Showing papers in "Small Business Economics in 1989"

In Search of the Meaning of Entrepreneurship

Abstract: This paper is an attempt to build a bridge between the popular and the academic usage of the terms entrepreneur and entrepreneurship, and to identify the raw materials needed to construct an interpretive framework capable of illuminating the nature of entrepreneurship and its role in economic theory. We review briefly the contributions made to this topic by Cantillon, Schumpeter, Schultz and Kirzner. We advance a ‘synthetic’ definition of the entrepreneur as someone who specializes in taking responsibility for and making judgemental decisions that affect the location, the form, and the use of goods, resources, or institutions. We then conclude with some observations on the basic choice confronting economics regarding the place of entrepreneurship in economic analysis.

Formation, growth and survival; Small firm dynamics in the U.S. Economy

Abstract: “Four out of five new firms fail within the first five years.” This statement has been made so many times that most people believe it is true. But it isn't. In fact, using a relatively new data source developed by the U.S. Small Business Administration, we found that on the average, 39.8 percent of new firms survive six or more years. This is equivalent to a failure rate of three out of five, substantially lower than popularly believed. Survival rates vary by industry with manufacturing having the greatest (46.9 percent) and construction the smallest (35.3 percent). More important, however, is the discovery that survival rates more than double for firms that grow. Even a small amount of growth boosts the average survival rate to 66.3 percent; that is two out of three growing firms survive. The earlier in the life of the business that growth occurs, the higher the chance of survival. But, most firms do not grow in the first four years. On average, only ten percent of firms show growth in the first four years. By the sixth year, however, 34.3 percent of the firms show growth and over fifty percent show growth within eight years. To put the old adage to rest, two out of five new firms survive at least six years and over half of the survivors grow.

Foreign Direct Investment by Small and Medium Sized Enterprises: The Theoretical Background

Abstract: This chapter is an attempt to give a theoretical background to research on foreign direct investment by small- and medium-sized enterprises (SMEs), Section 2 examines alternatives theoretical approaches to SMEs investing abroad. Section 3 outlines the special issues which arise from SME foreign ventures and ends with an attempted synthesis of the theoretical approaches. In Section 4, a brief discussion of the nature of foreign direct investment by SMEs takes place. The chapter ends with a short conclusion.

The determinants of changes in U.S. self-employment, 1968–1987

Abstract: The self-employment rate depends on the distribution of full-time workers across ages, educational levels, and industries and on tax rates and business conditions. About 90 percent of the variation in self-employment across time and across age groups is explained by these factors. Swings in the self-employment rate over time result from the interplay of changes in these factors. The entry of the baby-boom generation into the labor-force beginning in the later 1960s has led to a decrease in the average age of the full-time nonagricultural workforce and has tended to decrease the self-employment rate. The secular decline of manufacturing, the secular rise of services, and secular increases in educational levels have tended to increase the self-employment rate. Fluctuations in business conditions and tax rates have also affected the self-employment rate. The evidence reported here suggests that self-employment is procyclical, although not strongly so. Increases in effective federal income during the late 1970s tended to increase self-employment rates while decreases during the Reagan years tended to decrease self-employment rates. These findings are helpful for speculating about the answers to three important questions. First, are people more entrepreneurial than they used to be? The fact that the ebb and flow of self-employment over time can be explained almost entirely by structural changes in the economy suggests that people with given demographic characteristics and morking in particular industries have not become more likely to try entrepreneurship28. Second, did the supply of entrepreneurs increase during the Reagan years? The answer is yes and no29. The number of people who operate full-time businesses has certainly increased: from 5.99 million in 1981 to 6.46 million in 1985. The absolute supply of entrepreneurs has risen. But the number of people who are full-time wage workers has also increased: from 65.2 million in 1981 to 71.6 million in 1985. The fraction of workers who operate businesses has fallen: it increased from 9.3 percent in 1981 to a peak of 10.0 percent in 1983 and then fell to 9.1 percent in 1985. The relative supply of entrepreneurs has thus fallen. Ironically, one of the many causes for the decline in the relative supply of entrepreneurs was the decrease in tax rates that were, according to supply-side advocates, supposed to have increased entrepreneurship30. Third, will we see rising or falling self-employment in the coming decade? Predicting future rates of self-employment is treacherous because these rates depend upon many factors. The aging of the baby-boom generation will by itself lead to sharply increasing rates of self-employment as the baby-boomers, who started turning 40 in 1985, pass through the peak years of self-employment. This upward trend may be offset by a number of more fragile structural changes in the economy. The sharp decline of the dollar may reinvigorate manufacturing at the expense of services. If so, self-employment will decline. Further lowering of federal income tax rates may reduce the gains from tax-avoidance through self-employment and thereby impart a further downward trend in self-employment rates. Other changes that have helped increase self-employment may have run their course. Female labor-force participation rates and educational levels among both men and women may have reached a plateau. If so, these factors will cease to be a factor in changing self-employment rates. This paper has analyzed the determinants of changes in the aggregate rate of self-employment across age cohorts. When examining aggregate rates of self-employment we have ignored more subtle questions concerning why particular individuals choose to try self-employment at particular times in their careers and what makes a successful entrepreneur. These questions await future research.

