Fostering Entrepreneurship in Emerging Industries: The German Renewable Energy Industry and Lessons for Entrepreneurship Policy by Holger Berg, Katja Pietzner, Christine K. Volkmann, Manfred Fischedick _______________________________________ This paper is dedicated to entrepreneurship policy as a means to establish politically desired industries. A triangle of three vital dimensions is developed: legitimacy, the role of institutions and the question of direct vs. indirect measures in entrepreneurship policy are analysed based on a case study of German policy towards renewable energies. Results with regard to entrepreneurship policy are obtained from different empirical sources. Propositions with regard to the improvement of entrepreneurship policy theory, further research directions and normative implications are given. _______________________________________

Introduction Economic policy is often concerned with fostering industries believed to have strategic significance for the future. As many authors (for example Audretsch et al. 2002, Gilbert et al. (2004), Minnitti (2008)) have pointed out, entrepreneurship and its creative potential are crucial factors for the emergence and prosperity of industries (Acs et al. 2008). Hence, policy in support of entrepreneurship appears mandatory for the establishment of a new industry and it is the goal of this paper to identify hints to a meaningful and effective policy in this context. More precisely, we turn towards the question how specific industries can be promoted and successfully implemented with the help of entrepreneurship policy. We develop our findings by assessing the German policy for the creation of a renewable energy industry. The results of this study are part of a larger research effort conducted on behalf of the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety as well as the University of Technology Berlin where we analyzed the situation of German entrepreneurs and start-ups in renewable energy industries. In the course of our research we found that the 

Holger Berg is managing director at the Institute of Entrepreneurship an Innovation Research, University of Wuppertal. Katja Pietzner is a research scientist at the Wuppertal Institute for Climate, Environment and Energy. Prof. Christine K. Volkmann holds the UNESCO Chair of Entrepreneurship and Intercultural Management at the University of Wuppertal. Prof. Manfred Fischedick is Vice-president of the Wuppertal Institute for Climate, Environment and Energy. Corresponding Address: Holger Berg, Institute for Entrepreneurship and Innovation Research, Gaußstr. 20 42119 Wuppertal, Germany. [email protected]

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conditions created in the development of the German renewable energy industry had mostly been shaped and influenced by young as well as small and medium-sized companies, many of them founded in this specific industry. Since the German renewable energy industry is completely dependent on political support due to market failure and pricing, it seemed logical to analyze which of the political measures can be characterized as effective in terms of entrepreneurship policy.

Entrepreneurship Policy as a Means for the Establishment of New Industries In nascent industries innovative steps in most cases are being pursued by entrepreneurial as well as small and medium sized companies (SMEs), because larger companies tend to shy away from the risks associated with innovation in relatively young industries (Audretsch et al. 2002, Audretsch 2004). The impact of entrepreneurship and entrepreneurship policy on the development of an economy has seen in-depth studies by multiple researchers (for example, Audretsch et al. 2002, Gilbert et al. 2004, Acs/Szerb 2007, Baumol et al. 2007). They revealed that entrepreneurial start-ups, as well as SMEs, are accountable for a higher ratio of innovation in many economies than large companies. These companies have also been found to relate disproportionately to positive shifts in economic growth (cf. Audretsch 2004, Gilbert et al. 2004, Plosila 2004 among others).1 However, theory on policy that fosters entrepreneurship remains somewhat underdeveloped: “… The fundamental and general question of how, and if, governments are able to influence positively entrepreneurial activity is far from being resolved” (Minitti 2008, p. 780; see also Storey 2002, Woolley/Rottner 2008, and Michael/Pearce 2009). Based on Audretsch et al. (2009) we define entrepreneurship policy as a policy that encourages entrepreneurial activities and that aims at the support of start-up formation. There has been discussion on the relationship between a (traditional) policy designed for SMEs and entrepreneurship policy (cf. Audretsch 2004, Lundström/Stevenson 2005, Welter 2009). In 1

For a critical assessment of this view cf. Holtz-Eakin (2000).

