Belgian policy is insufficiently geared to stimulating scale-ups

These are the findings of new academic research by the postdoctoral researcher Thomas Standaert (Ghent University), Professor Veroniek Collewaert (Vlerick Business School, KU Leuven) and Professor Tom Vanacker (Ghent University, University of Exeter). They mapped the percentage of scale-ups in 33 European countries. They also investigated how a varying combination of four legal frameworks (relating to labour, credit providers, investors and property law) in those countries boosts entrepreneurship or slows it down. Only young scale-ups no more than 10 years old were included in the study.

Belgium’s score for the percentage of rapidly growing businesses that create employment wasn’t very impressive. At 9.5%, we rank 23rd among the 33 European countries in the study. Moreover, the gap between countries with a higher and lower score has remained more or less constant over the years, a finding that is confirmed by statistics from Eurostat.

Six ingredients

For a company that wants to grow, and therefore needs resources to support that growth, there are four relevant legal aspects that have a direct impact on access to funding, people and other resources.

• The extent to which a government protects credit providers and facilitates or impedes access to debt financing
• The extent to which a government protects minority investors and positively or negatively impacts access to risk capital (venture capital, business angels, etc.) 
• The extent to which a government strongly regulates the labour market with strict labour laws, or alternatively, leaves the labour market very free
• The extent to which a government protects property rights, thus determining the extent to which companies can keep hold of the value they create in the long term

Additionally, there are two other aspects that significantly influence the climate in which entrepreneurs are expected to mobilise resources, which are a country's degree of economic development and its degree of economic openness (i.e. how much a country exports).

Dr Thomas Standaert: “Rapidly growing companies are crucial to a country’s economy. Governments that want to stimulate entrepreneurship and scale-ups often opt either to regulate everything strictly, or to deregulate everything. Our research shows that neither of these extremes is optimal. We also see that no single measure is sufficient on its own or strictly necessary to stimulate growth. What does work is an appropriate combination of regulating measures.”

Importance of debt financing still too often underestimated

The research shows that countries with a high percentage of scale-ups certainly have one factor in common: their legal framework offers a high degree of protection, which makes it easier for businesses to access at least one source of external financing. What is striking here is that debt financing can be as valuable as venture capital.

Professor Tom Vanacker: “Over the past few years, many European initiatives have been launched to improve access to funding for rapidly growing companies. The focus is mainly on venture capital, which is good, but we also see that many scale-ups tap into debt financing. Thus measures aimed to protect loan providers are also important. The stereotypical image of venture capital as the only route really does need to be adjusted.”

Recipes for success: The UK and Scandinavia as role models for Belgium

• The recipe for success in the United Kingdom, but also in Sweden, Finland and Denmark, consists of high protection for both credit providers and minority investors in combination with well-protected property rights. In other words, the government facilitates access to funding, which is crucial to fast growth, whilst ensuring that both entrepreneurs and financiers can reap the harvest of that growth. Labour market regulation is a factor that has not played any role in this recipe, and it could be either high or low.
• Portugal and Spain are two other countries where the percentage of rapidly growing companies is higher than the European average. They have strong labour market laws, combined with easy access to risk capital and strong property laws, to thank for that. Because employees are well protected, they are stimulated to support risky growth ambitions for their companies.

Professor Veroniek Collewaert: “Belgian policymakers would do well to monitor the gap with scale-up hotspots such as the UK, Ireland and Scandinavia. We already had good protection for minority investors and property rights, and in 2019 we caught up well in terms of protecting loan providers. The trouble we see today, though, is that those countries are still scoring better than Belgium for flexibility in their labour laws. If the gap between us and these high-fliers gets any bigger, it might be time to consider relaxing our strict labour market laws more. Possible options in this regard are the minimum wage and notice period. But to improve the quality of our labour market, increasing the employment level would also be beneficial. Although our score for protecting minority investors is already quite good, countries such as the UK and Ireland are showing that there is still room for improvement in that area as well.”