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Smoothing the path for new firms: Are we in it for the long haul?

Smoothing the Path for New Firms

An increasing number of startup-savvy policymakers throughout the United States and around the world are racing to build better entrepreneurial ecosystems to create jobs and generate real economic growth, but real results don’t happen overnight.

I spent this past weekend in Italy with representatives of the Ministries of Education, Economic Development and Foreign Affairs, speaking at startup conferences and a Maker Faire, and discussing plans for Italy’s upcoming hosting of the Global Entrepreneurship Congress in March 2015. It provided me with some insights into the challenge for policymakers trying to sustain public support for measures they implement with long-term horizons.

Two years after the Italian Ministry of Economic Development launched an ambitious package of actions (Decreto Legge Crescita 2.0) aimed at turning the country into a startup hub, short-term results are far from jaw-dropping. At a festival on Sunday afternoon in Ferarra, I was reminded about how tough it is for policymakers to sustain their efforts to remove regulatory burdens for new and young firms. During one of the panels I served on, Massimo Sideri, the moderator from Corriere della Sera, got into a heated discussion with Mattia Corbetta from the Ministry of Economic Development and flatly declared their Ministry’s startup policy efforts already a failure – just months after their implementation.

Hold on. Italy only embarked on a path to experiment with different policy levers in 2012, beginning with fiscal incentives and labor law flexibility, and then, like Canada did earlier this year, the Ministry of Economic Development and Ministry of Foreign Affairs launched a startup visa program — a bold move other nations like the United States have not been able to accomplish. This immigration measure, effective as of June 2014, targets non-EU entrepreneurs who wish to found innovative startups in Italy. In return, the government offers a quick startup visa process of approximately 30 days. The procedure can move even faster if the applicant has already secured space and financing from an Italian certified incubator. The startup visa website offers a map of the ecosystem by sector, showing startups and incubators. A more complete map is the downloadable Who’s Who Guide.

To access incentives and programs set up in the Crescita 2.0 legislation, startups must qualify as innovative and register as such. According to the legislation, an innovative startup is one that develops, produces or commercializes products or services with high-technological value. To ease this process, the Italian Chamber of Commerce established a cost-free registry of innovative companies that is updated weekly for the public.

When I last looked at the registry, Italy had 2,685 innovative companies, with three northern regions showing the greatest concentration of them: 578 in Lombardy (home to Milan), followed by 287 in Emilia-Romagna (home to Bologna), and 243 in Lazio (home to Rome). 30 of the startups listed had one million Euros or more in annual revenues, and 128 of them directly employed five or more people.

The number of startups choosing to register in this system has increased rapidly since its implementation, averaging about 30 new startups per week over the course of 2014. Still, these numbers do not impress when compared to other ecosystems in Europe. While criteria to register and the incentives to register might differ, London alone is home to a similar concentration of startups as the whole of Italy. However, as Federico Guerrini’s article on ZDNet pointed out, Italy’s performance is “certainly still an improvement on the situation just a few years ago, when the innovation ecosystem in the country was restricted to a few dozen players.”

The work of tackling regulatory bottlenecks is still in its infancy in Italy and such patchwork efforts will not be able to counterbalance complex bureaucracy overnight. Some are calling for more active interventions in the ecosystem beyond just removing roadblocks (e.g. funds of funds), but as Nicola Zingaretti, the Governor of Lazio told me this weekend, whatever actions are taken, it is going to take a long time to change the culture of Italian bureaucracy and embedded public expectations.

Globally, Italy stands at 112 in the World Bank ranking of 189 economies on the ease of starting a business. The process to start a business requires 11 procedures, which altogether take almost 234 days to complete. It is therefore no surprise that a large portion of new Italian businesses remain in the informal sector, where their chances for growth and impact on the economy are low. Furthermore, according to the OECD, barriers to starting-up a corporation in Italy are significantly more demanding than those faced in becoming a sole proprietor.

Startup communities, as well as their current supporters both in and around government that are already convinced of the importance of new scalable firms to the economy, need time to scale a broader cultural shift around governments and value creation. They have to change people’s view of government’s role in entrepreneurial development into being just one (albeit a vital one) of several feeders to entrepreneurship communities and ecosystems, as opposed to being the main top-down, silver bullet program funder in charge.

To do this, they will also have to capitalize on research and experience from other ecosystems when evaluating policy moves and testing incentives. For example, the original package of the Italian government’s recent actions also included the certification of incubators, which amount to 31 to date across the country, and the immigration program for entrepreneurs uses that database. However, studies have failed to show evidence that incubator firms perform better than non-incubator firms.

Secondly, an OECD Entrepreneurship at a Glance 2014 report found that the presence of entrepreneurial role models is very important for supporting entrepreneurial intentions in Italy. This was already apparent in the 2012 Flash Eurobarometer on Entrepreneurship, when 86 percent of Italian respondents said a role model is needed (vs. 43 percent in Denmark, for example). Better use of new innovative Italian rock stars emerging on the global scene (e.g., Glancee and Candy Crush), might help with advancing the cultural shift within the public at large.

Thirdly, Italy has also yet to fully leverage dynamic entrepreneurialism in its less-developed, agricultural South. Rural technology adoption in Italy is fairly limited relative to its potential as a home to world-renowned food tradition. With Mediterranean countries launching initiatives on Agtech, Italy has a chance to embark on a movement of regional force.

All of this takes time. Healthy entrepreneurial ecosystems grow organically. There is no formula and they are not built overnight by one or two lead actors and especially not by governments. It is a collective team effort that requires those currently used to being in charge – such as established companies, families, and governments – to have faith and to follow as much as they lead. The big question though is whether Italians, or citizens of any nation for that matter, who aspire for a steady flow of new innovative scalable firms that employ more of their own citizens and unleash more national innovations, have the patience to let new policy experiments play out.