Southern Europe’s Small-Business Problem: Too Many Workers at Small Firms

It's a complex issue. Of course running an economy based on very small businesses is incredibly difficult, for all the stated reasons; however, as I grew older I came to realize that this diversity is also the source for most traits distinguishing these countries around the world.<p>For example, in fashion the "Italian Style" emerged thanks to small firms led by histrionic and talented designers, who would never have had such freedom in larger companies. Firms like Ferrari, Ducati and Lamborghini remained small, focusing on excellence rather than volume, and maintained this industrial setup even when financially absorbed by larger entities. Small companies in the food industry still maintain an incredible diversity of output, and keep quality standards very high. And of course every Italian city is so distinctive because shops, bars and boutiques are so different and not dominated by a few brands (the difference with England or France is striking -- in England, every town centre has exactly the same few chain-shops).<p>I'm sure there are similar examples in Spain and Greece. If all these countries "standardized" their economies on larger businesses, they'd lose most of their distinctive appeal. Unfortunately, this makes everything else more difficult, especially when it comes to centralized efforts to improve this or that. Also, small shops are prone to abusing worker rights (if everyone is "exempted" by legislation because of size, does that legislation actually exist?) and being unable to exploit opportunities to scale up in a globalized world.<p>It's a conundrum, really, and I personally don't know where I'd start fixing things.

Another factor unmentioned: in many countries costly employment/benefit regulations only come into force at 25 or 50 employees. Thus some firms hang below the threshold, even if (sans regulation) a somewhat larger scale would be beneficial. Here's a recent article that talks about the phenomenon in France:<p><a href="http://www.businessweek.com/articles/2012-05-03/why-france-has-so-many-49-employee-companies" rel="nofollow">http://www.businessweek.com/articles/2012-05-03/why-france-h...</a><p>The US (federal and state/local) has similar thresholds, so I suspect Greece/Italy/Spain do too... and combined with the other low-trust/anti-competitive factors, such cost-jumps could be even more harmful there than elsewhere.<p>(For example: serving the large US domestic market, a firm might blow by the 50 employee threshold figuring they're on the way to 500 or 1000, at which point they'll be able to handle the added costs. If in a smaller country, where the top size a firm could reach is only 50-200 employees before other limits hit, maybe they'll just stay where it's simple/cheap in the first place.)

He is nitpicking on pharmacies, claiming that big chain model is better. But we have something called Preisbindung with both books and pharmacies in Germany, so the same book costs the same in every shop, with the result that we still have small book shops and pharmacies. So this small business protection is also usual in Germany. And Germany is certainly not a poor south European county. Even worse, lets nitpick on taxi cab licenses in NY. A system that makes taxi drivers poor and license owners rich. I wont call this 'better'.<p>He next blames corruption. But we have a lot of corruption in Germany, its just not as open, as in southern countries, and more accepted and hidden by the people. Things often fail, if corruption is the only business design. We had the same in our town.<p>The article fails to address the real point: The Euro-Zone. Germany has an extreme low cost of work. Only 5% of cost in Germany is wages, while this is more like 15%-30% in other countries in Europe. Those countries had been able to devalue their currencies prior to Euro-Zone, to evade German price dumping. But now the can no longer, and wages became even lower in Germany, thanks to a law called Hartz IV, and our exports are now their dept.<p>There are only two ugly solutions: The better one would to reinstall social wellfare in Germany at a level of 1970-1980, or even better install an unconditional income grant in Germany. European economy would be much healthier, if we send on 3rd of Germans home to drink beer, watch tv and play computers, permanently! And the wages for every job would rise above the unconditional income grant for those who still work. The evil alternative would be a coup de etat in Greek. The military replaces the government with a junta, Greek is thrown out of Eurozone, Greek junta claims that they wont pay the debts of prior corrupt government, and prints drachmes again.

Matthew Yglesias is well on his way to David Brooks-like hackdom. And "hack", in this sense is not used in any sort of good way. He started this piece with the idea that he would find some reason why the European economic crisis was caused by something, anything, except a catastrophic theft from society by the banks and elites, and he came up with: "it's because they have too many small businesses".<p>Bravo, Mr. Yglesias, bravo. You'll go far in modern punditry.

It's astounding that this author believes size alone is evidence of competitiveness. It completely ignores the ample evidence that very large firms achieve market and regulatory capture in a way that biases them towards anti-competitive behavior by establishing barriers to entry. They maximize revenue by denying their customers access to competitors.<p>There is no simple continuum. The sparse examples he mentions do not offer evidence of causal relationships.<p>But it also misses the biggest point: regulation needs to promote competitiveness. Size of firms isn't particularly significant if you get that right.

I live in Italy and the idea I've come up with is that staying little helps you dodging the bizantine bureaucracy.<p>When you grow big the bureaucracy will entangle your business to the point you'll need direct help from local politicians to move on. The very tragic downside of this is that this political link is two way and you'll need to return the favors by, for example, hiring endorsed (and unqualified) people and so on. This is one of the roots of our clientilistic society.<p>No wonders that a common expression here is "to have a saint in paradise".

