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Can Europe replicate Silicon Valley?04/06/2004. Source: SJ Berwin.
 The European private equity and venture capital industry is campaigning hard for the implementation of fiscal and legal structures that they hope will enable the European market to emulate its more advanced US counterpart. But Europe will also have to overcome more fundamental barriers to entrepreneurial activity, explains SJ Berwin.
For some time, European policy-makers have said that they want to be more like
the United States in at least one important respect: they want to improve the
environment for enterprise and entrepreneurs. Various initiatives - both European-wide
and at national government level - have been focused on this objective, including
an ambitious plan that the European Union embarked upon in 2000. These initiatives
usually concentrate on the legal and tax environment in which new and growing
businesses operate, and make the assumption that a favourable climate will stimulate
entrepreneurship. So they look upon bankruptcy and insolvency laws and the legal
protection of intellectual property, for example, as tools to encourage risk-taking
and innovation.
The European Private Equity and Venture Capital Association (EVCA) also believes
that the European regulatory environment could be better, and says that Europe
lags behind the United States. Many of its policy priorities are aimed at improving
the supply side of the venture capital business - arguing for legal reforms,
which will increase the number of good quality companies for their members to
back. To help catalyse the necessary changes it published its second annual
benchmarking report last week, which looks at 13 legal and fiscal indicators
(on both the demand and supply side) across 21 European countries and scores
each country on each criterion. The result is a league table of countries, ranked
from the most to the least favourable overall for the development of private
equity, venture capital and entrepreneurship. In part, the purpose of this exercise
is to encourage countries that are behind the pace to change their laws.
The results of the latest study are interesting in themselves and - in very
broad terms - say quite a lot about a number of important background regulations.
Overall, the UK comes out on top (as it did last year), with Luxembourg and
Ireland not far behind, and catching up. Countries which sit near the bottom
of the table include Germany, Austria and Denmark, who clearly have some work
to do.
European governments are urged to look at the paper, and consider its implications.
Even countries which do quite well have ample room for improvement, and a number
have performed less well this year than they did in 2003.
But policy-makers may well wonder whether all of this really matters. If Europe
wants to stimulate enterprise, can it do that with legal and fiscal reforms
- or is the problem more fundamental? Is it a question of culture and attitudes,
rather than tax rates and red tape? Some argue that comparisons with the US
are unhelpful, and that business culture has shaped the law, not the other way
around. Research published at the end of last year - entitled The Legal Road
to Replicating Silicon Valley - sheds some light on that cause-and-effect line
of reasoning.
The study, produced by two academics, suggests that the law really does matter,
and that changes to the law can spark significant changes in behaviour. Using
the EVCA's benchmark paper as a starting point, the researchers tracked data
in 15 countries across 13 years and concluded that policy-makers are right to
focus on the law as a way of improving their competitive position.
Europe's legislators are likely to take note of the EVCA study, and now they
have evidence that they are right to do so. There are, no doubt, a number of
factors which contribute to the success of clusters like Silicon Valley, but
Europe - and some parts of it in particular - has plenty of room for improvement
in at least one vital respect.
SJ Berwin is a pan-European law firm with a particular focus on private
equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and
Brussels. If you would like further information on our services to the private
equity industry please contact Jonathan Blake or Simon Witney in our London
office 020 7533 2222 or visit our website at www.sjberwin.com
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