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this paper we opt for the approach delineated in Audretsch (2004) and perceive entrepreneurship policy as one that “… includes potential entrepreneurs as well as the existing stock of SMEs. […] (Audretsch 2004, p. 182). We choose this more encompassing approach for two reasons: Firstly, our interest lies in entrepreneurship policy concerned with building a new industry. Entrepreneurial action in our case is then about the establishment of new product-market combinations in a theretofore non-existing market (Schumpeter 1934). This implies either original start-ups or innovative diversification from existing companies. Secondly, since the German economy is fundamentally based on the “Mittelstand” which consists of SMEs (Verheul 2002b) and is strongly associated with innovative, entrepreneurial behaviour, German entrepreneurship policy and entrepreneurship is inseparable from SMEs (Audretsch et al. 2009). From the above mentioned research it may be derived that a structure consisting of entrepreneurial SMEs and start-ups may yield relatively high rates of innovation, growth and job creation. An industry‟s performance is then affected by its composition in a feedback relationship (Gilbert et al. 2004, McMullen/Shepherd 2006, Acs/Szerb 2007). However, the environment for entrepreneurship in industries with new technologies is often underdeveloped due to the simple fact of newness (Stinchcombe 1965, Freeman et al. 1983, Wooley/Rottner 2008). To be effective, policy that aims to establish a new industry thus needs to stimulate entrepreneurship and its “ecosystem” (Acs/Szerb 2007). With regard to the dimensions of entrepreneurship policy several studies have dealt with aspects of the institutional framework. Examples are van de Ven (1993), Aldrich/Fiol (1994), Gnyawali and Fogel (1994), and Verheul et al. (2002a,b). Kreft and Sobel (2005) as well as Koveos (2007) specifically showed that the level of entrepreneurship is a direct result of economic freedom. With regard to entrepreneurship as an alternative occupation, Carlsson and Mudambi (2003) hence argued that policy should concentrate on making entrepreneurship easy, since otherwise high opportunity costs resulted in adverse selection (Baumol et al. 3

2007). This especially concerns questions of market dynamics versus political engineering; it has to be analyzed when a specific institutional framework fosters entrepreneurship or opposes it. Legitimacy of interventions marks a second line of research. Legitimacy is important because it affects the cognitive approval of the emerging industry (Aldrich/Fiol 1994). With a view to this paper‟s topic the creation of legitimacy is thus essential. Four strands of argumentation can be identified on when legitimacy may be assumed: A first argument regards the positive impact of entrepreneurial firms and SMEs on economic growth (cf. for example Gilbert et al. 2004, Baumol et al. 2007, Michael/Pearce 2009). In this view, entrepreneurship policy is legitimate when it improves economic welfare and promotes (favourable) structural change. Secondly, Entrepreneurship policy is justified if it serves to correct market failure (Verheul et al. 2002a, Audretsch 2004, Minitti 2008, Michael/Pearce 2009). It is the innovative, structure breaking nature of entrepreneurship that legitimates it as an instrument for this endeavour (Gnyawali/Fogel 1994). A third line of argumentation developed by Smallbone and Welter (2001) can be described as factual legitimacy: Since small and emerging companies are more affected by changes in economic policy, they need special attention. Baumol (1990) and Baumol et al. (2007) propose a fourth alternative: They argue that there is an almost constant supply of entrepreneurship but that entrepreneurship may take productive, unproductive or even destructive forms depending on the incentives provided by legislation and society. It is then the task of policy makers to channel the residuum of entrepreneurship into the productive canal. An important question is to which extent a government should interfere with the development of an economy. Another dimension of entrepreneurship policy is thus whether governments should pursue a strategy of micro-management or if they should confine themselves to long-term oriented macro-management (Carlsson/Modambi 2003, Plosila 2004). For example, Michael and Pearce (2009) argue that only indirect governmental action concentrating on property rights was justified while direct action is less preferable. Minitti 4

(2008), Kreft/Sobel (2005) as well as Carlsson/Mudambi (2003) also argue in favour of indirect measures which in their view should concentrate on entrepreneurial freedom. In contrast to this, Gnyawali/Fogel (1994), White/Reynolds (1996) as well as Woolley/Rottner (2008) propose possibilities for direct support. This dimension also relates to issues of creating a support environment that nurtures entrepreneurship such as universities or incubators (Carlsson/Mudambi 2003, Wooley/Rottner 2008). To analyze the German policy on renewable energies we will utilize an interpretation scheme developed by Verheul et al (2002b).2 We found this approach useful as it takes a distinct view on instrument categorization, encompasses an interdisciplinary perspective, and an institutional framework view. The following categories are suggested (Verheul et al. 2002b): 1. Government interventions on the demand side of entrepreneurship, 2. Intervention on the supply side of entrepreneurship, 3. Policies aimed at influencing the availability of resources, skills and knowledge of individuals, 4. Policies aimed at influencing the preferences [for entrepreneurship] and 5. Policies (directly) aimed at the decision-making process of individuals. German policy for the establishment of renewable energies will be analysed and interpreted along this scheme and in terms of the triangle specified above: The importance of legitimacy, the role of institutions and the question of direct vs. indirect measures.

