ENTREPRENEURSHIP IN THE NETHERLANDS 4.2.1 State of Entrepreneurship
4.4 GOVERNMENT POLICY .1 Introduction
4.4.3 Government Intervention in the Dutch Economy
The Polder Model
When studying the impact of government policy on the level of entrepreneurship in the Netherlands, we cannot ignore the so-called Polder Model. After the economic recessions of the 1970s and the early 1980s, the Netherlands faced a high wage rate and a correspondingly low profit share in value added, a high unemployment rate as well as a low labor participation rate, and a huge government deficit. In those days this was often referred to as ‘Dutch disease’. In the early 1980s a trilateral agreement was made between the employers’ organizations, employees’ organizations and the government (Thurik, 1999). Employers would abstain from massive lay-offs;
labor organizations would abstain from striving for higher wages and work on further refinement of the social security system and the government would create order in its financial household, maintaining a sufficient welfare safety net and encouraging companies to act in the public interest.
This was done by providing tax cuts to companies while stimulating them to hire long-term unemployed, low-paid workers and providing other facilities, such as apprenticeship schemes and child-care facilities.
The trilateral agreement and the slipstream of events it produced reflect a remarkable degree of consensus within Dutch society usually referred to as the Polder Model.22 Government policy consisted of the following five basic ingredients: restructuring public finance, creating a stable monetary climate,
restructuring social security, wage moderation and improving market functioning. These ingredients have undoubtedly contributed to economic revival in the Netherlands in the period after their introduction in 1982. The basic conditions of restructuring social security, wage moderation and improving market functioning are dealt with in subsequent sections, where they will be explicitly related to the level of entrepreneurship.
The first two goals, dealing with creating a healthy financial climate, are assumed to only indirectly stimulate entrepreneurship through financial stability. In combating the economic decline in the 1970s and the early 1980s, public expenses increased substantially (Hogenboom and Van Vliet, 2000). Because public revenues stayed behind, the government deficit increased. In response the deficit has been diminished over the years reducing public expenses. A healthy financial climate also includes a stable monetary environment. This was for a large part accomplished in 1983 through linking the rate of the Dutch Guilder to that of the German Mark.
The price level stabilized and the Netherlands benefited from the German monetary reputation, leading to a decrease in the real interest rate. Moreover, revenues of the export of Dutch products (to Germany) were secured.
It is argued that the Dutch above average growth in the 1990s (the ‘Dutch Miracle’) is due to two sets of different policy measures (Thurik, 1999). The first set of measures is that produced by the Polder Model in the 1980s, when multilateral agreements cured the ‘Dutch disease’. This first phase primarily dealt with removing labor market rigidities and adapting the institutional environment. The second set of policy measures is related to the transition to the entrepreneurial economy, taking place in the 1990s.23 This phase dealt with removing output market rigidities and deregulating the institutional environment. The policy measures of the first phase aimed at diminishing the constraining effect, whereas the policy measures of the second phase focused on enabling and stimulating free flows of people and goods.
Over the past 20 years the economic situation in the Netherlands has changed dramatically. While unemployment was extremely high in the early 1980s, at present it has virtually disappeared. The labor market shows signs of ‘overheating’: wage increases are no longer moderate and the inflation rate is picking up. Accordingly, it may be argued that the Polder Model is history, and a focus on innovation, life-long education and entrepreneurship now seems a more likely and more suitable economic policy model.24
Macro-Economic Policies
Social Security and Income Disparity
Social security and income disparity are interrelated factors. A high level of social benefits is assumed to lead to a low disparity of incomes that again is assumed to have a negative impact on the rate of business ownership.25 Within the framework of the Polder Model the Dutch government in 1982 abandoned the so-called koppelingswetgeving that tied wage levies to social benefits. This created room for more income inequality. Moreover, the level of social security has been reduced by decreasing both the number and the level of social benefits (Hogenboom and Van Vliet, 2000).