The evolution of manufacturing technology and its impact on industrial structure: An international study

Abstract: This paper shows that plant and firm size in manufacturing, and especially in engineering industry, in several Western industrial countries has declined since the early 1970s. Two hypotheses explaining the decline are advanced. One is “de-glomeration” or specialization: the divestiture of non-core businesses in order to free up scarce resources (particularly management time) to defend and nurture core business activities. The second hypothesis is that the emergence of new computer-based technology has improved the quality and productivity of small and medium scale production relative to standardized mass-production techniques which dominated previously.

Firm size and innovation

Abstract: In an innovation survey in the Netherlands, we find considerably more SMEs which perform small scale RD a lack of capital; a lack of management qualifications; problems in finding adequate technical information, and problems in finding qualified employees.

Small business economics

Abstract: The paper presents an overview of small-business economics. Small businesses are shown to comprise a substantial and expanding segment of the U.S. economy. The role of small businesses in the economy is considered from the standpoint of various economic theories of the size distribution of firms. Firm-size related empirical regularities are reviewed and their implications for economic theory is discussed. Several small-business policy issues are discussed, including the role of small businesses in labor, macroeconomic, and regulatory policies, along with a review of research on small-business economics that might help guide these policies.

Financing the small firm

Abstract: This study presents a framework to delineate financing the small firm. Special consideration is given to small firms' unique financing sources such as trade and bank credit, entrepreneur's own resources, informal investment, and venture capital. The small firm has limited or no access to many traditional debt and equity markets that supply long term financing to the corporate world, and therefore operates in segmented and imperfect financial markets. The links between small firms' financing opportunities and managerial goals are traced from the start-up stage through establishing a mature firm. As the small firm matures, it operates in a broader financial market. This study establishes the foundation for future empirical research.

The scale of informal capital markets

Abstract: Informal capital markets are the leading source of external risk capital fueling entrepreneurial startup and small business growth. They are virtually the only practical source of risk or venture-type capital for most entrepreneurs once their capital needs surpass family resources. Informal risk capital is equity and near-equity dollars invested by private individuals directly (informally) in entrepreneurs without formal intermediation.1 The importance of understanding how and where small firms obtain their risk capital is reenforced by the growing recognition of the role of small business in U.S. economic performance.2 Continued and enhanced supply of informal capital requires rational public policy. Because of the lack of reliable empirical data, it has been difficult to formulate effective policies that would guide markets where necessary, leave them alone where desirable, and accelerate their growth where possible. Such policy is best built on an accurate appreciation of the scale of informal risk capital's contribution to U.S. economic growth and change. New microdata evidence just recently available contributes a wealth of empirical data about how informal investors and entrepreneurs interact.3 The object of this paper is to use the new data to reach preliminary estimates of recent aggregate flows of informal capital. To achieve this goal I also provide collateral estimates of the stock of informal investors, recipient firms and annual transactions volume.

