishment, a small business or a corporation” (Acs et al.,
2016a, 37). The European Commission suggests entrepreneurship simply
involves “turning ideas into action and developing one’s own projects”
(European Commission, 2015, 117). 18 The authoritative measure of
entrepreneurship using GEM data also includes incorporated and
unincorporated ventures in its measure of total entrepreneurship activity
(Bosma & Kelley, 2019). The authoritative work of Audretsch (2003, 3) contends
that “[n]o single organizational form can claim a monopoly on
entrepreneurship”. Taking a broad perspective, new ventures related to the
establishment of any new administrative structure that facilitates new,
independent economic activity (Ahmad & Seymour, 2008; Bosma & Kelley, 2019;
Chowdhury, Terjesen & Audretsch, 2015; Reynolds et al., 2005; Wiklund et al.,
2011). Therefore, any administrative vehicle or set up allowing
entrepreneurship activity by individuals, simply represents a particular way of
working or engaging in economic activity (Bjørnskov & Foss, 2016;
Blanchflower, Oswald & Stutzer, 2001; Burton, Sørensen & Dobrev, 2016; Dey,
2016; Gries & Naudé, 2011; Heinonen & Hytti, 2016). Instead of entering into an
employment contract for a salary, individuals who decide entrepreneurship is a
viable option establish a new venture to carry out their economic activity
(Burke, Lyalkov, Millán, Millán & van Stel, 2019; Codagnone, Lupiáñez-
Villanueva, Tornese, Gaskell, Veltri, Vila, Franco, Vitiello, Theben, Ortoleva,
18 This is a rare reference to a definition of “entrepreneurship” by the European Commission.
Another place is on the European Commission website (in relation to industry, entrepreneurship and SME
strategies) which states Entrepreneurship is an individual’s ability to turn ideas into action. It includes
creativity, innovation (https://ec.europa.eu/growth/industry/innovation_en), risk taking, ability to plan and
manage projects in order to achieve objectives” (see http://ec.europa.eu/growth/smes/promoting-
entrepreneurship_en retrieved 12.08.2019). Note that reference again is made to individual action.
25
Cirillo & Fana, 2018; Quadrini, 2009; Tammelin, 2019). Specifying only
acceptable forms of ventures would arguably exclude a large proportion of the
population who are treated as entrepreneurs for administrative purposes (e.g.
tax office, labour market statistics) (Baumol et al., 2007; Buschoff & Schmidt,
2009; Spasova et al., 2017). What is non-negotiable, however, is that the ventures
created are legal (see Dau, & Cuervo-Cazurra, 2014; Thai & Turkina, 2014).
Consistent with the predominant approach to entrepreneurship policy in
highly regarded entrepreneurship research, measurement conventions and
administrative purposes, this study considers entrepreneurship policy as
focused on creating all forms of new, legal ventures.19 The next section explores
how entrepreneurship policy has sought to influence individual behaviour to
promote entrepreneurship activity by changing institutions.
19 However, it is entrepreneurship research conventionally excludes business ventures in the
primary sector (agriculture, forestry, hunting, and fishing) (see Stenkula, 2012). Therefore, such ventures
are outside the scope of the discussion in this study.
26
4 THE ROLE OF INSTITUTIONS
“Institutions are the rules of the game in a society or, more formally, are the
humanly devised constraints that shape human interaction. In consequence
they structure incentives in human exchange, whether political, social or
economic” North (1990, 3)
The following discussion considers how institutions can influence the
behaviour of individuals. Similar to other economic or social activity, the
prevailing political, regulatory and cultural institutions play a significant role in
facilitating entrepreneurship (Zahra & Wright, 2011) and thereby, determining
the success of entrepreneurship policy (Bradley & Klein, 2016). Institutions are
recognised as working together to achieve, reinforce and shape a society’s
operational framework and economic performance (North, 1990; North, 1992) –
that is, the context in which individuals within a society function and behave.
Institutional theory is concerned with how formal and informal rules, or
behavioural guidelines, influence and intersect with each other to form a social,
political and economic order (Bruton et al., 2010; North, 1990; Scott, 2014;
Urbano & Alvarez, 2014). For over two decades, institutional theory had been
recognised as a legitimate and useful theoretical lens through which to study
entrepreneurship, but the Great Recession reinforced its importance as a
meaningful and appropriate theoretical framework (Bruton et al., 2010; Su et al.,
2017; Minniti, 2008; Urbano et al., 2019). Increasingly, researchers are seeking to
better understand the role of institutions in influencing entrepreneurship and
meeting stated goals (e.g. Abdesselam, Bonnet, Renou-Maissant & Aubry 2017;
Bosma, Content, Sanders & Stam, 2018; Pinho, 2017).
As entrepreneurship research has strong theoretical roots in
management, the literature has historically applied a sociological perspective of
institutional theory (Bruton et al., 2010). This influential framework, advanced
by sociologist W. Richard Scott, focuses on the individual’s socio-cognitive
functioning within a society. The sociological perspective posits that
behavioural outcomes are influenced through three institutional pillars, or
fundamental elements: (1) Regulative (i.e. rules and regulations constraining
behaviour); (2) Normative (i.e. social values and norms which prescribe rights,
privileges, responsibilities, duties); (3) Cultural-cognitive (i.e. individual frames
of reference and reasoning which form reality, and is based on prevalent
collective norms and shared beliefs) (Scott, 2010; Scott, 2014). For
entrepreneurship research, these pillars are considered important when
considering how individual-level cognition, mental processes and perceptions
influence an individual’s decision with regards to entrepreneurship (DiMaggio
& Powell, 1991; Stenholm, Acs & Wuebker, 2013; Valdez & Richardson, 2013).
However, when examining policy initiatives aimed at solving economic
and societal challenges, the economic perspective of institutional theory is
preferred. In their meta-analysis of entrepreneurship literature, Urbano et al.
(2019) found that almost three quarters of all research examining factors
influencing entrepreneurship and the implications for economic growth relied
27
on the economic perspective of institutional theory. This perspective aims to
understand how contextual constraints and enablers resulting from particular
institutional settings affect entrepreneurship activity at more macro-levels of
analysis (Bjørnskov & Foss, 2016; Su et al., 2017). Less emphasis is placed on the
effects of institutions on specific, individual cognition and perceptions about
the world and greater emphasis is placed on the influence of institutional
context on observable, behavioural outcomes of individuals (von Staden &
Bruce, 2015). Since both the economic and sociological perspectives view
institutions as being integral to society and in shaping individual behaviour,
both perspectives can be complementary when trying to understand the
consequences of institutions on entrepreneurship activity (Bjørnskov & Foss,
2016). Nevertheless, the economic perspective is most concerned with how
institutions can solve behavioural divergence from equilibrium rather than, as
with the sociological perspective, how institutions affect the way individuals
navigate particular contexts (DiMaggio & Powell, 1991). In addition, the
economic perspective acknowledges the wider influences of political processes,
such as policymaking, on economic activity (North, 1992). As this study focuses
on entrepreneurship policy, its constraining and empowering effects on new
venture creation and the implications on a country’s macroeconomic and social
advancement, emphasis is placed on research which considers the economic
perspective of institutional theory attributed to Douglass C. North.20 This
approach also takes into account the European Commission’s commitment to
removing obstacles and structural barriers in order to create an environment
more conducive to entrepreneurship activity (European Commission, 2013). It
also links with the measurable objective of entrepreneurship policy of new
venture creation. The following section explores the economic perspective of
institutional theory.
4.1 The economic perspective of institutional theory
The seminal work of North (1990, 3) specifically states that “[i]nstitutions are
the rules of the game in a society or, more formally, are the humanly devised
constraints that shape human interaction. In consequence they structure
incentives in human exchange, whether political, social, or economic”.21 Within
any given context, there are formal institutions (e.g. laws, property rights,
20 Douglass C. North (5.11.1920 - 23.11.2015) was a Nobel Laureate in Economics in 1993
(Levi & Weingast, 2017). North is credited for linking institutional change with economic behaviour and
performance sometimes referred to as new institutional economics (von Staden & Bruce, 2015).
21 In a later work, North refers to institutions simply as “the constraints that human beings
impose on human interaction” (North, 1993, 1).
28
judicial and governmental rulings, policies) and informal institutions (e.g.
unwritten codes of conduct, sanctions, taboos, customs, traditions, religion).
Formal institutions are generally created by governments while informal rules
emerge from a society’s heritage or culture (Boudreaux, Nikolaev & Klein, 2017;
North, 1990). Complementary accountability mechanisms work to monitor and
enforce the rules, or constraints. Governance structures enforce and review the
rules to mitigate conflicts and help parties realise mutual gains (Williamson,
2000). Enforcement methods provide feedback about acceptable behaviour by
imposing incentives and costs for certain actions (North, 1990; Williamson,
2000). In principle, formal and informal institutions, together with
complementary enforcement mechanisms, work to mitigate uncertainty by
prescribing what behaviour is expected, desirable and unfavourable within a
society. As a behavioural outcome, whether and how to engage in
entrepreneurship comes within the remit of a society’s institutional framework,
or context.
Reducing or removing uncertainty is considered important for
diminishing some of the risks associated with economic and other activities, as
well as maximising their benefits (DiMaggio & Powell, 1991; North, 1990; North,
1992; North, 1993). For example, clear behavioural guidelines during exchange
relationships reduces the transaction costs of communicating, monitoring and
enforcing one’s rights (North, 1990; North, 1992). In this way, institutions
support and empower individuals to take advantage of opportunities and
engage in beneficial interactions with others (North, 1990; Scott, 2014). Whether
there is trust in institutions (or the “system”) to provide opportunities and
benefits, is also guided by societal norms, values and codes of conduct
embedded in formal and informal rules (Welter, 2012).
