Varieties of entrepreneurship: exploring the institutional foundations of different entrepreneurship types through ‘Varieties-of-Capitalism’ arguments

Different varieties of entrepreneurship exist. But what do these different types of entrepreneurship look like? And why do they emerge? The entrepreneurship literature started to explore these questions in the early 1990s, stating that the manner in which a society’s institutions structure economic payoffs influences the nature of entrepreneurial efforts and activities (Baumol 1990; Murphy et al. 1990; Sobel 2008; Calcagno and Sobel 2014). Over the years, a consensus has emerged that formal and informal institutions incentivize individual behaviour (North 1990), thereby influencing the extent and character of an economy’s entrepreneurial activity (Acs et al. 2008; Stenholm et al. 2013; Urbano and Alvarez 2014). Formal institutions that have been identified as particularly important for entrepreneurship include the protection of private property, tax codes, social insurance systems, employment protection legislation, competition policy, trade policies, capital market regulation, contract enforcement, as well as law and order (Hall and Jones 1999; Henrekson and Johansson 2009; Bjørnskov and Foss 2013). Informal institutions influencing entrepreneurship encompass social capital, trust, individualism, power distance, and uncertainty avoidance (Hechavarria and Reynolds 2009; Taylor and Wilson 2012). In short, the current literature suggests that entrepreneurship takes different forms between countries or regions, inter alia, because of institutional differences (see, e.g., Case and Harris 2012; WEF 2013; Stam 2014).

Accordingly, the literature on institutions and entrepreneurship thus comes up with an eclectic list of institutional factors that may explain entrepreneurial differences between countries. A clear-cut concept of institutions is missing, as well as a parsimonious understanding of the core institutions shaping different types of entrepreneurship. Such an understanding is needed, however, for both theoretical and practical reasons: A parsimonious theoretical framework would enable future research to move away from an eclectic towards a more focused investigation of how specific core institutions influence entrepreneurship. From a practical perspective, such insights are highly useful for all those policy-makers who aim to foster entrepreneurship in general, and distinct types of entrepreneurship in particular.

Consequently, we ask here: How do institutions that are relevant for entrepreneurship form distinct complementary constellations? And which forms of entrepreneurship are facilitated by these institutional constellations?

To address these questions, we use the Varieties-of-Capitalism (VoC) literature to develop a theoretical framework about how distinct national institutions and their complementarities facilitate the development of different types of entrepreneurship. Ever since the publication of its core oeuvre by Hall and Soskice (2001), the VoC literature has become one of the most influential explanations of how national institutions lead to differences in economic behaviour across countries. In line with this literature, we define institutions as the written or verbally agreed ‘rules of the game’ that lead to systematic behaviour on the part of actors (individuals and organisations) (see Streeck and Thelen 2005), in this case entrepreneurs and their ventures.

In a nutshell, the VoC literature illustrates how a distinct and highly parsimonious set of institutions governing the exchange between companies and their national labour markets, financial markets, and research & development (R&D) collaborations lead to different ‘models of capitalism’, translating into different innovation, technology, and production outcomes across economies. These ‘varieties of capitalism’ are considered to be particularly stable because of the complementarities of their underpinning institutions. Institutions are complementary “if the presence (or efficiency) of one [institution] increases the returns from (or efficiency) of the other” (Hall and Soskice 2001: 17).

While the VoC arguments are meant to apply to all sorts of companies active in the manufacturing sector, it is interesting to note that the VoC literature has developed through studies of established firms and the institutions channelling their behaviour. Institutional impacts on establishing entrepreneurial ventures are less researched. By illustrating how distinct institutional constellations are linked to specific types of entrepreneurship, our study also contributes to closing this gap.

We focus our analyses on the United States (US) and those 20 European economies which have been studied most intensely in the VoC literature. Based on factor, cluster, and regression analyses of institutional indicators that are particularly relevant for entrepreneurship, we show (1) how a core set of institutions governing the exchange between entrepreneurial ventures and their shareholders, workforces, and R&D partners differ systematically and in a parsimonious way between countries and (2) how these institutional constellations facilitate the development of different types of entrepreneurship.