Firm performance and size: Explanations from the small firm sectors

Abstract: This paper has presented the case that small firms deserve greater attention from economists who, in the past, have been interested primarily in larger firms.

The Relationship Between Firm Growth and Labor Demand

Abstract: Several American studies have recently estimated models of employment growth from longitudinal data sets of business firms (Evans 1987, Leonard 1986, Hall 1987). By and large, these studies find that the growth rate of employment is inversely correlated with initial size (measured by employment) and with age — young firms tend to grow more rapidly than old ones. These studies have cast considerable doubt on Gibrat’s Law, or the assumption of independence between firm size and the rate of growth. However, departures from Gibrat’s Law are modest, especially among firms above minimum size. Recently a group of researchers has proceeded along similar lines of investigation using data from a panel of Italian manufacturing firms located in Northern Italy. The purpose of this paper is to compare our results with those obtained for the U.S. and to explore in more detail the soundness of this approach. Our results are similar to the abovementioned American studies. We find that departures from Gibrat’s Law are not large.

Small Business in German Manufacturing

Abstract: In recent years, one observes a renaissance of small business research efforts. The stimuli came from different directions. One strand of more policy oriented research concentrated on the impact of small businesses on the creation of new employment opportunities.1 Another host of studies paid attention to the relationship of innovation productivity of small versus large business.2 And industrial economics research examined the role of small businesses as actual and potential challengers of larger competitors in a given market.3 Whatever motive guided this research, it was emphasized that the cumulated knowledge about large business behavior is by far greater than about their small business counterparts.

Entrepreneurial strategy and the presence of small firms

Abstract: A model is presented hypothesizing that the level of small-firm presence in any given industry emanates from the exogenous stock of entrepreneurial talent, a stochastic element of managerial and entrepreneurial talent, entry deterrence, and the entrepreneurial strategy deployed by small firms. Using data newly released by the U.S. Small Business Administration, the hypothesis is tested for a sample of 247 four-digit standard industrial classification industries, spanning the entire spectrum of firm sizes. We find that, consistently for all the measures of small-firm size and for all of the time periods used, the existence of entry deterrence and reliance upon innovative strategy explains a significant proportion of the variation in the presence of small firms.

Small-Scale Industry at a Crossroads: U.S. Machine Tools in Global Perspective

Abstract: In 1975, the United States was the world’s largest producer of machine tools, the second largest exporter, and had the lowest degree of dependence on imports of all major machine tool producing countries. By 1987, the U.S. had slipped into fourth place as producer of machine tools (behind Japan, F.R.G., and the USSR), into sixth place in exports (behind Switzerland, G.D.R., and Italy), and relied on imports for more than half of its supply of machine tools.

Employment, ownership, and Survival in microbusiness: A study of New retail and service establishments

Abstract: This investigation provides new data and commentary on several neglected topics: employment contributions of microbusinesses, characteristics of the selfemployed, business survival rates, and psychological and social aspects of new business ownership. A survey and archival analysis of 413 retail and service establisments that began operation in 1985 is reported. The modal staff size of these establishments was three persons; 28% had no employees. Women, young people, and Latinos were among the larger groups of employees, although employment patterns varied according to size and type of business. The typical owner was male, white, in his 30s or 40s, and relatively inexperienced in business. Fifty-nine percent of the establishments survived two years; survival was associated with corporate ownership, with the owners' reliance on the business for a livelihood, and with their prior employment experience.

Creative Destruction among Industrial Firms in the United States

Abstract: There is a growing interest in dynamic modeling of capitalism as recent experience has demonstrated the importance of innovation in shaping the structure and growth rate of capitalist nations. Economists recognize that innovation by its nature describes a dynamic, evolutionary model of capitalism which is inadequately described by the equilibrium models which have dominated economic thought since the 19th century.

R&D and Market Structure: The Impactof Measurement and AggregationProblems

Abstract: Estimates on the relationship between concentration and R&D effort are shown to be sensitive to problems of aggregation and of adequate measurement of R&D in small firms. While estimates from the official R&D survey of the Netherlands show a highly significant linear relationship between concentration and R&D, comparable estimates from our R&D data base prove it to be insignificant. However, at a finer level of disaggregation and when our sample is split into sectors with low and high technological opportunities, we discover evidence of a quadratic relationship in the latter and evidence of a weak linear relationship in the former.

