Entrepreneurship and Its Economic Significance, Behavior and Effects

ENTREPRENEURSHIP AND ITS ECONOMIC SIGNIFICANCE, BEHAVIOR AND EFFECTS No part of this digital document may be reproduced, stored in a retrieval system or transmitted in any form or by any means. The publisher has taken reasonable care in the preparation of this digital document, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained herein. This digital document is sold with the clear understanding that the publisher is not engaged in rendering legal, medical or any other professional services.

ENTREPRENEURSHIP AND ITS ECONOMIC SIGNIFICANCE, BEHAVIOR AND EFFECTS

MARIA V. BRADSHAW AND

PATRICIA T. CARRINGTON EDITORS

Nova Science Publishers, Inc. New York

Copyright © 2009 by Nova Science Publishers, Inc. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or by any means: electronic, electrostatic, magnetic, tape, mechanical photocopying, recording or otherwise without the written permission of the Publisher. For permission to use material from this book please contact us: Telephone 631-231-7269; Fax 631-231-8175 Web Site: http://www.novapublishers.com NOTICE TO THE READER The Publisher has taken reasonable care in the preparation of this book, but makes no expressed or implied warranty of any kind and assumes no responsibility for any errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of information contained in this book. The Publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or in part, from the readers’ use of, or reliance upon, this material. Independent verification should be sought for any data, advice or recommendations contained in this book. In addition, no responsibility is assumed by the publisher for any injury and/or damage to persons or property arising from any methods, products, instructions, ideas or otherwise contained in this publication. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered herein. It is sold with the clear understanding that the Publisher is not engaged in rendering legal or any other professional services. If legal or any other expert assistance is required, the services of a competent person should be sought. FROM A DECLARATION OF PARTICIPANTS JOINTLY ADOPTED BY A COMMITTEE OF THE AMERICAN BAR ASSOCIATION AND A COMMITTEE OF PUBLISHERS. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Bradshaw, Maria V. Entrepreneurship and its economic significance, behavior and effects / Maria V. Bradshaw and Patricia T. Carrington. p. cm. Includes index. ISBN 978-1-60876-567-6 (E-Book) 1. Entrepreneurship. 2. Economic development. I. Carrington, Patricia T. II. Title. HB615.E6267 2009 338'.04--dc22 2008052099

Published by Nova Science Publishers, Inc.  New York

CONTENTS Preface Chapter 1

Chapter 2

Chapter 3

vii Family Matters: Differences in Having Self-Employed Parents between Black and White Entrepreneurs Robert P. Singh,, Micah E. S. Crump and Xingxing Zu

1

A Comparative Study of Entrepreneurial Attitudes and Attributes of Turkish and Kyrgyz Entrepreneurs Mehmet Turan, Seil Nazhimudinova and Ali Kara

21

Entrepreneurship Policies: A Multiple Case Study in a Highly Entrepreneurial Spanish Region Nuria Toledano, David Urbano, and Alex Rialp

41

Chapter 4

Strategic Entrepreneurship: Integration Support Journals Teresa García-Merino and Valle Santos-Álvarez

Chapter 5

Nascence to Newness: The Influence of Internal and External Factors on the Likelihood of First Sale Linda F. Edelman, Tatiana S. Manolova and Candida G. Brush

69

Time and Risk Entrepreneurial Characteristics of Growth: The Case of Persistent Light Industrial Prototypes P. E. Petrakis

95

Chapter 6

Chapter 7

Business Incubators and the Emergence of the Entrepreneurial University: Lessons learned from Portugal João Paulo Coelho Marques

Chapter 8

Sources of Information in International Entrepreneurship Process Valle Santos Álvarez and Teresa García Merino

Chapter 9

Entrepreneurial Innovation, Economic Growth and the Stigma of Failure Patricia Crifo and Hind Sami

55

113 133

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vi Chapter 10

Chapter 11

Maria V. Bradshaw and Patricia T. Carrington Is Entrepreneurship the Salvation for Enhanced Economic Growth? A Review of the Empirical Evidence of the Effect of Entrepreneurship on Employment, Productivity and Economic Growth Kristina Nyström Internationalization as an Act of Entrepreneurship: Economic Effects and Examples Arild Aspelund and Mathieu Cabrol

Chapter 12

Entrepreneurship and Economic Policy Objectives Miguel-Ángel Galindo Martin and María Teresa Mendez Picazo

Chapter 13

Innovation Policies and VC Management to Support Entrepreneurial Financing Jarunee Wonglimpiyarat

163

179 193

205

Short Communication From Entrepreneur to Manager: A Brief Consideration of Economic Transition Scott A. Beaulier,, Joshua C. Hall, and William S. Mounts Index

223 233

PREFACE Entrepreneurship is the practice of starting new organizations or revitalizing mature organizations, particularly new businesses generally in response to identified opportunities. Entrepreneurship is often a difficult undertaking, as a vast majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part-time) to major undertakings creating many job opportunities. Many "high-profile" entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Angel investors generally seek returns of 20-30% and more extensive involvement in the business. Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs.This new book presents the latest thinking in this vibrant and essential area. Chapter 1 - The rate of black entrepreneurship has lagged the national average for decades. Rather than look at financial factors, as most of the literature that has explored the disparity has done, we examine the importance of having self-employed parents and differences in the family structures of black and white Americans. We conducted chi-square tests and logistic regression analyses on General Social Survey data collected from 1972-2004, and found significant differences between black and white entrepreneurs. This paper discusses the implications of our results, offers new insights into the lagging rate of black entrepreneurship, and discusses future directions for research. Chapter 2 - There is little knowledge available about entrepreneurship in transition economies of Central Asia in comparison to the advanced economies where significantly more research information is available about entrepreneurs and entrepreneurial process. Despite the lack of information about entrepreneurs and entrepreneurship process in transition economies, especially about former Soviet Republic countries, it is recognized that the effective practice of entrepreneurship is highly correlated with a successful transition from a planned economy to a market based economy. On the other hand, although there might be cultural similarities between Turkish and Kyrgyz entrepreneurs due to historic Turkic ties between the two countries, significant differences exists between the two countries in terms of economic approach and policies adopted. Turkey has adopted market based economic policies right after WWII and has experienced much longer period of rapid economic growth compare to Kyrgyzstan. As a result, Turkey offers a more positive and mature environment for new enterprise development.

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Accordingly, a comparative study of the entrepreneurial attitudes and attributes in these two countries that have historically common roots and tradition but have followed totally different economic paths should prove to provide valuable insights to the researchers and policy makers alike. Through an empirical study of Turkish and Kyrgyz entrepreneurs in different sectors, this study explores the characteristics and attributes of Turkish and Kyrgyz entrepreneurs and their attitudes towards entrepreneurship and the entrepreneurial process. We also explore the motives, challenges encountered, and demographic attributes of Turkish and Kyrgyz entrepreneurs. Data for the study is collected in both countries using a developed questionnaire translated in both languages. A total of 203 usable questionnaires are collected from Turkish entrepreneurs and a total of 100 questionnaires are collected from Kyrgyz entrepreneurs. Our findings indicate significant differences between Turkish and Kyrgyz entrepreneurs in terms of their profiles, attitudes, motivations, and environmental conditions of entrepreneurship. Chapter 3 - It is generally accepted the importance of entrepreneurship and SMEs to the contribution of economic growth and social development. Consequently, over the last decade, entrepreneurship has been a subject of growing interest by governments of all political ideologies, who have implemented different programmes to promote the creation of new firms. Similarly, academics have increasingly focused on these topics, analyzing the entrepreneurship policies in different contexts. In this research, the role of entrepreneurship policies and support programmes in the promotion of local development through new firm creation is analyzed. The study is developed in Catalonia, one of the most entrepreneurial regions of Spain, through a multiple case study methodology under the light of Institutional Economics as a theoretical framework. The main findings of the research show that despite the relevance of programmes and policies concerning new firm formation, one of the most important factors for business creation as well as for local development are the socio-cultural ones. Chapter 4 - Strategic management and entrepreneurship are two research fields in which significant progress has been made. The field of strategic management has already reached a level of maturity whilst the field of entrepreneurship continues to develop. Both have thus generated a vast amount of literature, with some papers being published in a group of influential journals. Authors such as Boyd et al. (2005) for strategic management and Fried (2003) or Linton (2006) for entrepreneurship have attempted to highlight the most widely recognized journals. Over the last decade some authors (Evans and Wurster, 1999; McGrath and MacMillan, 2000; Hitt et al., 2001, 2002; Ireland et al., 2001, 2003) have proposed merging the theory and research of both disciplines, leading to the emergence of the strategic entrepreneurship (SE) construct. Despite certain initial disagreements (Shane and Venkataraman, 2000), complementarities between the two fields seem to strongly support the idea of integration. Further, the publication of the Strategic Entrepreneurship Journal (an official journal of the Strategic Management Society) in 2007 heralded a significant milestone. However, the question arises as to which journals have thus far contributed to sustaining this integration, what support each has provided in the merging process, which can be considered a reference for current and future research in strategic entrepreneurship, and finally what level of recognition cited journals have reached in recent years. Using the Scopus database (from Elsevier) and the Web of Science and Journal Citation Reports in ISI Web of

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ix

Knowledge databases (from Thomson) as sources of information and analysing the period between 2000 and 2008, we have attempted to answer these questions. Our analysis reveals that over the last decade SE literature has evidenced a clear growth. A wide range of differing journals have contributed to this, although a prominent role has been played by those more closely linked to the field of entrepreneurship. Based on the recognition achieved by certain journals, a group of publications is proposed as a reference framework for SE researchers. Chapter 5 - Each year between four and six percent of the working population in the United States take action to start a new venture, however, only about half of all potential business founders succeed in creating a new enterprise. Evolutionary theory attributes this high failure rate to the liability of newness in which young organizations do not have the internal and external resources needed to compete in their respective markets. Alternatively, the entrepreneurship literature suggests that it is individual perceptions and actions that determine early venture success. In both cases, a critical juncture for nascent entrepreneurs – those individuals who are engaged in the processes of starting a new venture – is the transition from nascence to newness, which culminates in the firm’s first sale. This paper explores the effects of internal organizational conditions as well as perceived external environmental circumstances on the likelihood of the fledgling firm making its first sale. To do this we used a random sample of 473 nascent entrepreneurs located in the United States. Findings indicate that social capital and the commitment of the entrepreneur to the new venture significantly influence successful transition from nascence to newness. In addition, the perceived strength of competition and the level of product/service development are also significant predictors of the likelihood of first sale. Implications are discussed. Chapter 6 - This article is about the role of entrepreneurial perception of time and risk vis à vis structural change and growth. Entrepreneurship is a basic constituent element of social capital which in turn is a productive lubricant of the growth process. Different structural entrepreneurial prototypes with respect to time and risk have different structural change effects. Those structural changes (and any structural changes) are not neutral as far as the implications of growth rate changes are concerned. Therefore the time and risk characteristics of active entrepreneurship are reflected in the growth process either in the form of structural change and/or in the form of growth rate change. Chapter 7 - This Chapter concerns University-Industry (U-I) interaction via business incubators, highlighting the part played by the University in implementing, sponsoring and promoting these infrastructures. The empirical study was based on exploratory work that involved 11 business incubators, 8 Portuguese universities sponsoring and/or associated with these incubators, and a sample of 79 firms under incubation. The results confirmed the existence of factors that determine U-I links, and identified others not yet studied, such as the “statutory situation of the incubator” and the “origin of the firms” based in it. It was also found that the "economic sector of activity" of the firm is associated with the "statutory situation” of the incubator. The entrepreneurial university model proposed is based on earlier results, bearing in mind the conception of incubator constructed on pre-existing theoretical knowledge relating to the role of the university in the technology transfer process, to the importance of certain characteristics of SMEs, and to the relevance of the nature of entity promoting the incubator. Finally, a series of policy implications for the universities, incubators and firms, are put forward, with the aim of bridging the gap between the parties.

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Chapter 8 - The globalisation of markets is increasingly forcing firms to internationalise. Managers’ decisions in firms’ internationalisation processes are complex because of the diversity of information stimuli that are involved. Thus the internationalisation process is conditioned by the strategic interest that international activity has for the firm, the accessibility of the foreign markets, the pressure of the competitive and institutional environment, and the firm’s ability to integrate into international competition. It is not, however, these objective factors that directly affect the decision, but rather the information stimuli that the manager receives about them. Consequently, information plays a critical role in the internationalisation decision. Managers acquire information in many different ways: through personal contacts, or social networks, from the media, or organisms linked to business activity, and so on. Thus the current chapter studies the information sources that company managers use in their firm’s internationalisation process. The literature has emphasised the importance of access to information and the manager’s active role in the search for information. Moreover, faced by different sources of information, managers, through a process of selective attention, attend some messages and ignore others. In other words, the managers classify some messages as signals and others as noise. In this line, the current research looks at which information sources managers take into account when they absorb the information stimuli about the factors involved in the firm’s internationalisation decision. The chapter studies the extent to which managers attend the opinions of other individuals with whom they maintain relationships, or messages from the media, or the information offered by different organisms. The following organisms are considered: (1) organisms dedicated to the phenomenon of business internationalisation (Spanish Institute of Foreign Trade – ICEX, regional export promotion body); (2) other public organisms, such as the chambers of commerce; and (3) the corresponding sectorial associations. This chapter also studies the extent to which the managers behave actively in their search for information or receive information without search effort. The empirical analysis involves firms in the Castile-Leon region of Spain from two sectors: information and communications technologies, and the natural stone industry. Chapter 9 - This contribution proposes a model of entrepreneurial activity highlighting a complex relationship between innovation and stigma of failure. Innovation decisions are examined in an endogenous growth model with horizontal differentiation in the spirit of Romer (1990). In our framework, entrepreneurs decide to invent a new good, given entrepreneurial talent and production costs, and face a risk of failure. If an entrepreneur fails in this innovation process, the firm remains on the market but bears a stigma of failure. We then analyze how the risk and the stigma of failure affects business dynamism and economic growth. We show that while a higher risk of failure is detrimental to innovation and growth, it positively affects the returns to entrepreneurial talent (or equivalently the comparative advantage of successful innovators). On the contrary, a higher stigma of failure inhibits entrepreneurial creation but might be beneficial for growth. These results are supported by recent empirical evidence in OECD countries. Chapter 10 - During the last decades, enhancing entrepreneurship has emerged as commonly used policy- measure in order to improve economic growth. However, is it true that entrepreneurship unambiguously can be claimed to improve economic growth? This paper intends to review the empirical evidence on the relationship between entrepreneurship on three measures of economic growth, employment, productivity and aggregate economic growth. The review shows that the studies that find no positive relationship between

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entrepreneurship and productivity growth have studied a relatively short period. Most studies that have studied a longer period (about ten years) provide rather clear evidence on the positive relationship between entrepreneurship and growth. Regarding the relationship between entrepreneurship and employment growth, the empirical evidence to some extent point in different directions. However, it must be concluded that in the long run there seems to be a positive relationship. A majority of the studies on the relationship between entrepreneurship and aggregate economic growth find a positive relationship. Studies that find a negative relationship usually employ non-harmonised self-employment rates as the measure of entrepreneurship. Chapter 11 - For centuries there has been an ongoing discussion in the economics literature on the nature and drivers of economic development. In most views, entrepreneurship in one shape or another has been seen as the main driver of economic change and development. The problem with this literature is that is has its origin in national economics and occurred in a domestic single market setting. Hence, the international effects of entrepreneurship have been largely ignored. This study aims to close some of this gap by reviewing three dominant schools of economy, namely Neo-Classical, Schumpeterian and Austrian economics, and their principal views of economic development. Further, we extend the argument of these theories of economic development into a cross-national setting and assess the theoretical effects of internationalization as a driver for economic development. Finally, we present and discuss some cases that illustrate the economic effects identified from the theoretical review through their international activities. The study has three major contributions. First, we extend the notion of economic development from the cradle of national economics into the international arena. Secondly, we bring forward practical examples of internationalizing companies and exemplify the entrepreneurial effects that these firms have caused in the path of their internationalization. Finally, we extend the theoretical perspectives of international entrepreneurship by introducing effects of internationalization on economic development, and hence, conceptualizing international new ventures as global change agents. Chapter 12 - The economic growth and the progress of the nations have been two economic policy targets that have interested to the economists during centuries. Different approaches have been developed to determine which variables promote economic progress and growth so the policy maker could use them to design the adequate economic policy to achieve these objectives. During the last decades, “entrepreneurship” factor has been considered as a relevant element in the economic policy area, because it has an important role in the employment creation and improvement social welfare processes, achieving in this sense some of the most relevant economic policy objectives. In this paper, we analyze the relationship between entrepreneurship initiative and several economic policy targets, namely, employment and economic growth and progress. Also, we will consider the role of monetary and fiscal policies to promote the entrepreneurial activity, developing an empirical study for developed and developing countries to estimate the relationship between both policies and entrepreneurship activity. Chapter 13 - With the exception of the United States, no other country in the world could manage to create successful high-tech venture capital (VC)-backed industries. The government of developed and developing countries have placed importance on the government financial policies to boost high-tech investment capacity. This chapter is

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concerned with the innovation policies to support the development of the VC industry. There are difficulties in terms of access to finance for start-up firms. The governments around the world have initiated the government investment programmes and laws to support early-stage investments in start-ups. This chapter explores the differences across countries in respect of tax measures to support the development of the VC industry and proposes the National System of Innovation-based model of VC financing. This chapter is organised as follows. Section 1 presents an introductory section. Section 2 reviews the literature on the national system of innovation, management of VC financing and the Triple Helix model for innovation development. Section 3 explores the innovation policies and tax measures to support the development of the VC industry. Section 4 discusses the initiatives and challenges to create effective VC financing system. Section 5 concludes this chapter by drawing useful implications for policy makers attempting to provide an environment conducive to high-tech industry. Short Communication - Both change and persistence matter in economics. Change ultimately leads to persistence. In economics, marginal analysis, disequilibrium, and market entry and exit highlight the importance of change. Persistence, on the other hand, can be seen in equilibrium—the assumption of zero (i.e., normal) profits is an example. Entrepreneurs are agents of change. Yet, on-going competitive firms must learn to survive in the long run setting of normal returns. If entrepreneurs bring both change and manage to persist, then there is no reason to read further. If they do not, then how does the transition from change to persistence occur? In this paper we discuss the importance of the transition from entrepreneurial information to managerial information. We argue that both entrepreneurs and managers have specialized sets of information and that firms require each type of information at different stages of their existence.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 1

FAMILY MATTERS: DIFFERENCES IN HAVING SELF-EMPLOYED PARENTS * BETWEEN BLACK AND WHITE ENTREPRENEURS Robert P. Singh1,†, Micah E. S. Crump2and Xingxing Zu1 1

Morgan State University Earl G. Graves School of Business, 1700 E. Cold Spring Lane, Baltimore, MD 21251 2 Howard University School of Business, 2600 6th Street N.W., Suite 551 Washington, DC 20059

ABSTRACT The rate of black entrepreneurship has lagged the national average for decades. Rather than look at financial factors, as most of the literature that has explored the disparity has done, we examine the importance of having self-employed parents and differences in the family structures of black and white Americans. We conducted chisquare tests and logistic regression analyses on General Social Survey data collected from 1972-2004, and found significant differences between black and white entrepreneurs. This paper discusses the implications of our results, offers new insights into the lagging rate of black entrepreneurship, and discusses future directions for research.

*

The term “black” represents the broader groups of blacks living in the U.S. These include African-Americans, as well as black people from African countries, the Caribbean, and other countries. An earlier version of this paper was presented at the 2007 Academy of Management Meeting

†

Phone: 443-885-3433; Fax: 410-885-8252; Email: [email protected]

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu

INTRODUCTION According to the U.S. Bureau of Labor Statistics (BLS), the unemployment rate for blacks is 8%, while the unemployment rate for whites is 4.2% (U.S. Bureau of Labor Statistics, 2007). In fact, over the last 50 years, the unemployment rate of blacks has consistently remained about double that of white Americans (Badgett, 1994; Hoynes, 2000; Spriggs & Williams, 2000). Since most of the net new jobs in the U.S. economy are created by new ventures and small businesses (Birch, 1987; Scarborough & Zimmerer, 2005), a natural solution to improving the disproportionately high black unemployment rate is through increased black entrepreneurship. Research has found that black business owners are more likely to hire African-Americans and other minority job seekers, than are white business owners (Bates, 1994). Thus, entrepreneurship represents a viable alternative to unemployment and/or discrimination in the labor market and can provide a path out of poverty (e.g., Glazer & Moynihan, 1970; Light, 1979; Sowell, 1981; Moore 1983). There are many definitions of entrepreneurship and various sources provide different measures for the rate of entrepreneurship among blacks and whites (e.g., Fairlie & Meyer, 1996; 2000; Hipple, 2004). No matter what statistics are cited or what definition is used, the rate of black entrepreneurship lags both the national average and the entrepreneurship rate of whites in the United States. According to the U.S. Census Bureau, blacks make up 12.8% the U.S. population, but of the 23 million firms in the U.S., only 1.2 million (5.2%) are owned by blacks (U.S. Census Bureau, 2007). Just 4.4% of African-American men and 2.0% of African-American women work for themselves (Fairlie & Meyer, 1996). Federal government statistics on the self-employment rates of Americans show that compared to whites (8% selfemployed), blacks (4.1% self-employed) are half as likely to be self-employed (Hipple, 2004). Fairlie and Meyer (2000) reported that whites are three times more likely than blacks to own their own businesses. The significant difference in the percentage of white versus black self-employment rate has remained for nearly a century (Fairlie & Meyer, 1996; 2000). The reasons for the wide disparity are not well known. Most researchers have focused on personal financial assets (Evans & Leighton, 1987), and access to capital (Bates, 1995, Cavalluzzo & Cavalluzzo, 1998) as reasons for the lagging black entrepreneurship rate in the U.S. However, it would seem that if the problem was simply providing access to capital the issue of low black participation in entrepreneurship would have been solved, or at least improved, long ago through such institutions as community banks and local angel investors, or initiatives such as government revitalization efforts and affirmative action lending programs. Yet, there has been relatively little change in the rate of black entrepreneurship over the last 90 years (Bates, 1995; 1997; Fairlie & Meyer, 1996; 2000). Beyond financial/access to capital issues, there is little research that has examined the causes for the relatively low black entrepreneurship rate in the United States. Having a father who is/was an entrepreneur has consistently been found to be related to becoming an entrepreneur (Hisrich et al., 2005; Hundley, 2006). This is not surprising given that fathers serve as role models and pass on knowledge and experience to their children. However, with the depressed rate of black entrepreneurship there simply are not as many black entrepreneur fathers per capita as there are white entrepreneur fathers. This is supported by the findings of Hout and Rosen (2000), who combined General Social Survey (GSS) data

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collected from 1974 through 1996, and found that blacks are less likely to have fathers who are self employed (15.5%) than the general population (24.1%). However, Hout and Rosen (2000) also found that black males whose fathers were self-employed had lower rates of selfemployment than white males whose fathers were not self-employed. This suggests that not only is there a significant difference in the percentage of having a self-employed father between blacks and whites, but also that the parent-child impact of having a self-employed father is different between black and white males. According to Hout and Rosen (2000), the differing percentage of whites and blacks who had self-employed fathers could only explain 15% of the gap between white and black men who chose to be self-employed. We believe that further study of family structures may reveal more about the new venture formation gap between blacks and whites. In this paper, we examine the importance of having parents who are self-employed. We follow up on the work of Hout and Rosen (2000) by conducting additional analyses using updated GSS data since 1996. In addition, they only looked at males and the importance of self-employed fathers in their sample. There are also far more female entrepreneurs than ever before (Scarborough & Zimmerer, 2005), and for this reason we include females in our sample and study the importance of having a self-employed mother. We also consider several different questions. Hout and Rosen (2000) combined data over their 22-year period of analysis, but much has changed over that period and in the 10 years following their 1996 data cutoff period with respect to family structures. We hypothesize that, over time, there have been differential impacts on self-employed blacks and whites as a result of changing family structures. These changes have seen more American households becoming single-parent families. Further, a greater percentage of black households versus white households are now single-parent families that are being run by women. Given the reduction in males heading black households with children, the role of the mother as a facilitator of entrepreneurship is likely to have become far greater within the black community, when compared to white households. We examine the possibility that this family structure difference has an impact on black entrepreneurship. The broad purpose of this exploratory paper is to attempt to better understand the reasons for the gap in the levels of black and white entrepreneurship. However, a secondary goal is to examine the effects of changing family structures on new venture creation in general. Specifically, we study the effects of different parental entrepreneurial experiences and the impact of changing family structures on self-employed whites and blacks. We were interested in identifying changing trends over time. Following a brief literature review, we present five hypotheses. These are tested using GSS data collected between 1972 and 2004. After the empirical results are discussed, we offer practical and academic research implications, and discuss limitations along with future research directions.

LITERATURE REVIEW AND RESEARCH HYPOTHESES Benefits of Having Self-Employed Parents A significantly higher percentage of entrepreneurs have fathers who are/were selfemployed than non-entrepreneurs (Hisrich et al., 2005; Hundley, 2006). In fact, the offspring

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu

of entrepreneurs have been found to be two to three times more likely than those who do not have entrepreneurial parents to become entrepreneurs themselves (Lentz & Laband, 1990; Fairlie, 1999; Dunn & Holtz-Eakin, 2000, Hout & Rosen, 2000). It is possible that there is an “entrepreneurial gene” that has yet to be identified, but this seems unlikely. Instead, researchers have focused on more tangible benefits of having entrepreneurial parents. Dunn and Holtz-Eakin (2000) argue that financial and human capital benefits are two possible explanations for why the offspring of the self-employed display a greater propensity to become entrepreneurs. The financial capital explanation refers to the fact that capital market constraints limit an entrepreneur’s ability to finance a start-up venture (e.g., banks will not extend loans to startup ventures which have no history of operations), which can be a significant obstacle to becoming an entrepreneur. To the extent that greater personal wealth relaxes capital market constraints and eases the transition to entrepreneurship, successful entrepreneurs are more able and willing to transfer financial wealth to their offspring, thereby overcoming capital market constraints. In short, the authors reason that family credit markets may substitute for formal access to funds. Dunn and Holtz-Eakin’s (2000) second explanation, human capital, is that parents transmit to their children valuable work experience, reputation, or other managerial human capital. Lentz and Laband (1990) explain that business owners obtain industry-specific, integrated managerial skills from two potential sources: market experience and pre-market experience. The researchers refer to market experience as “the school of hard knocks” (p. 565), and they refer to pre-market experience as the equivalent of an internship that takes place prior to starting their own firm, and under the auspices of their parents’ (or other family member’s) business. Lentz and Laband (1990) looked at respondents from the 1979 membership of the National Federation of Independent Businesses (NFIB) and found that half of all business owners had a parent who was also a self-employed business owner. The researchers found that business owners acquired their entrepreneurial skills informally through their experiences within family firms, than through formal education and training programs. Similar to Lentz and Laband (1990), Fairlie and Robb (2007) found that nearly half of all business owners had a self-employed family member prior to becoming a business owner, and that half of that group had actually worked in that family member’s business. The authors present two additional explanations for why the offspring of parents display a greater propensity toward entrepreneurship. First, family members tend to share preferences for entrepreneurial activities and entrepreneurial ability, such as preferences for autonomy, selfemployment, and attitudes toward risk. The second explanation is that the offspring may become partners with their parents or inheritors of their parents’ businesses. However, using data from the 1992 Characteristics of Business Owners (CBO) survey, Fairlie and Robb (2007) found inheriting a family’s business to account for only 1.6% of small businesses, although businesses that are inherited tend to be more successful and larger than those that are not inherited. Entrepreneurship is an unstructured activity that requires a wide variety of skills. Financial resources are just one element of successful entrepreneurship – passion and drive, knowledge of market needs, and multi-disciplinary skills (e.g., strategic, accounting, financial, legal, technical) are just some of the other important factors. The benefit of having entrepreneurial family members appears to go well beyond any financial benefits. Entrepreneurial family members can serve as informal sources of information that can be

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useful for helping to shed light on the challenges and difficulties faced by entrepreneurs. This benefit can give would-be entrepreneurs a more realistic understanding of how to become a successful entrepreneur. To this end, both Fairlie and Robb (2007), as well as Lentz and Laband (1990), emphasize that the transfer of physical capital is less important than the transfer of knowledge and experience in explaining why the offspring of business owners become business owners.

Hypotheses As discussed earlier, black males are far less likely to have self-employed fathers (Hout & Rosen, 2000). This has created a “chicken-and-egg” type problem when looking at black entrepreneurship. That is, a lower percentage of blacks have self-employed fathers to act as role models to help them better understand how to become successful entrepreneurs. Then, the lower firm founding rate for blacks keeps future generations of black children from benefiting from having an entrepreneurial father who can serve as a mentor and teach entrepreneurial skills, and the cycle repeats itself. Beyond the statistics which show that the wide gap in the self-employment rates of whites and blacks has remained in place for decades, there are also changes to the basic family structures of Americans that are likely to have some impact on the role and importance of fathers. Table 1 provides a summary of the changing nature of black and white families in the U.S. from 1970 to 2000. Table 1 shows that the structures of black and white families in the U.S. are strikingly different and have become even more different over time. In 1970, only 64.3% of black households with children under the age of 18 were 2-parent family units. This compared with 89.9% of similar white households. However, over a 30-year period, while both groups have seen their percentage of 2-parent family households drop, the changes have been much more dramatic in black households. By 2000, 61.4% of children in black households were living in single-parent family units and the overwhelming majority (90.1%) of these families was being led by mothers. Only 26.1% of children in white families were living in single-parent families. Table 1. Family Structures of Black and White Family Groups with Children Under 18 (U.S. Census Bureau, 2007)

Race Black Families 2-parent family unit single-parent family unit % of single-parent units maintained by mothers White Families 2-parent family unit single-parent family unit % of single-parent units maintained by mothers

1970

1980

1990

2000

64.3% 35.7% 92.6%

48.1% 51.9% 93.9%

39.4% 60.6% 92.8%

38.6% 61.4% 90.1%

89.9% 10.1% 88.3%

82.9% 17.1% 88.4%

77.4% 22.6% 83.1%

73.9% 26.1% 79.3%

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu

One reason for the increasing number of single-parent black families is the declining percentage of blacks who choose to get married (Pinderhughes, 2002). However, even for those who get married, the divorce rate of blacks is twice that of whites (Tucker & MitchellKernan, 1995). The result has been that from 1990 to 2005 the percentage of blacks over the age of 18 who were married dropped from 46% to 41%. While for whites the number only dropped from 64% to 61% (U.S. Census Bureau, 2007). What all of this data suggests is that fathers have played a diminishing role within the household over time, particularly within the black community. We want to be clear that we are not making a moral judgment or assessment of how involved fathers may or may not be in the lives of their children. Obviously, a father who does not live in the household may still play an active part in a child’s upbringing. We are only looking at the objective statistics and trends that show that fathers are less likely to be living with their children. Based on government statistics, the number of non-farm proprietorships has nearly quadrupled from 5.8 million in 1970 to 19.7 million in 2003 (U.S. Census Bureau, 2007). Over that same time period the U.S. population has grown from 227 million to 291 million people (U.S. Census Bureau, 2007). Thus, the growth in proprietorships (340% growth) is rising at a much faster pace than the U.S. population (28% growth). With the rate of entrepreneurship on the rise and the societal trends toward fathers playing a diminished role in the lives of children, it is possible that for would-be entrepreneurs there is less importance being placed on having a self-employed father. In fact, over the last 35 years we believe that it is likely that fewer self-employed people have had self-employed fathers. Further, given the significant numbers of blacks who now grow up in single-parent, mother-led families, we believe this finding will be stronger for blacks. This leads to the following two hypotheses: Hypothesis 1a: For both self-employed blacks and self-employed whites, having a selfemployed father has become less likely over the last 35 years. Hypothesis 1b: Self-employed blacks have become even more unlikely than their white counterparts to have self-employed fathers over the last 35 years. Between 1975 and 1996, the labor force participation of women increased from 46% to 59% (Hayghe, 1997). Among women with children under 6 years of age the increase was even more dramatic – from 39% to 62% (Hayghe, 1997). Research has also shown a significant increase in the number of women entering and rising to senior management positions in organizations, and that many female senior executives have families (Catalyst, 2001), which is leading to an increase in the number of families with full-time househusbands (Morris, 2002). No doubt, a major reason for this increase is that women are graduating from educational institutions in increasing numbers (Marklein, 2003). In addition to greater participation in the labor force, more women than ever are founding new ventures. In fact, the rate of new venture creation by women is twice that of the U.S. national average (Scarborough & Zimmerer, 2005). For women of color, the rate is even higher – the founding rate has been found to be 6 times the national average (Center for Women’s Business Research, 2007). As fathers have become increasingly less likely to live with their children, mothers have taken on a more important role in society than in the past, especially within black families. As shown in Table 1, during the 1980s, the family structure of blacks had changed to where the majority of black households with children under the age of 18 were headed by single

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mothers. This remains true today (55.3%). For whites the statistics are much different. In 1970, 8.9% of white families with children under the age of 18 were headed by mothers. By 2000 this number had grown to 20.7%. So, for both black and white families with children, mothers have taken on a much larger role as the head of household over the last 35 years. This has been especially true of black families. Based on these statistics, we propose the following: Hypothesis 2: Hypothesis 3: Hypothesis 4:

A growing percentage of self-employed blacks and self-employed whites have a self-employed mother. A greater percentage of self-employed blacks will have a self-employed mother than the percentage of self-employed whites. Having a self-employed mother is more likely for self-employed blacks than having a self-employed father.

We recognize that data are not theory (e.g., Sutton & Staw, 1995), and that there may be some questions about the theoretical basis for the hypotheses. However, we view this work as exploratory and important because it examines an issue that has remained largely unanswered by the literature – why there is a significant gap between the rates of black and white entrepreneurship. We take the view of Weick (1995) that data analysis is critical to theory development. In addition, as DiMaggio (1995) points out, theory construction is social construction that often takes place after the fact. For these reasons, we believe the proposed hypotheses, the empirical tests, and the discussion of results that follow are important because they can help shed further light on the subject of black entrepreneurship.

RESEARCH METHODS Data and Sample To test the hypotheses, we utilized General Social Survey (GSS) data. The GSS is a personal interview survey of a representative sample of thousands of U.S. households conducted by the National Opinion Research Center (NORC). A full description of the GSS project is available at the NORC website (see http://www.norc.org/projects/gensoc1.asp). There are a number of websites that allow public access to the GSS data. We downloaded the data from the University of California, Berkeley’s Survey Documentation and Analysis website (see http://sda.berkeley.edu/archive.htm). The GSS contains a standard core of demographic and attitudinal questions, plus topics of special interest. It has been administered annually from 1972 until 1994, when it became a biennial survey. Because of its usage of permanently worded questions, the survey allows researchers to examine the opinions and issues faced by the U.S. population over time. In total, more than 38,000 respondents have answered over 3,260 different questions since the survey’s inception (NORC, 2007a). The survey employs a national area probability sampling frame of noninstitutionalized (i.e., non-military or other government-affiliated adults). The sample size is about 1,500 for the first 19 surveys, and 3,000 since 1994. The survey is administered by in-person interviews

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu

which last about 90 minutes each. Response rates fluctuate between 74% and 79% from 1975 to 1991; between 76% and 82% from 1993 to 1998; and remained at 70% for the years 2000, 2002, and 2004 (NORC, 2007b). While there was no 1992 GSS, there was a special survey in which respondents to the 1991 GSS were re-contacted by mail or telephone, with a response rate of 84%. For this study, we only used data and analyzed the results for the black and white respondents. Following Hout and Rosen (2000), we treat the self-employed as being entrepreneurs. We recognize and acknowledge that some may disagree with this, however, equating self-employed people with entrepreneurs is consistent with prior entrepreneurship studies (e.g. Bingham & Melkers, 1989; Butler & Herring, 1991; Hout & Rosen, 2000; Katz & Green, 2007), and allows us to utilize the GSS for this exploratory study. The statistical methods utilized in this study were chi-square tests and logistic regression analyses.

Measures The variables used in this study are defined as follows: Race – Categorical variable: 1=white, 2=black. Respondent Self-Employed – Categorical variable: 0=not applicable, 1=self-employed, 2=work for someone else. Father Self-Employed – Categorical variable: 0=not applicable, 1=self-employed, 2=worked for someone else. Mother Self-Employed – Categorical variable: 0=not applicable, 1=self-employed, 2=worked for someone else. Decade – Categorical variable that divided the GSS response data into 4 categories: 1=1970s, 2=1980s, 3=1990s, 4=2000s.

RESULTS Table 2 breaks down the respondents by decade, race, whether they are self-employed or not and whether their father was self-employed or not. Chi-square analyses of the data show that for whites, a greater percentage of those with self-employed fathers became selfemployed than those whose fathers worked for others. This difference is statistically significant and has remained over time (p<.001 for all four decades). For blacks, the results are quite different. During the 1980s, a greater percentage of blacks with self-employed fathers became self-employed themselves, than those blacks whose fathers worked for others (p<.001). The statistical significance of this difference grew weaker in the 1990s (p<.05), and by the 2000s there was no statistical difference between the percentage of blacks who became self-employed and whether or not their father had been self-employed. These results provide support for Hypothesis 1b, as the link between having a self-employed father and being selfemployed oneself appears to have diminished for blacks over time. We were also interested in testing whether the increasing importance of mothers as the heads of households is playing a role in predicting self-employment. In Table 3, we

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conducted similar chi-square analyses as described in Table 2, except that we replaced the self-employed father variable with the self-employed mother variable. For both whites and blacks, we can see that having a self-employed mother resulted in a greater percentage of selfemployment than not having a self-employed mother. This provides support for Hypothesis 2. Table 2. Chi-Square Analysis of the Importance of Having a Self-Employed Father for Self-Employed Whites and Blacks by Decade Decade

Race

1970s

White N = 7529 χ2 = 194.3, (1 df)*** Black N = 835 χ2 = 3.5, (1 df)t

1980s

1990s

White N = 9597 χ2 = 165.1, (1 df)***

t

p<.10 * p<.05 *** p<.001

No Yes No Yes No

Black N = 1407 χ2 = 26.3, (1 df)***

Yes

White N = 8756 χ2 = 135.9, (1 df)***

Yes

Black N = 1047 χ2 = 5.3, (1 df)* 2000s

Father SelfEmployed Yes

No

No Yes No

White N = 5290 χ2 = 58.8, (1 df)***

Yes

Black N = 730 χ2 = .95, (1 df)

Yes

No

No

Respondent SelfEmployed Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No

Percentage (N) 17.3% (458) 82.7% (2190) 6.9% (339) 93.1% (4542) 10.6% (24) 89.4% (202) 6.7% (41) 93.3% (568) 20.0% (628) 80.0% (2508) 10.4% (675) 89.6% (5786) 11.5% (36) 88.5% (277) 3.9% (43) 96.1% (1051) 19.8% (512) 80.2% (2069) 10.6% (652) 89.4% (5523) 10.3% (21) 89.7% (183) 5.8% (49) 94.2% (794) 19.0% (275) 81.0% (1169) 11.0% (422) 89.0% (3424) 9.4% (12) 90.6% (115) 7.0% (42) 93.0% (561)

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu Table 3. Chi-Square Analysis of the Importance of Having a Self-Employed Mother for Self-Employed Whites and Blacks by Decade

Decade

Race

1990s

White N = 3836 χ2 = 32.1, (1 df)*** Black N = 730 χ2 = 9.9 (1 df)**

2000s

Mother SelfEmployed Yes No Yes No

White N = 3759 χ2 = 23.9, (1 df)***

Yes

Black N = 793 χ2 = 16.1, (1 df)***

Yes

No

No

Respondent SelfEmployed Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No

Percentage (N) 21.0% (90) 79.0% (339) 11.4% (388) 88.6% (3019) 16.5% (15) 83.5% (76) 6.9% (44) 93.1% (595) 18.5% (81) 81.5% (357) 10.6% (351) 89.5% (2970) 15.9% (17) 84.1% (90) 5.4% (37) 94.6% (649)

** p<.01 *** p<.001

Unlike the statistics on self-employed fathers which show a significant disparity between the races, no such difference can be found regarding self-employed mothers. More specifically, self-employed whites are much more likely than self-employed blacks to have a self-employed father. However, there is no statistical difference between blacks and whites in terms of the importance of having a self-employed mother. Table 4. Importance of Having Self-Employed Parents to Self-Employed Whites and Blacks in the 1990s and 2000s Race White

Black

Decade 1970s 1980s 1990s 2000s χ2 1970s 1980s 1990s 2000s χ2

N/A – Data not collected in GSS. * p<.05 *** p<.001

Father Self-Employed (N) 57.5% (458) 48.2% (628) 44.0% (512) 39.5% (275) 55.799 (3 df)*** 36.9% (24) 48.2% (36) 30.0% (21) 22.2% (12) 8.654 (3 df)*

Mother Self-Employed (N) N/A N/A 18.8% (90) 18.8% (81) .001 (1 df) N/A N/A 25.4% (15) 31.5% (17) .510 (1 df)

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Table 5. Logistic Regression Statistics for Self-Employment Independent variables Race Decade Decade(1) Decade(2) Decade(3) Self-Employed Father (Father) Self-Employed Mother (Mother) Father*Race Father*Decade Father*Decade(1)

Model 1

Model 2

.536 (.000)*** (.000)***

.529 (.000)*** .903 (.167) N/A

1.438 (.000)*** 1.500 (.000)*** 1.587 (.000)*** 2.679 (.000)*** N/A .943 (.671) (.008)**

Mother*Race

.829 (.045)* .781 (.010)** .700 (.001)*** N/A

Mother*Decade

N/A

–2logL

25123.224

Father*Decade(2) Father*Decade(3)

(Whites) Model 3 N/A

(Blacks) Model 4 N/A

(Whites) Model 5 N/A

(Blacks) Model 6 N/A

(.000)***

(.025)*

1.563 (.000)*** 1.582 (.000)*** 1.651 (.000)*** 2.802 (.000)*** N/A

.567 (.011)* .855 (.474) 1.037 (.873) 1.646 (.065) N/A

.920 (.283) N/A

.771 (.258) N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

2.066 (.000)*** N/A

2.669 (.002)** N/A

N/A

(.000)***

(.138)

N/A

N/A

N/A

.766 (.006)** .748 (.004)** .681 (.001)*** N/A

1.930 (.066) 1.130 (.751) .847 (.703) N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

23170.997

1932.871

.929 (.697) 5517.194

1.241 (.631) 783.559

N/A N/A N/A 2.030 (.000)*** N/A

N/A N/A 1.490 (.101) .964 (.833) 6301.352

N/A – term is not included in the specific model; * p<.05 ** p<.01 *** p<.001 Notes: 1. The numbers in the cells are the exponentiated coefficients, with corresponding p-values in parentheses. 2. Since the Decade variable involves 4 groups – 1970s, 1980s, 1990s and 2000s, Decade(1), Decade(2) and Decade(3) are the dummy variables representing those 4 groups which use the 1970s as the reference group. For example, in Model 1, (.000)*** means that overall the Decade variable is significantly related to the odds of a person being self-employed. Decade(1) has a statistically significant exponentiated coefficient greater than 1. This indicates that compared to the 1970s, the percentage of self-employed persons increased in the 1980s, and similar results are found for the 1990s and 2000s. However, the slightly different exponentiated coefficients of Decade(1), Decade(2) and Decade(3) indicate that from the 1980s to 2000s, the percentage of self-employed workers has not substantially changed.

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu

In an effort to understand the broader trends for self-employed blacks and whites, we calculated the percentages of blacks and whites who had self-employed fathers and selfemployed mothers (see Table 4). For self-employed whites, there has been a steady trend away from having a father who is self-employed. In the 1970s, 57.5% of self-employed whites had a father who was self-employed. In the 2000s, this figure has fallen to 39.5%. Based on chi-square tests, the differences are significant (p<.001). For self-employed blacks, 36.9% had self-employed fathers during the 1970s, and this grew to 45.6% in the 1980s. However, over the last 20 years there has been a steady decline in the percentage of black entrepreneurs with self-employed parents. Currently (in the 2000s) just 22.2% had a selfemployed father (chi-square test of differences significant at p<.05 level). These results support Hypothesis 1a. For both self-employed blacks and whites, having a self-employed mother appears to be important; however, there are clear differences between blacks and whites about the relative importance of having a self-employed mother. Self-employed blacks in the 2000s are more likely to have a self-employed mother than a self-employed father. Whereas, self-employed whites are about half as likely to have a self-employed mother than a self-employed father. These statistics are revealing about the growing importance of mothers within the black community and they provide support for Hypotheses 3 and 4. To further explore the influence of race, whether parents were self-employed, and changes over time to one’s choice of being self-employed, logistic regression was conducted. In total, six logistic regression models were examined as shown in Table 5. Table 5 presents the exponentiated coefficients which can directly assess the magnitude of the change in odds due to each explanatory variable (Hair et al., 2005). Separate logistic regression models were run for self-employed fathers (i.e., Model 1) and self-employed mothers (i.e., Model 2) to maximize the sample size, because data for self-employed mothers were only collected after 1996. Had we used both father’s employment status and mother’s employment status in a single model many observations would have been lost as a result of missing data. Also, to study the changing effect of father’s employment on a person’s own employment over the decades, two separate models were run for whites and blacks respectively (see models 3 and 4), and a similar set of models were run to examine the changing effect of mother’s employment (see Models 5 and 6). For mothers, data for only two decades (1990s and 2000s) could be included in Models 2, 5, and 6. Overall, the results indicate that having a self-employed father or mother is important to explain the probability of a person being self-employed. For example, in Model 1, the significant exponentiated coefficient of 2.679 means that if a person has a self-employed father, the odds that that person becomes self-employed increases 167.9%. However, the exponentiated coefficient for race in Model 1 is less than one. This indicates that the odds of becoming self-employed are significantly lower for blacks than for whites: the odds for blacks to become self-employed is 46.4% lower than whites (i.e. (1 – .536)*100%). Similar results are found in Model 2 which focuses on mother’s employment. Moreover, it is found that over time, the effect of having a self-employed father on a person’s choice to become self-employed is decreasing over time (supporting Hypothesis 1a). This can be seen in Model 1 where the exponentiated regression coefficients of the interaction terms between father’s employment and decade are all significantly less than 1. This is particularly true for whites (see Model 3). Interestingly, while for whites, having a selfemployed father is significantly related to being self-employed (p<.001), it is not true for

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blacks. Model 4 shows that having a self-employed father is only marginally significant (p<.065) to whether a black person is self employed. On the other hand, it is noteworthy that having a self-employed mother is important for both whites and blacks. The results of Models 5 and 6 indicate that a white person having a self-employed mother is 107.7% more likely to become self-employed than a person who does not have a self-employed mother, and the odds of becoming self-employed are even higher for a black person who has a self-employment mother, which is 166.9% higher. These results also show support for Hypotheses 2 and 3.

DISCUSSION This paper has endeavored to explore the reasons for the long-term continued disparity between the new venture creation rates of blacks and whites. Rather than focusing on financial and economic reasons, as most researchers who have studied the issue have done, we chose to build on the work of Hout and Rosen (2000) and examine the importance of having self-employed parents who may serve as entrepreneurial mentors. As expected, there were significant differences between self-employed blacks and whites with respect to having entrepreneurial parents. We also noted significant changes in the family structures of Americans. What emerges from our analyses is clear support for our hypotheses that as family structures of blacks and whites have changed over time, there has been an impact on the backgrounds of self-employed Americans. More specifically, having a self-employed father appears to be more likely for whites than for blacks, but may be diminishing in importance to becoming self-employed. However, among the self-employed, the likelihood of having a self-employed mother is increasing rapidly, especially among blacks. There are significant implications of these findings which we discuss below. Most directly related to the ongoing new venture creation disparity between whites and blacks may be the finding that for self-employed whites, having a self-employed father is statistically significant at a very high level (p<.001), but for blacks the relationship is no longer significant. When we look at these relationships over time, we see in Tables 2 and 5 that self-employed whites were consistently more likely than self-employed blacks to report having a self-employed father. This was true and highly significant (p<.001 level) for whites in all four decades that we studied (i.e., 1970s, 1980s, 1990s, 2000s). For blacks, the relationship was much weaker. In fact, in the 2000s, there is no significant difference between the percentage of self-employed blacks who had a self-employed father and those who did not have a self-employed father. We believe this significant difference that has existed between white and black entrepreneurs for decades may help explain the disparity in firm founding rates. Simply put, whites are more likely than blacks to benefit from entrepreneurship mentoring provided by their self-employed fathers. At the same time, based on the results shown in Table 4, we can see that for both whites and blacks, the relationship between having a self-employed father and being self-employed has been trending downward over the last four decades. These results are a reflection of broader changes in society that have seen greater numbers of children raised by mothers in single-parent households. As described in the paper and shown on Table 1, American families are changing, with fewer fathers living within family households, particularly within black households. The absence of the father from an increasing number of American households

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu

may be the reason that we find fewer self-employed fathers being reported among the selfemployed over time. This fact is likely to have two major impacts on would-be entrepreneurs. First, single-parent families often have less household net worth and income, making it less likely for them to have personal or family capital that can be invested in future new ventures. The diminished level of household income also makes it less likely for children in singleparent families to benefit from tutors, private education, college, or other programs that may be able to provide useful knowledge and skills that can facilitate successful entrepreneurship. The fact that a greater percentage of black households are single-parent households suggest that they are more likely to suffer from the capital shortage described above. However, as discussed earlier in the paper, the financial differences between black and white households do not explain much of the variance in firm founding rate differences between the races. The second major impact on entrepreneurship from not having a father in the household is that greater numbers of children do not have the opportunity to benefit from the knowledge and personal mentoring that a father – and more specifically an entrepreneurial father – can provide. To date, this has not been studied in the literature, but it may be a fundamental reason for the entrepreneurship gap we see between blacks and whites. As the percentage of American households with fathers has shrunk, and the importance of having self-employed fathers for spurring entrepreneurship in offspring appears to be diminishing, our results show that having a self-employed mother is becoming more important among the self-employed. This is particularly true of blacks (see Table 4). As discussed earlier, given the increasing numbers of college-educated women who are in the workforce, as well as the social trend toward more single-parent households that are headed by mothers, especially in black households, our results are not particularly surprising. More research attention is certainly needed on the role mothers play in the new venture creation process of entrepreneurs. This is especially true because research has found that there are significant differences between the types of businesses founded by men and women, and the economic potential of those firms. For example, women-owned businesses tend to be smaller than male-owned firms (Chaganti & Parasuraman, 1996; Cliff, 1998; Scarborough & Zimmerer, 2005). Women have also been found to be more likely to have difficulty securing capital (Coleman, 2000; Fabowale, Orser, & Riding, 1995; Riding & Swift, 1990), which can greatly impact the viability and potential success of their firms. These two differences between male and female firms may be having an impact on the type of information and mentoring would-be entrepreneurs receive from entrepreneurial mothers relative to entrepreneurial fathers. More specifically, it is possible that there are greater benefits from having an entrepreneurial father than from having an entrepreneurial mother. Obviously, this is an empirical question that is in need of further study. However, the hypothesis is somewhat consistent with the continued disparity in the founding rates of blacks and whites. We found that self-employed blacks are 42 percent more likely to report having a self-employed mother than an entrepreneurial father, while self-employed whites are more than twice as likely to report having a self-employed father than a self-employed mother. The higher founding rate of whites is consistent with there being greater benefit to having a selfemployed father than a self-employed mother. It is also possible that having an entrepreneurial parent is no longer as important for entrepreneurship as it once was. There has been significant growth in formal entrepreneurship education programs over the last several decades (Katz, 2003). This has made information and training about how to become an entrepreneur more accessible to a wider range of people.

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While we are encouraged by this development, the hands-on, personalized experience and knowledge gained through an entrepreneurial parent is still likely to be invaluable to entrepreneurial success. The potential differences in mentoring by self-employed mothers and fathers notwithstanding, the fact is that we found highly significant correlations between being self-employed and having a self-employed parent. If there were no relationship between having a self-employed parent and becoming self-employed, we would not expect to see the results that we got in our analyses. This is why we believe that it is still important to study and consider the impacts and benefits of having entrepreneurial parents. Clearly, dramatic shifts are occurring in the social structures of Americans, especially among blacks. Beyond the possible impacts on entrepreneurship, there are growing issues that may be a result of the changing family structures among African-Americans. For example, the ratio of black men in prison to black men in college is increasing, based on a recent study from the Justice Policy Institute, a Washington, DC-based think-tank. This study reported that at the end of 2000, 791,600 black men were behind bars and 603,032 were enrolled in colleges or universities. By contrast, in 1980 black men in college outnumbered black men behind bars by a ratio of more than 3 to 1 (Justice Policy Institute, 2002). The figures are certainly discouraging and may also be related to the shrinking percentage of black families with fathers living in the household. The lack of a positive male role model in black households may very well be negatively impacting the development of black male youths. Obviously, this is beyond the scope of this study, but it points to a larger problem that may also be impacting black entrepreneurship today, and into the future. There is a significant challenge to entrepreneurship researchers that is suggested by our results. Given the rapidly changing trends in family structures, we caution entrepreneurship researchers to consider the impacts of these changes, particularly for blacks, before accepting prior research results as social facts. As we have discussed, prior research has consistently shown that entrepreneurs are more likely to have entrepreneurial fathers than nonentrepreneurs. However, in the past, this correlation was not nearly as strong for blacks as for whites, and in fact, for blacks this is no longer true in the 2000s. Even for whites the relationship is trending downward suggesting that it is becoming less true. The new reality with respect to social and familial relationships may make past findings in the literature obsolete. Prior research results may not be replicable or even valid given the changes that have happened and appear to be happening. If this is true, then there is a great need to develop new theoretical models and to conduct research to test these models.

