Entrepreneurship in Democratic Contexts: Social Contracts, Risks, and Pathways Forward

Author

Alicia García Herrero

Center for Asia-Pacific Resilience and Innovation

Biography

Alicia García Herrero is Adjunct Professor at the Hong Kong University of Science and Technology. She also serves as a Senior Fellow at the Brussels-based think-tank Bruegel and as Chief Economist for Asia Pacific at the French investment bank Natixis. She is a non-resident Senior Fellow at the East Asian Institute (EAI) of the National University of Singapore (NUS) and at the Institute of Chinese Studies in Delhi. She is a non-executive board member of the listed insurance group AGEAS. Finally, Alicia is a Member of the Council of Advisors on Economic Affairs to the Spanish Government and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR). She holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books. She is also highly active in international media.

In democracies, the interplay between entrepreneurship, democratic values, and societal structures presents profound challenges. These challenges arise from varying social contracts between entrepreneurs and the state across regions, uneven risk distribution that disproportionately affects underserved workers and women, and the glorification of entrepreneurship that often masks reductions in welfare support. These dynamics exacerbate income inequality, particularly in the gig economy, where digital platforms (e.g., Uber and Deliveroo) extract value from precarious workers. Many such workers view themselves as entrepreneurs but frequently earn below minimum wage without adequate protections. The challenge for policymakers then becomes how to encourage innovation and entrepreneurship while adequately protecting entrepreneurs from precarity and promoting equality without compromising democratic values.

A promising pathway forward involves cooperatives, which reimagine entrepreneurship as a collective endeavor. By fostering worker ownership and democratic governance, cooperatives mitigate inequality through profit redistribution, enhanced social protections, and democratized technology. This model enables innovation to coexist with robust social support.

Social contracts of entrepreneurship around the world

Modern economies rest on a social contract among entrepreneurs, society, and the state. Entrepreneurial ecosystems are shaped by these contracts, which influence incentives, risks, and societal outcomes. However, these contracts differ markedly across regions.

In China, entrepreneurial success has historically involved a reciprocal pact with the state or Communist Party, enabling economic liberalization in exchange for political allegiance. This state-centric “you owe us” model channels resources toward strategic priorities such as infrastructure megaprojects and AI dominance, often at the expense of individual freedoms. Amid a prolonged economic slowdown, however, young Chinese have grown increasingly disinterested in entrepreneurship due to perceived risks and reduced space for individuality. This fraying contract reflects a broader retreat from entrepreneurial zeal, as state preferences shift talent toward conformity. The trend intensified in 2025, when urban youth unemployment (ages 16–24, excluding students) peaked at 18.9% in August before declining somewhat (to around 16.9%–17.7%) in later months.

In contrast, the United States embodies a “winner-takes-all” ethos. Minimal regulations have fueled explosive growth and innovation but have entrenched inequality. In 2022, the top 1% captured approximately 23.6% of national income.1 Venture capital concentrates in high-potential sectors, producing technology unicorns like Uber, yet entrepreneurial exits disproportionately benefit white, male founders from elite networks. Meanwhile, gig workers—often driven by necessity—face stagnating wages and precarious conditions. In this social contract, entrepreneurs in the US have the freedom to create the next unicorn, but they must support themselves to achieve it.

Europe’s regulatory framework—encompassing taxes, licensing requirements, and social security contributions—prioritizes democratic principles such as equity and worker protections. It struggles, however, to compete globally. Europe’s contract emphasizes “first regulation,” imposing social security contributions and compliance to offset innovation’s negative distributional effects. This benefits self-employed entrepreneurs, who retain access to unemployment benefits and healthcare—unlike many Asian counterparts. For example, French and German microentrepreneurs contribute to pension schemes, protecting retirement savings even if ventures fail.

Yet in a globalized economy, Europe faces pressure from leaner models: Chinese low-cost manufacturing and US technology dominance erode competitiveness and suppress wages. The labor share of national income in the EU declined from around 65% to 62% between 2000 and 2019.2 This partly stems from rising self-employment, which accounts for roughly 15% of the workforce in many countries, with many in low-wage micro-ventures and facing low unionization rates (below 20% in places like Spain). Deglobalization trends, including US–China trade frictions, intensify competition for European entrepreneurs.

Democratic guardrails—voting rights, reputational accountability, and empathy-driven policies—often conflict with innovation’s imperatives. The biotech sector illustrates this: China’s regulatory exemptions enable rapid prototyping aligned with state goals, outpacing Europe’s ethically constrained firms. Western democracies cannot match this speed without compromising core values. Democratic entrepreneurship must therefore evolve, balancing competitiveness with equity and innovation.

This comparative perspective highlights entrepreneurship’s contextual fragility. Policymakers should prioritize safeguards for microentrepreneurs as technology reshapes labor markets. Hybrid models blending innovation with equity are essential to maintain societal buy-in and avoid competitive disadvantages becoming existential threats.

