Showing papers in "Small Business Economics in 2011"

R&D investment and financing constraints of small and medium-sized firms

Abstract: This study tests for financial constraints on R&D investment and how they differ from capital investment. To identify constraints in the access to external capital, we employ a credit rating index. Our models show that internal constraints, measured by mark-ups, are more decisive for R&D than for capital investment. For external constraints, we find a monotonic relationship between the level of constriction and firm size for both types of investment. Thus, external constraints turn out to be more binding with decreasing firm size. On the contrary, we do not find such monotonic relationships for internal constraints. Differentiation by firms’ age does not support lower constraints for older firms.

How do Female Entrepreneurs Perform? Evidence from Three Developing Regions

Abstract: Using the World Bank Enterprise Survey data, we analyze performance gaps between male- and female-owned companies in three regions—Eastern Europe and Central Asia (ECA), Latin America (LA), and Sub-Saharan Africa (SSA). Among our findings are significant gender gaps between male- and female-owned companies in terms of firm size, but much smaller gaps in terms of firm efficiency and growth (except in LA). Part of the reason women run smaller firms is that they tend to concentrate in sectors in which firms are smaller and less efficient (in ECA and SSA). By contrast, we find no evidence of gender discrimination in access to formal finance in any of the three regions, although in ECA women are less likely than men to seek formal finance. Finally, while female entrepreneurs receive smaller loans than their male counterparts, the returns from each dollar they receive is no lower in terms of overall sales revenue.

Towards a practice theory of entrepreneuring

Abstract: Adopting a process perspective on entrepreneurship, captured by the notion of “entrepreneuring,” the emerging practice-theory approach in the social sciences is proposed as an appropriate frame of reference. Entrepreneuring as a practice is ontologically/epistemologically qualified by presenting phronesis as the relevant guiding intellectual virtue in the knowledge-creating process. A constructionist view invites different modes of coping with an ambiguous environment, including the use of analogizing and bricolage when enacting entrepreneuring by way of improvisation and personal networking. The notion of “organizing context” is introduced to grasp how collective support for entrepreneuring may be mobilized. Enactive research as an interactive way for doing field research is outlined and illustrated in order to complete the paradigmatic and theoretical arguments for a practice-theory approach to entrepreneuring with an adequate methodology.

Relationship between individualist–collectivist culture and entrepreneurial activity: evidence from Global Entrepreneurship Monitor data

Abstract: This paper examines how one dimension of national culture (an individualist–collectivist orientation) is related to Total Entrepreneurial Activity, depending on the level of economic development, measured by GDP per capita. Researchers have traditionally associated individualism with high rates of firm creation, arguing that an orientation towards achievement and the pursuit of personal objectives (dominant aspects in individualist cultures) are determinants of entrepreneurial activity. The current analysis shows that a country’s culture correlates to entrepreneurship, but cannot uphold the idea that higher levels of individualism mean higher rates of entrepreneurship. Using data from the Global Entrepreneurship Monitor on 52 countries, the results show that a country’s entrepreneurship rate is negatively related to individualism when development is medium or low, and positively related to individualism when the level of development is high. Thus, individualism is not related to entrepreneurship in the same way in countries with differing levels of development.

Institutions and female entrepreneurship

Abstract: This paper compares the impact of institutions on men and women’s decisions to establish new business start-ups between 2001 and 2006. We use data from the Global Entrepreneurship Monitor survey (GEM) which cover at least 2,000 individuals per year in each of up to 55 countries and have merged it with country-level data, from the World Bank, Economist Intelligence Unit, Polity IV and the Heritage Foundation. We find that women are less likely to undertake entrepreneurial activity in countries where the state sector is larger, but the rule of law is not generally found to have gender-specific effects. However, more detailed institutional components of discrimination against women, in particular, restrictions on freedom of movement away from home, make it less likely for women to have high entrepreneurial aspirations in terms of employment growth, even if their entry into entrepreneurial activities, including self-employment, is not affected by this.

Entrepreneurial intentions in the third age: the impact of perceived age norms

Abstract: This article investigates the impact of perceived age norms on the formation of entrepreneurial intentions in the third age. Age norms refer to those social norms that determine whether establishing and running a business are considered appropriate behavior for a mature individual. An empirical analysis of Finnish individuals finds that norms perceived as permissive of enterprising activity in the third age exert a significant positive influence on entrepreneurial intentions in this segment, even when controlling for the general level of entrepreneurship in the municipalities. This influence is partially mediated by whether the individual has a positive attitude toward entrepreneurship, by how the individual perceives their own ability to start and run a business, by the extent of support from their family and friends they perceive and by the importance of that support to them. Thus, if policy aims to increase enterprising activity in the third-age segment, the portfolio of instruments should include measures that address people’s general awareness of third-age entrepreneurship as a viable, positive and attractive late-career option.