To illustrate these points, our paper is structured as follows: Section 2 draws on the VoC and entrepreneurship literatures in order to develop a consistent theoretical framework. We use the framework to develop hypotheses about which types of institutions chiefly influence entrepreneurship. In Section 3, we describe the data and methods we use, while we present the results in Section 4. Finally, Section 5 concludes by discussing the results obtained.

Across the entrepreneurship literature, agreement is broad that distinct types of entrepreneurship occur with different frequencies between countries. In order to explain how such differences are caused by distinct institutional constellations, we conceptualise entrepreneurship in line with Henrekson and Stenkula’s (Henrekson and Stenkula 2016: 71; closely related to Wennekers and Thurik 1999) as:

“the ability and willingness of individuals, both independently and within organisations,

More concretely, we think of entrepreneurship as a continuum which ranges from Schumpeterian entrepreneurship on one end to its non-Schumpeterian counterpart on the other. While Schumpeterian entrepreneurship is characterised as risk-loving, based on radical innovations, and aiming for high corporate growth, non-Schumpeterian entrepreneurship is risk-avoiding and based on imitation, without aiming for corporate growth.

This distinction between Schumpeterian and non-Schumpeterian entrepreneurship can be made at different moments of entrepreneurial activity: First, before the start of a new venture. At that stage, an important distinction is whether the potential entrepreneur perceives good business opportunities or rather is faced with the necessity to earn his or her living (Coad 2009:131; Vivarelli 2013: 1476). Importantly, such perceptions of entrepreneurial opportunities or necessities do not automatically translate into the starting-up of an entrepreneurial venture.

Second, at the moment of venture creation, entrepreneurship differs considerably in the extent of its innovativeness. While the technology-intensity of some (few) ventures is highly innovative in a Schumpeterian sense, thus having the potential for creative destruction (Vivarelli 2013: 1458), many new ventures are less technology intense or are mere imitators copying the business ideas of others. Interestingly, the propensity for innovation generally emerges as a driver of firm growth (Freel 2000; Coad and Rao 2008; Altindag et al. 2011; Corsino and Gabriele 2011), and several studies find a positive relationship between innovation and performance (Vivarelli and Audretsch 1998; Colombo and Grilli 2005).

Consequently and finally, the growth aspirations of founders during the early life of a new venture are an additional important characteristic that distinguishes Schumpeterian from non-Schumpeterian entrepreneurship. While Schumpeterian ‘high impact entrepreneurs’ exhibit high growth aspirations and a propensity for rapid growth (Acs 2008), “most small businesses are best described as permanently small” and thus non-Schumpeterian in their growth aspirations (Henrekson and Sanadaji 2014:1760).

To identify the core of institutions that are most influential to any kind of business activity, the VoC literature draws on the fundamental insights of economic theory (Williamson 1985; Milgrom and Roberts 1992; Teece and Pisano 1998) and the resource-dependence view (Pfeffer and Salancik 1978), arguing that three types of resources are key for any business to operate: finance, labour, and know-how. These resources are considered essential, because companies can only secure them after solving a collective action problem with external economic actors, namely financiers, workforces, and R&D partners. Consequently, institutions that channel the interaction between firms and their financiers, workforces, and R&D partners are considered to be the most economically impactful ones (i.e. they offer comparative advantages). Accordingly, the VoC literature explains how finance-related institutions, labour-market as well as education-related institutions, and institutions governing inter-organisational collaborations take different shapes between countries, thereby leading to different institutional settings on the one hand and different types of corporate behaviour on the other.