In Table 4.4 developments in the dispersion of incomes in the Netherlands is presented. It can be concluded that until the late 1970s the income share of the lowest (20 percent) incomes increased. As compared to 1959 income disparity diminished in 1990, as represented by the decrease of the Gini coefficient from 0.375 to 0.312.26 Since 1995, income differences tend to increase (Trimp, 1999). In addition to studying the developments in income disparity over time, developments in income disparity can be studied in comparison to other countries. From an international perspective the Netherlands have a relatively low level of income disparity. Countries, such as France, the United Kingdom and the United States are characterized by a higher level of income disparity.27
In the 1980s the Dutch government, together with their social partners, i.e., organizations representing employers and employees, agreed to wage moderation to increase international competitiveness. This wage moderation is likely to have contributed to entrepreneurship in the Netherlands because of higher incentives for people to become self-employed and lower costs of hiring employees (Bosma et al, 2000).
When comparing the average real disposable income for the self- employed, the employed and the unemployed, self-employed people have the highest income (CBS, 1996). However, the difference between income groups has not been constant over time. Until 1977 the disposable income of all groups increased and after this increase, especially the incomes of the employed and the unemployed decreased. This decrease continued until the mid-1980s, followed by a slight increase and, subsequently, stabilization (Kuipers et al., 2000). The income level of the self-employed shows a different development. At the end of the 1970s and the beginning of the 1990s the income level decreased, while it increased in the other periods.
Although the income of the self-employed is highest of all mentioned income groups, it is the least stable. Furthermore, the difference between the income of employed and self-employed people is diminishing.
In addition to real income differences, the difference in social benefits between self-employed and wage-employed people can be a factor in the decision to start a business or to continue an established business. The Netherlands are characterized by a universal social security system, in which all residents, whether wage- or self-employed, are insured against the same risks within one scheme. However, the earnings-related social insurance on top of the basic insurance is limited to employees (Baenen and Visser, 1996). As compared to other countries, such as the United Kingdom, Belgium and Germany, the Netherlands do not maintain a scheme for protecting the self-employed against the risk of short-term incapacity for work. However, the risk of long-term incapacity to work is insured. The level of these benefits approximates the subsistence level and the benefits may last until the retirement age (Baenen and Visser, 1996). With respect to social support, the Netherlands has the highest level of benefits and the Netherlands is the only country with separate schemes for self-employed people.28
Taxation
The height and type of taxation in a country can have impact on entrepreneurship. Higher income tax rates can diminish the returns on entrepreneurship. This may inhibit entrepreneurs to start new ventures and make failure of established businesses more likely as it erodes the financial basis of the firm.
In the Netherlands self-employed people can pay either corporate income tax or personal income tax. Personal tax is often preferred to corporate tax by self-employed with a low taxable income. This is the case for a majority of the Dutch small business owners, and, in particular, for most starting entrepreneurs. The average effective profits tax rate in the Netherlands is
approximately 30 percent, which is within the average range of tax rates in OECD-countries (OECD, 1998, p. 181).
The Dutch government has taken several measures affecting taxes paid by the self-employed. The first set of measures affects the income of the self-employed. An important measure is the tax deduction for the self- employed (zelfstandigenaftrek) introduced to preserve the entrepreneurial income. In addition, there is the opportunity of a fiscal old-age reservation (fiscale oudedag reserve), in case financial means are utilized within the business, and a tax deduction for partners of the business owner who are employed in the business (meewerkaftrek) (EZ, 1999). Second, measures have been taken affecting entrepreneurial behavior. These measures relate to stimulating investments in R&D and durability, as well as increasing the education and skills level of employees through a deduction on training expenditures. Third, there are specific measures affecting finance and investment. The Dutch tax system favors debt financing over equity financing and retained earnings over new equity investment. This may be attributed in part to the double taxation of dividends and the absence of a capital gains tax (OECD, 1998). A specific type of fiscal legislation aimed at stimulating investments is the investment deduction (investeringsaftrek). In addition, the so-called Tante Agaath measure was introduced to stimulate family members, relatives and friends of the entrepreneur to invest in the business by making the investment partly tax deductible. Banks have used this measure to set up funds in which people can invest and deduct taxes.
Finally, the Dutch tax system includes different fiscal regulations to explicitly fit the needs of businesses in different phases. There is a deduction opportunity for starting entrepreneurs. For growing businesses there is a regulation that streamlines the transfer from income tax to corporate tax payment. In the Netherlands an important bottleneck is the existence of taxes inhibiting the succession of a business. The tax legislation related to bankruptcy is currently under revision.