Trust is a complex and multidimensional concept, occurring at both the
micro (i.e. personal, organisational) and macro (i.e. institutional) levels (Li, 2013;
Mishra & Mishra, 2013; Welter, 2012). The accepted definition of trust is “a
willingness to be vulnerable to another person or party based on some positive
expectations regarding the other party’s intentions and/or behaviours” (Mishra
& Mishra, 2013, 60). Within the context of entrepreneurship, trust occurs when
parties perceive that the other will behave in an expected way and seeks to
cause them no harm (Welter, 2012). It can promote greater collaboration, risk-
taking, innovation and improved performance (Mishra & Mishra, 2013; North,
1990; Welter, 2012) because such an environment provides a basis on which
individuals can predict how rules will be implemented and enforced (Voigt,
2013). The implications of actions can become clearer and provide a basis for
decision-making. For entrepreneurship activity to be attractive, individuals
must trust that institutions are willing and able to establish environments and
support mechanisms to facilitate it (Li, 2013; Mishra & Mishra, 2013; Welter,
2012). Institutional theory posits that institutions can be adjusted to create
environments conducive to any activity, including entrepreneurship. The
difficulty is that institutional change is a challenging and slow process (North,
1990, Williamson, 2000). Effective institutional change requires complementary
adjustments to both the formal and informal rules governing a society as well as
29
the appropriate reinforcing mechanisms (North, 1990; Scott, 2010). Formal
institutions can be used to effectively steer informal institutions in particular
directions but simply introducing formal rules does not necessarily result in
behavioural change, or induce the change intended (North, 1990). There is a risk
that institutional change can produce unintended consequences and overlook
social needs, which in turn runs the risk of suboptimal outcomes (Baumol, 1990;
DiMaggio & Powell, 1991; North, 1990; North, 1992).
Furthermore, institutional change relies on the actions of various actors
(Jennings, Greenwood, Lounsbury & Suddaby, 2013). Over time, dominant
power structures as well as political, economic and social interests work to
establish their own ideas by de-legitimising existing ones, and then introducing
and reinforcing their own (DiMaggio & Powell, 1991; North, 1990; North, 1992).
As new concepts and ideas gain legitimacy, they diffuse throughout society,
become validated and survive (Arshed et al., 2014; Scott, 2014). Once ideas,
concepts and behaviours are institutionalised, they become enduring and form
the precedent for future activities and behaviours up until the point they are
disrupted and changed (Fritsch & Wyrwich, 2018; North, 1990).
Therefore, to meet its objective, entrepreneurship policy requires
disruption to existing institutional arrangements to remove any barriers to
entrepreneurship. Institutional change aimed at encouraging new venture
creation requires a holistic, systematic and structural approach (Baumol, 1990)
where the appropriate institutional context prompts individuals to take action
(Boudreaux & Nikolaev, 2019). As society becomes more familiar with
entrepreneurship, formal and informal rules are adjusted to promote it and
reward structures are aligned to reinforce associated behaviours and activities.
Once normalised, barriers to taking action fall away. The next section considers
how formal and informal rules can influence entrepreneurship activity.
4.2 Institutions and entrepreneurship policy
“The institutional factors impacting entrepreneurial efforts include the direct
action of governments in constructing and maintaining an environment
supportive of entrepreneurship as well as societal norms toward
entrepreneurship” (Bruton et al., 2010, 426)
Having identified entrepreneurship policy, its objective and the role of
institutions in shaping behaviour, the discussion below explores how
institutions can promote new venture creation. Institutional change aimed at
promoting entrepreneurship is focused on communicating the “usefulness,
utility, or desirability of a career in entrepreneurship” (Segal, Borgia &
Schoenfeld, 2005, 45). Interventions which change formal and informal
institutions are an attempt to build up the necessary motivation, opportunity
and skillset required for starting a new business venture (Lee, Cottle, Simmons
& Wiklund, 2020; Lundström & Stevenson, 2005).
30
The seminal work of Baumol (1990) demonstrates that institutions
account for observable cross-country variations in entrepreneurship activity
since they establish the context in which entrepreneurial ambitions and
activities unfold. In the context of entrepreneurship research, the economic
perspective of institutional theory contends that institutions, rather than an
individual’s personal characteristics and propensity for entrepreneurship,
significantly influence the level, quality and outcomes of entrepreneurship (e.g.
Autio & Fu, 2015; Bjørnskov & Foss, 2013; Bosma et al., 2018; Boudreaux &
Nikolaev, 2019; Bruton et al., 2010; Kirzner, 1997; Pinho, 2017). Studies focused
on personal characteristics also explicitly or implicitly embed this assumption
because institutions are considered as ultimately shaping how a society and the
individuals in it, function (Valdez & Richardson, 2013).
Moreover, researchers agree that individual characteristics alone cannot
fully explain why some individuals engage in entrepreneurship while others do
not (Fuentelsaz, Maicas & Montero, 2018). Even the seminal work of Shane &
Ventakaraman (2000, 218) which is often quoted in reference to the importance
of personal characteristics, emphasises the significance of context, arguing that
while mindset and behaviour matter “it is improbable that entrepreneurship
can be explained solely by reference to a characteristic of certain people
independent of the situations in which they find themselves”. For example,
creativity, which is needed for idea generation and opportunity identification as
part of the entrepreneurial process, is a function of institutional legacy (Del
Monte & Pennacchio, 2019). Institutions also affect perceptions of
entrepreneurship through the choice and availability of role models within a
society, what they teach about entrepreneurship and what individuals are able
to learn from them (Zozimo, Jack & Hamilton, 2017). Even when individuals
have a high propensity or readiness to engage in entrepreneurship, the desired
outcomes need to be cultivated, encouraged and enforced by the environment
(Boudreaux & Nikolaev, 2019; Schillo, Persault & Jin, 2016). Welter (2011, 166)
argues that “context is important for understanding when, how, and why
entrepreneurship happens and who becomes involved”.
Institutions can provide the tools, models and constraints guiding
individual decisions, including how a new venture is set up, financed, managed
and grown (Valdez & Richardson, 2013). Institutions facilitate access to
complementary resources and relationships which individuals may not
personally possess but need, in order to create and operate their new ventures
(De Clercq, Lim & Oh, 2013; Fuentelsaz et al., 2018). The implication of
institutional context or set-up can be that individuals who may find it difficult
to create a venture in one environment may flourish and excel in another. This
links back to Baumol (1990) which posits that the institutional context
determines the type of entrepreneurship activity that unfolds. There is general
consensus within entrepreneurship research that institutional context influences
the characteristics of the new ventures created (e.g. Acs et al., 2016a; Acs et al.,
2016b; Dilli, Elert & Herrmann, 2018; Fritsch & Wyrwich, 2018) as well as their
performance and overall impact (e.g. Bosma et al., 2018; Boudreaux & Nikolaev,
2019; Bradley & Klein, 2016; Kuckertz, Berger & Mpeqa, 2016).
31
Much of what underlies the initiatives flowing out of entrepreneurship
policy seems to relate to attempts at creating an institutional environment that
enables the pursuit of entrepreneurial opportunities. The concept of
“opportunity” is central to entrepreneurship and its recognition and pursuit,
vital elements of entrepreneurial behaviour and new venture creation
(Ardichvili, Cardozo & Ray, 2003; Casson & Wadeson, 2007; George, Parida,
Lahti & Wincent, 2016; Kirzner, 1997; Schumpeter, 1912; Shane and
Venkataraman, 2000). Short, Ketchen, Shook & Ireland (2010, 40) argues that
“[w]ithout an opportunity, there is no entrepreneurship”. Entrepreneurs are
individuals who “act on the possibility that [they have] identified an
opportunity worth pursuing” (McMullen & Sheperd, 2006, 12). The
entrepreneurial opportunities available for exploitation are influenced by the
prevailing institutions (North, 1990).
Institutions not only influence the opportunities available but they also
signal whether and what entrepreneurial opportunities are worth pursuing
given the risks, returns, constraints and support available. The appeal and
worth of activities can be signalled by institutional changes that actively remove
barriers to entrepreneurship, reward individuals who pursue opportunities
with high social status, encourage experimentation, allocate funding for
innovation and sanction high returns for the creativity and effort used to
pursue opportunities (Audretsch et al., 2020; Baumol et al., 2007; Boudreaux et
al., 2017; Fu, Wennberg & Falkenhall, 2020). Alternatively, if institutions signal
that a particular activity is not valued, unacceptable or not beneficial,
individuals are less likely to engage in it (Haynes & Marshall, 2018; Stenholm et
al., 2013; Ucbasaran, Shepherd, Lockett & Lyon, 2013). Behaviour can also be
negatively affected when perceptions about rewards and penalties (or lack
thereof) are misaligned with expectations (Collins, McMullen & Reutzel, 2016).
Some researchers argue that changes to informal institutions should be
the focus of policymakers and institutional change because they have a greater
influence on the amount and type of entrepreneurship (e.g. Aparicio, Urbano &
Audretsch, 2016; Audretsch, Bönte & Tamvada, 2013). For instance, a nation’s
culture (Dheer, 2017; Hechavarria & Reynolds, 2009) and religion (Zelekha,
Avnimelech & Sharabi, 2014) have been found to impact the type and level of
entrepreneurship. The meta-analysis by Urbano et al. (2019) also finds that
belief systems, social norms and culture can significantly influence
entrepreneurship. Others find that informal institutions become relevant when
formal institutions are particularly weak or dysfunctional (Bradley & Klein,
2016; Bruton et al., 2010).
Research also finds that informal institutions show a weak, mixed or
indirect influence on entrepreneurship (Haynes & Marshall, 2018; Nikolaev et
al., 2018; Stephan & Pathak, 2016). These findings are largely attributed to
informal institutions representing abstract notions (Liñán & Fernandez-Serrano,
2014) and the varying approaches to institutional theory applied in the
literature (Baumol et al., 2007; Terjesen, Hessels & Li, 2016). Schumpeter (1912)
argues that cultural and social aspects are relevant to entrepreneurship within a
society, and that collectively, the actions of individuals inform a society’s
culture, but these informal institutions are largely outside the scope of
32
economics, and therefore, entrepreneurship. As a result, when considering
public policy aimed at behavioural change and macro-level impacts, greater
focus is placed on formal institutions (e.g. Bjørnskov & Foss 2013; Bradley &
Klein, 2016). Taking a pragmatic view, formal institutions are more easily
controlled and influenced by policymakers seeking to promote
entrepreneurship (Abdesselam et al., 2017). It is easier for policymakers and
governments to change, for instance, protection of private property, tax codes,
social insurance systems, capital market regulation than religious beliefs or
traditional customs. Changing formal institutions may not induce anticipated
behavioural changes but can provide significant cues as to what is expected
(North, 1990).