In its original form, the VoC literature identified just two different institutional settings, termed Liberal Market Economies (LMEs) and Coordinated Market Economies (CMEs). In LMEs, such as the US or the UK, competition prevails as labour and financial markets are deregulated, so that shareholder capital is available to firms in the short run, while labour is mobile. This deregulated institutional environment leads firms to engage with their business partners in a highly competitive way, thereby facilitating radical innovations. In CMEs, exemplified by Germany, economic actors often engage with each other on the basis of non-market relationships. The institutions regulating financial and labour markets tie shareholders as well as workforces to ‘their’ firm. This, in turn, leads firms to cooperate closely with their financiers and employees, which makes the institutional environment conducive to incremental (technological) innovation (Hall and Soskice 2001).

The dichotomous distinction between CMEs and LMEs initiated a debate about the heterogeneity of CMEs and LMEs, as well as about additional country groups (e.g., Amable 2003; Hancké et al. 2007; Schneider and Paunescu 2012). Accordingly, researchers pointed out that more varieties of capitalism can be observed than CMEs and LMEs. Among the most researched economies, at least two more institutional models have been recognised, namely Mediterranean Market Economies (MMEs) and Eastern European Market Economies (EMEs).

Due to their recent histories of extensive state intervention, firms in MMEs have built specific capabilities of non-market coordination in the sphere of corporate finance, whereby they are characterised by slightly more liberal arrangements in the sphere of labour relations (Hall and Soskice 2001: 21). Overall, MMEs provide moderate levels of social protection with high investments into poverty alleviation and pensions. External shareholders are not well protected, and venture capital from national investors is hardly available. Similarly, national expenditure for education is limited. This firms in MMEs a comparative advantage in low-cost production—with the exception of some niche markets, for example furniture or fashion, where Italian firms compete on incremental innovations and design (Molina and Rhodes 2007).

EMEs have a comparative advantage in the assembly and production of relatively complex and durable consumer goods. These comparative advantages are based on institutional complementarities which combine low labour costs and a skilled population with substantial knowledge of medium-level technologies. Contrary to CMEs, employers in EMEs are unwilling to bear the additional costs of on-the-job training for inexperienced young workers. Regarding financial markets, foreign direct investment is by far the most important source of capital. Domestic bank lending, the second most important source of finance, is dominated by transnational companies (Hancké et al. 2007; Nölke and Vliegenthart 2009).

Importantly, the VoC reasoning about how institutions governing the exchange between established firms and their workforces, financiers, and R&D partners translate into different forms of economic activity can well be applied to entrepreneurial ventures. To begin with finance-related institutions, the VoC literature points out how institutions differ in how they address the principal-agent problem related to the provision of shareholder capital (see Hall and Soskice 2001; Vitols 2001). In short, to be willing to provide funding, shareholders need to be assured that their investment is used in the most efficient way by the corporate management.

In so-called outsider corporate governance systems, most pronounced in LMEs, shareholders have hardly any say in how (their) funds are invested, so that managers have unilateral power to take major strategic and financial decisions. Consequently, shareholders monitor the soundness of managerial decisions chiefly through the development of equity prices on the stock market, which leads corporate managers to maximise return on investment by engaging in high-risk, radical innovation projects (idem).

The opposite applies to so-called insider corporate governance systems, most pronounced in CMEs, which grant shareholders the right to elect their representatives onto a supervisory board with a say in all major strategic investment decisions. This gives shareholders both a say and insights into how their funds are used and, in turn, makes them more patient towards maximising returns on investment in the short run—given in particular that the shareholders on corporate supervisory boards are also major stakeholders of the company, such as suppliers or ‘house banks’. Consequently, the board members often prefer projects based on incremental innovations, as the latter guarantee lower, but more stable and predictable returns over a longer period of time (idem).

Translating these insights to the development of different forms of entrepreneurship, one can expect that outsider corporate governance institutions (typical for LMEs) ‘push’ founders to engage in more Schumpeterian forms of entrepreneurship, whereas founders in insider corporate governance systems find it easier to engage in less Schumpeterian forms of entrepreneurship.