LIMITATIONS We acknowledge that researchers differ on whether self-employment constitutes entrepreneurship or not and some may view this as a limitation. However, based on our views and on its treatment in the literature (e.g., Bingham & Melkers, 1989; Lentz & Laband, 1990; Butler & Herring. 1991; Hout & Rosen, 2000; Fairlie & Robb, 2007; Katz & Green, 2007), we believe that it is appropriate to equate self-employment with entrepreneurship, particularly for exploratory studies that seek to break new ground. Beyond the definitional issue, our data has significant limitations worth noting. We do not know what industries or types of business the self-employed respondents in the GSS are

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Robert P. Singh, Micah E. S. Crump and Xingxing Zu

operating. The data also do not allow for comparison of financial conditions, the level of education, or the experience level of respondents at the time of startup. Thus, we cannot control for these factors before isolating any effects from having a self-employed parent. If the data were available, we could better test the importance of having a self-employed parent to entrepreneurship and the relative importance to both blacks and whites. Another limitation of the data is that the relationship between being self-employed and having a self-employed father can be examined from the 1970s through 2000s, but the relationship and importance of having a self-employed mother can only be examined from 1996 on. Thus, the dataset does not allow us to test the longer term trend of having a selfemployed mother, or to make comparisons between that trend and having a self-employed father. In addition, the measures used in this study assume that the offspring reside in only one home. Absent from separate analysis are any “single-parent” children who may have partial (shared custody) residence with both parents. These children may be exposed to similar entrepreneurship facilitation processes and parental nurturing as children in two-parent homes.

FUTURE RESEARCH Even with the limitations, we feel that we have made a contribution by opening up new ground with our exploratory study. There are many questions and issues raised by our results. These can only be answered through additional research. Collecting primary data and asking more in depth, qualitative questions may help yield new knowledge about the entrepreneurial processes of blacks and whites, especially as social trends toward more single-parent (mostly mothers) families become the norm. There are countless questions that could be asked and rather than try to provide an exhaustive set of suggestions, we focus on three areas of research that we feel may be particularly fruitful. First, it would be interesting to examine the firm failure rates of those entrepreneurs who had entrepreneurial fathers, as well as entrepreneurial mothers, versus those who did not. If there are significant differences between these groups of entrepreneurs, and those with entrepreneurial parents are found to be more likely to survive and succeed, then there would be empirical evidence to support the importance of having an entrepreneurial parent. To date, research has only showed that there is a correlation between being an entrepreneur and having an entrepreneurial parent (mainly an entrepreneurial father). By including failed entrepreneurs, we may be able to see that having an entrepreneurial parent is far more important than previously suspected. It would also go a long way to explaining the entrepreneurship disparity between blacks and whites. Second, more research is needed on a variety of gender-related issues. Our findings show that the percentage of self-employed individuals who reported having a self-employed father is declining, but those who report having a self-employed mother is increasing. This raises a number of issues, such as whether there is a difference in the mentoring provided by males (selfemployed fathers) versus females (self-employed mothers). Similarly, do male versus female entrepreneurs respond differently to the mentoring provided by self-employed fathers versus mothers. For example, do self-employed fathers have more of an influence on sons? Do selfemployed mothers have more impact on their daughters? Or vice-versa? Or are there no differences? In this paper, we found significant differences between blacks and whites in terms of

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which parent is providing entrepreneurial mentoring. Blacks are more likely to report having an entrepreneurial mother, while whites report having an entrepreneurial father. What exactly are the implications of this difference? These questions are interesting, but there is a risk for researchers who study these relationships. The changes that are occurring are happening so rapidly that empirical results may change quickly over a short period of time. Any gender-related differences that appear today may diminish over time as more females earn higher positions of power and start new entrepreneurial ventures. Finally, future research is needed to examine all of the different types of family structures that exist. Family households do not simply fall into dichotomous categories (i.e., singleparent households or dual parent households). In some cases, the parent’s boyfriend or girlfriend may live in the household. There are differences between single-parent households that are a result of divorce versus death of one spouse. The involvement of parents in a child’s life does not always depend on both parents living in the household. One can picture a child who has a parent who travels on business on a weekly basis – is that better than a child who may see both divorced parents regularly during the week as part of an amicable custody arrangement. Studying the different family structures and determining whether there are significant differences between blacks and whites may further shed light on the ongoing entrepreneurship disparity.

CONCLUDING THOUGHTS Any solution to the lagging rate of black entrepreneurship will be complex and the problem cannot be solved quickly. But before solutions can be developed, the major reasons for the longterm disparity between the entrepreneurship rates of blacks and whites must be better understood. Notwithstanding the limitations, we believe this study makes an important contribution to the entrepreneurship literature by breaking new ground and looking at research relationships that have not been studied in the past. We focus attention on how entrepreneurs are impacted by changing family structures, and found significant differences between blacks and whites. For blacks, the historically lower rate of entrepreneurship results in lower numbers of black entrepreneurs who can serve as role models and supportive information sources. We believe that this, in and of itself, is a limiting factor for black entrepreneurship. Much future research, particularly longitudinal research, is needed to further develop the theory in this important area. Through our data analysis and discussion, we hope that researchers will be able to further build theoretical frameworks and test theory-based hypothesized relationships. The U.S. population is changing and within the next several decades the majority of the country will be made up of minorities (i.e., less than 50 percent of the population will still be white). The long-term economic viability and global competitiveness of the nation requires that all subgroups remain productive, especially one that makes up about 12 percent of the nation’s population. If researchers can unlock the reasons for the lagging black entrepreneurship rate and help increase the rate, the impact would be enormous. Even just a marginal increase in the black entrepreneurship rate would result in thousands of new firms and employment opportunities. Beyond the immediate economic benefits, over time, these entrepreneurs would be able to serve as mentors to the next generation

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of black entrepreneurs. Ultimately, this may be the key to significantly increasing the rate of black entrepreneurship.

REFERENCES Badgett, M. V. (1994). Rising black unemployment: changes in job stability or in employability? Review of Black Political Economy, 22, 55-75. Bates, T. (1994). Utilization of minority employees in small business: a comparison of nonminority and black-owned urban enterprises, Review of Black Political Economy, 23, 113-122. Bates, T. (1995). Why do minority business development programs generate so little minority business development? Economic Development Quarterly, 9, 3-14. Bates, T. (1997). Michael Porter's consecutive urban agenda will not revitalize America's inner cities: what will? Economic Development Quarterly, 11, 39-44. Bingham, R.D. & Melkers, J.E. (1989). Entrepreneurs in America: are they really a different breed? Environment and Planning C: Government and Policy, 7, 411-422. Birch, D. L. (1987). Job creation in America. New York: Free Press. Butler, J. S. & Herring, C. (1991). Ethnicity and entrepreneurship in America: toward an explanation of racial and ethnic group variables in self-employment, Sociological Perspectives, 34, 79-94. Catalyst (2001). Women in corporate leadership: Progress andpProspects. New York. Catalyst Press. Cavalluzzo, K. & Cavalluzzo, L. (1998). Market structure and discrimination: the case of small businesses, Journal of Money, Credit, and Banking, 30, 62-87. Center for Women’s Business Research. (2007). Online summary of collaborative research project with Babson College's Center for Women's Leadership. Available at http://www.womensbusinessresearch.org/content/cols.php?pid=128. Accessed Jan 03, 2007. Chaganti, R. & Parasuraman, S. (1996). A study of the impact of gender on business performance and management patters in small business, Entrepreneurship Theory & Practice, 21, 73-75. Cliff, J. (1998). Does one size fit all? Exploring the relationship between attitudes towards growth, gender, and business size, Journal of Business Venturing, 13, 523-542. Coleman, S. (2000). Access to capital and terms of credit: A comparison of men- and womenowned small businesses, Journal of Small Business Management, 38, 37-52. DiMaggio, P. J. (1995). Comments on “what theory is not”, Administrative Science Quarterly, 40, 391-397. Dunn, T. & Holtz-Eakin, D. (2000). Financial capital, human capital, and the transition to self-employment: evidence from intergenerational links, Journal of Labor Economics, 18, 282-305. Evans, D. S. & Leighton, L. S. (1987). Self-employment Selection and Earnings over the Life Cycle. Washington, D.C.: U.S. Government Printing Office.

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Fabowale, L., Orser, B., & Riding, A. (1995). Gender, structural factors, and credit terms between Canadian small businesses and financial institutions, Entrepreneurship Theory & Practice, 19, 41-65. Fairlie, R. W. (1999). The absence of African-American owned businesses: an analysis of the dynamics of self-employment, Journal of Labor Economics, 17, 80-108. Fairlie, R. W. & Meyer, B. D. (1996). Ethnic and racial self-employment differences and possible explanations, Journal of Human Resources, 31, 757-793. Fairlie, R. W. & Meyer, B. D. (2000). Trends in self-employment among white and black men during the twentieth century, Journal of Human Resources, 35, 643-669. Fairlie, R. W. & Robb, A. (2007). Families, human capital, and small business: evidence from the characteristics of business owners survey, Industrial and Labor Relations Review, 60, 225-245. Glazer, N. & Moynihan, D. P. (1970) Beyond the melting pot: The negroes, Puerto Ricans, Jews, Italians, and Irish of New York City, 2nd ed. Cambridge, MA: MIT Press. Hair, J.F., Black, B., Babin, B., Anderson, R.E. & Tatham, R.L. (2005). Multivariate data analysis, 6th ed. New York: Prentice Hall. Hayghe, H. V. (1997). Developments in women’s labor force participation, Monthly Labor Review, September, 41-46. Hipple, S. (2004). Self-employment in the United States: an update, Monthly Labor Review, July, 13-23. Hisrich, R. D., Peters, M. P. & Shepherd, D. A. (2005). Entrepreneurship, 6th ed. New York: McGraw-Hill. Hout, M. & Rosen, H. S. (2000). Self-employment, family background, and race, Journal of Human Resources, 35, 670-692. Hoynes, H. (2000). The employement and earnings of less skilled workers over the business cycle, in R. Blank & D. Card (eds.) Finding Jobs: Work and Welfare Reform, New York: Russell Sage Foundation, 23-71. Hundley, G. (2006). Family background and the propensity for self-employment, Industrial Relations, 45, 377-392. Justice Policy Institute (2002). Cellblocks or classrooms: The funding of higher education and corrections and its impact on African American men, http://www. justicepolicy.org/reports/coc.pdf. Accessed Jan 03, 2007. Katz, J. A. (2003). The chronology and intellectual trajectory of American entrepreneurship education 1876-1999, Journal of Business Venturing, 18, 283-300. Katz, J. A. & Green, R. P. (2007). Entrepreneurial small business. Boston: McGraw-Hill Irwin. Lentz, B. F. & Laband, D. N. (1990). Entrepreneurial success and occupational inheritance among proprietors, Canadian Journal of Economics, 23, 563-579. Light, I. (1979). Disadvantaged minorities in self-employment, International Journal of Comparative Sociology, 20, 31-45. Marklein, M. B. (2003). Women outpacing men in college degrees, USA Today, June 10, 10D. Morris, B. (2002). Trophy husbands, Fortune, October 14, 79-98. Moore, R. L. (1983). Employer discrimination: evidence from self-employed workers, Review of Economics and Statistics, 65, 496-501.

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NORC (2007a). GSS About: Introduction to the GSS. Available at http://webapp. icpsr.umich.edu/GSS/about/gss/about.htm. Accessed Jan 03, 2007. NORC (2007b). General Social Survey: Study FAQs. Available at http://www.norc. org/projects/gensoc3.asp. Accessed Jan 03, 2007. Pinderhughes, E. B. (2002). African American marriage in the 20th century, Family Process, 41, 269-282. Riding, A. L. & Swift, C. S. (1990). Women business owners and terms of credit: Some empirical findings of the Canadian experience. Journal of Business Venturing, 5, 327340. Scarborough, N. M. & Zimmerer, T. W. (2005). Effective small business management: An entrepreneurial approach, 8th ed. Upper Saddle River, NJ: Prentice Hall. Sowell, T. (1981). Markets and minorities. New York: Basic. Spriggs, W. & Williams, R. (2000). What do we need to explain about African American unemployment, in R. Cherry & W. R. Rogers, III (Eds.) Prosperity for all? The economic boom and African Americans. New York: Russell Sage Foundation, 188-207. Sutton, R. I. & Staw, B. M. (1995) What theory is not, Administrative Science Quarterly, 40, 371-384. Tucker, M. & Mitchell-Kernan, C. (1995). The decline of marriage among AfricanAmericans. New York: Russell Sage. U.S. Bureau of Labor Statistics. (2007). Table A-2. Employment status of the civilian population by race, sex, and age. Available at http://www.bls.gov/news.release/ empsit.t02.htm. Accessed August 22, 2007. U.S. Census Bureau, (2007). Statistical abstract of the United States: 2007, 126th ed. Washington, D.C.: U.S. Government Printing Office. Weick, K. E. (1995). What theory is not, theorizing is, Administrative Science Quarterly, 40, 385-390.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 2

A COMPARATIVE STUDY OF ENTREPRENEURIAL ATTITUDES AND ATTRIBUTES OF TURKISH AND KYRGYZ ENTREPRENEURS Mehmet Turan Cukurova University, Faculty of economics and Administrative Sciences, Cukurova University, Turkey

Seil Nazhimudinova Business Administration, Kyrgyz-Turkish Manas University, Kyrgyzstan

Ali Kara* College of Business, Pennsylvania State University, York, 1031 Edgecomb Ave. York, PA 17403 USA

ABSTRACT There is little knowledge available about entrepreneurship in transition economies of Central Asia in comparison to the advanced economies where significantly more research information is available about entrepreneurs and entrepreneurial process. Despite the lack of information about entrepreneurs and entrepreneurship process in transition economies, especially about former Soviet Republic countries, it is recognized that the effective practice of entrepreneurship is highly correlated with a successful transition from a planned economy to a market based economy. On the other hand, although there might be cultural similarities between Turkish and Kyrgyz entrepreneurs due to historic Turkic ties between the two countries, significant differences exists between the two countries in terms of economic approach and policies adopted. Turkey has adopted market based economic policies right after WWII and has experienced much longer period of rapid economic growth compare to Kyrgyzstan. As a result, Turkey offers a more positive and mature environment for new enterprise development. *

Contact Author. Tel: (717) 771-4189; E-mail: [email protected]

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Mehmet Turan, Seil Nazhimudinova and Ali Kara Accordingly, a comparative study of the entrepreneurial attitudes and attributes in these two countries that have historically common roots and tradition but have followed totally different economic paths should prove to provide valuable insights to the researchers and policy makers alike. Through an empirical study of Turkish and Kyrgyz entrepreneurs in different sectors, this study explores the characteristics and attributes of Turkish and Kyrgyz entrepreneurs and their attitudes towards entrepreneurship and the entrepreneurial process. We also explore the motives, challenges encountered, and demographic attributes of Turkish and Kyrgyz entrepreneurs. Data for the study is collected in both countries using a developed questionnaire translated in both languages. A total of 203 usable questionnaires are collected from Turkish entrepreneurs and a total of 100 questionnaires are collected from Kyrgyz entrepreneurs. Our findings indicate significant differences between Turkish and Kyrgyz entrepreneurs in terms of their profiles, attitudes, motivations, and environmental conditions of entrepreneurship.

Keywords: Entrepreneurship characteristics/traits, Kyrgyzstan, Turkey, comparative study

INTRODUCTION Ever since the collapse of Soviet Union in the late 80’s, the newly formed independent states have continued to experience dramatic economic, social, and political transformations. However, only few of these states have been relatively successful in attracting international investments because of their rich endowments of natural resources (Luthans, Stajkovic, and Ibrayeva, 2000). As a result, rapid growth experienced in these transition countries in the early 1990s has slowed down significantly in the latter half of the 1990s and a more gloomy business atmosphere has replaced the initial euphoria. Among many other factors, increasing regulations and lack of financial resources are considered the major factors contributing to the decline of business environment (Kontorovich, 1999). It is, however, suggested that these transition countries need to develop a private business sector to allow entrepreneurs to create their own businesses (Samllbone and Welter, 2001) in order to successfully deal with the current challenges faced by these countries. Economists posit that there are a large number of economic and non-economic factors that contribute to economic progress of nations and they agree that entrepreneurial activity should be considered a vital part and the engine of economic growth and development. It is known that entrepreneurs can contribute to the economic development through innovations, enhancing our knowledge, and increasing efficiencies in their processes (van Stel, Carree, and Thurik, 2005). Survey evidence shows that entrepreneurial activity is the main source of growth in post-socialist countries where entrepreneurs quickly managed to fill niches that were ignored under socialism (Berkowitz and DeJong, 2005). Similarly, McMillan and Woodruff (2002) concluded that the robust economic growth enjoyed by China and Poland was largely due to the substantial entrepreneurial development they have experienced. As a result, one can argue that despite the significant challenges and roadblocks, entrepreneurship is identified as the activity that leads to successful economic change in transition economies of Central Asia as well as in the Middle East (Johnson and Loveman, 1995).

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However, when it comes to entrepreneurship, there are major differences in the institutional infrastructures between these transition economies—former Soviet Republic countries in general and Kyrgyzstan in particular—and the advanced economies of Western nations. Perhaps the most notable differences are political instability and uncertainty, hostile economic environment, and scarcity of resources (Newman, 2000). It can be argued that rapidly changing hostile environment should place extraordinary demands on entrepreneurial activity and on potential entrepreneurs. Despite the problems that these transition countries are experiencing, they are, at the same time, attracting investors from all over the world due to cheap labor, energy, and untapped market potential. Some of these investors are coming from either geographically close countries, or from the countries that they have some historically common cultural roots or associations. Turkish entrepreneurs may be viewed in the latter group. Although there might be cultural similarities between Turkish and Kyrgyz entrepreneurs due to historic Turkic ties between the two countries, significant differences exists between the two countries in terms of economic approach and political policies have been adopted in during the last half century. Turkey has adopted market based economic policies right after WWII and has experienced much longer period of rapid economic growth compare to Kyrgyzstan. As a result, Turkey offers a more positive and mature environment for new enterprise development. Although Islam is the religion of the majority of both Turkish and Kyrgyz populations, Turkey has adopted more Western style political and economic market systems as well as its social lifestyle (Turan and Kara, 2007). According to Farid (2007), on the ideological base, free market and Islam do not seem to conflict with each other in especially democratic and secular Muslim countries whereas in non secular Islamic countries some conflicts might exist on several aspects. Family and religion play an important role in individual economic behaviors but free market system and capitalism is embedded in Turkish culture more so than other Islamic nations. Consequently, Turkish culture shares similarities with Islamic cultures (such as Arab cultures) as well as Western cultures (such as Judeo-Christian cultures). Also, significant changes have occurred in Turkey during the last two decades in terms of political, economical and social factors (mostly related to the accession agreements signed with European Union), which have contributed to shaping the dominant economic and social values of new entrepreneurs in this emerging market. In contrast to Turkish culture, Kyrgyz culture has been affected significantly by the non-religious assimilation policies used during the Soviet era. While Kyrgyz people have protected most of their family values, they could not be able to practice Islamic religion extensively during the Soviet occupation and hence, they may be considered a “less religious” society. Also, centrally planned economic system that was adopted during the Soviet era did not create a favorable environment for Kyrgyz entrepreneurial activity. Previous entrepreneurship literature has frequently examined the entrepreneurial personal characteristics. Begley and Boyd (1987) found that personal characteristics of an entrepreneur are very important in the formative stages of a business. Also, literature provides considerable support for the positive relationship between entrepreneur’s psychological characteristics and performance. Gros and Suhrchke (2000) found certain common characteristics (such as concentration in manufacturing sector and underdevelopment of financial systems, legal and governance standards) of entrepreneurs in transition countries. The choice of these two countries was dictated by the fact that both countries are going through radical and revolutionary transformations. Given the significant

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contrasts and similarities between Turkey and Kyrgyzstan in terms of cultural and contextual factors, a comparative study examining entrepreneurial traits and behavior between these two countries would be intriguing and warranted. Therefore, the aim of this empirical study is to explore the characteristics and attributes of Turkish and Kyrgyz entrepreneurs, examine their attitudes towards entrepreneurship and the entrepreneurial process—pre- and post-start-up of business—and provide comparative empirical results. We also explore psychographic motives and demographic attributes of Turkish and Kyrgyz entrepreneurs. Such investigation provides important insights into the types of personal resources entrepreneurs have and entrepreneurial spirit needed for a business idea conception and actual business start-up.

BACKGROUND AND LITERATURE REVIEW There is agreement among scholars that the encouragement of successful innovation and entrepreneurship is beneficial to society (Hull, Bosley & Udell, 1980). In his earlier work, Schumpeter (1934) described innovation and entrepreneurship as the driving force of economic growth in a capitalistic society. Similarly, innovative entrepreneurship is considered as a catalyst for transforming and improving nations’ economy and seen as the engine for growth and prosperity (Sexton and Bowman, 1985; Sternberg, Otten, and Tamasy, 2000). From this perspective, future success and competitiveness of nations in a global market depends on their ability to be innovative and on the dynamics of entrepreneurial thinking and acting. Early research on factors that may enhance entrepreneurship focused on economic and legal conditions. More recently, psychological characteristics have been recognized as being of great importance in understanding and fostering entrepreneurship and assessing entrepreneurial potential. Also, there has been significant interest in the literature for the studies that examined characteristics, attributes and motives of entrepreneurs. In their seminal article, Busenitz and Lau (1996, p. 27) suggested that “cross-cultural entrepreneurial outcomes, such as start-up intention and the venture-creation decision, depend upon cognitive structure and cognitive process, which in turn depend upon a variety of variables grouped under the headings social context, cultural values, and personal variables.” Later, Mitchell et al., (2002) investigated several hypothesized relationships regarding the cognitive structures of entrepreneurship in different cultures. Their main research questions were to examine whether the entrepreneurial cognitions were universal and how they differed across national cultures. Their findings provided some evidence to the existence of four conceptualized global entrepreneurship cognitive archetypes. Their results also indicated that some support for the idea that entrepreneurs possess similar patterns of cognitive structure regardless of country of origin. More specifically, their findings indicated that while there are country-based differences in cognitive scripts (such as in arrangements, willingness, and ability), they also found some similarities that the circumstances had made no difference. The idea that "some cultures produce more entrepreneurs than others" (Busenitz & Lau, 1996, p. 25) motivated many researchers to investigate underlying sources of such variation (Fukuyama, 1995; Waldinger, Aldrich, & Ward, 1990) among nations. The fact that entrepreneurial activities do not occur in isolation, led scholars to think that environmental context may shape entrepreneurial behavior (Covin and Covin, 1990; Covin and Slevin, 1991;

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Dess, Lumpkin, and Covin, 1997; McDougall, Robinson, and DeNisi, 1992; Tan, 1996; Zahra, 1993). Since entrepreneurs seek "available opportunities in the environment" (Kirzner, 1997, p. 72), the differences in entrepreneurial behavior can be attributed to two major contextual variables, which are known as cultural and national environments (North, 1990; Shane, 1994). In search of understanding the effects of these two variables on entrepreneurial behavior, Tan (2002) found that national differences are more effective than cultural differences on entrepreneurial beliefs. Pearson and Chatterjee (2001) suggested a model (Figure 1) that illustrates and explains a decision process to create a new enterprise (i.e., entrepreneurship). According to the model the cultural environments that he/she operates influence individual’s decision. Cultural environment may facilitate and encourage the development of individual personality characteristics and may also create a work environment which may have the capacity to foster economic growth and create new employment opportunities. In this respect, government policies may influence the work environment by, for instance, encouraging the integration of investment, industrialization and the strategic development of the workforce. Using this model, Pearson and Chatterjee (2001) examined the effect of contextual settings on entrepreneurial success in Australia and Singapore. They found strong indications that entrepreneurial characteristics may be influenced by contextual boundaries and assumptions. Furthermore, Beugelsdijk and Noorderhaven (2004) used European Values Studies (EVS) dataset on norms and values in 54 European regions to empirically test if regions with a culture that can be characterized as “entrepreneurial” had faster economic growth than regions that score lower on entrepreneurial characteristics. Their results indicated that there were differences among regions in terms of entrepreneurial attitude and a high score on entrepreneurial characteristics is correlated with a high rate of regional economic growth. Elements of Contextual Setting

Key personal Attributes

National Policy Priorities

Entrepreneurial Predispositions

Source: Pearson and Chatterjee (2001). Figure 1. A Model for Entrepreneurial Development.

NonEntrepreneurial Predispositions

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As Chell et al., (1991) point out that there are certain behaviors and characteristics that may define entrepreneurs. In general, they argued that entrepreneurs are the kind of people who: have a desire and tendency to create new businesses; continuously examine business environments and seek new business opportunities; search and develop innovative solutions to problems and opportunities; take initiative in finding obtaining and organizing resources and converting them into marketable –but profitable- goods and services; are profit and growth oriented; and are willing to take risks associated with their behaviors. To explore the individual differences, Cowling (2000) carried out a survey covering 13 European union countries to investigate whether there were differences in the types of individuals who choose to become entrepreneurs in EU countries. His study found that there are a number of traits common to entrepreneurs across European countries. For instance in more than half of the countries examined, a positive relationship between age and selfemployment were found. Additionally, in some countries, a significant relationship between gender and self employment (entrepreneurship) was also found; that is, males were seen to be more likely to be self-employed. Marital status and children did not have any effect on entrepreneurship across 13 countries and mixed results were reported with respect to the role of education. In the entrepreneurial literature, however, there is some support for the view that education affects entrepreneurial ability. Schultz (1975; 1980) for instance, argues that educated entrepreneurs will grasp disequilibrium more than those with no education or poor education. Also, the two personality traits that are frequently hypothesized to characterize entrepreneurs are need for achievement (McClelland, 1961; 1965) and need for power (Collins and Moore, 1964). In addition, Barkham (1994) claims that entrepreneurial variables such as motivation, education, work skills and market information may influence the characteristics and size of new firms and their performance subsequently. For instance, one of the major influences on the characteristics of a new firm would be the work skills the entrepreneur may have gained in his or her previous employment (McGuire, 1976; Cross, 1981). Starting and running a company is a complicated activity. There are a number of skills required and those are the ones such as negotiation, planning, organization, problem-solving, production management, production and management. Barkham (1994) also argues that the level of information held by the entrepreneur may affect the size and initial growth of a new firm. Good information, for instance, may be defined as a detailed knowledge of customer tastes, location and spending power.

Entrepreneurship in Transition Economies General uncertainty may be considered a constant aspect of every business in these countries and this uncertainty makes decisions more complicated and challenging for entrepreneurs in these countries. For instance, transaction and start-up costs are high because of the inadequate legal frameworks and frequent changes in regulations. Finding (obtaining) financial assistance, particularly at the initial stage of establishing a business, is an intimidating task. Moreover, direct assistance, programs and venture capitalists that are crucial for entrepreneurial activity either do not exist in these markets at all or at primitive stages (Kuznetsov, McDonald, Kuznetsova, 2000). Most importantly, in transition countries such as Russia, relying on informal arrangements and networks for doing business has been a

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traditional way of doing business (Kuznetsov, 1994). It is known that especially in the transition period; successful networking is necessary and plays an important role in the entrepreneurial success. Several authors emphasized the importance of institutions and their effect on economic development in transition countries (Knaack 1995; Norgaard 1996; Feige 1997; North 1997; Hedlund 1999; Yeager 1999; Van de Mortel 2002; Welter and Smallbone 2003; Aidis 2006). North (1990, p. 3) defines institutions as any form of force that shape human interaction. According to North, (1990, p. 4) formal institutions are the visible ‘‘rules of the game,’’ such as constitutional law, which can be modified quickly to adapt to changing economic conditions. Informal institutions, in his view, are the invisible ‘‘rules of the game’’ made up of norms, values, acceptable behaviors, and codes of conduct. While studying entrepreneurship in transition countries or comparing them with market based countries, we should keep in mind the fact that the historical background of companies and societies in Eastern and Central Europe and in former Soviet Union countries differ significantly from those in the West. Most of the entrepreneurship literature has been developed in the US (Schildt and Sillanpaa, 2004), and therefore it is not easy to apply many of these empirical findings to other socio-cultural settings (Ulhoi, 2005), especially to post-communist countries, which had been isolated from free market system for almost 70 years, and still possess a very different social, cultural, and institutional environment (Rebernik, 1997). In order to facilitate the transition from a centrally planned economy to a free market system, proper institutional arrangements must be developed and implemented by the governments, a legal framework must be established and the government policies must support the competitive performance of the companies. Even though it may not be sufficient condition, liberalization of market processes, is a prerequisite for the growth of this sector in transition economies (Kolodko, 2000). For instance, majority of firms in Poland are made of small businesses (Reed, 2001a). More than 2 million small businesses were created in Poland in the 1990s. And they have generated over one half of Poland’s economic output (Reed, 2001b) and account for over 30% of GDP. Matusiak (2003) reports that, since 1990, Poland has had 64 business incubators that have helped to create over 1075 firms and over 6500 jobs. To improve enterprise development and the economy, Poland has implemented legal and regulatory changes, including changes in the tax system, lowering labor costs and revising labor standards (Reed, 2001a). When we compare entrepreneurship in transition economies (which is characterized by a high level of uncertainty, rapidly changing external conditions, and institutional deficiencies that causes additional operating costs for businesses and not providing any additional value (Smallbone and Welter, 2001) with mature market economies in terms of identifying and exploiting opportunities, one of the key questions that should be answered is whether there are fundamental differences in terms of the types of organizations that are established in these two different type of economies. Answers to this question should also shed light on the impact of institutional differences in transition countries.

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CONTEXT FOR ENTREPRENEURSHIP Turkish Environment Rapidly changing economic, political, and competitive environments in Turkey require both the public and the private sectors to adapt themselves or they will face elimination from the market. Some of the most visible changes taking place for the last decade are the privatization, tax reform, deregulations, abolishment of anti-competitive barriers, reduction in monopolies, agricultural reforms, and the efforts made to meet the very explicit expectations of the European Union with regard to ongoing membership process. These reform efforts have aimed to restructure and strengthen the fundamentals of the market economy, and they will create a more favorable environment for the entrepreneurs to take initiation (Ozilhan, 2002). There are approximately 3.5 million small businesses in Turkey, which includes traditional craftsmen and tradesmen. Approximately 55.9% of active population is employed by these small businesses and they account 24.2% of added value. The general attitude towards entrepreneurship seems very positive in Turkey and the country has a long tradition of commercial trade. Long period of economic instability in the 70s, 80s and 90s has taught Turkish people to deal with crisis and rely on their ability to survive. Moreover, changing economic conditions especially in the area of declining interest rates has discouraged investors to rely on fixed and secure income sources, such as interest income. At the same time, entrance requirements for public sector employment have been toughened up and detailed screening combined with rigid employment policies have resulted in almost impossible conditions for public sector employment, which might have ultimately motivated people to explore entrepreneurial opportunities more aggressively. Hence, for many people, entrepreneurship may be the only way to secure an economical future. Previous experience and research indicate that entrepreneurship promotion and small business development are effective approaches for the creation of new jobs, unemployment reduction, and income generation. Small businesses are recognized as an engine of economic growth and a source of sustainable development. In other words, entrepreneurship is beneficial to a country primarily because of its positive influence on the economy (Bartell and Payne, 1995).

Kyrgyz Environment Kyrgyzstan with its 200 thousand square kilometer of land has a population little over 5 million according to 2007 estimates. In general, similar to other developing nations, Kyrgyz population has younger characteristics considering 46% of the population is less than 20 years old. Sixty five percent of the population lives in rural area and gender distribution is approximately equal. As an ex-Soviet Union country, Kyrgyzstan had adopted planned economic system for over 50 years, which required state ownership of the production and distribution. Soviet Union continuously subsidized the Kyrgyz economy, which had no strategic resources such as natural gas or oil. As a result, there was a significant flow of financial, technical, and human resources into Kyrgyzstan that played an important role in the development of the industrial base. The heavy industries such as construction, energy,

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mining, metallurgy and agriculture especially farming were developed as a result (Кumskova, 2003, p. 72). After its independence, Kyrgyzstan has faced challenging and indefinite future economic prospects. During the earlier phases of this new era, Kyrgyzstan faced with significant challenges in terms of economic and political problems. Despite these difficult challenges, transition from planned economy to market economy reforms was implemented. During the second half of 90s Kyrgyz economy faced much more difficult conditions (declining GDP and rising unemployment) exacerbated by Russian crises. Currently, agriculture related employment is approximately half of the total employment in Kyrgyz economy while private entrepreneurs employ less than 20% of the population (Isakov, 2003). Perhaps the most important and significant contribution of the Soviet Union for Kyrgyz economy is the highly educated and skilled labor left from the planned economy (i.e., literacy rate is 98.7%--UNDP Human Development Report, 2005).

METHODOLOGY A questionnaire was developed consisting of several sections to collect data from Turkish and Kyrgyz entrepreneurs. In the first section, demographic information about the entrepreneurs and their businesses was collected. In the second section, participants were asked to provide information in terms of how they would describe themselves and their personality traits using several structured questions. This section also included questions regarding the problems that they face and the importance of certain factors for their future plans. Finally, the last section included questions about motivational factors, attitudes about entrepreneurship and entrepreneurs, and attributes needed to be an entrepreneur. Since most of the scale items were extracted from Western sources, they were adapted and modified to the Turkish and Kyrgyz market and country environment through a small scale of pilot study. The questionnaire was first developed in English using the available scales in the literature and then translated into Turkish (for Turkish entrepreneurs) and Russian (for Kyrgyz entrepreneurs). To ensure the accuracy of the translation, a back translation was completed to check for any inconsistencies or possible translation errors. The questionnaire was also administered to a group of Turkish and Kyrgyz entrepreneurs to pilot test the questionnaires for clarity, comprehension, and consistency, and the appropriateness of items on the questionnaire. Data from Turkish entrepreneurs were collected from the southern part of the cities (eg. Adana Mersin, Antakya) while the data from Kyrgyz entrepreneurs were collected from two big cities of Kyrgyzstan (Jalal-Abad and Bishkek). Turkish dataset contained a total of 203 useable questionnaires while Kyrgyz dataset had only 100 usable questionnaires.

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Mehmet Turan, Seil Nazhimudinova and Ali Kara Table 1. How Turkish and Kyrgyz Entrepreneurs Defined themselves

Self-description

I have a network of family and friends that are self employed I have previous experience or training in the area that I started my business in I have been engaged in business activities in early ages I have a high level of sensitivity to business opportunities and needs I have a strong need to prove that I can be successful I am being highly involved in my business I am a strong supporter of the free enterprise system

Kyrgyz Entrepreneurs (n=100) .74 .85

Turkish Entrepreneurs (n=203) .76 .80

.33 .71

.75* .86*

.80 .90 .85

.76 .70* .88

* Significant Chi-square at p<.05.

ANALYSIS AND RESULTS Characteristics of Turkish and Kyrgyz Entrepreneurs Descriptive analysis revealed that Kyrgyz entrepreneurs were relatively younger than Turkish entrepreneurs. The average age of Turkish sample was between 31-50 (n=202) and the average age of Kyrgyz participants was between 25-40 (n=100). Kyrgyz participants indicated that they had their first entrepreneurial activity at the age of 25 where as Turkish participants experienced it much later the age of 30. In both countries, majority of the entrepreneurs were male (59 % of Kyrgyz entrepreneurs and 80.8 % of Turkish entrepreneurs) and majority of the Turkish entrepreneurs were married (82.8 %) while little over 50% of the Kyrgyz entrepreneurs were single. There were not any significant differences in terms of number of household members that these entrepreneurs were responsible for taking care of. When we analyze the educational levels of these entrepreneurs, the results were noticeably different. Half of the Kyrgyz entrepreneurs had a college degree while only a third of Turkish entrepreneurs indicated that they held a college degree. This supports the earlier discussions regarding the educated human resources of Kyrgyzstan. Similarly, clear differences were observed with respect to the family history of involvement with entrepreneurship. Sixty one percent of Turkish entrepreneurs indicated that their parents were “somewhat engaged in entrepreneurship” while this percentage was significantly lower for Kyrgyz entrepreneurs (only 24%), which is not surprising due to the existence of long period of centrally planned economy in which the establishment of free enterprise was not allowed. Finally, entrepreneurs in both countries employed between 1-20 workers in their business and the length of time they have been in business were very similar (3-10 years). Table 1 illustrates that both Turkish and Kyrgyz Entrepreneurs indicated that their selfemployed family and friends had the most influential role on their entrepreneurial decisions. Also, both Turkish and Kyrgyz entrepreneurs had previous experience and knowledge about the field they were planning to start their entrepreneurial activities. As mentioned above, our results indicated that Turkish entrepreneurs started their entrepreneurial activities at an earlier

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age than their Kyrgyz counterparts. Moreover, Turkish entrepreneurs indicated that they were more sensitive or attuned to business opportunities and needs than Kyrgyz entrepreneurs. Kyrgyz entrepreneurs on the other hand indicated that they were more involved with their business. Finally, both Turkish and Kyrgyz entrepreneurs supported the idea of free enterprise system.

Business Type Table 2 shows the comparative work history of both Turkish and Kyrgyz entrepreneurs. Perhaps the most prominent differences between the Turkish and Kyrgyz entrepreneurs are visible in the manufacturing versus service areas. Kyrgyz entrepreneurs have more of production/technical background while Turkish entrepreneurs have more marketing/management background. This could be closely associated with the role of former Soviet Union; that is most of the working population in Kyrgyzstan has worked in the production units of state owned factories. After independence, people who became unemployed began to work for private companies or chose to start their own businesses. One interesting finding is approximately 6% of Kyrgyz and 14 % of Turkish entrepreneurs had never worked before when they started to establish their own private businesses. There were almost no significant differences found between Kyrgyz and Turkish entrepreneurs about reasons to leave their previous jobs. It seems like the most common reason to leave their jobs in both countries were to establish their own businesses and to work independently. They did not have a specific plan before they left their jobs. Some other reasons cited to leave their previous jobs were dissatisfaction with the wages or salaries and layoffs due to companies ending their operations. Similarly, there were no statistically significant differences between Kyrgyz and Turkish entrepreneurs with respect to their future business plans and expanding their current businesses was one of the major goals for these two groups of entrepreneurs. Table 2. Employment History of Turkish and Kyrgyz Entrepreneurs

Background Purchasing Production Marketing Management/administrative Technical Accounting/Finance HRM Sales Customer service Logistics Never worked before * Significant Chi-square at p<.05.

Kyrgyz Entrepreneurs (n=100) .13 .23 .09 .09 .10 .17 .02 .05 .05 .01 .06

Turkish Entrepreneurs (n=203) .14 .16* .25* .23* .12 .01* ---.04 .14*

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Personality Characteristics Our results indicate that Kyrgyz and Turkish Entrepreneurs have some similarities and differences in terms of personality characteristics. Table 3 shows that there were no statistically significant difference between Turkish and Kyrgyz entrepreneurs in terms of their achievement orientations, responsibility, resilience, and optimism levels. Moreover, they are good planners and prefer to work on their own business and they tend to be good at communicating with people (good mixer) when necessary. These similarities support the arguments that there might be some universal characteristics of entrepreneurs regardless their cultural backgrounds. On the other hand, our results indicate some statistically significant differences on some characteristics such as self-confidence levels, preferring challenges and changes, high self-esteem levels, speed of decision making, trust, and acceptance of authority. Although the direction of the agreement were no different between Turkish and Kyrgyz entrepreneurs (that is, they agreed or disagreed with similar statements), levels of agreement were different. In other words, Turkish entrepreneurs scored lower indicating the strength of their agreement with these statements. This leads us to infer that the impact of communism on Kyrgyz people were significant; that is, the Soviet system’s policies of not allowing their people to freely engage in free market activities and continuously keeping them under control inhibited Kyrgyz people to develop and improve their self-confidence, quick decision making ability, and ability to adjust or accept challenges and changes. Table 3. Mean Values of Personality Characteristics and Attributes of Turkish and Kyrgyz Entrepreneurs

  Characteristics* Need for achievement Highly responsible Good mixer Do not give up easily Optimistic Self confident Like to work on own Like challenges High self-esteem Good planner Quick decision maker Likes changes Likes to take risks Impatient Trusting Rebellious of authority Autocratic

Kyrgyz Entrepreneurs (n=100) 1.45 1.55 1.78 1.81 1.82 1.88 1.89 2.05 2.08 2.29 2.40 2.46 2.69 2.98 3.05 3.53 3.54

* A 5-point scale was used (1=strongly agree and 5=strongly disagree). ** Significant t-value at p<.05.

Turkish Entrepreneurs (n=203) 1.39 1.50 1.98 1.45 1.70 1.47** 1.76 1.48** 1.59** 1.95 1.84** 1.91** 2.11 2.51 2.39** 2.61** 2.91

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Entrepreneurial Motives Perhaps the most important factor affecting Turkish and Kyrgyz entrepreneurs to set up their own business is their interest in having more freedom and being independent. Moreover, there are no differences between Turkish and Kyrgyz entrepreneurial motivations in terms of ability to earn more money, innovation, encouragements by significant others, and achieve a better position in the society. However, it seems like change, a hobby for a commercial enterprise, dissatisfaction with previous jobs, and being out of for a long time were significantly more important for Kyrgyz entrepreneurs than Turkish entrepreneurs (see Table 4). This could be perhaps explained by the role of environmental factors on Kyrgyz entrepreneurs. For instance, Turkish market might offer better employment opportunities and hence dissatisfaction with prior position may not be important to start up a new venture in Turkey. Furthermore, since Kyrgyzstan has been in a transition period from centrally planned system to a free market based system and has not had much experience in market based economic system along with inadequate and insufficient legal and operational infrastructure, they seem to prefer a safer method by following the footsteps of somebody who already succeeded or whom they admired. And they differ significantly on this factor from Turkish entrepreneurs. Table 4. Mean Values of Reasons and Motivational Factors of Turkish and Kyrgyz Entrepreneurs

  Motivational factors*

Kyrgyz Entrepreneurs (n=100)

Turkish Entrepreneurs (n=203)

Wanted greater freedom to adopt my own approach to work Wanted to make more money than before Always wanted to be my own boss Wanted to develop an idea and innovate My friends/family encouraged me to start my own business Wanted to challenge myself Wanted to develop a hobby and turn it to a commercial enterprise Wanted to achieve a better position for myself in the society Wanted to follow the footsteps of someone whom I admired Wanted to lead and motivate others Was dissatisfied with my previous job I had been out of work for a long time Thought I would get more respect by working for myself Wanted to continue my family tradition I had been made redundant

1.56

1.88

1.70 2.23 2.23 2.26

2.28 2.11 2.29 2.81

2.46 2.59

3.04** 3.30**

2.72

2.42

2.76

3.22**

2.81 2.86 2.94 3.18 3.71 4.15

2.86 3.24** 4.00** 2.92 3.53 4.14

* A 5-point scale was used (1=strongly agree and 5=strongly disagree). ** Significant t-value at p<.05.

34

Mehmet Turan, Seil Nazhimudinova and Ali Kara Table 5. Mean Values of Challenges Encountered by Turkish and Kyrgyz Entrepreneurs

  Challenges faced*

Inability to obtain financial loans for start-up Assuming all responsibility Inability to acquire a feasible location for the enterprise Stress due to long and hard work Inability to access information sources Inability to obtain financing for purchases Inability to find expert advice and guidance Not enough support Inability to spend enough time with kids/family Unbalanced family—business life Not taken seriously by others Prejudices against women

Kyrgyz Entrepreneurs (n=100) 2.15 2.22 2.33 2.54 2.56 2.58 2.78 3.08 3.09 3.24 3.34 3.95

Turkish Entrepreneurs (n=203) 2.88** 1.86** 2.68** 2.65 3.28** 3.01** 3.22** 3.53** 2.84 3.05 3.84 3.42

* A 5-point scale was used (1=strongly agree and 5=strongly disagree). ** Significant t-value at p<.05.

Obstacles and Constraints Faced Our findings also indicate that the challenges faced by Turkish and Kyrgyz entrepreneurs might be considered similar with minor differences. It might be concluded from Table 5 that Kyrgyz entrepreneurs have agreed strongly with existence of technical handicaps such as not finding sufficient credit, feasible location, limitations in information access, financing, expert guidance, and support. Turkish entrepreneurs scored significantly different on these challenges encountered. Turkish entrepreneurs on the other hand emphasized more of stress due to hard work and the burden of responsibility. These results also support the arguments that Turkish entrepreneurs might be operating in a much more favorable environment for entrepreneurship than their Kyrgyz counterparts.

CONCLUSIONS The use of personal characteristics in entrepreneurship research has been considered an important area of inquiry and has attracted significant research interest around the globe. The objective of this exploratory study was to compare and contrast entrepreneurial characteristics of Turkish and Kyrgyz entrepreneurs and understand the extent of the impact of differing entrepreneurial, economic, and political environments on entrepreneurial development. Our study profiled characteristics of Turkish and Kyrgyz entrepreneurs and provided insights into how they shape entrepreneurship development in these two different countries. Such a comparison is intriguing because there are significant similarities (i.e., Turkic origin) as well as differences (i.e., economic systems) between these two countries. Such comparative

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studies among the countries with Turkic origins may enable us to develop a common entrepreneurial profile and consequently facilitate the prediction of entrepreneurial behavior in these countries. However an important note to consider here is the role of entrepreneurial environment and culture, which are assumed to influence the development of entrepreneurial attributes and attitudes. Therefore, studies that are designed to identify the obstacles for entrepreneurship should also help us to highlight the issues and then to develop suggestions for better entrepreneurial environment for transition countries. With these objectives in mind, our study results produced important findings in this area. The findings of this study suggest that both Turkish and Kyrgyz entrepreneurs are significantly motivated by the need for personal achievement, desire to make an impact/contribution and freedom to own a business. Kyrgyz entrepreneurs mostly have technical backgrounds while Turkish entrepreneurs might be considered to have mostly service or management oriented backgrounds. Both Turkish and Kyrgyz entrepreneurs may be characterized as very high on need for achievement, highly responsible, optimistic and resilient. Kyrgyz entrepreneurs seemed to be handicapped by the difficulty of finding sufficient credits, feasible location, limitations in information access, financing, expert guidance, and support while Turkish entrepreneurs more focused on the challenges faced due to hard work and the burden of responsibility. These results also support the arguments that Turkish entrepreneurs might be operating in a much more favorable condition for entrepreneurship than their Kyrgyz counterparts. Moreover, it is very surprising to see that both Turkish and Kyrgyz entrepreneurs are motivated by the need for achievement, desire to make a direct contribution, and the desire for economic security. These results are even more interesting because of the fact that Pistrui et al. (2001) reported similar results for Chinese entrepreneurs. It is no surprising to find out significant differences and similarities between Turkish and Kyrgyz entrepreneurs due to the close cultural and historical links. Turkey is considered as an emerging nation that provides significant opportunities for entrepreneurship and risk taking while limiting the negative effects of failure. As a result, Turkish entrepreneurs may be more apt to assume entrepreneurship responsibility in comparison to their Kyrgyz counterparts. These findings also suggest that Turkish entrepreneurs with their longer period of market based experiences may complement their Kyrgyz counterparts who are well educated and have strong manufacturing abilities because their former work experiences in the state owned factories, to build strong entrepreneurial partnerships or form successful joint-ventures.

LIMITATIONS AND FUTURE RESEARCH This study contributes to the entrepreneurship literature by demonstrating that certain characteristics associated with entrepreneurs are prevalent in different cultural environments. These finding further highlights the need for the development of entrepreneurial profiles that are common and different across cultures. As in other cross-cultural empirical research, this study has some limitations. First, due to the sample size and selection method, findings of the study should be evaluated carefully and should not be taken out of context and broad generalizations should be avoided. Second, our study was exploratory in nature and hence does not provide any causal arguments with

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respect to the entrepreneurial characteristics studies and entrepreneurial success. Finally, our study employed concepts and terms used and developed in western cultural contexts to describe entrepreneurship in these two different countries. Consequently, future research should employ a combination of quantitative and qualitative methodologies to study entrepreneurial behavior in culturally different markets.

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Mitchell, R.K., Busenitz, L., Lant, T., McDougall, P.P., Morse, E.A., & Smith, B. (2002), “Entrepreneurial cognition theory: Rethinking the people side of entrepreneurship research,” Entrepreneurship Theory and Practice, 27(2), 93–104. Newman, K.L. (2000), “Organizational Transformation during Institutional Upheaval,” Academy of Management Review,” 25 (3), 602-619. North. D. C. (1990), Institutions, institutional change, and economic performance, New York: Norton. Nørgaard, Ole (1996), The Baltic States after Independence, Brookfield, VT: Edward Elgar. Ozilhan T. (2002), “Entrepreneurship and sustainable development in Turkey: risks and opportunities,” The Speech by the Chairman of the Board of TUSIAD, in World Conference and Exhibition on Oil Seeds and Edible, Industrial and Specialty Oils, August 12, Pearson, J.A.L. and Chatterjee, S.R (2001), “Differences and Similarities of Entrepreneurial Characteristics in a Diverse Social Setting Evidence from Australian and Singaporean Managers,” Journal of Enterprising Culture, 9(3), 273-289. Pistrui, David, Huang, Wilfred, Oksoy, Dolun, Jing, Zhao, and Welsch, Harold (2001), “Entrepreneurship in China: Characteristics, Attributes, and Family Forces Shaping the Emerging Private Sector,” Family Business Review, 14 (2), June, 141-152. Rebernik, M. (1997), “Beyond Markets, Hierarchies and Ownership Mania in Transitional Countries,” Systems Research and Behavioral Science, 14, 193–194. Reed, J., (2001a),“Poland to Cut Red Tape in move to Boost Enterprise Development,” Financial Times, December, 19, p. 8. Reed, J., (2001b), “Survival of Poland’s Fittest: Eastern Europe after a Decade of Growth,” Financial Times, November, 9, p. 14. Schumpeter, J. (1934), The theory of economic development, Boston: Harvard University Press. Schultz, T. W. (1975), “The Value of the ability to Deal with Disequilibrium,” Journal of Economic Literature, 13(3), 827-846. Schultz, T. W. (1980), “Investment in Entrepreneurial Ability,” Scandinavian Journal of Economics, 82, 437-448. Sexton, D.L. and Bowman, N. (1985), “The entrepreneur: A capable executive and more,” Journal of Business Venturing, 1, 129-140. Schildt, H. and A. Sillanpaa (2004), ‘The Field of Entrepreneurship: A Bibliometric Assessment,” Working paper No. 2004/1, Helsinki University of Technology, Espoo. Shane, S. (1994), “The effect of national culture on the choice between licensing and direct foreign investment,” Strategic Management Journal, 15, 627-642. Smallbone, D. and Welter, F. (2001), “The Distinctiveness of Entrepreneurship in Transition Economies,” Small Business Economics, 16, 249–262. Sternberg, R., Otten, C. and Tamasy, C. (2000), “Global Entrepreneurship Monitor Cologne,” University of Cologne (www.gemconsortium.org.) Tan, J. J. (1996), “Regulatory environment and strategic orientations: A study of Chinese private entrepreneurs,” Entrepreneurship Theory and Practice, 21 (Fall), 31-44. Tan, J (2002), “Culture, Nation, and Entrepreneurial Strategic Orientations: Implications for an Emerging Economy,” Entrepreneurship Theory and Practice, 26 (4), 95-112.

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In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 3

ENTREPRENEURSHIP POLICIES: A MULTIPLE CASE STUDY IN A HIGHLY ENTREPRENEURIAL SPANISH REGION Nuria Toledano, David Urbano, and Alex Rialp Autonomous University of Barcelona, Spain

ABSTRACT It is generally accepted the importance of entrepreneurship and SMEs to the contribution of economic growth and social development. Consequently, over the last decade, entrepreneurship has been a subject of growing interest by governments of all political ideologies, who have implemented different programmes to promote the creation of new firms. Similarly, academics have increasingly focused on these topics, analyzing the entrepreneurship policies in different contexts. In this research, the role of entrepreneurship policies and support programmes in the promotion of local development through new firm creation is analyzed. The study is developed in Catalonia, one of the most entrepreneurial regions of Spain, through a multiple case study methodology under the light of Institutional Economics as a theoretical framework. The main findings of the research show that despite the relevance of programmes and policies concerning new firm formation, one of the most important factors for business creation as well as for local development are the socio-cultural ones.