Changes to formal institutions can also remove the barriers to
entrepreneurship presented by existing informal institutions which have
become embedded within an society (Baumol, 1990). While, formal institutions
do not work alone to change behaviour, they can be used to effectively steer
informal institutions in particular directions. Targeted interventions can change
informal institutions to establish a new entrepreneurial culture, or maintain an
entrepreneurial culture which may be at risk (Darnihamedani, Block, Hessels &
Simonyan, 2018; Economidou et al., 2018). Government support and incentives
can significantly influence the attractiveness of entrepreneurship activity
(Bjørnskov & Foss, 2013; Bruton et al., 2010; Chowdhury et al., 2019; Román,
Congregado & Millán, 2013). Tailoring formal institutions to specific contexts
such as country, culture and level of market maturity can also be more effective
in achieving desired outcomes (Lundström & Stevenson, 2005; Smallbone, 2016).
A one-size-fits-all approach to institutional structure and functionality, is not
appropriate (Dilli et al., 2018). A considered approach to institutional change is
required because “creating an entrepreneurship culture is a long-term task
but...its effect, once established, is long-lasting” (Fritsch & Wyrwich, 2018, 351).
Therefore, a balance of formal and informal institutional change can be
more effective in producing desired outcomes. The question of which specific
institutions better promote entrepreneurship and to what extent, remains
contentious, largely because of how institutions are measured and
differentiated (Voigt, 2013). Consequently, there are calls for more research
providing a better understanding of the role of institutions (e.g. Abdesselam et
al., 2017; Bjørnskov & Foss, 2016; Chowdhury et al., 2015; Su et al., 2017) and the
joint impact of both formal and informal institutions on entrepreneurship
(Nikolaev et al., 2018; Urbano et al. 2019).
Researchers are attempting to apply a multidimensional approach to
understanding institutions and entrepreneurship. There is broad consensus that
institutions impact entrepreneurship by influencing behaviour and that
policymakers can directly influence formal institutions to create a more
entrepreneurial Europe. The following section examines the role of
organisations in forming policy and the challenge of balancing economic,
political and social interests.
33
4.3 Organisations and institutional change
“The purpose of the rules is to define the way the game is played. But the
objective of the team within that set of rules is to win the game - by a
combination of skills, strategy, and coordination; by fair means and sometimes
by foul means” (North, 1990, 4-5)
According to institutional theory, organisations play a significant role in
changing and legitimising institutions. North (1990) contends that if institutions
are the “rules of the game” then the “players” of the game are organisations.
Organisations, are groups of individuals who are collectively striving towards a
common objective: they include economic bodies (e.g. firms, trade unions,
cooperatives), political bodies (e.g. political parties, regulatory agencies), social
bodies (e.g. church, clubs) and educational bodies (e.g. universities, schools,
vocational training centres). Such organisations work to develop, shape and
implement and reinforce institutions (Lundström & Stevenson, 2005; North,
1990). In regards to entrepreneurship policy, organisations can facilitate the
incremental, institutional changes needed to create the desire and willingness
for individuals to engage in entrepreneurship. For example, the activities of the
public sector (e.g. welfare, social insurance), financial providers (e.g. venture
capitalists, banks), private organisations (e.g. consultants) and the cultural
sectors (e.g. media) work strategically to promote and sustain entrepreneurship
activity (Brown & Mason, 2017).
The decisions and actions of actors in both the entrepreneurship policy
making and implementation processes can be influenced by power structures
and special interests, which moderate the way in which institutions evolve and
outcomes are assessed (North, 1990). Initiatives that promote entrepreneurship
reflect a nation’s interplay between political, social and economic factors
(Dennis Jr, 2011a; Heinonen et al., 2010; Heinonen & Hytti, 2016). Many
policymaking actors who have the power, legitimacy and resources to influence
policies and outcomes, are protected from public scrutiny (Arshed et al., 2014).
These hidden but influential actors include think tanks (Arshed, 2017), 22
lobbyists and civil servants (Arshed et al., 2014). The relative obscurity of these
actors can pose a risk to balanced policy making because they usually have
competing and vested interests (Arshed et al., 2014; Bager, Klyver & Schou
Nielsen 2015). It is therefore necessary to remember that “[i]nstitutions are not
necessarily or even usually created to be socially efficient; rather they, or at least
22 Arshed (2017, 76) uses the following definition of think tanks: “an independent organization
engaged in multi-disciplinary research intended to influence public policy…with a range of interests and
expertise amongst their staff which gives think tanks a distinctive perspective on policy issues”. Think
tanks produce advice and research, and undertake advocacy work. However, they may be closely aligned
with or receive funding from political parties and/or receive private sources with vested interests.
34
the formal rules, are created to serve the interests of those with the bargaining
power to devise new rules” (North, 1990, 16).
Consequently, processes and activities connected with entrepreneurship
policy can be subject to bias whereby political, organisational and personal
interests affect how priorities are assessed and decisions made. Institutional
change, therefore, cannot be considered apolitical. North (1990) argues that
when the objective is to win, or meet one’s objective, there is a risk that the
means and methods may become partisan. In his subsequent work, North
warns of the need to understand who is creating the rules and the interests they
may be serving (North, 1992). Coupled with time and other pressures, some of
what drives entrepreneurship policy formulation has the potential to serve
narrow or special interests, rather than meeting the long term needs of society
(Arshed et al., 2014; Bager et al., 2015; Brown, Mawson & Mason, 2017). For
example, in 2005, Denmark was one of the first nations to direct their
entrepreneurship policy specifically towards growth orientated ventures.
During this shift, stakeholders whose reputations were based on achieving
economic growth through entrepreneurship, tended to highlight more
favourable information, and disregard conflicting opinions and weak
methodologies in order to meet their objectives (Bager et al., 2015). Any kind of
political capture and rent-seeking by actors may overemphasise the interests of
a narrow field of stakeholders, leading to potential bias and unintended
consequences detrimental to the public interest (Baumol, 2008; Campbell &
Mitchell, 2012).
Therefore, initiatives supporting entrepreneurship policy that balance
economic, political and social objectives pose practical challenges for
policymakers and researchers. The policy process and role of organisations are
contingent on the political, economic and social context, with each element
interacting and influencing the other. Understanding the challenges inherent
within entrepreneurship policy is particularly pertinent in light of the European
Commission’s commitment to creating an entrepreneurial Europe largely based
on US-centric research (see Audretsch, 2003). With this backdrop in mind, the
next section explores some of the policy initiatives employed to change
Europe’s institutional context to promote entrepreneurship.
4.4 Promoting entrepreneurship in Europe
“the future prosperity of any economy depends to a considerable extent on its
success in promoting entrepreneurship” (Baumol, 2008, 588)
The previous sections outline the pervasive influence of institutions and the
important role they play in helping create behavioural change, inform policy
and meet objectives. Institutions transmit information about behavioural
expectations within a society. Specific to entrepreneurship policy, policymakers
can instigate institutional change to create conditions conducive to new venture
creation. Within this context, institutional theory posits that institutions can
35
more significantly motivate new venture creation than an individual’s
propensity for entrepreneurship.
Therefore, entrepreneurship policy and its related interventions are
geared towards managing the potential pool, or supply of entrepreneurs.
Ideally, entrepreneurship activity expands as more opportunities for
individuals to respond to market demand are created, appropriate risk-reward
frameworks are established and the capabilities required to engage in
entrepreneurship are fostered (Audretsch, 2003; Baumol, 2008; North, 1992;
Zahra & Wright, 2011). Interventions can also target the supply of
entrepreneurs by helping develop the necessary human capital23 required to
create and operate a business venture, (e.g. management and technical ability),
establishing funding and financial support systems (e.g. access to individuals,
networks and services), implementing regulatory reforms to remove barriers to
entry, and creating relevant infrastructure (e.g. internet access, education and
training), and supporting initiatives that normalise entrepreneurial behaviours
and mindset (Brown & Mason, 2017). These interventions are expected to
stimulate new venture creation by providing individuals the necessary tools,
beliefs, behavioural boundaries and support needed for venture creation (De
Clercq et al., 2013; Valdez & Richardson, 2013). Specific interventions are
discussed in the next section.
4.4.1 Initiatives promoting entrepreneurship
In the 1990s, the pervading logic for promoting entrepreneurship advocated
government intervention through education programmes, or subsidies and
venture capital initiatives (see Sobel, 2008). This logic underpinned the US
“entrepreneurial state” when in the 1950s and 1960s US public institutions were
crucial in funding, nurturing and generating innovation (Botta, 2017). Similarly,
the European Commission’s entrepreneurship policy was grounded in the idea
of nurturing entrepreneurship activity through public investment, and
supported by three pillars: (1) Entrepreneurship education and training; (2)
Environments supportive of entrepreneurship; (3) Role models and outreach to
target groups such as the unemployed, women, youth and migrants (European
Commission, 2013). For instance, to demonstrate a commitment to supporting
education, research and innovation, the EU Horizon 2020 funding programme
made multiple billions of Euros available to support researchers identify
sustainable, inclusive, and innovative growth opportunities through
entrepreneurship (Economidou et al., 2018; Misuraca, Geppert & Codagnone,
2017). Increased R&D expenditure by universities and governments has been
found to encourage entrepreneurship activity (Castaño, Méndez & Galindo,
23 Human capital can be categorised into general human capital (e.g. years of formal education
and employment experience) and specific human capital (e.g. previous entrepreneurial, managerial and
founding experience) (Amaral, Baptista & Lima, 2011).
36
2016; Castaño-Martínez, Méndez-Picazo, and Galindo-Martín 2015; Murdock,
2012). Close collaboration with universities can not only encourage more
empirical research in entrepreneurship but also aide in commercialising
university R&D, ideally culminating in new venture creation (Baumol et al.,
2007; Fini, Grimaldi & Meoli, 2020).
Furthermore, investment in education is considered a particularly potent
intervention (e.g. European Commission, 2013; Wennekers & Thruik, 1999).
Entrepreneurship education is focused on “education for entrepreneurial
attitudes and skills...[and aims to strengthen]...desires to own or start a new
business” (i.e. entrepreneurial intentions) (Bae, Qian, Miao & Fiet 2014, 218).
