Level of financial support

As shown in Table 4.6, the level of financial support as another impor- tant institutional determinant consists of two factors. On the one hand side, there is the financial amount an unemployed person can receive in the case of an approval of his application for funding. On the other hand, there is the time over which the founder receives this funding amount. In the literature significant differences between the funding instruments analyzed are found.

59 _{This argument is based on the assumption, that a start-up grant might also} induce moral hazard as the founder is not entirely responsible for the risks, i.e. no or low income, he has taken on (Caliendo et al., 2015).

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However, there are significant problems in the implementation of these measures, as a lack of experience (need of capacity building) on the part of the adminis- trative authorities often seems to hinder the efficient use of these instruments (European Commission, 2016; Minnetti et al., 2016).

Loans, which are usually paid out immediately, range from 5,000 GBP (5,600 EUR) in the UK (Meager et al., 2003a,b) to 25,000 USD (20.000 EUR) in Romania (Rodríguez-Planas and Jacob, 2010; Rodríguez- Planas, 2010) or are limited to a factor of the national average wage in Poland (O’Leary, 1999). On the other hand side, grants are paid either as a continuation of unemployment benefits (typically on a monthly ba- sis for a certain appropriation period) or as a one-off payment directly at the outset of self-employment.

The grant programs in Germany, France and Finland are financially more extensive, whereas the policies in Sweden and Spain are more modest. In Germany, for example, the “Start-Up Subsidy” (see e.g. Caliendo and Kritikos, 2010) amounted to a monthly lump sum pay- ment of about 25,000 EUR in total in the first three years. That the start-up funding is typically provided directly at the time of founda- tion as an entry subsidy (for a discussion see Santarelli and Vivarelli, 2007) expresses, in particular, the incentive to take up work (ALMP). Only in the UK support scheme one can apply for support within the first three years after start-up, which is closer to the idea of corporate subsidies as part of entrepreneurship policies.

In this context, Millán et al. (2012) point to an interesting finding in their study on determinants on firm survival for the EU-15: Even though entering self-employment from unemployment has a strong neg- ative effect on the survival probability within self-employment, com- pared to self-employed with other starting status than unemployment the survival rates are comparatively higher the higher the total amount of the received start-up subsidies expenditures are. This means that the level of funding can be a decisive and supporting factor not only as an incentive to take up self-employment, but also as a means of maintaining it. However, while a positive correlation between higher

promotion and higher survival rates is not surprising, there is unfor- tunately a lack of empirical evidence of the interrelation of the level of support and other program outcomes. For the purpose of effective policy design, it would not only be necessary to know whether there are interrelationships, but also whether they are linear in their course or whether certain thresholds exist with regard to the level of funding. In concrete terms, it would be interesting to see to what extent lim- its exist, up to which, for example, there is no damage to the market

mechanism61 or from which a disproportionate employment effect can

be achieved through the creation of new companies.62

An interesting starting point for further research is the concept of Haas and Vogel (2016), which would also act as a connective link to the eligi- bility criteria discussion of Section 4.4.2. Haas and Vogel (2016) classify existing funding instruments according to the two criteria (i) level of financial support and (ii) strictness of eligibility. This enables them to identify three different groups of funding approaches. Firstly, a group of low strictness of eligibility and medium to high levels of financial support exists (for example specifically the current policies in France, but also Sweden and others), which brings together generous funding programs. Although they are particularly interesting from the partici- pant’s perspective due to their financial scope and low administrative effort, they may also create false incentives, which may lead to firms with little economic growth and job impact as well as high failure rates 61

For example, the European Union assumes that an amount of 200,000 EUR can be paid to a company over a period of three years without creating market distortions (European Union, 2013b).

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However, Millán et al. (2014) once again point out that, compared to other founders, starting a business out of unemployment is in itself associated with an increasing likelihood of becoming unemployed again. This applies both to former unemployed founders with and without employees. For other groups of founders, however, the chances of survival for employers are significantly higher than for own-account workers.

after the funding period.

Secondly, a group of high strictness of eligibility and medium to high level of financial support exists, which is characterized in particular by Germany and Greece, but also Austria, Switzerland and Spain. After a competitive selection process by the administration, generous resources are made available to the unemployed persons. Especially Germany is interesting here, as it changes between the different eligible groups on a recurring basis (see Table 4.1).

Thirdly, a group of low level financial support exists. As the financial impact of the funding on the participant and the company is very small, only minor negative effects of the funding, but also only minor positive externalities such as job creation should be expected by policy makers. This classification could be used in a meta-analysis of impact estimates (see Kluve, 2010 and Card et al., 2015 for comprehensive studies on all other ALMP other than start-up incentives) in ALMP evaluation setting that accounts for differences between a participant group and

a comparison group.63