The importance of the fiscal measures is demonstrated on the basis of their significance for the revenue of small businesses. The fiscal measures account for 24 percent, i.e., 16,000 Dutch guilders, of the revenue earned by each unincorporated self-employed worker in 1999 (EIM, 2000). In the period from 1995 to 1999 these fiscal facilities increased with an average of 4 percent per year. Most of this increase is due to the tax reduction for the self-employed (EIM, 1997 and 1999).
Regulation of Dynamism
Establishment Legislation
Establishment legislation is aimed at preserving the quality of entrepreneurship. It involves acquiring relevant knowledge and skills.
However, the magnitude and complexity of establishment legislation is likely to hamper entrepreneurial activity.
In the Netherlands establishment legislation was implemented in 1937 to reduce the number of start-ups, thereby protecting established entrepreneurs, consumers and investors. The establishment legislation requires starting entrepreneurs to have knowledge and skills that are necessary to run a business. In 1996 the Dutch establishment legislation was simplified because it was considered a barrier to entrepreneurship rather than a quality preserver. The simplified legislation constituted of three requirement levels.
At the basic level entrepreneurs were required to have knowledge of different aspects of entrepreneurship, i.e., general entrepreneurial skills, such as management and finance. The second and the third level consist of additional requirements, depending upon sector and occupational choice (EZ, 1999). In the evaluation of the establishment legislation in 1998 it is concluded that the establishment legislation is not a necessary, efficient and effective means to preserve the quality of entrepreneurship and that it decreases the likelihood of people to start a business. This is confirmed in a study by Bosma, Zwinkels and Carree (1999) predicting that loosening establishment requirements will have a positive impact on the number of start-ups in the Netherlands. Moreover, Van Dijken and Heeres (1999) argue that abolishment of the establishment legislation in the Netherlands will increase the dynamics within the Dutch economy and raise the number of start-ups. Following this line of reasoning the Dutch government has loosened the establishment requirements further in the beginning of 2001 and decided to abandon the entire legislation by 2006.
Bankruptcy Legislation
The (partial) abandonment of establishment requirements is likely to lead to more competition and consequently to an increase in the failure rate, as inefficient businesses are confronted with more competition. In this case scarce resources are made available for new activities. Bankruptcy legislation can accelerate or slow down this process, depending upon the number and type of stakeholders. Bankruptcy legislation protects ownership rights of suppliers and investors and determines the possibilities and conditions of discontinuity of business, whether due to liquidation or reorganization.
As compared to other countries, the Netherlands are characterized by a high degree of government intervention in the bankruptcy process. The Dutch bankruptcy legislation is first implemented in 1893. The most drastic change in this legislation was realized in 1998 through the Law Schuldsanering Natuurlijke Personen, introducing a discharge clause for entrepreneurs of unincorporated businesses (EZ, 1999). An entrepreneur is required to pay off his/her debts within a set period after bankruptcy.
A negative aspect of the Dutch bankruptcy legislation is that it leaves relatively little room for restructuring. Approximately 75 percent of businesses with delayed or postponed payments end in bankruptcy (CBS, 1997). An important factor contributing to the lack of room for reorganization is the fact that the Dutch bankruptcy legislation favors creditors over debtors. This increases the willingness of people to invest, but at the same time discourages (potential) entrepreneurs to take risks. As opposed to the Netherlands, bankruptcy legislation in the United States favors debtors over creditors, enabling entrepreneurs to restructure their business by giving them the opportunity to write a plan for reorganization and the guaranteed support of suppliers and banks (EZ, 1999). It is interesting to note that, in the second phase of restructuring the bankruptcy legislation, the Dutch government aims at strengthening the position of the debtors, while in the United States the new bankruptcy legislation will probably strengthen the rights of creditors to warrant the availability of financial capital supply.
Both the debtor-approach and the discharge clause are important to stimulate entrepreneurship. In case of bankruptcy the entrepreneur is granted a second chance (through the option of reorganization) and in case of discontinuity the entrepreneur does not have a lifetime debt. These elements of the bankruptcy legislation lower the opportunity costs of entrepreneurship and are likely to have a positive impact on the number of start-ups.
Moreover, bankruptcy legislation directly influences the number of businesses through the regulation of exit. The alleged influence of bankruptcy legislation on the stigma that is often placed on failure has not been proved yet. However, it appears that the social stigma of failure is higher in the Netherlands and the United Kingdom than in the United States.