Entrepreneurship education is different from other type of education because it
has clear pedagogical approaches and aims. For instance, business education is
focused on the skills and technical knowledge for working in more established,
larger organisations such as corporations whereas entrepreneurship education
focuses on the skills and knowledge (e.g. innovative thinking, opportunity
recognition, creativity, self confidence) related to establishing business ventures
that do not yet exist (Bae et al., 2014).
In addition to teaching necessary skills, entrepreneurship education is
also expected to change personal attitudes towards entrepreneurship, as well as
nurture the necessary beliefs and abilities required for creating and operating
new ventures (European Commission 2008; European Commission, 2013; Nabi,
Liñán, Fayolle, Krueger & Walmsley, 2017). Effective entrepreneurship
education requires universities to fulfil three objectives: (a) Incentivise
encourage students to start their own business; (b) Develop inform students
with the desire to create their own ventures and; (c) Train – pass on knowledge
and bring students into business models (De Jorge-Moreno, Laborda Castillo &
Sanz Triguero, 2012). Environments with weak institutions and hostility
towards entrepreneurship benefit the most from entrepreneurship education
(Walter & Block, 2016). As a key policy implementation tool, various organised
and social educational channels, including personalised and experiential
learning, target students from kindergarten through to university (Kriz &
Auchter, 2018; Lundström & Stevenson, 2005; Ozgen & Baron, 2007; Watson,
McGowan & Cunningham, 2018).
However, education is only one tool used to promote entrepreneurship
activity. The seminal work of Lundström & Stevenson (2005, 83), states that
entrepreneurship education “is considered to be a very important factor in
improving the overall entrepreneurial culture and capacity of a nation, but to
achieve medium and long term increases in the rate of entrepreneurial activity,
other adjustments in the support environment will inevitably have to be made”.
Entrepreneurship requires both the willingness and ability to take action
(Campbell & Mitchell, 2012; Choi & Shepherd, 2004; McMullen & Shepherd,
2006). Limits in capability and functioning (e.g. accessing resources, being
healthy enough to work) can stunt an individual’s progression from desire, to
intention and ultimately, entrepreneurship activity (Gries & Naudé, 2011). To
legitimise and encourage entrepreneurship as a worthy pursuit, initiatives other
than accommodating educational curricula are required.
37
For entrepreneurship to gain legitimacy and value to prompt action, it
must conform to society’s “recognized principles or accepted rules and
standards” Aldrich & Fiol (1994, 646). The highly influential work of Audretsch
(2003, 30) asserts that despite entrepreneurship being “embedded into a broad
range of social, economic, political and cultural factors, ultimately it is
individuals who make a choice whether or not to engage in entrepreneurial
activities”. Accordingly, many entrepreneurship policy initiatives seek to
remove personal objections and negative perceptions about starting a new
business venture. For example, in 2013 the European Commission established a
Startup Europe Leaders Club and urged the European Union to “glorify our
entrepreneurs” because it “wants young Europeans to be inspired by home-
grown entrepreneurs” (European Commission, 2013a).
When culturally acceptable leadership standards and capabilities are
aligned with entrepreneurship activity it becomes more palatable as a career
choice (Stephan & Pathak, 2016). Awards, conferences and road shows have
been designed to generate enthusiasm about entrepreneurship (Lundström &
Stevenson, 2005). The winners, stars and speakers at events become role models
who influence what individuals learn about entrepreneurship and become
motivating drivers behind new venture creation (Zozimo et al., 2017). When
these role models are given a high standing in society, they help increase
awareness about the benefits of entrepreneurship and reduce the inherent
uncertainties people might fear (De Clercq et al., 2013). Role models can also
provide the impetuous for higher profit-making and growth aspirations linked
with entrepreneurial ambitions (Kirkwood, 2007). Accolades and rewards for
entrepreneurship activity have been used by organisations to reinforce it as the
type of economic activity that is acceptable and valued within society.
The European Commission has relied extensively on awareness
campaigns and education programmes to reach target populations such as
women, youth and the unemployed, to present entrepreneurship as a viable
career choice, reduce associated uncertainties and remove behavioural barriers
to entry (OECD/ European Union, 2017). A myriad of entrepreneurship policy
initiatives target women and ethnic minorities to encourage both greater
economic participation and social cohesion (Carter, Mwaura, Ram, Trehan &
Jones, 2015). Women are particularly targeted because of low participation
rates as well as institutional barriers such as access to finance and
discrimination (Foss et al., 2019; Marlow & McAdam 2013; Ribes-Giner, Moya-
Clemente, Cervelló-Royo & Perello-Marin, 2018; Verduijna & Essers, 2013).
The pervasiveness of initiatives promoting entrepreneurship can
arguably make it difficult for individuals to escape their influence and reflects a
commitment by policymakers to promote entrepreneurship to all European
citizens. Intensive media campaigns have been used to promote
entrepreneurship by raising awareness. For example, globally syndicated
38
reality television programmes such as Dragon’s Den (UK),24 where would-be
entrepreneurs pitch for funds and The Apprentice,25 where entrepreneurial
individuals vie for a job working with an already successful entrepreneur, are
used to normalise, dramatise and glamorise entrepreneurship. Many of the
entrepreneurial individuals are gloried and held up as aspirational role models
(European Commission, 2013a). As entrepreneurship becomes an acceptable
activity and its functions in society becomes familiar, individuals who conform
to such ideals can find it easier to access resources and networks to support
their entrepreneurial activities, gain recognition and increase their social
standing (Aldrich and Fiol, 1994; Boudreaux & Nikolaev, 2019; Stenholm et al.,
2013). Institutions facilitate and encourage behavioural change through
knowledge sharing, trust building and perception management to reinforce the
acceptability of entrepreneurship activity.
Trust building is a particularly potent approach to promoting
entrepreneurship because it facilitates exchange relationships (Welter, 2012).
For entrepreneurship to become an attractive and viable option, there must be
trust that the relevant institutions, organisations, market mechanisms and inter-
personal relationships function within acceptable boundaries (Li, 2013).
Similarly, without trust, institutions can risk losing their authority and
legitimacy over individuals. Individuals must trust that formal institutions are
willing and able to establish environments and support mechanisms to facilitate
their entrepreneurial activities especially because entrepreneurial success is
uncertain (Li, 2013; Mishra & Mishra, 2013; Welter, 2012). Research suggests
that institutional frameworks which overtly support entrepreneurship are
necessary to enable their positive contribution to economic growth, (Acs, Estrin,
Mickiewicz & Szerb, 2018; Bosma et al., 2018). Supportive mechanisms can be
considered an investment in the entrepreneurial potential of individuals which
provides an expected return on in the form of job creation, economic growth
and social cohesion (European Commission, 2013).
Attitudes and perceptions about failure and bankruptcy, as well as how
individuals are treated during these eventualities can create barriers to
entrepreneurship. Bankruptcy laws, in particular, are seen to represent “rules of
the end game” and form part of the institutional risk-reward structure for
entrepreneurship (Peng, Yamakawa & Lee, 2010). Within the European Union,
bankruptcy concerns pose the most significant barrier to venture creation
(European Commission, 2015). Both formal and informal institutions can
produce a stigma around failure (Lee et al., 2020). A legacy of centuries of
institutional context has indicated that failed entrepreneurs need to be punished,
24 This show is syndicated globally under various names such as “Shark Tank (Australia), “The
Project” (Egypt) and “The Lion’s Cave (Germany) (Wikipedia
https://en.wikipedia.org/wiki/Dragons%27_Denaccessed 26.02.2020).
25 Another reality television programme syndicated globally (see Wikipedia
https://en.wikipedia.org/wiki/The_Apprentice_(franchise)accessed 26.02.2020).
39
their victims recompensed and their participation in the market and society be
limited (Eklund, Levratto & Ramello, 2020). Alternatively, reframing failure as
an important input into longer term entrepreneurial success and introducing a
stigma-reducing approach can positively influence decisions to engage in
entrepreneurship (e.g. Saravathy, 2004). Supportive bankruptcy laws can signal
more tolerant views towards failure, and by enabling a “fresh start” for failed
entrepreneurs can encourage entrepreneurship activity (Armour & Cumming,
2008; Fu et al., 2020; Peng et al., 2010).
Moreover, a “fresh start” can mitigate the risk of subsequent
exclusionary sanctions resulting from failure, which can restrict future,
productive activities (e.g. Eklund et al., 2020). During financial difficulties,
entrepreneurs have an opportunity to revive their businesses and can continue
to attract capital for future activities (Peng et al., 2010). When a failed venture
“does not encumber failed entrepreneurs with onerous liabilities, [it] provides
them with incentives to supply greater effort if they try again in business after
failing” (Parker, 2009, 447). Aware of this effect and to encourage
entrepreneurship, in 2003 the European Commission recommended
amendments to personal bankruptcy laws and a number of European Union
Members (e.g. Germany, the Netherlands, the UK) subsequently relaxed theirs
(Peng et al., 2010). The Entrepreneurship 2020 Action Plan introduced a
“second-starters” initiative to promote entrepreneurship and change the
institutional context so as to mitigate the stigma and legal implications of failure
and bankruptcy resulting from entrepreneurship (European Commission, 2013).
Interventions providing protection and backing to support new ventures
engage productively with their environment can remove barriers to entry and
promote entrepreneurship (Amezcua, Grimes, Bradley & Wiklund, 2013). To
improve chances of survival governments can shield new ventures from failure
by providing support (“buffering” programmes) and/or by facilitating access to
important stakeholders (“bridging” programmes) (Autioa & Rannikko, 2016).
Support mechanisms have also specifically targeted individuals who may have
limited opportunities to create ventures, such as those with wealth restrictions,
women, migrants and the unemployed (Carter et al., 2015; European
Commission, 2015; Heinonen, Hytti, & Cooney, 2010; OECD/European
Commission, 2017; Sauer & Wilson, 2016). Forms of government support for
new ventures can signal a venture’s legitimacy to stakeholders and increase the
chances of success by attracting more human and financial capital (Söderblom,
Samuelsson, Wiklund & Sandberg, 2015).
Incubators provide “buffering” and “bridging” support can increase
survival rates for new ventures by providing subsidised services such as office
space, administration, networks and advice (Autio & Rannikko, 2016).
Incubators have been found to be particularly effective for new entrepreneurs
when they provide access to networks, opportunities and knowledge which
would otherwise not be accessible, although their usefulness is contingent on
needs and the environment in which ventures function (Amezcua et al., 2013).