Risk dynamics and inequality in entrepreneurship

Entrepreneurial risk is multifaceted. Democratic guardrails can limit “unicorn” scalability while unevenly burdening vulnerable groups, especially as the gig economy grows. EU tax breaks for entrepreneurship often fail to adequately benefit women due to insufficient recognition of childcare costs. In the US, gig participation has surged, but earnings volatility drives necessity-based rather than aspirational entrepreneurship. Narratives portray entrepreneurs as “risk managers,” yet gig workers are often coerced risk-bearers. In California, Proposition 22 (passed November 3, 2020) prioritized gig workers’ “entrepreneurial identity” over protections.3

Cultural differences in failure tolerance also shape risk appetite: US bankruptcy stigma is low, encouraging serial entrepreneurship; Europe’s preference for stability and Asia’s collectivist emphasis on “face” (reputation, dignity, social standing) hinder retries. Gender disparities compound these issues—micro-enterprise expands women’s access to economic opportunity, but gender inequality remains in high-value entrepreneurship, where firms attracting venture capital remain male dominated and often led by white Ivy League alumni.

For Europe, Asia’s low-wage competition threatens service reshoring, endangering microentrepreneurs and welfare systems. AI-driven dispatching could displace millions of EU delivery jobs. In Asia and North America, subpar compensation and limited protections reduce innovation, as stressed workers innovate less. Redistributing risks through inclusive policies—such as portable benefits and cooperative structures—is vital to align entrepreneurship with democratic equity and genuine innovation.

Solutions to the risks of entrepreneurship: Cooperatives, community-mased models, and the democratic reimagining of entrepreneurship

While China shifts toward civil-service stability and the US and Europe idealize individualism without fully addressing social costs, abandoning entrepreneurship risks stifling innovation and worker agency. Policymakers should cultivate entrepreneurship while mitigating inequities. Cooperatives bridge individualism and solidarity: worker-owned models democratize profits, share risks, and reduce inequality in microentrepreneurship and the gig economy by reallocating value from platforms to workers. Cooperatives exhibit lower failure rates than conventional firms and build resilience against volatility.4

Cooperatives follow democratic governance (one member, one vote) and surplus distribution based on labor, not capital. Unlike extractive gig platforms, cooperatives own their infrastructure, retain most fees, and reinvest in wages, training, and protections—directly tackling inequality.

Europe offers successful examples. Spain’s Mondragón Corporation has scaled effectively: with over 70,000 members across 80+ cooperatives, it generates around €12 billion annually without heavy investor reliance. In recent years, Mondragón has pursued green tech and digital initiatives, including training programs and sustainable manufacturing projects supported by EU funds (e.g., PERTE programs in 2024–2025). Germany’s foundation-owned firms (e.g., Bertelsmann) and France’s cooperative banks (e.g., Crédit Coopératif) prioritize long-term equity over short-term gains.

Cooperatives reduce inequality via profit sharing and risk mutualization. Collective bargaining and pooled insurance buffer shocks. Equitable governance promotes inclusivity, favoring women and migrants. Embedded in solidarity networks, cooperatives enhance resilience and transform gig precarity into collective empowerment.

Conclusion

Entrepreneurship drives innovation but amplifies inequality, posing challenges for democracies balancing equity amid global competition. Reconciling this requires risk redistribution, welfare adaptation, and scaling cooperatives to protect microentrepreneurs, including gig workers. By democratizing ownership, cooperatives stabilize incomes and foster inclusive innovation—as seen in Mondragón’s endurance and platform co-op wage premiums. These steps can strengthen the social contract between entrepreneurs and the state, enhancing their ability to innovate. Future research should examine scaling barriers and policy levers (e.g., EU-wide co-op incentives). Ultimately, cooperative ecosystems can ensure entrepreneurship supports democratic vitality and inclusive growth.

1 Updated estimates for 2022 top 1% share at 23.6%. See Emmanuel Saez, “Striking it Richer: The Evolution of Top Incomes in the United States,” 2024, https://eml.berkeley.edu/~saez/saez-UStopincomes-2022.pdf.

2 Alessandro Bellocchi et al., “The labor share puzzle: Empirical evidence for European countries,” Economic Modelling, 124 (2023), 106327, https://doi.org/10.1016/j.econmod.2023.106327.

3 Miriam A. Cherry, “Proposition 22: A vote on gig worker status in California,” St. John’s Law Scholarship Repository, 2021, https://scholarship.law.stjohns.edu/faculty_publications/622/.

4 Erik K. Olsen, “The relative survival of worker cooperatives and barriers to their creation,” in Sharing Ownership, Profits, and Decision-Making in the 21st Century 14 (2013), https://doi.org/10.1108/s0885-3339(2013)0000014005.