'Too few of Sweden's billionaires are self made'

“I want more entrepreneurs to dare to invest, create businesses based on their ideas and win ground in the international competition," wrote Fredrik Reinfeldt in the technology magazine NyTeknik earlier this month. The Swedish prime minister continued to list a number of reforms that the government has launched to reach this goal.

But many of policies, such as tax breaks making it more affordable to renovate a house or buy cleaning services, have more to do with encouraging self-employment than entrepreneurship.

At first glance, Reinfeldt's line of argument seems quite plausible. The government has introduced various measures to encourage work and business ownership. In a time when much of Europe is still struggling in the aftermath of the crisis, Sweden's economy is performing relatively well.

Reinfeldt makes the common mistake, however, of equating self-employment with entrepreneurship. In reality, the two are quite dissimilar. Reforms that encourage more people to work as taxi-drivers or start small cleaning companies are vital for promoting employment, but do not necessarily affect entrepreneurship.

In some ways entrepreneurship is like an elephant, hard to define exactly, but easy to recognize once you see it.

Starting a company may not really qualify as entrepreneurship if the company is a one-man operation. Even creative individuals cannot be described as entrepreneurs if they lack the skills required to convert a creative idea into a functioning business. Entrepreneurs are the rare individuals who combine these features, creating innovative businesses that manage to expand and create employment opportunities for others.

Self-employment is high in countries such as Turkey, Greece, Spain, and Portugal – which have low rates of innovative entrepreneurship. On the other hand, the US, which has high levels of innovative entrepreneurship, has a low share of self-employed individuals. Within the US, the entrepreneurial hotbed Silicon Valley has half the self-employment rate compared to the Californian average.

Why should we be concerned? The reason is simple: Successful entrepreneurs such as Ikea founder Ingvar Kamprad create job opportunities for others. Some who would otherwise have been small business owners instead become local managers. Others who would have been forced into self-employment as a last resort before unemployment, can find stable jobs in companies such as Ikea.

Although it's tricky to measure entrepreneurship, it is possible. One way is to look at all the people who have amassed a fortune of at least one billion dollars, and who have appeared on the Forbes lists of the world’s richest people since the mid-1990s.

It turns out that Sweden over the years has had 11 billionaires. But only four of them are self-made - hedge fund manager Thomas Sandell who is worth $1.3 billion, Gustaf Douglas who has amassed $4.2 billion through his security ventures, businessman and investor Melker Shorling who is worth $5.8 billion, and of course, Ingvar Kamprad who has gained $4.2 billion by supplying home furnishing to the world.

But that means only 36 percent of Sweden's billionaires are self-made.

This is slightly below the 42 percent average for Western European countries, and half the US 70 percent average.

The share of high-impact entrepreneurs in a population varies significantly across the world. Countries with high levels of entrepreneurship are characterized by low taxes and limited regulatory burdens. This suggests that the liberalizations and tax reductions introduced by the Reinfeldt government can have some effect on promoting entrepreneurship.

At the same time, the government has done little to reduce the high marginal taxes that affect in particular people who are creating new wealth. The financial benefits for an entrepreneur thus remain low in Sweden. Of course, financial incentives are not the only key factor. Entrepreneurship depends both on incentives and knowledge. Many high-impact entrepreneurs are themselves highly educated, and they often if not always rely on co-workers with expert knowledge.

Recent Swedish governments on both the right and the left have been unsuccessful preventing the deterioration of learning in the Swedish school system. Higher education is also lagging behind. As The Local recently reported, two out of the three Swedish universities have dropped out of the top 100 in the Times Higher Education’s 2014 World Reputations Rankings.

So, while the conditions for businesses have overall been improved, the same cannot necessarily be said about entrepreneurship.

Sweden has a long history of entrepreneurship and has the potential to foster new innovative businesses. But to reach that goal we must increase the rewards to the people who create new wealth and substantially increase the quality of education and research.

Otherwise, entrepreneurs from other parts of the world are likely to increasingly win ground on the competitive international marketplace.

Nima Sanandaji is a regular op-ed contributor to The Local. His latest book is called “Renaissance for Reforms”, co-authored with Stefan Fölster.