Southern Europe’s Small-Business Problem: Too Many Workers at Small Firms | Hacker News Reader

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

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35 pointsvwoolf33 comments

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.

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...

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.)

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.

In Greece it's twenty. It is actually easier for a larger company to tackle corruption and government inefficiency. Also each country has different number of employees to consider a business as small medium or large. In germany middle to small sized businesses is about 60% but it is also a different definition.

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.

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.

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.

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.

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".

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?

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.

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)...

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.

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...

I had to laugh at this because I am in the exact same process and I am an American. For a non-EU citizen I'm starting to think this is impossible. Essentially one needs to apply for a "professional card" which is good for 5 years before enter the country to work one of the requirements, which are numerous, is to already OWN A BUSINESS IN BELGIUM! WTF! Starting a company before arriving n the country is hard enough but you are asked for your local address and company address in the process. Chances are I'm not going to have that information sorted out until I enter the country. Classic Catch-22.

Good luck with the business and keep us informed, know at least HNer will be looking forward to your updates.

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.

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 :).

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.

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_&#...

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).

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.

Agreed, it isn't a perfect predictor, but it is an interesting one.

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...).

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.

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.

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.

>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.

I'd say growing is ramming.

> But what makes you 10x better?

here pharmacy and book chains define: Better = cheaper

There are some states in US, where alcohol can only sold at special dealers, thus protecting their small business. Books and medicals have a fixed price, and medicals must only be sold in pharmacies in Germany. There are some chains also. They have a better profit, because they buy in higher numbers, but competing at the customer most small shops survive, because they are better in terms that are a family doing a lifestyle business.

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.

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...

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.

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.

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