European entrepreneurial capitalism: the Schumpeterian secret to higher growth.

• Author: Siebert, Horst

If the European Community wants to develop a growth strategy, it needs to answer the questions: How can we create an environment conducive for growth? And how can we remove growth impediments?

Note that to investigate growth factors is not to investigate the question of convergence--that is, the catching-up process. Convergence means to approach the level of economic prosperity in the economically leading countries; this is not the relevant question for the core of Europe. The question for Europe must be how to become a growth engine in its own right.

Europe desperately needs an economic environment in which inventions, innovation, and investment flourish. We have to enhance technological change as a process endogenous to an economy.

An important element is the entrepreneur, the Schumpeterian entrepreneur, who takes on risk and who daringly implements new combinations of factor of production. For growth, you need the entrepreneur. And we need more of them in Europe.

There must also be a preparedness in the European societies to take risks, including technological risks, in areas such as atomic energy and biotechnology. Moreover, higher economic risks should be accepted. This, however, implies that the reward for taking these risks should not be called into question. This means accepting differences in income.

In essence, innovation is achieved by recombining existing ideas in a new manner. As the potential for new recombinations is higher than in diverse societies, rising diversity could promote innovative dynamics. We should therefore be prepared to accept higher diversity. Across countries, Europe exhibits quite a high degree of diversity--not only in income levels, but also in social and cultural attitudes. Within countries, however, diversity is much lower than, say, in the United States. With a deeper integration of European capital and labor markets, diversity could probably be much better harnessed to gain new momentum in the innovation process.

The innovative dynamics of an economy are no longer solely determined by its efforts in industrial R&D. Europe is not industry-based anymore, but service-based and knowledge-based. Innovation policy has not yet followed these fundamental shifts and still ticks too much to traditional innovation concepts and support schemes. Successful innovation in new technology fields--such as e-business or biotechnology--depends much more on open markets and favorable conditions for technology-intensive start-ups than conventional R&D subsidies. Innovation policy at the EU level, and at the national level as well, certainly needs a fundamental redesign. It should be more concerned with removing market barriers to innovative activities.

Ease of market entry is a key prerequisite for economic dynamics both in newly emerging and in traditional industries. Most relevant is market entry regulation in the new technological areas of biotechnology, pharmaceuticals, communications, and information. Regulations to obtain a business permit, to build a factory or construct a new building, and to license a new product define market entry. Market exit regulations affect market entry as well. The Internet and the New Economy should not be confronted with too narrow regulations. Another prerequisite is access to capital in the venture capital market, bypassing the traditional ties to banks as the only financial intermediaries.

We should open up our product markets to competition where this has not yet been done and deregulate them where regulation is no longer justified. Quite a bit has been achieved in Europe in this respect. In some areas, however, competition is still lacking, especially in some network industries (energy, gas, water, and parts of communications) and previously public enterprises like the postal service. Protected areas are equivalent to a tax on downstream industries and activities.

We should not introduce new forms of internal protection against competition, neither through new regulation nor through subsidies.

A continuous flow of inventions and innovations cannot be generated by the national governments or the European Commission. Starting from a Hayekian view of technological progress, the flow of new technologies must come from a decentralized process. The role of governments is to co-finance basic research and to ease the diffusion of new technical...