
Southern Europe’s Small-Business Problem: Too Many Workers at Small Firms - vwoolf
http://www.slate.com/articles/business/small_business/2012/07/the_small_business_problem_why_greece_italy_and_spain_have_too_many_small_firms_.html
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toyg
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.

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).

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.

It's a conundrum, really, and I personally don't know where I'd start fixing
things.

------
gojomo
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:

[http://www.businessweek.com/articles/2012-05-03/why-
france-h...](http://www.businessweek.com/articles/2012-05-03/why-france-has-
so-many-49-employee-companies)

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.

(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.)

~~~
danmaz74
Indeed, in Italy the limit is very low at 15 employees. This is part of the
explanation to the very small average size of businesses. Since the
introduction of this limit in 1970, bigger firms started contracting more and
more of their work to smaller firms with which they could flexibly terminate
the contract with at any time.

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kephra
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'.

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.

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.

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.

------
jellicle
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".

Bravo, Mr. Yglesias, bravo. You'll go far in modern punditry.

~~~
smashing
Haha. I agree. I always assumed that it had to do with Labor laws requiring
greater involvement of the corporate board when a business got larger.

------
jasonwatkinspdx
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.

There is no simple continuum. The sparse examples he mentions do not offer
evidence of causal relationships.

But it also misses the biggest point: regulation needs to promote
competitiveness. Size of firms isn't particularly significant if you get that
right.

------
gbrindisi
I live in Italy and the idea I've come up with is that staying little helps
you dodging the bizantine bureaucracy.

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.

No wonders that a common expression here is "to have a saint in paradise".

~~~
droithomme
Interesting! Are you skeptical that the article author's proposed solution of
creating more regulations and thus making the government larger and more
powerful is going to improve anything?

~~~
gbrindisi
I am, since the bureaucracy is part of the problem I don't see why adding more
bureaucracy might be of some help.

What we need are simpler regulations and a modern public administration. IMO,
of course.

------
jakeonthemove
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.

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?

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).

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).

Then, the banks. Opening a checking account is like going to the king and
asking for permission to farm the land or something. You _must_ 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.

And other BS... It's definitely harder than the US or UK.

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)...

~~~
Kliment
I don't know about the other countries you listed, but the process for
registering a company in Germany got significantly simpler a few years back
with the introduction of the UG. I'll attempt to describe it in case anyone is
considering founding in Germany.

The UG is rather similar to the UK Limited, which is what German companies
were using before due to onerous regulations. There is a standard protocol
that you can modify to match your setup. You pick a company name, check with
the local chamber of commerce to make sure it's not in use, and submit the
documentation to a notary. You don't have to prove anything except that you
are in possession of initial capital (may be any amount greater or equal to 1
euro) and have not been sentenced for fraud. The notary issues a document that
you can use to sign up for a bank account. You go to the bank with it, and
give them the initial capital, which they deposit into your company's new bank
account. You only have to prove identity and place of residence of the
company. It's easiest initially to register your company's place of residence
as your own address. It's easy enough to change later. The bank gives you a
proof of payment, which you give to the notary, and the notary signs off on it
and forwards your case file to the trade registry. You pay the notary (you can
make this payment from the new corporate account or from your personal funds).
The trade registry sends you a bill, which you pay. Then you get entered into
the registry and sent proof of this. With this registry entry, you have a
company. This document is proof of your company's existence. The tax authority
will send you a questionnaire asking you to estimate the income of your first
two years. This is an estimate, and is nonbinding (but it's easier later if
you guess approximately right). You fill that in, and you get issued a tax
number. With that tax number, you can issue invoices, and file tax reports. In
addition, you need to write yourself an employment contract if you receive
salary. Now, the UG is a restricted variant of the most common company format
in Germany, the GmbH. There are restrictions on the number of shareholders and
the amount of profits that may be paid out to shareholders. You are required
to hold a quarter of profits each year until you reach the minimum capital of
a GmbH. You can then ask to be reentered into the trade registry as a GmbH,
and the restrictions are lifted.

The tax authorities will happily tell you what you need to be aware of when
you first sign up, and will remind you with sternly-worded letters if you miss
anything. The company registration process takes a couple weeks of running
around, at most. There is an issue you need to be aware of though - company
registration information is public. This means a number of stationary,
supplies, and whatnot peddlers will send you junk mail. Do not put an email
address in your company registration data. A number of scammers will attempt
to get you to pay frivolous bills. If you receive a bill for several hundred
euros from a company you never heard of claiming to be a government agency,
throw it away.

In summary, it's not easy, and it's not impossible. Nowhere is a business plan
or proof of competence required, nor large amounts of capital. You will get
asked a LOT of questions if you apply for a loan or insurance with a fresh
company with 1EUR starting capital, but that comes with the territory. Getting
a company credit card or bank account is no issue at all.

