Regulatory obstacles are the most obvious. Bankruptcy law needs to strike the right balance between protecting the needs of investors who supply risk capital and encouraging innovation and risk taking. Businessmen in Europe complain that existing legislation errs too much in the former direction and excessively penalizes failure. Entrepreneurship is also hindered by difficulties in raising capital and barriers to the provision of stock options. Finally, the culture in most European countries has not accorded the entrepreneur the same status enjoyed in the United States.
Finance is the fuel that feeds the flame of innovation.
Without capital to nurture them through their infancy, most ideas soon die. Europe's financial structure differs in important ways from what we are familiar with in the United States. Financial institutions, particularly banks, have traditionally played a much more important role in channeling funds from lenders to borrowers than has been the case in the United States. The heavy reliance on bank funding posed a particular problem for business startups, which typically do not have much in the way of collateral to offer. Until two years ago, national capital markets were fragmented and cross-border investment carried significant exchange rate risk.