Methodology With respect to the early status of entrepreneurship policy theory and the nature of our research question, we opted for a case study approach (Eisenhardt 1989, Hamel et al. 1993, Yin 2003): Our analysis is thus exploratory and revelatory (Yin 2003, Flyjvbjerg 2006, Gerring 2007). It aims to reveal the mechanisms and effects behind German renewable energy policy as a catalyst towards creating an entrepreneurial industry structure as case studies are

2

Other approaches to the assessment of entrepreneurship policy have been developed for example by Welter and Smallbone 2001, Storey 2002, Lundström/Stevenson (2005), Welter (2009), see Welter (2009) on this regard.

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especially apt for analysing such change processes over time (Eisenhardt 1989, Curran/Blackburn 2001). We restrict the case to the effects of German policy on renewable energies starting in the 1970s and ending in 2008, thereby limiting it spatially and in time (Ragin 1992, Gerring 2007). To ensure validity and reliability (Yin 2003, Gerring 2007) we took the following steps: Construct validity was secured by multiple sources of evidence in parallel and sequential triangulation (Campbell 1975, Eisenhardt 1989). It was improved through having the findings reviewed by an interdisciplinary research team (Eisenhardt 1989). External validity of our research has been accomplished by the incorporation of the existing strands of entrepreneurship policy theory (Yin 2003). We achieved reliability by continuously tracing and delineating our research and by the development of an encompassing database (Eisenhardt 1989, Yin 2003). We have selected Germany since it can be tagged as an exemplary case: The German government has pursued a continuous policy3 to foster renewable energies (Wüstenhagen/Bilharz 2006) resulting in a very successful renewable energy industry. Germany can thus be considered a key case (Gerring 2007). Data has been collected from a variety of sources: We started with a literature analysis of the historical development and of data from databases on public support programs for renewable energies. We then performed several further steps. We conducted semi-structured interviews with 17 experts. In tune with the suggestions for entrepreneurial policy research, experts from politics, public administration, scientific institutions, energy associations, and entrepreneurs as well as managing directors of SMEs were included (Gnyawali/Fogel 1994). We then developed a database of companies and their respective decision makers. We identified them through internet research and membership tables of German renewable energy

3

Germany is not the only country with a longer history of renewable energy policy. Especially Denmark can be mentioned in this context. But Denmark shows some breaks and inconsistencies in the history of its renewable energy policies (see for example Lipp 2007).

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associations.4 586 decision makers, that is owners, managing directors etc. were addressed. We received 47 valid observations (return quota of about 8 percent). 35 of the companies were founded as original start-ups, while 12 were derivatives or spin-offs of existing companies. Of these 47 companies 18 worked in other industries as well, 14 of which originated from an industry other than renewable energies. A total of six companies declared to have received public funding. Only two cooperated with a university in the course of starting up. No company saw itself as a university spin-off. We further conducted four embedded case studies of companies in renewable energies (Yin 2003). These were constructed on the basis of internet research, company reports, press and media data and interviews with staff and experts. Two companies (A) and (B) are active in the photovoltaic sector. The other two, (C) and (D) are spin-offs. Companies A and B were chosen for their comparatively long, original and successful history in the renewable energy industry. C and D were chosen as cases representative of the present start-up situation.

