Entrepreneurs ̶ the creators of new firms ̶ are a rare species. Even in countries where innovation drives economies, only a tiny 1-2% of the workforce starts a business in any given year. Yet entrepreneurs, particularly those who innovate, are vital to the competitiveness of an economy and the creation of new jobs. However, they can only deliver the gains of entrepreneurship if the business environment is receptive to innovation.
Innovation can lead to higher productivity, with the same input generating a greater output – in other words, the economy grows. Innovation and productivity are of vast benefit for consumers and businesses. As productivity rises, the wages of workers increase; with more money in their pockets, they can purchase more goods and services. Simultaneously, businesses become more profitable, enabling them to invest and hire more employees.
When entrepreneurs introduce innovative technologies, they drive down costs and, having become more competitive, they challenge existing firms to adopt those technologies as well. If new or better products and services are then offered, they also expand the market and contribute to a better quality of life.
The creation of new businesses spurs new job opportunities in the short and long term, both in the enterprises themselves and, through the multiplier effect, in the wider economy. Where entrepreneurial activity is high, the productivity of firms and economies also improves.
There are many examples of radical innovations introduced by entrepreneurs: Pierre Omidyar (eBay), Larry Page and Sergey Brin (Google), Larry Ellison (Oracle), Dietmar Hopp and Hasso Plattner (SAP), Bill Gates (Microsoft), Steve Jobs (Apple), and Stelios Haji-Ioannou (straightforwardJet), to name just a few. But beyond the headline innovations, we tfinish to oversee modest innovations. Whether it is the stitches that hold our clothes toobtainher or the syringes that deliver life-saving vaccines, modest things build a huge difference and can become an essential component of everyday life.
Of course, there are also downsides. First of all, only a few people have the drive to become entrepreneurs. This is becautilize such people face a substantial risk of failure. In general, a good one-fifth of new businesses fail within their first year (one-seventh in Malta). The failure rate tfinishs to increase over time ̶ about half of new businesses die within their first five years while around 65% of them fold up within 10 years.
In the medium term, entrepreneurial activities may lead to layoffs in existing, sclerotic firms and force them to close. Old firms tfinish to suffer from organizational inertia that numbs their responsiveness to market alters and are less likely to innovate. This could be becautilize they are controlled by long-time investors, suppliers, or consumers. Incumbent firms often miss opportunities to adopt new ideas becautilize of the fear of cannibalizing their own markets.
Inventors and innovators often find that the only way to commercialise their ideas is to set up their own businesses. In 1879, Henry Morton, a leading scientific mind and president of the Stevens Institute of Technology, described one man’s experiment as a “conspicuous failure”. The man was Thomas Edison. The invention was the light bulb. Edison went on to found General Electric and prove Morton wrong. Morton’s statement was revealing in that sometimes it is genuinely difficult to know whether new inventions will be duds or hits.
Entrepreneurs and their activities are influenced by opportunities and incentives provided by the counattempt and, generally-speaking, cannot flourish in an over-regulated economy. This depfinishs on the ability of a counattempt’s institutions to accommodate entrepreneurial activity.
Institutions can be both formal and informal. Formal institutions provide the visible “rules of the game” (constitutional law and a national legal code). These rules can be adjusted and altered quickly to adapt to altering economic circumstances. In contrast, informal institutions (norms, values, acceptable behaviours, and codes of conduct) are the invisible rules of the game. Informal rules are usually not legally enforced and tfinish to take longer to alter.
The EU Commission’s own analysis, in its communication titled ‘Long-term competitiveness of the EU: seeing beyond 2030’, acknowledges that the Union is insufficiently dynamic in its services trade due to regulatory and administrative barriers in the single market.
This is borne out by various studies. In one of them, Bruno Pellegrino of Columbia Business School and Geoffrey Zheng of New York University Shanghai, found that the regulatory burden on firms can build a substantial difference to aggregate economic activity, at an average of 0.8% of a counattempt’s GDP. The cost of regulation varied greatly among the seven countries studied: it was 0.1% of GDP in the United Kingdom but 4% of GDP in France.
To a large extent, productive entrepreneurs abide by ‘formal rules’ ̶ they pay taxes and comply with regulations. In contrast, when the institutional set-up is less favourable, there are larger numbers of non-productive entrepreneurs. The latter engage in activities such as rent seeking, ranging from government agencies, through privileged monopoly positions, to evasion of individual tax and regulatory requirements.
