To increase the productivity of the Dutch business community and promote innovation, the next government must provide more space for venture capital. Nowadays, especially start-up companies benefit from venture investors, but there is hardly any capital available for further growth. An investment institution to be set up, in addition to the current European Investment Bank, could help with this.
This is stated by the Central Planning Bureau (CPB) in a study into innovation and productivity in the Netherlands published on Friday. The Planning Bureau thus joins a plea from the business community for the reestablishment of a National Investment Bank. More widely available venture capital has been a wish for years, especially in the Dutch tech sector, which sees innovative start-ups leave or collapse because continued growth is not financially feasible.
The CPB also advocates relaxation of bankruptcy law, allowing non-viable companies to close down more quickly and cheaply in order to free up capital and labor for new business dynamics. Reducing regulatory pressure, especially for small companies, can also stimulate productivity in the Netherlands, according to the CPB.
To survive
The recommendations for a new cabinet arise from an analysis of the so-called ‘creative destruction’ in the Netherlands. This process, made famous by the Austrian economist Joseph Schumpeter (1883-1950) and awarded the Nobel Prize for Economics this year, means that productivity in an economy grows because new, innovative companies continuously replace old, less innovative companies. The productivity growth that this produces is the main driver of economic growth.
The CPB shows that this process of creative destruction has clearly weakened nationally and internationally since 2007. Underperforming companies are less likely to make way for new, innovative and well-performing companies. The Covid-19 pandemic, which was accompanied by large-scale financial support for companies in trouble, has further weakened that process by keeping the number of bankruptcies artificially low. The share of companies perceived as ‘healthy’ that are closed down per year fell from 8 to 9 percent to 4 percent during the pandemic. That figure only partially ‘recovered’; now it is about 6 percent.
It is widely recognized that as a result, businesses have survived – and are still surviving – the pandemic 5.9 billion euros in outstanding debts to the tax authorities – which would have gone bankrupt under normal circumstances. They would otherwise have made room for new companies and jobs.
The CPB once again notes that fewer new companies have entered the Netherlands in recent years and fewer old ones have disappeared. Since the Great Recession (2007-2009), the share of new businesses added per year, as a share of the total, has declined from
At the same time, a change in employment has been visible since 2009: fewer new jobs are being created and fewer existing jobs are being ‘destroyed’. This can be seen in all sectors, in large and small companies, ‘young’ and ‘old’. If fewer new companies are added, the chance that successful young companies will continue to grow and need more staff also decreases.
Leaders
The decline in ‘business dynamics’ means that frontrunners remain frontrunners for longer, according to the CPB. New companies are increasingly unable to catch up with the leaders with important innovations. As a result, those frontrunners experience less competition and invest less in innovation. They become ‘lazy’, as it were, due to the lack of pursuit.
The analysis does show that innovation is increasing, with the CPB taking the number of hours for which companies receive subsidies under the Research and Development Act as an indicator. In total, around 19,000 companies applied for the scheme in 2023 a total of 1.37 billion euros. But that innovation is concentrated in a group of larger and somewhat older companies. Companies with more than 250 employees accounted for approximately 40 percent of innovation hours in 2023, 3 percentage points more than in 2015. In the smallest companies, with three to nine employees, the share actually fell from 10 to approximately 8 percent in the same period.
The share of the ten companies with the largest research budgets increased from 26 percent in 2017 to 35 percent in 2023. The contribution of the number one, chip machine manufacturer ASML, is four times greater than that of the number two, medical technology company Philips. As a result, existing products in particular are improved and less room remains for small and new companies.
It is also striking that older companies (over twenty years old) now account for half of the innovation hours, compared to 27 percent in 2015. Companies that have been in existence for less than five years saw their share fall from 16 to 12 percent in the same period.
The CPB emphasizes that the trend in the Netherlands does not differ from that in other countries. That does not reduce the need to encourage economically beneficial creative destruction. In addition to more venture capital, more flexible bankruptcy law and fewer rules, the CPB therefore also advocates increasing labor mobility, making it easier for employees to change employers. As a result, knowledge is better distributed across companies.
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