Analysis of Entrepreneurship Policy in the Establishment of the German Renewable Energy Industry Making the Case Climate change and rising scarcity of fossil fuels mandate political intervention to overcome these severe threats implying that renewable energies5 will provide strategically important markets for the future (BMU 2006, Krewitt et. al 2008). Few countries have been as successful in establishing a renewable energy industry as the Federal Republic of Germany (Campoccia et al. 2009). Employment in renewable energies in Germany more than quadrupled from 1998 (66,600 jobs) to 2008 (278,000 jobs) (BMU 2009). Scholars in renewable energies attribute this success to an effective policy which spawned an innovative structure dominated by start-ups and SMEs (Agnolucci 2006, Jacobsson/Lauber 2006,

4

There is no official statistic on companies active in renewable energies in Germany, so we opted for an approach in which we identified companies ourselves. 5 Our research included the renewable energy industries of photovoltaics, geothermal (surface and deep), hydropower, wind power and biomass.

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Wüstenhagen/Bilharz 2006, Lehr et al 2008, Lund 2009, Soppe 2009, Ragwitz etlal. 2009). 84 percent of the companies employ less than 250 people. Specifically Lehr et al. (2008) and further evidence stems from a recent study published by the European Commission (Ragwitz et al. 2009). German Policy towards Renewable Energies 1973-2008 Initial steps to foster renewable energies were taken by German policy in the 1970s6 when the first oil crisis shifted public attention to the dependency on fossil energy. In 1974 a research program was initiated (Wüstenhagen/Bilharz 2006). Emphasis was put on wind power with one large scale project in the late 1970s/early 1980s (GROWIAN). Additional small

scale

activities

were

fostered

by

research

funds

and

R&D

subsidies

(Wüstenhagen/Bilharz 2006, Jacobsson/Lauber 2006). While GROWIAN failed, the small scale programs yielded some success. Hence, in 1989 a “100 MW”-program was started that supported the installation of wind power plants until this capacity was reached. As it yielded rapid success, it was soon enlarged to 250 MW. For solar power a “1000 roofs”-program gave similar incentives and was followed by a “100.000 roof” program in 1999 (Jacobsson/Lauber 2006). Both wind and solar programs were based on investment incentives and flanked by soft-loan programs offered to investors of plants (Agnolucci 2006). Reiche/Bechberger (2004) and Wüstenhagen/Bilharz (2006) also emphasize the emergence of pressure groups and promoters for renewable energy in the 1980s and 1990s, which supported the proliferation of technologies and functioned as resistance towards the abolishment of political support. They integrate members from the whole political spectrum (Wüstenhagen/Bilharz 2006). In 1991 the „Stromeinspeisungsgesetz“ (StrEG) was introduced. This first German feed-in tariff (FIT) law guaranteed producers of renewable energy a market price measured as a constant percent share of the end-consumer price. This share had to be afforded by the utilities, who were

6

We will confine this paper to an extended overview. Wüstenhagen and Bilharz (2006) as well as Jacobsson and Lauber (2006) offer in-depth studies of the history of German renewable energy policy.

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exempted from this law and thus could not profit from FITs (Wüstenhagen/Bilharz 2006). The StrEG as well as the wind and solar programs set the starting point for the success of the German renewable energy industry. However, they were sidelined by many other efforts; some of them on the level of municipalities or the federal states. Here, accelerated and transparent permit procedures started in the late 1990s played an important role (Reiche/Bechberger 2004, Campoccia et al. 2009), significantly reducing the length and uncertainty of applications (Agnolucci 2006). In 2000 the StrEG was succeeded by the “Erneuerbare Energien Gesetz” (EEG), a reformed and improved FIT-law. The EEG introduced fixed prices per KWh for several types of renewable energy sources. In both FIT-laws electricity from renewable sources received priority grid access, transmission and distribution, and the utilities were obliged to buy the electricity produced (OECD/IEA 2007). To establish a level playing field for the different technologies, the prices per KWh were adapted to the production price so that relatively expensive technologies like photovoltaics yield a higher return per KWh. These prices were fixed for a considerable time span (ranging from 15-20 years depending on the type of renewable

energy)

and

thus

reduce

uncertainty

to

the

investor

considerably

(Reiche/Bechberger 2004). These prices are adapted and lowered for new installations every fourth year to stimulate efficiency of energy production from renewable sources and to spur technological progress (Haas et al. 2004). The EEG provided a boost to the German renewables industry (table 2) and it is regarded to be among the most effective instruments in fostering renewable energies so far (Lund 2009). From its introduction in 2000 until 2007 the German supply of renewable energy grew by 75% at an average annual level of 12% (OECD/IEA 2007). However, the renewable energy industry in Germany still is largely artificial, that is politically maintained. As long as the price of energy from conventional sources is cheaper than renewable energy, there will be no “natural” market for renewable energies in Germany (Weller 2001). 9