Importantly, though, these VoC arguments chiefly apply to incumbent firms or fast-growing start-ups which are publicly listed or have a size or legal form that requires a supervisory board. Given that most new ventures are rather small, not listed on the stock market, and have a legal form that does not require a supervisory board, the entrepreneurship literature points out that additional finance-related institutions influence the likelihood and conditions with which shareholders provide funds to a start-up company.

Major institutional differences also exist regarding the extent to which national institutions facilitate access to venture capital. To begin with, pension laws foresee different ways in which the funds destined for future retirees are administered. In many Continental European economies (often CMEs), companies are required to take provisions and thus administer huge amounts for future pensions, whereas in most Anglo-Saxon economies (LMEs), individuals need to provide for their pensions. Notably, companies in charge of their employees’ future pensions tend to be more conservative in their investment strategies than individuals. They often choose less risky investment options, hardly investing in venture capital funds. Consequently, the availability of venture capital funds is systematically more limited in CMEs than in the LMEs (Bottazzi and Da Rin 2002; Da Rin et al. 2006).

In addition to national pension systems, tax regulations also lead to national differences in the availability of venture capital (VC). Accordingly, the modern VC industry in the US could not evolve until the tax system was changed in several key aspects (Misher 1984; Fenn et al. 1995): In the 1970s and 1980s, US policy-makers implemented sharp tax cuts in capital gains with legislation allowing pension funds to invest in high-risk securities issued by small and new firms as well as VC funds (Gompers and Lerner 1999; cf. Keuschnigg and Nielsen 2004). Additionally, effective tax treatments of options contracts were needed to enable VC firms to appropriately incentivize founders to foster innovative firms (Henrekson and Rosenberg 2001; Henrekson and Sanadaji 2014). Taken together, we expect that institutions facilitating the availability of venture capital stimulate the development of Schumpeterian entrepreneurial ventures.

Finally, the propensity of shareholders to invest in start-ups depends not only on their rights in case of venture success but also on shareholder rights in case of disagreement with the management and venture failure. Entrepreneurial ventures are often not successful in generating sustainable profits: only about 50% of newly founded firms survive for more than 5 years (Geroski 1995; OECD 2003; Bartelsman et al. 2005; Delmar and Wennberg 2010). In case of failure, shareholders’ possibilities to disinvest depend importantly on the rights of creditors to recover their investments which, in turn, are determined by national institutions. The more easily creditors can recover the funds provided to entrepreneurial ventures, the more likely it is that ventures will be sold piecemeal instead of emerging from the proceedings as a going concern; the more constrained shareholders are in their disinvestment decisions, the more reluctant they are to invest in ventures in the first place.

The above reasoning leads us to the first proposition and hypothesis.

With regard to labour, the VoC literature highlights how national labour-market institutions, as well as the institutions at the basis of national education systems, address this free-riding problem. To begin with labour-market institutions regulating permanent employment, rigid institutions (typical for CMEs)—such as wage-bargaining centralisation, powerful works councils with authority over layoffs, long notice periods, and a pronounced use of competition clauses—tie employees to the same firm for a long period of time. Consequently, both employers and employees are assured that their investment in sophisticated, firm-specific skills will pay off (Hall and Soskice 2001: 25). Employees in rigid labour markets therefore often have in-depth corporate knowledge and long-standing relationships with supplying companies. Such firm-specific skills enable them to autonomously propose and develop improvements that translate into incremental innovations and high-quality products (see Herrmann and Peine 2011) at the basis of stable yet slow-growth forms of entrepreneurship.

The opposite applies to flexible labour-market institutions regulating dependent employment (typical for LMEs), such as wage-bargaining decentralisation, weak works councils, short notice periods, and a limited use of competition clauses. Faced with the possibility of hire-and-fire at short notice, employees acquire general skills that are useful for, and thus adequately rewarded by, all firms needing a certain business function. General skills facilitate radical innovations, and new business ideas as employees are particularly imaginative and flexible in adapting to new corporate environments because of their frequent job changes (see Herrmann and Peine 2011). We therefore expect that flexible labour-market institutions regulating permanent employment will facilitate the development of Schumpeterian entrepreneurial ventures.