Subsidised or low cost access to resources which reduce business costs (e.g.
finance, labour), tax concessions, advisory services including those tied to
specific locations and industries, have been a popular way in which to promote
40
entrepreneurship activity (Acs et al., 2016a; Caliendo, Hogenacker, Künn &
Wießner, 2015; Lundström and Stevenson 2005).
However, promoting entrepreneurship through any form of government
intervention is a contentious issue amongst researchers and policymakers. A
persistent debate centres around the size and role of government intervention,
which raises questions about the efficiency of policy initiatives that provide
direct support and subsidies (Klein, 2012). The influential work of Sobel (2008)
argues that to encourage the best forms of entrepreneurship and allow
resources to flow freely to where they can be put to best use, expanding
government programmes (e.g. subsidised loans, education) to foster
entrepreneurship should be replaced with institutional reforms that limit
government intervention. Research suggests that while subsidies do encourage
entrepreneurship, they can also keep businesses alive artificially because
without on-going support, some new ventures would simply fail or struggle to
prosper in the longer term (Caliendo et al., 2015; Dvoulety! & Lukeš, 2016). In
their analysis of subsidies and employment incentives, Millán, Congregado &
Román (2012, 251) conclude that “if the objective is the promotion of long-term
successful self-employment, the prescription should not only be to facilitate
entry by means of subsidies or guarantees, but also to support the acquisition of
the necessary entrepreneurial human capital and to facilitate growth
aspirations”.
Similarly, incubators which subsidise new ventures have also been found
to buffer or shield new ventures from economic realities, resulting in weaker
firms, sometimes at the expense of less politically connected but efficient
ventures (Bradley & Klein, 2016). Bridging programmes which keep new
ventures alive to boost their chances of growth have also been challenged: if a
business venture is identified as a high growth potential firm, it is expected to
intrinsically perform well and contribute to the economy regardless of
government support (Koski & Pajarinen, 2013; Norrman & Bager-Sjögren, 2010).
When new entrepreneurs are motivated, have high entrepreneurial skill and
appropriate technical and managerial resources, they are more likely to remain
engaged in their business venture and therefore, expected to succeed
(Carbonara, Tran & Santarelli, 2019).
In addition, employment subsidies can decrease the risk of exit and
create jobs (Millán et al., 2012) but because new ventures tend to pay less
(Nyström & Elvung, 2014), employment subsidies can also lead to appointment
of less-productive individuals, especially for low potential firms (Koski &
Pajarinen, 2013). The ability to attract and retain quality employees with higher
skills, for example, can be more influential on survival rates and growth
potential than subsidies (Koch, Späth & Strotmann, 2013). These factors can
increases the risk of failure. Such findings support the contention that a new
venture’s own resources and resourcefulness should be more influential on its
survival prospects and that the role of government is to give individuals the
freedom to fulfil their entrepreneurial ambitions.
Consequently, to promote entrepreneurship and new venture creation,
policymakers had begun to shift their approach from support and assistance, to
an incentives-based approach aimed at increasing the attractiveness of
41
entrepreneurship relative to other options (Heinonen et al., 2010). Policymakers
seemed to prioritise a free market approach, and this is discussed next.
4.4.2 Freedom to be entrepreneurial
This section examines the shift towards less government support and the
European Commission strongly urging “member states...to take measures to
reduce and simplify the regulations and procedures to create new companies
and also to facilitate access to credit” (Castaño-Martínez et al., 2015, 2,083). To
encourage greater competition, the European Commission had started
increasing reliance on market mechanisms during the 2000s (Bekker, 2018).
Policymakers also shifted the focus of interventions away from direct subsidies
and support, to removing barriers and reducing regulation to create incentives
for individuals to engage in entrepreneurship (Heinonen et al., 2010). By the
late 2000’s the European Commission was working to balance Europe’s social
model with the demands of the market economy (Bekker, 2018; European
Commission, 2010; Zeitlin & Vanhercke, 2018).
European policymakers were confronted with what is contentiously
considered a significant and robust influencers of entrepreneurship economic
freedom. Economic freedom is associated with changing formal institutions to
prioritise the efficient operation of the market economy and remove any
restrictions to entrepreneurship activity (Bradley & Klein, 2016; Parker, 2009).
The influential work of Gwartney & Lawson (2003, 406) states that “[t]he key
ingredients of economic freedom are personal choice, voluntary exchange,
freedom to compete, and protection of persons and property” and that “the
choices of individuals will decide what and how goods and services are
produced”. The consequence is that Governments “must refrain from actions
that interfere with personal choice, voluntary exchange, and the freedom to
enter and compete in labor and product markets” (Gwartney & Lawson, 2003,
407). Boudreaux et al. (2017) contends that with more economic freedom
individuals are better equipped to use their own judgement and take the
necessary actions they need to engage in entrepreneurship when their effort
and creativity is rewarded with high social status, individuals are motivated to
create extraordinary wealth through experimentation and innovation. The
promise of economic and social gains through innovation and entrepreneurship
has significantly influenced entrepreneurship policy, such as simplified
administrative requirements, flexible contracts for employees and easier access
to funds (Audretsch et al., 2020).
Economic freedom is conceptualised through “a summary measure
capturing the freedom to engage in economic activity without undue
restrictions or subsidies” (Bradley & Klein, 2016, 211). Greater economic
freedom is characterised by: small government, robust legal system and
property rights, stable inflation, freedom to trade internationally, and restraints
on regulations on credit, labour and business activity (Gwartney, Lawson, Hall
& Murphy, 2019). It represents a pro-market approach, concerned with
“economic liberalization (i.e., the reduction of the level of government influence
in economic activity)” (Dau & Cuervo-Cazurra, 2014, 669). Within
42
entrepreneurship research, economic freedom has been described as a concept
which “consists of a panopoly of categories, including trade freedom, fiscal
freedom, freedom from government, monetary freedom, investment freedom, labor
freedom, property rights, business freedom, freedom from corruption, and financial
freedom” (McMullen et al., 2008, 880). 26,27
Regulation and legislation are considered impediments to
entrepreneurship, and reducing them is expected to make it easier and more
profitable for individuals to create ventures. Such an environment embraces
low marginal tax rates, protection of property rights, openness to international
trade, less onerous business regulations and more flexible labour laws
(Bjørnskov & Foss, 2016; Boudreaux et al. 2017; Díaz-Casero, Díaz-Aunión,
Sánchez-Escobedo, Coduras & Hernández-Mogollón, 2012). Complex legal
systems regulating venture creation are considered to unnecessarily complicate
access to credit and negatively impacts entrepreneurship activity (Castaño et al.,
2016). The influential Heritage Foundation argues that “[f]ree markets and free
people have worked hand in hand to increase prosperity and the quality of life
for people. Freer economies have also led the world in innovation and economic
growth, and their governments have been made increasingly accountable to
those they govern” (Miller, Kim & Roberts, 2020, xi).
In theory, greater economic freedom is expected to encourage
competition between individuals, facilitate effective and efficient allocation of
resources and allow ventures that adapt quickly to market conditions to
prosper. The Entrepreneurship 2020 Action Plan explicitly promotes removing
barriers to entry and exit, labour market reforms, adjusting the taxation regime,
allowing for easier movement of capital and reducing the overall regulatory
burden for entrepreneurs more open, liberal markets for capital, labour and
other inputs are expected to empower entrepreneurs through unhindered
access to resources and the freedom to combine them in ways that facilitate
their business operations and contribution to macroeconomic performance
(European Commission, 2013). A popular institutional change is active labour
market reforms where changes to labour institutions encourage unemployed
individuals to find work and sources of income through entrepreneurship
(Caliendo et al., 2020; Mühlböck et al., 2018). To meet Europe’s social and
economic goals, the European Commission had already introduced the concept
of flexicurity to balance labour market flexibility and security, in the early 2000s
26 The most popular economic freedom indices are provided annually by the Heritage
Foundation (see Miller et al., 2020) and the Fraser Institute (see Gwartney et al., 2019). The Heritage
Economic Freedom Index (EFI) was developed in 1994 and the Fraser Institute Economic Freedom of the
World (EFW) Index first edition is dated 1996. The Fraser Institute measure is used largely in studies
exploring economic growth (Sobel, 2008).
27 McMullen et al. (2008) refers to the elements captured by the Heritage EFI. Elements, or
categories, include fiscal freedom (freedom from high tax rates and heavy government expenditures),
monetary freedom (freedom from inflation and governmental intervention), and labour freedom (freedom
from wage and price controls). Refer to APPENDIX A for more detailed and most recent descriptions.
43
(Bekker, 2018). The execution of balancing social and market models became
problematic, and there was a shift towards the free market model (Bekker, 2018;
Zeitlin & Vanhercke, 2018).
Underlying economic freedom is that an institutional context that invites
individuals to freely exploit financial, human and social resources with little
interference is more likely to promote entrepreneurship. The assumption is that
“individuals know their needs and desires best and that a self-directed life,
guided by one’s own philosophies and priorities rather than those of a
government or technocratic elite, is the foundation of a fulfilling existence”
(Miller et al., 2020, 12). The shift within Europe towards a more free markets, or
deregulation, approach to promote entrepreneurship was justified by its
association with Schumpeterian entrepreneurship – that is, radically innovative
and high growth entrepreneurship based on self-motivation and opportunity
exploitation with little government interference (Baumol et al., 2007; Dilli et al.,
2018; Ebner, 2006). Schumpeter (1934, 244) argues that “there can only be
complete equilibrium if there is free competition in all branches of production”.
He argues that the best circumstance for economic activity is where there is a
“commercially organised state, one in which private property, division of labor,
and free competition prevail” (Schumpeter, 1934, 5).
When institutions emphasise the individual as being at the centre of
economic and social development, economic freedom becomes intertwined
with individual autonomy and agency including an individual’s unimpeded
personal freedom to choose to engage in entrepreneurship, or not, and do so in
ways they deem appropriate. Individuals then become known generically as
“human capital” who are “competitive individualists, preoccupied with
investing and enhancing in their own economic value” (Fleming, 2017, 692). The
expectation is that while the individual benefits most from investing in
themselves and starting new ventures, their efforts eventually produce
beneficial spillovers to wider society.
