TCS Daily

Foreign Concepts

By Ingo Steinhaeuser - April 17, 2003 12:00 AM

An entrepreneurial mindset requires curiosity, courage and the desire to increase one's financial and social position. In Germany, however, this mindset is blocked by a variety of social taboos, such as cultural disapproval of individual initiative in the market, as well as the economic disincentives of high social security standards and the immense corporate tax burden. Individual freedom is the sacrificial lamb of the German welfare state.

Germany's disdain for corporate success has resulted in many bankruptcies owing to exorbitant taxes on profits. These profits support some of the most lucrative social security benefits in the world. The average net profit margin of corporations reaches only 2 percent of revenue, while an unemployed man receives around 60 percent of his salary for as much as three years. Germany, unsurprisingly, holds the pole position in the ninth consecutive year for corporate bankruptcies.

Heinrich von Pierer, CEO of Siemens, has observed that, contrary to the United States and other countries, a functioning and a well-respected entrepreneurial culture is widely absent in Germany. In fact, despite a plethora of new funding sources for entrepreneurs in Germany, only 7 percent of 18- to 64-year-olds are in the process of forming a corporation. Germany ranks 22nd internationally in the number of entrepreneurs - far behind any other industrialized country.

In contrast, America is often seen as the country that invented the quintessential entrepreneur. Traditional education generally views entrepreneurial endeavor as a measure of success in itself, regardless of failure or achievement of a specific goal. To Americans, creative efforts must be nurtured almost from birth. Interaction between universities and corporations is much more symbiotic and developed that than in Germany. Entrepreneurship is even taught as a discipline in around 170 universities in the US (in comparison to 17 entrepreneurial faculties in Germany). In many cases, business plans developed in collegiate competitions result in the formation of corporations creating jobs. Consequently, the number of corporate formations is not only in absolute numbers, but also in relative terms much bigger than in Germany.

The basic motivation to start a company in the US is also encouraged by low social security standards. Low social safety mechanisms lead to a much greater motivation to become successful in the job hunt or to become an entrepreneur. The German term "Besitzstandwahrung" referring to protecting job status can hardly be translated into American English. While many Americans often must take a lower-paying job once unemployment benefits end, Germans are often supplementing unemployment benefits with illegal work activity.

Forming a corporation in the US is simple from an administrative standpoint, comparable to a passport application, financing a car or renting an apartment. It takes little time and money for anyone to become incorporated. Forming a GmbH (limited liability corporation) in Germany, however, takes on average between 1-3 months and is relatively expensive. Lawyers must be consulted, and at least 50% of the liability capital must be paid into, and cannot be distributed. Thus, corporate formation in Germany requires the provision of capital prior to the beginning of corporate revenue streams.

It can also be said that German capital weighs in heavier than its entrepreneurial innovation. Young entrepreneurs, for instance, do not always have the capital to start a business and are often unwilling to put themselves in debt. In the US, generation of revenue becomes the first objective in corporate formation process; generated capital can then be used to increase capital stock. The entrepreneur in America, and not the creditor as in Germany, is the main source for job creation.

Liability is also an important distinction between US and German corporations. In the formation of an Inc., the founder is only liable for the nominal capital stock. In the formation of a German GmbH, the founder is often personally liable, making his corporate and private assets vulnerable. In the event of a bankruptcy, it becomes even more difficult for an entrepreneur to raise capital for a new venture. A failed entrepreneur appears in a negative light, making it more difficult to succeed in the future. The attitude is completely different in the US, where failure is not viewed negatively, but as a sometimes essential part of the learning process.

The natural growth of a GmbH corporation is further limited in some other unusual way. Corporations that count more than five employees have a very difficult time letting employees go. A company must state a very specific reason for dismissal, which often makes it very difficult to adapt to market needs. In addition, with more than five employees, the formation of a workers council or union becomes possible under German law, ensuring the balance of interests between employers and employees. It is particularly irritating to create two levels of interests in a small corporation, where the predominant interest is the achievement of a competitive edge.

Removing the "chains of equality" (high taxation and high unemployment benefits) is the only hope for Germany's long term viability in the global economy. Somehow, Germany must learn to develop an understanding of the entrepreneurial spirit.

Ingo Steinhaeuser is an Associate with the Institute for Free Enterprise (IUF) in Berlin, Germany.

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