To improve the picture of support for entrepreneurs we constructed a database of German support measures for entrepreneurs, SMEs and/or renewable energies. A total of 314 programs on the EU-, federal-, and Länder (state)-level were identified. The renewable energy programs addressed companies, communities, and end-consumers. However, we found that only 14 percent were also designed to serve indirect purposes by reducing barriers or improving the image of renewable energies. Of all programs, we found 10 on the EU-level and 89 on the national level; all others were federal state- or regional-specific. We identified 115 renewable energy programs that targeted plant investors and local administrations (for example subsidies for installation by municipalities). While these programs do not directly address entrepreneurs and SMEs, we consider them important since they represent indirect measures which foster demand for renewable energy technologies in Germany. We then examined which of the 199 direct programs only addressed renewable energies and came up with 65 of which six were EU based and 28 national. Most of these subsidized the installation of plants, R&D and demonstrational projects. We were surprised to find that none of them specifically aimed at start-ups. However, Germany also offers general funding to founders which is accessible to start-ups and companies in renewable energies, too. To take possible effects from these into further account we included specific questions concerning public support in the start-up phase into our interviews and survey. Findings on the role of entrepreneurs in renewable energies To learn about specifics of entrepreneurs in renewable energies we asked 17 experts to characterize this industry‟s “typical” entrepreneur. The interviewees explained that these tend to come from technological professions like engineering or physics, many of them from universities. Idealism was highlighted as a specific trait: Founders and entrepreneurs in renewable energies seek to contribute to a good cause by being active in a “green” market. One of our experts referred to founders in renewable energies even as “idealists, freaks, and worn-out engineers”. Another pointed out that by now a combination of idealism and profit 10

orientation has gained in importance. We then inquired about contributors to innovation within the German renewable energy industry. Most experts agreed on universities, entrepreneurs, and SMEs as most relevant. They thereby supported our earlier findings on the importance of these groups. Half of the experts associate a very high to high importance to the specific significance of start-ups for innovation in renewable energies. One referred to the historical impact of “garage start-ups” claiming that some of the contemporary market leaders started on a very low level. Another expert mentioned the trend-setting effect of the German market and industry: “A lot of things that have been demanded here [in Germany] for a long time, find international demand now. And in some aspects, the international standard is where we used to be ten years ago ...” A further statement stressed the importance of public support as a motivation for entrepreneurial engagement. When we asked the entrepreneurs and decision makers in the survey about the contribution of start-ups, we found further proof of their importance. Especially their higher innovative potential was mentioned several times. One entrepreneur claimed that start-ups induced “movement into the market” while others pointed out the general capacity of renewable energy technology for innovative behaviour. The “Mittelstand”-character and decentralised structure of the German renewable energy industry were explicitly mentioned as beneficial traits with regard to start-ups. We see this as a substantiation of our approach to include SMEs into a theory of entrepreneurship policy. The institutional framework Regarding the role of the institutional environment we received a high amount of responses that stress the importance of political support, subsidization and, especially, the FIT-law. One expert stated that the nature of start-ups in renewable energies was “always depending on the government and its goals on renewables”. This was qualified as a risk by another interviewee, since high dependency on the state is evoked. A third expert even critically stated that “intensive support of the industry even permits the establishment of companies which are not economically oriented”. Two experts from venture capital funds 11