Obviously the writer never tried to actually start a small business in any of the countries mentioned. It's so needlessly complicated and full of bureaucratic measures that the entrepreneurs have to turn to bribery and illegal corner-cutting to stay afloat.<p>As an example, take Belgium, where I am right now, trying to start a business with a partner. We thought it'll be easy - there are plenty of big name companies here, so it must be a good place for business, right?<p>Turns out you can't just go register a company, open a bank account and start working. In order to work with suppliers and clients, you need at least a bank account for your business (or you'll have a lot of issues with the tax authorities).<p>No, you need to prove that your new company is worth registering, that it will make money, you need to create a full business plan and financial predictions, make a list of suppliers/partners/clients, have proof that you worked in and know the industry, as well as prove that you have management skills (either 2 years as a manager or via management school in the EU) to show to the government - as you can imagine, that's a bit hard to do for a new entrepreneur even in an established industry. Also, you need to show that you've deposited the initial capital into your bank account (this is an amazingly stupid Catch-22).<p>Then, the banks. Opening a checking account is like going to the king and asking for permission to farm the land or something. You <i>must</i> have initial capital, you must show them that they don't bear any risk, you must go through security checks and then wait a month until the application is processed at the main office, and they can decline your account if they don't like something. Then you deposit the cash and finish registering the company. We've had two banks refuse to open an account because our main activity is "risky" - that's for a current checking account, we don't need a loan or credit line. Only a local bank finally accepted the application.<p>And other BS... It's definitely harder than the US or UK.<p>From what I hear, the same situation is in Germany, Italy, Spain and Bulgaria (the latter has only a 10% income tax, so it's quite popular with EU companies)...

Gosh, correlation is not causation. There are a million other random things we could correlate here and none of them causative. All this article really tells us is that, for some reason, the author has an interest in promoting certain courses of action.

Seems to me the biggest problem is regulatory capture by certain industries like pharmacy in Italy and livery/funeral services in the US. These industries are dominated by small business but high barriers of entry.<p>In other words, the title lead me to read the article thinking there'll be something new. But it turned to be a bad title and a bad article as well.

Speaking for the IT sector in south Portugal and Spain I don't see this really; people actually do not want to work for us generally because we are small; they want to work for Logica and such. Their motives are 'permanent contract' (which is what we provide as well, but he, who are we :).<p>We get only people who already worked in a big company and know what it is like; you either like that kind of thing or not and if not, you'll never go back.

Interesting argument, and large scale trust issues are probably an important factor in economies. However, the examples from the article do not have too much to say about it, since Greece and Spain were rather dynamic economies before the financial crisis.<p>World bank data of per capita GDP growth for Italy, Ireland, Greece, Spain and Portugal compared with Germany: <a href="http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&#38;ctype=l&#38;strail=false&#38;bcs=d&#38;nselm=h&#38;met_y=ny_gdp_pcap_kd_zg&#38;scale_y=lin&#38;ind_y=false&#38;rdim=region&#38;idim=country:DEU:GRC:IRL:ITA:PRT:ESP&#38;ifdim=region&#38;tdim=true&#38;tstart=994543200000&#38;tend=1278540000000&#38;hl=en_US&#38;dl=en_US&#38;ind=false" rel="nofollow">http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&#...</a>

I naturally prefer small firms because of the whole cog in the machine problem of big corps. But the article brings up an interesting point to me, bigger sometimes is better. I like to think that most mega-corps in the U.S. routinely abuse their monopoly position and stifle competition, and they certainly do to an extent.<p>On the other hand though, the scenario where small firms are the norm doesn't seem that great either. Let's say you create a new pharmacy thats like 10x better than any other pharmacy and given the option everyone would go to you. If you don't grow big(either by choice, or regulation) and put CVS out of business. Then your stifling progress in a sense and everyone is worse off for it.<p>Heh, I never thought I'd argue in defense of big business.

To me it boils down to whether there is a propensity to find short-cuts that you <i>can get away with</i> versus a culture that somehow encourages <i>doing the right thing</i> by going the distance.<p>Countries where short-cuts are popular are often ones where individuals are willing to <i>take</i> from the commons. So in this sense there is clearly a relationship with trust and corruption. If everyone around you seems to be screwing over the common, you would be irrational not to do the same.<p>How to transition from short-cutting to going the distance, e.g. from hurting the group for your gain, to sacrificing for the group's gain... that is the question. But at least part of the answer has to be that when the group can gain together, everyone is better off.

I agree with many points of this article, even if it simplifies too much. But, more than corruption, I think that the biggest incentive to keep your business small in some countries is the ease of tax evasion if you stay small. This can give a very high competitive advantage and compensate for the economies of scale of bigger firms.

I didn't really pick up the causation behind this. The article fails to explain any function of small companies to the economy at large.<p>I'd guess it goes other way round. If economy is unstable/unfair, only the small survive. Big companies have to spend so much to HR that they are in considerable disadvantage.