Entrepreneurship: It’s the Value System, Stupid

As a Swiss entrepreneur who lives in the United States, I often get asked about the differences between Europe and the U.S. for entrepreneurs. Or more specifically, why the U.S. seems to produce so many successful technology startups, while Europe still lags badly.

Hint: It’s not about technology parks or labor laws or tax incentives for investors — the stuff that politicians tend to discuss most frequently.

I think the many differences boil down to two aspects: Market size and the value system of society. And both are unfortunately hard or impossible to copy.

Market size is easy to explain: The U.S. is the only country in the world that has a domestic market of over 300 million people who speak the same language, use the same currency, follow the same legal system and typically have a middle class income. Europe on contrast is very fragmented by its many languages and cultures. India and China, while significantly larger than the U.S., are still relatively poor. The result is that the U.S. market alone represents consistently about 40-50% of the global market for most advanced technologies. So it’s simply a great (although very competitive) place to start a tech company because you can immediately access so many domestic customers.

The second aspect, the value system of each society is probably even more imporant and certainly more complex to analyze.

In each society, the smartest and most ambitious people tend to be attracted by the occupations and careers that are most highly regarded by society. I think that’s fairly obvious from history and our current world. In medieval Europe, being a high-ranking member of the clergy was a great career that brought access to power (and in many cases even wealth). In the old dynasties of China, a smart person probably wanted to be a mandarin at the court of the emperor.

In today’s modern, open societies these preferences are not quite so clear, but obviously there are still occupations that enjoy a much higher status than others. There is a connection to material rewards too, but it’s not a perfect correlation. It’s really all about what society holds in high esteem.

Psychological research has found out that money — or to be more precise, the power of money to buy material things — is only a motivating force up to a certain point. After that, acquiring more money mainly provides advantages in terms of social status. Let’s be honest: nobody really needs a fancy sports car, and getting from A to B in a Ferrari might even be less comfortable (though probably more interesting) than in a Toyota Corolla. Most material status symbols have only one single purpose: To impress others.

What we seek in the end is social status. The question therefore is of course how societies differ in their value system to assign status to certain occupations, and in particular to entrepreneurship. We hear all the time from politicians that we need more entrepreneurs to get us out of the economic slump that the financial services industry got us into. So which societies are best prepared to encourage entrepreneurs?

From observing the countries that I know relatively well (Switzerland, Germany, the U.S.), I think I can say that none has a value system that perfectly favors entrepreneurial activity over other, maybe less productive activities. But there are clearly huge differences.

The United States of course seems to have almost a cult of entrepreneurship. It’s difficult to find an American who has never considered starting his or her own business. Entrepreneurs are generally admired. The pioneering spirit is clearly alive and well in this nation of immigrants.

But there is also dark side to this American ambition: Making money seems to be more important than making useful stuff that really adds long-term value to society. Of course people admire Bill Gates or Steve Jobs, but just as much they admire Warren Buffet who — let’s face it — is more of a speculator than an entrepreneur. The current financial crisis was only possible because the smartest people were attracted by financial services firms that don’t really add value to society, but simply trade it. Somebody who made his money by building a company, inventing things, and creating jobs does not necessarily enjoy a higher status in American society than somebody who just buys and sells assets.

This could be a fundamental problem in the long run, and it probably already is. Over the last two decades, U.S. companies have systematically outsourced not only many manufacturing jobs, but also the engineering and design of many advanced products. Almost all of the work that goes into the production of a HP or Apple notebook is now done in Taiwan and mainland China. Sure, the U.S. companies still provide their brilliant marketing, but is that really enough? It’s not terribly surprising that the latest wave in PCs, the cheap laptops referred to as “netbooks”, was started and is completely dominated by Taiwanese companies under their own brands. The outsourcers are already eating their customers’ lunch.

I don’t think a society can survive just by providing financial services, bold marketing ideas and pure speculation. But that’s what American society rewards. Hopefully the current recession will help to change this.

In German-speaking Europe on the other hand, high-quality engineering and the creation of jobs still enjoy the highest status, often at the expense of financial success. When a German entrepreneur wants to boast about his success, you are more likely to hear about the number of jobs he created or the outstanding quality of his company’s products than about things like net worth, market value or profitability.

These are useful priorities up to a certain point. It’s not surprising that European companies dominate many high-tech niches. The famous German “Mittelstand” companies — medium-sized, typically family owned corporations — often have a 80%+ market share in their particular narrow niche. Germany is the largest exporter in the world, and Switzerland and Austria have very high export quotas relative to the size of their economies. The most important industries all make high value-added products such as luxury cars, pharmaceuticals or high-tech machinery.

The problem with the European mentality is that it promotes risk aversion and a radical focus on quality at the expense of agility and aggressive marketing. Many of the building blocks of the Internet — the Web itself, MP3, Linux, MySQL, Skype, and so on — were invented by Europeans, but commercialized by American companies. Europeans seem to be very reluctant to bring anything to market that is not yet perfect. That’s why they often miss the best opportunities.

But the biggest obstacle for European entrepreneurs is probably the stigma that is still associated with failure. The failure of a company is often seen as a catastrophic event, not (as in the U.S.) an unfortunate, but ultimately useful learning experience. The concept of serial entrepreneurship — starting multiple companies over the course of career, some of which succeed and some of which fail — is completely alien to most Europeans. Many European entrepreneurs have a dynastic view of company creation: A company is something that you start, that you control for the rest of your life and that you want to pass on to your children. That’s great for certain types of companies, but not helpful in rapidly moving markets.

Europeans also have a very inconsistent attitude towards wealth: In most countries, there’s an equivalent to the Forbes 400 list of the richest people, and Europeans are no less fascinated by these lists than Americans. But at the same time, openly displayed wealth is frowned upon.

This puts successful European enterpreneurs in a difficult balancing position: They enjoy a high status in society if they continue to be successful and are a “good boss” who creates a lot of jobs. But if their company becomes too profitable or if their lifestyle seems too frivolous, they can rapidly lose support. And if they take large risks and fail, they can be sure to get mocked. It’s not a coincidence that “schadenfreude” is a German word.

It’s therefore not very surprising that many European entrepreneurs and managers try to copy American values and behavior patterns — in the hope of moving their own countries’ cultures into a more entrepreneurial direction. Unfortunately, this often ends in disaster. The latest example: European banks and the real estate markets in some countries are suffering much more from the financial crisis than their American counterparts. Why? Because European companies tried to imitate aggressive American business concepts, without really understanding them. But a bad copy often ends up with a far worse outcome than the already bad original.

OK, so obviously no country has a really perfect environment for entrepreneurs that also sets the right incentives for “useful” companies. But I think the good thing that could come out of the current recession is that people on both sides of the Atlantic rediscover what made Western societies so wealthy in the first place: A healthy, open attitude towards risk taking and entrepreneurship, but also a focus on the creation of real value. Maybe even a bit of nostalgia is in order: the 1950s and 1960s were probably the times when Western societies really created the foundation for their wealth. Sometimes a crisis helps to dust off the best aspects of some solid, old values.