Several weeks ago, Marc Wagener was the host for a Brazilian Professor who gave an excellent comparison analysis of the European and US economies making the point that Europe (and Luxembourg) is in a less advantageous and less competitive situation as compared the US in a range of key indicators. In the discussion which followed, I made the statement that Luxembourg was not an entrepreneurial business environment. Marc promptly called me out on this and offered me the space to clarify/amplify my statement. Here goes.
By way of disclaimers, I first would like to make two points. First, having lived in Luxembourg for 24 years, I have come to love this country as my second home and would not have stayed so long if I did not really like it here. Likewise, in my capacity as Chairman of the American Chamber of Commerce, I am a very strong advocate for convincing foreign companies that Luxembourg is the best place in Europe for international companies to set up their European headquarters. So clearly I am a big believer and supporter of Luxembourg. Second, Luxembourg historically has been successful at finding and developing business niches. You have only to look at the history of the Arbed / Arcelor Steel firm, RTL, SES, the financial sector and the new initiatives for developing Luxembourg-based IT to see that the government is a prime driver and contributor to the success of all of these initiatives. One could call this “governmental entrepreneurship” and give the government praise for all they have done and the success they have achieved, attracting and developing new private business activities to Luxembourg by laying the relevant policy foundations. I would agree.
But when I was talking about entrepreneurship, I was referring to bottom up, generalized, grassroots entrepreneurship, not top-down government driven initiatives… I was talking about establishing and growing small enterprises across-the-board, in all sectors…encouraging people with ideas to make them into companies that work. And this is the area where I find the Luxembourg that I love, lacking. Several factors contribute to this:
It is widely said that the goal of the majority of Luxembourg students and their parents is to arrange to have a job working for the government or in the educational system: good pay, very comfortable working conditions, nice vacations…a job for life.. Ask these same young people if they want to become owners of their own businesses, if they have a passion to become entrepreneurs…and the numbers considerably thin. So this is my first indication that we have a risk adverse environment and do not encourage entrepreneurship successfully. This attitude needs to change.
Indeed, we seem to have a school environment that does not teach the skills and attitude to become entrepreneurs. The Luxembourg schools still predominantly focus on learning (take that as memorizing) facts, even though a secondary education reform is in the pipeline. Alternatively, the International School and St Georges, focus on teaching their students to think, to know how to find and use information. If you make a comparison of the university graduation success of students from these two private schools with the university attendance success of the general population, you will find a much higher drop out rate for the Luxembourg public school graduates. Since general IQ scores for Luxembourg public school university attendees are obviously comparable to those for the attendees of the private schools who go on to university, it is reasonable to wonder if one mitigating factor is the education approach…
But becoming successful as an entrepreneur is also about the environment where your idea will turn into a company. In Singapore and Hong Kong it takes merely a few hours to set up a company, get a VAT number, and costs less than 1,000 euro… and do all of the paperwork on line! You literally can decide to become an entrepreneur in the morning and be able to earn money in the evening. In Luxembourg, it usually takes months and costs thousands of Euro. To speed up this process, AMCHAM has been advocating for two years the idea originally proposed by the Luxembourg Chamber of Commerce for the legal provision to have what we in AMCHAM would call a 111 company…to allow ONE person, in ONE day, to set up a micro company for a cost of ONE euro ( thanks to Pedro Castillo, the AMCHAM Entrepreneur/Small Business Committee Vice Chairman, for coining this title!). Despite the governments promise to allow this to happen via the mechanism of the Simplified SARL, still, after two years we continue to do things the old way which discourages entrepreneurship. I would argue that this is over-regulation constitutes an environment which discourages entrepreneurial activities. And the relevant draft legislation (n°6777) has been deposited more than a year ago…
Another factor is the process of getting permission to even start a company. In addition to a minimum of 12,400 euro in capital requirements and the costs of Notary and other specialist fees… and a processing time which takes months, the mechanism in place also places heavy emphasis on having appropriately approved academic credentials as a precondition for approval to commence a business activity. This reality discriminates against those who have earned their academic credentials outside of Luxembourg or have learned by non-traditional means…like Steve Jobs did when he and Steve Wozniak started Apple in a garage in California. Literally they would have faced much more daunting and considerably higher barriers to start their company in Luxembourg. Likewise, would the college student founders of Facebook have been considered academically qualified to open their business in Luxembourg?.
I take these examples also demonstrate an environment that is over regulated, outdated and discourages entrepreneurism.
Likewise, the labor laws in Luxembourg are focused toward big companies and lack the flexibility required for startups.
Taxes are an issue as well. While Luxembourg has lower taxes than the surrounding countries of Benelux, France and Germany, we do not have the lowest European taxes at all. Luxembourg doesn’t even show up in the top 5 in low tax rates in EU: https://en.wikipedia.org/wiki/Tax_rates_of_Europe – Check out Hungary, Estonia, Latvia, Ireland and Cyprus for starters. Luxembourg corporate and payroll taxes are higher than many (most) countries in Europe. We think of Luxembourg as « low taxes » because of the « magical fairyland » that some of the big boys are said to enjoy and the propaganda that the international press bombards us with saying that we live in a tax haven, but Luxembourg is not a tax haven at all for all the small and medium-sized business entrepreneurs.
Combine these administrative barriers/burdens with limited venture capital funding, a high cost for employees, high cost of living and high cost of office accommodations and Luxembourg can indeed become a difficult environment for entrepreneurs.
Still, Luxembourg has so much going for it to make it the perfect place for international companies seeking to develop business in Europe: perfect location in the heart of Europe, a business friendly government, a well educated multilingual and multi cultural work force, a numerically large and enthusiastic foreign population… it is a shame it is not likewise the perfect place in Europe to start a company. If we believe the future lies in growing our own success stories, our own national business champions… then we must make an easier path to encourage entrepreneurs to establish and grow their businesses in the Grand Duchy.
If we are serious about developing a strong entrepreneurial environment, we should replicate or even improve on the best of what our European and global competitors are already doing. It’s time for Luxembourg to wake up and play the tax game like the “big boys” in Europe (andelsewhere)… as well as fix the entrepreneur situation. In addition to addressing the issues already raised, a further good start would be to implement similar incentives for investment as those in other countries like the UK – and if there are complaints in Brussels, Luxembourg should step up and demand that the other countries who started the incentives change their policies first. Equal treatment of all EU member states, in short. Luxembourg should become a tax-harmonization country, adopting the most attractive rates of any fellow EU member and adjusting rates only when they adjust theirs first…and then do the same…or better.
There are some very interesting programs which our fellow European countries follow that Luxembourg should copy. For example, investment in a UK based FinTech startup qualifies for 50% tax rebate, up to 50K GBP. So you can invest 100K and get a 50K deduction on your tax return, protecting 50% of your investment in the same year it was made! In certain cases in the UK (QI) this can be up to 500K on 1 million in investment!
AMCHAM will offer a program in several months to propose additional measures to promote this grass-roots, bottom up entrepreneurship that we think Luxembourg needs.
AMCHAM proudly promotes Luxembourg as the best place in Europe for Established International companies to set up and run their European subsidiaries. Let’s put the mechanisms and changes in place so we can with equal pride say that Luxembourg is the best place in Europe for entrepreneurs (both homegrown and expat) to found and grow a company!