Keywords: entrepreneurship policies, support programmes, case study, Institutional Economics, Catalonia (Spain)

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INTRODUCTION The importance of entrepreneurship and SMEs to the contribution of economic growth and social development is generally accepted. Many countries are seeking to increase their entrepreneurial vitality in recognition of growing evidence that a high level of entrepreneurial activity contributes to economic growth and development (Birch, 1999; Wennekers and Thurik, 1999; Lundström and Stevenson, 2001; Reynolds et al., 2002). In particular, since the mid 1980’s public administrations of all political ideologies and levels are developing serious efforts to promote support programmes and policies for the creation of new enterprises. One focus has been on reducing the difficulties for creating new business in terms of regulations, administrative procedures, and taxation. Recently, the central point has been on the direct provision of various forms of business support. The wide variety of support programs included on entrepreneurship policies1 has attracted the interest of academics, who analyze the different support mechanisms that are being undertaken in the EU, US and in some transition economies. In Ludström and Stevenson’s (2001) study, for example, good practices in entrepreneurship policy are analyzed in ten countries. Curran (2000), in contrast, focuses on examining business support in the UK during a long period, while Lambrecht and Pirnay (2005) develop a critical analysis of the supply and demand of support policies, as well as an evaluation of the efficiency and the effectiveness of public measures for private external consultancies to SMEs in Belgium. Similarly, although focused on transition economies, Smallbone and Welter (2001) study the role of government in SME development in Ukraine, Belarus and Moldova, and demonstrate that “as in mature market economies, the state is a major factor influencing the nature and pace of SME development, although more through its influence on external environment in which business activity can develop than through direct support measures or interventions” (Smallbone and Welter, 2001: 75). In this sense, Catalonia (Spain) is not an exception. In recent years, both regional and local government have implemented different policies aiming at the promotion and consolidation of new companies. There is also a significant entrepreneurial tradition in Catalonia, which along with the public policies have contributed for Catalonia being one of the most entrepreneurial regions in Spain, and in this sense a good example for other Spanish regions with lower levels of entrepreneurial activity. In this respect, it is appropriate to consider in-depth the various ways in which entrepreneurship policies influence the entrepreneurial activity and local development in Catalonia. To this end, and with the objective to achieve a better understanding of this complex phenomenon, the present study employs a qualitative approach for analyzing the role of entrepreneurship policies and support programmes in the promotion of local development through new firm creation in Catalonia. Specifically, two main questions are examined in this chapter: (1) how do the support programs for entrepreneurship stimulate the creation of new firms in Catalonia?, and (ii) how do these support programs for entrepreneurship influence local development in Catalonia? These issues are addressed from the perspective of the Institutional Theory (North, 1990, 2005). This theory stresses the function carried out by institutions in economic development 1

In this chapter, the expressions “entrepreneurship policy”, “support programs for entrepreneurship” and “support mechanisms for entrepreneurship” are used interchangeably. Also, new firm creation is used as a proxy of entrepreneurship.

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and has turned out to be one of the most suitable frameworks for the study of firm creation, as well as for the analysis of institutional factors that determine the creation of business in a specific context (Díaz et al., 2005; Urbano, 2006). The empirical research is carried out through a multiple case-study approach (Eisenhardt, 1989; Yin, 2003). The chapter proceeds as follows. The conceptual framework of the research is developed in the next section. Afterwards, the methodological approach is explained. Then, a brief description of cases studies and a discussion of the main aspects regarding the promotion of new firm creation and local development in Catalonia are presented. Finally, the article ends with the main conclusions and implications for future research.

BRIDGING ENTREPRENEURSHIP POLICY AND LOCAL DEVELOPMENT WITH INSTITUTIONAL THEORY Entrepreneurship Policy and Local Development As noted above, over the last decade, entrepreneurship has been a subject of growing interest by governments. In particular, from the European Council Meeting in Lisbon in 2000, entrepreneurship is being considered as a crucial element for achieving the political objectives established in the Council. Accordingly, every year there has been more policies and programmes that offer assistance for the new firm creation. Usually, based on the Birch’s (1979) report conclusions which noted that small firms were creating more employees than larger firms, the job creation has been one of the key objectives emerging from these policies. Nevertheless, further the creation of employment, “it is almost universally accepted among politicians that more small enterprise is unquestionably beneficial for the economy” (Curran, 2000:38). For example, Lawton Smith et al., (2005), among other authors, have considered the interaction between entrepreneurship and local development, and a decade before Saxenian (1994) pointed out that the region’s capacity for entrepreneurship is argued to be the key factor in successful regional economies. Overall, it is admitted that the local context is beneficiated by the public initiatives, however how can the effects of entrepreneurship policies in the new firm creation and the local development be contextualized and explained? From a theoretical point of view, it has been stated that the area of entrepreneurship policies lacks of consolidate theoretical base (Lundström and Stevenson, 2001; Verheul et al., 2003). Nevertheless, due to the fact that such policies are applied in a particular context, the environmental conditions are particularly important to our better understanding of this field of study. In this sense, we consider that the Institutional Theory provides an appropriate framework for exploring the different factors that explain the links among entrepreneurship policy, new firm creation and local development.

The Institutional Economic Theory In recent years, academics from various disciplines have increasingly focused on Institutional Theory. In particular, some authors have made use of this theory as a conceptual framework for the study of the influence of environmental factors in entrepreneurial activity

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(e.g., Anderson, 2000; North et al., 2001; Lerner and Haber, 2001; Djankov et al., 2002; WaiChung, 2002; Aidis, 2005; Díaz et al., 2005, Stephen et al., 2005) as well as for analyzing the implications of some public interventions in entrepreneurial activity of a specific context (e.g., Toledano, 2003; Urbano, 2006, Kalantaridis, 2007; Toledano and Urbano, 2007). Among the reasons that justify the adoption of such approach is the basic belief that the people’s behaviours and actions depend on the institutional framework. In other words, the existing institutions in a particular society condition the actions of different agents that participate in the society through a structure of incentives and opportunities. Institutional Economic Theory develops a very wide concept of “institutions”. North (1990:3), one of the main authors in this field, points out that “institutions are the rules of the game in a society, or more formally, institutions are the constraints that shape human interaction”. Since the main function of institutions in a society is to reduce uncertainty by establishing a stable structure for human interaction, North (1990, 2005) attempts to explain how institutions and institutional framework affect economic and social development. Institutions can be either formal –such as political rules, economic rules and contracts- or informal –such as codes of conduct, attitudes, values, norms of behaviour, and conventions, or rather the culture of a determined society. According to North (1995), formal institutions are subordinate to informal ones in the sense that they are the deliberate means used to structure the interactions of a society in line with the norms and cultural guidelines that make up its informal institutions. Moreover, whereas a governing body can influence the evolution of formal institutions in a rather direct way, informal institutions are much less tangible and usually fall outside the direct influence of public policy. They can be moulded, but tend to resist change and take time to evolve towards new social norms. North (1990, 2005) also explains how there can exist “radically differential” performances of economies over long periods of time. He follows up his path-dependency argument by describing the embedded character of informal institutions as a result of their cultural content. In this chapter, following the approach adopted earlier by several authors (e.g., Gibb, 1993; Young et al., 1999; Lerner and Haber, 2001; Urbano, 2006), we especially focus on formal institutions (North, 1990, 2005), represented herein by entrepreneurship policies implemented in the Spanish region of Catalonia. In this sense, we adopt as an overall proposition of the Institutional Theory that the formal institutions can define, create and limit the new firm creation and local development in Catalonia (see Figure 1). Due to the previous studies not dealing in-depth with this specific Spanish reality, we employ an inductive approach, which can be fruitful because it allows us to shed light on this important but understudied question.

Figure 1. Theoretical model.

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RESEARCH DESIGN Research Method As mentioned at the beginning of the chapter, the present investigation applies a casestudy approach as strategy of research (Eisenhardt 1989, Yin 2003). A case study is an empirical enquiry that investigates a contemporary phenomenon within its real-life context, and it is especially useful when the boundaries between phenomenon and context are not clearly evident (Yin, 2003). This strategy of research is being used increasingly in the entrepreneurship field (e.g., Godel, 2000; Rialp et al., 2005; Leung et al., 2006; Neergard and Ulhoi, 2006; Corbet el al., 2007), and it also enjoys a wide acceptance in the context of the evaluation and analysis of public policies (Patton, 2002; Yin, 2003). The case-study research can include both single- and multiple-case-studies (Yin, 2003). Multiple cases are generally regarded as more robust than single-case studies, providing the observation and analysis of a phenomenon in several settings. The multiple-case- study design also enables a replication logic in which the cases are treated as a series of independent experiments (Eisenhardt, 1989, Yin, 2003). Specifically, as noted earlier, in this chapter a multiple-case study integrated by three cases is developed (Eisenhardt, 1989; Yin, 2003) which serves to investigate how entrepreneurship policies stimulate the new firm creation and the local development in Catalonia (Spain).

Research Context Catalonia is an Autonomous Community2 located in the North East of Spain. It covers an area of 32,114 km2 with an official population of 7,210,508 in 2007, from which immigrants represent an estimated 12.3% of the total population. It is divided in four provinces (Barcelona, Girona, Lleida and Tarragona) and its capital city is Barcelona. The GDP of Catalonia in 2007 was € 202,509 million and GDP per capita was € 24,445, ranking very high among autonomous communities in Spain. It has the greatest number of businesses in Spain (612,404 in 2007) and the distribution of sectors is the following one: primary sector, 2.8%; secondary sector, 37.2% and tertiary sector, 60%. Regarding support policies for entrepreneurship, Catalonia is one of the main referents in Spain, due to the fact that it was one of the earlier regions that started designing and implementing specific support measures for new firm creation. Currently, there are more than 80 organisms that support the creation of new firms in Catalonia (Urbano, 2006).

2

Spain is politically and administratively divided into ‘autonomous communities’, which are normally referred to via the term ‘regions’. An autonomous community is a territorial area that is endowed with legislative autonomy and executive powers, as well as the ability to administrate through its elected representatives (Spanish Constitution, 1978).

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Selection of the Cases Studies The cases studies analyzed in this research were selected after an experience accumulated over years investigating entrepreneurship policies in Catalonia and maintaining contacts with several responsibles of many support programmes. Based on research already carried out, a solid relationship with people in charge of the support programs was built up. Along with the people in charge of entrepreneurship policies willing to collaborate in this study, the three case studies included in the research were selected according to the following criteria: eligible support programmes had to (1) promote the creation of high quality new firms in which innovation was a key factor for providing assistance, and (2) cover different target population.

Data Collection and Data Analysis To triangulate the case findings and enhance validity and reliability of the study , the data underlying the analysis were compiled from several sources, using different techniques. Over the years (starting in 2001), personal interviews with the people in charge of support programmes that represent the case studies have been regularly maintained. In the current year (2008), the people responsible for administering support policies in each case study were newly contacted and interviewed. These interviews followed a standard protocol, with a common set of open-ended question designed to elicit a discussion of the nature of the entrepreneurship policies, in particular about how support programmes stimulate the creation of new firms and contribute to local development in Catalonia. These interviews were conducted in June 2008, and lasted for between 90 and 120 minutes. Additionally, entrepreneurs who had been beneficiaries of support programs were also interviewed (15 in total, 5 for each case-study). Using a semi-structured questionnaire, the majority of entrepreneurs was personally interviewed and some of them contacted by telephone. The questions dealt with issues regarding their perception about the role of entrepreneurship policies on supporting the creation of new firms and the local development. Finally, different documental sources, such as memories of support programs and web pages, were consulted. Concerning the data analysis, a research database was initially created with the resulting information from data collection. The data were analysed using a theory-building approach (Eisenhardt 1989, Yin 1994). In this sense, the search for alternative propositions was assisted by using the Institutional economic theory (North 1990, 2005).

CASES STUDIES In this section, an abridged description of the three case studies is provided.

Case # 1: Network of Technological Springboards (TT Network) Technological springboards are support units for the creation of knowledge-based enterprises or technology-based enterprises. The TT Network was created in 2001 as an initiative of the CIDEM (an unit belonging to the Catalan Department of Innovation,

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Universities and Enterprise) together with eight Catalan Universities3. Its main objective is to increase the transfer of technology between universities and enterprises through the creation of technology-based companies and the transfer of industrial intellectual property. Currently, the TT Network is the channel to facilitate the transfer of innovative technologies from universities to companies to help them develop new research projects and, therefore, improve the innovative capability of the Catalan business community. In order to fulfil its objectives TT Network offers, among others, the following services: awareness and information to researchers about technology-based firms' creation and patents (business ideas competitions, training, conferences, etc.), preliminary assessment about the opportunity and feasibility of the business idea, assessment regarding legal aspects, copyright and patent rights, assessment to write the business plan, support in all the business creation process (seed stage, launching, and growth). In addition, TT Network facilitates the access to financing funds specialized in technology-based firms projects, connections with business men, CEOs and other economic agents with the aim of completing the entrepreneur's team. Finally, some springboards offer incubation programs specialised in technology-based firms.

Case # 2: Barcelona Activa Barcelona Activa is the local development agency of the Council of Barcelona. It was created in 1986 as a business incubator with 16 projects installed, and currently it does not only offer support for entrepreneurs, but also promotes innovation, professional improvement and employment generation. In particular, in its Action Plan 2004-2007, Barcelona Activa included seven activity lines specifically aimed at increasing the creation and consolidation of new firms, and providing new employment opportunities. In this sense, the creation of quality and future-oriented businesses is a high priority for this organism. On this respect, Barcelona Activa, through a mix methodology based on onsite and online support, as well as a large offer of training activities, stimulates entrepreneurship and facilitates the tools that allow potential entrepreneurs transform their business ideas into real businesses. Also, in order to promote the growth of new innovative companies, Barcelona Activa promotes the installation of companies in a business incubator and in a technology park, and facilitates the creation and maintenance of cooperation networks (the “Xarxactiva” Business Network) providing the entrepreneurs with a space where they can exchange ideas, learn and do business through a mentoring programme4. On the other hand, Barcelona Activa increases the new employment opportunities, facilitates the access to and use of new technologies, and promotes innovation.

3

4

Universitat Autònoma de Barcelona, University of Barcelona, University of Girona, University of Lleida, Technical University of Catalonia (UPC), Universitat Pompeu Fabra, Universitat Ramon Llull (ESADE and La Salle) and IESE. Currently, the University Rovira i Virgili and the Universitat Oberta of Catalonia are part of the TT Network The mentoring programme of Barcelona Activa is a programme in which well known and prestigious professionals devote part of their time to accompany recently created businesses in their growth.

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Case # 3: Business Creation Service of Generalitat of Catalonia (BCS) The business creation service of Catalonia is an initiative of the Department of Employment of the Generalitat of Catalonia (Regional Government). Since the 90s, this department is supporting the creation of new firms through several actions. The main objective of BCS is to provide information, orientation, advice, training, and funding to entrepreneurs who have a business idea, need to analyze its feasibility and have the firm intention to transform it into a new business. To this end, a great part of the activity of the BCS is focused on offering support to intermediaries who work for local development (local development agents). The underlying philosophy is based on the need to provide personal support to each individual who has interest in creating his/her own business, and offer such advice and support as nearest of the entrepreneur’s habitual context as possible. In addition, it is widely admitted that there are not general rules for applying to entrepreneurs and business ideas, each specific initiative having to be attended as a particular and individual case. The support offered by BCS covers all phases that integrate the entrepreneurial process. In 2007, BCS coordinated a network integrated by 334 partners (public and private) and more than 850 technical personal that assisted entrepreneurs.

DISCUSSION What can be learnt from the case studies described above about the entrepreneurship policies in Catalonia? How can these cases improve our understanding about the formal institutions, according to North’s (1990, 2005) terminology, and the manners in which they foster new firm creation and local development? When the different sources of evidence from our case studies are combined with the institutional theoretical framework, some propositions can be suggested as possible answers to our research questions. Besides, an interesting paradox emerges: while initially we had focused on formal institutions from North’s (1990, 2005) perspective, actually informal institutions reveal themselves as key intermediate mechanisms not only for promoting new firm creation and local development (see Figure 2). The evidence obtained regarding the ways in which the case studies, understood as formal institutions, promote entrepreneurship indicates that both training and advice become the most important parts of the process of stimulating new firm creation. This suggests that the case studies included in this research act, largely, during the earlier phases of the entrepreneurial process (at the identification of the business opportunity and the analysis of the viability of the entrepreneurial project). Also, based upon the case studies analyzed, the informative actions aimed to raise awareness of the possibilities of entrepreneurship are also a priority. Moreover, in the case of TT Networks such informative actions have focused on university researchers’ initiatives, while in the SCE Case local development agents are one of the main target groups who, in turn, inform and assit potential and actual entrepreneurs.

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Figure 2. Revised theoretical model.

All the mechanisms noted above reflect the importance that support programmes give to the supply side of entrepreneurship, for example, the capabilities of individuals and their attitudes towards entrepreneurship (preferences). This also concurs with Lundström and Stevenson’s (2001) suggestions about the possibility of increasing the individuals’ perceptions of desirability and feasibility for creating their own firms, improving access to business information and business support. In addition, if we consider North’s (1990, 2005) approach where informal institutions are defined as codes of conduct, attitudes, values, norms of behaviour, and conventions, we can observe also that formal institutions, as represented in this research by the three case studies, do not only automatically produce the new firm creation but also contribute to consolidate the entrepreneurial culture, thus influencing the informal institutions alike. On the other hand, two of the three case studies, TTNetworks and Barcelona Activa, also act as incubators for new enterprises. In both cases, the formation, advice, and information activities are accompanied by the incubator strategies in which the entrepreneurs are supported with infrastructures for locating their new firms. In this sense, some interviewed entrepreneurs stressed the fact that the modern installations, which are totally wired with high-speed access to the Internet, as well as the possibility that incubators offered them to increase their networks towards a deeper circle of entrepreneurs, clients, and venture capitalists. The incubators represent the drivers to identify and exploit the opportunities for entrepreneurship, or in other words, the demand side (Lundström and Stevenson, 2001). In the three case studies, some attention was also paid to the consolidation of new firms. However, with the exception of TTNetworks case, the other two cases stand out the growth of new innovative companies as one of their priorities. Therefore, from the findings shown above, and following Institutional Theory assumptions (North 1990, 2005), the following propositions can be suggested: Proposition 1: Proposition 2:

Formal institutions contribute directly to new firm creation by increasing the opportunities for entrepreneurship. Formal institutions contribute indirectly to new firm creation by promoting actions encouraging the informal institutions which, in turn, transmit positive attitudes toward entrepreneurship.

In the area of local development, our case studies provide a novel perspective to generally accepted relationships among new firms, new employees and local development. In effect, the creation of new firms as a result of the entrepreneurship policies has been

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supported by the data from the case studies5. According to the key informants (people in charge of support programmes and entrepreneurs), there is no doubt that the new firms along with the employement generated drive local development. Both constitute the clearest way to promote local development, although the debate about whether these outcomes would have resulted even if the policy had never been initiated (Curran, 2000) still goes on open. However, such as one of the entrepreneurs being interviewed pointed out “it is possible that without the public support I had created my own business, but maybe I would have need more time to transform my own business idea into my real firm”. Moreover, our qualitative approach also showed some evidence of the positive influence of the support mechanisms on general population’s perceptions about the legitimacy of entrepreneurship and the important role that new, growth-oriented businesses have in society. In this sense, several key informants described the situation in terms of “best practices”, that is role models. Such role models can exert a positive influence on the rest of population leading to intentions of pursuing an entrepreneurial career. Therefore, due to the fact that Catalonia is well-known by the entrepreneurial character of its citizens, a cumulative impact of role models implicate a greater influence on individuals’ behaviour to adopt entrepreneurial actions, which, in turn, promote local development. It means that in the long run informal institutions, represented by role models, also favour local development. Additionally, the entrepreneurial actions of the new firms, especially of those created with the support offered by TTNetworks and Barcelona Activa, are more highly embedded in networks of entrepreneurial relationships. This environment, with networks generating a high propensity for economic agents to develop entrepreneurial activity and increase the competitiveness, can be characterized as being rich in terms of entrepreneurial capital (Lawton Smith et al., 2005) by means of informal institutions stimulating local development. Hence, in the framework of Institutional theory (North, 1990, 2005), our discussion suggest the following propositions: Proposition 3: Formal institutions contribute directly to local development through the new enterprises created and the associated employment being generated. Proposition 4: Formal institutions contribute indirectly to local development by promoting actions encouraging informal institutions -such as role models and networks- which, in turn, influence on local development.

CONCLUSION For many years, Catalonia has been the most entrepreneurial Spanish region. Also in this geographic area, the most updated entrepreneurship policies have been implemented. In this chapter, we have focused on three specific support programmes, as formal institutions, for entrepreneurship which have been analyzed using a qualitative, case-based approach. The lack of a well-established theoretical base characterizing this field of research has been 5

The main results obtained by TT Network in 2007 were the following: 69 technology-based companies started-up, 21 patents, and 443 analyzed projects. Between 50 and 60% of the business projects coached by Barcelona Activa become a company by the end of the first year, creating an average of 2.4 jobs. In 2007, Business Creation Service supported the creation of 2,406 firms which generated 4,505 new employees.

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overcome by adopting the conceptual framework provided by Institutional Theory (North, 1990, 2005). The key aim of this research was to explore the rather unclear relationships existing between entrepreneurship policies, new firm creation and local development. In this context, by means of applying a theory-building approach (Yin, 2003), four theoretical propositions have been induced from evidence. The main conclusion derived from our inquiry is while formal institutions are increasing the number of new firms, employment and local development in Catalonia, other more intangible outcomes are being achieved. On the one hand, more entrepreneurial attitudes are being fostered through improved information and advice actvities, which implies also that a greater number of new firms might be created in the future. On the other, the newly created firms, emerged and supported by entrepreneurship policies along with highly entrepreneurial networks, contribute to disseminate an entrepreneurial culture that supports the view of individual entrepreneurial behaviour as a desirable way of life. In this way, from North’s 1990, 2005 perspective, formal institutions influence informal ones, which, in turn, contribute to increase the entrepreneurial vitality of the region and local development in the long run. These findings have important implications both for policymakers and academics. An important implication for public policy is that, in the future, the role of the Catalan government in order to stimulate local development should especially aim at accomplishing two key objectives: (1) to establish mechanisms that support the survival and growth of new firms, and (2) to design and implement mechanisms for reducing the specific liabilities affecting some groups of potential entrepreneurs, such as immigrants, students, and younger people. From an academic perspective, this research has also demonstrated that the Institutional theory (North, 1990, 2005) can be considered a valid conceptual approach for analyzing the impact of entrepreneurship policies. Finally, it should be noted that because our analysis rests on the case-study approach, the conclusions that emerge from our cases might not be fully appropriate in other regions. For this reason, further investigations are required to test the generalisation of our findings. Nevertheless, we believe that the exploratory study presented in this chapter provides a starting point for future researchers aimed at exploring the potential implications of entrepreneurship policies in other different contexts.

ACKNOWLEDGMENTS The authors acknowledge the financial support from the Projects SEC2006-06017 and SEJ2007-60995 (Spanish Ministry of Education and Science), and 2005SGR00858 (Catalan Government’s Department for Universities, Research and Information Society).

REFERENCES Aidis, R. (2005). Institutional barriers to small-and medium-sized enterprise operations in transitions countries. Small Business Economics, 25, 305-318. Anderson, A. (2000). Paradox in the periphery: an entrepreneur reconstruction? Entrepreneurship and Regional Development, 12 (1), 91-109.

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Birch, D. (1979). The job generation process. London: MA, Cambridge. Birch, D. (1999). Entrepreneurial Hot Spots. Boston: Cognetics, Inc. Corbett, A.C., Neck, H.M., & DeTienne, D.R. (2007). How corporate entrepreneurs learn from fledgling innovation initiatives: cognition and the development of a termination script. Entrepreneurship, Theory and Practice, 31(6), 829-852. Curran, J. (2000). What is small business policy in the UK for? Evaluation and assessing small business policies. International Small Business Journal, 18(3), 36-50. Díaz, C., Urbano, D., & Hernández, R. (2005). Teoría económica institucional y creación de empresas. Investigaciones Europeas de Dirección y Economía de la Empresa, 11 (3), 209-230. Djankov, S, La Porta, R, Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. The Quarterly Journal of Economics, 67, 1-37. Eisenhardt, K.M. (1989). Building theories from case study research. Academy of Management Review, 14 (4), 532-550. Gibb, A.A. (1993). Key factors in the design of policy support for the small and medium enterprise (SME) development process: an overview. Entrepreneurship and Regional Development, 5 (1), 1-24. Godel, S. (2000). Klaus B: the success story of an entrepreneur: a case study. European Journal of Work and Organization Psychology, 9(1), 89–92. Kalantaridis, C. (2007). Institutional change in post-socialist regimes. Public policy and beyond. Journal of Economic Issues, XLI (2), 435-442. Lambrecht, J., & Pirnay, F. (2005). An evaluation of public support measures for private external consultancies to SMEs in the Wallon Region of Belgium. Entrepreneurship & Regional Development, 17, 89-108. Lawton Smith, H., Glasson, J., & Chadwick, A. (2005). The geography of talent: entrepreneurship and local economic development in Oxfordshire. Entrepreneurship & Regional Development, 17, 449-478. Lerner, M., & Haber, S. (2001). Performance factors of small tourism ventures: the interface of tourism, entrepreneurship and the environment. Journal of Business Venturing, 16 (1), 77-100. Leung, A., Zhang, J., Wong, P.K., & Foo, M.D. (2006). The use of networks in human resource acquisition for entrepreneurial firms: multiple befitQ considerations. Journal of Business Venturing, 21(5), 664-686. Lundström, A., & Stevenson, L. (2001). Entrepreneurship Policy for the Future. Stockholm: Swedish Foundation for Small Business Research. Neergard, H., & Ulhøi, J.P. (2006). Government agency and trust in the formation and transformation of interorganizational entrepreneurial networks. Entrepreneurship Theory and Practice, 30(4), 519–539. North, D., Smallbone, D, & Vickers, I. (2001). Public Support Policy for Innovative SMEs. Small Business Economics, 16(4), 303-317. North, D.C. (1990). Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. North, D.C. (1995). Structural change of institutions and the process of transformation. Prague Economic Papers, 3, 229-234. North, D.C. (2005). Understanding the Process of Economic Change. Princeton, NJ: Princeton University Press.

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Patton, M.Q. (2002). Qualitative Research & Evaluation Methods. London: Sage Publications, Thousand Oaks. Reynolds, P., Bygrave, W., Erkko, A.L., & Hay, M. (2002). Global Entrepreneurship Monitor 2002 Summary report. Babson Park, MA: Babson College, Ewing Marion Kauffman Foundation and the London Business School. Rialp, A., Rialp, J., Urbano, D., & Vaillant, Y. (2005). The born-global phenomenon: a comparative case study research. Journal of International Entrepreneurship, 3, 133-171. Saxenian, A. (1994). Regional advantage. Cambridge, MA: Harvard University Press. Smallbone, D., & Welter, F. (2001). The role of government in SME development in transition economies. International Small Business Journal, 19, 63-77. Stephen, F.H., Urbano, D., & Van Hemmen, S. (2005). The impact of institutions on entrepreneurial activity. Managerial and Decision Economics, 26, 413-419. Toledano, N. (2003). Análisis de las políticas de desarrollo rural en la provincia de Huelva. Un estudio comparado de la iniciativa Leader II, el programa Proder y el programa Escuela de Empresas. Málaga: Analistas Económicos de Andalucía & Fundación Unicaja. Toledano, N., & Urbano, D. (2007). Políticas de apoyo a la creación de empresas en España: un estudio de casos. Boletín Económico del ICE, 2905, 33-46. Urbano, D. (2006). New Business Creation in Catalonia: support measures and attitudes towards entrepreneurship, Barcelona: CIDEM, Generalitat de Catalunya. Verheul, I., Wennekers, A.R.M., Audretsch, D.B., & Thurik, A.R. (2003). An eclectic theory of entrepreneurship: policies, institutions and culture. In D.B. Audretsch (Ed.), SMEs in the Age of Globalization (536-606). Heltenham: Edward Elgar Publishing. Wai-Chung, H. (2002). Entrepreneurship in international business: an institutional perspective. Asia Pacific Journal of Management, 19, 29-61. Wennekers, S., & Thurik, R. (1999). Linking Entrepreneurship and Economic Growth. Small Business Economics, 13, 27-55. Yin, R. (2003). Case Study Research, 3ed edition. Beverly Hills, CA: Sage Publications. Young, M., Wyman, S.M., Brenner, C.T. (1999). Assessment of small business perception of needed information and assistance. Journal of Business and Entrepreneurship, 11 (1), 99105.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 4

STRATEGIC ENTREPRENEURSHIP: INTEGRATION SUPPORT JOURNALS Teresa García-Merino1 and Valle Santos-Álvarez2 Universidad de Valladolid, Departamento de Organización de Empresas y C.I.M. Avda. Valle de Esgueva, nº 6, 47011 – Valladolid, Spain

ABSTRACT Strategic management and entrepreneurship are two research fields in which significant progress has been made. The field of strategic management has already reached a level of maturity whilst the field of entrepreneurship continues to develop. Both have thus generated a vast amount of literature, with some papers being published in a group of influential journals. Authors such as Boyd et al. (2005) for strategic management and Fried (2003) or Linton (2006) for entrepreneurship have attempted to highlight the most widely recognized journals. Over the last decade some authors (Evans and Wurster, 1999; McGrath and MacMillan, 2000; Hitt et al., 2001, 2002; Ireland et al., 2001, 2003) have proposed merging the theory and research of both disciplines, leading to the emergence of the strategic entrepreneurship (SE) construct. Despite certain initial disagreements (Shane and Venkataraman, 2000), complementarities between the two fields seem to strongly support the idea of integration. Further, the publication of the Strategic Entrepreneurship Journal (an official journal of the Strategic Management Society) in 2007 heralded a significant milestone. However, the question arises as to which journals have thus far contributed to sustaining this integration, what support each has provided in the merging process, which can be considered a reference for current and future research in strategic entrepreneurship, and finally what level of recognition cited journals have reached in recent years. Using the Scopus database (from Elsevier) and the Web of Science and 1 2

[email protected], Tel.: +34 983 183813, Fax: +34 983 423899 [email protected]

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T.García-Merino and V. Santos-Álvarez Journal Citation Reports in ISI Web of Knowledge databases (from Thomson) as sources of information and analysing the period between 2000 and 2008, we have attempted to answer these questions. Our analysis reveals that over the last decade SE literature has evidenced a clear growth. A wide range of differing journals have contributed to this, although a prominent role has been played by those more closely linked to the field of entrepreneurship. Based on the recognition achieved by certain journals, a group of publications is proposed as a reference framework for SE researchers.

Keywords: strategic entrepreneurship, strategic management, entrepreneurship, integration, journals.

“Strategic entrepreneurship is entrepreneurial action with a strategic perspective” (Hitt et al., 2001: 480)

INTRODUCTION Strategic management and entrepreneurship are two fields of research which over time and independently from one another have developed substantially3. The former of the two is currently a well established field whilst the latter has reached a considerable stage of development4. Despite the significant progress entrepreneurship has made, Aldrich and Baker (1997) and Aldrich (2000) point to its lack of a fully established and widely accepted research paradigm. In order to try to construct such a paradigm, over the last decade certain authors (Evans and Wurster, 1999; McGrath and MacMillan, 2000; Hitt et al., 2001, 2002; Ireland et al., 2001, 2003) have posited merging the theory and research of the two disciplines: strategic management and entrepreneurship, giving rise to the term Strategic Entrepreneurship (SE). Despite certain initial reluctance towards such a merge (Shane and Venkataraman, 2000), the complementarity between the two fields would strongly seem to support it. The two have even been talked of as inseparable or closely linked (Meyer and Heppard, 2000; Barney and Arikan, 2001; Venkataraman and Sarasvathy, 2001). It is therefore significant that Entrepreneurship and Strategy should be one of the seven groups of interest recognized by the Strategic Management Society and that in 2007 the latter should have launched the Strategic Entrepreneurship Journal. Both research fields (strategic management and entrepreneurship) have generated and continue to generate a vast amount of literature, each boasting a group of reference journals. Authors such as MacMillan (1991), Park and Gordon (1996) or more recently Boyd et al. (2005) point to reference journals in strategic management, while for such journals in the 3

See Rumelt et al. (1994), Hoskisson et al. (1999) or Bowman et al. (2002), for strategic management, and Busenitz et al. (2003) or Ireland et al. (2005) for entrepreneurship. 4 Business Policy & Strategy is currently the second largest interest group within the Academy of Management, and Entrepreneurship the eighth out of a total of twenty-four.

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field of entrepreneurship we may cite the works of Fried (2003) or Linton (2006). The literature therefore evidences journals which are common to the two fields as well as others which differ. The question thus arises as to which publications are helping to reinforce such an integration, what support is given by each, and which of them may be deemed a reference for both current as well as future research in strategic entrepreneurship. Finally, we should explore to what extent these journals have achieved recognition in recent years. Using the Scopus (from Elsevier) and Web of Science and Journal Citation Reports in ISI Web of Knowledge (from Thomson) databases as sources of information and analyzing the period between January 2000 and March 2008 we seek to provide an answer to these questions. This chapter is thus structured as follows. We first trace the scope and development of this relatively new field of research known as SE, highlighting the main complementarities which underlie it. We then describe the research methodology used to ascertain which journals have contributed towards supporting the merging of strategic management and entrepreneurship. The findings are then provided, where we evidence which journals have offered such support and what their level of recognition has been. The final section deals with the conclusions to emerge.

I. STRATEGIC ENTREPRENEURSHIP: SCOPE, DEVELOPMENT AND COMPLEMENTARITIES Although authors such as McGrath and MacMillan (2000) have used the term entrepreneurial mindset when referring to integration between the fields of strategic management and entrepreneurship, the most widely accepted term which has come to be used is SE. This term draws attention to the intersection and integration between the two fields of research mentioned and advocates that firms, whether new or well established, must at the same time be both entrepreneurial and strategic (Hitt et al., 2001; Ireland et al., 2003; Ireland and Webb, 2007). This implies that they should be able to address the issue of seeking opportunities on which to ground future competitive advantage for the firm (exploration or entrepreneurial behavior) whilst simultaneously seeking to ensure current competitive advantage (exploitation or strategic behavior), striking a trade-off between the two. Although the two fields are linked to the creation of wealth, their focus of attention varies slightly (Ireland et al., 2003, p.964). Early research into SE merely dealt with an analysis of those issues pertinent to the two disciplines, such as innovation, internationalization, organizational learning alliances and networks, top management teams and governance, as well as growth. Subsequent work aimed to provide an explanation to the SE construct. For instance, Hitt et al. (2001, 2002) and Ireland et al. (2001) sum up and set out the basic tenets of entrepreneurship and strategic management with a view to pinpointing areas of interest for research into SE. Ireland et al. (2003) develop an SE model with which they identify and explore the distinctive features of SE (entrepreneurial mindset, entrepreneurial culture and entrepreneurial leadership, managing resources strategically, applying creativity and developing innovation). Ireland and Webb (2007) analyze the two main components of SE (exploration and exploitation) as well as the three kinds of mechanism –operative, structural and cultural- used by firms to achieve a balance between the components.

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As knowledge of SE progressed, the publication of special issues devoted to the field and above all the launch in 2007 of the journal Strategic Entrepreneurship Journal set out the topics of interest covered by the area. The ten topics outlined by the journal as the areas to be covered are: Strategy versus Entrepreneurship; Creativity, Imagination and Opportunities; Risk and Uncertainty; Innovation; Change; Technology; Entrepreneurial Actions, Innovation and Appropriability; Behavioral Characteristics of Entrepreneurial Activity; Entrepreneurship and Economic Growth; Social Role of Entrepreneurship. Despite strategic management and entrepreneurship being two independent fields of research, various authors (Meyer and Heppard, 2000; Barney and Arikan, 2001; Hitt et al., 2001; Ireland et al., 2003) feel they are complementary in a number of respects. The complementary nature of the two is evidenced by the following: the focus in strategic management centers on theories addressing competitive advantage whereas in entrepreneurship it deals with theories related to creativity and the search for opportunities; the lack of any dominant paradigm in entrepreneurship in contrast to its existence in strategic management; the range of specific academic publications in entrepreneurship, with more than one having a significant impact as opposed to a smaller group of specific academic journals in strategic management, only one of which has any notable impact. An awareness of the complementary nature of these factors advocates merging the two and provides promising avenues for researchers to explore how firms create wealth (Ireland et al., 2003, p.964). Our focus deals exclusively with the question of publications. If we analyze academic reference publications in strategic management, Boyd et al. (2005) point to fourteen journals. All but one have an impact factor in the 2007 Journal Citation Reports of the ISI Web of Knowledge from Thomson. Only two of them are specific to strategy (Strategic Management Journal and Journal of Business Strategy), as opposed to the more general approach adopted by the remainder, and only the first has an impact factor. As regards reference journals in entrepreneurship, Fried (2003) and Linton (2006) include a total of 25, of which around one third are specific to the field, the rest being of a more general nature. With the exception of a fifth of the journals listed or around a quarter in the case of the specific journals, the remainder have an impact factor in the 2007 Journal Citation Reports. If we compare this with strategic management, we may state that there are more specific journals in the field of entrepreneurship and that, moreover, amongst these a higher percentage have an impact factor. Notwithstanding, Katz (2003, p.295) has highlighted the need for more journals in the area and has underlined the opportunities available for niche journals (an example of which is Strategic Entrepreneurship Journal). We therefore focus our interest on which journals might have contributed to integrating strategic management and entrepreneurship since the beginning of the decade, which might be expected to do so in the near future and what level of recognition these journals have achieved.

II. RESEARCH METHODOLOGY To provide an answer to the questions raised in the introduction, we conducted a two stage analysis: (1) exploring which journals had supported integration between strategic management and entrepreneurship and assessing to what extent each had contributed to said

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integration, and (2) ascertaining which journals currently provide a clear reference point for research into SE as well as determining how each had developed in terms of level of recognition.

1st Stage: Journals Supporting Development of SE To ascertain which journals had supported integration of strategic management and entrepreneurship and to what extent each had done so, we used Scopus, Elsevier’s abstract and citation database, and the Web of Science, Thomson’s database in ISI Web of Knowledge. Given that the term strategic entrepreneurship emerged at the beginning of the decade, our analysis covered the period between January 2000 and March 2008. To gather data from Scopus (www.scopus.com) we simultaneously used the search terms entrepre* and strateg*, restricting the choice of documents to those specifically related to journals (article, article in press, note, editorial, review), and focusing on the area of Business, Management and Accounting and, additionally, on the area Multidisciplinary. To gather information in the Web of Science of the ISI Web of Knowledge (www.accesowok.fecyt.es) we used the same criteria as in the previous case: simultaneously applying the search terms entrepre* and strateg*, taking into account documents related to journals (article, editorial material, review, book review) and focusing on the areas of Business, Management, Business-Finance.

2nd Stage: Level of Recognition of Reference Journals in SE We first used the results to emerge from the initial stage of our research to establish which journals currently seem to provide a reference point for research into SE. To determine development in the level of recognition of these journals we subsequently employed the Journal Citation Reports of the ISI Web of Knowledge (from Thomson) (www.accesowok.fecyt.es) database, specifically its Social Science Edition. The period covered was 2000 to 2007, the chosen subject categories being Business, Business-Finance and Management, and the criterion for determining recognition of a publication being its impact factor.

III. RESULTS: JOURNALS IN STRATEGIC ENTREPRENEURSHIP We now present the results for each stage of the analysis.

1st Stage: Journals Supporting Development of SE Simultaneously typing in the terms entrepre* and strateg* in the Scopus and Web of Science databases, we obtain a total of 688 and 757 documents respectively for the studied period. These figures differ enormously from those obtained when we use the two terms

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separately, which for strateg* yielded a total of 11471 documents in Scopus and 7025 in Web of Science, and 2795 and 2335 respectively for entrepre*. As regards its development over time, it may be stated that SE literature evidences clear and noticeable growth (figure 1).

160 140 120 100 80

SE

60 40 20 0 2000

2001

2002

2003

2004

2005

2006

2007

Source: Own elaboration, based on data from Scopus (Search date: end of March 2008). Figure 1. Evolution in Strategic Entrepreneurship

If we briefly look back and search in Scopus for information corresponding to SE (in other words, entrepre* and strateg*) for the period between 1960 (the first year for which information is available in the database) and 1999, we find the following results: 1983 is the first year for which any result appears, specifically one document; between 1983 and 1995 the number of documents per year varies between one and four, although four appear in only one year –1992. As we approach the year 2000, specifically after 1996, the number of documents per year increases substantially, exceeding thirty. As regards the journals which have published and disseminated research into SE between 2000 and 2008 (tables 1 and 2) the findings reveal the following. No journals specifically devoted to SE are found until the end of 2007 as mentioned in the introduction, as a result of which researchers have resorted to entrepreneurship, strategic management and even general management journals. This accounts for the widespread dispersion, meaning that, as can be seen from the two tables, no journal reaches 10% of the documents published and that in order to reach 50% around the first 30 journals need to be considered. The most prominent publication, or to put it another way, the journal which most seems to have embraced the emerging field of research into SE is the Journal of Business Venturing, which has published approximately 7% of all documents in this area of research for the period analyzed. However, it has not been the only one of the specialized entrepreneurship journals as, if we look at table 1 or table 2, the top four positions correspond to publications from that particular field of research. As mentioned in the first paragraph of the chapter, the field of entrepreneurship accounts for a greater number of specific journals than strategic management.

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Table 1. Journals-support for SE based on Scopus (January 2000 - March 2008) Scopus: Journals with most articles published for entrepre* and strateg* (2000-2008)

Num. of documents

% of participation

Journal of Business Venturing

49

7.12

Technovation

25

3.63

Journal of Small Business Management

20

2.91

Entrepreneurship and Regional Development

20

2.91

Strategic Management Journal

19

2.76

Research Policy

16

2.33

Organization Studies

15

2.18

Journal of Small Business and Enterprise Development

14

2.04

Harvard Business Review

12

1.74

Academy of Management Executive

12

1.74

Advances in Entrepreneurship Firm Emergence and Growth

12

1.74

Journal of International Business Studies

10

1.45

Management Decision

10

1.45

International Journal of Technology Management

10

1.45

International Journal of Entrepreneurial Behaviour and Research

10

1.45

International Journal of Entrepreneurship and Small Business

9

1.31

Strategic Direction

8

1.16

Journal of Business Research

8

1.16

European Management Journal

8

1.16

International Small Business Journal

8

1.16

International Entrepreneurship and Management Journal

7

1.02

Academy of Management Review

7

1.02

Long Range Planning

7

1.02

International Business Review

6

0.87

Journal of Business Strategy

6

0.87

Journal of Management Studies

6

0.87

Business Horizons

6

0.87

Journal of Management

6

0.87

Other Journals

342

49.71

TOTAL

688

100

Source: Own elaboration, based on data from Scopus (Search Date: end of March 2008)

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Table 2. Journals-support in SE, based on Web of Science (January 2000 - March 2008) Web of Science: Journals with most articles published for entrepre* and strateg* (2000-2008)

Num. of documents

% of participation

Journal of Business Venturing

52

6.87

Entrepreneurship Theory and Practice

41

5.42

Journal of Small Business Management

25

3.3

Entrepreneurship and Regional Development

21

2.77

Technovation

17

2.25

International Journal of Technology Management

15

1.98

International Small Business Journal

15

1.98

Organization Studies

15

1.98

Research Policy

15

1.98

Journal of Business Research

14

1.85

Strategic Management Journal

13

1.72

Journal of International Business Studies

12

1.58

Small Business Economics

10

1.32

Journal of Management Studies

9

1.19

International Business Review

8

1.06

Management Decision

8

1.06

Academy of Management Review

7

0.93

Journal of Business Ethics

7

0.93

Journal of Management

7

0.93

Journal of Product Innovation Management

7

0.93

Journal of World Business

7

0.93

Management Science

7

0.93

Academy of Management Journal

6

0.79

Harvard Business Review

6

0.79

International Marketing Review

6

0.79

Technological Forecasting and Social Change

6

0.79

Business History

6

0.79

Other Journals

395

52.18

TOTAL

757

100

Source: Own elaboration, based on data from Web of Science (Search Date: end of March 2008)

Strategic Entrepreneurship

63

The first four journals (tables 1 and 2), as we said specific to entrepreneurship, account for almost a fifth of all SE research dealt with here. With regard to presence, Scopus and Web of Science concur in the first four, the Journal of Business Venturing, Journal of Small Business Management and Entrepreneurship and Regional Development, differing in the remaining one: Technovation for Scopus, which does nevertheless appear in the list of journals in table 2, and Entrepreneurship Theory and Practice for Web of Science, which does not, however, form part of the list of publications in table 1. Seventeen journals appear in both lists (tables 1 and 2), of which according to Fried (2003), Boyd et al. (2005) and Linton (2006), two thirds are academic reference journals either in entrepreneurship, strategic management or in the two fields. With regard to the publications which differ between the lists, we will examine the tables 1 and 2 separately. In table 1, a quarter of these publications are reference journals in the fields referred to, the rest not being reference publications and practically all being specific to one or another of the fields considered. As regards table 2, half the publications which are different are academic reference journals in the field of entrepreneurship, strategic management or both, the remainder being neither reference journals nor specific to any of the fields considered here.

2nd Stage: Level of Recognition of Reference Journals in SE Based on the findings to emerge from the first stage of our research, we are now left with those journals which over the whole of the almost nine year period studied have published at least nine SE related papers (table 3). We are thus restricted to 21 journals, which may be defined as journals receptive to SE research and which have ultimately lent clear support to the integration between strategic management and entrepreneurship. Of these, 14 are amongst the academic reference publications in one of the fields cited, if we base our interpretation on the works of Fried (2003), Boyd et al. (2005) and Linton (2006). These twenty-one journals together with the new publication Strategic Entrepreneurship Journal henceforth provide the basis for integration. Our final goal is to ascertain the level of recognition achieved by these journals, for which purpose we have used the impact factor provided by the Journal Citation Reports database. Only five of the twenty-one journals clearly receptive to SE research have no impact factor (table 3). The rest are listed in table 3 in order of impact factor in 2007. Finally, we examine the evolution in the level of recognition obtained by these journals, specifically the twelve which had an impact factor of over one in 2007 (figure 2). Five of them (ETP, AME, ISBJ, SBE and TECH), which are reference journals in entrepreneurship and have an impact factor for only part of the period considered, have witnessed a growth in recognition, with Entrepreneurship Theory and Practice evidencing the highest level of recognition amongst the five.

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T.García-Merino and V. Santos-Álvarez Table 3. Reference journals in SE and level of recognition

JOURNALS

Impact Factor 2007

Strategic Management Journal (SMJ)

2.829

Journal of International Business Studies (JIBS)

2.283

Research Policy (RP)

2.211

Organization Studies (OS)

2.042

Journal of Management Studies (JMS)

1.926

Journal of Business Venturing (JBV)

1.875

Entrepreneurship Theory and Practice (ETP)

1.805

Academy of Management Executive (AME)

1.610

Harvard Business Review (HBR)

1.323

International Small Business Journal (ISBJ)

1.250

Small Business Economics (SBE)

1.168

Technovation (Tech)

1.004

Journal of Business Research

0.878

Entrepreneurship and Regional Development

0.872

Journal of Small Business Management

0.703

International Journal of Technology Management

0.356

Journal of Small Business and Enterprise Development

--

Advances in Entrepreneurship Firm Emergence and Growth

--

Management Decision

--

International Journal of Entrepreneurial Behaviour and Research

--

International Journal of Entrepreneurship and Small Business

--

Source: Own elaboration, based on data from Scopus, Web of Science and Journal Citation Reports.

With regard to the seven journals with an impact factor for all the period considered, five have witnessed a significant improvement in their recognition (JIBS, RP, OS, JMS and JBV), one has worsened (HBR), with SMJ remaining stable despite certain ups and downs. The latter is clearly the most widely recognized of all, although the five which have acquired greater prestige are now quite close in terms of recognition. Three of these five are reference journals in entrepreneurship, of which one is also a reference in strategic management. We may thus state that those journals linked to the field of entrepreneurship, which we have dealt with here, have worked hard in recent years to gain more widespread recognition.

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65

3,5

3 SMJ JIBS

2,5

RP OS JMS

2

JBV ETP

1,5

AME HBR ISBJ

1

SBE TECH

0,5

0 2000

2001

2002

2003

2004

2005

2006

2007

Source: Own elaboration, based on data from Journal Citation Reports. Figure 2. Evolution of the impact factor in SE reference journals.

CONCLUSION The last ten years have witnessed the emergence of what has come to be known as SE, at the meeting point between the fields of research into strategic management and entrepreneurship. The complementarities between the two fields, which extend into publications in the two areas, seem to have provided the basis for the integration demanded by certain authors. However, much remains to be studied and learnt about the field of SE. Integrating strategic management and entrepreneurship will help the latter find support in strategic management with a view to boosting its development and establishing the research paradigm which it has thus far lacked, strategic management in turn drawng on the rich and extensive research journals found in the field of entrepreneurship. Further, as posited by Katz (2003), this integration will facilitate the appearance of niche journals in SE. This is reflected in the recent creation of the journal Strategic Entrepreneurship Journal, which appeared at the end of 2007. SE literature appears to have taken its first and rather hesitant steps between 1983 and 1995, gaining momentum in the second half of the nineties. Since then it has made clear progress and it seems that a bright future awaits. The wide range of publications to appear over the last decade, many of which have been linked to strategic management or entrepreneurship, has made a decided contribution, with journals from the latter field playing a seemingly key role in providing support for research into SE.

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The more receptive nature of certain publications as regards SE research should lead them to be considered, at least in the near future, a reference for those choosing to conduct their research work in that area. This argument would seem to be strengthened even further thanks to the recognition which most of these journals currently enjoy and which is particularly evident in the case of those linked to entrepreneurship. Future progress in SE, which includes niche journals, will contribute to further establishing this reference framework which will help to support integration.

REFERENCES: Aldrich, H. (2000). Learning together: national differences in entrepreneurship research. In D.L. Sexton, and H. Landstrom (Eds.), Handbook of Entrepreneurship (pp. 5-25). Oxford: Blackwell Publishers. Aldrich, H.E. and Baker, T. (1997). Blinded by the cites?: Has there been progress in entrepreneurship research?. In D.L. Sexton, and R.W. Smilor (Eds.), Entrepreneurship 2000 (pp. 377-400). Chicago, IL:Upstart Publishing. Barney, J.B. and Arikan, A.M. (2001). The resource-based view: Origins and implications. In M.A. Hitt, R.F. Freeman, and J.S. Harrison (Eds.), Handbook of strategic management (pp. 124-188). Oxford: Blackwell Publishers. Bowman, E., Singh, H. and Thomas, H. (2002). The domain of strategic management: History and evolution. In A. Pettigrew, H. Thomas, and R. Whittington (Eds.), Handbook of strategy and management. London: Sage Publications. Boyd, B.K., Finkelstein, S. and Gove, S. (2005). How advanced is the strategy paradigm?: The role of particularism and universalism in shaping research outcomes. Strategic Management Journal, 26 (9), 841-854. Busenitz, L.W., West III, G.P., Shepherd, D., Nelson, T., Chandler, G.N. and Zacharakis, A. (2003). Entrepreneurship research in emergence: past trends and future directions. Journal of Management, 29 (3), 285-308. Evans, P. and Wurster, T.S. (1999). Getting real about virtual commerce. Harvard Business Review, 77 (6), 83-94. Fried, V.H. (2003). Defining a forum for entrepreneurship scholars. Journal of Business Venturing, 18 (1), 1-11. Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (2001). Strategic Entrepreneurship: Entrepreneurial strategies for wealth creation. Strategic Management Journal, 22 (6-7), 479-491. Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (2002). Strategic Entrepreneurship: Integrating entrepreneurial and strategic management perspectives. In M.A. Hitt, R.D. Ireland, S.M. Camp, and D.L. Sexton (Eds.), Strategic Entrepreneurship: Creating a new mindset (1-16). Oxford: Blackwell Publishers. Hoskisson, R., Hitt, M., Wan, W. and Yiu, D. (1999). Theory and research in strategic management: swings of a pendulum. Journal of Management, 25, 417-456. Ireland, R.D., Hitt, M.A., Camp, S.M. and Sexton, D.L. (2001). Integrating entrepreneurship and strategic management action to create firm wealth. Academy of Management Executive, 15 (1), 49-63.