Therefore, anything deemed as interfering with individual autonomy is
considered to be a limitation on economic freedom (Miller et al., 2020, 12).
Reducing perceived regulatory and legislative impediments to
entrepreneurship becomes necessary to freely facilitate venture creation by
individuals. For instance, since access to financial resources is essential to
entrepreneurship activity (Anderson & Nielsen, 2012; Becker-Blease & Sohl,
2007; Economidou et al., 2018; Schumpeter, 1934), even within industries
purported to have low entry costs (Dy, Marlow & Martin, 2017), limiting access
can deter individuals who may be considering entrepreneurship from taking
action (Blanchflower et al., 2001; Chowdhury et al., 2019; Vegetti & Adăscăliţei,
2017) or prevent them from growing their ventures (Bassetto, Cagetti & De
Nardi, 2015; Caliendo et al., 2020). After the 2008 Great Recession, the high the
cost of capital and credit constraints made access to finance problematic,
especially for smaller and younger businesses (Carbo-Valverde, Rodriguez-
Fernandez & Udell, 2016). Consequently, the European Commission instituted
better access to finance (i.e. financial freedom) in an attempt to encourage new
venture creation and facilitate growth (European Commission, 2013).
44
Similarly, labour market deregulation is expected to simultaneously
encourage entrepreneurship and reduce unemployment by removing barriers
to movement of labour and disincentives for entrepreneurship activity. Not
only can individuals freely allocate their labour to entrepreneurship, but labour
market deregulation is expected to provide entrepreneurs the freedom and
flexibility to more easily and efficiently manage their recruitment needs during
the start up and growth phases (Koch et al., 2013). The European Commission
has explicitly encouraged Member States to “continue modernising labour
markets by simplifying employment legislation and developing flexible
working arrangements, including short-time working arrangements”
(European Union, 2013, 20).
The shift towards economic freedom on the premise of availing
individuals the necessary resources and autonomy to explore and exploit
profitable opportunities has become a noticeable feature of entrepreneurship
policy within Europe. The next section explores how these institutional changes
can influence whether and why they might engage in entrepreneurship.
4.4.3 The pull and push of entrepreneurship
The discussions above highlight the many interventions related to
entrepreneurship policy aimed at creating environments conducive to
entrepreneurship activity. This section considers how institutions specifically
motivate action. According to the influential work of McMullen et al. (2008),
interventions that remove barriers to entrepreneurship and allow pursuit and
exploitation of an attractive opportunity for a return, are described as “pull”
factors. Individuals engage in entrepreneurship because they are capable, find
entrepreneurship appealing and freely engage in it to meet some personal goal
(Mühlböck et al., 2018). Individuals who are pulled into entrepreneurship are
considered to be self-motivated and expected to benefit most from an
institutional context shaped by the ideals of economic freedom.
Entrepreneurship resulting from pull factors are expected to produce the most
beneficial spillovers to the economy and society (Aparicio et al., 2016;
McMullen et al., 2008).
Institutions can also be configured to “push” individuals into
entrepreneurship. In this case, entrepreneurship becomes a desperate remedy to
unemployment or a last resort where “individuals feel compelled to start their
own businesses because all other options for work are either absent or
unsatisfactory” (McMullen et al., 2008, 876). External factors and constraints
rather than a desire to exploit opportunities become the primary motivating
factor for engaging in entrepreneurship (Mühlböck et al., 2018). When push
factors motivate entrepreneurship, it effectively becomes a necessity and a tool
for survival. Push factors most often relate to labour market deregulation and
programmes encouraging unemployed and marginalised individuals without
access to the labour market to start businesses for an income source (Laffineur,
Barbosa, Fayolle & Nziali, 2017; Román et al., 2013). Individuals can also be
pushed into entrepreneurship as a result of retrenchment by an employer,
45
reaching the end of a work contract or as a result of a sale or closure of an
existing business venture (van Stel, Millán, Millán & Román, 2018).
However, push factors resulting from institutional change raise
questions about whether there is real freedom to choose to engage in
entrepreneurship, or not. Pushing individuals into entrepreneurship is of
particular concern because as the labour market has become more flexible,
welfare institutions have also changed, and programmes have become more
rigid and difficult to access (Bennett, 2019). These circumstances have given rise
to what is described as “unemployment push”, the “refugee effect” or the
“desperation effect” (Thurik et al., 2008; Vegetti & Adăscăliţei, 2017) – situations
where an individual is pushed into entrepreneurship when they would prefer
to be in employment. Consistent with the contention in the seminal work of
Wennekers and Thurik (1999), it seems that much of what continues to motivate
entrepreneurship policy is the implicit assumption that more individuals
engaged in entrepreneurship is beneficial (Acs et al., 2016a; Carter et al., 2015;
Verduijna & Essers 2013). In their recent examination of the relevance of
entrepreneurship research, including its ability to appropriately examine real
world phenomena, Wiklund et al. (2019) argue that the assumption that
entrepreneurship is intrinsically beneficial, is rarely tested or questioned. The
seminal work of Shane (2009) argues that promoting more entrepreneurship is
not always good policy.
Thus far, this study has explored the background to entrepreneurship
policy in Europe and some of the prominent interventions adopted to promote
entrepreneurship. Interventions aimed at changing formal and informal
institutions range from education programmes to develop human capital, to
removing barriers to entry and exit. Institutional change is expected to create an
environment conducive to entrepreneurship and through pull and push factors,
motivate individuals to create new ventures. To consider the impacts of
entrepreneurship policy, the next section reviews literature exploring the
outcomes of entrepreneurship policy.
46
5 OUTCOMES OF ENTREPRENEURSHIP POLICY
“the impact of the policy is the change in the results/outcome indicator which
can credibly be ascribed to the policy intervention such that the movement
towards the desired outcomes can be confidently related to the policy”
(McCann & Ortega-Argilés 2016, 543).
This section begins the examination of policy outcomes by first considering the
role and challenges of policy evaluation. Section 4.1 discusses the importance of
accountability and governance for legitimising and reinforcing institutions.
Evaluation and accountability are necessary for well functioning institutions
(Williamson, 2000), and are particularly relevant given the billions of Euros
invested in institutionalising entrepreneurship policy (see Fotopoulos & Storey,
2019). Lundström et al. (2014) argues there has been a lack of transparency in
funding, concluding that funding allocation has been determined by political
priorities rather than expert policy advice or need. Evaluating entrepreneurship
policy effectiveness can help policymakers legitimise and reinforce institutional
changes that are effective in meeting stated goals. Reviewing behavioural
implications of policy also allows for necessary adjustments towards stated
goals. To determine how interventions can be better designed to fulfil desired
outcomes and to account for the vast amount of taxpayer funds allocated to
them, more efficient evaluation is necessary to foster transparency and
accountability (Figueroa-Armijos & Johnson 2016; Lundström & Stevenson,
2005; McCann & Ortega-Argilés 2016).
However, measuring the outcomes of policy initiatives and interventions
is challenging. The complex nature of entrepreneurship policy and its
intersections with other public policies make it difficult to isolate and measure
individual effects on a timely basis (Bager et al., 2015; Bjørnskov & Foss, 2016;
Lundström & Stevenson, 2005; Murdock, 2012; Smallbone, 2016). Conceptual
ambiguities make it difficult to determine the impact of any particular
institutional change (Voigt, 2013). In addition, policy impacts are not always
uniform or foreseeable, especially in the short term (North, 1990). Impacts of
policies and entrepreneurship activity are generally lagged (Carree & Thurik,
2008). Fotopoulos & Storey (2019, 205) concludes that “the impact of any policy
is likely to take several decades to emerge, and when it does, it is likely to have
been influenced by a range of influences external to the policy...[and that]...the
theoretical foundation for such policies is increasingly questioned”.
Measurement and methodological issues surrounding how variables are
defined, simplified and measured can have more influence on research results
and assessments of outcomes (Baumol et al., 2007; Carree & Thurik, 2010;
Lundström & Stevenson, 2005). Campbell & Mitchell (2012, 191) contends that
“evidence regarding the effectiveness of a given policy in achieving the stated
end runs the gamut from understudied, to ineffective, to generally effective”.
Response heterogeneity adds an extra layer of complexity in deciphering the
effects of policy interventions since individuals exposed to the same stimuli can
decide on different courses of action (e.g. Eberhart, Eesley & Eisenhardt, 2017;
47
Greene, Han & Marlow, 2011). In addition, Bjørnskov & Foss (2016, 301) find
that many “studies assume that the responses to institutional and policy
differences are approximately homogeneous across different types of industries,
businesses, and countries and institutional settings”. Data constraints can also
limit ability to measure impacts on specific target groups, such as women and
migrants (Smallbone, 2016). Study design can also be problematic. For instance,
Foss et al. (2019) finds that the majority of empirical studies examining the
policy implications of women’s entrepreneurship failed to explicitly address
policy level issues, institutional context or provide actionable recommendations
beyond educating women.
Notwithstanding these challenges, researchers and policymakers remain
committed to continuously improving evaluation methods (Lundström &
Stevenson, 2005). Various methods and quantitative models have been
developed to evaluate the impacts of entrepreneurship policy. For example, Acs
et al. (2018) explores the interaction between institutions and entrepreneurship
by introducing a composite index for entrepreneurial activity and institutional
quality aimed at measuring the impact on economic growth. Similarly,
frameworks for policy prioritisation, include the smart specialisation
framework promulgated by the European Union, which attempts to account for
context when choosing, forming and evaluating policy (McCann & Ortega-
Argilés 2015; McCann & Ortega-Argilés 2016).28
Therefore, there is consensus amongst researchers that despite the
challenges in evaluating policy, their nature, scope and potential long term
impacts requires valid attempts at evaluation. While the consequences of
specific policy may be uncertain, unpredictable and unforeseeable in the short
term, the overall long term trend is predictable, and outcomes can be difficult to
reverse once they become visible (North, 1990). In this case, it can be beneficial
to at least consider any divergence from expected policy outcomes and identify
any need for recalibration towards more desirable ones. Fotopoulos & Storey
(2019) argues that the effectiveness of entrepreneurship policy can be evidenced
by: (a) at a minimum, a link between entrepreneurship and economic
development (e.g. job creation, economic growth); (b) a causal relationship
between entrepreneurship and economic development; (c) evidence of market
failure which justifies government policy intervention; and (d) the policy
induces identifiable, measurable changes. The following section therefore, uses
available research to examine whether entrepreneurship policy has met
expectations.
