What Spain could learn from a former colony

Correction: An earlier versions of this column stated that Spain does not have the concept of limited liability. Spain does have limited liability protections, however they are markedly different from those in the United States. This version has been clarified to note that the U.S. concept of limited liability does not exist in Spain.

Vivek Wadhwa
Contributor, Innovations September 18, 2011

I recently traveled to Bilbao, Spain, to talk to government administrators, business people and academics about growing an entrepreneurial economy. With 21 percent unemployment and a sinking economy — dragged down by massive government debts and the aftereffects of a real-estate bubble implosion — Spain badly needs a burst of entrepreneurship. After all, the Spanish and U.S. economies don’t differ greatly. In Spain, just as in the United States, start-ups create the majority of new jobs. And in Spain, an even larger chunk of the economy than in the United States is fueled by small businesses. There, small and medium enterprises supply 79 percent of all jobs. Because of Spain’s participation in the euro zone, however, it cannot devalue its currency to inflate its way out of its current and sizable debt overhang.

That leaves Spain with two challenges: growing its economy out of a deep debt hole and breaking the grip of widespread and debilitating unemployment. Given this, one would think that the Spanish government would push hard to generate entrepreneurial jobs. To the contrary, Spain remains a valley of death for entrepreneurship. Clearing the bureaucratic hurdles to start a business requires 47 days as compared with seven or eight days in France or Portugal, respectively. The World Bank recently ranked Spain 147th of 183 countries for ease of starting a business. The Democratic Republic of Congo was ranked 146th.

Vivek Wadhwa is a fellow at Rock Center for Corporate Governance at Stanford University, director of research at Center for Entrepreneurship and Research Commercialization at Duke, and distinguished fellow at Singularity University. His past appointments include Harvard Law School, University of California Berkeley, and Emory University. View Archive

Those dismal statistics are fueled by backwards economic policies that not only discourage entrepreneurship but also stunt all economic growth. The Spanish government tightly regulates the labor market and makes hiring and firing almost prohibitively expensive. Social security taxes paid by a company to the government on behalf of an employee can come close to matching the gross salary of that worker. Firing employees is expensive because businesses often must give the departing workers big severance checks or must continue to pay their salary for many months. Naturally, under these conditions, employers are unwilling to hire new workers.

Paying workers in stock options is also expensive in Spain. According to Joseph Haslam, a professor at the IE Business School in Madrid, setting up a stock option plan can cost more than $200,000 in legal fees and will incur additional red tape. The legal and tax systems, according to Haslam, strongly discourage friends and family from investing — the lifeblood of early-stage start-ups. Then there’s the fact that Spanish banks are unwilling to loan money to companies with no assets. It’s a perfect capital-squeeze Catch-22 that perpetuates itself as it chokes off start-ups in need of cash to build a product and grow.

Should an entrepreneur be lucky enough to actually launch a company, he or she had better pray to make it, because the U.S. concept of limited liability does not exist in Spain. So, debts incurred by a company — including social security debts owed to employees — transfer back to the founders of the company if the company goes belly up. This makes employees that much more costly, because the debt they can incur becomes an albatross preventing the founder from moving on and launching another company. Not surprisingly, Spanish start-ups that should have closed sometimes try to stay open even if they are not growing — all in an attempt to avoid dumping a tax burden on the business owner.

Collectively, these factors serve as a perfect storm of disincentives for Spanish start-ups and have embedded risk aversion deep inside the Spanish psyche. So it’s not hard to understand why few young Spaniards are interested in technology start-ups and why those that are tend to want to leave Spain for greener pastures abroad. Nathan Ryan, an American-born professor teaching at Universidad Carlos III de Madrid in Spain, has found that his students are generally not aware that starting a tech company is a viable option. In fact, Ryan said that during his three-year tenure in Spain, not a single student has discussed starting a company. Rather, his students prize government jobs or jobs at large Spanish corporations in banking or telecommunications.

Spain also erects immigration and work permit policies that impede skilled foreigners from working in the country. Immigrants have to prove they are creating jobs and foreign investment in Spain— not taking away the job of a local. An example of this is Katelyn Melan, a U.S. citizen who graduated from Northeastern University with a bachelor’s of science in international business. She began working with local entrepreneurs in February to launch Tetuan Valley, a Silicon Valley-style incubator. I met Katelyn in Madrid, and in an e-mail exchange, Melan said she has spent three months trying to submit a work-visa application. The government keeps rejecting her application on minor technicalities. “We unsuccessfully tried once to turn in the application by ourselves based on the process we were given by a government agency on how to do it,” Melan wrote. “We ended up missing things that were written nowhere, and we were given incorrect information about the appointment.”

Taken all together, these factors explain why Spain lacks a vibrant start-up culture and struggles to get high-growth small companies to set up shop in a beautiful country with exquisite food and mild climate.

Spain desperately needs to get rid of bureaucratic obstacles and implement a program such as Start-up Chile. Chile faced the same cultural obstacles toward entrepreneurship as Spain. The Chilean government realized that the best way to fertilize the local entrepreneurial ecosystem was to import entrepreneurs. So last year, it launched a program that eliminated the red tape and offered $40,000 and free office space to foreign entrepreneurs who would move there for six months. In Santiago, entrepreneurship is booming and attitudes are changing. Spain needs Start-up Chile even more than its former colony Chile does.

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