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Ireland, R.D., Hitt, M.A. and Sirmon, D.G. (2003). A model of strategic entrepreneurship: The construct and its dimensions. Journal of Management, 29 (6), 963-989. Ireland, R.D., Webb, J.W. and Coombs, J.E. (2005). Theory and methodology in entrepreneurship research. Research Methodology in strategy and management, 2, 111141. Ireland, R.D. and Webb, J.W. (2007). Strategic entrepreneurship: creating competitive advantage through streams of innovation. Business Horizons, 50 (1), 49-59. Katz, J.A. (2003). The chronology and intellectual trajectory of American entrepreneurship education 1876-1999. Journal of Business Venturing, 18 (2), 283-300. Linton, J.D. (2006). Entrepreneurship today. Technovation, 26 (2), 139-141. MacMillan, I. (1991). Editor’s note: delineating a forum for entrepreneurship scholars. Journal of Business Venturing, 6 (2), 83-87. McGrath, R.G. and MacMillan I. (2000). The Entrepreneurial Mindset. Boston, MA: Harvard Business School Press. Meyer, G.D. and Heppard, K.A. (2000). Entrepreneurship as Strategy: Competing on the Entrepreneurial Edge. Thousand Oaks, CA: Sage. Park, S.H. and Gordon, M.E. (1996). Publication records and tenure decisions in the field of strategic management. Strategic Management Journal, 17, 109-128. Podsakoff, P., Mackenzie, S., Bachrach, D. and Podsakoff, N. (2005). The influence of management journals in the 1980s and 1990s. Strategic Management Journal, 26 (5), 473-488. Rumelt, R., Schendel, D. and Teece, D. (1994). Fundamental issues in strategy. In R. Rumelt, D. Schendel, and D. Teece (Eds.), Fundamental issues in strategy: A research agenda (947). Boston, MA: Harvard Business School Press. Shane, S. and Venkataraman, S. (2000). The promise of entrepreneurship as a field of research. Academy of Management Review, 25, 217-226. Venkataraman, S. and Sarasvathy, S.D. (2001). Strategy and entrepreneurship: outlines of an untold story. In M.A. Hitt, E. Freeman, and J.S. Harrison (Eds.), Handbook of Strategic Management. Oxford: Blackwell.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 5

NASCENCE TO NEWNESS: THE INFLUENCE OF INTERNAL AND EXTERNAL FACTORS ON THE LIKELIHOOD OF FIRST SALE* Linda F. Edelman† Business Policy and Strategy, Bentley College 175 Forest St., Waltham, MA 02452, USA

Tatiana S. Manolova‡ Business Policy and Strategy, Bentley College 175 Forest St., Waltham, MA 02452, USA

Candida G. Brush§ Paul T. Babson Chair in Entrepreneurship, Babson College Arthur M. Blank Center for Entrepreneurship, Wellesley, MA 02457, USA

ABSTRACT Each year between four and six percent of the working population in the United States take action to start a new venture, however, only about half of all potential business founders succeed in creating a new enterprise. Evolutionary theory attributes this high failure rate to the liability of newness in which young organizations do not have the internal and external resources needed to compete in their respective markets. Alternatively, the entrepreneurship literature suggests that it is individual perceptions and actions that determine early venture success. In both cases, a critical juncture for nascent entrepreneurs – those individuals who are engaged in the processes of starting a new venture – is the transition from nascence to newness, which culminates in the firm’s first sale. This paper explores the effects of internal organizational conditions as well as perceived external environmental circumstances on the likelihood of the fledgling firm †

Tel.: (718) 891-2530; Fax: (781) 891-2896; e-mail: [email protected] Tel.: (718) 891-2198; Fax: (781) 891-2896; e-mail: [email protected] § Tel (781) 239-5014; Fax (781) 239-4178; e-mail: [email protected] ‡

70

Linda F. Edelman, Tatiana S. Manolova and Candida G. Brush making its first sale. To do this we used a random sample of 473 nascent entrepreneurs located in the United States. Findings indicate that social capital and the commitment of the entrepreneur to the new venture significantly influence successful transition from nascence to newness. In addition, the perceived strength of competition and the level of product/service development are also significant predictors of the likelihood of first sale. Implications are discussed.

Keywords: Nascent entrepreneur, Event-history analysis, Evolutionary theory

INTRODUCTION Each year between four and six percent of the working population in the United States take action to start a new venture, while about 40 percent of American adults are self employed during their lifetime (Reynolds & White, 1997; Reynolds, 2000). However, only half of all potential business founders succeed in creating a new enterprise and fewer than one in ten of them are able to make their organizations grow (Duncan & Handler, 1994; Reynolds & White, 1997). At any given time, the number of surviving organizations is only but a handful of those that were actually started, as many new ventures fail or are abandoned early in their life (Katz & Gartner, 1988). Given this high failure rate, a better understanding of the factors leading to successful start-up would be of great interest. The transition from gestation to fledgling firm begins when someone thinking about starting a new business, alone or with others, actually engages in activities to further that objective (Reynolds, 1994). Activities such as writing a business plan, looking for facilities and equipment, investing money or organizing a start-up team may lead to successful founding, but in some cases, initial ideas are not realized because a firm cannot mobilize needed resources, or the entrepreneur’s intentions are misguided (Aldrich, 1999; Baum & Oliver, 1996; Reynolds & White, 1997). Evolutionary theory attributes high failure rates to the young firm’s liability of newness. Scholars note that selection processes favor firms that have highly reliable and reproducible organizational forms (Hannan & Freeman, 1984). Uninstitutionalized organizational forms are particularly vulnerable to liability of newness issues such as lack of internal organizational learning, low levels of internal and external coordination, and a need for external legitimation that then leads to the development of important webs of exchange (McKendrick & Carroll, 2001; Cohen & Levinthal, 1990; Hannan & Freeman, 1984; Hawley, 1950). While larger firms are better able to compete for critical resources, competition is most intense among similar sized organizations (Baum & Haverman, 1997; Carroll, 1984). In addition, resource scarcity may prevent firms from progressing from the formative stage to more routine operations (Swaminathan, 1996). Choices about location and products further affect the ability of firms to acquire resources (Baum & Haverman, 1997). Reproducibility of organizational forms over time leads to organizational inertia, which is favored by early selection processes (Stinchcombe, 1965). Therefore, organizational mortality rates tend to decrease by age (Hannan & Freeman, 1984). Complementing existing theory is a new paradigm that argues that entrepreneurs are engaged a process of opportunity recognition and exploitation (Shane & Venkataraman, 2000). This approach contends that the entrepreneur embodies key founding resources such as

Nascence to Newness

71

knowledge and experience. These resources, which are neither widely nor uniformly distributed, affect the extent to which some individuals recognize opportunities and search for relevant information (Venkataraman, 1997). Following successful opportunity recognition, the entrepreneur must acquire the necessary financial, physical, and organizational resources or effectively manage existing resource bases in order to exploit the newly discovered opportunity (Ucabasaran, Westhead & Wright, 2001). Some entrepreneurs will be more successful at exploiting opportunities than others, depending on their experience, search activities, and cognitive approaches. Likewise, environmental factors such as location and organizational legitimacy have implications for the opportunity recognition and exploitation processes (Davidsson, Low & Wright, 2001). While these two theoretical approaches to new venture success both emphasize the role of the entrepreneur in making initial choices, it is important to recognize that they differ with respect to their emphasis on environmental determinism. For example, while evolutionary theory accepts the role of the entrepreneur in making the initial location and product decisions (Baum & Haverman, 1997), it presumes that resources are located outside the boundaries of the firm. It is further assumed that throughout the start-up process, external factors such as market concentration (Carroll, 1984), or niche-overlap (McPherson, 1983; Baum & Singh, 1994) determine the likelihood of firm survival. This differs from Shane and Venkataraman’s (2000) perspective in that they focus on the influence of individual cognition in the opportunity recognition (discovery) and exploitation process. Notwithstanding the differences in these two approaches, the transition from nascence or gestation phase to new firm is not well understood and the influence of particular factors leading to survival of a fledgling firm has not been widely studied (Amburghey & Rao, 1999). In this paper, we seek to explore the impact of these two theoretical perspectives by examining internal and external factors that influence the likelihood of first sales. Our paper extends the previous research on organizational founding by examining both internal resource-based firm characteristics and external environmental factors as they predict the likelihood of the firm making its first sale. We test our hypotheses using event-history analysis, which can predict likelihood outcomes from a set of factors. Our overriding contention is that if nascent entrepreneurs can better understand the influence of internal conditions (i.e., new product development, social and human resources) and environmental circumstances (i.e., local environment), then they would be in a much better position to successfully manage the transition from nascence to newness.

NASCENCE TO NEWNESS The Blind-Variation-Selection-and-Retention (BVSR) paradigm from organization theory is useful in considering the process by which a venture moves from nascence to newness. BVSR is a selection model that is based on the “natural selection in biological evolution and the selective propagation of cultural forms” (Campbell, 1965:26). This paradigm suggests that a number of critical and often contradictory conditions must be met before organizations fit with their environment. The model has three principal components:

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Linda F. Edelman, Tatiana S. Manolova and Candida G. Brush 1. The occurrence of variations, that is “blind,” “random,” or “by chance,” happenings, but in all cases these are different or distinctive. 2. Consistent selection to include elimination of particular variations of organizations and organizational forms as well as the retention of others. 3. Mechanisms of preservation or retention, to include duplication and/or propagation of those variations that are retained (Campbell, 1965:27).

In the BVSR paradigm, it is predominantly external forces that influence the movement from variation to selection. For instance, environmental resource scarcity or munificence, competitive intensity, product choices or location decisions are found to influence survival (Swaminathan, 1996; Baum & Haveman, 1997). But, even though most research focuses on the macro level, recent work does suggest that the entrepreneur is an important source of variation in the emerging phases of organizational formation (Aldrich, 1999). The entrepreneur may consider many different ideas and possibilities in the disorganized and chaotic gestation process (Reynolds, 1994). He/she will seek to organize people, resources and actions that will shape the venture into a viable organization (Carter, et al, 2002). While variation captures the process of pre-organization, the next phase, selection is an event. In the selection phase external as well as internal forces determine which of the numerous ideas from nascence will evolve into viable organizational forms, and which other ideas will be discarded. Research shows the strength of selection forces at this phase in the organizational life-cycle in that only about half of all potential business founders succeed in transitioning from nascence to the actual creation of a new firm (Reynolds & White, 1997). The creation of a new firm, as evidenced by that firm making its first sale, is indicative of positive selection, and hence defines the end of the nascence phase. Finally, the third leg of the paradigm, retention, moves us beyond the nascence to newness transition and into more established organizational forms which are beyond the scope of this paper. In contrast, theory from the entrepreneurship literature argues that the entrepreneur engages in a process of discovery and opportunity exploitation. In the discovery process efforts are directed towards identifying new opportunities (Shane & Venkataraman, 2000). Discovery is a social and cognitive process where entrepreneurs search for information, and explore new ideas. Attributes such as the social capital of the entrepreneur, are particularly important in this early discovery period (Davidsson & Honig, 2003). The next phase, exploitation is characterized by efforts to obtain critical resources to take advantage of the newly discovered opportunity. Several factors may influence opportunity exploitation, such as trust, opportunity costs, specific skills and knowledge (Venkataraman & Shane, 2000). Evidence of successful opportunity exploitation is marked by various indicators including the emergence of a new organization, the establishment of routines and procedures, the sale of products or the development of prototypes (Davidsson & Honig, 2003; Gartner, 2001; Reynolds & White, 1997). Therefore, a firm moving from variation to selection, or discovery to exploitation is essentially making a transition from nascence to newness. From the BVSR perspective, it is the external resources, competition and other forces that have a major influence on the survival of the firm. From the entrepreneurial perspective, it is the entrepreneur’s social contacts, perceptions and ability to process information that provide the impetus for success. We combine elements from both perspectives in our empirical investigation of this transition, and examine them in terms of a defining event, the fledging firm’s first sale.

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Nascence and the Likelihood of First Sales A key event marking the end of the transition from nascence to newness is the firm’s first sale. First sale is a major milestone for a new firm. Not only does the first sale have the effect of generating early cash which can lead to subsequent financial independence, the firm’s first sale helps it to gain visibility, to increase its organizational legitimacy in the eyes of its customers, to begin to gain market share, and to increase the likelihood of continued survival (Schoonhoven, Eisenhardt & Lyman, 1990). First sale signals the nascent firm’s market entry as an operational new venture, and thus marks the end of the discovery phase and the beginning of opportunity exploitation (Davidsson & Honig, 2003; Reynolds & Miller, 1992). To date, little empirical work explores the factors predicting the likelihood of first sales. At the population level, one set of studies has primarily focused on the rates of births and deaths of new organizations in populations of firms (Carroll & Delacroix, 1982; Freeman, Carroll & Hannan, 1983; Hannan & Carroll, 1992). Alternatively, at the firm level, other scholars have examined the time between founding and first shipment for firms in the semiconductor industry (Schoonhoven et al, 1990), finding that the greater the young firm’s level of innovation, the longer it took the firm to make its first sale. Swaminathan (1996) explored environmental conditions and mortality rates at founding. He found that adverse founding conditions increase mortality, but if these conditions can be overcome, firms are better positioned to survive in the long run. Romanelli, (1989) examined the environmental resources, competitive conditions, and the corresponding firm-level strategies that are used by new firms to increase their likelihood of survival. She found that fledgling organizations need to tailor their competitive strategies to fit their environmental conditions. However, as Amburghey and Rao (1996:1272-1273) note, “One limitation of ecological research on foundings is that it understates organizational diversity because it includes only the outcomes of successful founding attempts and overlooks unsuccessful founding attempts. Drawing upon the entrepreneurship literature, many studies show the relationship between human capital (e.g., education and experience), entrepreneurship and success (Reynolds, 1997; Gimeno, et al, 1997) finding that generally there is a positive relationship between human capital and entrepreneurial activity. Davidsson and Honig (2003) examined the effect of human and social capital on initiating and advancing start-up activities in a sample of 380 Swedish nascent entrepreneurs. They found that both bonding and bridging social capital were significant positive predictors of the likelihood of a first sale, while human capital was only weakly connected with carrying the start-up process. In another study of Jamaican entrepreneurs Honig (1998) found that human capital influenced profitability in some cases as did social capital, but there were important variations across types of business (self employed, vs. those businesses with employees) and technology type. The next section develops hypotheses about influences on likelihood of first sale.

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FACTORS INFLUENCING FIRST SALE Human Capital and Achieved Attributes Human capital is the knowledge gained through formal education and work experience, as well as the practical learning gained through informal training or vocational experiences. Individuals with higher levels of human capital may have more knowledge that increases their ability to perceive opportunities (Davidsson & Honig, 2003). In addition, higher levels of human capital increase cognitive activities that lead to greater efficiency and productivity (Becker, 1964). Human capital is an important initial resource endowment of a nascent firm and can be a predictor of new firm performance (Cooper & Gimeno-Gascon, 1992). We measure the entrepreneur’s human capital by the degree of development of achieved attributes. . Achieved attributes refer to the stored knowledge and skill of individuals (Becker, 1964). Studies examining levels of education are inconclusive, with some finding those entrepreneurs with more education have lower performing ventures, while others finding that education level is positively associated with firm growth (Cooper & Gimeno-Gascon, 1992). More education can translate in to higher profits (Honig, 1998), but research on women entrepreneurs finds graduate studies are positively correlated with survival rather than growth (Brush & Hisrich, 1988). In contrast, a study of Swedish nascent entrepreneurs found that formal education was more likely to predict success in start-up behaviors but less likely to lead to success in achieving first sales (Davidsson & Honig, 2003). Similarly, research examining previous work experience is also inconclusive. While some studies indicate that previous experience in the area of the new venture is positively related to growth (Westhead, 1995), others show extensive work experience may not be necessary for success because achieved attributes may be unrelated to the ability to create sales, or effectively persuade someone to purchase a product (Bhide, 2000). Chandler and Jansen (1992) showed that experience was positively related to performance, while Chandler and Hanks (1998) found that in entrepreneurial firms, human capital (measured as experience) could be substituted for financial capital. Despite the inconclusive findings, logic suggests that entrepreneurs with skills and knowledge derived from higher education and experience will be more likely to produce first sale. Formally, H1 Higher achieved attributes will increase the likelihood of first sale.

Perception of the Local Environment The entrepreneur’s perception of environmental conditions has a significant impact on the approach taken by the entrepreneur to pursue an opportunity. Entrepreneurs see the environment via their own selective perception and their assessment of resources, competitive environmental dimensions, and even their own capabilities, are based on these perceptions (Shaver & Scott, 1991). Likewise, some founders are more likely to perceive less competition, which may direct their strategy in a different direction than an entrepreneur with a less positive assessment (Dess, Lumpkin & Covin, 1997). While over-optimism might result

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in seeing prospects more favorably than they really are, or encourage inflated views of a venture’s prospects, optimists are more energetic and resilient when dealing with start-up hurdles (Mehta & Cooper, 2000). Therefore, H2 Positive perceptions of the local environmental conditions will increase the likelihood of first sale. Social Capital. Social capital is defined as “the sum of the resources, actual or virtual, that accrue to an individual or group by virtue of possessing a durable network of more or less institutionalized relationships of mutual acquaintance and recognition” (Bourdieu & Wacquant, 1992:119). Unlike financial or human capital, which can be possessed by a large number of people, social capital is unique. It resides in the structure of relationships between or among actors making it a resource that does not lie with one individual, but instead is jointly owned (Coleman, 1988; Putnam, 1995). Structural social capital is embedded in the social networks that firms use to acquire resources (Nahapiet & Ghoshal 1998). In entrepreneurial firms, social networks tend to be informal, and are important for establishing linkages to potential customers, suppliers, and lending institutions (Birley, 1987). In addition, social networks that include extended family or community based relationships are likely to amplify the effects of education, experience and financial capital - facilitating the most advantageous accumulation and utilization of resources (Honig, 2000). In addition, Aldrich (1999) argues that nascent entrepreneurs are more likely to be successful when they are embedded in large social networks with persons involved in business-creating activities. Finally, Davidsson and Honig (2003) found that weak ties (also called bridging social capital) were important determinants of first sales. Therefore, H3 Social capital will increase the likelihood of first sale.

Entrepreneurial Commitment Entrepreneurial commitment is an indicator of how the founder approaches the business (Vesper, 1990). Commitment reflects emotional, intellectual, and physical energy employed to help a new venture reach its objectives (Erikson, 2002). A nascent entrepreneur’s ability to see a venture through to successful start-up is influenced by the entrepreneurial commitment. Commitment can be enhanced by the encouragement of others, social interactions, or a strong sense of personal capability. Uncommitted entrepreneurs may be tentative, temporarily dedicated, and operate in an opportunistic fashion that may lead to uncertainty of outcomes or reputational disadvantages (Bird, 1989). H4 Entrepreneurial commitment will increase the likelihood of first sale.

Level of Product/Service Development Central to the creation of an organization is the completion of a series of activities reflecting that the organization is becoming a reality (Carter, et al, 1996). Those nascent

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entrepreneurs that undertake more activities and pursue them more intensely are more likely to generate sales and positive cash flow. Similarly, resource providers will look for proof that the new venture is more than a fiction, while customers will be reluctant to spend money on something that is less proven (Aldrich & Martinez, 2001). It has been argued that product decisions are key decisions in the process of organizational founding (Baum & Haveman, 1997). Activities such as developing the first product model or the first prototype of a new product are signals to the greater community that the fledgling firm is likely to become a viable entity (Reynolds, 1994). Formally, H5 Advanced product/service development will increase the likelihood of first sale.

METHODOLOGY Sources of Data The data utilized for the current investigation are drawn from the 1998 phone interviews of nascent entrepreneurs, a component of the ongoing National Panel Study of Entrepreneurial Dynamics (see Reynolds, 2000; and Carter, Gartner, Shaver & Gatewood, 2002, for detailed methodology and background materials on the project). The goal of the longitudinal study is to gain an introspective understanding of how nascent entrepreneurs create new businesses and what activities and behaviors they engage in during the process of enterprise creation. . Nascent entrepreneurs were defined as individuals involved in attempting to start a new business within the past 12 months on their own (i.e., autonomous startups) as opposed to those doing so with sponsorship from existing firms. Further, to qualify for inclusion in the sample, the effort had to have still been in the startup or gestation phase at the time of initial contact (i.e., established infant firms were not eligible). This screen eliminated 27% of the initial pool of autonomous startups. The nascent entrepreneurs were identified from an earlier representative large scale screening of national population of adults (18 years or older) residing in the 48 contiguous states of the United States of America. The initial sample for the screening was 31,261 individuals. The nascent entrepreneur respondents, who were given a monetary inducement of $25 for survey completion, were asked a series of questions about the developmental details of their business in interviews that lasted between 35 to 90 minutes (60 minutes was average). Trained phone interviewers affiliated with the University of Wisconsin Survey Research Laboratory conducted the surveys. 1261 individuals completed the telephone interviews, which was comprised of 446 nascent entrepreneurs from the original sample, 223 women from a National Science Foundation (NSF) sponsored over-sample, 161 from a NSF sponsored over-sample of minorities, and 431 in a comparison group. The usable sample was reduced by the requirement that the respondent gender be consistently recorded across all stages of data collection. Following the classification scheme developed by Shaver, Carter, Gartner, and Reynolds (2001), the sample used for the present study includes fully autonomous nascent entrepreneurs who have not received a positive cash flow from their new businesses for more than three months (Shaver et al, 2001), which yielded a sample size of n

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= 5741, for which we report descriptive statistics and correlations. Because of missing data on the origin of the scale (time nascent entrepreneur first thought of the new venture) as well as timing of the first sale, the sample was reduced to a usable sample size of n = 473, for which we report the results of the Cox regression function. Table 1. Descriptive Statistics (n = 574) Variable Dependent Variable Received income from first sale Time to market (months) Independent Variables Human Capital Highest degree of education attained Log of paid full time work experience (years) Perceptions of Local Environment Strength of economy Strength of competition

Mean S.D.

Min.

Max. N

0.41

0.49

0.00

1.00

36.41

54.33

574 Nominal: 1 = yes (237), 0 = no (337)* -54.00 469.00 535 Interval

4.70

1.95

0.00

9.00

568 Ordinal: 0 = no; 9 = doctorate

1.16

0.34

0.00

1.78

559 Interval

2.38 1.95

0.72 0.83

1.00 0.00

3.00 3.00

558 Ordinal: 1 = weaker, 3 = stronger 568 Ordinal: 0 = no competition, 3 = strong

0.15

0.36

0.00

1.00

0.62

0.48

0.00

1.00

569 Nominal: 1 = yes (89), 0 = no (480) 571 Nominal: 1 = yes (356), 0 = no (215)

0.86

0.34

0.00

1.00

0.28

0.45

0.00

1.00

0.54

0.49

0.00

1.00

Asked for funds

0.21

0.41

0.00

1.00

Invested own money

0.88

0.33

0.00

1.00

Prepared business plan

0.56

0.49

0.00

1.00

1.00

5.00

0.00

1.00

Social Capital Contacted assistance programs Asked for help Commitment Gathered information about mkt oppty Work for venture 35+ hours/week Organized start-up team

New Product Development Stage of development of new 3.86 1.15 product Submitted or preparing a 0.29 0.45 patent submission * Numbers in parentheses are frequencies.

1

Scale

573 Nominal: 1 = yes (495), 0 = no ( 78) 573 Nominal: 1 = yes (160), 0 = no (413) 572 Nominal: 1 = yes (309), 0 = no (263) 572 Nominal: 1 = yes (124), 0 = no (448) 573 Nominal: 1 = yes (503), 0 = no ( 70) 571 Nominal: 1 = yes (320), 0 = no (251) 560 Ordinal: 1 = no work, 5 = ready for sale 573 Nominal: 1 = yes (170), 0 = no (403)

As the data on the minority over sample were not made available at the time of performing this analysis, the only over sampling included in the present data set was the over sampling for women.

Table 2. Correlation Matrix (n=574)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Variable Received income from first sale Time to market (months) Highest degree of education attained Log of paid full time work experience (years) Strength of economy Strength of competition Contacted assistance programs Asked for help Gathered information about market opportunity Work for venture 35+ hours/week Organized start-up team Asked for funds Invested own money Prepared business plan Stage of development of new product Submitted or preparing a patent submission

1 --

2

3

4

5

6

7

--.055 -.081 .027 .040

--.048 -.000 .116 .055 .073

8

9

-.106

--

10

11

12

13

14

15

16

-.129 -.048 .042

--

.093

.103

.094

--

-.042 -.007 .070 .134 .054

-.053 .090 .064 -.013 -.011

.017 -.008 .192 .084 .086

.003 -.123 .040 -.050 .072

.275

.030

-.023 .058

-.046 .026

.043

.042

.043

--

-.036 .126 .173 .051 .460

-.068 -.025 .031 -.010 -.032

-.049 .056 .048 .022 .075

-.018 -.001 .060 .031 .120

-.012 .014 -.059 .018 -.009

-.016 .004 .114 .034 -.017

.041 .114 .012 .051 .068

.009 .077 .022 .029 .026

.104 .061 .054 .213 .106

-.015 .185 .090 .149 .215

-.194 -.088 .207 -.040

--.092 -.216 .046 .112 .155

-.079

--

.017

-.060 .028

.102

-.005 .063

.024

.039

.044

.001

.060

-.085 --

-.010 .100

Note: All correlations above .08 significant at p< .05; all correlations above .12 significant at p<.01

.067

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Measures Both nominal (i.e., dichotomous and polychotomous) as well as continuous (ordinal and interval) operational measures are utilized in this study. Achieved Attributes were measured by two variables: the log of the respondent’s years of full time work experience, and the highest level of the respondent’s educational attainment (Becker, 1964). Both measures were self-reported. Following previous research, we took the log of the respondent’s full time work experience to account for its decreasing marginal benefit (Pennings et al., 1998). Environmental Perceptions were also measured by two variables: the nascent entrepreneur’s perception of the strength of the local economy and perception of the strength of competition (Chandler & Hanks, 1994; Brush & Chaganti, 1998) Social Capital was similarly measured with two variables: the nascent entrepreneur’s access to assistance programs and support from people outside of the nascent venture, following Davidsson & Honig (2003). These two measures were binary. Commitment to the new venture was measured by six binary variables. Nascent entrepreneurs were asked to report whether or not they had gathered information on market opportunities, started to work thirty-five or more hours a week for the new venture, organized a start-up team, asked for funds, invested their own money in the new venture, or prepared a business plan (Brush & Chaganti, 1998). New product development was measured by two variables (Reynolds & White, 1997; Davidson & Honig, 2002). The first variable measured the stage of new product development on a five-point scale. In addition, the second (binary) variable measured whether or not the nascent entrepreneur had submitted or was planning to submit any patent applications. Descriptive statistics are provided in Table 1, while Table 2 presents the correlation matrix of all variables used in the analysis.

RESULTS Analysis To estimate a model of factors that influence the likelihood of a firm making a first sale, we used the statistical technique of failure time analysis, more popularly known as an event history approach. By taking into consideration both the occurrence and the timing of an event while simultaneously estimating the effects of exogenous factors, event history analyses offers two advantages over multiple regression for the study of longitudinal data. First, it handles censored data, or events that the subjects under observation have not experienced before the end of the observation period. For example, 58% of the nascent ventures in our sample had not made a sale until the end of the study. Previous research shows that exclusion of such a large number of censored cases from the analysis can produce substantially biased estimates (Tuma & Hannan, 1978; Vermunt, 1996). Second, event history analysis effectively handles life-cycle dependent variable measures. The endogenous variable or “time to event” is specified not in real time, but in time forgone since a triggering event and is often referred to as “waiting”, “failure”, or “spell” time. In our study, the occurrence of the nascent venture’s first sale is life-cycle dependent, and so is more meaningfully compared in terms of

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the year and month in the life of the nascent venture than the historical calendar time. Following similar empirical research (Romanelli, 1989; Schoonhoven et al., 1990; Khavul, 2001), this study uses the Cox proportional hazards model to estimate the likelihood of an event occurring at any point in the life of the nascent venture, given that the event has not occurred until that point. Analyses were performed using the SURVIVAL procedure in SPSS. The general form of the simple one predictor Cox regression is as follows: h(t) = [ho(t)] e(BX), where X is the independent variable (covariate), B is the regression coefficient and t indicates the time to the event occurring. Here ho(t) is the baseline hazard function which estimates the expected risk of an event occurring without the presence of the covariate; while e(BX) is the hazard ratio which indicates the shift of the baseline function, or the increase or decrease in the risk of the event occurring when the covariate is included. The Cox regression is a semi parametric partial likelihood estimator, which does not take into consideration the change of the hazard rate over time (Allison, 1984). This means, for example, that the likelihood of making a first sale may increase or decrease with time. Given that the companies of interest to the study are all at a similar nascent stage, we are less concerned with the hazard’s time dependence. The Cox proportional hazard model is, therefore, an appropriate analytical tool (Bergh, 1993). A critical question in modeling the survival regression function was the choice of a meaningful origin of the time scale. Previous empirical studies on new venture survival and performance have used the “new venture’s founding date” as “time zero” (Freeman et al., 1983; Schoonhoven, et al., 1990; Khavul, 2000). The sample of interest to our study, however, was a sample of nascent ventures; and many of the activities of interest to the study were pre-founding activities. We chose the time the nascent entrepreneur first thought of the new venture as the origin of our time scale. The initial thinking of the new venture is a meaningful event because it is related to intentional actions to get into business (Carter, et al, 1996). Empirical evidence on nascent entrepreneurs indicates that thinking of the new venture is a critical triggering event in the nascence to newness process (Reynolds & White, 1997). The “spell” time is the number of months elapsed from first thinking of the new venture to the first income received from a sale. For the right-censored firms (e.g., those that have not made a sale until the end of the observation period), we recorded the “waiting period” or the minimum time for which we know no event occurred.1 The waiting period, or “failure time,” “qualified by the knowledge of whether or not a firm experienced an event” (Schoonhoven et al., 1990:195), became the dependent variable in the failure time analysis.

Hypothesis Testing Following Delacroix, Swaminathan, and Solt (1989), and Schoonhoven, et al. (1990), we used hierarchically nested models to compare the contribution of blocks of covariates to the overall fit of the data. As a set of variables is added to the model, their contribution to the improvement of the model is reflected in a significant increase in the model fit, as measured by a significant change of the likelihood (-2 LL) ratio. Individual estimated coefficients 1

A common concern in survival analysis is the fact that a firm may fail before it had experienced the event of interest. Given the fact that the population of interest in this study is still in the transition period from nascency to newness, this failure risk is not observed in the present study. It will be documented in the PSED project follow up studies (Reynolds, 2000).

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(B1…Bn) are interpreted as the predicted change in the log of the hazard for a unit change in the predictor covariate, while the overall chi-square (χ2) test checks the probability that all regression coefficients are equal to zero (Allison, 1984). The entry sequence in our modeling approach was based on the following logic. We first examined the effect of the initial resource endowments of the nascent venture, the human and social entrepreneurial capital. The choice of human and social capital as critical initial resource endowments follows a long lineage of research that emphasizes the role of the entrepreneur in new venture creation (Cooper & Gimeno-Gascon, 1992; Shaver & Scott, 1991). After testing for the effect of the entrepreneur’s achieved attributes (Model 1), we added the effects of the perceptions of the local environment (Model 2), and the entrepreneurial social capital (Model 3). We then examined the role of the nascent entrepreneur’s commitment to the new venture (Model 4). Finally, we tested for the effect of new product development (Model 5). Table 3 contains the Cox proportional hazard estimates of the five models predicting the likelihood of a first sale. Model 1 introduced the entrepreneur’s achieved attributes. This model offered no significant improvements over the baseline model; therefore, our Hypothesis H1 was not supported. This indicates neither the work experience of the nascent entrepreneur nor the educational level attained increase significantly the likelihood of making a first sale. Model 2 added the effect of environmental perceptions of the strength of the local economy and the strength of competition. The model did not achieve a good fit with the data and offered only a marginal improvement (p<.1) over the preceding step. The effect of one of the individual predictors approached significance at p<.1. More specifically, the likelihood of making a first sale decreased with the perceived strength of competition. Taken together, these results lend partial support to Hypothesis H2. Model 3 added the effect of the entrepreneur’s social capital. It did not achieve a good fit with the data and demonstrated only a marginal improvement (p<.1) over the previous model. Turning to the individual predictors in Model 3, we determined that, as expected, those entrepreneurs who asked for help people outside the nascent venture were significantly more likely to make a first sale relative to those who did not. Therefore Hypothesis H3 received partial support. Model 4 added the effect of entrepreneurial commitment to the new venture. This model achieved good fit with the data (p<.000) and a significant improvement over the preceding block of covariates (-2LL = 26.694 (6 d.f.), p<.000). Turning to the individual predictor effects, we established that entrepreneurs who worked 35+ hours for the new venture were more likely to make a first sale relative to those who did not. In addition, nascent entrepreneurs who asked for funds or invested their own money into the venture were marginally (at p<.1) more likely to make a sale relative to those who did not. The last two effects were not stable in the presence of other covariates, however (See Model 5); therefore their impact should be interpreted with caution. Overall, Model 4 provided support for our Hypothesis H4. Finally, Model 5 added the effect of the new product development. It presented a highly significant fit with the data (p = .000) and a significant improvement over the preceding block (the change of the –2LL from the previous block was 73.806 with 2 d.f., p <.000). Turning to the individual effects, we observed that the likelihood of making a first sale was not affected by patent activity. New product development mattered, however - the sequential progression from one stage of new product development to the next increased the likelihood of making a

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first sale. In addition, the effect of establishment of a start up team approached significance in Model 5. Because of its insignificant effect in the previous model, however, its impact should be interpreted with caution. Overall, Model 5 provides support for Hypothesis H5. Table 3. Cox Regression Estimates on Likelihood of First Sales (n = 473) Variable Beta (S.E.) Human Capital Highest degree of education attained Log of paid full time work experience (years) Perceptions of Local Environment Strength of economy Strength of competition

Model 1

Model 2

Model 3

Model 4

Model 5

.0019(.0374)

.0045(.0375)

-.0047(.0388) -.0165(.0387) -.0204(.0394)

.1094(.2311)

.0837(.2336)

.0763(.2332)

-.0605(.2375) -.1759(.2329)

-.0053(.1001) -.0081(.0998) -.0337(.1012) .0182(.1037) -.1588(.0879) † -.1536(.0880) † -.1623(.0874) † -.1214(.0884) †

Social Capital Contacted assistance .0136(.1934) -.1135(.1977) -.1412(.1996) programs Asked for help .3552(.1637)* .2989(.1672) † .3434(.1684)* Commitment Gathered information .1820(.2888) .1120(.2973) about market opportunity Work for venture 35+ .6375(.1616)*** .6268(.1636)*** hours/week Organized start-up .1515(.1585) .2560(.1632) † team Asked for funds .2803(.1812) † .1038(.1875) Invested own money .4370(.3222) † .3300(.3240) Prepared business plan -.0946(.1712) -.0891(.1754) New Product Development Stage of development .6982(.0952)*** of new product Submitted or preparing -.1048(.1713) a patent submission Regression Function: Chi-square(df) .232(2) 3.513(4) 8.395(6) 37.625(12)*** 100.330(14)*** Change (-2LL) (df) .236(2) 5.015(2) † 26.694(6)*** 73.806(2)*** 3.242(2) † † The number of cases entered in the regression was reduced because of the low response counts on the timing questions, as well as the procedure’s listwise deletion of cases with missing data.

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Individual Predictor Variable Effects We retained Model 5 as our full model in that it has the best fit with the data. This is due to its high statistical significance as well as the stability of individual regression effects, in terms of both significance and directionality of impact, even in the presence of additional covariates. We then turned to examining individual predictor variable effects. Comparing the models with significant improvement over the preceding block of covariates, (Models 2-5), we observed that four individual predictor variables preserve their significance and directionality of impact across the four models. We examined the effect of individual predictor variables by taking the antilogs, or exponentiating, the coefficients. Computing 100 [exp(b)-1] gives the percentage change in the hazard with each unit change in the explanatory variable. For dichotomous variables, the computation provides the relative hazard for the groups corresponding to values of the dummy variable (Allison, 1984). Exponentiating the variable coefficients in Model 5, we determined that: • • • •

each degree of perceived strength of competition decreased the likelihood of making a first sale by 11.43% those entrepreneurs who asked for help anyone outside the new venture were 40.97% more likely to make a first sale relative to those who did not; those entrepreneurs who spent 35+ hours a week working for the nascent venture were 87.16% more likely to make a first sale relative to those who did not; each transition from a lower to a higher stage of new product or service development increased the likelihood of making a first sale by 101.01%.

DISCUSSION Our original intent was to explore which internal factors and external circumstances predicted the transition of a fledgling venture from nascence to newness, as defined by the venture’s first sale. We were particularly interested in the effect of initial resource endowments, such as the entrepreneur’s achieved attributes, perceptions of the local environment, and structural social capital, as well the commitment to the new venture and the degree of new product development. Our analysis led to five principal findings, which we discuss below.

The Puzzle of Human Capital Our findings suggest the degree of development of the entrepreneur’s achieved attributes was not associated with the nascent venture’s likelihood of making a first sale. The lack of significance of predicting first sale is consistent with findings about nascent entrepreneurs as shown in recent work by Davidsson and Honig (2003). This finding stands in contrast to received wisdom and prescriptions suggesting that basic human capital, or the skills and experience of the entrepreneur, are related to firm success at start-up. One possible

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explanation for this is that education and experience are more highly correlated with aspects involved in managing a new venture, once it is already established. In other words, having a business school education would help an entrepreneur to manage financial and/or marketing tasks or that an engineering degree would enhance a new venture’s R & D capability leading to better firm performance (Cooper & Gimeno-Gascon, 1992). But our study suggests that for nascent entrepreneurs who are in the process of organizing for start-up, basic education and experience are less influential in creating organizational routines, and establishing firm boundaries. The chaotic and disorgnaized nature of the start-up process requires experimentation and improvisation, which are a different set of human capital attributes. Therefore, our research suggests that years of formal education and work experience in the industry are less influential in the nascence phase of a venture’s development. However, our sample consists of primarily consumer service and retail firms, hence the influence of education and experience necessary to achieve first sale might be less specialized than for a high technology or manufacturing firm.

Environmental Constraints on the Nascence-to-Newness Transition We established that the perceptions of the local environment significantly affected the likelihood of first sale. More specifically, the stronger the perceived intensity of competition, the lower the likelihood of the nascent venture making its first sale. Our finding supports Baum and Haveman’s (1997:308) contention that entrepreneurs rely on social comparisons as a basis to assess their firms’ capabilities and identify rivals. It appears that the domains of competition are reference points around which entrepreneurs conceptualize their firm’s competitive positions compared to those of potential rivals. These results also support Shane and Venkatraman (2000) who posit that the decision to exploit an entrepreneurial opportunity is influenced by individual differences in perceptions and the notion that the entrepreneurial process is localized (Romanelli & Schoonhoven, 2001). Perceived strength of local competition may be of particular importance given the nature of our sample, which is generalizable to the entire population of nascent entrepreneurs. The industry distribution of the sample shows about a third (30.8%) of the nascent ventures were in restaurant and retail, almost half (44.5%) were in consumer services, and 6% were in construction and agriculture. Overall, over 80% of the contemplated new businesses were in industries characterized by intense geographically localized competition (Baum & Mezias, 1992). At start-up, these entrepreneurs moving forward given strong local rivalry, would face more competition for resources, and less differentiation among similar sized firms. Naturally, the greater the perceived intensity of local competition, the more hesitant the nascent entrepreneur would be to enter the competitive arena.

The Role of Formal versus Informal Support Networks Our findings showed that social capital was an important determinant of likelihood of first sales. In particular, structural capital (asking for help) appears to be more important than formal support infrastructure (contacting assistance programs). This result is consistent with Davidsson and Honig (2003) who found that bridging social capital, such as being a member

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of a local business organization, was a significant and strong predictor of first sales while attending a class on small business was not. The result that informal support networks (i.e., people helping with the new venture) were significantly more important in increasing the likelihood of a first sale compared to formal support infrastructure (assistance programs) is thought provoking. Institutional theorists stress the important role of formal institutions in establishing a new organizational form, by providing working rules, governance structures, and legitimacy (Scott, 1995). These institutions are viewed as providing social order and reducing uncertainty (McKendrick & Carroll, 2001). This suggests that organizations that provide small business training should concentrate less on the program’s content such as how to start a business or do a particular activity and more on helping small business people build networks and contacts.

From Opportunity Recognition to Opportunity Exploitation The level of entrepreneurial commitment was significant in predicting the likelihood of first sale. This is consistent with Carter, et al (1996) who found that those entrepreneurs taking action were more likely to succeed in start-up. In other words, making a dedicated effort to carry forth the idea, or actively manage the transition from nascence to newness, makes a difference. Our study indicates that the more hours that were put into a venture, the more likely it was to produce a first sale. However, we were quite surprised to find that asking for funds, or investing one’s own money were not significant across all models. This implies that while some aspects of human capital and the role of the entrepreneur are of critical importance, it takes a variety of different activities to move an idea from conception to reality. Finally, with respect to commitment, gathering more information and perception of favorable market opportunity were not significant with respect to predicting first sale. This is contrary to the theoretical arguments set forth by Shane and Venkataraman (2000) who argue that opportunity recognition and relevant information search and are central to opportunity exploitation. There are two possible explanations, first the ventures in this inquiry are at the initial discovery stage and hence those activities that are related to opportunity exploitation are not relevant at this point. Alternatively, the fledgling firms in this study are predominantly low-technology businesses operating in the service or retail sectors. Therefore, the information needed to launch these new ventures is readily available rendering the search process less important.

Product Decisions Are Key Decisions The stage of development of the fledgling firm’s product significantly predicted the likelihood of the firm making its first sale. This finding supports the life cycle literature that argues for “formalization” of the product/service (Churchill & Lewis, 1983), as well as Baum and Haverman (1997) who argue that product decisions are key decisions in the process of organizational founding. Following evolutionary theory, this finding suggests that firms that are further developed with respect to the product development cycle are more likely to be selected to remain in the population.

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Taken together, our five main findings suggest that action leads to success in the transition from nascence to newness (Weick, 1969). By this we mean that it is less who you are, from a human capital perspective, that matters when launching a new venture, rather, it is what you do, coupled with who you know that predicts success. Our findings suggest that entrepreneurs that are more likely to make a first sale are those who are committed to their new companies, take the actions towards starting a new venture, and utilize their social capital by asking for outside help even when they perceive strong competition. Our research links our two theoretical perspectives. The significance of the variables full time work and invested own money suggests that opportunity discovery and exploitation are active processes (Shane & Venkatraman, 2000). The significance of social capital and asking for money follows Hannan and Freeman’s (1984) argument that the entrepreneur’s network is critical for survival. Taken together, these two perspectives suggest that entrepreneurship is an active process in which entrepreneurs must not only work hard, but also work smart by leveraging all available resources if they are going to make a first sale.

RESEARCH LIMITATIONS Origin of the Time Scale Choosing a meaningful origin of the time scale for event history analysis is challenging (Allison, 1984). We chose the time the entrepreneur first thought of the new venture as the origin of our time scale. This decision was based on the idea that the first entrepreneurial activity, in the gestation period, it the entrepreneur thinking about the business that is to be created. However, despite the inherent logic of using first thought of a new venture, 1.9% of our sample reported that they made their first sale and then started thinking about creating a new venture. Given the origin of our time scale, our results and ensuing conclusions are generalizable to the majority of entrepreneurs who have followed a more or less deliberate path from the initial idea to the first sale. Our study suggests that the majority of nascent entrepreneurs think about starting a business first and act upon that idea later. However, future research, building off Reynolds and Miller, (1992), should look in more depth as to whether there is a universal triggering event for entrepreneurship that can be a meaningful origin for all event history time scales. This would allow the actions of those entrepreneurs who make a sale before thinking about starting a business to be included in the analysis. Indeed, a comparison study of these two types of start-up profiles might render very different cognitive and resource profiles, which could lead to different start-up experiences.

Binary Measures About half of the measures utilized in the present study were binary. While binary measures give an idea of the relative hazard rate across subgroups of the population, more refined measures could allow future researchers to evaluate the merits of developing a particular resource relative to the chance of making a first sale. For example, given the

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nascent entrepreneurs’ limited resources, how would a unit incremental investment in patent activity compare to a unit incremental investment in social capital or legitimacy building activities in view of improving the chances of making a first sale? Providing some guidance in these matters would have important practical implications for nascent entrepreneurs.

IMPLICATIONS AND CONCLUSIONS This paper explored a critical juncture for nascent entrepreneurs - the transition from nascence to newness. We examined the effects of internal organizational conditions and external environmental circumstances on the likelihood of the fledgling firm making its first sale, in a random sample of 473 nascent entrepreneurs. Drawing from evolutionary theory and from the entrepreneurial theory of opportunity discovery and exploitation, we develop and test hypotheses that explore the perceptions of the environment, the founder’s human and social capital, the entrepreneur’s commitment to the new venture and the level of new product development in the fledging firm. Our results show that the perceived strength of competition, the commitment of the entrepreneur to the new venture, the social capital of the entrepreneur, and the level of product development, are significantly related to likelihood of first sales. On the other hand, the strength of the local economy, the entrepreneur’s education level and experience, and gathering information and preparing a business plan were not related to first sale. From this, we can draw three conclusions. First, theory suggests that fledging firms that survive the transition from nascence to newness will adapt to the institutional environment of the population that they join (Aldrich, 1999). Our findings are generally consistent with this in that the activities leading to first sale, such as investing seed money, developing a proto-type, and asking for assistance can be considered as actions designed to conform to existing institutional standards. However, our results suggest that in the nascence process, actual conformance to institutional norms may be an outcome of the nascence to newness transition whereas commitment or effort on the part of the entrepreneur is the key to getting there. Our data showed that effort put forth in developing a prototype, and committing time to the venture contributed significantly to likelihood of first sale. Second, our research shows that there appear to be differences in influences leading to success in the transition from nascence to newness (as indicated by first sale) and those leading to survival and growth. In particular, a limitation of the present study, contingent on the nature of the sample, is that it does not incorporate data on the founding, survival and growth of these nascent ventures. We surmise that the human capital variables that are more likely to lead to high growth and performance are not necessarily those that lead to success in creating a fledgling firm. Education and experience have little impact in achieving this first benchmark. Hence, we cannot assume that the same human capital variables are important to performance at all phases of the entrepreneurial cycle. A more complete study of the human capital variables associated with success in moving a venture from nascence to newness and beyond would be of interest. Third, product-market characteristics, such as how far has the entrepreneur progressed down the new product development path, are a highly significant predictor of first sales. This has implications for the types of actions in which the nascent entrepreneur engages. While

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Carter, et al, (1996) found that that for nascent entrepreneurs having some action was critical, our findings indicate that the more the entrepreneur has focused on actions surrounding the development of the fledgling firm’s product, the more likely that a successful nascence to newness transition will occur. Clearly, understanding the nascence to newness transition is critical to the field of entrepreneurship. This paper examines the factors that contribute to that transition. Future research should include specific industry dimensions. It seems likely that the internal conditions or external circumstances, which include all types of nascent entrepreneurial activity, may vary depending on specific industry context. Finally, for nascent entrepreneurs who are to trying to achieve their first sales, the issues identified in this paper warrant careful consideration, as they have important ramifications on the success of the transition effort.

APPENDIX 1. MEASURES USED IN THE STUDY Construct Item Dependent and Control Variables Dependent Variables Received revenue Has the new business received any money, from sales income, or fees from sale of goods and services Time to Market Computed: month and year of first income from sales – month and year nascent entrepreneur first thought of new venture Independent Variables Achieved Attributes Full time work How many total years of full time paid work experience experience in any field have you had

Response Categories

1-yes, 0-no Actual Year and Month

Open Ended

Educational attainment What is the highest level of education you have 0 completed so far 1 5 … 9 Perceptions of the Local Environment Strength of local Would you describe the local economy as 1 economy getting stronger, stable, or getting weaker 2 3 Strength of competition

Social Capital Any other helping with start-up

Do you expect the competition to be low, moderate, or strong for this new business

0 1 2 3

Are there any people other than the people on 1-yes, the start-up team who have been helpful to you 0-no in getting the business started

up to eighth grade some high school Community college LLB, MD, Ph.D.

Getting weaker Stable Getting stronger No competition Low Moderate Strong

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Appendix 1. (Continued) Construct Any contact with assistance programs Commitment Asked others or financial institutions for funds Thought for a long time about new venture Invested own money in business Gathered information about market opportunities Organized start-up team Devoted 35+ hours/week to new business Prepared business plan

Item Have you made contact with any programs helping new businesses get established

Response Categories 1-yes, 0-no

Have financial institutions or other people been 1-yes, asked for funds 0-no Have you spent a long time thinking about the 1-yes, new venture 0-no Have you invested any of your own money in this business Has an effort been made to define the market opportunities by talking to potential customers or getting information about the competition Has a start-up team been organized Have you begun to devote full time to the business - 35 or more hours per week Has a business plan been prepared

New Product Development Applied for patents, copyright, trademark

Has an application for a patent, copyright, or trademark relevant to the new venture been submitted? Stage of development At what stage of development is the product or of product service this start-up will be selling?

1-yes, 0-no 1-yes, 0-no 1-yes, 0-no 1-yes, 0-no 1-yes; 0-no

1-yes; 0-no 1 2 3 4 5

no work done still in idea stage model/procedure being developed prototype/procedu re tested completed and ready for sale

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Mehta, S.R. & Cooper, A. 2000. Optimism as a predictor of new firm performance. Paper presented at the Babson Kauffman Conference on Entrepreneurship Research, Jonkoping, Sweden. McKendrick, D.G., & Carroll, G.R. 2001. On the genesis of organizational forms: Evidence from the market for disk arrays. Organization Science, 12(6): 661-682. Nahapiet, J. and Ghoshal, S. 1998. Social capital, intellectual capital and the organizational advantage. Academy of Management Review, 23,2: 242-266. Pennings, J. M. 1982. Elaboration on the entrepreneur and his environment. In Kent, C., Sexton, D. & Vesper, K. (eds). The Encyclopedia of Entrepreneurship. Englewood Cliffs, NJ: Prentice Hall, 307-313. Penrose, E. 1959. Theory of Growth of the Firm. New York: John Wiley. Putnam, R.D. 1995. Bowling alone: America’s declining social capital. Journal of Democracy, 6: 65-78. Reynolds, P.D. and Miller, B. 1992. New firm gestation: Conception, birth, and implications for research, Journal of Business Venturing, 7:5, 201-220. Reynolds, P.D. 1994. Reducing barriers to understanding new firm gestation: Prevalence and success of nascent entrepreneurs, Unpublished paper, presented at the Academy of Management meetings, Dallas, TX. Reynolds, P.D., & White, S.B. 1997. The Entrepreneurial Process: Economic Growth, Men, Women and Minorities, Westport, CN: Quorum Books. Reynolds, P.D. 1997. Who starts firms? Preliminary explorations of firms in gestation. Small Business Economics. 9: 449-462. Reynolds, P. D. 2000. National panel study of U.S. business startups: Background and methodologies. In Katz, J.A. (Ed.) Advances in Entrepreneurship, Firm Emergence, and Growth, Volume 4, Stamford, CT: JAI Press, 153-227. Romanelli, E. 1989. Environments and strategies of organization start-up: Effects on early survival. Administrative Science Quarterly. 34: 369-387. Schoonhoven, C.B., Eisenhardt, K. & Lyman, K. 1990. Speeding products to market: Waiting time to first product introduction in new firms. Administrative Science Quarterly, 35: 177-207. Scott, W.R. 1995. Institutions and Organizations. Sage: Thousand Oaks, CA. Scott, B.R. & Bruce, R. 1987. Five stages of growth in small businesses. Long Range Planning 20:3, 45-52. Shane, S. & Venkatraman, S. 2000. The promise of entrepreneurship as a field of research Academy of Management Review, 25,1:217-226. Shaver, K.G., & Scott, L. 1991 Person, process, choice: The psychology of new venture creation, Entrepreneurship Theory and Practice. 16:2, 23-46. Shaver, K.G., Carter, N.M., Gartner, W.B., & Reynolds, P.D. 2001. Who is a nascent entrepreneur? Decision rules for identifying and selecting entrepreneurs in the panel study of entrepreneurial dynamics (PSED). Paper presented at the 2001 Babson Kauffman Conference on Entrepreneurship Research, Jonkoping, Sweden. Stinchcombe, A. 1965. Social structure and organizations, in March, J.G. (Ed.) Handbook of Organizations, Chicago: RandMcNally, 142-193. Tuma, N.B., & Hannan, M.T. 1978. Approaches to the censoring problem in analysis of event histories. In Schuessler (Ed.) Sociological Methodology. San Francisco, CA: Jossey-Bass.

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Ucbasaran, D., Westhead, P. & Wright, M. 2001. The focus of entrepreneurial research: Contextual and process issues. Entrepreneurship Theory and Practice, 25:4, 57-80. Vermunt, J.K. 1996. Log-linear Event History Analysis: A General Approach with Missing Data Latent Variables, and Unobserved Heterogeneity. Tilburg, The Netherlands: Tilburg University Press. Vesper, K. 1990. New Venture Strategies. Englewood Cliffs, NJ:Prentice Hall. Westhead, P. 1995. Survival and employment growth contrasts between types of ownermanaged high-technology firms. Entrepreneurship Theory and Practice 4,20:1, 5-28.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 6

TIME AND RISK ENTREPRENEURIAL CHARACTERISTICS OF GROWTH: THE CASE OF PERSISTENT LIGHT INDUSTRIAL PROTOTYPES P. E. Petrakis* Athens National and Kapodistrian University, Department of Economics, Division of Economic Development, Stadiou 5, Athens 10562, Greece

ABSTRACT This article is about the role of entrepreneurial perception of time and risk vis à vis structural change and growth. Entrepreneurship is a basic constituent element of social capital which in turn is a productive lubricant of the growth process. Different structural entrepreneurial prototypes with respect to time and risk have different structural change effects. Those structural changes (and any structural changes) are not neutral as far as the implications of growth rate changes are concerned. Therefore the time and risk characteristics of active entrepreneurship are reflected in the growth process either in the form of structural change and/or in the form of growth rate change.