28 Discussion of policy formulation, prioritisation frameworks and analysis of particular
evaluation methodologies is beyond the scope of this study.
48
5.1 Effectiveness of entrepreneurship policy
This section discusses research addressing the outcomes of entrepreneurship
policy. The Entrepreneurship 2020 Action Plan identifies investment in
education as being fundamental to entrepreneurship, and a primary method of
promoting it. Researchers have encouraged increased public investment in
higher education (e.g. Castaño-Martínez et al., 2015). There is consensus that
better educated individuals (i.e. generally with tertiary education) are more
likely to engage in entrepreneurship (see Bosma et al., 2018). For instance,
Barreneche García (2014) finds that European cities with higher numbers of
university students experience higher rates of venture creation. Tertiary
education is also linked with ventures that are generally more productive and
beneficial to the economy (van Praag & van Stel, 2013). In Europe, education
ecosystems and cultures with a strong knowledge base grounded in science are
linked with the creation of new ventures focused on innovation (Del Monte &
Pennacchio, 2019; Dilli et al., 2018; Fritsch & Wyrwich, 2018;). Environments
with rich traditions of education support the creation of new ideas and
entrepreneurial opportunities which in turn encourage entrepreneurship
activity. Entrepreneurship education can also provide the necessary bridge to
entrepreneurship activity when other institutional support is lacking (Walter &
Block, 2016).
However, when specifically considering the impact of entrepreneurship
education,29 overall results are mixed and ambiguous (see Nabi et al., 2017).
Some researchers find education geared towards entrepreneurship can produce
the necessary human capital required for venture creation (De Clercq et al., 2013;
Martin, McNally & Kay, 2013) and reinforce a desire to engage in
entrepreneurship (Rauch & Hulsink, 2015). Others question whether
entrepreneurial attitudes, skills or innovation can be taught (see De Jorge-
Moreno et al., 2012). Walter & Block (2016, 217) finds that “entrepreneurship
education is more effective, in terms of stimulating more entrepreneurial
activity, in entrepreneurship hostile institutional environments”. In their meta-
analysis of 73 articles, Bae et al. (2014) found that whether students had any
intentions of engaging in entrepreneurship prior to commencing their
entrepreneurship education was more important in determining likelihood of
entrepreneurship activity than the actual entrepreneurship education itself. The
implication is that entrepreneurship education enhances rather than triggers
entrepreneurship activity.
A key critique of entrepreneurship education studies is that they
generally “focus on short-term, subjective impact measures such as
29 Recall from section 4.4.1 that entrepreneurship education is exclusively focused on developing
entrepreneurial attitudes and skills, and promotion of new venture creation.
49
entrepreneurial attitudes and intentions, rather than longer term ones such as
venture creation behavior and business performance” (Nabi et al., 2017, 278)30.
While the concept of “intention” in other disciplines has been found to be
highly correlated with subsequent action, intention alone tends not to be
significantly related to entrepreneurial activity and better measures, such as
actual behaviour, are recommended (Bae et al., 2014). Entrepreneurship
education incorporated into labour market policy measures to assist individuals
affected by business closure has been found to encourage actual transition into
entrepreneurship (Nyström, 2020).
Education can fill knowledge gaps about entrepreneurship but a
significant barrier to entry is the lack of real world experience in creating and
running a business (Giacomin, Janssen, Pruett, Shinnar, Llopis & Toney, 2011;
Staniewski & Awruk, 2015). The probability of failure for entrepreneurship is
generally, substantial (Criscuolo, Gal & Menon 2017; Peng et al., 2010; Shane
2009) and the risk is exacerbated by a lack of actual experience (Mátyás, Soriano,
Carpio & Carrera, 2018).31 As a result, researchers warn against measuring the
success of teaching simply by the number of ventures created by students and
encourages universities to provide a more realistic education by ensuring
students are aware of the high risk of failure, provide ways to increase the
probability of success and focusing on evidence-based choices rather than
theoretical outcomes (Buchnik, Gilad & Maital, 2018).
A lack of practical knowledge or experience can be moderated by
offering “well-mentored experiential simulations of the startup process” which
ultimately lead to more venture creation (Buchnik et al., 2018, 17). Action-based,
or learning-by-doing, education programmes have been found to overcome
knowledge and experience gaps, and supports new venture creation
(Donnellon, Ollila & Middleton, 2014; Gielnik, Frese, Kahara-Kawuki, Katono,
et al., 2015; Watson et al., 2018). Educational business games that simulate the
actions and decision-making process during the start up phase can increase an
individual’s knowledge of business administration, planning and preparation.
In Germany, this has led to new venture creation at approximately twice the
standard rate (Kriz & Auchter, 2018).
Moreover, connecting individuals to social sources of learning, resources
and experiences attained through networks, mentoring, and professional
associations have also been found to be beneficial (Buffart, Croidieu, Kim &
Bowman, 2020; Donnellon et al., 2014; Ozgen & Baron, 2007; Rigg & O'Dwyer,
2012; Nabi et al., 2017). Exposure to role models is positively related with
venture creation (De Clercq et al., 2013). Learning from external sources of
30 Entrepreneurial intentions are “desires to own or start a business” (Bae et al., 2014: 218).
31 It can be difficult to find definitive percentages but Lee et al. (2020) states that 50 percent of
new ventures in the USA fail.
50
education and networks is also related to innovation (Gimenez-Fernandez,
Sandulli & Bogers, 2020).
Other policy initiatives, such as R&D expenditure encouraged by the
Europe 2020 strategy have also been positively linked with entrepreneurship
activity. Encouraging R&D spend has been popular with governments and in
the 1990s shifted the source of Germany’s regional growth from established
firms to new ventures (Audretsch & Fritsch, 2003; Audretsch & Keilbach, 2004).
Spending on R&D by higher education organisations is particularly useful in
new venture creation especially in more developed, entrepreneurial economies
(Murdock, 2012). Using European data, Castaño-Martínez et al. (2015) finds that
more expenditure on R&D by governments and universities stimulates
entrepreneurship activity. In a follow up study using different methodology,
Castaño et al. (2016) was able to replicate these results.
However, Fini, Fu, Mathisen, Rasmussen & Wright (2017) found that
institutional pressure and incentives to create ventures resulting from
university R&D in three European countries (i.e. Italy, Norway, the UK) was
linked with higher rates of venture creation but the overall quality of these
ventures was low. More recently, Burke et al. (2019) found that in Europe,
higher levels of R&D expenditure is linked with the creation of better quality
ventures which contribute more to the economy and society, including job
creation. As with much of entrepreneurship research, results are ambiguous.
Changes to tax regimes have also been linked with entrepreneurship
activity. Baliamoune-Lutz & Garello (2014) finds reducing tax progressivity in
Europe for the higher income range has a positive and significant effect on
entrepreneurship activity. In other contexts, Darnihamedani et al. (2018) finds
that lower corporate taxes can increase innovative entrepreneurship but
favourable capital taxes (i.e. on property and goods) on returns is more likely to
result in the creation of viable, high quality ventures in the longer term without
increasing income inequality or government debt. In contrast, to many studies
which use data from countries with relatively low tax levels and less substantial
welfare systems or social insurance programmes, Stenkula (2012) examines the
effects of taxes in Sweden a high-tax welfare state. Stenkula (2012) finds that
despite the various taxes imposed in Sweden, there is a significant but small
negative relationship between payroll taxes and entrepreneurship activity. They
argue that the results reaffirm the importance of considering the holistic design
of a tax system and the institutional context in which it operates.
Another salient influence on entrepreneurship activity is ease of access to
resources, such as finance (e.g. De Clercq et al., 2013). Although, simply
providing resources may not be a motivating factor for venture creation in
Europe, facilitating access to resources (e.g. finance) is helpful for individuals
already motivated to engage in entrepreneurship (Vegetti & Adăscăliţei, 2017).
Access to finance has been found to be particularly important for young,
innovative companies (Giraudo et al., 2019). In their extensive literature review
of entrepreneurship and innovation, Block et al. (2017) finds that access to
venture capital is overwhelmingly important for encouraging innovation. Using
German employment data, Koch et al. (2013) finds that labour market freedom
enables new venture growth by allowing easier access to the labour needed to
51
fulfil human resource needs. In line with economic freedom principles,
reducing start up costs to remove barriers to entry has also been found to
increase venture creation although this may unintentionally encourage
entrepreneurship with high failure rates, and produce few benefits to the
economy or society (Darnihamedani et al., 2018; Sobel, 2008).
The USA has historically been considered an innovation leader and taken
the lead on instituting economic freedom (Botta, 2017). Research examining
economic freedom rely on US-centric measures (e.g. Economic Freedom of
North America (EFNA) index) and often find a positive relationship between
economic freedom and entrepreneurship in the USA (e.g. Powell & Weber,
2013). The alternate US-based Fraser Institute Economic Freedom of the World
(“EFW”) Index is used by studies primarily focused on explaining economic
growth (Sobel, 2008) but has also been used by researchers examining links
with entrepreneurship activity. An alternative measure of economic freedom is
the Heritage Economic Freedom Index (“EFI”).32 There is no consensus on
which measure to use (e.g. Aidis et al., 2012). During the literature search, it
was difficult to find studies examining economic freedom using a European
dataset. Irrespective, examining the impact of economic freedom on
entrepreneurship can help researchers and policymakers understand its
effectiveness, and where European data has been used, it has been noted.
Using the Fraser Institute EFW measure of economic freedom Bjørnskov
& Foss (2008)’s influential study finds that high rates of government spending
(i.e. bigger government) discourages entrepreneurship activity but monetary
freedom (e.g. low inflation) and access to finance encourage it. Angulo-
Guerrero, Pe!rez-Moreno & Abad-Guerrero (2017, 33) finds that “better legal
structure and security of property rights and more lenient regulation of credit,
labor and business tend to favor entrepreneurship by opportunity” and that a
lack of economic freedom pushes individuals into entrepreneurship because it
produces an environment with limited opportunities: although, they admit that
due to limitations, their results can “not be interpreted as definitive” (Angulo-
Guerrero et al. (2017, 35). Also using the Fraser EFW Index, Dempster & Isaacs
(2017), finds that the economic freedom index has a large impact on
entrepreneurship activity but upon further analysis, only size of government
and trade freedom were positively related to beneficial, or more productive
forms of entrepreneurship activity. In contrast, Baliamoune-Lutz & Garello
(2014) finds that economic freedom does not significantly affect
entrepreneurship activity in Europe.