This may be due to the more strict legislation. At present, the Dutch government, like many other European governments, seriously aims at reducing this stigma by attempting to create a positive public attitude towards entrepreneurship. This may also facilitate serial entrepreneurship as entrepreneurs use the knowledge obtained in their previous business experience for their subsequent efforts.
Deregulation and Simplification
Competition and Improving Market Functioning
In the early 1990s the Dutch government introduced policies aimed at improving market functioning. These policies include the so-called MDW- process, the restriction of anti-competitive behavior and the introduction of competition in the public sector (Haffner and Van Hulst, 1998; Van Wijnbergen, 1999). The MDW-process includes the lowering of entry barriers to markets, reducing unnecessary regulation and improving the quality and transparency of regulation. To restrict anti-competitive behavior the Dutch government introduced a new competition law that linked the Dutch competition laws to those of the European Union (Hogenboom and Van Vliet, 2000). This new competition law states that businesses are not allowed to restrict competition through (mutual) price agreements or abuse their market power.29
Competitive elements have been introduced in public sectors, such as electricity, public transport, mail services, telecommunication and social security (Hogenboom and Van Vliet, 2000). The process of liberalization and privatization in telecommunications was introduced in the late 1980s and as the prices decreased, the range of supplied products and serviced increased and employment in these sectors increased (Van Wijnbergen,
1999).
These government policies are likely to have stimulated entrepreneurship in the Netherlands through enabling small businesses to enter (new) markets, reducing compliance costs of regulation and creating new opportunities for small businesses. In the subsequent section the impact of a reduction of compliance costs on the level of entrepreneurship is discussed in more detail.
Administrative Burden and Compliance Costs of Legislation
The task of the government is to stimulate and at the same time regulate entrepreneurship. The quality of regulation plays an important role in the simultaneous pursuit of both goals. Accordingly, the regulations should be subjected to a critical appraisal (Nijsen, 2000). It is important that the regulation involves as little administrative burden for the entrepreneur as possible. Small businesses are often relatively sensitive to the burden of information requirements (measured by the average costs per employee) as compared to larger businesses. Indeed, compliance costs of legislation have found to be regressive in the Netherlands - weighing more heavily on smaller businesses than on larger ones (OECD, 1997a). Administrative costs can be divided into the costs of routine business administration and the costs related to compulsory administrative procedures resulting from regulation
(EIM/ENSR, 1995). The latter is often referred to as ‘administrative burden’.
This includes the requirement of information provision to governmental bodies as well as the acquisition of information necessary for providing this information (Boog et al., 1999). The administrative burden can be a barrier to growth of the business since the time, effort and money entrepreneurs spend on the compliance with government regulation distract them from their basic activities.
The Dutch government has acknowledged that an excess burden of legislation damages established businesses and discourages potential entrepreneurs. As a result, measures are taken to simplify the Dutch administrative regulations (OECD, 1998). The reduction of the administrative costs of legislation has been at the center of attention of the Dutch government in recent years (OECD, 1997a). In 1993 the administrative burden amounted to 13 billion guilders, which is more than two percent of the Dutch GDP. The administrative burden has two components. The first component is the general legislation, as it applies to all businesses, including taxes, environmental legislation, costs of financial statements, and import- and export regulation. The second component only applies to businesses with employees and includes wage taxes, employment conditions and provisions related to illness. The first component is more profound and amounts up to 67 percent of the total burden. The total amount of the administrative burden has increased to a level of 17.8 billion guilders in 1999. The increase is attributable for a large part to the increase in the number of firms, employment, and wages. However, without active policy directed at reducing the burden, this amount would even have been higher.
In the period between 1994 and 1999, the Dutch government reduced the administrative burden by 5.5 percent and further reductions are planned. The pronounced aim to reduce the administrative burden by 25 percent in the period between 1994 and 2002 is not yet within sight (Boog et al., 2000).
Input-Related Policies
Most input-related policies refer to the provision of information and finance. The government can provide information through counseling and can provide entrepreneurs with direct financial support through subsidies and with indirect support through streamlining the supply of capital and stimulating the development of the (venture) capital market. It is not within the scope of this chapter to deal with all input-related Dutch policies, as there are many. In the present study we focus on the Dutch venture capital market, as it differs from other capital markets in Europe and the United States.