The marginal reality of entrepreneurship in Spain

Ignacio de la Vega. Professor. IE Business School

20 June 2006

Spain’s entrepreneurial activity, although increasing, has not reached the same levels as other European countries. What can be done to improve this situation?

Taking the pulse of Spain’s entrepreneurial activity

Last February, the Instituto de Empresa presented the national figures for the Global Entrepreneurship Monitor (GEM) for 2005. This report, considered one of the most important for taking the pulse of entrepreneurship on a world level, provides an analysis of the Total Entrepreneurial Activity (TEA) and gives an annual reading of the economic performance of 40 countries in relation to their GDP, job creation, innovation and other fundamental variables that measure the economic health of a society.

The 2004 GEM report for Spain revealed a disturbing figure for the economy. Although activity has recovered somewhat after declining in 2004--when it reached 23.9%-- the TEA rose only 0.25% in 2005, to reach an entrepreneurial activity value of 5.4%, far below the average figure of 6.5% for developed economies.

This low level of TEA in Spain is of great concern because GEM reports from previous years indicate there is a direct relationship between entrepreneurship and GDP, employment and innovation in an economy. However, we must ask if this is a temporary phenomenon or a structural problem?

It is true that the fall in the TEA in 2004 could be chalked up to atypical situations: The uncertain economic, political and social climate in the wake of the terrorist attacks of 11-M; the change in government after the elections of March 2004; the latent influence of the Iraqi conflict; and the instability brought on by fluctuating oil prices and the imbalances plaguing the US economy. There is no doubt that so many uncertainties persuaded a large number of entrepreneurs to wait for better times. However, even though 2005 was a year of greater stability, the much anticipated recovery fell short of expectations.

Despite the modest recovery in entrepreneurship last year, the 2004 GEM report does include some very good news about our entrepreneurial economy. For example, the small business failure rate did not increase drastically in 2004, despite an economic recession. Since then, the rate has remained stable, albeit at a still high level compared with our neighbours. Another promising figure is that new enterprises (between 3 and 42 months) are continuing to stabilize and grow.

Although the failure rate of Spanish SMEs (small-to-midsized enterprises) has not increased dramatically, Spain still suffers from a persistently high failure rate. What is more, Spanish SMEs also have problems with dimension and growth--another worrisome factor, taking into consideration the important correlation between size and profitability. In response to this, and operating within the GEM framework, the Instituto de Empresa in 2006 is working--with the support of Fundación Cultural Banesto and DGPyme--on a very innovative study aimed at identifying the factors behind the low growth rate of Spanish SMEs. We also are trying to pinpoint the growth drivers of those domestic SMEs that enjoy strong growth and consolidation rates, thus enabling them to create employment—a key goal of our companies and our economy.

Other positive domestic news from the GEM 2005 report is the increase in the average investment in new companies, which has doubled in three years from €20,000 to €40,000. Increased financing boosts both the dimension and scope of new projects. There has also been outstanding growth in female entrepreneurship; Spain now ranks fifth in the EU for the percentage of female entrepreneurs it has.

In Conclusion – What improvements should we implement?

In summary, the GEM report suggests a number of ways for Spain to improve its TEA. Recommendations include introducing educational policies designed to foment an entrepreneurial spirit and implementing legislation aimed at improving the health coverage, pensions and unemployment benefits of self-employed workers and entrepreneurs. The GEM report also underscores the importance of improving taxation on capital gains from investments in business projects, informal investments and venture capital, as well as from investments in RD&I transfers.

The report also advocates establishing a more fluid relationship between the university community and business, developing networks for informal investors and/or business angels, providing entrepreneurs with access to physical and commercial infrastructures as well as developing government programs that simplify regulations and financing, and supporting training and the diffusion of culture for the small business person.

It would be in all of our best interest to work together to support Spanish entrepreneurs, for we must keep in mind that the countries with the highest growth rates are those that also have the highest rates of entrepreneurship.

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