~~~
jakeonthemove
That's definitely a step in the right direction - I know it was pretty hard to
open a GmbH just a few years ago (2009 I believe). Germany is much more
entrepreneur-friendly, too.

All the back and forth with papers isn't _that_ hard, but why can't it be
simple like in the US - open an LLC online and a bank account in less than an
hour and you're good to go.

In Europe, opening a company is serious business. In North America (well, US
and Canada), it's a given...

------
droithomme
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.

------
vermontdevil
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.

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.

------
tluyben2
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 :).

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.

------
yk
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.

World bank data of per capita GDP growth for Italy, Ireland, Greece, Spain and
Portugal compared with Germany:
[http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&#...</a>

~~~
danmaz74
Keep in mind that Greece, Spain, Portugal and Ireland started from very low
GDP per capita levels when they joined the EU and received quite a lot of net
aids, access to rich markets and capital. That helps starting a growth cycle.
It becomes more difficult to maintain it later, especially if that growth
starts sustaining itself with a housing bubble (as it very often happens in
booming times).

~~~
yk
Yes, but then you can compare Greece and Portugal, both joined the Euro in
about 2000, both have now a financial crisis and both have rather small
businesses. But Greece did quite a bit better between 2002 - 2007 than
Portugal, suggesting that size of business is not a very good indicator for
overall economic health.

~~~
tluyben2
How is Portugal doing now? I live in Spain for part of the year but I have an
office in Portugal and my feeling is that they are listening to the demands
from EU a lot more than Spain. Taxes rose all over and they cut spending
across the board. In Spain nothing much changed (don't know about Greece?).
Before this year, the news would say Greece falls, then Portugal; now they say
Greece then Spain. Did it change? I cannot find news about it and I got tired
of reading The Economist (you get tired of this OMG Euro OMG stuff when you
live here...).

~~~
antman
Don't trust the economic press for future predictions. Most of the time they
don't have access for information. Only if they do a post mortem when they
have documents they might read them. If they don't have the facts giving
something plausible to their readers is good enough.

------
soup10
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.

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.

Heh, I never thought I'd argue in defense of big business.

~~~
nosse
If you can make a good pharmacy that is 10x better than any other in town, you
probably can grow to other towns. But what makes you 10x better? Some good
procedure that is copyable, or your personal management skills? It it's
procedure, the competitors can copy it also, so this growing point is kind of
invalid. If it's your personal management skills, this growing point is again
invalid.

In good competition there should be a threat of someone growing big because
they make things better. So pharmacies would copy all good procedures from
each other. But that growth should never actually happen.

~~~
ovi256
>It it's procedure, the competitors can copy it also, so this growing point is
kind of invalid.

As someone smart said, you have to ram a good idea down people's throats.

~~~
nosse
I'd say growing is ramming.

------
redwood
To me it boils down to whether there is a propensity to find short-cuts that
you _can get away with_ versus a culture that somehow encourages _doing the
right thing_ by going the distance.

Countries where short-cuts are popular are often ones where individuals are
willing to _take_ 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.

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.

~~~
danmaz74
To make the change, one necessary point is to really start punishing the
freeriders But, as long as the freeriders are a very important part of the
whole economy, it becomes a chicken or egg problem...

------
danmaz74
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.

------
nosse
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.

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.