support this. They described investment risks as low in renewable energies when compared with other industries because of its reliable, long-term oriented legal framework. Also, the importance of continuous policy support from renewable energies and a step-by-step procedure towards an alignment of energy prices until renewables reach competitiveness with conventional energy was pointed out. In the company survey, the respondents, too, were well aware of the importance politics has for the industry. Asked about the relevance of the legislative framework 24 respondents answered that these were “very important” and 14 labelled them as “important”. Accordingly, opportunities resulting from legislation were marked as “very important” by 26 respondents and as “important” by 15. Also, potential failure from policy development as a risk was tagged as vital (24 “very important”, 13 “important”). When asked about characteristics of renewable energy start-ups, one of the respondents answered “the as of yet strong dependence on the politically set framework”, another hinted to the significance of stable policy with regard to entrepreneurship. Within the embedded cases we found further awareness for the importance of political support and legislation. The impact of long-term security and transparency was confirmed here: Again, the FIT-law (EEG) was regarded as especially important. For example, we found evidence in Company B‟s annual report of 2004. An interviewee from company D stated that “the EEG sets very positive and good general conditions.” Regarding threats from political inconsistency, one entrepreneur from company A mentioned that in the history of his company, sudden turns in political decision making had been of particularly negative impact (Batarilo 2007). This is confirmed the company‟s annual reports of 1999 and 2003, which also mention problems resulting from unclear political decision making. The expert interviews confirmed the significance of property rights for successful entrepreneurship suggested by theory. One of the experts, a corporate venture capitalist, stresses the weight of property rights for their investment decision: “The existence of property rights and patents is obligatory for the conclusion of an investment contract. […].” However, 12

a very interesting result emerged when we asked the entrepreneurs and decision makers. In contrast to the experts only very little weight was attributed here. Less than a third saw property rights as a strategic success factor for their company. Only three respondents viewed inadequate property rights as a potential source of failure for start-ups. Existing property rights were regarded as a barrier to market entry by only two respondents. Findings on this regard in the four case studies show a similar picture. They stem essentially from companies C and D, both high-tech spin-offs in geo-thermal technology. An interviewee from company C paid little concern to property rights. He stated that his firm owned one patent but really considered the 30 years of experience provided by the mother company as the most important competitive advantage. To the contrary, a member of Company D stated that in the establishment of this firm a patent really was the triggering factor. Direct versus Indirect Measures Strong support for indirect measures could already be shown in the section on the institutional framework. For direct policy measures the experts acknowledged specific importance of financial support. One referred to the special circumstances of strong political subsidization (the FIT) and support as a risk mitigating aspect that spurred entrepreneurship. Early public R&D funding was also seen as effective. Regarding direct support measures the experts show rather strong reservations to the status quo: They perceive too little transparency regarding offers and processes and criticize that too much activity in too many fields resulted in opacity and misinformation hampering start-ups and innovation. The same criticism applies to politically created clusters and networks. With a view to the current state some experts claim that too many efforts in this area yielded an opaque and ineffective plethora of possible networks. The company survey attributed lesser importance to direct measures when compared to indirect ones. Public support was labelled as “very important” or “important” by 30 respondents, and R&D support was important to about 50 percent. No high significance was 13

attributed to future offers of public monetary funding. Externally provided networks were equally regarded as rather irrelevant; 11 of the respondents ascribed these as “insignificant” and 16 claimed they were “not important”. In contrast, personal networks were accredited with high impact for the start-up of the company (16 “very important”, 21 “important”). We posed some questions exclusively to those 20 decision makers who were founders in renewable energies. Since we found no specific direct support programs for start-ups in renewable energies, we were interested in this target group‟s attitude towards those. With the exception of financial support the founders seem to prefer indirect political measures: The feed-in tariff was pointed out as the most important backing to companies in renewable energy industries by 17 of the entrepreneurs. Less impact was attributed to direct measures such as bank loans, private equity or public subsidies. When asked what kind of support the entrepreneurs wished for, most open responses aimed at transparency and simplicity. Opportunity costs and search costs thus seem to play an important role in the perception and utilization of direct support programs. Here, the results support our findings from the expert interviews, especially regarding a stable long-term perspective and a relative preference for indirect, framework-setting measures.

Discussion From the scheme of Verheul et al. (2002b) we can derive a high degree of effectiveness for politically induced demand pull-effects for entrepreneurship: The FITs and investment incentives into renewable plants did not work on the technology producers themselves, but on investors in energy producing plants. However, these investors started to request better and more machinery, which resulted in a stable and growing demand for plant technology and innovation. Furthermore the experts stressed the importance of pricedegression by FIT-law adaptation as a technology-driving and hence opportunity creating factor. Stability of demand in Germany was granted by the long-time perspective given to investments into renewable energies by the feed-in tariff law. Stable and growing domestic 14