Importantly, these arguments from the VoC literature apply to workforces with permanent employment contracts. However, the entrepreneurship literature highlights that entrepreneurial ventures often employ workforces on a temporary basis (in the form of trainees, temp agency workers, or employees with fixed-term contracts) in order to be able to quickly adjust their human resources’ needs to the rapidly changing business development. Yet, national institutions also differ substantially in the extent to which they allow for temporary employment. While flexible labour-market institutions allow for systematic and repeated temporary work, rigid labour-market institutions require temporary work to be changed into permanent employment under specific circumstances. Rigid labour-market institutions thus tie employees to the same firm, whereas flexible labour market institutions have the opposite effect (Golpe et al. 2008; Román et al. 2011). We therefore expect that flexible labour-market institutions regulating temporary employment will facilitate the development of Schumpeterian entrepreneurial ventures.

In order to facilitate entrepreneurship in general, and Schumpeterian ventures in particular, many countries have initiated labour market programmes providing social spending for start-up initiatives. Given that start-up incentives increase the attractiveness of entrepreneurship as a source of income, such programmes influence the career choices of workforces—partly offsetting the impact of labour-market flexibility or rigidity on their career trajectories (Hessels et al. 2007). We expect that the more developed labour market programmes offering start-up incentives are, the more Schumpeterian entrepreneurial ventures will develop within a country.

The above reasoning leads us to the second proposition and hypothesis.

The VoC literature illustrates how rigid labour-market institutions (typical for CMEs) are often complementary to sophisticated national vocational training programmes that train future workforces in firm-specific skills—often in close collaboration with companies needing these skills. Tertiary education programmes, on the other hand, teach general skills that can be used across different companies (Hall and Soskice 2001; Schneider and Paunescu 2012). In line with the VoC reasoning, we expect that countries with less well-developed vocational training systems will lead more workforces to engage in tertiary education and thus, to be better equipped with general skills, facilitating Schumpeterian entrepreneurial ventures.

The entrepreneurship literature also highlights the importance of scientific knowledge for the development of entrepreneurial ventures in general, and Schumpeterian forms of entrepreneurship in particular. Given that Schumpeterian entrepreneurial ventures come up with radically new innovations, they are typically based on technological inventions developed by scientifically oriented workforces. Yet, workforces with scientific skills are not only educated within a country, they are also hired from abroad (Herrmann 2008; Herrmann and Peine 2011). The academic systems of the US, the UK, and the Netherlands are examples of countries that not only offer sophisticated scientific training but also attract high numbers of immigrant scientists. We therefore expect that institutions facilitating the development and attraction of scientific knowledge will facilitate the development of Schumpeterian entrepreneurial ventures.

The above reasoning leads us to the third proposition and hypothesis.

Firms often engage in R&D collaborations with other organisations—such as suppliers, universities, or research labs—in order to jointly develop the know-how needed for the new product or service development (Lundvall 1992; Tate 2001: 444–6). This is particularly true for small entrepreneurial ventures. The VoC literature illustrates the hold-up problem related to such inter-organisational development of know-how. It arises whenever two or more parties seek to appropriate the intellectual property developed by their cooperation partner without having adequately contributed to the development of this know-how (see Rogerson 1992: 777; Klein 1996).

The VoC literature furthermore argues that institutions governing inter-firm collaborations influence the extent to which companies can protect themselves against the theft of intellectual property (IP), depending on the extent to which institutions facilitate the enforcement of R&D contracts between collaboration partners (Tate 2001; Teubner 2001). Two ways are identified: in countries with code-based (‘Continental’) law, typical for CMEs, hold-up is overcome by a fairly predictable outcome of lawsuits because of the clearly pre-defined conditions for IP theft to be present. The obligations laid out in R&D contracts can thus be enforced in a straightforward manner. Given that this limits the risks of IP theft, firms in code-based law systems show a higher propensity to collaborate in R&D processes on a large scale which, in turn, facilitates incremental product improvements rather than radical innovations.