Using the Heritage Economic Freedom Index (“EFI”) Dau & Cuervo-
Cazurra (2014) finds a positive relationship between pro-market policy
measures and entrepreneurship. Saunoris & Sajny (2017, 312) finds that
32 This index comprises categories currently consist of 12 specific components. Refer to
APPENDIX A for more detail about the separate components.
52
economic freedom positively effects entrepreneurship activity but warns that
“blanket policies that promote economic freedom might not be equally effective
across countries”. Aidis et al. (2012) finds no significant relationship between
EFI and entrepreneurship activity although the Size of Government (i.e. lower
government spending and taxation) and, to a lesser extent the Freedom from
Corruption, significantly increase entrepreneurship activity. 33
The seminal work of McMullen et al. (2008) drills down to examine the
impact of economic freedom on entrepreneurship by considering the
motivations for entrepreneurship. Using the Heritage EFI, it finds that fiscal
freedom, monetary freedom and labour freedom pushed34 individuals into
entrepreneurship out of necessity for survival. Labour freedom, as well as
property rights, also worked to pull individuals into entrepreneurship to
exploit profitable opportunities. Although economic freedom in advanced
economies can stimulate entrepreneurship aimed at exploiting profitable
opportunities, increasing the degree of economic freedom “has a greater
explanatory power for economies in the earlier stages of development than for
innovation-driven economies” and that overall, it is more likely to encourage
entrepreneurship of poorer quality (Kuckertz et al., 2016, 1,292). Díaz-Casero et
al. (2012, 1,708) finds that “almost all components of the Economic Freedom
Index have a significant relationship with Entrepreneurial Activity, which is
negative [emphasis added] in most of the analyses”. Most relevant to Europe, in
developed countries, fiscal freedom, government size, financial freedom,
property rights, freedom from corruption and labour freedom tend to pull
individuals into entrepreneurship.35 Using a European data, Ignatov (2018)
finds that European Union members with greater economic freedom
experienced higher levels of innovative entrepreneurship.
Historically, research indicates that the relationship between economic
freedom and entrepreneurship activity is neither direct or straightforward
(Minniti, 2008). More recently, research suggests that not all aspects of
economic freedom are significantly or positively related to venture creation.
Context, such as USA versus Europe, and level of development also impact the
outcome, and interactions between the various elements which can have wider
implications beyond entrepreneurship activity. For instance, deregulated
financial markets can increase capital market volatility and market risk while
deregulated labour markets are associated with increased inequality and
systematic underinsurance against risks, such as disability, old-age poverty and
33 This work is largely based on the seminal work of McMullen et al. (2008) which also uses the
Heritage EFI.
34 For explanation of “push” and “pull” factors see section 4.4.3, above.
35 In developing countries, Government Size and Monetary Freedom pull individuals into
entrepreneurship. In developing nations, lack of employment prospects is high and a way out of this
situation is the creation of a business or self-employment, where Business Freedom, Trade Freedom,
Property Rights and Freedom from Corruption emerge as areas that are negatively associated with
entrepreneurship. Government Size is the only aspect that encourages it” (Díaz-Casero et al., 2012, 1,708).
53
illness (Dilli et al., 2018; Hermmann, 2019). The seminal work of Audretsch &
Thurik (2000) highlighted back in 2000 that despite popular perceptions, labour
market deregulation such as dismantling social safety nets to solve
unemployment is unnecessary and based on the misconception that reduced
wages could stimulate employment. They pointed to the Netherlands which at
the time, had adequate safety nets in place and rising employment. Bjørnskov &
Foss (2013) finds that there is some support for government intervention and
welfare states promoting entrepreneurship, especially through investment in
high quality infrastructure. These findings raise the possibility of an optimal
level of economic freedom.
The concept of economic freedom has a history of being controversial
because it is complex and difficult to measure (de Haan, 2003; Gwartney &
Lawson, 2003). Aidis et al. (2012, 127) argues that using one index to measure
economic freedom is inadequate to capture the complexity inherent in economic
freedom and conclude that their results “demonstrate that the set of indicators
has more than one dimension and enforcing a one-dimensional scale on it may
not be a valid technique”. Recent studies indicate that results remain generally
mixed (Nikolaev et al., 2018) and subject to measurement challenges (Bruns,
Bosma, Sanders & Schramm, 2017; Su et al., 2017).
Significant effort and funding has been allocated to entrepreneurship
policy over the last decade. Institutional change was expected to increase
entrepreneurship but evidence of the effects of these changes on
entrepreneurship activity has been mixed. The impact of economic freedom
principles which is influenced by the USA’s legacy of innovation and
entrepreneurship seems to be the least studied in Europe despite the shift
towards a more pro-market approach. More recently, researchers are beginning
to caution about having too many positive expectations from efforts to promote
entrepreneurship (Mühlböck et al., 2018). The effects of institutional change not
only impact entrepreneurship, but can also spill over to the wider economy and
society with some unintended consequences. This is explored further in the
next section.
5.2 Unintended consequences
“the aim of governments should not only be to increase entrepreneurship
indiscriminately, but to also take into account the types and characteristics of
entrepreneurship” (Angulo-Guerrero et al., 2017, 35).
Entrepreneurship policy has resulted in institutional changes aimed at
promoting entrepreneurship to improve Europe’s economic and social
prospects. While research examining the effectiveness of particular
entrepreneurship policy initiatives and interventions is ambiguous, official
reports estimate that aggregate entrepreneurship levels have risen only slightly,
sitting at approximately 15 per cent since 2002 (Caraher & Reuter, 2019a;
Eurofound, 2017; OECD/ European Union, 2017; Spasova et al., 2017;
54
Tammelin, 2019). Fotopoulos & Storey (2019) found that the £245 million of
taxpayer money spent by the Wales Entrepreneurship Action Plan in the UK to
increase entrepreneurship to stimulate economic development, was ineffective
or had only short term effects. In 2016, other European countries such as
Germany, Luxembourg France, Austria, Switzerland and Belgium, which have
embraced entrepreneurship policy experience entrepreneurship rates below the
EU28 average (Spasova et al., 2019).
However, there is a visible trend showing that the composition of new
ventures in Europe has skewed towards ventures which contribute little to
economic or social prosperity (Spasova et al., 2019). Countries such as the
Netherlands have experienced significant venture creation in recent years but
these have generally not met the expectations of policymakers (Conen &
Schulze Buschoff, 2019; Economidou et al., 2018; Spasova et al., 2019). In line
with this trend, the UK experienced a significant growth in entrepreneurship
activity, but as a result of ventures that add little to macro-economic outcomes.
Between 2001 to 2014, the UK experienced a 45 per cent increase in
entrepreneurship to almost five million workers, at least 1.8 million of which
were considered to be of the poorest quality (Fleming, 2017). Bennett (2019, 236)
highlights that UK “House of Commons (HC) Work and Pensions Committee
(2017) reports that part-time self-employment grew by 88 per cent from 2001 to
2015, compared to 25 per cent for full-time self-employment”.
Mühlböck et al. (2018) finds that European’s have also created new
ventures after the Great Recession and in response to efforts to promote
entrepreneurship, not because they have found opportunities to exploit or
because they believe in their own skills, but for lack of other income earning
options.36 Nikolaev et al. (2018) highlights that in 2014, Germany’s ratio of
opportunity to necessity entrepreneurs was similar to those of some developing
countries (e.g. Uganda). In terms of macro-level impacts, since 2014 until 2019,
the European Union GDP has hovered around 2 per cent, unemployment fell to
6.7 per cent (2019) and the employment rate reached 73 per cent (2019) (Eurostat,
2020).37 These results indicate that the GDP and employment targets set in the
Europe 2020 strategy of 3 per cent and 75 per cent respectively (European
Commission, 2010), have largely remained unrealised.
It is noteworthy that in his seminal work, North (1990, 90) acknowledges
that throughout history, “[s]ometimes, indeed frequently, policies had
unintended consequences”. It is possible, therefore, that entrepreneurship
policy initiatives and interventions attempting to promote entrepreneurship
have also produced unintended consequences. For example, removing barriers
to entrepreneurship by reducing start up costs has been found to produce
36 Mühlböck et al. (2018) refer to these individuals as no-opportunity-no-skills entrepreneurs (i.e.
nons-entreprenurship).
37 This data is based on the EU-27. It excludes the impact of COVID-19 on GDP and the United
Kingdom (the United Kingdom left the European Union on 31 January, 2020).
55
unanticipated problems, such as encouraging more entrepreneurship which
adds little value (Darnihamedani et al., 2018; Mühlböck et al., 2018; Sobel, 2008).
Much of the impetuous for entrepreneurship policy stems from the
expectation that it will provide some solution to Europe’s structural
unemployment problem and in turn, benefit economic growth (European
Commission, 2013; European Commission, 2015). One significant and popular
intervention is tied to active labour market reforms (Buffart et al., 2020;
Mühlböck et al., 2018). These reforms change labour institutions on the premise
that it will encourage unemployed individuals to find work and/or allow
businesses to meet their resource needs (see discussion in section 4.4.2, above).
Admittedly, when an unemployed individual creates a new venture they are
creating their own job, and possibly jobs for others, which can potentially
contribute to economic growth (Dvoulety! & Lukeš, 2016; Thurik et al., 2008).
New ventures can create jobs for family members and friends (Ferraro &
Marrone, 2016; Morris, Neumeyer, Jang & Kuratko, 2018; Olson, Zuiker, Danes,
Stafford, Heck & Duncan, 2003). They can provide individuals better work-life
balance and greater job fit (de Jager, Kelliher, Peters, Blomme & Sakamoto, 2016)
and greater work satisfaction (Millán, Hessels, Thurik & Aguado, 2013).
Entrepreneurship may even provide a stepping stone into employment (Millán
et al., 2012; OECD/ European Union, 2017). New ventures can also be attractive
for individuals