Barriers to scaling-up across Europe: real life stories

Cross-posted from Linkedin

One of our recent policy focus is on startups and scaleups, and in particular on what should be done at EU level to support them. This is also the main topic of the online consultation on the Startup Initiative, open until the 31st July.

One of the issues the EU faces is that there are relatively few high-growth innovative firms, and that they are reluctant to expand across borders. The fact is, as of today only 23 % of new and young SMEs (up to seven years old) export within the EU. Why is that?

I have been talking with entrepreneurs, gathering experiences of barriers to scaling up across border in the EU. One reason that came up is the different practices in the EU countries when it comes to payments.

Here are their stories told anonymously.

Italian SME “Societá”, a reseller of professional products, aimed to cut costs by bypassing intermediaries and buying directly from German suppliers. Unfortunately, this proved impossible because German suppliers want to be paid upfront, while the Italian SMEs receive payments from their client with a delay. Additionally, the banking system is designed around these local practices,  so they are unwilling to cover upfront costs.

Spanish SME “Empresa,” after much effort, finally succeeded to get a contract with a public body in Italy. Everything went well until the payment was due: the payment was made one and a half year late, which for an SME this is huge. Traditional contingency plans don’t work. Banks don’t provide factoring for invoices with foreign governments. Legal requirements about timely payments are much more difficult to enforce across countries, and lawyers discouraged “Empresa” to submit formal payment request as they would have little impact unless it went to court, which “Empresa” is not willing to do.

In other words, in some countries such as Italy, it is normal to be paid late, and the whole payment practices is that everyone in the value chain is paid late. But then foreign suppliers are wary of making business there, because their value chain relies on prompt payments. This is a major barrier to cross border expansion, even more because it often comes as a total surprise.

Here are some official data about payments by government. Italy stands out.

I am sure there are many others: what are your real life stories?

 

Would Andreotti worry about Facebook?

Facebook has a double role when it comes to existing policy: as a driver of change or of conservation.

On the one hand, Facebook is the primary vehicle for very populist ideas. It sometimes looks like a repository of the worst human feelings: garbage tends to spread virally. In this sense, it can be seen as a help to the established power in keeping people busy with the illusion of participation, by letting them rant freely about flat earth and therefore acting as a safety valve to prevent actual changes.

On the other, Facebook offer an alternative platform to mass media, allowing outsiders to have a voice and augment their reach. It is a formidable tool to bypass the filtering of the media conglomerates, and to let ideas circulate more freely. Indeed, one question is the very definition of populism. According to some, Universal Minimum Income is a populist idea; according to others it is a revolutionary idea.

 

In other words: would Andreotti (the Italian politician in power for over 50 years, the ideal-type of the establishment) be worried or comforted by Facebook?

But there is a third option. That Facebook acts as a learning platform for people to discover public engagement over time. That it acts as a force of conservation initially, but as a force for change in the medium term.

In fact, I found the same question many years ago when researching the history of philanthropy in the 19th century: one the one hand, it acted as a safety valve for the bourgeoisie and women to be active in public issues without troubling the establishment, on the other, it acted as a stepping stool towards democratic participation.

Innovators and government programs: a tale of two circles

Government programs seldom involve top innovators. Typically, a very minor percentage of innovators benefit from government funding. Typically, the funding reaches instead more established players, which know how to play the “funding game”: the so-called usual suspects.

This is a common finding in the evaluation of most government funding programmes. For instance, our recent study on the FP7 impact on industry finds that only 5% of the fast-growing innovative SMEs participates in the programme – consistently with previous studies.

This is certainly a problem. We all want public money to go to the best projects, to the disruptive innovators, to the next Google, rather than to the incumbents or to the “industry” of professional project-writers that has emerged around public funding.

The cause seem to lie in a combination of administrative barriers to entry (complex procedures) with the lack of a strategic alignment between the priorities of government and of innovators.

Indeed, the capacity to involve the top innovators could become a success criterion for public policy. For instance, the European Research Council is widely respected, because of its ability to involve the top scientists in Europe. It is able to reward excellence. My understanding is that this is the aim of the forthcoming European Innovation Council: to do for innovation what the ERC has done for research.

In fact, the performance of different policies could be described through different Venn diagrams. Here is a sketch of the impression I have of two different instruments, the ERC and the Structural Funds (at least how they are used in Southern Italy based on my experience in evaluating Kublai).

 

But in fact, the involvement of top innovators has never been formally defined as a success criteria or a KPI of public policy.

We know that KPI in public policy are particularly dangerous because they induce government to focus on getting the right numbers and play the metrics game, rather than addressing the real problems. We can easily imagine governments focussing on getting some high profile “unicorn” involved in their programs purely for communication reasons.

But the problem is more complex than that. We do not know if government programs should involve the top innovators in the first place. In the same study we note that according to some scholars, “the involvement of this “elite” could lead to a risk of reduced additionality by attracting firms that would have invested in innovation even in the absence of public support”.

Arguably, the appropriate KPI should be the percentage of unicorns/gazelles/scaleups involved that received public funding BEFORE they became successful.

But this is just a guess, as we don’t have much evidence behind it. After all, Google or Facebook didn’t get any government funding. We know that Defence funding and public procurement (e.g. DARPA) funds top innovators and generates disruptive innovation, but that’s a very specific context.

It could also be that government funding works best when it helps the moderate innovators that create a wider environment conducive for unicorns to emerge. Or perhaps, as a colleague pointed out to me, we should consider research funding just as we consider the Common Agricultural Policy, as a kind of subsidy that pays beneficiaries not for what they actually produce (innovations), but to maintain the environment (research activity).

What do you think?