Capital Structure Decisions During a Firm's Life Cycle

Abstract: The study reported here examines the financing choices of small and medium-sized firms, i.e., those most vulnerable to information and incentive problems, through the lens of the business life cycle. We argue that the controversy in the empirical literature regarding the determinants of capital structure decisions is based on a failure to take into account the different degrees of information opacity, and, consequently, firms' characteristics and needs at specific stages of their life cycles. The results show that, in a bank-oriented country, firms tend to adopt specific financing strategies and a different hierarchy of financial decision-making as they progress through the phases of their business life cycle. Contrary to conventional wisdom, debt is shown to be fundamental to business activities in the early stages, representing the first choice. By contrast, in the maturity stage, firms re-balance their capital structure, gradually substituting debt for internal capital, and for firms that have consolidated their business, the pecking-order theory shows a high degree of application. This financial life-cycle pattern seems to be homogeneous for different industries and consistent over time.

Entrepreneurship, export orientation, and economic growth

Abstract: In this paper the relationship between a country’s prevalence of new ventures and its rate of economic growth is investigated, while taking into account new ventures’ export orientation It is generally acknowledged that new venture creation as well as export activity may both be important strategies for achieving national economic growth However, to our knowledge no attempt has been made to investigate empirically the role of export-driven new ventures in economic growth We focus on the national level and use data for a sample of 34 countries over the period 2002–2008 Our results suggest that, on top of a positive relation between entrepreneurial activity in general and subsequent macroeconomic growth, there is an additional positive effect of export-oriented early-stage entrepreneurship in higher-income countries However, there is no such additional effect in lower-income countries

The advantage of experienced start-up founders in venture capital acquisition: evidence from serial entrepreneurs

Abstract: Entrepreneurs with prior firm-founding experience are expected to have more skills and social connections than novice entrepreneurs. Such skills and social connections could give experienced founders some advantage in the process of raising venture capital. This paper uses a large database of venture-backed companies and their founders to examine the advantage associated with prior founding experience. Compared with novice entrepreneurs, entrepreneurs with venture-backed founding experience tend to raise more venture capital at an early round of financing and tend to complete the early round much more quickly. In contrast, experienced founders whose earlier firms were not venture-backed do not show a similar advantage over novice entrepreneurs, suggesting the importance of connections with venture capitalists in the early stage of venture capital financing. However, when the analysis also takes into account later rounds of financing, all entrepreneurs with prior founding experience appear to raise more venture capital. This implies that skills acquired from any previous founding experience can make an entrepreneur perform better and in turn attract more venture capital.

Why does the effect of new business formation differ across regions

Abstract: We investigate regional differences in the effect of new business formation on employment growth in West Germany. We find an inverse U-shaped relationship between the level of start-up activity and employment change. The main variables that shape the employment effects of new businesses in a region are population density, the share of medium-skilled workers, the amount of innovation activities as measured by the proportion of research and development (R&D) employees, and an entrepreneurial character of the regional technological regime. In contrast, a high share of small-business employment has a negative influence on the employment effect of start-ups. Other indicators for education, innovation activity, and labor productivity do not prove to be statistically significant.

Dependent self-employment as a way to evade employment protection legislation

Abstract: This paper examines whether the strictness of employment protection legislation encourages employers to contract out work to their own paid employees by the formula of dependent self-employment, while making transitions to independent self-employment less likely by altering the relative valuation of risk between salaried work and self-employment in favour of the former. In conducting this analysis, discrete choice models are applied to data drawn from the European Community Household Panel from 1994 to 2001. To test the hypotheses, a tentative individual measure of the potential severance payment that a worker would receive in the case of dismissal is included as well as aggregated variables that try to capture differences in labour market institutions and macroeconomic conditions. Evidence for a positive impact of the strictness of employment protection legislation and the potential severance payment on transitions to dependent self-employment is found. The opposite effects, however, are detected for individuals becoming independent self-employed.

Serial entrepreneurship: impact of human capital on time to re-entry

Abstract: This study uses a longitudinal matched employer–employee database to examine how ex-entrepreneurs’ levels of general and specific human capital influence their likelihood of re-entering entrepreneurship over time, in a different firm, thereby becoming serial entrepreneurs. The results reveal a negative effect of general human capital on the hazard of becoming a serial entrepreneur; the impact of entrepreneurial-specific human capital on the hazard of re-entering entrepreneurship is in general positive. This research provides a dynamic approach to serial entrepreneurship revealing that specific types of human capital play distinct roles on individuals’ entrepreneurial behavior.