Keywords: Time, Risk, Entrepreneurship JEL Classification: M13, O12

INTRODUCTION This article is about the role of the entrepreneurial perception of time and risk vis à vis structural change and growth. Entrepreneurship is a basic constituent element of social capital which in turn is a productive lubricant of the growth process. Different structural *

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entrepreneurial prototypes with respect to time and risk have different structural change effects. Those structural changes (and any structural changes) are not neutral as far as the implications of growth rate changes are concerned. Therefore the time and risk characteristics of active entrepreneurship are reflected in the growth process either in the form of structural change and/or in the form of growth rate change. The analysis of the growth process, based on the Schumpeterian tradition of real economic structure change, with the development of endogenous models and the introduction of research (Romer 1986) and knowledge (Lucas 1988) effects of human capital contribution to growth has found a respectable and well-spread acceptance. At the same time growth models have been found to be in line with developments in the real economy (Vaitsos and Bartzokas 2004), increasing their acceptability. However, the present mature stage of economic growth in developed countries and the challenge of sustainable growth patterns, together with the observed persisted light industrial prototypes in a number of peripheral countries (Balkans etc.) may reopen the discussion on the growth process with ‘reasoned history on the time and space particularities of growth dynamics’ (Vaitsos 2003). The reopening of the discussion will be facilitated with the introduction of the extended concept of social capital as being broken down into human capital, entrepreneurship and networks effects (Piazza-Georgi 2002). The paper is developed as follows: section 2 focuses on social capital, entrepreneurship and growth relationship; sections 3 and 4 relates to the analytics of risk and time; section 5 clarifies the time and risk dimensions of entrepreneurship; section 6 analyses the effects of entrepreneurial time and risk on structural change. Finally conclusions will be drawn.

ENTREPRENEURSHIP, SOCIAL CAPITAL AND GROWTH The relation between growth and entrepreneurship appears to be easily accepted. However until now this has not yet been fully scientifically supported. First, this is because the phenomenon of entrepreneurship lacked a conceptual framework by itself (Shane and Venkataraman 2000). Also for a very big period of time the significance/meaning of entrepreneurship had been excluded (Barreto 1989) from the picture with equilibrium approaches in economics (Khilstrom and Laffont 1979). Adam Smith (1776) formed the conditions of introducing entrepreneurship as an engine of growth since he recognises that the only restriction on sustainable growth is division of labour and the extent of the market. Thus entrepreneurship (innovation) extends the market and increases productivity and therefore causes economic growth. Moreover if we accept that entrepreneurship opportunities already exist but were unnoticed (Kirzner 1973) and profit, as a reward of entrepreneurship, is the engine that moves the system away from equilibrium (Schumpeter (1934) and in a decentralised context, Hayek (1945), then we may have a logical consequence of growth. On the other hand, Ricardo (1821) set the principles of growth as they were organised in the model of Solow (1956). Only by investing in capital (K), can production (Y) be increased and thus productivity will increase. The restrictive terms will emanate from fixed factors of production and the diminishing marginal factor productivity.

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Any other influences in the productive process should be searched in the Solow residual (Solow 1956). Lucas (1988) rearranges the neoclassical model and introduces the idea that attention should be on the labour factor l and the external effects of human capital. Romer (1986, 1990) adds that additional investment in research could produce increasing returns through knowledge spillover embodied in human capital. The aspect of knowledge that is crucial is alertness (Kirzner 1973), that is the ‘knowledge’ of where to find market data (Holcombe 1998). The entrepreneurial discovery process is associated with the actor's interpretation framework, or the stock of knowledge, which is derived from everyday life experiences (Yu 2001a). The concept of social capital has been put forward alongside the traditional concept of financial, real and human capital during the 1990s (Portes and Landolt 1996) and it has recently been related to entrepreneurship (Westlund and Bolton 2003). According to Bourdien and Wacquant (1992) social capital is an individual or group-related resource that accrues by possessing a durable network of more or less institutionalised relationships. According to Coleman (1988, 1990) it is to be found in the relations between individuals and it includes obligations, expectations, information channels and social norms (Piazza-Georgi 2002), like high-trust and low-trust attitudes (Fukuyama 1995) or family-based social trust vs community-based trust (Fukuyama 1995). Social capital should be regarded as the most diversified of capital forms. The extent of the diversification will largely depend on how its basic nature is analysed: Coleman’s (1990) endogenous phenomenon of social relations vs Fukuyama (1995)’s view that it is the result of society's trust and cooperation. Woolcock (1998) and Fedderke et al. (1999) proposed that we should see in the concept of social capital two interacting dimensions: ‘transparency’ (the transaction-cost-lowering functions of social capital) and the rationalisation potential of maintaining increasing returns to scale, i.e. delaying the onset of diminishing returns. Two more notes were added to this by Piazza-Georgi: (a) social capital operates to a significant extent through human skills capital and entrepreneurial skills by lowering their creation costs; (b) there may be a significant substitution effect between human and social capital (towards human capital) through the increased cost of human time. If we then accept that investing in human capital is more efficient that investing in social capital we could have another reason for delaying the diminishing returns process. Thus growth and social capital are positively connected since the accumulation of the latter is fuelling the growth process. Yu (2001a) utilising Kirzner’s theory of entrepreneurial discovery, Schumpeter’s two types of economic responses (extraordinary and adaptive) and the Austrian theory of institutions as building blocks, constructs an entrepreneurial theory of institutional change and social capital accumulation. Yu and others do not use the concept of social capital and institutions alternatively. However, the concept of social capital as it is defined (Westlund and Bolton 2003) can be very closely compared with Yu’s definition of institutions (Yu 2001a and b). The process of institutional change is the continuous interaction between entrepreneurial exploitation and exploitation of opportunities (Dosi and Malebra 1996). Institutions (stock of knowledge) emerge as a result of human agents attempting to reduce structural (vs neoclassical static) uncertainty. Therefore, entrepreneurship enlarges institutional development and social capital accumulation. It is obvious that there are secondround effects where social capital accumulation reinforces entrepreneurship through the production of externalities which promote the distribution of information and generate

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asymmetric information. At the same time institutions reinforce entrepreneurial alertness and the discovery process (Yu 2001b). Thus we may accept that entrepreneurship enlarges social capital accumulation. Therefore, entrepreneurship positively affects growth.

ENTREPRENEURSHIP AND RISK Although as Knight proposes there is considerable difference between the concept of uncertainty and the risk (measurable) from now on we will use the two terms alternatively because there is no added value in the scope of the paper. In our attempt to establish the positive theoretical relationship between entrepreneurship and uncertainty we may approach the subject from four different angles. The first refers to the role of social capital and the Knightian uncertainty as presented by Brouwer (2000). The second will be based on the entrepreneurial perspective of institutional change (Yu 2001a). The third utilises the basic financial relationship of (entrepreneurial) return and risk (Markowitz 1952, Tobin 1958, Sharpe 1964), proposed by Petrakis (2004). Finally the fourth can be based on the concept of distribution of risk through the division of labour process. According to Brouwer (2000) in Knight’s view, true uncertainty is the only source of profits, since profits would disappear as soon as change became predictable or it can be hedged and they will be changed into costs. Brouwer shows how the introduction of Knightian uncertainty can abate diminishing returns of innovative investment. This can be done by R&D cooperation, that is, by creating social capital through R&D networks. So we can conclude that uncertainty makes perpetual innovation more likely. Thus growth and uncertainty are positively related. Knight saw rates of return on entrepreneurial investment vary around an average and it is the relative entrepreneurial ability that is rewarded. Entrepreneurs also create a great deal of uncertainty through Schumpeterian innovation which creates confusion in the market. Lack of entrepreneurship means that we are locked up in old structures, interpretations and understandings (Yu 2001a). Thus, entrepreneurial activation is positive concerned with uncertainty. The portfolio theory, as shaped by Markowitz (1952), Tobin (1958) and Sharpe (1964), recognised the positive relationship between expected return and risk. When an individual creates a portfolio, optimalisation is based on the risk and return relationship: risk is the result of either systematic risk or, in the case of imperfect unsystematic risk, diversification due to project indivisibility or project interrelationships (Acemoglu and Zilibotti 1997) or a combination of both. Given these prerequisites, the risk premium that the economic agent enjoys is the entrepreneurship premium that we come across in entrepreneurship theories. The relationship of risk and growth can be approached from a more general point of view. This can be done if we consider the growth process as facilitated by divisions of the labour process. Thus, the division of labour not only increases developments in specification and broadens labour skills expertise and therefore increases rates of returns but also by necessity distributes the risks around different economic activities. The distribution of risk, and thus the lowering of the prevailing risk levels, increases the discounted (by risk) rates of returns. From the above analysis, irrespective of the angle we approach the issue under discussion, we can conclude that entrepreneurship and uncertainty are related with the latter

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positively affecting entrepreneurship. Finally, we may conclude that growth and uncertainty are related with the latter positively affecting growth. Risk reflects the degree of uncertainty and potential loss associated with the outcomes which may follow from a given behaviour or a set of behaviours (Forlani and Mullins 2000). Yates and Stone (1992) identify the basic element of risk construction: potential losses and the significance of those losses. The point of research focuses on how entrepreneurs cope with the risks inherent in their decisions, what determines the way they perceive the riskiness of their decisions, whether they posses character traits which predispose them to engage in uncertain behaviour or whether they assess opportunities and threats differently from nonentrepreneurs (Norton and Moore 2002). In any case entrepreneurs’ risk-taking decisions are extremely complex (Ray 1994). This is quite an obvious conclusion and has been stated very clearly from Knight (1921) to Baird and Thomas (1985) with their contingency model of strategic risk-taking. Sitkin and Weingart (1995) summarise the whole framework of risk decision in two main sub-domains: outcome history and problem framing (Sitkin and Pablo 1992) as mediated in two crucial entrepreneurial variables: entrepreneurial risk propensity and perception of risk. Problem framing refers to whether a situation is presented to decision-makers as an opportunity or a threat. Outcome history is a person–situation interaction characteristic defined as the degree to which the decision-maker believes that previous risk-related decisions have resulted in successful or unsuccessful outcomes (Sitkin and Weingart 1995). Correspondingly risk perception is defined as an individual’s assessment of how controllable that uncertainty is (Baird and Thomas 1985) and risk propensity is defined as an individual’s current tendency to take or avoid risk. The concept of meditation on risk perception has also been stated in the work of Hean Tat Keh et al (2002). Their model also recognises four independent variables (overconfidence, belief in the law of small numbers, planning fallacy and illusion of control) and two control variables (demographics and risk propensity). The researchers have been utilising the work of Simon et al (1999) who found that the significant relationships are illusion of control belief in the law of small numbers with risk perception (negative relationship). Illusion of control and belief in the law of small number affects uncertain decisions positively and risk perception negatively. The same authors identify that flexibility, optimism and risk propensity affect a decision-maker’s tolerance of risk. Derived from the above analysis is the fact that risk perception mediates the relationship between cognitive biases and decisions under risk. Although enough theorisation has been developed about these associations (Busenitz and Barney 1997, Cooper et al. 1988, Palich and Bagby 1995) the question about how cognitive biases – i.e. common types of mental stochastics used to make judgments (Simon et al 1999) – lead individuals to perceive different levels of risk in the same decision situation needs further classification. This is despite the empirical evidence on the role of overconfidence, illusion of control etc. produced by Simon et al (1999) mainly because those approaches are partial equilibrium approaches. In other words, when we study such a complex phenomenon it is very difficult to isolate the influences of even basic factors that influence the decision under risk. This point should be taken into account when we examine well-supported evidence (Brockhaus 1980, Masters and Meir 1988) that risk tolerance or ambiguity tolerance do not reside differently in entrepreneurs. However, there is a discussion (Ghosh and Ray 1997) that risk and ambiguity

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have different and distinguished effects on entrepreneurial behaviour and specifically that the presence of ambiguity accentuates the perception of risk.

THE ENTREPRENEURIAL PERCEPTION OF TIME According to Shane and Venkataraman (2000, p. 218) entrepreneurship also means the process by which opportunities to create future goods and services are discovered, evaluated and exploited. In the framework of a well-structured theory for tracing and developing entrepreneurial opportunities (Ardichvili et al 2003) two levels of analysis appear. The first includes the process of tracing and developing entrepreneurial opportunities (development, recognition, perception, discovery and evaluation) while the second includes the factors that influence this process (entrepreneurial alertness, information asymmetry and prior knowledge, discovery versus purposeful search, social networks and finally personality traits). The individual according to his or her sensitivity alertness (Kirzner 1973, 1979) reacts to the information s/he receives and recognises the entrepreneurial opportunity. At that moment the entrepreneurial opportunities are continuously evaluated either within a formal or informal process (Timmons et al 1987). The individual informally collects information until it becomes more formal and particularly when the collaboration of third parties is necessary in the search for essential resources. If the result of this process is satisfactory, then a feasibility study is produced. The personal trait of preference of time has its role through the Stage–Gate procedure (Ardichvili et al 2003) or, alternatively, through the Passage via the Knowledge Corridor (Ronstandt, 1988). Thus, the process of the evaluation of time acts upon entrepreneurship as one continuous screening procedure. Entrepreneurs develop their entrepreneurial alertness either on the grounds of backward or forward interpretation (Yu 2001a) of incoming information and only to the level that they pace with their time preference. For example, they exclude from their evaluation all information (in this case preference for short-term entrepreneurship) connected to long-term entrepreneurship. Thus entrepreneurial alertness is not a complete process but a unilaterally developed sensitivity which is biased in favour of short-term actions. Note that in cases where a long-term perception of time prevails in society, then the long-term entrepreneurial trap can arise where no immediate results in entrepreneurial activity are taking place. In other words the entrepreneur’s time preference is something more than a simple recognition of cost difference of the present vs the future. Thus, the time preference is a personal attitude of the entire process of opportunity tracing and development. Basically it consists of a characteristic of the social capital and a characteristic of the entrepreneurial lifestyle (Westlund and Bolton 2003). The final phase of the evaluation, by using time discount of future inflows, constitutes only part of the influence of the time preference on the process of entrepreneurship. Time preference is much more important in all previous stages of the process of opportunity, identification and development. Thus, for example, the businessperson with a powerful preference for the present will never be interested in assembling information and consequently in developing his or her alertness with regard to sectors which require a large degree of engagement of resources and thus a long period of depreciation. Thus accidental

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discovery (Teach et al., 1988) is dramatically decreased. Moreover social networks (De Koning 1999, Lechner and Dowling 2003) are shaped under the influence of a specific perception of preference of time, which they also transmit to the candidate entrepreneur. In this way, they contribute to the reproduction of entrepreneurial opportunities which obey specific values of time (Anderson and Jack 2002). The relevant questions which are the subject of this paper refer to whether the average ideal duration of entrepreneurial commitment can be considered as the outcome of a linear or non-linear approach towards time perception; furthermore, whether it is a state of the world situation or an event (or a sequence of events); and finally whether this is an objective or a subjective perception. In any case we can accept that how the present is determined depends on the subjective perceptions of the entrepreneur (Hurmerinta-Peltomäki 2003; Chapman 1982). Moreover the concept of the average ideal duration of entrepreneurial commitment fits more with the notion of states of the world assessment of time rather than to the point of view of a single event (or a consequence) of events. The entrepreneur engages himself in a situation where its implications are diffused in a continuous time assessment and are not restricted to a single calculation or a solid conclusion.

ENTREPRENEURSHIP, TIME AND RISK The development of the decision-making investment process within the standard neoclassical model has shaped time into a simple, mono-dimensional factor of decisionmaking. This happened with the same simplicity that also forced out the entrepreneur’s role from the function of the economic system (Barreto 1989). But the question of preference of time is too important for the process of entrepreneurship – and, therefore, for us – to ignore. Temporal dynamics are at the heart of entrepreneurship (Bird and Page 1997). Anything that involves an entrepreneurial organisational process (including the decision of resources commitment) has its time-dimensional character. When the process of evaluation is conducted in terms of excessive preference for the present over the future, very few or no entrepreneurial plans are going to materialise. Additionally it is very unlikely that specialised markets of time and risk are going to help the investor to materialise his or her investment. Moreover, it is known that very few similar markets exist. Even if they exist, very few entrepreneurs have access to them. The inclusion of time can be connected with significant aspects of the growth process. Time is introduced by the dynamic models and therefore it brings up the issues of equilibrating vs. non-equilibrating growth paths. Thus, disequilibrium based on growth (evolutionary theory) can emerge. It is also related to convergence issues. However, according to the scope of the present paper the issue of time is related and defined as the ideal duration of entrepreneurial commitment. This concept is directly related to the structural prototype prevailing in space and time since it can distinguish between short-term entrepreneurship and long-term or future-oriented entrepreneurship (Das and Bing-Sheng teng 1997). Decision risk is defined here, according to the extended Sitkin and Pablo (1992) definition, as the extent to which there is uncertainty about whether potentially significant

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(satisfactory) and/or disappointing outcomes of decisions will be realised. Thus, risk reflects the degree of uncertainty and potential loss associated with the outcomes which may follow from a given behaviour or set of behaviours (Forlani and Mullins 2000). Yates and Stone (1992) identify the basic element of risk construction: potential losses and the significance of those losses. The point of research focuses on how entrepreneurs cope with the risks inherent in their decisions, what determines the way they perceive the riskiness of their decisions, and whether they possess character traits which predispose them to engage in uncertain behaviour or whether they assess opportunities and threats differently from non-entrepreneurs (Norton and Moore 2002). In order to do so, we should clarify the meaning of the two basic risk concepts: risk perception and risk propensity. Thus, risk perception is a subjective concept about the controllability of uncertainty (Sitkin and Pablo 1992, Baird and Thomas 1985). This subjective concept generally speaking is developed according to how the problems are framed (how the problem is presented to the entrepreneur, positively or negatively), the outcome history (Sitkin and Weingart 1995), the problem under consideration and the cognitive process of risk perception development. This concept could be connected with general society’s sense of uncertainty controllability as a social value and it is formed at a personal level. When we speak about low (high) risk perception we are referring to a situation where the individual believes the uncertainty of outcomes is highly uncontrollable (strong controllability). Risk propensity is defined as an individual’s current tendency to take or avoid risks (Sitkin and Pablo 1992, Sitkin and Weingart 1995). It is a clear personal trait which can also be influenced by general social values (as they can influence all aspects of entrepreneurial behaviour). Drawing and extending the work of Sitkin and Pablo (1992) and Forlani and Mullins (2000) we can imply that the entrepreneur’s perception of risk and decisions involving risk are distinct and separate cognitive processes. Moreover the risk propensity is a separate cognitive process from risk perception. Following Sitkin and Weingart (1995) and in contrast with previous researchers (Derby and Keeney 1981) we do not consider risk propensity as a stable personal attribute. Thus, we employ a trait-based definition which is constructed as a cumulative tendency to take or avoid risks and can be changed as a result of experience. Risk and uncertainly is about future and therefore is about time. Thus it is generally agreed that time plays a crucial role in risk (Strickland et al 1966). Researchers such as Vlek and Stollen (1980) observed that several risk behaviours are related to time and the notion of discounting in time. Das and Bing-Sheng Teng (1997) analyse the interrelation of risk and time given that risk is inherently embedded in time. First they put forward the notion of the risk horizon differentiating short-range risk from long-range risk and examine the risk behaviour of entrepreneurs in terms of their individual future orientation in connection with their risk propensity. Short-range risk refers to variations in outcomes in the near future, while long-range risk relates to the distant future (Drucker 1971). However, when people make decisions about the distant future they may be engaged in either low-risk or high-risk long-range risk behaviour. The same individual may well exhibit low-risk behaviour regarding long-range risk and highrisk behaviour regarding short-range risk or vice versa. Thus Das and Bing-Sheng Teng develop different entrepreneurial types by employing their distinct risk behaviour in the short run and in the long run. They suggest that craftsman

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entrepreneurs can be identified by their short-range high risk behaviour, while opportunistic entrepreneurs can be identified by their long-range low-risk behaviour. Their distinction has received empirical support although the findings are far from conclusive (Woo et al 1991). According to Smith (1776) a craftsman entrepreneur is characterised by narrowness in education, low social awareness and involvement and they do not offer innovative products. In contrast, an opportunistic entrepreneur is one who typically has breadth in education and training as well as high social awareness and who is involved in providing novel products/services. It may appear in two cases that an entrepreneurial attitude cannot be developed: when short-range orientation and low-risk behaviour manifest in the same individual as well as when long-range high-risk behaviour also manifest in the same individual. Does entrepreneurial risk attitude affect entrepreneurial time perception or vice versa? How distinct are the cognitive processes of development of risk attitude and time perception? So far we have seen a situation where the combination of the two attitudes produced particular types of entrepreneurial attitudes. The prevailing of long-lasting attitudes towards the formation of one or other type of entrepreneurship (or some in between forms) may affect the industrial structure permanently or at least for a long period of time. More interesting would be the case where the cognitive process of developing the risk attitude may affect the cognitive process of developing the perception of time. These interrelations may develop not only because the cognitive process may be interrelated but because of cultural and social economic factors which determine that the one process may affect the other. The important point arises when we come to the type of interrelation. If for instance the correlation of the two types of behaviour is positive then there will be a tendency for riskloving behaviour to be developed in parallel with long-term perception of entrepreneurial commitment which will have serious consequences on the type of entrepreneurial attitude behaviour since, as we have seen, a non-entrepreneurial behaviour is expected to be observed under these circumstances. The interrelation of risk and time attitudes can also affect the entrepreneurial intertemporal rate of substitution. Long-range and risk-loving entrepreneurship may be connected with large intertemporal rate substitution while shortrange and risk-averting behaviour are connected with a small intertemporal rate of substitution. Another important point arises as to how the cognitive process of time and risk attitude is developed in relation to entrepreneurial decision-making. In other words the important points are related to the way those attitudes interfere with the entrepreneurial opportunities identification and development. Following the alertness perspective where entrepreneurs may assess opportunities and threats based on a Bayesian probability (Norton, William and Moore 2002), differing assessments of prospective outcomes may be attributable to differences in prior information as they are filtered by the risk and time attitudes. Therefore time and risk consideration will not enter within entrepreneurial decision-making as any type of investment criteria but as particular types of cognitive attitudes towards the assessment of entrepreneurial decision-making. These attitudes are developed and embodied in entrepreneurial behaviour through a long-lasting procedure originating in the general economic environment as it is mediated by personal traits and cognitive factors.

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STRUCTURAL CHANGE, TIME AND RISK Montobbio (2002), in his critical and concentrated literature review, presents three main trends in structural change thinking: (a) endogenous growth models assess the determinants of aggregate growth in a multisectoral economy (Romer 1990, Aghion and Howitt 1998) which incurs difficulties in explaining major processes of structural changes; (b) the life-cycle models of growth, maturity and decline (Audretsch 1987) when they do not have a role for demand pressures and how growth is linked with the declined sectors; (c) the supply and demand side factors approach. This last approach seems to have attracted most of the recent work done in the field. The supply side was first proposed by Schumpeter (1928). Kuznets (1988) in the same vein stressed the importance of different impacts of technological innovations and a selection mechanism based on the competitive advantage. Pasinetti (1981, 1993) shows that growth rates depend on productivity rates. Baumol (1967) and Baumol et al. (1985) follow the same reasoning, arguing that stagnant sectors in return of productivity tend to absorb a relatively higher share of employment. Metcalfe (1999) also stresses the importance of sectoral differences in productivity without affecting the relative industrial shares in terms of employment. Finally Montobbio (2002) shows that positive aggregate productivity growth can be achieved without technological change at the level of firms. This can be achieved, as far as the supply side is concerned, through the effect of sectoral output growth of selection on firm’s unit costs. The demand side approach is also used, usually in connection with the supply side, to explain structural shifts. Kuznets (1988) pinpoints the different income elasticity of domestic demand. Pasinetti (1981, 1993) stresses the importance of trends in demand and differentiation of income elasticities. Montobbio (2002), as far as the demand side is concerned, emphasises the importance of sorting procedures according to elasticity of substitution of sectoral demand which depends on the institutional characteristics of the market. From the previous analysis it follows that there are four types of situations which can cause different types of structural change as they arise, all with different possible combinations of time and risk perception: (a) (b) (c) (d)

short-term future orientation and risk aversion; long-term future orientation and risk aversion; short-term future orientation and risk loving; long-term future orientation and risk loving.

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Future orientation I

II -

Risk-loving orientation

Equilibrating entrepreneurship

-

Innovative entrepreneurship

III

IV

Equilibrating Entrepreneurship Figure 1.

We may also consider the economy to be characterised by two separate sectors: the equilibrating sector where entrepreneurship produces products and services which match demand and supply and the innovative sector where new creative products are produced. As we have seen, generally speaking we expect that the innovative sector will be characterised by long-term future orientation and risk-averting attitude (the b situations) while the equilibrating sector will expand to two of the above situations (b and c). The risk–return relationship holds if the innovative sector equilibrates at a higher level than in the equilibrating sector. The resources move intersectorally according to (a) risk– return relationships prevailing in both sectors and (b) the time and risk characteristics of entrepreneurship activated in the sectors. Thus it follows that when time and risk influences reduce the intertemporal rate of substitution while risk and return on innovative sectors are higher than the equilibrating sector, then the innovative portfolio share will be increased. The opposite is true under conditions of enlargement of intertemporal rate of substitution (see Figure 1). The analysis shows that it can be the case where societies develop entrepreneurship which can be classified in one or more of the above two (II, III) quarters depending on a number of factors which have been identified in previous sectors of the paper. Depending on the type of entrepreneurship that is developed (with respect to time and risk characteristics) it is clear that we may have a different type of structural changes growth process which in turn may result in growth rate change. Is it probable that a growth rate change neutral process may result? It is very unlikely to be the case. There are two reasons for this: (a) the two sectors (equilibrating and creative) do not enter under identical (equivalent) conditions of portfolio shares participation and rates of return and risk relationship. Therefore any departure from the initial non ‘equivalent’ position in the economy will result in a (probably) non-equivalent continuity in the evolution of the portfolio of relative shares; (b) the rates of returns of two sectors which reflect the time and

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risk entrepreneurial consideration are different with the innovative sector characterised by larger levels. This difference in conjunction with the entrepreneur’s intertemporal rate of substitution will result in different patterns of portfolio shares expansion.

CONCLUSIONS The activation of one of the most important components of social capital, which is entrepreneurship, with particular effects through its time and risk characteristics, can be used in order to understand the growth prototypes prevailing in space and time. At the same time we can very well understand that those characteristics are long-lasting accumulated cultural and personal characteristics which cannot be altered through the interference of short-term policies. As a matter of fact the history, political and geostrategical procedures responsible for the establishment of these values should be affected if the structural change process is to be altered. We expect that entrepreneurial risk and time elements will have significant influence on basic growth structural elements such as the portfolio shares of distinct types of entrepreneurial events, the rate of returns on them, and thus the way markets operate. Finally those basic structural elements will affect the growth rate of the economy itself since there is no reason to suppose that structural changes offset each other. The risk and time elements interfere with the entrepreneurial identification process and shape the actor’s interpretation framework by influencing the stock of knowledge and everyday life. Thus, those factors are not acting as a type of criteria of entrepreneurial decision but are more activated as filters of incoming signalling and information. Most of the institutionalised relationships between individuals, including the derived obligations (and thus expectations as well), are developed in such a way that they are inherent in the particular time and risk horizons and limits prevailing for the entrepreneurial society. By referring to trust issues we may notice that it is very difficult to develop high-trust attitudes under short-term risk-averse behaviour. It is also very probable that under specific conditions the family-based social trust will be prevailing at the expense of community-based trust. It is also clear that entrepreneurs will develop a high perception of risk (irrespective of whether they are characterised by low- or high-risk propensity) when they experience a long period of political stability or because they act in a wealthy economy for a considerable time. An important question arises of risk and time in connection with social capital and refers to its transparency and rationalisation potential. We may argue that the introduction of the two constitutional elements will alter the transaction costs and thus will affect or reinforce the corresponding rate of social capital. Thus if the institutionalised forms reflect short-term riskaverse attitudes they will tend to enlarge their bureaucratic institutions in order to control this type of attitude. For the same reasons the rationalisation potentiality will cease. The above analysis pinpoints the fact that it is no longer enough to accept that entrepreneurship enlarges social capital accumulation and vice versa. The important thing lies in what type of social capital is developed under the influence of time and risk entrepreneurial considerations. Uncertainty affects entrepreneurship. However, what is now evident is that uncertainty affects the way that entrepreneurship is developed, which is the way that the time and risk elements are developed. At the same time, the entrepreneurial time and risk elements affect

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uncertainty in the economy as entrepreneurs are activated. Long-term risk-seeking activities develop different (larger) levels of uncertainty than long-term risk-averting entrepreneurship which in fact may not produce any uncertainty. This could be one explanation as to why individuals who could be classified within this cell of combination of attitudes may not be entrepreneurs at all. Under the specific circumstances uncertainty will not act as a starter to the growth process. According to the risk–return relationship, short-term risk-averting entrepreneurship will lead to a short-term low-return entrepreneurship which could be characterised as the growth structure since it seems that it cannot promise a strong growth prospect, at least in terms of development prototype. The same could be valid in the opposite situation where long-term risk-averting behaviour prevails. The human capital proxy and more generally social capital could operate as a mediator of short-term, risk-averting educational investment choices which may not affect the growth process positively. Similar scores will be reflected in capital variables. Generally speaking, if in the economy short-term, risk-averting values on entrepreneurial decisions are prevailing then capital accumulation and capital investment flows will reflect these values. The capital investment will be designed to engage entrepreneurial resources for a short period of time while it will be characterised by a low rate of returns. Obviously, the structural prototype will have these characteristics as well. The resulting structural prototypes in the different economies are very well connected with the growth rate of change performance. Thus, growth and structural prototypes depend on cultural values and personal traits and especially on time and risk entrepreneurial attitudes. Long-lasting entrepreneurial behaviours are not subject to easily manageable and short-term policy manipulations. The policy implications of the previous analysis may extend to a variety of fields. One of the immediate results will refer to policies towards upgrading the growth rate of change performance of peripheral economies through structural change which will be based on the introduction of innovative entrepreneurship. It becomes clear that a general policy towards political stability which could reduce risk could be more effective than a huge programme of structural funds development aiming at zero cost capital. This is because the improvement of the entrepreneurial climate, which could be the result of the structural fund development programme (EU structural funds), will lead to a reproduction of the existing industrial process in terms of risk and time characteristics rather than to a required structural change. Thus, it is very probable that the resulting overall rate of change will be weak and correspond to the existing industrial structure. In contrast it becomes evident that the improvement of social capital of the economy through the improvement of entrepreneurial factors by enlarging the investments of human capital (education and continuous education) will change attitudes towards innovation and result in an acceptable longer time of entrepreneurial commitment.

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Westlund, H., Bolton, R., 2003, Local social capital and entrepreneurship, Small Business Economics 21: 77–113. Woo, C.Y., Cooper, A.C., Dunkelberg, W.C., 1991, The development and interpretation of entrepreneurial typologies, Journal of Business Venturing, 6(2): 93–111. Woolcock, M., 1998, Social capital and economic development: Towards a theoretical synthesis and policy framework, Theory and Society 27(2): 151–208. Yates F., Stone E.R., 1992, The risk construct. In: Risk-Taking Behavior (Yates, F. ed.), John Wiley & Sons, pp. 1–26. Yu, T. Fu-Lai, 2001a, Entrepreneurial alertness and discovery, Review of Austrian Economics 14(1): 47–63. Yu, T. Fu-Lai, 2001b, An entrepreneurial perspective of institutional change, ConstitutionalPolitical-Economy 12(3): 217–236.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 7

BUSINESS INCUBATORS AND THE EMERGENCE OF THE ENTREPRENEURIAL UNIVERSITY: LESSONS LEARNED FROM PORTUGAL João Paulo Coelho Marques* ISCAC – Coimbra Higher Institute of Accounting and Administration, Quinta Agrícola – Bencanta 3040-316 COIMBRA Portugal

ABSTRACT This Chapter concerns University-Industry (U-I) interaction via business incubators, highlighting the part played by the University in implementing, sponsoring and promoting these infrastructures. The empirical study was based on exploratory work that involved 11 business incubators, 8 Portuguese universities sponsoring and/or associated with these incubators, and a sample of 79 firms under incubation. The results confirmed the existence of factors that determine U-I links, and identified others not yet studied, such as the “statutory situation of the incubator” and the “origin of the firms” based in it. It was also found that the "economic sector of activity" of the firm is associated with the "statutory situation” of the incubator. The entrepreneurial university model proposed is based on earlier results, bearing in mind the conception of incubator constructed on preexisting theoretical knowledge relating to the role of the university in the technology transfer process, to the importance of certain characteristics of SMEs, and to the relevance of the nature of entity promoting the incubator. Finally, a series of policy implications for the universities, incubators and firms, are put forward, with the aim of bridging the gap between the parties.

*

Tel.: +351-239 802 000; Fax: +351-239 445 445; E-mail: [email protected]

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1. INTRODUCTION The rapid progress of the knowledge-based global economy places increasing emphasis on the effective development of new technology, and on its swift evolution and commercialisation on the market. Since politicians are faced at various levels of government with strategies to stimulate these forces, they need to find suitable mechanisms to achieve goals of economic development. One such mechanism, used for over three decades, is the technology-based incubator. It has traditionally been defined as an instrument for technological development, designed to speed the growth and success rate of new enterprises by offering a range of services and support resources (OECD, 1997; 1999). One of the main goals of an incubator is to create successful firms that are financially viable and independent when they leave the programme. They should create jobs, revitalize their neighbourhoods, commercialize significant new technologies and boost local and national economies. The chief reasons given in the literature for the emergence of business incubators imply the inadequacies and failures of a market that restricts the ability of micro and small innovative firms to survive the early stages of their existence, and of entrepreneurs to overcome the uncertainties and obstacles associated with starting an activity. Entrepreneurs face many challenges when starting a business, including substantial entry costs, lack of access to sources of capital, insufficient technical and market information and poor management skills. The initial phase of a small firm is a period of great uncertainty, when a new enterprise often has liquidity problems. (Lewis, 2002; OECD, 1997; Tornatzky et al, 2003) This chapter examines University - Industry (U-I) cooperation links that operate via a knowledge / technology transfer mechanism, which is what the business incubator is (Autio and Laamanan, 1995). In this study we use the concept of business incubator in its wider sense (CSES, 2002), including traditional technology incubators, science and technology parks, technology parks and Business Innovation Centers (BICs). In these infrastructures, the part played by the University in implementing, sponsoring and promoting infrastructures of this kind is the focus of attention. Universities, as operators or promoters, have been regarded worldwide as vital participants in setting up and running incubators (Carayannis and Zedtwitz, 2005; Etzkowitz, 2002; Kalis, 2001; Tornatzky et al, 2002). The emergence of this new sphere of action of the university, and its vocational role in helping new technology-based firms, whether or not they are spin-offs, has provided the argument and motivation for this empirical work: its purpose is to improve knowledge of U-I relations and to propose a model characterizing the situation in Portugal. This study first looks at the main research on the establishment of links between enterprises and universities through incubators, analysing the present situation in the light of the (very few) empirical studies available. It then goes on to give an overview of the emergence of business incubators in Portugal. Afterwards, the chapter describes the research methodology employed and gives the results obtained, highlighting the existence of some characteristics of firms and incubators that affect the existence of U-I links. It concludes with the presentation and discussion of the model of entrepreneurial university developed and the lessons learned with respect to Portuguese business incubators promoted by and/or associated with universities. Some relevant policy implications are also indicated.

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2. U-I COOPERATION MODES VIA BUSINESS INCUBATORS: QUALITATIVE ANALYSIS OF THE LITERATURE Many studies have been carried out on business incubators in general, and technology incubators in particular. Some of the more important ones are: Aerts et al (2007), Albert et al. (2004), Allen and Bazan (1990), ANPROTEC (1998; 2003), Colombo and Delnastro (2002), Geenhuizen and Soetanto (2005), Jin et al. (2003), Hackett and Dilts (2004a and b), Lalkaka (2002; 2003), Lee (2003), Lewis (2002), Linder (2003), Matusiak (2003), Mian (1996), Phillips (2002), Smilor and Gill (1986), Tornatzky et al. (1996; 2003) and Wiggins and Gibson (2003). They characterize the many studies on business incubation, with different objectives, also representing the current state of incubators, both over time and between countries, to give a sounder understanding of the globalization of the concept. The information contained in many of the above studies confirms the heterogeneity and multiplicity of purposes represented by the implementation of incubators and similar phenomena, in various countries. But one factor common to most studies is the importance of the universities in implementing, sponsoring and promoting incubators in general, and technology incubators in particular. Universities, as operators or promoters, have been regarded worldwide as vital participants in implementing and running incubators. Indeed, against the backdrop of a knowledge-based economy, and the new triple helix conception of University – Industry – Government relations (U-I-G), an entrepreneurial paradigm has emerged, where the university plays a relevant part in technological innovation (Etzkowitz et al, 2000). The economy and society are urging the university to steadily get involved in new activities, like identifying, creating and commercialising intellectual property. As a result, the promotion of incubators has been seen as an appropriate mechanism for supporting start-ups, improve entrepreneurship and commercialising academic R&D (Etzkowitz, 2002). The literature of University-Industry cooperation is large and wide. But we can identify several authors which have assessed the strength of U-I cooperation. For example, empirical studies seem to suggest that firms with more employees (Corsten, 1987a and b; Deiaco, 1992; Santoro and Chakrabarti, 2002) and stronger R&D activities (Feller, 1989; Freeman, 1994; Grossman et al., 2001), engaged in high technology economic sectors (Faulkner and Senker, 1994; 1995) are more inclined to create links with a university than other firms. But this generalization should be made with caution. This because we do not find consistent empirical studies on the establishment of U-I links where these three characteristics of firms have been analyzed together. Furthermore, the geographic proximity of firms and universities does not seem to be a determining factor in the creation of links between them. However, for all its importance, the University and U-I cooperation has made only a modest, limited contribution to the innovative activity of firms and the search for technical solutions. In fact, universities have been more important to firms by developing their traditional activities - training staff and increasing scientific and technical knowledge through independent research - than by applying and exploiting its results commercially in industry (Faulkner and Senker, 1994 and 1995; Grossman et al., 2001; Klevorick et al., 1995; Mansfield, 1991; Marques, 2005; OECD, 2000). This is particularly important because contact between people facilitates the tacit transfer of technology, which is the kind of

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information that comes more from experience than instruction, and this is fundamental to innovation. But the analysis of the above empirical studies about business incubators reveals that establishing links between firms in incubation and universities, via business incubators, has not been a concern until now. Only a few of the studies analyzed deal with the importance of the university in technology incubators, in knowledge / technology transfer, the generation of academic spin-offs, and the establishment of links with incubator-based start-ups. But most of the links found are only related to informal contacts with academics and with the use of university support and infrastructure. Thus, many important questions related to U-I interaction and business incubators have been neglected in most of incubator’ studies. One concerns the lack of more systematic research into the characteristics of incubators and characteristics of firms based in them, and their potential influence on the establishment of U-I links, especially those related to R&D and the promoting or sponsoring university. Another issue that has been ignored so far is that of knowing which factors determine the location of start-ups in the various kinds of incubator. Furthermore, the appraisal of the university's role as promoter of an incubator and manager of intellectual property, i.e. the internal management of publishing or patenting, is another missing factor. And so knowledge of these and other aspects of U-I cooperation in relation to incubators has aroused a certain amount of scientific interest in finding out how this interaction develops in business incubators, and how to understand the entrepreneurial role of the university in Portugal.

3. OVERVIEW OF BUSINESS INCUBATION IN PORTUGAL In Portugal, the first business incubators emerged in the 80s. The history of such infrastructures followed closely the world movement of this instrument supporting the businesses generation. Originally, they evolved from the impulse and promotion of universities which were mainly technical, but by mid-90s they were jointly promoted with the Government through their instances. In Portugal, it should be noted that the universityindustry-government (U-I-G) relationship is affected by the interrelations between the public nature of universities depending on the Government on one hand and a quite weak industry on the other. Thus, the Portuguese business incubators evolution, the configurations adopted and the services offered are diverse. This diversity is due in part to the different goals and expectations of their promoters and operators, and of course due to the evolution of the Portuguese national innovation system, and specific policies under which incubators were planned and set up (OECD, 1997; 1999). A study commissioned by the European Commission (CSES, 2002), included a survey and a detailed analysis of organisations that were involved to some extent in business incubation independently of the promoting entity. The study included both business and technology incubators and S&T parks, technology parks, BICs, innovation centres and technology centres, indicating a total of 20 incubation infrastructures in Portugal. Most of these Portuguese incubators are linked directly or indirectly to universities – the main source of human training and intellectual capital. They are usually set up as private not-for-profit institutions. Other promoters in Portugal include S&T Parks, Technology Parks, BICs and

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public R&D institutions. The National Association of Young Entrepreneurs and various industrial associations also promote these activities. The intervention of the Portuguese Universities, mainly public, in incubation activities is fairly recent. The weak national innovation system in Portugal, notable for the poor participation of the “enterprise” sector in funding R&D expenditure, accounting for only about one fifth (21.3%), with the “government” and “other national sources” being responsible for the remaining four fifths (OECD, 2002), characterises the context of the universities in Portugal. However, a growing number of Portuguese universities, industries and public authorities are playing an active role in the dynamic of the creation of business incubators. A recent study (Marques, 2005) found only 11 business incubators with a university as an associated or promoting entity, and most incubating firms maintained relatively strong links with the academics. These incubators vary widely in size: some are quite small, with only 5-6 rooms, with others can have as many as 25-30 units. Portuguese incubators do not tend to have a particular sectoral orientation, and they are almost all mixed-use/purpose premises. The main economic sectors of the firms are high added value ones, like information and communication technology (ICT) and biotechnology. Furthermore, many of them specialise in new, knowledge-based economic sectors such as commerce and services. And so it must be stressed that there is a strong tendency for business incubators to emerge, and it should be noted that the private and public influences have backed and stimulated the promotion of entrepreneurship and the establishment of this kind of technological infrastructure.

4. METHODOLOGY The work is based on a case study of 11 Portuguese business incubators, existing on 31 December 2002, promoted by and / or involving a university institution. This approach was deemed capable of enabling the following goals to be achieved: 1. a detailed exploration of the different links established between a sample of firms under incubation and the respective associated and / or promoting universities; 2. finding out what are the characteristics of the firms and the incubators that affect the existence of links with promoting and / or associated universities; 3. identifying the characteristics of the firms and the incubators that may affect the decision to locate in a particular incubator. These objectives have given the study the character of a completely new approach to the knowledge / technology transfer mechanism that is the business incubator, in the hope of learning to what point it operates as a transfer mechanism, driving U-I cooperation and generating spin-offs. It should also make it possible to characterise and model the entrepreneurial function of the Portuguese university. The research was exploratory in nature, not aiming to test hypotheses but to respond a two research questions directly related to the goals defined, which are:

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João Paulo Coelho Marques 4. What are the characteristics of the firms and the incubators that affect the existence of links with promoting and / or associated universities? 5. What characteristics of the sample firms are related to the characteristics of these incubators?

This present study initially included 20 incubators that were analysed in terms of “being associated with and/or promoted by a university”, since our intention was to examine the present state of business incubators created from the dynamics of a “knowledge-based economy” in which universities play a significant part. We therefore established a group of Incubators that were subsequently analysed according to three additional criteria: • • •

They were real, physical business incubators, not virtual or non-physical ones; Regardless of their legal status, they did not operate on a profit-making basis; They were currently operating.

After applying these filters, we were left with a group of 11 incubators: 1. CEBI –Business Centre for Biotechnology at the Catholic University (Higher Institute of Biotechnology – Porto); 2. CEIM – Business and Innovation Centre of Madeira (BIC Funchal); 3. CEISET – Business and Innovation Centre of Setúbal (BIC Setúbal); 4. CID – Centre for Incubation and Development in the Lisbon Technology Park – LISPÓLIS; 5. CIE – Centre of entrepreneurial Innovation of Taguspark – Lisbon Science and Technology Park; 6. IPN – Pedro Nunes Business Incubator – Coimbra 7. MADAN – Almada/Setúbal Science and Technology Park Business Incubator; 8. NET – New Business and Technologies (BIC Porto); 9. OFICINA – Innovation Ofice (BIC Minho); 10. SOGIST – Society for Sector Incubation – Porto; 11. Aveiro University Business Incubator. Starting with a group of 160 firms based in the 11 incubators, we then selected a sample of businesses to study individually. This selection took into account the research goals and the size of the various populations. A sample from all the incubators with more than 8 firms based in them was selected to study what was considered to be a reasonable number (a portion of 0.33 or approximately 33%), bearing in mind the varying number of firms in each incubator. A stratified sample was used, consisting of two strata: year incubation began and sector of economic activity. In the incubators with 8 or more firms, we aimed to interview all (100%) of them, with a sampling error = 2.419% being found. The modelling of the research took into account the necessary comprehension of the context of incubators and the deepening of U-I cooperation in those incubators with links to a university. The structuring process was based on the construction, fulfilment and intersection of 3 taxonomies: characteristics of the incubators (Table 1); characteristics of the businesses (Table 2), and U-I links (Table 3).

Business Incubators and the Emergence of the Entrepreneurial University Table 1. Taxonomy of business incubator characteristics Characteristics of Business Incubators: 1. Start-up date 2. Legal form of incubator 3. Statutory situation / dependence of Incubator 4. Shareholding of university in incubator capital (percentage) 5. Sector Orientation 6. Funding sources 7. Services provided Source: Marques (2005).

Table 2. Taxonomy of firms’ characteristics

1. 2. 3. 4. 5. 6. 7. 8. 9.

Characteristics of firms Firm origin Sector of economic activity Time in incubation Legal status of firm Firm size (number of employees) Main activity Existence of R&D activity Type of R&D activity Intensity of R&D activity (number of employees) (only full-time R&D firms)

Source: Marques (2005).

Table 3. Taxonomy of U-I cooperation links U-I Links A) R&D and Human Resources Links: 1. R&D contracts 2. R&D projects of university-sponsored firms 3. Firms’ access to university R&D agenda 4. University personnel allotted full-time to firms 5. Lecturers and researchers as part-time consultants for firms 6. Informal contacts with academics 7. Recruitment of new university graduates 8. Support for student projects 9. Training given by university to firm’s employees 10. Other links B) Service Provision links: 1. Firms’ access to university information and informatics services 2. Firms’ access to university equipment and laboratory facilities 3. University laboratory analyses, design, tests and assessments 4. Firm as supplier of university goods/services 5. Other links Source: Marques (2005).

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The main results of the research stemmed from three personal interviews, using three Interview Scripts, with: 1 – Heads of the 11 incubators; 2 – Managers of the 79 sample firms; and 3 – The people responsible for defining U-I cooperation policy and strategies in the 8 promoting and / or associated universities. The field work was done between February and July 2003. Personal interviews were conducted, using previously-prepared scripts designed to find out about the different aspects of the taxonomies used. The incubator interview script was geared to finding out about their characteristics (Table 1), funding sources and services provided to firms. The firms’ interview script was designed to learn about their characteristics (Table 2) and U-I links (Table 3). The third interview script was used in the 8 Universities involved in the 11 incubators with the aim of finding out about the guidelines, strategies and policies of each University in its involvement in incubation activities. Along with this, we used information supplied by the incubators, their promoters and the firms we interviewed. This information included prospectuses, business and financial reports, statutes and articles on business incubators in specialist journals and books and general press articles. In terms of processing the information, a combination of qualitative and quantitative analytical techniques and methods were used, whenever possible, bearing in mind the exploratory nature of the study. Qualitative processing used classic methods, especially "content analysis" and the analysis of "taxonomies". The qualitative data were used to understand and explain the quantitative results obtained, and in the construction of the model and formulation of the policy implications. The quantitative processing was based on simple and cross tabulation of data and the application of non-parametric statistical tests with a 90% confidence level, viz. the independence test and the exact Chi Square test. Cramer’s V coefficient was used to measure and quantify the association.

5. ANSWERS TO THE RESEARCH QUESTIONS After the three taxonomies were complete (Tables 1 to 3), the intersections between all the variables were performed, and some associations were identified between the characteristics of the firms and incubators and U-I links. These findings are the answers to the research questions and can be organised as follows.

5.1. Determining Factors for U-I Links In relation to the first research question, the results of some earlier empirical studies were confirmed in the context of the Portuguese business incubators, in particular the association between certain firms characteristics and U-I links (Table 4): •

the sector of economic activity influences the existence of U-I links, with firms in the Biotechnology sector justifying this weak association (Cramer’s V=0.294). But all the firms in this sector have U-I links; one explanation may be that, in this high technology sector, the concentrated nature of the research needs a close link to the sources of knowledge;

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•

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the number of employees in a company also influences the existence of U-I links, with firms with more than 15 employees accounting for this strong association (Cramer’s V=0.563). The most natural reason for this association is related to the fact that more full-time workers contribute to the creation of more U-I links; the development of R&D activities also affects the existence of U-I links, with the small number of firms without cooperation links and no R&D interests being responsible for dependence. The association was found to be relatively weak (Cramer’s V=0.302). One reason for this association stems from the specific nature of R&D activities, which benefit from interaction with the university.

In addition to these variables, the study yielded two new factors, not yet studied until now, that determine U-I links. The first is the “Firm origin", which indicates a moderate association (Cramer’s V=0.311) and which is due to university spin-off firms, which all of them have natural cooperation links. The second factor is the incubator’ characteristic “statutory situation”, and the university's incubators account for the moderate association found (Cramer's V=0.370). This association is largely explained by the proximity between the university and its incubator, which quite naturally provides an environment that favours the U-I relationship. Table 4. Characteristics of business incubators and Firms according to existence/absence of U-I links Characteristics

Incubator character istics Firm character istics

Statutory situations Firm origin Sector of economic activity No. employees in firm R&D activities

Test for independence p-value a Statistical No. of firms value of test 10.821 0.050 79

Cramer’s V coefficient p-value b Value 0.370

0.055

7.630 6.848

0.064 0.032

79 79

0.311 0.294

0.106 0.033

25.005

0.0001

79

0.563

0.0001

7.211

0.023

79

0.302

0.027

Notes: a The null hypothesis to be tested is that the existence/absence of cooperation links is independent of the incubator or firm characteristics. b The null hypothesis to be tested is that Cramer’s V coefficient is equal to zero. Source: Marques (2005).

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Test for independence Firm characteristic

Incubator characteristic

Sector of economic activity

Statutory situation / 22.159 dependence of incubator

Statistical value of test

No. p-value a of firms

Value p-value b

0.013

0.374 0.013

79

a

The null hypothesis tests the independence of the firm characteristics and the incubators’ characteristics. b The null hypothesis to be tested is that Cramer’s V coefficient is equal to zero. Source: Marques (2005).

5.2. Firms’ Characteristics Related to the Incubator’s Characteristics In response to the second research question, it was found that the “economic sector” of the firms is related to the “statutory situation” of the incubator. In other words, the economic sector of the firms influence the decision to locate in the various types of incubators (moderate association: Cramer’s V=0.374). The firms that account for this dependence are those in: • • •

ICT sectors, which mostly locate in “incubators within technology parks”; biotechnology sector, which tend to locate in “university incubators”, and firms from other sectors, which are largely in “BIC incubators” (Table 5). The main reason for these findings is that firms in ICT sectors, working mostly in computing, programming, telecommunications and so forth, find conditions ideal for them in incubators based in Technology Parks. Firms in the biotechnology sector, on the other hand, naturally find the right atmosphere to nurture them in a university incubator. Finally, companies from other sectors mostly opt to locate in BICs, because these organisations are more open and have no sectoral orientation.

6. A PORTUGUESE ENTREPRENEURIAL UNIVERSITY MODEL The proposed Entrepreneurial university model is based on business incubators linked to universities. It was motivated by the results of the two research questions (Tables 4 and 5) that identify some factors that affect the existence of U-I cooperation links, with a confidence level equal to 90%. Three sets of variables can therefore be specified: 1. characteristics of firms: their “origin”, the “economic sector of activity”, the “number of employees / firm size” and its “R&D activities”. These variables are measured according to the indications proposed in the taxonomy of firm characteristics (Table

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2), and are represented in the model by arrow 5. These variables affect the existence of U-I links, and influence greater intervention on the part of the university; 2. incubator characteristics: “statutory situation / dependence”, which is measured by the taxonomy of incubator characteristics (Table 1), represented in the model by arrows 2 and 3. This variable focuses on the kind of dynamic incubator that could potentiate U-I links; 3. U-I cooperation links: these are measured by the taxonomy of U-I links (Table 3). They are divided into R&D and human resources links and provision of services links, and are represented in the model by arrow 4. This variable expresses the existence of at least one of the kinds of links with academics, in the firms in incubation. These three sets of variables are conceptualised in Figure 1, and are defined in terms of the knowledge of the essential actors in an incubator (promoting entity and/or operator, financers / investors, and the characteristics of the firms based in them). So, from the practical point of view, the proposed scheme captures most of the important dimensions established by the literature review, with particular reference to 1) organisational structure of the incubator and incubation process; 2) regarding the firms’ characteristics that influence the establishment of links with universities: “economic sector”, “number of employees” and engagement in “R&D activities”; and 3) importance of U-I cooperation. The model also brings out the association between the “economic sector” of the firms and “statutory situation of the incubator” (arrows 7 to 9). The university is crucial to this model, since its mission is to take the lead in the knowledge / technology transfer process by ensuring the availability of resources and providing continuous support (arrow 1). Furthermore, with its traditional functions of teaching / training and R&D, the university helps to train the personnel involved, improving levels of scientific and technical knowledge and facilitating the transfer of ideas and technology to society and the economy (arrow 6). It should be stressed that the model described here gives a systematic, comprehensive approach for the assessment of different types of U-I cooperation links. It is applicable to business incubators where any of the incubating firms has any of the 15 kinds of links proposed in the taxonomy of U-I links. For analytical reasons and the graphic representation of Figures 1 and 2, the model has been structured in two major “blocks”, which in practice overlap one another. Block 1 (shaded) is the “Business incubation unit” as a whole, and block 2 consists of: “University”, “Firms in incubation” and "U-I cooperation links”. Block 2 included in and thus completely overlaps block 1, since both the incubating firms and the promoting universities are located in and/or belong to the specific environment of each incubation unit, and the U-I links are also located within each transactional context of the incubator. The dynamic nature of the model is expressed by the constant interaction of the actors involved in a broad context, where the roles of those actors adjust in function of the types of U-I links and the market needs.