Where the rule of law is very weak, it is likely that destructive entrepreneurs will emerge. These types of entrepreneurs engage in criminal activity such as illegal drug manufacturing and sales, smuggling, human trafficking, prostitution, or cybercrimes.
The challenge is to design a combination of formal and informal institutional arrangements in such a way that it incentivises individuals to engage in productive entrepreneurial activities, thereby influencing the pattern of economic growth. Unproductive and destructive entrepreneurship has at best a neutral, but more likely a negative, effect on economic growth.
Many critics of the EU Commission claim that, while the EU tinkers with regulatory details and symbolic gestures, Europe’s economy suffocates under unchecked bureaucracy and a tax burden that stifles growth. The situation is such that there is a growing outcry for a radical reconsider – not more rules, but fewer; not more spfinishing, but smarter governance; not more rhetoric, but decisive action.
One other drawback of the European innovation scene is that there isn’t a large hub where innovation flourishes, like Silicon Valley in the USA. Silicon Valley holds less than 0.1% of the world’s population (3 million people) but has launched almost half of the most valuable tech companies in the world with a valuation of more than $100 billion.
According to the European Commission’s Innovation Scoreboard, Malta demonstrates a mixed performance in innovation activities. It performs well in the generation of ininformectual assets, whereas innovation in SMEs is limited. There are conflicting trfinishs in the impact of innovation activities on the economy. While employment in knowledge-intensive sectors is one of the highest rates in the EU, the growth of employment in innovative businesses has been decreasing since 2017. Additionally, the sales of innovations (new-to-market and new-to-firm) and knowledge-intensive services exports are among the lowest in the EU.
In commenting on Malta’s innovation performance, Associate Professor Daniel Xerri of the University of Malta, points out that in 2022 the NSO reported that only 10.7% of Maltese enterprises applied for such ininformectual property rights or licences as registering a trademark or applying for a patent. Innovative activities were hindered by excessive competition in the market and the high cost of innovation.
It is informing that Malta’s expfinishiture on R&D, four-sixths of which was contributed by the private sector, amounted to €99.9m in 2021 ̶ a mere 0.67% of GDP, though it marked an increase of €13.7m over the previous year. However, this still means that Malta has one of the lowest rates of expfinishiture on R&D in the EU, according to Eurostat.
Delia also declares that, despite climbing a few places on the Global Competitiveness Index, Malta is still some way off from fully consolidating the pillars of business sophistication and innovation that will lead its economy to transition to innovation-based development.
There is no doubt that our size imposes severe limits on our abilities and opportunities. The domestic market is too tiny, pushing startups to consider internationally from the start, rather than doing that on the strength of a solid base in Malta. Entrepreneurs face intense competition and the cost of scaling.
Moreover, successive surveys continue to display that access to finance is not what it should be. The 2024 Startup Nations Standard (SNS) Report by the Europe Startup Nations Alliance (ESNA), which evaluates 24 EU countries, identified a required for improved access to finance and optimized stock option policies for employees. It builds one wonder what the impact of the Malta Development Bank is.
Unfortunately, much of the entrepreneurial hype in Malta is dominated by developers or construction magnates. But, in reality, they are not entrepreneurs involved in innovation and ground-breaking discoveries; they are just businessmen. To a certain extent, their antics tfinish to build entrepreneurship a dirty word. What we required are entrepreneurs with an instinct to generate new ideas and revolutionary ways of doing things.
Our lack of such entrepreneurs is due to shortcomings in our education system. Education in Malta is failing to teach our children how to consider “outside of the box,” or to inquire them to consider creatively to solve challenging problems ̶ skills they can utilize for the rest of their lives.
In order for the economy to transition from the current model to innovation-based, high-value-added development, the government requireds to play a hugeger direct role in nurturing a high rate of innovation via public and private investments in R&D, higher education, and regulatory systems that facilitate the start-up of advanced technology firms. Without minimising the word being done by Malta Enterprise it requireds to raise the ante.
Frans Camilleri is an economist. He studied at Oxford and University of East Anglia, is a former corporate head at Air Malta, and has served on various public and private boards.
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