Entrepreneurship, job creation and wage growth

Abstract: This paper analyses the importance of entrepreneurs in terms of job creation and wage growth. Relying on unique data that cover all establishments, firms and individuals in the Danish private sector, we are able to distil a number of different subsets from the total set of new establishments—subsets which allow us to more precisely capture the “truly new” or “entrepreneurial” establishments than has been possible in previous studies. Using these data, we find that while new establishments in general account for one-third of the gross job creation in the economy, entrepreneurial establishments are responsible for around 25% of this, and thus only account for about 8% of total gross job creation in the economy. However, entrepreneurial establishments seem to generate more additional jobs than other new establishments in the years following entry. Finally, the jobs generated by entrepreneurial establishments are to a large extent low-wage jobs, as they are not found to contribute to the growth in average wages.

Small business survival and sample selection bias

Abstract: Analyses of small business and the fac- tors affecting their survival are fairly common in the research literature. The level of research interest may stem from the fact that in the US, only about half of all new small businesses survive after 4 years (Headd 2003). However, research attempting to understand the phenomenon that employs data using only information from and about surviving firms may lead to erroneous conclusions regarding the factors that influence firm survival and failure. In this paper, we provide evidence that omitted information about the firms that disappear from the research data over time leads to biased coefficient estimates. Comparing the Heckman two-step estimation approach of switching regression models to a semi-parametric Cox hazard model, the Accelerated Failure Time (AFT) model, we conclude that the Cox ATF approach is the most appropriate model for firm survival analysis.

Career motives and entrepreneurial decision-making: examining preferences for causal and effectual logics in the early stage of new ventures

Abstract: The influence of entrepreneurs’ career motives is examined on two alternative modes of decision-making logic; causation and effectuation. Based on Sarasvathy’s (Acad Manage Rev 26(2):243–288, 2001) seminal study, causation is defined as a decision-making process that focuses on what ought to be done given predetermined goals and possible means, and effectuation as a decision-making process emphasizing the question of what can be done given possible means and imagined ends. Analysis suggests that entrepreneurs who identify themselves with linear or expert career motives have a higher preference for causal decision-making logic. Entrepreneurs who identify themselves with spiral or transitory career motives have a higher preference for effectual decision-making logic. In addition, indications that prior start-up experience moderates the relationship between career motives and effectual decision-making logic for spiral-minded entrepreneurs is found. The overall results give ample support for the assumption that entrepreneurs’ career motives influence their decision-making.

Workforce age and technology adoption in small and medium-sized service firms

Abstract: This paper provides empirical evidence on the relationship between the age structure of the workforce and the adoption of new or significantly improved technologies. Moreover, it attempts to identify the role of teamwork in this relationship. The econometric analysis is based on data of 356 small and medium-sized German firms from the knowledge-intensive services and ICT services sectors. The results show that, compared to employees younger than 30 years, an older workforce is negatively related to the probability of technology adoption. On the contrary, the dispersion of the employees’ age within the workforce seems not to be connected with the probability of technology adoption. However, in firms with intensive use of teamwork a homogenous workforce in terms of age is positively related to the probability of technology adoption.

Creative destruction and regional productivity growth: evidence from the Dutch manufacturing and services industries

Abstract: Do firm entry and exit improve the competitiveness of regions? If so, is this a universal mechanism or is it contingent on the type of industry or region in which creative destruction takes place? This paper analyses the effect of firm entry and exit on the competitiveness of regions, as measured by total factor productivity (TFP) growth. Based on a study across 40 regions in the Netherlands over the period 1988–2002, we find that firm entry is related to productivity growth in services, but not in manufacturing. The positive impact found in services does not necessarily imply that new firms are more efficient than incumbent firms; high degrees of creative destruction may also improve the efficiency of incumbent firms. We also find that the impact of firm dynamics on regional productivity in services is higher in regions exhibiting diverse but related economic activities.