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BUSINESS INCUBATION UNITS Statutory Situation / Dependence of Incubator (Taxonomy of Incubator Characteristics)

PROMOTING AND/OR ASSOCIATED UNIVERSITY •

1

• • •

1. University Incubator 2. Incubator integrated into the structure of a S&T Park 3. Incubator integrated into the structure of a Technology Park

•

Public image of the University when it promotes economic development; Knowledge / technology transfer Commercialisation of technology; Development of new firms just starting up; R&D and HR training (entrepreneurship);

6 2

U-I COOPERATION LINKS VIA INCUBATORS:

Incubation Process Spin-offs, Individual initiative new firm, Already-existing firm

•

4 3

•

Existence of “R&D and HR links” and “Provision of services links” (U-I Links Taxonomy) Function of knowledge / technology transfer 5

Statutory Situation / Dependence of Incubator 4. Incubator based in a Technology Park 5. Business Innovation Centre (BIC) 6. Independent incubator

FIRMS IN INCUBATION

• • • •

7

Other Sectors

Health

ICTs

Incubator integrated into the structure of a Technology Park

University Incubator

Biotechnology and

Economic Sector

Statutory Situation

BICs

(Taxonomy of Firms’ Characteristics) Firm origin Sector of economic activity Number of employees / size R&D activities

8

Figure 1. Portuguese Entrepreneurial University Model – Analytical version.

9

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1

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UNIVERSITIES

6

TYPE OF

2/3

INCUBATION UNIT

U-I COOPERATION LINKS 4

5

FIRMS IN INCUBATION

7/8/9 Figure 2. Portuguese Entrepreneurial University Model - Synthetic version.

With respect to the assumption that the model can be applied to other contexts, attention is drawn to the fact that the university is promoting and/or associated entity of the business incubator, and the incubator is not virtual and not-for-profit. Finally, the need to ascertain the suitability and compliance of the model in terms of reality was also addressed. As the model was based on the modelling process adopted in this empirical research, and the variables used in its conceptualisation have been measured according to the significance criteria adopted, it is taken that the suitability and compliance have been safeguarded.

7. POLICY IMPLICATIONS OF THE MODEL Bearing in mind all the above considerations, it is clearly necessary to explain some policy implications, and make some recommendations as to how the present gap between university and industry can be bridged. The measures listed below are backed by the assured position of the OECD (2000 and 2002), and by the results of the fieldwork interviews. So, the focus of efforts on the sphere of knowledge / technology transfer, and licensing services, which are part of the university research institution, makes it possible to foresee a dynamic and pro-active prospect, with the creation of useful mechanisms to facilitate cooperation. It is therefore clear that certain measures have to be adopted. This research has provided the knowledge required to put forward and sustain a number of practical steps to bridge the U-I gap, and they are duly presented below. The measures are:

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João Paulo Coelho Marques 1. Universities should create an interface service like “technology transfer office” (TTO), offering instant help to researchers - This Interface Service should be an “intellectual property support service”. Universities must assign exclusive rights to the commercial exploitation of their ideas to the business incubator, which implies that it takes the ownership rights of discoveries into consideration; 2. Universities should establish a business incubation structure, putting them on an equal footing with other partners such as venture capital, with the aim of supplying services and financial resources to start-ups - Up to now, incubators have mostly been concerned with logistical support and services to start-ups. But, essentially, the mission of a university-promoted incubator must be to make the most of university R&D by studying the commercial applications of scientific discoveries or knowledge that can be exploited economically; 3. Universities should develop Motivational actions - It is extremely important to value the researchers who make the results of their R&D available. They should be allowed a stake in the shareholder structure of the spin-off from a project to reward the knowhow it has brought to the new firm. This is the only way to motivate creative researchers to excellence, and to give other researchers an example and incentive to follow in their footsteps; 4. Follow-up of spin-offs and promote U-I links - Very important to assure success in the incubation phase. New firms are monitored closely and supported in this phase, so as to achieve the best performance, prevent failure and promote links with University and researchers; 5. Universities should create an innovation network in the university, designed for innovating firms and start-ups - The aim of this is to create synergies between firms, between firms and Government and between them and knowledge institutions operating the sphere of technology transfer and innovation management.

Some of these measures have been reported in the literature, albeit fairly haphazardly. But taken as a whole, these five policy suggestions are the outcome of the model induced, and so they offer a new view that is both interconnected and consistent. They are, therefore, concrete measures aimed at facilitating the interaction between universities and companies. The academic institution, with its traditional functions of teaching / training and R&D, performs the leadership role throughout the knowledge / technology transfer process, and this neither could nor should be delegated as to do so would jeopardise the entire process.

8. CONCLUSION This chapter has described and demonstrated a university Entrepreneurial model, inducted on the basis of the dynamics of the U-I cooperation through business incubators associated and/or promoted by a university. The model uses three kinds of variables extracted from the empirical study: the “statutory situation / dependence of the incubator” as the sole characteristic influencing the existence of U-I links; the “origin”, “economic sector”, “number of employees” and “R&D activities” as

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the firms’ characteristics that influence the existence of links, and whether or not any kind of U-I links exist at all. The Portuguese entrepreneurial University Model proposed, puts forward an integrated scheme to conceptualise a business incubator that has been constructed on already-existing knowledge in four major areas: 1) support for the incubation of businesses, with special reference to universities; 2) the function of knowledge / technology transfer from university to firm; 3) specific characteristics of micro- and small enterprises in incubation that affect the existence of U-I links; and 4) the statutory situation / dependence of the incubation unit, with all the specificities of the respective promoting and/or operating entities, which of course affect the existence of U-I links. The model is applicable to business incubators where any of the incubating firms has any of the 15 kinds of links proposed in the taxonomy of U-I links. What is more, the model shows a close dependence between the “firms’ economic sector of activity” and the “statutory situation of the incubator”, spotlighting the natural tendency of firms in the biotechnology sector to locate in university incubators, given the nature of the scientific knowledge in this area. The university plays a core, irreplaceable role in the model to the extent that it is an important source of scientific and technical knowledge, well-suited to teaching / training and R&D, and so to the economic development of its region. New trends in the involvement of universities in entrepreneurial activities have also started to take their first steps in Portugal. Business incubation has provided them with an opportunity to interact with firms and to promote their image within the community. Furthermore, the institution of the Portuguese business incubators includes the elements that contribute to the transition to an entrepreneurial university, namely the possibility of technology transfer with spin-off creation, commercialisation of R&D results, orienting R&D to market needs and better assessment of academic researchers. These developments identified in the Portuguese university are not isolated. They are part of a broader trend toward entrepreneurial university. Finally, there are policy implications of the model both for the university, by leading and galvanising the processes of knowledge / technology transfer and business incubation, and for companies and the wider community, by supporting and facilitating mechanisms to create start-ups. Five concrete measures are listed, which would bridge the relationship gap between universities and companies. These are founded on a conception of an interventionist and entrepreneurial university, one that is very much concerned with taking every economic advantage of the outcome of its R&D. Among the measures proposed are: the establishment of an interface service like “technology transfer office” (TTO) within the university, and of an incubator outside it, and also of a network for innovation and practical actions to motivate researchers and promote U-I links.

ACKNOWLEDGMENTS The author would like to thank the valuable contributions made by Professor João Caraça, Professor Henrique Diz and Professor Henry Etzkowitz during the research that has resulted in this chapter.

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Matusiak, K. B. (2003). Business Incubators in Poland. International Journal of Entrepreneurship and Innovation Management, 3, 87-98. Mian, S. (1996). Assessing the value-added contributions of university technology business incubators to tenant firms. Research Policy. 25, 325-335. Novozhilov, Y. V. (1991). University-Industry Cooperation in Eastern Europe: The Experience of Some Advanced Universities in the USSR. International Journal of Technology Management. 6(5/6), 469-477. OECD (1997). Technology Incubators: Nurturing small firms, Report of the OECD Workshop on Technology Incubators – 25 Jun, OECD, Paris. OECD (1999). Incubators: The state of the art, OECD, Paris. OECD (2000). Science Technology and Industry Outlook 2000: Innovation Networks, OECD, Paris. OECD (2002). OECD Science, Technology and Industry Outlook 2002, OECD, Paris. Phillips, R. (2002). Technology Business Incubators: How effective as technology transfer mechanisms?. Technology in Society, 24, 2999-316. Polt, W. R., Gassler, H., Schibany, A. & Schartinger, D. (2001). Benchmarking Industry Science Relations: The Role Of Framework Conditions, Science and Public Policy, 28(4), 247-258. Rubio, M. L. (2001). Un Modelo flexible de incubación para emprendimentos innovadores. In ANPROTEC e SEBRAEE. World conference on Business Incubation. CD-ROM, ANPROTEC, SEBRAE, Rio de Janeiro. Schartinger, D., Schibary, A. & Gassler, H. (2001). Interactive relations between Universities and Firms: Empirical evidence for Austria. Journal of Technology Transfer, 26, 255-268. Santoro, M. D. & Chakrabarti, A. K. (2002). Firm size and technology centrality in industryuniversity interactions. Research Policy, 31, 1163-1180. Siegel, D., Thursby, T., Thursby, H. & Ziedonis, A. (2001). Organizational Issues in University-Industry Technology Transfer: An overview of the Symposium issue. Journal of Technology Transfer, 26,5-11. Smilor, R. & M Gill, D. (1986). The New Business Incubator: Linking Talent, Technology, Capital and Know-How. Lexington, Mass: Lexington Books. Tornatzky, L., Waugaman, P. & Gray, D. (2002). Innovation U.: New University Roles in a Knowledge Economy. Southern Growth Policies Board, Research Triangle Park. Tornatzky, L., Sherman, H. & Adkins, D. (2003). Incubating Technology Businesses: A national benchmarking study. NBIA Publications, Athens, Ohio. Wiggins, J. & Gibson, G. (2003). Overview of US incubators and the case of the Austin Technology Incubator. International Journal of Entrepreneurship and Innovation Management, 3, 56-66. Van Dierdonck, R., Debackere, k. & Engelen, e. (1990). University-Industry relationships: how does the Belgian academic community feel about it?. Research Policy, 19(6), 551566. Vedovelho, C. (1997). Science Parks and University-Industry interaction: geographical proximity between the agents as a driving force. Technovation, 17(9), 491-502. Vedovelho, C. (1998). Firms’ R&D Activity and Intensity and the University-Enterprise Partnerships. Technological Forecasting and Social Change, 58, 215-226.

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In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 8

SOURCES OF INFORMATION IN INTERNATIONAL ENTREPRENEURSHIP PROCESS *

Valle Santos Álvarez†, Teresa García Merino‡ University of Valladolid, Departamento de Organización de Empresas y C.I.M. Avda. Valle de Esgueva, 6. 47011 – Valladolid, Spain

ABSTRACT The globalisation of markets is increasingly forcing firms to internationalise. Managers’ decisions in firms’ internationalisation processes are complex because of the diversity of information stimuli that are involved. Thus the internationalisation process is conditioned by the strategic interest that international activity has for the firm, the accessibility of the foreign markets, the pressure of the competitive and institutional environment, and the firm’s ability to integrate into international competition. It is not, however, these objective factors that directly affect the decision, but rather the information stimuli that the manager receives about them. Consequently, information plays a critical role in the internationalisation decision. Managers acquire information in many different ways: through personal contacts, or social networks, from the media, or organisms linked to business activity, and so on. Thus the current chapter studies the information sources that company managers use in their firm’s internationalisation process. The literature has emphasised the importance of access to information and the manager’s active role in the search for information. Moreover, faced by different sources of information, managers, through a process of selective attention, attend some messages and ignore others. In other words, the managers classify some messages as signals and others as noise. In this line, the current research looks at which information sources managers take into account when they absorb the information stimuli about the factors involved in the firm’s internationalisation decision. The chapter studies the extent to *

This research has received funding from the Spanish Ministry of Education and Science (SEJ 2007-60922/ECO). Tel.: +34 983 183813; Fax: +34 983 423899; E-mail: [email protected] ‡ E-mail: [email protected] †

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Valle Santos Álvarez and Teresa García Merino which managers attend the opinions of other individuals with whom they maintain relationships, or messages from the media, or the information offered by different organisms. The following organisms are considered: (1) organisms dedicated to the phenomenon of business internationalisation (Spanish Institute of Foreign Trade – ICEX, regional export promotion body); (2) other public organisms, such as the chambers of commerce; and (3) the corresponding sectorial associations. This chapter also studies the extent to which the managers behave actively in their search for information or receive information without search effort. The empirical analysis involves firms in the CastileLeon region of Spain from two sectors: information and communications technologies, and the natural stone industry.

Keywords: Opportunity recognition, entrepreneurial, internationalisation, manager, sources of information

Environments are not given realities, but created through a process of attention and interpretation (Pfeffer and Salancik, 1978: 13)

INTRODUCTION The globalisation and opening of markets is increasingly forcing firms to internationalise. Thus firms sooner or later face the strategic decision of whether or not to join the internationalisation phenomenon. This phenomenon is complex because of the diversity of information stimuli that intervene in the internationalisation decision and because of the variety of strategies open to the firm in that process, although we do not focus on this latter aspect here. Various factors intervene in the internationalisation decision: the strategic interest that international activity has for the firm, the accessibility of the foreign markets, the pressure of the competitive and institutional environment, and the firm’s ability to integrate into international competition. The decision does not, however, emerge naturally from the simple combination of these factors, but through the intervention of a manager. Moreover, it is not these objective factors that directly affect the decision, but rather the information stimuli that the manager receives about them (Weick, 1979). Thus information plays a critical role because it gives an idea about the elements upon which the internationalisation decision is based. The literature has stressed the importance of managers’ access to information (Shane, 2002, 2003) and the importance of the information search process (Child, 1972; Pfeffer and Salancik, 1978; Garg et al., 2003). But the individual’s cognitive limitations, the information constraints and the ambiguity of the information limit the effectiveness of the perception process. Consequently, the receiver classifies an information stimulus either as a signal or as noise (Starbuck and Miliken, 1988). Only in the first case will the receiver pay attention to the stimulus. Thus it is not only access to information that is important, but also the interpretation process, which attributes meaning and importance to the information in the decision-making process.

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Thus, the current chapter studies the information sources that provide company managers with the information that determines their firm’s international entrepreneurship process. In this line, we look at which information sources managers take into account when they absorb the information stimuli about the factors involved in the firm’s internationalisation decision. We study the extent to which managers pay attention to the opinions of other individuals with whom they maintain relationships, or messages from the media, or the information offered by different public organisms: Spanish Institute of Foreign Trade (ICEX), the regional export promotion body, the chambers of commerce, or the corresponding sectorial associations. This chapter is organised as follows. After this short introduction, the second section reviews the research into the importance of access to information in the strategic decisionmaking process, and then formulates the analytical model used in this research. The third section presents the empirical application of that model, through a preliminary study. Section 4 reports the results of the analysis carried out. The final section discusses the main conclusions of this research and offers some implications for future research.

I. INFORMATION IN THE FIRM’S INTERNATIONALISATION PROCESS: A THEORETICAL FRAMEWORK The firm’s internationalisation process refers to a set of commitments that permit the establishment of more or less stable links between the firm and foreign markets (Alonso, 1994). It is a broad and complex process, because firms have a wide variety of mechanisms available for selecting and penetrating foreign markets (Coviello and McAuley, 1999). Thus the process ranges from export activities to strategic alliances with foreign partners to foreign direct investment operations. But the majority of firms, particularly SMEs, start their internationalisation process by using exports. Various factors intervene in the international entrepreneurship decision, including those to do with the firm’s individual interest and the public policies promoting business internationalisation. But the decision does not emerge naturally from the simple combination of these factors, but through the intervention of the manager. Moreover, it is not the objective factors that intervene in the decision, but the personal perception that the manager has formed about them (Weick, 1979). But managers normally experience conditions of information overload, high uncertainty, strong emotions, time pressure, and fatigue (Baron, 1998). Moreover, the cognitive complexity of the business context far exceeds the individual’s cognitive possibilities. The manager consequently faces information asymmetries and an overload of stimuli. For these reasons, the managers do not pay attention to all the information stimuli they receive from outside, but only a subset of them – what the literature calls “selective attention” (Beyer et al., 1997; Fiske and Taylor, 1991; Thomas, 2006). The managers subsequently interpret the stimuli they have selected. The literature has identified systematic and persistent variations in managers’ interpretations of their environment (Dutton, 1993; Milliken and Lant, 1991; Starbuck and Milliken, 1988; Daft and Weick, 1984). Managers’ perception ignores some information stimuli and attributes meanings to others that are not always very accurate. The perception process consequently becomes the central element of the analysis of managerial decisions in general and managers’

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internationalisation decision in particular (Burton and Schlegelmilch, 1987; Manolova et al., 2002). Perception refers to the cognitive process through which the individual, in this case the manager, captures information from the environment and forms a representation of the surrounding reality. Researchers have distinguished two stages in this process (Starbuck and Milliken, 1988): (1) the reception of the information stimuli, or information gathering; and (2) their subsequent interpretation. Stimulus reception refers to the stage in which the individual determines which of the information stimuli received they pay attention to and which they ignore. In other words, in this stage the individual classifies the external stimulus either as a signal or as noise (Starbuck and Milliken, 1988). Then, in the interpretation stage, the individual attributes meaning to the stimuli they have selected. Thus the perception process generates a series of filters that amplify some stimuli and dampen others (Starbuck and Milliken, 1988). We can therefore conclude that managers use perceptual filters to discriminate between relevant and irrelevant stimuli (Oswald et al., 1997). This chapter focuses exclusively on the information gathering stage. The study of the reasons why managers pay attention to some information stimuli and ignore others can be found in the literature focusing on entrepreneurs’ recognition of business opportunities (Gaglio and Katz, 2001; Venkataraman, 1997; Shane and Venkataraman, 2000). The internationalisation decision has been seen as an entrepreneurial act, and some authors distinguish an emergent field of study: “International entrepreneurship” (Oviatt and McDougall, 2005). The international expansion of the firm refers to an opportunity available to all firms that only some, however, exploit: those that embark on the internationalisation process. With regard to opportunity recognition, researchers ask: why do some people and not others discover and exploit particular entrepreneurial opportunities? (Venkataraman, 1997; Mitchell et al., 2002). According to research, two broad categories of factors “influence the probability particular people will discover particular opportunities: (1) the possession of the prior information necessary to identify an opportunity and (2) the cognitive properties necessary to value it” (Shane and Venkataraman, 2000: 222). Looking at the first reason – the access to information – the problem is for the managers to be able to recognise and pay attention to the associated information stimuli. Indeed, some authors argue that many of the problems that emerge in firms’ internationalisation processes are due to managers’ ignorance of the existence of the information sources (Katsikeas and Morgan, 1994). The information that is relevant in the internationalisation process deals with various questions that Santos and García (2008) summarise as follows: the attractiveness of internationalisation, the barriers to the process, and the different aid programmes that help firms overcome their limitations and implement this process. The attractiveness refers to the assessment of internationalisation as a strategic option to exploit business opportunities in foreign markets (Ramirez and Rosell, 2006). The barriers are defined as any attitudinal, structural, operational or other type of obstacle that obstructs the firm’s wish to initiate, develop or maintain its international activity (Leonidou, 1995). The aid programmes are those that different organisms provide to facilitate internationalisation among firms1. 1

With respect to the content of the programmes, these can be of a very different kind: information, consultation, business promotion (aid to trade fairs, market prospects, communication and image, export consortiums, etc.), export initiation, individualised services to companies (the drawing up of strategic studies, search for

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Research shows that the criteria for selecting some stimuli and not others are very varied. Sometimes the stimuli are selected according to the source. For example, stimuli coming from economic agents or partners whom we trust are more likely to be attended (Carolis and Saparito, 2006; McEvily et al., 2003). In the same line, other authors have found that public organisms have a high legitimacy as sources of messages and so managers receive their information signals with greater interest and pay more attention to them (Dutton and Ashford, 1993; Dutton et al., 2001; Ling et al., 2005). Likewise, Singh (2000) stresses the social sources of information that managers use (Baron et al., 2005; Sedikides and Gregg, 2003). At other times, the selection criterion is based on the content of the stimulus. Thus according to Dutton and Ashford (1993) and Ling et al. (2005), stimuli linked to threats win more attention than those linked to opportunities. Moreover, individuals tend to pay attention to stimuli related to information that they already know. In this respect, Shane (2000) suggests that entrepreneurs discover opportunities because their previous knowledge triggers recognition of the value of the new stimuli. The second reason why some firms recognise and exploit opportunities concerns the manager/decision-maker’s cognitive framework. The cognitive framework is the structure that organises and interprets information, and which is developed through experience (Fiske and Taylor, 1991; Baron, 2004). Research on internationalisation has examined the influence of the demographic characteristics of the managers on the internationalisation process (Cavusgil and Naor, 1987; Leonidou et al., 1998). Nevertheless, the literature has shown that firms’ internationalisation process does not depend as much on demographic characteristics as on the cognitive variables that affect the gathering and interpretation of information (Markoczy, 1997). The possible role of the individual’s psycho-cognitive characteristics in this process has received much less attention, despite an important work in the 1970s (Weidersheim-Paul et al., 1978). In the same line, the decision-maker’s individual international posture (IIP) is a determinant factor in the firm’s internationalisation strategy (Acedo and Florin, 2006; Manolova et al. 2002). The IIP “encompasses the cognitive elements entrepreneurs may possess to both identify and exploit international opportunities” (Acedo and Florin, 2006: 52). Specifically, the IIP represents the “individual’s propensity to adopt and enact international expansion strategies”, and is measured by three variables: proactive disposition, an intuitive cognitive style, and high tolerance for ambiguity (Acedo and Florin, 2006: 52-53).

INFORMATION STIMULI

PERCEPTION PROCESS

PERCEIVED REALITY

RECEPTION OF STIMULI:

• Access to information • Cognitive framework INTERPRETATION

Figure 1. Model of perception.

intermediaries and customers), training, insurance, credit financing, subsidy financing, fiscal measures, aid to

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II. EMPIRICAL APPLICATION The empirical application in this chapter has one specific objective: to determine which sources of information managers consider when they gather the information stimuli that intervene in their firm’s internationalisation decision. The empirical analysis starts with the elaboration of a questionnaire, which was sent to a sample of firms in the Spanish region of Castile-Leon from two sectors: information and communications technologies (henceforth, ICT) and Natural Stone (henceforth, NS). These two sectors were chosen because they are on the list of target sectors that the regional government of Castile-Leon has drawn up with the objective of promoting the internationalisation of the region’s business. Specifically, both sectors are included in the Second Business Internationalisation Plan of Castile-Leon (2008-2011)2. The questionnaire asks managers for their opinion about the importance of the elements intervening in the internationalisation decision, as well as about the different sources from which they obtain the information stimuli that intervene in that decision. The information stimuli refer to three different aspects: the attractiveness of internationalisation for firms in general; the barriers to that process; and the aid programmes that various organisms have implemented. The information sources come in four categories: (1) managers’ own experience or opinion; (2) other individuals’ opinions; (3) the media; and (4) different public organisms. The first category includes the manager’s personal opinion. The second refers to the opinions of managers from the sector and other agents in the business world. The third category includes both the media from the sector and the general media. Finally, the public organisms are as follows: the chambers of commerce; the regional agency for the promotion of business internationalisation (Ade Internacional EXCAL); the national organism dedicated to encouraging business internationalisation (ICEX); and the sectorial associations (AETICAL in the ICT sector, and PINACAL in the NS sector). The responses to all the questions in the questionnaire are measured on 5-point Likert scales. The firms considered in this study are ones that are members of the corresponding sectorial association (AETICAL or PINACAL) and that have also expressed an interest in the internationalisation process. In the NS sector, only 15 of the 53 member firms have shown an interest in internationalisation3. In the case of the ICT-sector firms, only 33 of the 162 member firms have expressed a similar interest4. We obtained a total of 35 valid responses from the questionnaires sent, 21 from the ICT sector and 14 from the NS sector. The sample size is clearly very small, but we should point out that the sample does capture the majority of firms from the two sectors that are interested in internationalisation. The sample size prevents us from applying statistical interference techniques. Instead, we use the narrative approach, which is more in accordance with the context of the research. This approach is a qualitative research method, which is appropriate for examining the interpretations and opinions of a investing abroad, overseas offices, etc. (Cavusgil and Czinkota, 1990; Calderón and Fayos, 2004). Castile-Leon Exports 2007: “New strategies to export more”, No. 10, p. 10 (Castilla y Léon Exporta, 2007). 3 Castile-Leon Exports 2007: “Interview with Alberto Prados Sastre”, No. 10, p. 12-14 (Castilla y Léon Exporta, 2007). 4 Castile-Leon Exports 2007: “Interview with Miguel Angel Garcia”, No. 11, p. 12-14 (Castilla y Léon Exporta, 2007). 2

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relatively small number of subjects (Barry and Elmes, 1997). The results obtained do not allow us to generalise the conclusions, but we do think that they serve as an illustrative example of the object of study of this chapter.

III. RESULTS The following table shows the managers’ assessments of the importance, in the internationalisation decision, of the attractiveness of internationalisation, the barriers to that process, and the aid programmes in place. The table also shows the mean evaluation of the different information sources with respect to these three questions. We can draw various conclusions from these data. In both sectors, of the three aspects considered, the managers consider the aid programmes to be the most important, while they consider the attractiveness of internationalisation to be the least important. Moreover, the managers from the ICT sector give higher evaluations than those from the NS sector in all three aspects. With regard to the information sources, we note first the diversity of sources that managers use when they are evaluating the importance of the different aspects intervening in their firm’s internationalisation decision. Indeed, the managers consulted mention all of the information sources considered. Nevertheless, the data show some important differences between the sources. Thus the promotion campaigns that the different organisms involved in business internationalisation implement are generally the most important source of information of all the sources considered. There are also important differences in the results between the two sectors. For the ICT sector, the results show that the managers diversify their sources of information among the different options available. Thus the managers get their information about the attractiveness of internationalisation mainly from the promotion campaigns, but also, and with almost the same intensity, from the rest of the sources considered. For the barriers, the main source of information is the opinions of other managers, followed by the manager’s own experience. For the different aid programmes the most important sources are the manager’s own experience and the promotion campaigns of the various public organisms. Globally, we can say that for the ICT firms, the promotion campaigns of the public organisms and sectorial associations and the manager’s own experience are important sources of information about the factors that determine internationalisation. Messages from the media are clearly the least important source of information. For all the sources of information taken together, the managers of the ICT firms receive more information about the attractiveness of internationalisation and less information about the barriers that limit this process. The results are different in the case of the NS-sector firms, since the public organisms and sectorial associations stand out from the rest of the information sources. Moreover, the media, the manager’s own experience and the opinions of other managers are scarcely relevant in the evaluation of attractiveness. Finally, it is also interesting to note that the manager’s own experience is barely relevant in the evaluation of barriers and aid programmes. These firms’ limited tradition of internationalisation and their specificity may explain this result. Looking at the global evaluation of the three concepts considered, the

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results coincide with those of the ICT firms: the information sources provide more information about the attractiveness of internationalisation, less about aid programmes, and still less about barriers. The public organisms and sectorial associations seem to be important in the gathering of the information stimuli that intervene in the firm’s internationalisation decision, so we now look in more detail at the relative importance of each one of them. Table 1. Managers’ evaluation of importance of attractiveness, barriers and aid, and of different information sources and managers’ evaluation of the information sources

Evaluation Own experience Opinions Media messages Public organisms: C. Commerce Excal Icex Sector association (mean)

ICT firms NS firms Attractiveness Barriers Aid Attractiveness Barriers 3.25 3.36 3.63 2.63 3.06 SOURCES OF INFORMATION 3.1 2.71 3 0.355 0.71 3.05 3.065 2.73 0.7 1.46 2.85 2.375 2.565 0.052 1.67 2.85 3.1 3.8 3.8 (3.38)

2.28 3 2.85 2.66 (2.69)

2.90 3.3 3.28 2.61 (3.02)

2.1 3.55 1.75 3.55 (2.73)

Attraction

Chamber of Commerce 4

Barriers Aid

3 2 1

AETICAL

0

ICEX Figure 2. ICT firms' evaluation of promotion campaigns.

2 3.07 1.78 2.71 (2.39)

EXCAL

Aid 3.42 0.85 1.31 1.71 2.07 3.07 1.92 2.85 (2.47)

Sources of Information in International Entrepreneurship Process Chamber of Commerce

141

Attraction

4

Barriers

3,5

Aid

3 2,5 2 1,5 1 0,5 PINACAL

0

EXCAL

ICEX

Figure 3. NS firms’ evaluation of promotion campaigns.

In the case of the ICT firms (Figure 2), the regional internationalisation promotion body (EXCAL) is the most important source for the evaluation of the barriers and aid programmes, followed by the corresponding national organism (ICEX). The most important sources for the evaluation of attractiveness are ICEX and the sectorial association (AETICAL). The chambers of commerce provide only weak information stimuli in the three aspects considered, above all in the case of barriers. Thus EXCAL is an important source of information for the barriers and aid programmes. ICEX is the most complete source of information, since it is one of the most important for the three concepts that intervene in the internationalisation decision. Finally, the sectorial association (AETICAL) is clearly an important point of reference for information about attractiveness, but not so much for the barriers, and it is the least important for information about aid programmes. With regard to the global evaluation, these campaigns provide more information about attractiveness, followed by aid programmes. They provide less information about barriers to internationalisation. The results are slightly different in the case of the NS-sector firms (Figure 3). We first note that EXCAL is an important point of reference for all three concepts considered. The sectorial association (PINACAL) is an important source of information about attractiveness, but less so about aid programmes and barriers. The least important sources of information about the aspects intervening in the internationalisation decision of firms from this sector are the chambers of commerce, and particularly ICEX. Consequently, in this sector the promotion campaigns that most attract managers’ attention come mostly from the regional export promotion agency (EXCAL) and the sectorial association (PINACAL). Globally, the promotion campaigns of the various organisms provide more information about attractiveness, followed by aid programmes, as in the case of the ICT sector. Again, these organisms provide the least amount of information about the barriers.

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IV. CONCLUSION Firms’ internationalisation processes constitute the firms’ response to the process of economic globalisation. Managers’ decision to implement the internationalisation process rests on the exploitation of the opportunities that foreign markets provide. The factors that determine the exploitation of these opportunities are basically: access to information, and the cognitive framework of the firm’s decision-maker, the manager. This chapter concentrates on the first of these factors and analyses the sources of information that provide the information stimuli that intervene in the internationalisation decision. For this we sent a questionnaire to firms in the Spanish region of Castile-Leon interested in internationalisation and from two specific sectors: ICT and natural stone (NS). The information stimuli refer to three aspects – attractiveness, barriers and aid programmes – and the sources of information are the manager’s own opinion, other individuals’ opinions, the media, and public organisms and sectorial associations. The results show that the different sources considered provide more information about attractiveness than about aid programmes, and rather less again about barriers. Perhaps for this reason the evaluation of the importance of attractiveness is the lowest among the managers consulted. On the other hand, the results show that the managers receive information mostly from the promotion campaigns of the various organisms involved in business internationalisation (ICEX, EXCAL, chambers of commerce and sectorial associations). In the ICT sector, the campaigns from the Spanish Institute of Foreign Trade (ICEX) and the regional agency for the promotion of business internationalisation (EXCAL) are important sources of information for the different aspects of the internationalisation process. This information is complemented by the information offered by the sectorial association about the attractiveness of internationalisation. The managers of the NS-sector firms point to EXCAL, however, as the most important source of information. Likewise, the sectorial association is also an important source of information about the attractiveness of internationalisation. All these results show that the managers have easy access to information about the attractiveness of internationalisation, despite the fact that the managers consider this concept to be the least important of the three aspects in the decision. Perhaps the promotion campaigns should stress information about the support available to firms in their international expansion, as well as about the possible barriers to progress. In other words, the institutions and organisms that promote business internationalisation should try to consider the importance managers attribute to each particular aspect when designing the information they provide about them.

V. REFERENCES Acedo, F.J. and Florin, J. (2006): “An entrepreneurial cognition perspective on the internationalization of SMEs”. Journal of International Entrepreneurship, Vol. 4 (1), pp. 49-67. Alonso, J.A. (1994): “El proceso de internacionalización de la empresa”. Información Comercial Española, nº 725, january, pp. 127-143.

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Baron, RA. (1998): “Cognitive mechanisms in entrepreneurship: why and when entrepreneurs think differently than other people”. Journal of Business Venturing, Vol. 13 (4), pp. 275294. Baron, RA. (2004): “Potential benefits of the cognitive perspective: expanding entrepreneurship’s array of conceptual tools”. Journal of Business Venturing, Vol. 19 (2), pp. 169-172. Baron, RA, Byrne, D. and Branscombe, NR (2005): Social Psychology, 11h ed. Allyn and Bacon, Boston. Barry, D. and Elmes, M. (1997): “Strategy retold: toward a narrative of strategic discourse”. Academy of Management Review, 22; pp. 429-452. Burton, FN and Schlegelmilch, BB (1987): “Profile analyses of non-exporters versus exporters grouped by export involvement”. Management International Review, Vol. 27 (1), pp. 38-49. Calderón, H and Fayos, T. (2004): “Análisis de la relación entre el compromiso exportador y las ayudas a la internacionalización de las empresas”. Investigaciones Europeas de Dirección y Economía de la Empresa, Vol. 10 (2), pp. 201-220. Carolis, DM and Saparito, P. (2006): “Social Capital, cognition, and entrepreneurial opportunities: a theoretical framework”. Entrepreneurship Theory and Practice, Vol. 30 (1), pp. 41-56. Cavusgil, S.T. and Czinkota, M.R. (1990): International Perspectives on Trade Promotion & Assistance, Quorum Books. Westport. Cavusgil, ST and Naor, J. (1987): “Firm and management characteristics as discriminators of export marketing activity”. Journal of Business Research, Vol. 15, pp. 221-235. Child, J. (1972): “Organization Structure, Environment and Performance: The Role of Strategic Choice”. Sociology, Vol. 6; pp. 1-22. Coviello, N. and McAuley, A. (1999): “Internationalisation and the smaller firm: A review of contemporary empirical research”. Management International Review, Vol. 39 (3), pp. 223-256. Daft, R.L. and Weick, K.E. (1984): “Toward a model of organizations as interpretation systems”. Academy of Management Review, Vol. 9 (2), pp. 284-295. Dutton, J.E. and Ashford, S.J. (1993): “Selling Issues to Top Management”. The Academy of Management Review, Vol. 18 (3), pp. 397-428. Dutton, JE, Ashford, RM, O’Neil and Lawrence, KA (2001): “Moves the matter: issue selling and organizational change”. Academy of Management Journal, Vol. 44, pp. 716-736. Fiske, S. T. and Taylor, S. E. (1991). Social cognition (2nd edn.). New York: McGraw Hill. Gaglio, CM and Katz, JA (2001): “The psychological basis of opportunity identification: Entrepreneurial alertness”. Small Business Economics, Vol. 16, pp. 95-111. Garg, V.K., Walters, B.A. and Priem, R.L. (2003): “Chief executive scanning emphases, environmental dynamism, and manufacturing firm performance”. Strategic Management Journal, Vol. 24, pp. 725-744. Katsikeas, C. and Morgan R. (1994): Differences in perception of exporting problems based on firm size and export marketing experience”. European Journal of Marketing, Vol. 28 (15), pp. 17-33. Leonidou, L.C. (1995): “Export stimulation research: review, evaluation and integration”, International Business Review, Vol. 4 (2), pp. 133-156.

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Leonidou, L., Katsikeas, C and Piercy, N. (1998): “Identifying managerial influences on exporting: Past research and future directions”. Journal of International Marketing, Vol. 6 (2), pp. 74-102. Ling, Y., Floyd, SW. and Baldridge, DC (2005): Toward a model of issue-selling by subsidiary managers in multinational organizations”. Journal of International Business Studies, Vol. 36, pp. 637-654. McEvely, B., Peronne, V. and Zaheer, A. (2003): “Trust as an organizing principle”. Organization Science, Vol. 14 (1), pp. 91-103. Manolova, TS., Brush, CG and Greene PG (2002): ”Internationalization on small firms”. International Small Business Journal, Vol. 20 (1), pp. 9-31. Markoczy, L. (1997):”Measuring beliefs: accept no substitutes”. Academy of Management Journal, Vol. 40 (5), pp. 1228-1242. Mitchell, RK., Busenitz, L., Lant T., McDougall, PP and Morse J. (2002): “Toward a theory of entrepreneurial cognition: rethinking the people side of entrepreneurship research”. Entrepreneurship Theory and Practice, Vol. Winter, pp. 93-104. Oviatt, BM and McDougall, PP (2005): “The internationalization of entrepreneurship”. Journal of International Business Studies, Vol. 36 (1), pp. 2-8. Ozgen E and Baron, RA (2007): “Social sources of information in opportunity recognition: Effects of mentors, industry networks, and professional forums”. Journal of Business Venturing, Vol. 22 (2), pp. 174-192. Pfeffer, J. and Salancik, G.R. (1978): The external control of organizations. New York: Harper and Row. Ramírez, M. and Rosell, J. (2006): “La actividad internacional de la empresa aragonesa”. Boletín Económico de ICE, Nº 2894, pp. 29-44. Santos, MV and García MT (2008): “The export decision and the cognitive limitation of the managers”. Journal of Information and Knowledge Management. Vol. 7 (2), pp 123-133. Sedikides, C. and Gregg, AP. (2003): “Portraits of the self. In. Hogg, MA, Cooper, J. (eds.), The Sage Handbook of Social Psychology. Sage, Thousand Oaks, CA, pp. 110-138. Shane, S. (2000): “Prior knowledge and discovery of entrepreneurial opportunities”. Organization Science, Vol. 11, pp. 448-469. Shane, S. (2003): A general theory of entrepreneurship: The individual-opportunity nexus. Edward Elgar, Cheltenham, UK. Shane, S. and Venkataraman, S. (2000): “The promise of entrepreneurship as a field of research”. Academy of Management Review, Vol. 25 (1), pp. 217-226. Singh, R. (2000): Entrepreneurial opportunity recognition through social networks. New York: Garland publishing, Inc. Taylor and Francis Group. Starbuck, W. and Milliken, F. (1988): “Executive perceptual filters: What they notice and how they make sense”. In D. Hambrick (ed.) The executive effect: Concepts and methods for studying top managers: 35-65. Greenwich, CT: JAI Press. Thomas, D. (2006): “Domain and development of cultural intelligence: the importance of mindfulness”. Group & Organization Management, Vol. 31 (1), pp. 78-99. Venkataraman, S. (1997): “The distinctive domain of entrepreneurship research: An editor’s perspective”. In Katz, J. and Brockhaus, R. (eds) Advances in entrepreneurship, firm emergence, and growth, Vol. 3: JAI Press, Greenwich CT, pp. 119-138. Weick, K. (1979): The Social Psychology of Organizing. Reading: Addison-Wesley.

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Wiedersheim-Paul, F., Olson, HC. and Welch, LS (1978): ”Pre-export activity: The first step in internationalization”. Working paper, Center of International Business Studies Department of Business Administration, Uppsala University.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 9

ENTREPRENEURIAL INNOVATION, ECONOMIC GROWTH AND THE STIGMA OF FAILURE *

Patricia Crifo1,† and Hind Sami2,‡ 1

Ecole Polytechnique, Univ. of Haute Alsace and IRES, Catholic U. of Louvain, France 2 IESEG School of Management and LEM, France

ABSTRACT This contribution proposes a model of entrepreneurial activity highlighting a complex relationship between innovation and stigma of failure. Innovation decisions are examined in an endogenous growth model with horizontal differentiation in the spirit of Romer (1990). In our framework, entrepreneurs decide to invent a new good, given entrepreneurial talent and production costs, and face a risk of failure. If an entrepreneur fails in this innovation process, the firm remains on the market but bears a stigma of failure. We then analyze how the risk and the stigma of failure affects business dynamism and economic growth. We show that while a higher risk of failure is detrimental to innovation and growth, it positively affects the returns to entrepreneurial talent (or equivalently the comparative advantage of successful innovators). On the contrary, a higher stigma of failure inhibits entrepreneurial creation but might be beneficial for growth. These results are supported by recent empirical evidence in OECD countries.

JEL Classification: Entrepreneurship, innovation, stigma of failure, economic growth Keywords: M13, O33, Z13, O41

*

Patricia Crifo acknowledges the financial support of the Ecole Polytechnique chair for Business economics and the Toulouse and Ecole Polytechnique chair for Sustainable finance and responsible investment. † Contact: Ecole Polytechnique. Department of Economics-Laboratoire d'Econometrie, 91128 Palaiseau cedex France. [email protected]

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1. INTRODUCTION Entrepreneurial creation is a key component of business dynamism and growth. Because the success of nascent enterprises is all but linear, the analysis of business creation is important for the understanding of the relation between entrepreneurship and growth. Indeed, only 30% of entering firms survive beyond the first two years of life (OECD, 2003). In France for instance, 2007 witnessed the creation of 321 478 firms and the failure of 43 000 firms (INSEE, 2008). All new enterprises are not created equal and business creation is characterized by early failures, market churning and turbulence. Two main stylized facts on entrepreneurship have reached a consensus in the recent literature (see Crifo and Sami, 2008). On the one hand, the rate of entrepreneurial activity differs largely across countries (from 7.2% in Europe to 12.2% in the US), across sectors (entry rates in ICT-related industries are twice as high as in business services activities) and across individuals (there exists a relationship between firms ex ante characteristics and post-entry performance). On the other hand, entry and exit rates are highly correlated across industries suggesting that firm turnover is characterized by search and experimentation. Many explanations are evoked in the literature to explain the large discrepancies in entrepreneurship across countries: individual characteristics (skills, risk aversion), institutions and regulations (regulations on labor and/or credit markets, administrative costs, barriers to entry), social norms (perception of failure), competition, technological advance, growth, business cycles, information asymmetry, corporate governance (Santarelli and Vivarelli, 2006). One common assertion is that high rates of entrepreneurship and superior economic performance in the US would be linked to a higher cultural tolerance of business failure (for a comprehensive analysis of stigma of failure across OECD countries see Hughes and Burchell, 2007). Given the positive link between business creation and growth, the fear of failure seems detrimental to economic growth (according to the Global Entrepreneurship Monitor, such a fear would prevent 30% to 40% of potential entrepreneurs from starting a new business in 2002).1 This argument is all the more appealing as it may contain various phenomenons. The fear of failure may indeed be indirectly related to the extent of administrative costs and barriers to entry or to the cost of capital. More specifically, a high stigmatization of failure may act as a strong disincentive to potential entrepreneurs. A stigma toward failed entrepreneurs induces a lack of propensity to take the risks of starting new businesses and start a second business if the first one has failed, leading to lower rates of innovation and growth in those economies (e.g. European Commission 2000). More interestingly, explaining differences in entrepreneurial creation and performance across countries by appealing to cultural differences and social norms toward failure may explain the puzzling stylized fact according to which entry and exit rates are correlated across industries. Indeed, it is not surprising that higher entry and exit rates tend to be observed in countries like the US where the tolerance of business failure is high. ‡ 1

Contact: 3 rue de la digue, 59000 Lille, [email protected] The relationship between entrepreneurship and growth is complex and widely debated, for instance following the schumpeterian tradition. Our assertion simply builds upon the numerous empirical evidence that report a positive relationship between entrepreneurship and growth. For instance, Audretsch and Thurik (2001) report

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In this paper, we propose a theoretical model to analyze how the stigma of failure in innovative sectors affects business dynamism and economic growth. We focus on the positive link between entrepreneurial creation in innovative sectors and growth and examine the effect of both the risk and the stigma of failure on growth and on the returns to innovative talent. The role of social norms in economic decision has received a renewed attention in the economics literature recently (see for instance the short survey in Giannetti and Simonov, 2004). From a theoretical perspective, the closest approach to ours is Landier (2006). Landier proposes a very comprehensive analysis of the dynamics of business creation with endogenous social norms. He shows that when the decision to continue a project or abandon it in favor of a new one depends on the cost of starting a new venture and, in particular, on the cost of capital after failure, multiple equilibria can arise which are characterized by different levels of stigmatization of failure. In particular, two types of equilibria are highlighted. In the `conservative equilibrium', the cost of capital for failed projects is high, the probability of liquidating and the average value of new ventures are low because mediocre projects persist. In the `experimental equilibrium', the cost of capital for failed projects is low, the pool of failed entrepreneurs is of higher quality, entrepreneurs fail more often and this leads to the creation of more firms with high prospects. Landier's conclusions are all the more interesting as he shows that " serial entrepreneurship" (entrepreneurs creating multiple start-ups) may be bad for welfare since in the experimental equilibrium, good entrepreneurs are more active but this raises the cost of capital for first-timers and the number of projects undertaken by bad entrepreneurs. Due to this lower sorting out of bad entrepreneurs, the experimental equilibrium can be less efficient compared to the conservative equilibrium. In this paper, we adopt a different but complementary approach to Landier's model. We propose a model of entrepreneurial creation within an innovation-driven endogenous growth à la Romer (1990). In this framework, entrepreneurs operate on a horizontally differentiated intermediate goods sector. The novelty compared to Romer's model consists in introducing the possibility of failure for intermediate good entrepreneurs. Two types of new intermediate good firms exist on the market: successful entrepreneurs who have paid for the patent and operate as local monopolists, and failed entrepreneurs who have lost their monopoly position and operate under a competitive environment, subject to a stigma of failure. Failure of innovations hence is reflected via two variables: the probability of losing the monopoly position associated with the innovation, and the corresponding stigma which affects production costs. In Landier's model, the stigma of failure affects the capital markets for startup finance, that is the cost of capital. Here, the stigma of failure affects the cost of production (which is a cost of labor). Moreover, business failure does not imply the disappearance of a new firm, it simply affects the firm's position on the market and the corresponding production costs. Our model allows examining several issues regarding the links between business dynamics and growth. First, we characterize the steady-state growth rate as a function of technological efficiency and the probability of innovation failure (i.e. the probability of losing the monopoly position). Second, we analyze whether a higher stigma of failure results in too much or too little business creation and growth in equilibrium. Finally, we examine the impact of business dynamism on the returns to entrepreneurial creation. Unlike Landier, our model leads to a unique steady-state in equilibrium. In this stationary equilibrium, a stable that for different samples including OECD countries over different time periods, an increase in entrepreneurial activity tends to result in higher subsequent growth rates and a reduction of unemployment.

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proportion of successful and failed entrepreneurs coexist. Our results however allows examining the distinct effect of the risk (that is the probability) of failure on the one hand, and of the stigma of failure on the other hand, both on growth and on the returns to entrepreneurial success. This paper is organized as follows. Section 2 presents the model. Section 3 derives the steady-state. Section 4 analyzes the impact of the risk and the stigma of failure on growth and on the returns to innovative talent. Section 5 concludes the article.

2. THE GROWTH MODEL WITH RISK AND STIGMA OF FAILURE 2.1. Basic Set-up The structure of the model is similar to Romer's framework (1990). The economy is composed by three sectors: a final consumption good sector, an intermediate goods sector and a research sector. There is a fixed mass of individuals who are either skilled or unskilled. The allocation of the workforce between skilled and unskilled labor is exogenous. Skilled workers are employed both in the research and the intermediate goods sectors and unskilled workers are employed in the final good sector. New goods are created by researchers and commercialized by intermediate good producers, provided that they buy a patent to the innovator. Unlike Romer's model, intermediate good producers are not symmetric in equilibrium. The monopoly position associated with the patent is not infinite and is eroded if the innovator fails to maintain her position on the market. Many R&D projects indeed do not result in a successful new product or service. For instance, in intangible asset industries while well-managed firms excel in productivity profitability and sales growth, there are many poorly managed firms (OECD, 2004). Firms in the intermediate goods sector are therefore not homogeneous: there is coexistence of `successful innovative' and `failed innovative' firms. It is important to note that here, failure means that the firm loses its monopoly position and hence that it has to produce under a competitive environment (subject to a stigma of failure as we will see below). Such an asymmetry in the intermediate goods sector is similar to Michel and Nyssen (1998). However, in Michel and Nyssen, patents are finite-lived, which explains why monopolies are contested over time. Once the patent expires, goods are automatically produced in a competitive environment. Here, patents remain infinite-lived and the erosion of monopolies is a random process. We distinguish the two types of intermediate good firms according to their production costs. If the firm fails to keep its monopoly position on the market, it bears a stigma of failure that affects its production costs by a factor γ > 1 . This assumption relies on the idea that innovators who have failed are still given a second chance such that they do not exit the market. However, because enjoying a second chance is costly firms bear higher production costs than their successful rivals. This assumption is in line with stigmatization costs that often take the form of wage reductions on the labor market or higher cost of capital after bankruptcy (see e.g. Landier, 2006). Here, failed entrepreneurs may have to reorganize production (for instance search and hire new employees) and the stigma of failure increase their labor costs.

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The asymmetry between successful and failed entrepreneurs on the intermediate goods market then rely both on their position on the market (monopoly versus competitive) and on their production costs (costs due to the stigmatization).

2.2. The Final Good Sector The homogenous final good is produced competitively using unskilled labor ( l ) and a variety of intermediate goods x(i ) , i ∈ 0, n] , according to the following technology: n

y = l α ∫ x(i )1−α di

(1)

0

where 0 < α < 1 is the weight placed on unskilled labor to produce the final good and n is the number of intermediate goods.2 The final good is the numeraire in this economy. Profit maximization by a representative firm in the final good sector leads to the following inverse demand functions for unskilled labor and intermediate goods:

p (i ) = (1 − α )(l ) ( x(i ) ) , i ∈ [0, n]

(2)

wu = α (l )

(3)

α

α −1 n

−α

∫ x(i) 0

1−α

di

where p (i ) denotes the price of intermediate good i and wu is the wage rate of unskilled workers.

2.3. The Intermediate Good Sector In this sector, firms produce horizontally differentiated goods. There is a continuum of intermediate firms (on the interval [0, n] ) which are characterized by specific production f

costs. Let n denote the number of entrepreneurs who have failed to maintain their monopoly position on the market. The number of successful innovators is then equal to

n−nf . Firms that have failed to innovate (labelled F-firms, i ∈ [0, n ] ) do not have a patent f

and produce an intermediate good in a perfectly competitive environment (with stigmatized production costs) whereas successful innovators (labelled S-firms, i ∈]n , n.] ) bear the f

innovation cost and act as local monopolists (with lower production costs). 2

Time is continuous, but to simplify notations time indexes are omitted when they are not necessary.

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Both types of firms produce differentiated goods using skilled labor as sole input. We denote by wh the wage of skilled workers. We assume that the stigma of failure is captured through the parameter

γ . In a successful firm the unit production cost is wh whereas in a

failed firm the unit (stigmatized) production cost is equal to γ .wh , where

γ > 1.

The optimization program for S-firms producing a good i ∈]n , n] thus writes: f

max π (i ) = p (i ) x(i ) − wh (i ) x(i ) x (i )

s.c.

p (i ) = (1 − α )(l ) ( x(i ) ) , i ∈]n f , n] α

−α

In F-firms, production takes place in a perfectly competitive environment such that the free-entry condition is given by:

π (i ) = p (i ) x(i ) − γwh (i ) x(i ) = 0, i ∈ [0, n f ] The indifference condition for skilled workers between working in any firm i ∈ [0, n] implies that the wage of skilled workers in the intermediate goods sector is the same for all s

f

firms: wh = wh = wh . The first-order conditions of the optimization program of F-firms producing variety

i ∈]n f , n] and the free-entry condition of S-firms producing variety i ∈ [0, n f ] imply: For i ∈ [0, n ], f

p(i ) = γwh = p f

(4)

1

⎡1 − α ⎤ α f x(i) = l ⎢ ⎥ =x γ w ⎣ h ⎦ π (i) = π f = 0

(5) (6)

For i ∈]n , n], f

p(i ) =

wh = ps 1−α

(7) 1

⎡ (1 − α ) ⎤ s x(i ) = l ⎢ ⎥ =x ⎣ wh ⎦

(8)

π (i ) = α ⋅ p s ⋅ x s = π s

(9)

2

α

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2.4. The Research Sector ⋅

In each period, n new goods (or new varieties) are invented in the research sector. We assume that the research process is deterministic. New goods are produced using skilled labor according to the following technology: ⋅

n = δ ⋅ n ⋅ hr where

(10)

δ ∈]0,1[ is an efficiency parameter and h r is the number of skilled workers

employed in the research sector. New varieties are invented by researchers and commercialized by intermediate good producers, provided that they buy a patent (or license) to the innovator. Only S-firms, producing variety i ∈]n , n] pay for the patent and act as local monopolists. F-firms produce f

the variety of good i ∈ [0, n ] under a competitive environment subject to a stigma cost, but f

they do not pay for the patent price. S-firms face a risk of innovation failure captured by a probability of failure λ , which is equivalent here to a measure of the erosion of the monopoly position.3 More precisely, if the intermediate good i is produced by a S-firm (local monopolist), the probability that this good become produced by a F-firm (competitive) during the next time interval dt is equal to λ ⋅ dt , where λ ≥ 0. 4 When a good is invented at time t , it is initially produced by a S-firm and the probability that it remains produced by this local − λ ( z −t )

monopolist at a future date z ≥ t is then equal to e . In other words the risk of failure is formalized by the probability of the replacement of a successful innovation ( λ ), that is by a probability of falling into the pool of failed innovator (who continue to produce but under a competitive and stigmatized environment). f

The model has two state variables, n and n , that we now characterize.