The opposite holds true for countries with a common-law tradition, typical for LMEs, where the case-by-case decisions of judges or lay juries make the outcome of lawsuits unpredictable. Consequently, firms often find it difficult to have the contractual obligations of their R&D collaboration partners enforced by courts. This, in turn, discourages large-scale cooperation and stimulates fierce competition between potential collaboration partners, which is at the basis of radical innovation. We therefore expect that institutions hindering the straightforward enforceability of contracts between collaboration partners will facilitate Schumpeterian forms of entrepreneurship.

While the VoC arguments refer to situations in which well-functioning legal systems are in place, the entrepreneurship literature illustrates that unreliable legal systems prevent entrepreneurial ventures not only from engaging in R&D collaborations but also from any form of radical or incremental innovation. Institutions prohibiting judicial independence, impartial courts, the protection of property rights, and the integrity of the legal system discourage firms in general—and Schumpeterian entrepreneurial ventures in particular—from being innovative, as they cannot protect their innovations from IP theft (Autio and Acs 2010; Stenholm et al. 2013). We therefore expect that institutions facilitating the reliability of legal systems will foster the development of Schumpeterian forms of entrepreneurship.

The above reasoning leads us to the fourth proposition and hypothesis.

Having identified those institutions that are presumably most influential for entrepreneurship, the question arises as to how these institutions relate to each other. Again, the VoC literature offers advice by arguing that institutions are complementary, so that the presence of one increases the efficiency of the other (Hall and Soskice 2001: 17). Amable (2003: 6) offers a useful example: “Flexible labour markets may be more efficient when financial markets allow for a rapid mobilization of resources and creation of new businesses that in return sustain labour demand. Conversely, a more stable employment relationship may be more efficient when a specific pattern of monitoring is implemented in the context of a close relationship between a firm and a bank.” Translating the idea of institutional complementarity to the development of different forms of entrepreneurship, we expect that

To test these hypotheses, we conduct a two-step analysis. In the first step, we use factor and cluster analyses in order to assess whether—and, if so, how—the aforementioned finance-related, labour-market, education and training, and inter-firm institutions form distinct and complementary institutional constellations. In a second step, we then use ordinary least square regression analyses in order to assess how the institutional constellations identified support different types of entrepreneurship. Taken together, our analyses show that different varieties of entrepreneurship exist and illustrate what they look like.

To conclude, what have we learned about the institutional foundations of entrepreneurship? To begin with the institutional foundations, we saw that countries fall into distinct families with regard to finance-related, labour-market, education and training, as well as inter-firm institutions governing entrepreneurship. Interestingly, these institutional families resemble the institutional families identified in the Varieties-of-Capitalism literature rather strongly. This is noteworthy to the extent that the institutions we studied go way beyond the ‘classical’ institutions studied in the VoC literature, because they influence the ease (or difficulty) with which entrepreneurial ventures can acquire different types of finance, labour, and know-how. This, in turn, makes it surprising that the country groups we identify are basically identical to the ones in the VoC literature.

It is furthermore noteworthy that ‘entrepreneurship-relevant’ institutions also seem to form complementarities. Accordingly, we identified different varieties of entrepreneurial capitalism that are best described as LMEs, CMEs, MMEs, and EMEs. LMEs include the Anglo-Saxon economies (Ireland, the UK, and the US) with permissive financial and deregulated labour markets, scientific education systems teaching workforces general skills, and reliable legal systems governing inter-firm collaborations. In contrast, CMEs (including the Continental and Northern European economies) are characterised by somewhat permissive financial and well-regulated labour markets, vocational education systems that teach specific skills to workforces, and reliable legal systems supporting inter-firm collaborations. MMEs (including France, Italy, Portugal, and Spain), in turn, are characterised by somewhat constraining financial institutions and constraining labour markets, education systems that mostly teach basic skills to workforces, and unreliable legal systems that make inter-firm collaborations difficult. Finally, EMEs are characterised by constraining financial and well-regulated labour markets, education systems that mostly teach basic skills, and unreliable legal systems that hamper inter-firm collaborations.