Financing the entrepreneurial decision: an empirical approach using experimental data on risk attitudes

Abstract: This paper empirically examines the role of personal capital in the entry decision for US high-technology entrepreneurs. Our innovative approach utilizes both survey data and data from economics-based field experiments, which enables us to elicit and control for the risk attitudes of individual entrepreneurs in the study. Empirical findings suggest that (1) Small Business Innovation Research (SBIR) grants, (2) credit cards, and (3) earnings from a salaried job are among the most important sources of funds for entrepreneurs in their decision to start up a firm. Our findings support Evans and Jovanovic (Journal of Political Economy 97(4):808–827, 1989) in that wealth appears to have a positive impact on the probability of starting up a firm, even when controlling for risk attitudes; however, risk attitudes do not appear to have a strong role to play in the entry decision overall. Policy implications suggest that firm start-ups are dependent on access to capital in both initial and early stages of development, and that government funding, including SBIR grants, is an important source of capital for potential and nascent high-technology entrepreneurs.

Linking net entry to regional economic growth

Abstract: Regional growth differentials could be explained by how intensively and dynamically new firms of a particular region enter expanding industries. Although the direct contribution of new firms to value creation and growth may be regarded as tautological, the aggregate impacts are largely empirically unobserved. After a brief motivation, we use an expression of firm net entry as an indicator of the distinctive capacity of regional entrepreneurial resources to enter new industries and create value. Using data for Belgian districts, we test the net entry effects on subsequent economic growth in the manufacturing and services industries. Our analysis helps emphasize the different dynamics at work within the manufacturing and services industries and, although requiring cautious interpretation, provides evidence for some positive impact of net entry on regional economic growth in the services industry.

Introduction to special issue of Small Business Economics on female entrepreneurship in developed and developing economies

Abstract: Research into entrepreneurship has for many years been interested in the differences in rate of participation and performance by female entrepreneurs. The motivation for considering female entrepreneurship in both developing and developed countries arises from our increasing understanding of the significance of the role of women in creating, running and growing businesses as a fundamental driver for economic growth. This special issue examines the reasons for differences in gender participation across levels of development using empirical studies.

The growth process of informal enterprises in Sub-Saharan Africa: a case study of a metalworking cluster in Nairobi

Abstract: Small and informal enterprises are preponderant in Africa’s manufacturing sector. Their growth is negligibly low except when young and small, but little is known beyond this. This paper reports the results of our field study of a metalworking cluster in Nairobi. As competition was intensified by the entry of new enterprises, the education level of entrepreneurs became important in determining enterprise performance, which is reminiscent of East Asian experiences. Recently, some enterprises have left for formal industrial areas partly because their original sites have become too congested for them to grow and partly because being formal facilitates marketing and further growth.

University spillovers and new business location in high-technology sectors: Spanish evidence

Abstract: This paper examines the relationship between knowledge spillovers from universities and new business location in high-technology sectors. We focus on the contribution to new business formation through spillovers stemming from three main university outputs: knowledge-based graduates, research activities, and technological knowledge. We construct a new dataset with information on 604 companies and 63 universities in Spain and group the data across 36 geographical areas from 2001 to 2004 (144 observations). After controlling for several traditional cost factors and agglomeration characteristics, we find that university spillovers are relevant in explaining the location of new businesses in high-technology sectors in Spain. Further, our analysis draws attention to the relevance of graduates as the main source of spillovers, while research activities and university technology do not have significant effects.

New firm formation and employment growth: regional and business dynamics

Abstract: This study examines differences in the effects of start-up rates on subsequent employment change. Two sources of such differences—types of start-ups and types of regions—are analyzed. We find that differences between knowledge-based and other start-ups dominate differences between highly agglomerated and modestly agglomerated regions. In particular, differences in the effects of new start-ups on subsequent employment growth between highly agglomerated and modestly agglomerated regions are greater for knowledge-based start-ups than for other types of start-ups. The results suggest that, while knowledge-based start-ups are likely to impart greater benefits on future employment than other types of start-ups, these benefits are greater when those start-ups locate in more agglomerated regions.

Only the lonely? The influence of the spouse on the transition to self-employment

Abstract: Previous research showed that married individuals are overrepresented among the self-employed. Few studies proposed skill-spillover between the spouses within the marriage as an explanation. This paper deviates from the previous research by exploring different relationship contexts (e.g., cohabitation, being married or divorced, a widow(er) or single) and the role of partner influences under these contexts. It argues that the interaction between gender and relationship status implies variation in not only resources but also constraints, and hence sorts individuals into two different types of self-employment: entrepreneurial self-employment (i.e., incorporated business) and unincorporated self-employment. Using “Panel Study of Income Dynamics (PSID) 1965–2005” data, results of the competing risk models show that marital status contributes to both types of self-employment transitions, especially for men, but also for women. Cohabitation is a less supportive context for entrepreneurship and a partner’s self-employment experience increases only women’s likelihood of entering into entrepreneurship. These results suggest that skill-spillover between partners might be context dependent and only in one direction (from men to women).