Varieties ]n f , n] Equation (10) is a (standard) production function for researchers. Inventing a new variety leads to a patent which property rights (or licences) are sold to intermediate goods producers

i ∈]n f , n]. The patent price is denoted by V (t ) , it equalizes the cost and the benefit of innovation, that is the value of the monopoly in the intermediate goods sector. The cost of acquiring a patent (i.e. the cost of creating and marketing a new product variety) is determined by the free-entry condition in the R&D sector: ⋅

π r = V ⋅ n − whr ⋅ h r = 0 3

Innovation hence may be thought of as following a Poisson process with parameter Martin, 1995, Ch. 6). 4 Recall that time is continuous in this model.

λ

(see Barro and Sala-i-

154

Patricia Crifo and Hind Sami r

where wh is the wage rate of skilled labor in the R&D sector. Given equation (10) this condition leads to:

V=

whr δ ⋅n

(11)

The market value of an intermediate monopolist is given by the expected present value of profits earned by the intermediate monopolist. Given the risk of failure (erosion of the monopoly power of S-firms), this market value is given by:

[

]

∞

E V e (t ) = ∫ e −( λ + r )( z −t )π s ( z )dz t

λ the risk of failure (replacement rate). Differentiating with π s (t ) e . Using (9) and dropping the time index to respect to time yields E [V (t )] = r (t ) + λ (t ) where r is the interest rate and

simplify notations, we obtain:

πs α ⋅ ps ⋅ xs = E (V ) = r+λ r+λ e

(12)

[

e

]

The patent price is determined by the equality between E V (t ) and V (t ) . Indeed, a potential innovator introduces a new variety only when the entry cost (the cost of R&D) is

[

]

such that V (t ) ≤ E V (t ) . But free-entry in this sector implies that all profits opportunities e

[

]

[

]

are exploited, which imposes that E V (t ) ≤ V (t ). In turn, when E V (t ) = V (t ) , e

e

potential innovators are indifferent between innovating or not. This equality gives the wage rate of skilled labor in the research sector:

[ ]

E V e = V ⇔ whr =

α ⋅δ ⋅ n ⋅ ps ⋅ xs r+λ

(13)

Varieties [0, n f ] Each new good, initially produced by S-firms may be produced with probability unit of time by F-firms firms in a competitive environment. When n − n

f

λ per

is large, the

⋅ f

variation in the number of goods produced by F-firms firms, n ⋅ f

n ≅ λ ⋅ (n − n f

)

is given by:

(14)

Entrepreneurial Innovation, Economic Growth and the Stigma of Failure

155

Hence, at any point in time, the number of goods produced by F-firms is proportional to the number of goods produced by S-firms. The coefficient of proportionality is equal to the risk of failure (probability of replacement).

3. EQUILIBRIUM AND STEADY STATE We now determine the equilibrium of this economy by using the resources constraint to close the model, and by computing the steady-state growth rate. The resources constraint specifies the use of the workforce. The population has a constant size N and is composed of two types of labor: skilled and unskilled workers, respectively in constant proportions H and L . In each period, skilled workers must be indifferent between working in the research sector and in the intermediate goods sector, and unskilled workers are employed in the final good sector.

3.1. The Skilled Labour Demand In the intermediate goods sector, the demand for skilled labor is driven by production costs. Producing one unit of intermediate goods requires 1 unit of labor in S-firms and γ units of labor in F-firms. Hence, the demand for skilled labor in F-firms, producing varieties

0 to n f , is equal to γ ⋅ x f , and in S-firms, producing varieties n f to n , the demand for skilled labor is equal to xs . The aggregate demand for skilled labor hence writes:

h f = γ ⋅ x f ⋅nf

and h s = x s ⋅ (n − n f )

Using equations (8) and (5), we get: 1

x s = x f ⋅ (γ (1 − α )) α

(15)

The total demand for skilled labour in the intermediate goods sector is equal to:

⎡ nf h f + h s = γx f n f + x s (n − n f ) = n ⋅ x s ⎢1 + n ⎢⎣

1 − ⎛ 1− 1 ⎞⎤ ⋅ ⎜⎜ γ α ⋅ (1 − α ) α − 1⎟⎟⎥ ⎝ ⎠⎥⎦

(16)

In equilibrium, skilled workers must be indifferent between working in the research sector or in the intermediate goods sector. This condition implies that wages are equal in both r

sectors: wh = wh . 5 Using equations (7) and (13), this condition is given by: 5

Note that we already stated the equality of the wage rates in the intermediate goods sector:

whs = whf = wh .

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Patricia Crifo and Hind Sami

α ⋅δ ⋅ n ⋅ p s ⋅ x s = (1 − α ) ⋅ p s r+λ Substituting this equation into (16), we finally obtain:

1−α r + λ ⎡ n f h +h = ⋅ ⋅ ⎢1 + α δ ⎣⎢ n f

s

1 − ⎞⎤ ⎛ 1− α1 α ⎜ ⋅ ⎜ γ ⋅ (1 − α ) − 1⎟⎟⎥ ⎠⎥⎦ ⎝

(17)

3.2. Equilibrium on the Labour Market Equalization of labor supply and labor demand yields::

N =H +L L=l H = hr + hs + h f The number of skilled workers employed in the research sector is then given by:

1− α r + λ ⎡ n f h =H− ⋅ ⋅ ⎢1 + α δ ⎣⎢ n r

1 ⎞⎤ ⎛ 1− α1 − ⋅ ⎜⎜ γ ⋅ (1 − α ) α − 1⎟⎟⎥ ⎠⎥⎦ ⎝

(18)

3.3. Households' Preferences Households consume the final good and maximize an intertemporal utility function given by: ∞

U = ∫ u (c) ⋅ e − ρ ( t ) dt , u (c) = 0

c1−σ − 1 , σ ≥0 1−σ

1/σ the consumption's intertemporal elasticity of substitution, and ρ the discount rate. Consumption optimization leads to the standard growth rate: ⋅

c 1 = (r − ρ ) c σ

(19)

Entrepreneurial Innovation, Economic Growth and the Stigma of Failure

157

3.4. Growth Rate of the Economy The budget constraint is such that final consumption is equal to output minus R&D expenses minus the production of both competitive (F-goods) and monopolistic (F-goods) intermediate goods: ⋅

C = y − V ⋅ n− n f ⋅ x f − (n − n f ) ⋅ x s f

In steady state, n , n , C and y all grow at the same rate g given by: ⋅

n g = = δ ⋅ hr n

(20)

r

Using h from (18) leads to the following growth rate:

g =δ ⋅H −

⎡ nf ⋅ (r + λ ) ⋅ ⎢1 + α n ⎢⎣

1− α

1 ⎞⎤ ⎛ 1− α1 ⎜ γ ⋅ (1 − α )− α − 1⎟⎥ ⎟ ⎜ ⎠⎥⎦ ⎝

(21)

f

And from equation (14) we get that the steady state value of ( n /n ) is given by:

⎛nf ⎜⎜ ⎝ n

∗

⎞ λ ⎟⎟ = ∗ ⎠ λ+g

(22)

4. RISK AND STIGMA OF FAILURE, GROWTH AND ENTREPRENEURIAL TALENT The balanced growth path of the economy has the following characteristics:

Proposition 1. Balanced Growth Path (i) Along the balanced growth path, the economy grows at a unique constant rate g

∗

defined by: ∗ 1 1 ⎞⎤ δ ⋅ H − (ρ + λ ) ⋅ Γ 1 − α ⎡ ⎛ n f ⎞ ⎛ α −1 − ⎢1 + ⎜⎜ ⎟⎟ ⎜⎜ γ ⋅ (1 − α ) α − 1⎟⎟⎥ g = , Γ= 1+ σ ⋅ Γ α ⎢ ⎝ n ⎠⎝ ⎠⎥⎦ ⎣ ∗

(23)

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Patricia Crifo and Hind Sami

⎛nf with ⎜⎜ ⎝ n

∗

⎞ λ ⎟⎟ = ∗ ⎠ λ+g ∗

(ii) The steady-state growth rate g is -

δ , the efficiency of the research process, in H , the number of skilled workers and in γ , the stigma of failure, decreasing in λ , the risk of failure.

increasing in

The effect of

α is not clear.

Proof. (i): Combining (21) and (22) defines the steady-state growth by an implicit function

F ( g ) = g − G ( g ) where G ( g ) = 1−α ⎡ ⎛ n f ⎢1 + ⎜ and Γ( g ) = α ⎢ ⎜⎝ n ⎣

⎞ ⎟⎟ ⎠

∗

δ ⋅ H − (ρ + λ ) ⋅ Γ( g ) , 1 + σ ⋅ Γ( g )

1 ⎞⎤ ⎛ α1 −1 ⎜ γ ⋅ (1 − α )− α − 1⎟⎥ . ⎟⎥ ⎜ ⎠⎦ ⎝ '

We easily prove that 0 < G (O ) < 1 , 0 < G (1) < 1 , and G ( g ) > 0 . Hence, the steadystate growth rate exists and is unique. This is transparent from figure 1 in appendix 1 (detailed proof available upon request). (ii): We easily show that dF/dδ > 0 , dF/dH > 0 , dF/dγ > 0 and dF/dλ < 0 .

g 1

G(g), with G’>0

G(1) G(0 )

0

Figure 1. existence and uniqueness.

g*

1

Entrepreneurial Innovation, Economic Growth and the Stigma of Failure

159

This comparative statics exercise is transparent from figure 2 in appendix 1. The model shows standard effects of innovation on growth. In this model, innovation is the only source of growth. Hence, the factors that promote innovation: the efficiency of the research process δ and the number of skilled workers in the economy H are growth enhancing. On the contrary, an important factor that inhibits innovation, namely the risk of failure, λ is detrimental to growth. An interesting issue concerns the impact of the stigma of failure γ on growth. Is it counter-intuitive that such a stigma be beneficial for growth? In fact, the stigma of failure has an efficiency effect on growth: since F-firms bear a cost of stigmatization, their production of intermediate goods is less efficient than S-firms, and a higher stigma of failure shifts the demand for intermediate goods from F-firms to S-firms, which favors innovation and growth. We now analyze the returns to entrepreneurial talent. These returns are captured through the skill premium, that is the ratio of the wage of skilled workers to the wage of unskilled workers. The equilibrium wage of unskilled workers is given by equation (3):

[

wu = α (l )α −1 n f ( x f )1−α + (n − n f )( x s )1−α

]

Using equation (15) we get:

⎡ n−nf ⎤ wu = α (l )α −1 n f ( x f )1−α ⎢1 + (γ (1 − α ))1/α ⎥ f n ⎣ ⎦

(24)

Using equation (5), the wage of skilled workers writes:

wh = (1 − α )(l )α ( x f ) −α

g 1

Δγ Δλ G(g)

0 Figure 2. comparative statics.

g*

1

160

Patricia Crifo and Hind Sami The relative wage of skilled labor is thus given by:

wh 1 − α l = α nf xf wu

1 1+

n−n (γ (1 − α ))1/α f n f

Given the resource constraints and equation (22), the skill premium that measures the return to entrepreneurial talent has the following characteristics.

Proposition 2. Returns to Entrepreneurial Talent The relative wage of skilled labor, given by,

wh 1 − α L 1 = , f wu α h 1 + g (γ (1 − α ))1/α

(25)

λ

f

•

increases with L/h , the relative supply of unskilled labor compared to the supply of skilled labor if F-firms, and with λ , the risk of failure.

•

and decreases with g , the growth rate and with

The effect of

γ , the stigma of failure.

α is not clear.

Proof: immediate by simple comparative statics exercises on For n , n

f

and h

f

given, a rise in the stigma of failure

wh . wu

γ exerts a downward pressure

γ indeed raise the production costs in Ffirms. Since the demand for skilled labor is decreasing in γ , a rise in γ exerts an downward on the returns to entrepreneurial talent. The rise in

pressure on the demand for skilled labor, the wage of unskilled labor increases (see equation (24)), and the return to entrepreneurial talent decreases. A decrease in the growth rate g exerts a upward pressure on the return to managerial talent by the same mechanism. Hence, since it is detrimental to the most efficient (successful) innovators and reduces the return to entrepreneurial talent, a higher stigma of failure or a lower growth rate inhibits entrepreneurial creation . This result is consistent with empirical evidence documented in the introduction. On the contrary, a rise in the risk of failure λ exerts an upward pressure on the returns to managerial talent. From (22), all else being equal, the number of goods produced by S-firms ( n − n ) divided by the number of goods produces by F-firms ( n ) decreases with λ . A decrease in the relative number of goods produced by S-firms reduces the quantity of final good and hence the unskilled wage (equation (3) implies that wu = αy/l ). A higher risk of f

f

Entrepreneurial Innovation, Economic Growth and the Stigma of Failure

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failure hence serves as an incentives device on entrepreneurial creation. This result contrasts with the idea that more risk automatically inhibits new businesses creation.

5. CONCLUSION This article proposes a simple model of endogenous growth with horizontal differentiation in which two categories of entrepreneurs coexist in equilibrium: successful entrepreneurs who enjoy a monopoly position on the intermediate goods market, and failed entrepreneurs who are stigmatized. Two main results are highlighted regarding the links between innovation, growth and the risk and stigma of failure. First, while the risk of failure is detrimental to growth, a higher stigma of failure favors growth. Second, while a higher stigma of failure or a lower growth rate inhibits entrepreneurial creation, a higher risk of failure serves as an incentives device on entrepreneurial creation.

REFERENCES Audretsch and Thurik (2001). Linking entrepreneurship to growth. OECD STI Working papers 2001/2. Bartelsman, E., Scarpetta, S. and Schivardi, F. (2005). Comparative Analysis of Firm Demographics and Survival: Evidence from Micro-level Sources in OECD Countries. Industrial and Corporate Change. 14, 365-91. Barro, R., Sala-i-Martin, X., (1995). Economic Growth, New York, McGraw-Hill. Brandt, N., (2004). Business dynamics in Europe. STI Working Paper No. 2004/1, OECD. Crifo, P., Sami, H., (2008). Entrepreneurship turnover and endogenous returns to ability, Economic Modelling, 25, 4, 585-604 European Commission (2000). Challenges for enterprise policy in the knowledge-driven economy. Giannetti, M., Simonov, A., (2004). On the determinants of entrepreneurial activity: Social norms, economic environment and individual characteristics, Swedish Econmic Policy Review, 11, 269-313. Global Entrepreneurship Monitor, Kaufmann Center for Entrepreneurship (2002). Gromb, D. and Scharfstein, D. (2002) Entrepreneurship in equilibrium. NBER Working Paper No. 9001. Hughes, A., Burchell, B., (2007). The Stigma of Failure: An International Comparison of Failure Tolerance and Second Chancing, ITEC Working Paper Series 07-25. INSEE, (2008). Tableau de l'economie francaise. Paris: Insee. Landier, A. (2005). Entrepreneurship and the stigma of failure, Stern School of Business, New York University Working Paper. Michel, P., Nyssen, J. (1998). On Knowledge Diffusion, Patents Lifetime and Innovation Based Endogenous Growth. Annales d'Economie et de Statistiques 49/50, 77-104. OECD, (2004). Creating Value from Intellectual Assets. OECD Policy brief. OECD. (2003). The sources of economic growth in OECD countries. Paris, OECD.

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Romer, P., (1990). Endogenous Technical Change, Journal of Political Economy 98, 5, S71S102. Santarelli, E. and Vivarelli, M. (2006). Entrepreneurship and the Process of Firms Entry, Survival and Growth. IZA Discussion Paper No. 2475. Scarpetta, S., Hemmings, P., Tressel, T. and J. Woo. (2002). The role of policy and institutions for productivity and firm dynamics: evidence from micro and industry data. OECD Working Paper No. 329.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 10

IS ENTREPRENEURSHIP THE SALVATION FOR ENHANCED ECONOMIC GROWTH? A REVIEW OF THE EMPIRICAL EVIDENCE OF THE EFFECT OF ENTREPRENEURSHIP ON EMPLOYMENT, PRODUCTIVITY AND ECONOMIC GROWTH Kristina Nyström* Department of Transport and Economics, The Royal Institute of Technology, Drottning Kristinas väg 30, SE-100 44 Stockholm, Sweden The Ratio Institute, P.O. Box 3203, SE-103 64 Stockholm, Sweden

ABSTRACT During the last decades, enhancing entrepreneurship has emerged as commonly used policy- measure in order to improve economic growth. However, is it true that entrepreneurship unambiguously can be claimed to improve economic growth? This paper intends to review the empirical evidence on the relationship between entrepreneurship on three measures of economic growth, employment, productivity and aggregate economic growth. The review shows that the studies that find no positive relationship between entrepreneurship and productivity growth have studied a relatively short period. Most studies that have studied a longer period (about ten years) provide rather clear evidence on the positive relationship between entrepreneurship and growth. Regarding the relationship between entrepreneurship and employment growth, the empirical evidence to some extent point in different directions. However, it must be concluded that in the long run there seems to be a positive relationship. A majority of the studies on the relationship between entrepreneurship and aggregate economic growth find

*

E-mail: [email protected]

164

Kristina Nyström a positive relationship. Studies that find a negative relationship usually employ nonharmonised self-employment rates as the measure of entrepreneurship.

1. INTRODUCTION In recent years, a strong belief among policy-makers that entrepreneurship is crucial for economic growth has emerged. Some politicians seem to regard improved levels of entrepreneurship the salvation for economies struggling with declining economic growth rates. To what extend does this belief rely on solid empirical evidence on the relationship between entrepreneurship and growth? Is it true that entrepreneurship unambiguously can be claimed to improve growth? Baumol (1990) raises the question whether entrepreneurship always is beneficial for the society. He distinguishes between productive, unproductive and even destructive entrepreneurship. It can be argued that an operationalisation of these concepts implies that productive entrepreneurship is entrepreneurship which has a positive effect on GDP while destructive entrepreneurship has a negative effect of GDP (Desai and Acs, 2007). In fact, previous empirical findings give a somewhat scattered picture of the role of entrepreneurship for economic growth. Audretsch et al. (2006) provide a somewhat contradictory picture of the role of entrepreneurship for employment growth. At one point, the importance of new firms for stimulating employment growth is emphasised. However, later on the picture is somewhat altered and studies that show that for certain countries and certain time-periods the evidence is less convincing. Also Henrekson and Stenkula (2007) and Karlsson et al. (2005) find that the empirical evidence regarding the role of entrepreneurship for employment growth is unclear or even contradictory. Van Praag and Versloot (2007), on the other hand, present a research overview based on studies published in selected international journals and conclude that entrepreneurs are important to employment growth and productivity. Note that the overview by van Praag and Versloot (2007) also includes studies where entrepreneurship is measured in terms of small firms. This paper intends to provide a comprehensive review of the empirical evidence on the relationship between entrepreneurship and three measures of economic growth, employment, productivity and aggregate economic growth. What is the empirical evidence and what are the policy implications? Can politicians pray for increased levels of entrepreneurship and expect to be rewarded with increased levels of growth? As emphasised by for example Carree and Thurik (2003), entrepreneurship is a multidimensional concept and therefore particularly difficult to measure. Measures frequently used in empirical work are new firm formation (e.g. entry), self-employment rates, or innovation (measured by for example R&D or patents) in small firms, firm size or entrepreneurship indices from the Global Entrepreneurship Monitor (GEM). Hence, in our literature review it is important to distinguish between studies that have used different measures of entrepreneurship. However, it should be noted that this review article does not intend to include studies using small firms as a measure of entrepreneurship. Evidently, small firms and new firms are highly interrelated phenomena’s since most new firms are small. Nevertheless, being small does not necessarily imply being entrepreneurial. Hence, it is unfortunate that some of the previous empirical conclusions, especially regarding the

Is Entrepreneurship the Salvation for Enhanced Economic Growth?

165

relationship between entrepreneurship and employment growth, rely quite heavily on studies using small firms as a measure of entrepreneurship.1 This paper is organised as follows: Section two reviews the empirical evidence on the relationship between entrepreneurship and productivity. Section three discusses the role of entrepreneurship for employment growth. Section four reviews the empirical evidence on the aggregate economic level i.e. presents a number of cross-country and time series studies on the relationship between entrepreneurship and growth. Finally, we summarise the empirical evidence and discuss the implications for economic policy.

2. ENTREPRENEURSHIP AND PRODUCTIVITY Empirical studies on the relationship between entrepreneurship and productivity growth usually distinguishes between the effects on total factor productivity (TFP) growth2 and labour productivity (LP) growth. Ahn (2001) provides an extensive overview of the empirical results regarding importance of firm dynamics for productivity growth. Ahn (2001) concludes that in the short run the effect of new firm formation on productivity may actually be negative, but in the long run the new firms that actually survive are important to productivity growth. He also concludes that the importance of entry and exit of firms is more pronounced for TFP compared to LP. It should however be noted that most of the studies included in Ahn’s overview refer to the manufacturing industry. An obvious reason for the lack of studies covering the service sector is that it is much more difficult to measure productivity in this sector compared to the manufacturing sector. Nevertheless, studies that actually are available for the service sector tend to show that firm dynamics seem to be even more important for productivity growth in this sector. Since the overview provided by Ahn (2001) includes the most important studies published before 2001, the rest of this survey will focus on studies published after 2001. A summary of the empirical findings is presented in table 1. One frequently used method to estimate productivity contribution from different firms is decomposition analysis. Decomposition analysis usually distinguishes between the productivity contribution from innovation or re-organisation in existing firms, denoted internal re-allocation, and the contribution to productivity by external re-allocation. External re-allocation refers to the selection mechanisms associated with entry of more productive firms, exit of less productive firms or productivity gains due to that incumbent firm increase or decrease their market shares. Disney et al. (2003) compare the importance of technological and organizational change in incumbent firms with the role of market selection mechanisms for productivity growth. According to this study, the market selection mechanism contributes to about 80–90 percent of TFP growth in the manufacturing industry in Great Britain. Hedén (2005) presents a similar study as Disney et al. (2003) but for a selection of Swedish manufacturing firms and show that 60 percent of the LP growth and 50 percent of TFP growth are due to external re-allocation. Baldwin and Gu (2006) show that 70 percent of LP growth in Canadian manufacturing industry is due to external re-allocation. For the retail1

Our choice of focus and importance of new firms are supported by a study by Haltiwanger and Krizan (1999). They study the net employment growth in the U.S manufacturing industry and conclude that the employment contribution by small firms primarily are caused by new firms. 2 OECD prefer to use the term multi factor productivity (MFP) growth.

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Kristina Nyström

trade sector in the U.S Foster et al. (2006) find that almost all LP growth in this sector can be derived from firm entry and exit. Hakkala (2006) find that for both LP and TFP growth, net entry account for the largest part of productivity growth. However, one must note that this study only covers large Swedish manufacturing firms. Scarpetta et al. (2002) are less convinced, in particular regarding the positive effect of external re-allocation, for productivity. They find that a large share of the increase in LP is due to internal re-allocation. On the other hand they conclude that firm exit is more important for productivity growth in mature industries, while entry is more important in industries with rapid technological change. Scarpetta et al. (2002) conclude that the contribution to TFP growth from internal reallocation is somewhat smaller than the contribution to LP growth. Table 1. Summary empirical studies on the relationship between entrepreneurship and productivity growth Author(s)

Country and coverage Great Britain (manufacturing industry)

Timeperiod 19821992

Sweden (manufacturing industry, selection of firms) Canada (manufacturing industry) US (retail trade)

19902000

Hakkala (2006) Sweden (manufacturing sector, large firms) Scarpetta et al. 10 OECD(2002) countries (manufacturing industry and some service sectors) Andersson Sweden

Disney et al. (2003)3

Hedén (2005)

Baldwin and Gu (2006) Foster et al. (2006)

3

Measure of Summary of results productivity TFP TFP: 80-90 percent of the LP increase are from external reallocation LP: 50 percent of the increase are from external re-allocation LP LP: 60 percent of the increase are TFP from external re-allocation TFP: 50 percent of the increase are from external re-allocation

19791999

LP

LP: 70 percent of the increase are from external re-allocation

19871997

LP

19861996

LP

LP: Entry and exit account for almost all of the productivity increase. AP: 47 percent of the increase are from external re-allocation

19871992 and 19921997

LP TFP

1997-

LP

LP: 50-85 percent of the increase are from internal re-allocation TFP: The main part of the increase (but less compared to LP) are from internal reallocation LP: More than 90 of the increase

An earlier version of this paper is included in the overview by Ahn (2001).

Is Entrepreneurship the Salvation for Enhanced Economic Growth? (2006)

(all industrial sectors) Bosma and The Nieuwenhuijsen Netherlands (2002) (40 regions) Holz-Eakin and U.S (states) Kao (2003) Callejón and Spain Segarra (1999) (manufacturing industry) Aghion et al. Great Britain (2004) Braunerhjelm Sweden and Borgman (70 regions) (2004) Aghion et al. Great Britain (2006) (manufacturing industry) Brandt (2004)

2003

are from internal re-allocation

19881996

TFP

19861998 19801992

LP

19801993 19751999

TFP

19871993

TFP

9 EU countries 19982000

167

TFP

LP

LP and TFP

TFP: Turbulence (entry and exit) is positively related to productivity growth LP: Entry is positively related to productivity growth TFP: Entry and exit has a positive effect on both industry and regional productivity. TFP: Entry is positively related to productivity growth LP: Regional entrepreneurship (measured by self-employment) important for regional growth TFP: Entry of technologically advance foreign firms is positive for productivity development in incumbent firms. LP and TFP: Positive relationship which is more pronounced for the service sector. Compared to the manufacturing industry.

Andersson (2006) shows that as much as 90 percent of LP growth is due to internal reallocation. This study covers the period 1997–2003 and includes both manufacturing and service sectors. If we summarise the empirical results of the studies using the decomposition methodology presented above we conclude that studies which do not support the role of external re-allocation for productivity growth are those of Scarpetta et al. (2002) and Andersson (2006). What these studies have in common is that they use shorter periods in their analysis (only five years). Most of the other studies use data for at least ten years. In fact, Scarpetta et al. (2002) conclude that the short time period used in their study may be one important reason for why their results differ from previous studies. In addition to the studies using the decomposition methodology there are a number of other studies that investigate the relationship between firm dynamics and productivity. Bosma and Nieuwenhuijsen (2002) analyse the importance of market turbulence (defined as entry and exit of firms) and TFP in the Netherlands. They find that market turbulence is positively related to TFP-growth in the service sector but no relationship is found for the manufacturing industry. Holtz-Eakin and Kao (2003) find a positive relationship between entry and productivity in the U.S using regional data. Callejón and Segarra (1999) find a positive relationship between turbulence of firms and TFP growth on both an industry and a regional level. Furthermore, Aghion et al. (2004) find a positive relationship between entry and productivity growth. Braunerhjelm and Borgman (2004) find that regional entrepreneurship (measured by self-employment) is important for regional productivity growth in Sweden.

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Aghion et al. (2006) show that firm entry has a positive impact on productivity growth in incumbent firms especially in industries close to the technological frontier. In particular, entry of technologically advanced foreign firms, seem to be important since they force incumbent firms to innovate and improve their productivity. For firms further away from the technological frontier there is instead a negative relationship between entry and encouragement of innovation and productivity improvements in incumbent firms. Finally, Brandt (2004) in one of the few available cross-country studies finds a positive relationship between entry and productivity. Brandt (2004) notes that the role of entry for both LP and TFP is more pronounced in the service industries.

3. ENTREPRENEURSHIP AND EMPLOYMENT GROWTH By the end of the 1970s, Birch (1979) published a study on the importance of small firms for employment growth. This study became highly influential to both researchers and policymakers. According to Birch’s study small firms, and in particular new firms, accounted for the lion’s part of new jobs created in the U.S. This study was followed by several other studies trying to measure the role of small and new firms for employment growth (see e.g. Davidsson et al. 1994). Unfortunately, many of these studies do not explicitly distinguish between small firms and new firms. Recall that we in this review of the empirical evidence have decided to exclude this measure since we regard firm size as a less straightforward proxy for entrepreneurship (see e.g. van Praag and Versloot, 2007). Before we proceed to further review the empirical findings in this field, it is important to mention that the causal relationship between entrepreneurship and employment growth, can be expected to be dual. This implies that employment changes can be expected to be influential for entrepreneurship rates. For example, it clearly the case that the level of unemployment might influence the level of necessity-based entrepreneurship i.e. entrepreneurship induced due to lack of other opportunities of employment. However, as previously mentioned, this literature review chooses to focus on the employment effects of entrepreneurship. In addition, we have chosen to focus on studies that cover a substantial part of each economy studied. This implies that we exclude, for example, the study by Johansson, (2001) which focuses on the Swedish IT sector. As previously mentioned, there are a few authors who have tried so summary the empirical results on the relationship between entrepreneurship and employment growth and their findings are in some cases contradictory. Additional frequently cited reviews worth mentioning are Caves (1998) and Geroski (1995). Caves (1998) emphasises that while the short-term employment effects of new firm formation may be small the effects may be much more important for long-term growth. Geroski (1995) claims that new firm formation does not seem to be important for employment growth in the manufacturing industry. Table 2 summarises the main findings of the empirical studies discussed below. Few available studies use cross-country data to study the relationship between entrepreneurship and employment growth. The main reason for this absence of cross-country studies is the lack of comparable data across countries. Two exceptions are the studies by van Stel and Diephuis (2004) and Brandt (2004). Van Stel and Diephuis (2004) use data covering seven countries and find a positive relationship. However, it should be mentioned that they use net new firm formation. The employment effect of new firm formation is found to be

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larger in the manufacturing industry compared to the service sector. Brandt (2004) finds a statically significant relationship. However, the size of the effect is moderate. The study by Brandt (2004) includes nine EU-countries, but it should be emphasised that the study covers a very short period. In contrast to the lack of cross-country studies, there are quite a few empirical studies at the country level available. Ashcroft and Love (1996) study the relationship between new firm formation and net employment growth in Great Britain during the 1980s and find a strong positive relationship. Fölster (2000) uses self-employment as a measure of entrepreneurship and find that increased levels of self-employment enhanced Swedish employment growth. Persson (2004) find that the net employment contribution by entering and exiting firms was positive, while the net contribution by incumbent firms was negative. Acs and Armingon (2004) find a strong relationship between new firm formation and faster regional employment growth. However, this finding does not seem to be valid for the manufacturing industry. They also reflect on the fact that the immediate employment effect may be rather small since many newly established firms do not survive. However, this negative effect, due to the low survival of the new firms, is compensated by the growth of the surviving firms. Hence, a more dynamic perspective needs to be applied in order to reconcile the full employment effects of entrepreneurship. Fritsch and Mueller (2004) provide such a dynamic perspective, which implies three types of employment effects of new firm formation: • •

•

Direct effect: The initial employment effects are of course positive due to the new firms hiring employees. Selection mechanisms: As previously mentioned many new firms do not survive. Furthermore, competition from new firms might force existing firms to close down or create prerequisites for mergers or acquisitions and job rationing. Hence, the net employment effect of new firm formation might be negative at this stage. Indirect supply-side effects: The establishment of a new firm do also influence the actions of already incumbent firms. An example is that new firms might bring new products or production methods to the market. As these products reach the market they cause improvements in production in other firms or might even stimulate further product or production innovations, which further increases efficiency. Certainly, these increases in competition, productivity and efficiency are positive for both consumers and producers. However, these improvements might imply a decrease in employment. Nevertheless, Fritsch and Mueller (2004) argue that the increased competition is positive for improved growth in the long run perspective Furthermore, resources become idle and can be re-located to other markets. In summary, they conclude that the indirect employment effects of new firm formation might be positive. In fact, they can even be more important than the immediate employment effect of new firm formation.

As previously pointed out the dynamic process described above is naturally a long-term process. According to Fritsch and Mueller (2004) it might take up to eight years before the economy experience the indirect employment effects. Baptista et al. (2005) report similar findings. A recent special issue of the journal Small Business Economics devoted to the

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discussion on the employment effects of entrepreneurship provide evidence from six countries.4 Many countries seem to follow a similar pattern as the previously mentioned pattern described in Fritsch and Mueller (2004). However, the size of the employment effects may vary across countries and it may take up to ten years until the employment effect sets in (Fritsch, 2008). An additional study which emphasises the long-term employment effects of entrepreneurship are Klette and Mathiasen (1996) study new firm formation as well as firm exit in the Norwegian manufacturing industry. It shows that firm dynamics have a relatively little influence on employment in the short-run but are very important for long-run employment growth. Audretsch and Fritsch (2002) find no significant relationship between new firm formation and employment growth in West Germany during the 1980s. However, they find a positive relationship for 1990s. Furthermore, they find that regions with high new firm formation rates during the 1980 are the regions with high employment growth during the 1990s. Hence, they claim that new firm formation is mainly important for long-term employment growth. The empirical evidence presented so far gives a rather positive picture of the importance of entrepreneurship for employment growth. Other empirical evidence are however not that convincing. Van Stel and Storey (2004) find, in spite of a clear policy to stimulate new firm formation in Great Britain during the 1980s, no or even a negative relationship between entrepreneurship and employment growth in some areas. In addition, Fritsch (1997) find the importance of new firm formation for regional employment much smaller than expected. The initial effect was to some extent positive but during the following periods the effect became negative. Fritsch and Mueller (2008) emphasises that that there may be important regional variations in the response of new firm formation on employment growth. The regional environment in terms of density and regional productivity is found to be of great importance for the size of the employment effect of new firm formation. In regions with low productivity, the effect may be negative. In summary, one must conclude that a majority of the empirical studies presented here provide evidence for a positive relationship between entrepreneurship and employment growth, at least in the long-term. Nevertheless, there are undoubtedly some questions marks regarding the positive employment effects of entrepreneurship since it has been shown that there may be important variations across industries, regions and periods.

Table 2. Summary empirical studies on the relationship between entrepreneurship and employment growth Author(s)

van Stel and Diephuis (2004)

4

Country and coverage 7 countries and 15 industries

Timeperiod 19921999

Measure of entrepreneurship Net new firm formation

U.S., Spain, Portugal, West Germany Great Britain and the Netherlands

Summary of empirical evidence Net new firm formation has a positive effect on employment growth.

Is Entrepreneurship the Salvation for Enhanced Economic Growth? Table 2. (Continued) Author(s)

Country and Time- Measure of Summary of empirical coverage period entrepreneurship evidence Brandt 9 EU-countries 1998- Entry Statistically significant (2004) 2000 positive correlation between entry rates and employment growth (but the size was not that large) Ashcroft and Great Britain 1981- New firm Strong positive Love (1996) (64 regions) 1989 formation relationship between entry and employment Fölster Sweden 1976- Self-employment Self-employment (2000) (24 counties) 1995 positively related to total employment. Persson Sweden 1986- New firm The net employment (2004) (3 industrial 1995 formation (plants) contribution by entering sectors) and exiting firms is positive Acs and U.S. 1991- New firm Strong relationship Armington (6 industries 1996 formation between new firm (2004) and 394 regiformation and regional ons) employment growth. Fritsch and Germany 1983- Entry (plants) Th indirect employment Mueller (former West 2002 effects may be more (2004) Germany) important than the initial (326 districts) employment effect. Baptista et Portugal 1982- New firm New firm formation al. (2005) (30 regions) 2002 formation positively related to regional employment. The positive effect appears after eight years. Klette and Norway 1976- Entry and exit Entry and exit have a Mathiasen (manufacturing 1986 (plants) small effect on (1996) industry) employment in the shortrun but are important in the long-run. Audretsch Germany 1983- New firm No significant and Fritsch (former West 1989 formation relationship between new (2002) Germany)) and firm formation and (74 regions) 1993regional employment 1998 growth during the 1980s. Positive relationship during 1990s.

171

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Kristina Nyström Table 2. (Continued)

Author(s)

van Stel and Storey (2004)

Fritsch (1997)

Fritsch and Mueller (2008)

Country and coverage Great Britain (60 regions)

Timeperiod 19801998

Measure of entrepreneurship New firm formation

Summary of empirical evidence The employment effect is questionable especially as regards policies aimed at enhancing new firm formation. Initially a positive effect compensated by a negative effect during the following periods

Germany (former West Germany) (75 planning regions) Germany (former West Germany) (74 planning regions)

19861989

Entry (plants)

19832002

New firm The effect is dependent formation (plants) on regional conditions. The effect might be negative in regions characterised by low productivity.

4. ENTREPRENEURSHIP AND AGGREGATE ECONOMIC GROWTH Reynolds et al. (1999) and Zacharakis et al. (2000) assign differences in entrepreneurship rates a crucial role for economic growth. They claim that about one–third to half of the differences in national growth rates are explained by variations in entrepreneurial activity. Yet, there is a lack of studies, which have studied the relationship between entrepreneurship and economic performance at the country level (Carree and Thurik, 2003). Data on economic growth measured by, for example, GDP is of course readily available for most researchers. Unfortunately, sufficiently consistent and comparable data on entrepreneurship across countries has been unavailable for a long time. During recent years, a number of initiatives that has tried to overcome this lack of data have emerged. Two frequently used data sources are the GEM study5 and the COMPENDIA6 research project. The GEM project was imitated in 1999 and the number of countries covered by the study has subsequently increased. The GEM project annually present an entrepreneurship index which claim to measure the entrepreneurial activity. The GEM data is based on surveys conducted in the different countries.7 The COMPENDIA research project bases its data on self-employment rates gathered by OECD and adjust them in order to harmonise the data.8 The number of empirical studies in this field can definitely be expected to increase further as the amount of comparable

5

Global Entrepreneurship Monitor COMParative ENtrepreneurship Data for International Analysis. Further information about the COMPENDIA database is available in van Stel (2005) 7 Further information about the research method can be found on their website: www.gemconsortium.org 8 Data and further information on this dataset is available at the EIM research group website: www.eim.net 6

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cross-country data and longer time series become available. Table 3 summarises the main findings of the empirical studies discussed below. Blanchflower (2000) studies the relationship between self-employment and economic growth for 23 OECD countries during 30 years and finds a negative relationship. However, it should be noted that this study was criticised due to that fact that it used non-harmonised OECD data. Van Stel et al. (2005) uses the entrepreneurship measure from the GEM study. This study distinguishes between the effects of entrepreneurship on growth for countries that have reached different levels of development. In countries regarded as relatively rich, they find a positive relationship between entrepreneurship and economic growth, while the relationship was negative in less developed countries. Carree et al. (2002) raise the question whether there is an ‘equilibrium’ level of entrepreneurship in a country.9 In their empirical study, they find that entrepreneurship below as well as above the ‘equilibrium’ level have negative consequences for aggregate economic growth. An extended version of this study again finds that entrepreneurship levels below the equilibrium level have a negative effect on growth. However, in this study they do not find any negative effect of deviations above the equilibrium level of entrepreneurship (Carree et al. 2007). Table 3. Summary empirical studies on the relationship between entrepreneurship and aggregate economic growth Author

Country and coverage Blanchflower 23 (2000) OECDcountries van Stel et al. 36 (2005) countries

9

Time period

Measure of Summary of findings entrepreneurship

19661996

Self-employment

19992003

GEM

Carree et.al. (2002)

23 1976OECD- 1996 countries

Self-employment

Carree et.al. (2007)

23 1972OECD- 2004 countries

Self-employment

Negative relationship between self-employment and economic growth In relatively rich countries entrepreneurship has a positive effect on economic growth, while the relationship is negative in less developed countries. Positive and negative deviation from the equilibrium level of entrepreneurship has negative effects on economic growth. Negative deviation from the equilibrium level of entrepreneurship restrains economic growth.

The equilibrium level of entrepreneurship is defined with regard to the deployment stage of each country.

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Kristina Nyström Table 3.(Continued)

Author

Country and coverage Klapper et al. 84 (2007) countries Acs et al. (2004)

Time period

Measure of Summary of findings entrepreneurship

2003Self-employment 2005 (Wold Bank) (average) 1981Self-employment 2001

Reynolds et al. (2004)

20 OECD countries 40 2000countries 2003

Carree and Thurik (2008)

21 1972OECD- 2002 countries

Self-employment

Wong et al. (2005)

37 2002 countries

GEM

SalgadoBanda (2007)

22 1980countries 1995

Self-employment and patents

GEM

Positive relationship between entrepreneurship and growth. Positive relationship between entrepreneurship and growth Positive relationship between entrepreneurship and growth but it takes some time before the effect appears. Initially a positive relationship then a negative and finally a positive effect. The net effect is positive. The existence of entrepreneurs defined as high growth potential entrepreneurs is positive for economic growth. Negative relationship between self-employment and GNP growth Positive relationship between patents and growth.

An extensive study, using World Bank data from 84 countries, by Klapper et al. (2007) finds a positive relationship between self-employment rates and economic growth. Also Acs et al. (2004) find a positive relationship between entrepreneurship and economic growth. Reynolds et al. (2004) use GEM data on entrepreneurship and find that initially there is a positive but rather weak relationship between entrepreneurship and GDP growth. However, this relationship seems to grow stronger over time. Another study emphasising the dynamics and long-term effects is the study by Carree and Thurik (2008). The dynamics and results presented are similar to the previously mentioned study by Fritsch and Mueller (2004) on the employment effects i.e. that the initial effect is positive but then become negative but again positive in the long run. Carree and Thurik (2008) find that the net effect is positive. Some studies try to distinguish between different types of entrepreneurship hypothesising that different kinds of entrepreneurship are more or less important for the ability to create aggregate economic growth. Reynolds et al. (2004) distinguish between opportunity- and necessity-based entrepreneurship where necessity-based entrepreneurship refers to

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entrepreneurship initiated by that fact that the entrepreneur lack other employment opportunities, for example due to unemployment. Interestingly enough the relationship between opportunity based entrepreneurship and growth seems to decrease over time while the relationship between necessity-based entrepreneurship and growth tends to increase over time. Wong et al. (2005) focus on entrepreneurs defined quite narrowly as entrepreneurs with high growth potential.10 They find that these entrepreneurs do have a positive effect on economic growth. Salgado-Banda (2007) uses two measures of entrepreneurship, selfemployment and patents, to study the relationship to economic growth. Inspired by Baumol’s (1990) theory on productive and unproductive entrepreneurship patents are used as a measure of productive entrepreneurship. Self-employment may, on the other hand, comprehend both productive as well as unproductive entrepreneurship. The empirical findings show a negative relationship between self-employment and economic growth while patents are found to be positively correlated with economic growth. If we summarise the empirical findings presented above there are some doubts regarding whether entrepreneurship really creates economic growth especially if we base the conclusions on non-harmonised self-employment data. However, a majority of the studies show results that imply that stimulating entrepreneurship have positive effects on aggregate economic growth.

5. CONCLUSIONS AND POLICY IMPLICATIONS This paper has reviewed the empirical evidence on the relationship between entrepreneurship and economic growth in terms of productivity, employment growth and aggregate economic growth. Regarding the relationship between entrepreneurship and productivity it is definitely questionable whether the effect is positive in the short-run. However, in a long-term perspective the positive effects of entrepreneurship are much more pronounced. Also regarding the relationship between entrepreneurship and employment growth, some researchers present empirical evidence, which questions the positive effects. Some of the empirical findings clearly imply that employment effects may vary significantly across time and space. Hence, as emphasised by Sternberg and Rocha (2007) a policy focused on stimulation of entrepreneurship cannot be considered as a universal measure in order to tackle employment problems in all regions. However, in the long-term perspective most recent research indicate that the indirect employment effects of entrepreneurship can be expected to be beneficial for the economy. Hence, policy-makers need to be very patient since it may take 8-10 years before the effect appears. Finally, if we focus on the effects of entrepreneurship at the aggregate economy level, most studies that find a negative relationship between entrepreneurship end aggregate economic growth employ selfemployment as a measure of entrepreneurship. Several researchers emphasise that this is due to that non-harmonised measures of self-employment are used. An additional reason for this result is that this measure might include productive as well as unproductive entrepreneurship. Furthermore, self-employment must be regarded as a static measure of entrepreneurship, which does not fully encompass the dynamic aspects usually assigned to entrepreneurship. 10

To be defined as an entrepreneur with high growth potential all of the following four criteria must be fulfilled: employment growth potential, have an effect on the market, a global customer base and use new technology.

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REFERENCES Acs, Z.J. and C. Armington (2004), Employment Growth and Entrepreneurial Activities in Cities, Regional Studies, 38, 911-927. Acs, Z.J. D. B. Audretsch, P. Braunerhjelm and B. Carlsson (2004), The Knowledge Filter and Entrepreneurship in Endogenous Growth, Discussion paper on Entrepreneurship, growth and Public Policy Nr 0805, Max Planck Institute, Jena. Aghion, P., R. Blundell, R. Griffith, P. Howitt and S. Prantl (2004), Entry and Productivity Growth: Evidence from Microlevel Panel Data, Journal of the European Economic Association, 2, 265-276. Aghion, P., R. Blundell, R. Griffith, P. Howitt and S. Prantl (2006), The Effects of Entry on Incumbent Innovation and Productivity, NBER Working Paper 12027. Ahn, S. (2001), Firm Dynamics and Productivity Growth: A Review of Micro Evidence from OECD Countries OECD Economics department Working Paper NO. 297, OECD, Paris. Andersson, L-F. (2006), Företagsdynamik och tillväxt, En kartläggning och analys av företagsdynamik och arbetsproduktivitetstillväxt i Sverige. (Firm Dynamics and growth), ITPS report A2006:016, Swedish Institute for Growth Policy Studies, Östersund. Ashcroft, B. and J. Love, (1996), Firm Births and Employment Change in the British Counties: 1981-1989, Papers in Regional Science, 75, 483-500. Audretsch D.B. and M. Fritsch (2002), Growth Regimes over Time and Space, Regional Studies, 36, 113-124. Audretsch, D.B., M.C. Keilbach and E.E. Lehmann (2006), Entrepreneurship and Economic Growth, Oxford University Press, New York. Baldwin, J.R. and W. Gu (2006), Competition, Firm Turnover and Productivity Growth, Research Paper Economic Analysis, Research Paper Series, Statistics Canada. Baptista, R., V. Escária and P. Madruga (2005), Entrepreneurship Regional Development and Job Creation: the Case of Portugal, Discussion Paper No. 0605, Max Planck Institute for Research in Economic Systems, Jena. Baumol, W. J. (1990), Entrepreneurship: Productive, Unproductive and Destructive, Journal of Political Economy, 98, 893-921. Birch, D. (1979), The Job Generation Process, The MIT Press, Cambridge MA. Blanchflower, D.G. (2000), Self-Employment in OECD Countries, Labour Economics, 7, 471-505. Bosma, N. and H. Nieuwenhuijsen (2002), Turbulence and Productivity; An Analysis of 40 Dutch Regions in the period 1988-1996, SCALES-paper N200205, EIM Business and Policy Research, Zoetermeer. Brandt, N. (2004), Business Dynamics, Regulation and Performance, OECD Science technology and Industry Working papers , 2004/3 OECD. Braunerhjelm, P. and B. Borgman (2004), Geographical Concentration, Entrepreneurship and Regional Growth. Evidence from Regional Data in Sweden, 1975-99, Regional Studies, 38, 929-947. Callejón M. and A. Segarra (1999), Business Dynamics and Efficiency in Regions: The Case of Spain, Small Business Economics, 13, 253-271.

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Carree, M., A. van Stel, A.R. Thurik and S. Wennekers (2002), Economic Development and Business Ownership: An Analysis Using Data of 23 OECD Countries in the Period 19761996, Small Business Economics, 19, 271-290. Carree, M., A. van Stel, A.R. Thurik and S. Wennekers (2007), The Relationship between Economic Development and Business Ownership Revisited, Discussion Paper No 2007022/3, Tinbergen Institute. Carree, M. and A.R. Thurik (2003), The Impact of Entrepreneurship on Economic Growth, in Acs, Z.J. and D.B Audretsch (ed), Handbook of Entrepreneurship Research. An Interdisciplinary Survey and Introduction, Kluwer Academic Publishers, Boston. Carree, M. and A. R. Thurik (2008), The Lag Structure of the Impact of Business Ownership on Economic Growth in OECD Countries, Small Business Economics, 30, 1:101-110, January. Caves, R.E. (1998), Industrial Organization and New Findings on the Turnover and Mobility of Firms, Journal of Economic Literature, 36, 1947-1982. Davidsson, P., L. Lindmark and C. Olofsson (1994), New Firm Formation and Regional Development in Sweden, Regional Studies, 28, 395-410. Desai S. and Z. J. Acs (2007), A Theory of Destructive Entrepreneurship, Jena Economic Research Papers 2007-085. Disney, R, J. Haskel and Y. Heden (2003), Restructuring and Productivity Growth in UK Manufacturing, Economic Journal 113, 666-694. Foster, L., J.C. Haltiwanger and C. J. Krizan (2006), Market Selection, Reallocation, and Restructuring in the U. S Retail Trade Sector in the 1990s, The Review of Economics and Statistics 88, 748-758. Fritsch, M. (1997), New Firms and Regional Employment Change, Small Business Economics 9, 437-448. Fritsch, M. (2008), How Does Business Formation Affect Regional Development? Introduction to the Special Issue, Small Business Economics, 30, 1-14. Fritsch, M. and P. Mueller (2004), Effects of Business Formation on Regional Development over Time, Regional Studies, 38, 961-975. Fritsch, M. and P. Mueller (2008), The Effect of New Business Formation on Regional Development over Time: The Case of Germany, Small Business Economics, 30, 15-29. Fölster, S. (2000), Do Entrepreneurs Create Jobs?, Small Business Economics, 14, 137-48. Fölster, S. (2002), Do Lower Taxes Stimulate Self-Employment?, Small Business Economics, 19, 135-145. Geroski, P.A. (1995), What Do We Know About Entry?, International Journal of Industrial Organization, 13, 421-440. Hakkala, K. (2006), Corporate Restructuring and Labor Productivity Growth, Industrial and Corporate Change, 15, 683-714. Hedén, Y. (2005), Productivity, Upskilling, Restructuring, Entry and Exit: Evidence from the UK and Swedish Micro Data, University of London. Henrekson, M. and M. Stenkula (2007), Entreprenörskap, (Entrepreneurship) SNS, Stockholm. Holz-Eakin, D. and C. Kao (2003), Entrepreneurship and Economic Growth: The Proof is in the Productivity, Center for Policy Research, Working Paper No 50, Syracuse University. Johansson, D. (2004), Is Small Beautiful? The Case of the Swedish IT Industry, Entrepreneurship and Regional Development, 16, 271-287.

