Before going to a Thai restaurant near my German apartment, I asked a long-time resident how it is, and she said it’s brand new. It was a Texas barbecue (!!) joint for a few months, and something else before that.
Why the turnover? Of course, being unable to cover variable costs matters generally, as always; but the German government apparently gives a small business an incentive to open up, and an incentive to close quickly if it cannot cover its costs: certain taxes are waived if the business is small, but only for a short period of time; thereafter, the tax break phases out.
Thus the risks of opening a new business are reduced; and, if the business is not very successful, the impending loss of the tax break provides an incentive to close it down within the time period necessary to escape these taxes.
I have grave doubts about this policy and about subsidizing small businesses generally: if there are scale economies naturally, why should the government try to offset them? And it’s hard to imagine that there are too few new small businesses — or that people are so unwilling to take risks that the government should offer subsidies.
I see no good economic rationale for these policies, but they are widespread in Germany — and in the U.S. too.
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Have you been to a chain restaurant? Economies of scale are overrated if they mean you have to eat at an Applebees! I see your point for widgets, but food?
Even in America, where there are no real equivalents to the German subsidies, it’s not uncommon to see restaurants coming and going in relatively rapid succession in the same location.
Insert “Mafia” in the second paragraph instead of “German government” and this article still makes sense.
In an ideal economic world such subsidies for business starting and closing might not be needed but as a small business owner I think these are a fabulous idea. Not because I would use them (my business runs fine, thank you), but because fast shutdown incentives seem like they might prevent some of the strange games failing businesses play with vendors and landlords to delay the final accounting and bankruptcy. Wouldn’t it be nice if their eye was on a quick wrapup instead of seeing if they can make $500 by screwing a vendor out of $2,000?
“I have grave doubts about this policy and about subsidizing small businesses generally: if there are scale economies naturally, why should the government try to offset them?”
Because barrier to entry is a big problem our markets. Attempts to reduce the barrier to entry should result in a more dynamic market.
The incentive to close quickly may be a problem, though, as new businesses often take a bit of time to start operating profitably.
A bad location can turn out to be quite a curse.
If a new restaurant moves into a space formerly occupied by a failed restaurant, the new restaurant also seems to fail very quickly. I have seen this happen many times. It does not seem to be location-specific.
I had a conversation with a neighbor of mine who owns four restaurants about a popular chain restaurant outlet near us that closed about 30 days after opening. I was surprised they hadn’t hung on a little longer. His response: you know whether a location will make it or not in a week. Intentionaly or not, the German law probably pushes marginal operators in the right direction.