Europe must ‘clean up’ its business environment

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In an interview with EURACTIV, Jonathan Zuck, president of the Association for Competitive Technology (ACT), says Europe must address levels of red tape that are still “far too high”, tax policies that are “far too aggressive”, labour laws which are “too inflexible for SMEs and businesses that need to be agile”, and an intellectual property regime which “fails to promote investment” if it wants to promote entrepreneurship and innovation across the continent.

The Association for Competitive Technology (ACT) represents more than 3000 IT SMEs from around the world, as well as larger companies such as eBay, Oracle and Microsoft. 

To read a shortened version of this interview, please click here. 

The EU has presented a mid-term review on SME policy, in which hails some of the good results that it achieved so far, including on cutting red tape. Do you agree with the Commission’s positive overview that it has become easier for SMEs to do business? 

I think there have certainly been some changes in metrics that are good but I think we need to wait and see whether this will actually result in progress on the ground. 

It is clear that perceptions, at the very least, have not changed among SMEs. It is going to be a real task for people to have a better understanding of the improvements that have been made. And I think you cannot stop here but you have to continue to make progress along these same lines. 

Which are the key areas where more progress needs to be made? 

One of the most significant areas where more efforts are needed is intellectual property. That is something which is really important to innovative start-ups, particularly in the IT-sector that I represent. This is an area which is still quiet a quagmire in Europe and something that needs to be addressed with some consistency. 

Beyond that, the issue of the single market is something that keeps coming up in discussions with our members – issues associated with hiring foreign nationals; getting venture capital across company boundaries; doing business for companies in other countries without having create a subsidiary, etc. So there are still a lot of things that small businesses need simplified if they are to grow their businesses to become more Europea-wide. 

One solution that has been offered to help companies do business across Europe is this ‘European Company’. Is that of any help for SMEs? 

It can potentially be a help for SMEs – it is certainly a step in the right direction. I think providing a consistent framework within which to create subsidiary organisations in other member states is useful. 

However, creating a subsidiary is a still high overhead simply to do some work in another member state. If I get a small project in another member state, the red tape associated with performing those tasks is still quite high. For example, if I want to engage a programmer who lives in another member state, the regulations, social welfare obligations and tax policies are still very complex. 

Ideally, the SMEs that we talk to would like to have the ability to directly engage employees, customers and partners without having to create subsidiaries. But, in the interim creating a subsidiary is the most efficient way to do that and the EPC (European Private Company) helps make that method more attainable.

You were mentioning the difficulties that you meet in the labour market. Do you think the services directive will help in the longer term? 

The services directive will certainly be progress in the right direction but there is more work to be done to truly have a single market. 

What SMEs need is low overhead flexibility – the ability to quickly engage, for example, a programmer in Romania if you have a project going on in Paris and can’t find someone on the spot, could be very helpful. But the laws surrounding being an independent contractor are complicated, the laws surrounding engaging a foreign national are very complicated – these are still areas for real simplification. 

You also mentioned tax systems. This is a sensitive issue for EU member states…

It sure is. I do not mean to imply that these things are easy. 

I think that having competitive tax infrastructures can be very good because countries with better tax structures can then become more attractive to small businesses. 

But, it can become an issue if you look at the small scale, when companies try to engage partners in other member states, or try to get venture capital from other EU countries, etc. 

So, some level of simplification would make sense to these types of cross-border agreements and contracts easier. 

I do not know whether there needs to be a Europea-wide tax – it is more a question of simplifying some exceptions to facilitate a kind of agility by small business. 

In your opinion, is this idea of a common consolidated tax base, put forward by Tax Commissioner Laszlo Kovacs, going in the right direction? 

I do not know the answer because I actually believe that certain kinds of tax competition between states can be a positive thing. It can help to lower taxes and allows member states to create incentives for businesses to exist within their territories. 

I think the issue is finding avenues, both technical and financial, simply to engage partners in other member states. 

Europe is always talking about the need to boost innovation, but as you mentioned, there is a problem related to intellectual property. Are you in favour of creating a Community patent? What do you want to see happen in this field? 

There is a lot of desire for a Community patent among SMEs in the IT-sector. A lot of SMEs end up patenting their inventions in the US because they can get to a market much more efficiently there instead of patenting their inventions in Europe. I think that is a shame and I think having a less complicated, less fragmented system in Europe could be a real boon to entrepreneurship and innovation throughout Europe. 

So do you think that Europe is actually driving investments and innovative businesses away with its current policies? 

It is, for sure, a fact the EU is doing that. 

We often talk about the competition between the EU and the US, but there is also now rising competition from China and India, which are also innovating a lot. Are they also sucking investments away from Europe? 

They are attracting a lot of investment and there is direct correlation between that investment and the institution of stronger intellectual property regimes in those countries. 

Of course there are still issues with respect to piracy in both countries, but there is also already recognition, both in China and in India, of the importance of patent protections and other assurances to potential investors. 

