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 Vice President of Innovation and Research at Singularity University and Arthur & Toni Rembe Rock Center for Corporate Governance at Stanford University. His other academic appointments include Harvard, Duke and Emory Universities as well as the University of California Berkeley.
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.