Nano-economics, spinoffs, and the wealth of regions

Abstract: The historical evolution of four prominent industry clusters is compared: automobiles in Detroit, Michigan, tires in Akron, Ohio, semiconductors in Silicon Valley, California, and cotton garments in Dhaka, Bangladesh. Detailed data are collected concerning the intellectual and geographic origins of entrants into the clusters and other regions to probe the mechanisms underlying geographic clustering. The main mechanism at work in the four clusters involves employees leaving established firms to found their own firms or shape new entrants in their industry. Questions and policy implications related to the spinoff mechanism and the mobility of employees are discussed.

The shadow of death: analysing the pre-exit productivity of Portuguese manufacturing firms

Abstract: The pre-exiting productivity profile of mature firms relative to survivors is examined along with an evaluation of how productivity affects the probability of exit along various dimensions. An empirical approach, based on an unbalanced panel of Portuguese manufacturing firms covering a 10-year period, is used. The findings confirm that market selection forces low-productivity firms to exit, but there is also evidence that a sizeable portion of low-productivity firms do not shut down. Conversely, there is a non-negligible fraction of high-productivity firms that do actually close. Consistent with some key theoretical predictions, our analysis reveals that exiting firms have a falling productivity level over a number of years prior to exit. Finally, the results from the survival model show that both small firms and ones with low productivity are relatively much more likely to exit the market. Industry and macro-environment are also found to have a non-negligible role on the exit of mature firms.

The survival and success of Canadian penny stock IPOs

Abstract: We analyze the survival and success of a large sample of Canadian penny stock initial public offerings (IPOs), launched mostly by small and unprofitable firms from 1986 to 2003. The failure rate of these IPOs is lower than in the US for larger IPOs, probably because of lax delisting rules and the market’s capacity to refinance non-profitable firms. The survival of new issuers is significantly associated with their characteristics at the IPO and with the level of initial listing requirement they meet. The involvement of reputable intermediaries in the IPO process mitigates this effect. Success, estimated by the graduation to a senior exchange, is not linked to the financial conditions at the IPO. Overall, Canada seems to have developed a particular strategy to finance the growth of small firms even if the propensity to fail of firms listed at a pre-revenue stage is very high.

Whose business is it anyway

Abstract: This article examines how gender may account for productivity gaps across enterprises. First, using data from six countries in Sub-Saharan Africa, the article demonstrates that the extent and significance of any productivity gap by gender depends critically on the criteria used to classify an enterprise. Using a definition of ‘female participation in ownership,’ there are few differences in average performance measures. However, a 12% productivity gap emerges when a tighter definition, based on decision-making control, is used. Second, the article examines which entrepreneurial characteristics (education, management skills, experience and the motivation for being an entrepreneur) are most associated with higher productivity. The findings reveal that there are some gender gaps in the prevalence of these characteristics, but that these do not account for the overall gender productivity gap. Rather, while women benefit as much as men from education and management skills, there are non-linear impacts by gender in the benefits of having a family background in entrepreneurship; sons rather than daughters benefit from having a father that was an entrepreneur or from joining a family enterprise.

Public knowledge, private knowledge: the intellectual capital of entrepreneurs.

Abstract: This paper focuses on the innovative actions of entrepreneurs, namely their tendency to reveal the intellectual capital that results from their research efforts either in the form of public knowledge (publications) or private knowledge (patents). Using data collected by the National Research Council within the US National Academies from their survey of firm’s that received National Institutes of Health phase II Small Business Innovation Research awards between 1992 and 2001, we find that entrepreneurs with academic backgrounds are more likely to publish their intellectual capital compared with entrepreneurs with business backgrounds, who are more likely to patent their intellectual capital. We also find that, when universities are research partners, their presence complements the tendencies of academic entrepreneurs but does not offset those of business entrepreneurs.

Operationalizing opportunities in entrepreneurship research: use of data envelopment analysis

Abstract: Despite the impressive development of substantive theories in entrepreneurship, without the development of measurement theories, further advancement of the field is problematic. In particular, the notion of opportunities, central to entrepreneurship research, requires adequate macro-level operationalization. We demonstrate how to employ data envelopment analysis (DEA) to operationalize not only innovative opportunities, but also technological arbitrage opportunities. We provide an illustrative example based on a sample of 66 countries during the period of 1993–2002. We include estimates of innovative and arbitrage opportunities for possible use by other scholars, discuss the promise and limitations of such estimates, demonstrate how both innovative and arbitrage opportunities correlate with the rates of entrepreneurial activity, and suggest several possible directions for future research.