Friday 18 June 2010

Shy Entrepreneurs

   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?


  1. Interesting analysis - particularly if it is true that Portuguese entrepreneurs take less risks than their peers in other geographies.

    I've never seen such fact based benchmark, though.

    Pedro H.

  2. Most importantly, I think that people in Portugal don't think is worthwhile to take risks because at the end it is the political connected people that gets the golden opportunities, there is no free market (the hand is not invisible...) and working hard it's just not enough. Also, for a small entrepreneur with an idea, all the bureaucratic ever changing tax and accounting rules are very demotivating. Finally, people tend to do what they perceive it works. The example they see is that what works is to know the right people and, if necessary, get a way to bend the law in self profit... at the country expenses.

    Sebastião Nunes da Gama

  3. But then again, aren't the northern european countries much worst than the portuguese in taxes and social regulations but a lot more successful with their economies? Can these factors alone explain the portuguese shyness? Could it be that portugal never had a good economic environment and the portuguese are not even educated towards investments nor understand their social value?

  4. Very interesting analysis.

    I believe it's a combination of all the above mentioned factors:
    passive corruption,
    high taxation,
    extremely complicated and inflexible bureaucracy (not to be underestimated, especially if you plan on doing something out of the norm, many times necessary when risk taking),
    and the static nature of the labour force, in the sense that it is unable to be used to respond to market needs (thus the push for easier dismissals by companies).

  5. Thanks to everyone for the good comments.

    estadosocial/Pedro: the Portuguese product mix is biased against hi-tech and investment goods, compared to more developed nations. Firms producing in these sectors tend to be more risky.

    Sebastião, Rui, and Gabriel: you all raise good points and challenges to the analysis. Taxes are also high in northern Europe, which is a challenge to the hypothesis. However financial markets, for example, work better. Instead, heavy bureaucracy and business setup costs are also factors that could explain entrepreneurial shyness.

  6. As a former entrepeneur I can testify that the most challenging task is to, on a daily basis,
    exaust yourself battling to be paid on time, to comply with all the known and unknown regulations, to fight a culture where everybody looks happy to fail their commitments.
    To feel all the way that if you succeed, you will be raising enemies everywhere at all government levels and they will do everything to show you their power, and take their piece off the business.
    However if you fail you will be treated with simpathy as a "nice guy".

  7. I would just like to comment how the attitude towards failure might have an impact also on the "shyness" of entrepreneurs.
    I have been recently having classes on entrepreneurship in MIT (one of the hottest spots in entrepreneurship in the world right now) and what stroke me as completely different from the portuguese reality was the "rewarding" of failure. For them, a "begginer" entrepreneur will only have ~10% chances of succeding, and each time he fails and tries again this probability will increase due to the knowledge he collected from previous failures.
    Contrary to Ricardo, I don't belive taht in Portugal when you fail you are only a "nice guy". I think society blames you for taking a risk and failed - you are no more than a person too much eager for money, that you couldn't go for a safer job in the public sector or in big established companies (portuguese or mulitnationals). In my view, this cultural environment also contriutes to understanding the shyness of entrepreneurs.