Last night I had dinner with a group of friends from high-school that I hadn't seen for a long time. It is of course a great joy to meet good old friends, however I anticipated some of our conversation would touch on somber topics. After all, the Portuguese soccer team didn't really put up a promising performance in their first World Cup game. Instead, we didn't discuss soccer at all, all we talked about was the Portuguese Economy.
Like me, my friends are all about turning 40. Which means they lived through the great Portuguese stagnation during a key period of their life-cycle, their 30's. Their view is that one of the reasons we did so badly over the past decade is that Portuguese entrepreneurs are too shy, in the sense of taking on too little business risk. This is a cultural trait, the argument goes.
I have heard this argument many times over the years, and I'm very skeptical about it. Cultural traits can change very quickly with incentives. My view is that it is more helpful to think of Portuguese entrepreneurs as rational profit maximizers. If they look shy, then it must be because taking risks doesn't pay-off for them. I can think of a few reasons why. First, why take on risks when, if things go well, you get taxed heavily? Second, why take on risks when, if things go badly, you cannot easily fire workers? Third, do financial markets provide entrepreneurs with enough funding and, if so, do financing terms provide entrepreneurs with some degree of risk-sharing (i.e., allow them to pay back a bit more if things go well, and a little bit less if things go badly - in other words, not the terms offered by standard debt/bank loan contracts)? Why take on risk if you have to bear it all by yourself?