It is not a question of theory anymore. Where countries like Japan have instituted a strong intellectual property protection they have enjoyed economic growth. If you look at Ireland and its experiment in economic growth; they made a decision to put aside a lot of distracting issues and focus on being a center for investment and they succeeded in doing so. So it is one of those situations where ‘f it exists, it must be possible’. 

The Commission recently published a Eurobarometer on what it calls the ‘entrepreneurial mindset’, which shows that people in the EU are still not really keen on starting up their own businesses and becoming entrepreneurs. Do you think this is a contributing factor and can the EU help change this? 

This is certainly a topic for great debate in Europe and I have been involved in a lot of discussions surrounding innovation and entrepreneur policy. There is certainly a lot of activity surrounding it in Europe, including trying to build entrepreneurship into secondary school curricula and other kinds of educational campaigns. 

But, I frankly think that the most important thing that Europe can do for entrepreneurship is to create an environment conducive to that entrepreneurship – in other words: making it easier for venture capital firms to work and operate within Europe, or reforming the bankruptcy law – which is one of the things the Commission is doing in its recent Communication on overcoming the stigma of business failure. I think that there are some positive steps in that, involving making structural changes that eliminate some of the unnecessary risks associated with starting a small business. 

The cultural adversity towards risk is maybe exaggerated because, in reality, if the risks are too high and the rewards are too little, what may seem like risk-adversity might just be rationality.

The Eurobarometer also finds that people find becoming self-employed less attractive in Europe than they do in the US. Do you think it is possible that this trend has less to do with Europeans being averse to self-employment than with the fact that it is more attractive to be employed in Europe than in the US? 

I think that is right. I actually believe that creating an environment for entrepreneurship is a combination of instability and opportunity. What I mean by that is that if you have too much comfort in your job and your social protections, and you also have a lot of limits on your opportunities for success – both through the tax and regulatory systems – then the risk of leaving the ‘comfort zone’ to take the risk seems far too high. 

I think when the potential that can be achieved is much greater and the risks of leaving your current position are lower, then you will see a lot more people willing to take those risks. So, it is a combination of factors, but I think it is less about Europeans innately being risk-averse and more about creating an environment in which the ‘risk-to-reward-ratio’ is decreased. That it will make it more rational to take those risks. 

Access to capital is also a problem in Europe. Is it much easier for start-ups and small businesses to get fresh money in the US than it is here? 

It is easier, but a lot of that has to do with regulations and laws associated with venture capitalists getting their money back out of investments, the complexity of taxes around high-risk investments, etc., that make it less interesting to be a venture capitalist in Europe. 

So, there is plenty of money and plenty of venture capitalists in Europe, but the environment for investing in start-ups is not as fluent in Europe as it is in the US and that shows itself in the numbers. 

One of the Lisbon-strategy goals is also to raise investment in research and development. Is the EU doing enough on this and – because the EU often points out that private companies are not investing sufficiently in R&D – are SMEs working on this? 

They certainly are. And again, I think this is two-fold: There is direct investment by governments in basic research, where there are no immediate financial gains for companies and it would be irresponsible for a company to take that level of risk. And, there is investment by companies in the ‘productisation’ of inventions, which I think has a strong connection to the protection of intellectual property. 

If you are trying to figure out where to put your money and it turns out to be safer to put it in real estate than to put it in R&D, because of your expected return-on-investment, then you’re going to put it in real estate. That is the good thing about money – it is very easy to put it wherever you want. 

So, again, I think that encouraging companies to invest in R&D is not the right answer. Instead you want to create an environment conducive and rewarding to the investments in R&D. 

Do you think that the creation of this European Institute of Technology will help? There are many arguments for and against… 

There are, and I have not got a consistent reaction from our members on this issue. 

I think it has the potential to be interesting but I think it misses the point… In Europe there is a constant desire by the government to ‘create and manage’, but in reality, most of the time it is a question of getting out of the way. 

So do you think the EU is actually interfering too much? 

Well, I think the level of red tape is still far too high. I think tax policies are still far too aggressive. I think labour laws are still too inflexible for SMEs and businesses that need to be agile. I think that the intellectual property regime fails to promote investment by corporations in research and development. An environment has been created that is not conducive and it needs to be cleaned up if you want to see a transformation of European business. 

If you could pick just one, what do you think should be the EU’s number one priority for SME-policy? 

It’s a tough question because I don’t believe that all SMEs are the same. I think there’s a danger in having an ‘SME-policy’ except in some very specific areas, such as healthcare and labour law, which affect all SMEs. 

But other issues, such as intellectual property, affect innovative SMEs far differently than service-oriented SMEs… I often talk about the innovation economy and, in the context of the innovation economy, there is no greater demand than for a better system of intellectual property protection. 

For SMEs generally, that question will have much more to do with red tape and regulatory burdens. But again, within the IT-community – and that covers both the services and innovative side of the economy – reforms associated with a single market and really increasing the fluidity with which money, labour and contractual obligations can span member states’ boundaries would be an enormous boon to the SME community. 

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