It is furthermore interesting to note that these institutional constellations support different types of entrepreneurship. While entrepreneurs in CMEs outrank their counterparts in all other economies in the extent to which they perceive business opportunities, this optimism does not fully translate into the creation of Schumpeterian entrepreneurial ventures: On the one hand, entrepreneurs in CMEs create more high-tech ventures than entrepreneurs in EMEs and MMEs, but on the other, they also create more low-tech ventures than their counterparts in LMEs, whereby these ventures are characterised by limited growth overall. Contrary to that, entrepreneurs in LMEs are less optimistic than entrepreneurs in CMEs about possible business opportunities, but outperform their counterparts in other economies when it comes to actually founding Schumpeterian high-tech and medium-low-tech ventures, which also grow quite substantially. In contrast, entrepreneurs in EMEs are not overly optimistic about possible business opportunities. Furthermore, they are outperformed by entrepreneurs in both LMEs and CMEs in setting up high-tech ventures. However, EME entrepreneurs are decisively better in setting up medium-low-tech ventures than their counterparts in CMEs and MMEs alike. Importantly, though, the ventures established show little sign of substantial growth. Finally, Schumpeterian entrepreneurial activity is least developed in MMEs: This is true for both possible business opportunities as well as the start of Schumpeterian ventures. Accordingly, MME entrepreneurs are decisively more pessimistic about possible business opportunities and hardly set up any high-tech or medium-high-tech ventures compared to their counterparts in all other economies. At the same time, entrepreneurs in MMEs outperform entrepreneurs in all other economies in the extent to which they set up low-tech ventures, whereby these ventures basically do not grow substantially.

What implications do our findings have for policy-makers? In a nutshell, we show that distinct institutional constellations facilitate the emergence of distinct forms of entrepreneurship. Importantly, this means that policy-makers need to be aware of the implications that regulatory changes in the institutional environment will have. To be clear, the institutional environment that is most conducive to Schumpeterian forms of entrepreneurship is a deregulated financial and labour market, making rapid investments and disinvestments both easy and financially attractive, while limiting the protection of dependent employment. The Anglo-Saxon economies in general, and the US in particular, provide the most clear-cut examples. To facilitate more Schumpeterian—that is, radically innovative, high-growth—entrepreneurship in Continental, Southern and Eastern Europe, policy-makers would thus need to deregulate both labour and financial markets. Given the complementarity of the different institutions underpinning labour and financial markets, a partial flexibilisation would—in our view—hardly be successful! The case of the Dutch economy provides a particularly telling example, as the tax breaks introduced about a decade ago led to a steep increase in solo self-employment without having the desired effect of facilitating high-growth entrepreneurship (Liebregts 2016).

But is the full-fledged deregulation of labour and financial markets actually desirable? In our view, this is not necessarily the case. While the protection of dependent employment has a negative impact on the development of radically innovative, high-growth entrepreneurship, it stimulates the development of incrementally innovative, slow-growth entrepreneurship, as exemplified by numerous Continental European countries. Only when employment protection becomes stifling for the employing firms, so that vacancies are no longer created because it is impossible to dismiss employees in case of economically harmful behaviour (as this is the case in most Mediterranean economies), then labour market reforms are opportune. But even in these instances, constraining labour and financial market institutions leads to entrepreneurial specialisation, namely the development of low-tech, no-growth ventures. In more general terms, any form of financial and labour-market constellation in Europe facilitates the development of distinct entrepreneurial forms. In other words, an institutional constellation that is equally conducive to radically innovative, high-tech, high-growth; as well as to incrementally innovative, medium-tech, low-growth; as well as to imitative, low-tech, no-growth entrepreneurship does not exist and cannot be created! Policy-makers will always be faced with trade-offs.