Small business in Japan: A historical perspective

Abstract: Small firms have been considered to be an important element of the industrial structure in Japan since the turn of the century. In this paper the history of small business in Japan is examined. In particular, the dramatic development of the technological and managerial ability of small firms within the last two decades is analyzed. Under the regime of rapid industrial restructuring in Japan, small firms are identified as developing their own diversive management strategies, especially with respect to international trade and the implementation of information and high technology.

Small business and the economics of flexible manufacturing

Abstract: The impact that flexible manufacturing has had on the structure of international trade is examined. By introducing an analysis of the economics of flexible manufacturing, it is concluded that flexible technology is more conducive to small rather than large firms. This shift in the size distribution of firms is the result of a new emerging techno-economic paradigm.

Firm size, efficiency and employment: A review article

Abstract: S-J's book contains much careful and interesting discussion of small-firm employment data and related issues, and will be read by all workers in the field. However it also contains too much detailed quantification and international comparison of doubtful relevance, at least for most economists, and misses much background material of direct importance for evaluating the role of small firms. As a result, the authors seriously under-estimate the contribution of small business to both employment and efficiency of modern economies, as well as the importance of policy to correct the traditional and still pervasive bias towards large organizations.

Comparisons between small business data base (USEEM) and Bureau of Labor Statistics (BLS) employment data: 1978–1986

Abstract: The BLS versus USEEM comparison generally points out some major classification differences in the data sets particularly in the classification and growth of larger establishments. USEEM and BLS data generally agree as to the direction of employment growth over the 1978 to 1986 period. Differences occur in 7 of the 63 comparisons of employment growth — but BLS attributes a greater proportion of growth to larger reporting units, USEEM to smaller establishments. BLS and USEEM data have concurring positive or negative growth rates for all size classes in the construction, wholesale trade, services, and finance, insurance, and real estate industries.

The Size of the Small-Firm Sector in Hungary

Abstract: There currently exists an unprecedented enthusiasm for small business in virtually every country in the world. This applies not only to the developed nations, the so-called market economies, but also within the socialist bloc (Sato 1989). Traditionally there exist two reasons why centrally planned economies usually prefer larger plants and firms to smaller ones: (1) the belief that economies of scale are found in larger firms, and (2) a small number of firms are more conducive to central planning, and party control. Monopoly power will not be questioned since the party itself constitutes a monopoly. These motives prevailed for many years leading to highly centralized economies in Eastern Europe.

The determinants of new firm formation in italian manufacturing

Abstract: This paper focuses on entry of small firms in the manufacturing industries. It is argued that the exit option can be viewed as an insurance against risks of failure, increasing the likelihood of entry in an uncertain environment; the result is implicit in recent stochastic models of competition and entry decision under uncertainty. A regression model of industry birth rates in the Italian manufacturing industries provides empirical evidence on the impact of factors determining the decision to enter and the supply of new entrepreneurs. In our estimates, yearly entry rates are found to decrease with entry costs and barriers and to increase with market growth, expected growth of small firms, risks of failure and an index of spatial concentration of activities.

Employment change in the small business sector: Evidence from five manufacturing industries

Abstract: This paper examines the scale and nature of employment flows into and out of the small business sector (SBS) in five United Kingdom manufacturing industries over the period 1979–85. It first provides a taxonomic framework for analysing these flows. It then draws on specially prepared analyses from the Annual Census of Production (ACOP) for the UK to show that the SBS in each industry has experienced very substantial turbulence: although the SBS (across all five industries) lost only four per cent of 1979 employment over the period, movement in and out each represented about half of 1979 employment. Most gains and losses were in the very small size bands. The paper also briefly explores the relationship between births and deaths and industrial characteristics across the five industries. The study raises questions about the causes and costs of high turbulence in the SBS. It also demonstrates the potential value of the ACOP data base for longitudinal studies of business in the UK.1