demand yielded further opportunity and allowed the German companies to diversify and to invest into international markets assuming market leader positions in several branches of the industry. We found few supply side measures that specifically addressed entrepreneurship in renewable energies, but there are programs promoting entrepreneurship in general open to entrepreneurs in the industry. Neither expert interviews nor the survey among companies revealed any impact of these measures. We would thus propose that they might not be very important with regard to entrepreneurship policy with an industry focus and that further research on industry specific supply side measures is required. Political measures that influence the resources available to entrepreneurs clearly do matter, albeit from our findings not as much as indirect, framework setting instruments. Special significance was attributed to funding for R&D, demonstration projects and capital support. For these measures to be effective, both experts and entrepreneurs demand transparent granting procedures and an accessible, that is, understandable, program design. Regarding measures that influence the preference for entrepreneurship we did not find specific motivational programs. However, the double orientation of the entrepreneurs who have been motivated by ecological and economic goals might indicate that state programs which promote the acceptance of renewable energies indirectly also promote entrepreneurship in this field. From our results the political management of the entrepreneurs‟ risk-reward profile is of great importance. Reduction of risk and uncertainty was confirmed to have been crucial by all our sources. Entrepreneurial activity rose with reliable, long-term perspectives granted by the state (FIT-laws). As shown above, the establishment of strong political support grants entrepreneurs the possibility of experimentation and might thus yield quicker technological progress. Vice versa, we learned from the interviews and the embedded cases that risks created by change in political approaches have detrimental effects on entrepreneurial motivation.

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Legitimacy From the four lines of legitimacy which were identified from the literature we think that the first three lines particularly apply: The need for structural change, innovative technologies and economic growth was found and has been described for example by Jacobsson/Lauber (2006). Since these advantages are associated with superior returns and economic growth (Acs/Szerb 2007), fostering a renewable energy industry was thus legitimized by this line of argumentation. Market failure, the second line of legitimization, exists through pollution. Specifically, harmful effects from emissions in energy production are not sufficiently priced so that the costs for conventional forms of energy production are kept beneath the costs of renewable sources (Schumacher/Sand 2006, OECD/IEA 2007, ren21 2007). The resulting structure of the industry which is dominated by (young) SMEs as shown in chapter 4 has meanwhile brought the third line of legitimization into effect: A large number of SMEs and start-ups has developed and hence needs special attention in the legislation process of renewable energy policy (Lund 2009). One might especially keep in mind that legitimacy is directly linked to the public support of a political effort. Our research has shown that a strong backing for renewable energies throughout the German society and political parties was important for the emergence of the renewable energy industry. The perceived legitimacy of interventions is then an important aspect of entrepreneurship policy for the establishment of new industries and clearly deserves further attention from research. The Institutional Framework Concerning matters of the institutional framework, experts and the survey acknowledged the importance of political regulation – especially its stability in the formation phase of the industry – and at the same time detested fast change and opacity: The entrepreneurs need to know that their investment relies on a calculable risk. In a politically framed young market, manipulations of the institutional framework induce change into the system. A volatile framework thus severely raises the perception of risk and uncertainty and 16

hence the danger of sunk costs and rising opportunity costs. However, the fact that even undertakings with low economic orientation were possible because of a high degree of political support indicates that experimentation with limited risk was feasible in the case studied here. In such a setting technology might develop more freely and more diversely, granting more options to renewable technologies and hence more entrepreneurial opportunities. Still, such experimentation and its potentially lower economic survivability are afforded by the tax payer. Policy makers are thus confronted with a trade-off between granting enough room for entrepreneurial experimentation and efficient tax allocation. The relationship between state funded room for experimentation and a sound institution of a selfsustainable market hence makes one of the desiderata for further theory-building. We were surprised to learn that the industry did not attribute as much significance to property rights as might have been predicted from the literature. While we do not know why exactly property rights were not seen as decisive, there are at least two lines of argumentation which may explain this: The high innovativeness of most parts of the industry might lend a short life-span to developments so that the amount of money and time necessary to receive for example a patent is not worth the investment. A second reason might be the increasingly international character of the industry. Since property rights are much harder and more expensive to receive, control and enforce internationally, companies may choose not to invest. From this, interesting implications for industry focused entrepreneurship policy may arise, because little importance of property rights for innovative, fast developing industries could be proposed. Direct vs. Indirect Measures We found strong support for the significance of indirect measures in the „construction‟ of an industry. These measures especially reduced uncertainty and risk for entrepreneurs in renewable energies. A strategic political perspective can almost be described as a prerequisite for intensive entrepreneurial activity. Concerning the institutional framework, we suggest that 17