Furthermore, one should keep in mind that the regulation of labour and financial markets and thus, their deregulation, not only serves the purpose of stimulating distinct forms of entrepreneurship. They have broader societal aims, so that the deregulation of labour and financial markets also has effects that may be societally undesirable. To give just some examples: Strong wage inequalities and increasing disparities between the rich and the poor, as well as systematic underinsurance against the risks of disability, old-age poverty, and illness are also typical characteristics of deregulated labour markets. Similarly, high capital market volatility and risky investments go hand in hand with deregulated financial markets. In short, a ‘perfect’ institutional constellation that stimulates Schumpeterian entrepreneurship while facilitating social cohesion does not exist and cannot be created either!

Furthermore, policy-makers may wonder whether the stimulation of radical-innovation, high-growth entrepreneurship is actually necessary. In the entrepreneurship literature, Schumpeterian ventures are often described as superior because they are more conducive to growth and thus, to the creation of employment. This idea is supported by our analyses, as we find that the innovation-oriented entrepreneurs in LMEs display higher growth ambitions than entrepreneurs in the other countries studied. Importantly, though, radically innovative entrepreneurship is also more volatile. As indicated by our analyses, radically innovative ventures not only grow more strongly, they also fail more frequently: Accordingly, we did not find more sustainable venture creation rates in LMEs than in other economies as soon as corporate failure (or exit) rates were considered together with venture creation (or entry) rates. Hence, Schumpeterian entrepreneurship does not necessarily mean employment and growth that is sustainable. On the contrary, incrementally innovative, medium-tech and imitative, low-tech entrepreneurship are more stable and thus, more reliable and may, in the long run, therefore be equally viable ‘engines of economic development’. In sum, the stimulation of—and specialisation in—the same type of radically innovative, high-tech, high-growth entrepreneurship across the developed Western economies seems to be neither desirable nor necessary.

Does this mean that policy-makers cannot, or do not need to, proceed to any institutional reform? In our view, this is not the case either. For starters, our analysis clearly demonstrates the importance of reliable legal systems that facilitate inter-firm collaborations. These are the fundamental rules of the game, and we conclude that all member states must ensure that these rules are stable and secure. As for the rules governing labour and financial markets, although flexibilisation is likely desirable here as well, things are more equivocal: Clearly, there are different trajectories that countries can take in this respect, but they should be taken with awareness of the extant complementarities between the different sets of institutions. For instance, Denmark’s flexicurity model, which combines generous welfare systems with weak job security mandates (Andersen and Svarer 2007), can provide an example for other CMEs. In Ireland’s progress in entrepreneurial activity, access to loan finance and credit facilities from banks has been identified as a constraint for entrepreneurial activity. Our findings here would suggest that following a similar strategy in terms of financial institutions to the ones in the United States and the United Kingdom would be more useful than introducing reforms where banks or government provide funds, which is a strategy followed in countries such as Denmark that have a social democrat model. In conclusion, our findings in this paper highlight the necessity of identifying entrepreneurship policies that correspond to the diversity in the institutional structure in Europe.

That said, we call for some caution not to draw overly general conclusions from our research since it is not without limitations. First, it only provides a snapshot of institutions over a limited time period, and therefore hardly illustrates all possible changes occurring in institutional structures. Yet institutional evolution has been far from unidirectional, and institutional reversals are common throughout history (Acemoglu and Robinson 2012). A historical study of the evolution of institutional diversity therefore constitutes a first important avenue for future research. Second, variation exists within countries at the level of states, regions, and individuals. To better understand the complex relations between institutions and individual behavior, a multilevel analysis would be desirable, examining how institutions influence individual entrepreneurial behavior not only at the country level, but also at the level of states or regions. A further investigation of these issues constitutes a second avenue for future research.