this is linked to the perceived calculability of the market‟s future. Accordingly, we find little acceptance for political micro-management, as constant political intervention reduces the perception of stability and reliability. We hence suggest that entrepreneurial policy theory must intensively regard instruments that yield indirect, framework setting effects (as suggested for example by von Hayek 1945). Concerning direct intervention, we have found evidence for the usefulness of financial and R&D support and learned that entrepreneurship policy should provide instruments that are transparent, accessible, and easily understandable. We identified mixed support for the importance of networks and clusters. While they are regarded as useful in general, they are not seen as crucial to the development of the industry. We suggest that with a view to cluster initiatives, again few but transparent, understandable and accessible measures might be effective. Concerning universities we found a slight contradiction between experts, the four embedded cases and companies. While we do not know exactly why that is the case, we assume that the relatively small size of many companies functions as a barrier. Moreover, German universities as public institutions might be subject to inertia and might need some time to develop the experts necessary to support an emerging industry. This would be in tune with the propositions posted by Aldrich/Fiol (1994) on the role of education in emerging industries and a lagging of dedicated research. On the other hand, two of the four cases (C and D) resulted from cooperation with universities. Also, the majority of the entrepreneurs in our survey were university graduates. Hence, even if universities do not play an overly active role in the industry‟s evolution, they clearly matter as a breeding ground for entrepreneurs and technological innovation. We hence suggest that a policy towards entrepreneurship which pursues a holistic approach should include the development of competencies within universities in the early stages of its agenda. A related implication that may be derived from our findings concerns absorptive capacity (Cohen/Levinthal 1990, Shane 2003): As Germany has strong roots in engineering and technology, renewable energies found an existing basis of experts and small companies (for 18

example from the automotive industry) who had the necessary knowledge and technology to quickly make use of the opportunities granted by legislation and demand pull, and needed little direct incentives to become entrepreneurial (Carlsson/Mudambi 2003). The small scale projects and R&D programs of the 1980s further enhanced absorptive capacity. We find further proof of the role of absorptive capacity in the aforementioned existence of a broad and early green conscience in Germany – renewable energies “hit a nerve”. Smaller success of government approaches in other industries like Microprocessors and Biotech in Germany (Carlsson and Mudambi 2003) may thus also be explained: There was not enough absorptive capacity to introduce a sustainable industry on a large scale. Hence we suggest that a successful entrepreneurship policy aiming at the industry level has to take existing absorptive capacity into account. Its role as a success factor in the emergence of new industries deserves more attention from future research. Combining the findings concerning the institutional framework and the question of direct vs. indirect measures, we think that a stable institutional framework – and hence indirect measures – is a condition sine qua non. But the history of renewable energies also reveals that direct measures clearly do have a place, too. The question thus is not one of indirect or direct measures, but which combination of these is most effective. The study presented here has some limitations: While we included quantitative data from secondary sources, most data is qualitative and explorative. It may thus be affected by subjective interpretation. Furthermore, our survey among entrepreneurs and decision makers in renewable energies was conducted among existing firms. We may thus clearly be subject to a survivor bias. However, as shown in chapter 3, by ensuring validity and reliability we have taken measures to limit this risk. We also consider the fact that the German renewable industry is still dependent on political support as a risk factor: While the German companies and entrepreneurs are very successful also on an international level, the industry still has to prove its overall viability when exposed to original free market conditions. This makes further 19

research into other, more mature industries erected with strong public support a desideratum of future research. To close the discussion we would like to point to a fact that, in our view, needs strong emphasis: The evolution and emergence of a successful and entrepreneurial renewable energy industry in Germany has been a process of approximately 35 years marked by a staged, pathdependent (David 1985, 1997) process. It was a process between policy, induced effects and emerging structure as described by McMullen/Shepherd (2006) that has yielded the presented outcome and included mutual learning and feedback mechanisms between policy, the public, entrepreneurs and companies. We conclude that entrepreneurial policy with a view to the construction of an industry should be perceived, analyzed and implemented not only with a long-term perspective towards measures but also towards its evolution and effects. Therefore it would be helpful to add a dynamic component to the future assessment of entrepreneurship policy.

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