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Karlsson, C., C. Friis and T. Paulsson (2005), Relating Entrepreneurship to Economic Growth, in Johansson B., C. Karlsson and R.R. Stough (red.) The Emerging Digital Economy: Entrepreneurship, Clusters and Policy, Springer-Verlag, Berlin, 83-111. Klapper, L, L. Laeven and R. Rajan (2006), Entry Regulation as a Barrier to Entrepreneurship, Journal of Financial Economics, 82, 591-629. Klette, T. and A. Mathiasen (1996), Job Creation, Job Destruction and Plant Turnover in Norwegian Manufacturing, Annales d’Economique et de Statistique, 41/42, 97-125. Persson, H. (2004), The Survival and Growth of New Establishments in Sweden 1987-1995, Small Business Economics, 23, 423-440. Reynolds, P.D., D.J. Storey and P. Westhead (1994), Cross-National Comparisons of the Variation in New Firm Formation, Regional Studies, 28, 443-456. Reynolds, P.D., W.D. Bygrave and E. Autio (2004), Global Entrepreneurship Monitor: 2003 Executive Report, Babson College, Babson Park, MA. Salgado-Banda, H. (2007), Entrepreneurship and Economic Growth: An Empirical Analysis, Journal of Developmental Entrepreneurship March, 2007. Scarpetta, S., P. Hemmings, T. Tressel, and J. Woo (2002), The Role of Policy and Institutions for Productivity and Firm Dynamics Evidence from Micro and Industry Data, OECD Economics Department Working paper no. 329, OECD, Paris. Sternberg R. and H. O. Rocha (2007), Why Entrepreneurship is a Regional Event, i Rice, M.P. and T.G. Habbershon, (2007) (Eds.) Entrepreneurship. The Engine of Growth, Volume 3, Praeger Publishers, Westport 215-237. van Praag, M.C. and P.H. Versloot (2007), What is the Value of Entrepreneurship? A Review of Recent Research, Small Business Economics, 29, 351-382. van Stel A. and D.J. Storey (2004), The Link between Firm Births an Job Creation: Is there a Upas Tree Effect?, Regional Studies, 38, 893-909. van Stel A. J. (2005), “COMPENDIA: Harmonizing Business Ownership Data Across Countries and Over Time”, International Entrepreneurship and Management Journal, 1, 1:105-123. van Stel A, M. Carree and R. Thurik (2005), The Effect of Entrepreneurial Activity on National Income Growth, Small Business Economics, 24, 311-321. van Stel A. and B. Diephuis (2004), Business Dynamics and Employment Growth: A CrossCountry Analysis, in Frontiers of Entrepreneurship Research 2004, Babson College. Wong P.K., Y.P. Ho and E. Autio (2005), Entrepreneurship, Innovation, and Economic Growth: Evidence from GEM Data, Small Business Economics, 24, 335-350. Zacharakis, A. L. Bygrave W. D. and Shepherd, D. A. (2000), Global entrepreneurship monitor: National entrepreneurship assessment: United States of America. Kaufmann Center for Entrepreneurial Leadership, Kansas City.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 11

INTERNATIONALIZATION AS AN ACT OF ENTREPRENEURSHIP: ECONOMIC EFFECTS AND EXAMPLES Arild Aspelund* Norwegian University of Science and Technology, Department for Industrial Economics and Technology Management, Trondheim, Norway

Mathieu Cabrol† ESC-Troyes, Champagne School of Management, Paris, France

ABSTRACT For centuries there has been an ongoing discussion in the economics literature on the nature and drivers of economic development. In most views, entrepreneurship in one shape or another has been seen as the main driver of economic change and development. The problem with this literature is that is has its origin in national economics and occurred in a domestic single market setting. Hence, the international effects of entrepreneurship have been largely ignored. This study aims to close some of this gap by reviewing three dominant schools of economy, namely Neo-Classical, Schumpeterian and Austrian economics, and their principal views of economic development. Further, we extend the argument of these theories of economic development into a cross-national setting and assess the theoretical effects of internationalization as a driver for economic development. Finally, we present and discuss some cases that illustrate the economic effects identified from the theoretical review through their international activities. The study has three major contributions. First, we extend the notion of economic development from the cradle of national economics into the international arena. Secondly, we bring * †

Corresponding author. E-mail: [email protected] E-mail: [email protected]

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Arild Aspelund and Mathieu Cabrol forward practical examples of internationalizing companies and exemplify the entrepreneurial effects that these firms have caused in the path of their internationalization. Finally, we extend the theoretical perspectives of international entrepreneurship by introducing effects of internationalization on economic development, and hence, conceptualizing international new ventures as global change agents.

INTRODUCTION For centuries there has been an ongoing discussion in the economics literature on the nature and drivers of economic development and from the entrepreneurship literature we see that entrepreneurship and innovation have been identified as prime candidates for a very long time (Landström, 1999b). Especially the works of the Irish banker Richard Cantillon (that was published in 1755) and the French economist Jean Baptiste Say (1814 and 1816) are brought forward as the first theoretical works that identifie the entrepreneur and sketches some implications of her actions on economic development. Later works in the field of economics and entrepreneurship seem to have cemented the position of the entrepreneur and entrepreneurship as a major force in economic development. For example, William Baumol concluded in his review of Entrepreneurship and Economic Development from 1968 that “It has long been recognized that the entrepreneurial function is a vital component in the process of economic growth” (pp. 65). However, this argumentation has primarily been presented by national economists such as Adam Smith, Carl Menger, Joseph Alois Schumpeter, Frederick von Hayek and Ludwig von Mises and the theoretical arguments have been based on the setting of national economies. Studies of the effects of entrepreneurship in the setting of international economic development have been few and fragmented. This gap in the literature on economic development has become evident with the emergence of international new ventures (INV; also often labeled Born Globals, Instant Internationals, or Global Start-Ups). INVs are defined as “a business organizations that, from inception, seek to derive significant advantages from the use of resources and the sales of outputs in multiple countries” (Oviatt and McDougall, 1994, pp 49) and recent reviews have showed this type of companies represents a significant and growing portion of the modern global economy (Zahra, 2005; Rialp, Rialp and Knight, 2005; Aspelund, Madsen and Moen, 2007). This development must be seen from the perspective of the current era of globalization that has pushed more and more small firms in general to seek international resources and markets (OECD, 1998). Nevertheless, the growth of international entrepreneurship and internationalization of small firms in general have triggered a need for further understanding of the role of internationalization in global economic development beyond the existing frameworks from national economy. The objective of this study is to close this gap by presenting three dominating schools of economic development and establish a framework to assess the implications of international entrepreneurship on global economic development. Further, we present two well-known cases that exemplify the argument in question. Finally, we conclude the study by discussing contributions, implications and limitations of the proposed framework.

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THEORETICAL FRAMEWORK In the following we will give a short description of three major schools of economic development, namely Neo-Classical, Schumpeterian and Austrian economics. We will start with the Neo-Classical approach, not because it is the most central to our discussion, but because it forms the basis for the theoretical problem that triggered the development of the other two.

The Neo-Classical Perspective Neo-Classical economics is a tradition that is defined by its association to a set of assumptions and theories rather than defined by a singular theoretical perspective. NeoClassical economics is in everyday language used as a reference to mainstream economics due its dominance on microeconomic applications. The assumptions that together define NeoClassical economics are well-known for most students of economics. They are: 1. People are economically rational - they know their preferences and are able to assign them to a value. 2. The behavior of people and organizations are economically rational – hence people seek to maximize utility and firms maximize profits. 3. All actors share complete market information – all people in the market have the same access to all relevant information. Based on these assumptions Neo-Classical economists derive price and output estimates based on analysis of supply and demand. These analyses of prices, supply and demand has given raise to a central theory of the Neo-Classical tradition, namely the general equilibrium theory. This theory argues that all markets are in equilibrium in a state where all actors maximize their utility (or profits) based on the resources and information available. In the following we will refer to this state as the Neo-Classical equilibrium – a state where all actors in a market have optimal resource utilization from all available knowledge and technology. In terms of economic development, the Neo-Classical perspective is predominantly based on two functions. Economic development in terms of increased economic efficiency is simply a question of optimizing the use of productive resources. Since all resources and market information are uniformly distributed and all parties will optimize them to maximize their own profits, the inevitable Neo-Classical conclusion is that in long term prices will stabilize equal to average costs of production (long term Neo-Classical equilibrium) and no actors will earn above average rent unless they benefit from a monopoly situation. Concerning the question of economic development in terms of growth, Neo-Classical economics state that growth is simply a question of savings (Cesaratto, 1999). To put it simple, the growth of an economy is the result of the accumulated profits that are reinvested into economic activity. This way of looking at economic development works well in “static” markets – that is markets that are reasonably stable over time.

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The Schumpeterian Perspective At the turn to the 20th century neoclassical theory reigned the discussion of economic development, however the static and allocative nature of neoclassical theory makes it little suited to explain radical economic change as it does not treat key change aspects such as market dynamics, exploration and disequilibrium (Schumpeter, 1934; Schumpeter, 1947; Landström, 1999b; Peters, Elliot and Cullenberg, 2002; Wickham, 2004). In Schumpeter’s own words: “Continuous changes, which may in time, by continual adaptation through innumerable small steps, make a great apartment store out of a small retail business, come under the “static” analysis. But “static” analysis is not only unable to predict the consequences of discontinuous changes in the traditional way of doing things; it can neither explain the occurrence of such productive revolutions nor the phenomena which accompany them. It can only investigate the new equilibrium position after the changes has occurred. It is just this occurrence of the “revolutionary” change that is our problem, …” (Schumpeter, 1934, pp 62-63). As an answer to this the 20th century saw the emergence of two distinct schools of economic development, both in which the entrepreneur had a central role. The first was introduced by a young Austrian economist named Joseph Alois Schumpeter in 1911. The original work was titled Theorie der wirtschaflischen Entwiklung, but the English version, “The Theory of Economic Development”, from 1934 is the most read and cited. Schumpeter’s answers to the problem of “revolutionary change” lies in his focus on the role of technological innovations and the entrepreneur. Schumpeter argues that the nature of economy development is not found in equilibrium as stated by Neo-Classical theory, but in processes where the economy is brought out of equilibrium by entrepreneurs introducing a “new combination of means of production” (Schumpeter, 1934, pp 74). He argued the new combination of resources could take different forms like, the introduction of a new good, or a new quality of a good, the introduction of a new method of production, the opening of a new market, the conquest of a new source of supply, or the carrying out of a new organization of an industry (including the creation and breaking up of a monopoly) (Schumpeter, 1934, pp 66), however their defining trait is the inherited ability to increase overall productivity in the industry in which they were introduced. In the Neo-Classical view the only opportunity an economic actor had to earn excess rent was through temporary monopolies (Peters et al., 2002). By his new theory, Schumpeter also introduced an additional possibility of earning excess profit for economic actors, namely entrepreneurial profit (Schumpeter, 1934; Schumpeter, 1947). The actor that introduces the new technology into the market, the entrepreneur, can take out excess profit due to higher productivity than competitors, at least until other actors have adopted the innovation. Therefore, in more recent studies, Schumpeterian entrepreneurship has been synthesized as technology-driven entrepreneurship, where the introduction of a new technology in a market leads to a disruptive increase in productivity and opportunities for entry and profit for new actors (Cheah, 1990; Erikson, 2001).

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The Austrian Perspective Parallel to the development of the Schumpeterian school, another perspective on economic development rose from the early work of Carl Menger, Eugen von Böhm-Bawerk, Frederich von Hayek, and Ludwig von Mises (Landström, 1999a). This tradition has been labeled the Austrian tradition from the origin of the principal contributors1 (Cheah, 1990; Jacobson, 1992), and conceptualizes a market-oriented model of economic development (Erikson, 2001). The Austrian economists relaxed the Neo-Classical assumptions about the “economic man” (Wickham, 2004) and perfect market information symmetry (Hayek, 1945) and argues that economic development occurs when an actor, the entrepreneur, are able to identify market imperfections and acts on the profit opportunity (Kirzner, 1997). A typical example of an Austrian entrepreneur is one that due to his knowledge is able to spot inefficient use of resources in an industry and establishes an organization to arbitrage the market inefficiency. Hence an Austrian entrepreneur is able to earn excess rent from more efficient use of the resources under his/her control than the competitors. To illustrate the differences between the two schools Landström (1999a) sketches the effects of Schumpeterian and Austrian Entrepreneurship in a Productivity Possibility Curve (PP-Curve). The Neo-Classical equilibrium curve symbolizes the theoretical optimal resource utilization based on all available knowledge and technologies. The Schumpeterian effect of economic development occurs when a Schumpeterian entrepreneur shifts the PP-curve radically outwards by the introduction of new technology. The Austrian entrepreneur, on the other hand, is able to spot inefficiencies in the market and increases productivity by bringing an actor closer to the optimal Neo-Classical equilibrium.

Figure 1. The Effects of Innovation in the Productivity Possibility Curve (from Landström,1999a).

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Schumpeter was also Austrian and even served as the Austrian Minister of Finance from 1920 to 1924.

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Hans Landström’s way of visualizing the effects of Schumpeterian and Austrian entrepreneurship is very good because it does not only show the effects of economic development in an industry, but also visualize the potential “entrepreneurial profit”. The two arrows in Figure 1 show the “potential entrepreneurial profit” that the entrepreneur can gain by introducing new technologies or new ways of organizing productive resources. Even though the two schools are diametrically different, there are no contradictions between the two. On the contrary, Schumpeterian and Austrian entrepreneurship can both function simultaneously in an economy, and there is even a strong theoretical argument that one encourages the other (Cheah, 1990).

INTERNATIONALIZATION AS AN ACT OF ENTREPRENEURSHIP Let us now move on and see how these effects work in an international setting. International markets are heterogeneous in nature. That is, due to idiosyncratic conditions for supply and demand and hence different levels of access to productive assets such as qualified labor, raw materials, infrastructure etc. prices of productive assets varies between national markets. That also means that the PP – curve will vary between markets. This heterogeneity in efficiency levels gives raise to opportunities for arbitrage – the practice of taking advantage of a price difference between two or more markets – which is the primary motivation for international business as well as international trade theories. Seen from the eyes of the eager international entrepreneur any significant difference in efficiency between two markets represents an opportunity to earn “entrepreneurial profit” by introducing new technologies or new ways of organizing productive assets into new markets. However, there are some conditions that need to be met in order to have a possibility to earn entrepreneurial profit. The Austrian entrepreneur takes advantage of a structural imperfection in the market that she enters. She sees that she can raise the general level of efficiency by new ways of organizing productive assets. It is not certain that this market imperfection is present in other markets and thus the entrepreneur’s opportunity to gain entrepreneurial rent from the introducing her innovation in other markets might not exist. As we will see below the American entrepreneurs Ray Kroc, Dick and Mac McDonald were able to identify an imperfection in the American restaurant market that proved to be present in virtually any national market around the globe and they created a very profitable global franchise organization to exploit this imperfection. Successful international transfer of Schumpeterian innovations is also dependent on certain conditions. The primary condition is that prices on substitute resources are sufficiently high. For example, sophisticated production technology (such as automation and robot technology) that is widely adopted in the manufacturing industry in developed countries might not be economically transferred to low-cost countries because the potential cost benefit are nullified by far lower costs of labor. Another condition is that the price of complementary assets needs to be sufficiently low. Using the same example as above with exporting sophisticated production technology, prices on complementary assets such as qualified labor might be too high to make export of the technology feasible. Below we will see an example of Japanese firms that introduced quartz technology in the watch-making industry and created all the positive (and destructive) economic effects we desire from Schumpeterian innovators.

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Applying these two schools of entrepreneurship to the case of internationalizing businesses, we see that an internationalizing firm will play the role of an entrepreneurial agent in the market which it is introduced both in terms of the economic effects and profit. The theoretical implications of the argument above are apparent. If there are no differences in the general productivity of the actors in two markets there are no opportunities for arbitrage and internationalization will anyway be ill-advised. If there are differences in the general level of productivity between actors in two markets and this difference could be closed by transferring Schumpeterian or Austrian innovations there exists opportunities for gaining entrepreneurial profit through internationalization and the economic effects will be accordingly. Hence, internationalization can be seen as an act of entrepreneurship.

TWO WELL-KNOWN EXAMPLES TO ILLUSTRATE THE ARGUMENT AND EFFECTS In the following we will present two cases that illustrate the framework and some of the effects that occur when entrepreneurship and innovations spread internationally. We start with a company that most people are familiar with, namely McDonald’s.

McDonalds The rapid and extensive global expansion of certain franchise organizations are examples of how Austrian innovations can be leveraged by organizations with global intent. In this setting, the well known fast-food chain McDonald’s is an excellent example.

McDonald’s Basic Innovation McDonald’s was established as a typical drive-in restaurant in 1940 by Dick and Mac McDonald in San Bernardino, California. The original restaurant was not very profitable, so the brothers decided to redesign it. When the store reopened in December 1948 it was with a new and innovative concept based on speedy service, low prices and big volume (McDonald’s, 2008). What the brothers did in practice was to end service in the cars and substitute it with self-service at the counter. Thereby they reduced labor cost by reducing their demand for waiter services. Customers still received more value for their money as McDonald’s also slashed prices far below the level of their competitors to increase sales volumes. Furthermore, they reduced the number of items on the menu to mere 9 items in order to reduce the complexity of the activities in the kitchen. Finally, they redesigned their kitchen inspired by mass production thinking to fulfill orders more rapidly even with significantly increased volumes. We see that McDonald’s represents a significant innovation in the food-serving market that lifts McDonald’s’ resource efficiency far over the level of their competitors. They do this without introducing any new technologies and without lifting the optimal level of the industry’s PP – curve. Hence, McDonald’s innovation is Austrian in nature. The McDonald’s

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brothers simply saw an inefficient use of known resources and established a new and more efficient business concept based on a new combination of known resources. This is best illustrated through a comparable example. Basically, a McDonald’s franchise and a typical traditional restaurant are in possession of the same basic resources, i.e. restaurant facilities, production equipment (a kitchen), chefs, waiters, food supplies and a menu. However, the set-up is really different! In a traditional restaurant you are met by a waiter at the door which shows you to the table, he comes back with a detailed menu with a broad range of different dishes and an even broader range of drinks, leaves, comes back to take your orders, leaves, comes back with drinks, leaves, … etc…, until the end of the meal when he cleans your table, put on a new table cloth and reset the table for the next customers. At McDonald’s on the other hand, most of the tasks traditionally performed by the waiter are left to you as the customer. You find your own table, go to the counter to order from a narrow range of opportunities from a standardized menu, bring your own meal to your table and you clean it yourself when you are finished. In the kitchen there is really no use for highly skilled personnel as all menus are standardized and made from a narrow list of ingredients. This industrializes and facilitates the work flow and competence requirements in the kitchen. It is plain to see that McDonald’s way of utilizing their resources is far more efficient than a traditional restaurant.

McDonald’s International Expansion and some of its Effects Ray Kroc’s first thought when he saw the McDonald brothers’ hamburger restaurant in San Bernardino in 1954 was “This will go anyplace. Anyplace!” (McDonalds, 2008) and that was exactly what happened. After the McDonald’s brothers took in Ray Kroc as their franchising director in 1954 the McDonald’s chain experienced an extraordinary growth, first domestically, but then also globally. June 1st 1967 saw the opening of the first McDonald’s franchise abroad in Richmond, British Colombia, and the introduction in a host of other countries followed suit. Today McDonald’s operates in over 110 countries and it seems most national markets suffered the same market imperfection that the McDonald brothers and Ray A. Kroc identified in the US market. Moreover, the imperfection is still present in most markets as the fast-food chains still continue to grow. The internationalization of McDonald’s has had large effects both in the global economy and in each country where the concept has been introduced over the past 40 years. First and foremost it has opened a global market for low-priced, mass-produced restaurant services for new customers that previously did not have the buying power to eat out. It has also paved the way for other fast-food chains to follow suit into international markets increasing the variety, supply and competition for customers2. And the industry is indeed attractive. According to researchandmarkets.com the global market for fast food passed $100 billion in 2006. One can also argue that McDonald’s has generally increased the efficiency of the restaurant industry in each country they have entered. The basic problem for the franchiser 2

This presentation takes a pure techno-economical viewpoint, but the internationalization of McDonald’s have had the tendency to be put in the middle of several controversies related to our era of globalization and our modern way of living. For a very interesting study of the cultural effects of McDonald’s expansion to Asia see Golden Arches East edited by James L. Watson (1998).

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and most Austrian innovators in general is that such innovations are hard to protect through IP regulations and the business concept is fairly easy to copy. With the exception of McDonald’s brand, “the Golden Arches”, potential competitors can copy or adapt to the chains business concept as they wish and this is indeed also what has happened in most markets. McDonald’s expansion and success history has given rise to many local competitors (of which some has also gained global reach) that has basically copied the McDonald’s concept or partially adapted to it. In some cases, McDonald’s story spread more rapidly than the organization itself and local competitors with a McDonald’s-like concept was already in place when McDonald’s opened its first franchises in the country. This is for example the case for the Belgian-French fast-food company Quick that was established in Schoten, Belgium, in 1971, seven years before the first Belgian McDonalds franchise was opened in 1978. Quick is an obvious McDonald’s hybrid and rapidly spread to compete with McDonald’s in the French-speaking parts of Europe and Northern Africa. Another example of adaptations to the fast food revolution that McDonald’s has spearheaded is Delifrance. Delifrance is not a fast food franchise concept like McDonald’s3, but rather a bakery company that specializes in offering products from the traditional French bakeries like baguettes, viennoiseries, patisseries and savoury products to catering professionals with quick service concepts. Delifrance innovation is actually Schumpeterian in nature as their market offer relies on the development of several new bakery methods in order to make traditional French pastry available in quick service outlets. This is an example of an Austrian innovation that triggers a Schumpeterian entrepreneur and offers an example to Cheah’s (1990) argument reciprocal effects between the two types of innovation. In conclusion we see that the basic innovation that occurred in the small hamburger outlet in San Bernardino have opened a $100 billion global market for low-priced food services that is currently employing hundreds of thousands of workers world wide. McDonald’s success story and subsequent internationalization have trigged a broad range of competitors of many nationalities and has also triggered innovations in other related industries.

The Quartz Technology Unlike Austrian innovations, Schumpeterian innovations are often hard to tie to single firms. New technological innovations often result in a swarm of companies contributing to economic development in different ways. David Landes’ (1985) bestselling book, Revolutions in Time, is a good example of the Schumpeterian argument. In the final chapter of the book Landes tells the story of the introduction of the quartz technology in clock-making. This process is also often referred to as the quartz crisis due to the damaging effects the introduction of the new technology had on the traditionally innovative and globally dominating Swiss watch-making industry.

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In France Delifrance is simply a supplier. Abroad Delifrance is a franchise concept similar to McDonald’s, but with emphasis on coffee and products from traditional French bakeries

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The Basic Innovation The quartz technology origin’s are from the late 19th century and the Nobel Prize winning French physicist Pierre Curie. In 1881 he and his brother Jacques demonstrated that some crystals changed shape when they where subject to an electric field. This demonstration led to the discovery that some crystals physically vibrate when it is sent alternating currents through them. Physicists soon after found that electrically stimulated crystal vibrations can be made stable and with very high frequency, which make them excellent candidates for components in applications for precise time keeping. In the beginning quartz clocks were, due to their sheer size, for laboratory use only. But with the rapid technological development in the post-war period watch-makers realized that quartz-technology could eventually be introduced on wrist-watches as well. It was, ironically enough, the Centre Electronique Horloger in Neuchâtel, Switzerland, that developed the world’s first quartz wristwatch in 1967 (Federation of the Swiss Watch Industry, 2008). It was given the name Beta 21 and was soon followed by other manufacturers such as the Seiko’s 35SQ Astron in 1969. However, the early quartz watches never became a commercial success outside of the segment of innovative enthusiasts. They were generally expensive, unreliable and short-lived and as a result of this Swiss clock-makers made the decision to focus on their core competencies in mechanical watches that had given them global market domination and leave the quartz technology to other actors; a decision that in hindsight appears to be very unfortunate. The rapid technology development that followed in the late 1960’s and 1970’s shows why the quartz technology soon became the dominant technology in clock-making. Already in the mid-1960’s the accuracy of wrist-sized quartz clocks out-competed the very best mechanical clocks by a factor of 10. By 1968 the difference in accuracy from the two technologies was so big that the Swiss suspended their traditional wristwatch chronometer competition (Landes, 1985). Subsequent technology development and use of mass production lowered the manufacturing costs of quartz clocks significantly to a level far below that of mechanical clocks. Due to the need for high levels of highly skilled labor in the manufacturing of mechanical clocks they could never be even near competing with quartz clocks on costs as soon as the quartz watches were put into modern mass production. The result was that the introduction of the quartz technology significantly shifted the PP – curve outwards in the clock-making industry. It allowed many more and far more accurate clocks to be manufactured at the same price of one mechanical clock; the typical effect of a Schumpeterian innovation.

The International Expansion of the Quartz Technology in the Watch-making Industry As one would expect from the superiority of the quartz technology over the mechanical alternative it also had great economic effects on global markets. First of all it broke up the global monopoly that Swiss manufacturers had on high precision wrist watches. In 1970 Swiss manufacturers had about 90 % of this market employing 90 000 highly skilled professionals in about 1 600 different clock-making companies in Switzerland. By 1978 half of all watches sold in the world was based on quartz technology and by 1980 the numbers of

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employees in the Swiss clock-making industry was reduced to 30 000 and the number of Swiss manufacturers was reduced to about 600. So much for the damaging effects, on the bright side the quartz revolution opened up a completely new market for low-prized high precision watches. When the Japanese manufacturers like Seiko and Citizen and the American Timex Corporation put the quartz watches in mass production it made high precision clocks available to a price that virtually everybody could afford and the sales volumes soared. A final but notable effect was that the quartz technology also opened a new market for watches integrated with other types of digital applications. This was the strategy that the Japanese manufacturer Casio followed from the mid 1970’s. Casio was at that point already a world leading producer of calculators, but realized that the new technologies allowed integration of some of their applications in wrist watches. Soon after that Casio became a significant global supplier of digital watches with applications such as alarms, calculators, thermometers, barometers, altimeter, and finally in 1983 the introduction of the shock resistant G-SHOCK watches that remains their primary global brand today. In conclusion one can say that the quartz revolution increased the efficiency of the global clock market by breaking up a monopoly and allowing more variations in terms of competing suppliers. It generally increased the efficiency of the industry by making the same commodity (precise time keeping) available at significantly lower prices. And finally, it also illustrates Cheah’s (1990) argument that the Schumpeterian innovation opened the way for Austrian innovators such as Casio that made new combinations of available knowledge (i.e. digital applications in watches) to make new market offerings that benefited customers world wide.

DISCUSSION AND IMPLICATIONS As we have seen here, internationalizing firms play the role of an entrepreneurial agent either in the Schumpeterian or Austrian sense and thereby play a significant role for the dissemination of innovations world wide and as drivers of global economic development. Hence, an entrepreneurial view on international marketing as a bearer of innovations and driver for international economic development is justified. However there are still a few issues to address. First of all, are these two stories of international entrepreneurship different from any other typical example of entrepreneurial efforts? Arguably they are different for two reasons. First, obviously they are different merely because the introductions of these innovations have had tremendous effects and triggered economic change in a broad range of markets around the globe. Second, and maybe more important, we see that both the emergence and the subsequent effects are cross-national in nature. In the McDonald’s case we saw that European McDonald’s clones, for example in Belgium, were already well established before the McDonald’s corporation made their own entry. We also saw that actors in related industries abroad also chose to innovate their business to accommodate to the growing fast food industry. In the quartz technology example we also saw considerable multi-national effects as the quartz revolution led to a significant crisis for the Swiss clock industry that was reduced by two thirds in a decade from 1970 to 1980. On the other hand Japanese (and American) industry rose on the new technology and we saw the market and technology dominance in the wristwatch industry shift rapidly from

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Europe to Asia. The late 1980 also saw the resurrection of the Swiss watch-making industry, but now more technologically competitive and with a distinct focus on the high-end markets. Another question is whether any firm is as good bearer of innovations internationally as the other? In principle, the answer to this question is yes, but in practice it is probably not so. The story of the quartz technology showed us that it is not necessarily the incumbent multinational firms that are the best carriers of innovations. The Swiss clock-making industry dominated 90 % of the world market at the time of the emergence of the quartz technology and was even the first makers of a functional commercial quartz wrist watch, but they declined the opportunity to make better watches from this technology. Rather the economic benefits of the new technology were realized by market challengers such as for example Timex, that followed a strategy of low-priced watches, Seiko, that followed the opportunities given by the new technology to make great watches at low prices, and Casio, that followed the opportunities of integrating other electronic applications into digital quartz watches. The reason why this happens is that radical new innovations are often more of a challenge to incumbents than market challengers because incumbents often have invested more in the currently dominating technologies. These investments might be worth nothing if a completely new competing technology takes over the market and studies have also concluded that market challengers often use the opportunities that arise around industry shifts in order to challenge the incumbents’ global dominance (Jolly, Alahutha and Jeannet, 1992). Therefore, the recent attention that has been given to international new ventures (Zahra, 2005; Rialp, Rialp and Knight, 2005; Aspelund, Madsen and Moen, 2007) might be well justified. A final question that deserves some attention is the question of whether these stories are rare. We argue that they are not. Although, we grant that the cases in this study are not selected on random, but rather because they are well known to most people and because of the great effects they had on international markets. As international trade becomes more outspread in all sectors of open and developed economies it seems harder and harder to identify firms that are not dependent on either income from foreign markets or sourcing raw material, tools or technology from foreign suppliers. Dependency of international actors and innovations has become the rule rather than the exception in the modern world. With such interdependence between actors in different markets there is no surprise that innovations travels fast over national boundaries and even incremental innovations show rapid effects on multiple markets.

Managerial Implications Even though the managerial implications have not been the prime objective of this presentation, there are also managerial implications from the framework. The PP – curve framework can offer managers that are considering international expansion guidance on two questions. The first question is whether a business concept has international potential and could be internationalized or whether it is a business concept that is dependent on idiosyncratic domestic market conditions. If the introduction of a business concept into a new market will give either an Austrian or a Schumpeterian increase in market efficiency, then there exist a potential for earning entrepreneurial profit from internationalizing your concept, and hence internationalization could be well-advised provided that the potential is

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substantial4. Following the same reasoning, market selection should be made upon the consideration of which market that would give the largest potential for entrepreneurial profit. The second question is also of vital importance, namely how to choose an entry mode into a foreign market that secures the firm a reasonable part of the entrepreneurial profit. This is an important question that might make or break the internationalizing firm (Burgel and Murray, 2000). To answer this question the firm should perform a thorough analysis of which resources and capabilities that actually are the constituent of the firm’s ability to gain entrepreneurial rent in foreign markets. The firm should, regardless of organizational arrangement of the foreign entry mode, make sure it keeps control over key resources and capabilities that constitute the basis of its foreign competitiveness.

CONCLUSION In this study we have brought forward the effects of entrepreneurship on economic development and put them into an international setting. Our primary conclusion is that internationalization of firms constitutes the same economic effects as that of an entrepreneur, either in the Schumpeterian or the Austrian way, and hence internationalization should be viewed as an act of entrepreneurship. A firm that is internationalizing its operations is in principle seeking to gain entrepreneurial rent by internationalizing its activities abroad. Because of this we conclude that internationalization is an act of entrepreneurship and internationalizing firms are global change agents that drive economic development on the global level. To exemplify these effects we have presented two examples of international entrepreneurship that both have had great effects in term of developing their industries into more efficient sectors, but have done so by introducing very different types of innovations. We assert that international entrepreneurship is similar to entrepreneurship in terms of its ability to drive economic development, but it is still different in terms of the magnitude of the effects that is causes in multiple markets and due to the cross-national effects that occurs in their wake.

REFERENCES Aspelund, A., Madsen, T. K., & Moen, Ø. (2007). International new ventures: Review of conceptualizations and findings. European journal of marketing, 41 (11-12), 1423-1474. Baumol, W. (1968). Entrepreneurship in economic theory. The American economic review, 58 (2), 64-71. Burgel, O. & Murray, G. C. (2000). The international market entry choices of start-up companies in high-technology industries. Journal of international marketing, 8 (2), 3362.

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Supporters of the Neo-Classical tradition would rightfully argue that internationalization would be economically beneficial also if the firm holds a monopoly advantage that it could transfer across borders. But the monopoly advantage would still have to have an efficiency effect on competition, either Schumpeterian or Austrian, in order to be profitable.

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Cesaratto, S. (1999). Savings and economic growth in neoclassical theory: A critical survey. Cambridge journal of economics, 23 (6), 771-793. Cheah, H. -B. (1990). Schumpeterian and austrian entrepreneurship: Unity within duality. Journal of business venturing, 5 (6), 341-347. Erikson, T. (2001). Perceiving entrepreneurial opportunities in the ‘wireless alley’. Quarterly journal of electronic commerce, 2 (1), 25-30. Federation of the Swiss Watch Industry (2008). www.fhs.ch Hayek, F. A. (1945). The use of knowledge in society. American economic review, 35 (4), 519-530. Jacobson, R. (1992). The ‘Austrian’ school of strategy. Academy of management review, 17 (4) 782-807. Jolly, V. K., Alahutha, M., & Jeannet, J. -P. (1992). Challenging the incumbents: How high technology start-ups compete globally. Journal of strategic change, 1, 71-82. Kirzner, I. M. (1997). Entrepreneurial discovery and the competitive market process: An Austrian approach. Journal of economic literature, 35 (1), 60-85. Landes, D. S. (1985). Revolution in time: Clocks and the making of the modern world. Cambridge, MA: Harvard University Press. Landström, H. (1999a). Entreprenörskapets Rötter. Lund, Studentlitteratur (In Swedish). Landström, H. (1999b). The roots of entrepreneurship research. New england journal of entrepreneurship, 2, 9-20. McDonalds (2008). www.mcdonalds.com OECD. (1998). Industrial performance and competitiveness in an era of globalization and technological change. Paris, OECD. Oviatt, B. M., & McDougall, P. P. (1994). Toward a theory of international new ventures. Journal of International Business Studies, 25 (1), 45-64. Peters, J. J., Elliot J., & Cullenberg, S. (2002). Economic transition as a crisis of vision: Classical versus neoclassical theories of general equilibrium. Eastern economic journal, 28 (2), 217-240. Rialp, A. , Rialp J., and Knight, G. A. (2005). The phenomenon of early internationalizing firms: What do we know after a decade (1993 - 2003) of scientific enquiry. International business review, 14 (2), 147-166. Schumpeter, J. A. (1934). The theory of economic development. New Brunwick, NJ: Transaction Books. Schumpeter, J. A. (1947). The creative response in economic history. Journal of economic history, 7 (2), 149-159. Wickham, P. A. (2004). Strategic Entrepreneurship. Harlow, UK: Prentice Hall. Zahra, S. A. (2005). A theory of international new ventures: A decade of research. Journal of international business studies, 36 (1), 20-28.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 12

ENTREPRENEURSHIP AND ECONOMIC POLICY OBJECTIVES Miguel-Ángel Galindo Martin Universidad de Castilla-La Mancha, Spain

María Teresa Mendez Picazo Universidad Complutense, Madrid, Spain

ABSTRACT Economic growth and the progress of nations have been two economic policy targets that have interested economists over the centuries. Different approaches have been developed to determine which variables promote economic progress and growth so that the policy maker could use them to design adequate economic policy to achieve these objectives. During recent decades, the “entrepreneurship” factor has been considered a relevant element in the economic policy area, because it plays an important role in the processes of employment creation and social welfare improvement, achieving in this sense some of the most relevant economic policy objectives. In this paper, we analyze the relationship between entrepreneurship initiative and several economic policy targets—namely, employment and economic growth and progress. Also, we will consider the role of monetary and fiscal policies to promote entrepreneurial activity, developing an empirical study for developed and developing countries to estimate the relationship between both policies and entrepreneurship activity.

Keywords: entrepreneurship, economic growth, progress, economic policy

INTRODUCTION Economic growth and the progress of nations have been two targets that have worried economists for centuries. The classic economics texts have developed different

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theories and considered several factors that could explain those processes. Unfortunately, a single answer has not been obtained and nowadays economists try also to achieve a response to the mechanism of economic growth. Economic growth has been considered one of the most relevant economic policy areas. As it is well known, the validity of an economic policy is measured in terms of economic growth rate. It is supposed that those countries that obtain a higher economic growth rate are designing more efficient economic policies than those that show lower rates. The main corollary to this hypothesis is that the developing countries must follow and copy the economic policies designed by the developed countries. If we accept this assumption, it is then necessary to analyze and determine those factors that are growth-enhancing. Since 1980s, several economic growth models have been developed in the specialized literature, and this process has been mainly favored by two circumstances: first, the use of new econometrician techniques and the improvement of statistical data information of quantitative and qualitative variables; second, the appearance of endogenous growth models that have facilitated the introduction of new variables in the production function. Due to these circumstances,different factors have been considered in this kind of analysis. Not only have quantitative variables been added (physical capital, technology, etc.), but also qualitative (social capital, governance, etc.), in an attempt to offer better information about economic growth processes and to help to policy makers design economic policy measures. However, this effort is not enough. Labor markets are not efficient, as it was supposed by the orthodox literature, and the economic growth rates attained by some countries are neither sufficient to reduce unemployment rates nor will be adequate to resolve future problems in that market. Probably both facts have stimulated the inclusion of new factors in economic growth analysis. One possibility is to consider entrepreneurial activity, due to the fact that the best way to increase the employment rate and production is through the entrepreneurs’ activity. And “entrepreneurship” is a relevant activity to be considered in this field. It implies, among other things, that someone discovers the possibility to obtain some profits and then decides to invest. However, it is not a new variable. In the economic literature it is possible to find several references to this concept. The main goal of this paper is to analyze the relationship between entrepreneurship and economic growth and progress, as well the main measures that could be used to improve entrepreneurial activity. To achieve this goal, five sections are considered. Section two determines entrepreneurship concept. Section three, the nexus between entrepreneurship and economic growth, and economic progress (section four). An empirical estimation is carried out in section five. The main conclusions are considered in the last section.

ENTREPRENEURSHIP CHARACTERISTICS The main difficulty in entrepreneurship analysis is its delimitation. There is no general definition of this concept. Wennekers and Thurik (1999), following the ideas exposed by Hebert and Link (1989), Bull and Willard (1993) and Lumpkin and Dress (1996), define it as the manifested capacity and desire of the individuals to create new business opportunities,

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that is, new products, new organization forms, new production methods, etc., and to introduce their ideas into the markets—confronting uncertainty and other obstacles, adopting decisions on localization and on resources use. These decisions could be adopted individually or in networks included or not in institutions. Following this definition, several characteristics can be considered: 1. The definition takes into account the economic agents’ behavior. For this reason, entrepreneurship doesn’t mean an occupation, but an activity that considers the different circumstances and aspects of a person. 2. Entrepreneurships must consider uncertainty and several obstacles that are inherent in the business creation process. 3. They must have information or an idea about efficient production processes, as well as new organizational forms. It doesn’t mean that they have had to attend special academic courses on management. They must have an idea, and they can ask for information or advice from experts to create the firm. 4. Entrepreneurs can also be encountered in big firms. In this case, they are called “intrapreneurs” or “corporate preneurs”. Following the modern perspective, it is possible to consider the different main types of entrepreneurships: 1. Innovator, following Schumpeter’s (1950, 1934) thesis. Schumpeter considers that entrepreneurship activity implies innovation in the introduction of a new product, organization or process, generating a destruction process. He creates new industries and, for this reason, he causes relevant structural changes in the economy. Entrepreneurs cannot be considered inventors because they adopt the inventions created by others. When an entrepreneur gives up innovation, his condition of entrepreneurship lessens. For this reason, the Schumpeterian vision implies that the entrepreneur is an innovator who destroys the existing structures. From a more modern and general point of view, entrepreneurship creates a new firm but it doesn’t imply that he must create new products. He/she can generate a new business without being an innovator in the Schumpeterian sense and assimilate the technological advances. 2. To take advantage profit opportunities (Kirzner, 1973, 1999). Kirzner as well as Schumpeter consider that the entrepreneur tries to take advantage of profit opportunities, but opposite to Schumpeter’s view, the entrepreneur learns from past mistakes and tries to correct them, driving the market towards equilibrium. From his point of view, there is a relationship between institutions and entrepreneurships that enhances economic progress, due to two reasons: first, institutions facilitate the competitiveness level that entrepreneurships need; second, they also facilitate the incentives structure that enhance entrepreneurships in developing their activity. 3. Uncertainty (Knight, 1921). Knight distinguished between risk and uncertainty. The former is insurable because it refers to recurrent evens whose relative frequency is known from experience, and the second is not insurable because it relates to events whose probability is only subjectively estimated. Knight considered uncertainty as an important factor considered by entrepreneurs. They have to take it into account and

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Miguel-Ángel Galindo Martin and María Teresa Mendez Picazo to adopt decisions in an uncertain world. Their profits are a reward for bearing this uncertainty. 4. The entrepreneurship differentiation defended by Baumol (1990), ranking them between “productive” and “nonproductive”. From his point of view, the entrepreneurs are creative and ingenious, searching for the more appropriate means to increase their wealth, power and prestige. The existing environment around them has an important influence on their decisions. For this reason is possible to find different kinds of entrepreneurships. 5. It is also relevant to consider the sociological point of view. Max Weber’s (1978, 1988) contribution is one of the most relevant to be considered in this group1. Following Swedberg (2000) we can consider, at least, three main characteristics: a. Charisma. Weber considered that the entrepreneur is a kind of person who makes other people want to follow him. However, Weber also recognizes that this charisma is not as relevant in capitalistic society as it was in the early stages of mankind. In a capitalistic society the main factor for entrepreneurship is to take advantage of market opportunities. b. Religion. In his celebrated The Protestant Ethic and the Spirit of Capitalism Weber considered a certain form of religion that he called “ascetic Protestantism”, which favored the development a positive attitude towards moneymaking which facilitated the change in attitude towards the entrepreneur. c. Bureaucracy. In some writings, Weber also counterpoised entrepreneur with bureaucrat. From his point of view, a society with a more rationalized view of bureaucracy becomes more relevant, both within enterprises and within the state. And the entrepreneur is not only the person who can keep the bureaucrat in his place, but also has better knowledge of the firm.

ENTREPRENEURSHIP AND ECONOMIC GROWTH As it is well known, economic growth is nowadays considered one of the most relevant economic policy targets. The positive or negative character of the design of an economic policy is tested by its results in economic growth. The policies developed in nations with higher economic growth are valued as positives, and less developed countries are encouraged to follow those policies to improve their situation. The main reason to accept this statement is because higher economic growth supposes higher social welfare: a greater amount of products and services can be achieved by economic agents but also it is possible to maintain or increase the employment rate. In other words, we are buying “social peace” and we are introducing into a “virtuous circle” higher welfare and “social peace,” which enhances future economic growth. From an entrepreneurship point of view, in general terms their activity has a positive effect on economic growth because the existence of a group of persons that are interested in assuming risk is necessary, using their funds to generate new firms and business. This is the best way to achieve sustainable economic growth. It can be explained by Figure 1. If we are 1

We have included Weber’s approach in the sociologist group. However, following Swedberg (1998), he must be considered an economist sociologist.

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below point A we are not using all the resources that are accessible, so it is a position characterized by inefficiency. In this case, entrepreneurships have the possibility to use the resources, driving the economy to point A, which is a state of technical and economic efficiency. However, entrepreneurships could be interested in discovering and introducing new technologies or introducing foreign technologies to the production process. In this case the product possibility curve will shift towards right, as well as the line isocost, achieving a new equilibrium, point B. All of this process implies the spirit of economic growth, because real product will increase owing to an increase in productivity. However, it is also necessary to take into account the indirect effect shown by Holcombe (1998). From his point of view, the behavior of a certain entrepreneurship not only encourages other entrepreneurs to follow his/her example, but also creates new opportunities that can be taken advantage of by third persons. Obviously, it is necessary to have an adequate environment or climate to facilitate the activity and favor the achievement of the process described in Figure 1. In this sense, “rule of law”, the private property protection, level of liberty, and trade agreements, among others, are necessary requisites to create such an environment (Harper, 1998; North, 1994; Olson, 1996). It must also take into account the existence of a possible feedback effect in the relationship between entrepreneurship and economic growth, as shown in Figure-2. As demonstrated in the figure, socioeconomic circumstances, culture and country evolution have an influence on entrepreneurship activity. 1. A favorable entrepreneur environment, from a historical perspective, has sometimes not existed. Some literature, economic and noneconomic, has shown the entrepreneur as an individual who is only profit seeking, acting in his own self-interest. He/she only tries to achieve his/her personal profit without being interested in the consequences of his/her activity on other economic agents. In such an adverse environment it is quite difficult to offer an incentive for entrepreneurial activity. As Solomon (2002) states, entrepreneurs need to use their ingenuity to develop their task, which doesn’t mean that they lie or try to take advantage of other people.

y

B

A

Figure 1.

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Miguel-Ángel Galindo Martin and María Teresa Mendez Picazo 2. The environment of the entrepreneurship. His/her training, education, etc. favors or does not favor entrepreneurship activity. A higher education does not necessarily offer incentive for this activity. In some countries, university students prefer a remunerated job rather than creating a new business, because they avoid risk and consider their wage guaranteed. 3. Culture. It facilitates not only the assimilation and introduction of technological advances but also confronts modifications in the economic environment in a more effective way. However, culture could also have a negative effect from the worker’s point of view. A higher education could increase wages and, as previously stated, discourage entrepreneurial activity, creating a preference for wage-earning instead of becoming an entrepreneur. 4. Expectations of economic activity. Positive expectations of economic results and economic growth could encourage individuals to create their own business. In that situation, new market opportunities appear to be a good opportunity to obtain relevant profits. So, the introduction of a new technology, as well as the demographic and institutional behavior, creates new opportunities on the demand side that the entrepreneurs could take advantage of. The final result will depend on individual capabilities. 5. Foreign Sector. External sectors would have a positive and negative effect on entrepreneurship. From a positive perspective, free trade implies the free circulation of persons and goods, increasing business volume and facilitating the hiring of the most qualified workers. But on the opposite side, new and competitive firms are introduced into the domestic economy, increasing the competitiveness and adding complications to the small firms’ activity. Technology is introduced by foreign industries and the more restrictive monetary policy trying to reduce inflation will reduce the possibilities for new entrepreneurships (Galindo, 2005). 6. Firms’ concentration. Some entrepreneurship activity, thanks to the innovation process developed by some foreign industries, would be able generate undesirable firm concentration. For this reason, sometimes a more active fiscal policy to help small firms is defended. However, together with the positive effects of such an instrument, it is also necessary to take into account the negative one derived from its financing and the “crowding-out” effect.

All in all, there are several channels through the relationship between entrepreneurship and economic growth that could be studied. Some of them show positive relations, but there are also indirect negative effects that must be considered. However, this is not the end of the story. There is a feedback effect that must also be considered, that is, economic growth process would have effect on entrepreneurship. In effect, economic growth process supposes culture and social changes that modify the entrepreneur’s perspectives and his/her view of the future. A more prosperous society increases the propensity to consume, facilitating the appearance of new market opportunities. New technology gives the opportunity to satisfy new and higher necessities created by the consumption society. The innovation process facilitates the creation of new products that make obsolete the existing ones.

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Economic Policies

“Entrepreneurship”

Foreign Sector

Invest ment

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Economic Progress

Figure 2.

The individual knowledge and human capital are also relevant to develop entrepreneurship activity. Marketing is the most useful system for presenting new products and convincing individuals to buy them. But, as it has been shown before, the presence of economic growth and progress is incessary to encourage individuals to buy the new goods and services. There is a circle: entrepreneurship, technology, competitiveness, economic growth, consumption, appearance of entrepreneurships.

ECONOMIC PROGRESS AND ENTREPRENEUR BEHAVIOR In classical economics, it was usually considered that economic progress is an economic objective. In some recent studies, this variable is considered again. Holcombe (2007), for example, distinguishes between progress and economic growth, based on the quality or quantitative assets of a product, respectively. However, this distinction is not common. It is supposed that economic growth and progress are similar and those variables that are economic growth-enhancing also promote economic progress. In our case, someone, mainly an entrepreneur and/or entrepreneurship, introduces innovation by way of the firm’s activity, and this is growth/progress enhancing. In this sense, Keynes (1930, p. 323) stated that the “slow rate of progress, or lack of progress, was due to two reasons: to the remarkable absence of important technical improvements and to the failure of capital to accumulate.” He adds that “The modern age opened, I think, with the accumulation of capital which began in the sixteenth century.” And the result is that “In spite of an enormous growth in the population of the world, which it has been necessary to equip with houses and machines, the average standard of life in Europe and the United States has been raised, I think, about fourfold” (Keynes, 1930, p. 324).

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From this perspective, technology has played a relevant role in the process. It not only increases production, but also reduces the human effort in the production process. However, many writers of the eighteenth and nineteenth centuries criticized the technological process, not only economists but also writers. For example, Carlyle, Gaskell, Twain, and Wells, among others, showed the dangers derived from an excessive use of technology. Keynes considers that the main problem is the “technological unemployment, that is, unemployment due to our discovery of means of economizing the use of labor outrunning the pace at which we can find new uses for labor” (Keynes, 1930, p. 325). However, he pointed out that it is possible to solve the technical unemployment and technology would have important positive effects on human welfare. However, Keynes considers that it is not an important problem. Is only a temporary phase of maladjustment. For this reason, in the long run, mankind would resolve its economic problem and there would be an improvement in society’s progress, so the standard of life in the progressive countries one hundred years hence would be between four and eight times as high as it was at the beginning of the 1930s (Keynes, 1930, pp. 325-326). Schumpeter is perhaps the economist that has most stressed the relevance of technology in the economic process. In his book, The Theory of Economic Development (1934, Chapter II) he develops an economic growth model that includes not only traditional quantitative variables, but also qualitative ones. His production function includes labor, capital stock, resources and technology. For our purposes it is interesting to take into account that Schumpeter considers two kind of investment: autonomous and induced. The former depends on innovation processes (that is, technological progress or/and discovery of new resources); the latter depends on profits, interest rate and stock of capital. Technology progress and discovery of resources depend on the entrepreneur’s behavior. Nowadays, this term also includes entrepreneurship. It is quite difficult to determine the factors that have some influence on the entrepreneur. However, its role is the most important. It is possible that a society has a lot of scientists and innovators creating new machines, technologies, etc. But without a person to introduce these innovations, they would be useless. And this person is the entrepreneur/entrepreneurship. Schumpeter considers that the entrepreneur’s activity depends on profits and “social climate”, that is, the sociological-economic-institutional aspects of the society. It includes the social environment in which the entrepreneur develops his or her activity. Therefore, it includes social values, class structure, education system, and so on. In this sense, it is most relevant that the entrepreneur knows and accepts the “game rules”, that is, the existing conditions in the environment in which he or she develops his or her activity. In general terms, it could be accepted that Schumpeter considered that income distribution existing in the society reflects this “social climate”. If there is inequality, there would be social stress, labor unions would try to convince the government to introduce distribution taxation, and it would affect negatively on the entrepreneur’s intentions. This “social climate” could also include moral and ethical values. Therefore, entrepreneurship plays also a relevant role in promoting economic growth. When she or he introduces a new technology in the production process, she or he is improving not only the quantity but also the quality of the product. And following Holcome, this behavior means that economic growth and progress are enhanced.

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ECONOMIC POLICY MEASURES If entrepreneurship plays an important role in the economic growth and progress process, it is interesting to design different economic policy measures that stimulate entrepreneurship activity. In this sense, there are several factors that promote development of a new productivity activity (Galindo, 2006). First, the society’s education: a society with a high education facilitates the introduction of new technology because individuals esily assimilate the technological advances. As it is well known, thanks to this introduction, products are more competitive and firms can introduce their products into new markets. Second, the workers’ protection systems and wages could discourage entrepreneurship activity. High wages or very profitable unemployment benefits could damage entrepreneurship activity in two ways. On one hand, several individuals could consider that they would obtain more money being employed rather than creating a new productivity activity. On the other hand, some entrepreneurships could not pay such wages and benefits. Third, the social climate must be favorable to entrepreneurship activity, that is, the society must understand the risk assumed by the entrepreneurship and the profits that the society obtains from her or his activity. Fourth, the expectations concerning the economic evolution of the country must be also considered. If they are positive, that is, a positive economic evolution is expected, new productive processes could be expected, because there are more market opportunities for the products. This process is stimulated thanks to the free trade agreements existing among many countries. In this sense, the information on the economic data and on the economic measures designed by the policy maker is also relevant. Fifth, bureaucracy activity discourages entrepreneurship activity. If someone has to spend a lot of time and money solving bureaucratic requirements, they will be discouraged from initiating a new productive activity. This is a relevant problem in some countries with a high number of institutions that have a great weight on social activity. And finally, financial institutions also play a relevant role, because they facilitate the resources to finance new activity. Financial markets more profound and with more products and services would facilitate entrepreneurship in obtaining financing at a lower cost. To complete our analysis, we will consider the fiscal and monetary policy effects on these factors to improve entrepreneurship activity. Taking into account fiscal policy, an expansive policy that increases the public capital and/or reduces taxes would have a positive effect on entrepreneurships. An improvement of infrastructures and public services would reduce firms’ costs because they facilitate product transportation and they increase the connection among markets. A tax reduction would increase the disposable income of individuals, which would increase the consumption, in turn increasing the firms’ income and stimulating an increase in production. In this sense, a positive effect would also result if a reduction of corporation taxes is established. Morover, it must also be considered that if these measures promote economic growth, there would be an improvement in expectations that would promote entrepreneurship activity. In the case of monetary policy, an expansive policy would reduce interest rates and/or facilitate the possibility of obtaining credit, reducing the cost of financing. This kind of policy would enhance entrepreneurship activity.

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EMPIRICAL ANALYSIS In this section we are going to develop an empirical analysis to determine the monetary and fiscal policy effects on entrepreneurship. The equation to be estimated is: TEA = β + β y + β t + β ms 1 2 3 3

TEA being the Total Entrepreneurship Activity, that is, the index estimated by the GEM (Global Entrepreneurship Monitor) for several countries, which captures individuals who are involved in either the startup phase or managing a business that is less than 42 months old; y is the income (GDP); τ taxes (representative variable of taxes); and ms the money supply (representative variable of monetary policy). The expected sign is positive in all of the variables except in the case of taxes. y is included in the equation because it is expected that a higher income would improve the agents’ expectations and it would have a positive effect on the entrepreneurial intentions to create a new business. The period considered is 2000−2006 and for the following countries: Argentina, Australia, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Singapore, Spain, South Africa, Sweden, United Kingdom, and United States. The results obtained are shown in Table-12. The table shows that the signs are expected; therefore, an improvement of the expectations and expansive monetary and fiscal policies will have a positive effect on entrepreneurial activity.

Table 1. Dependent Variable: TEA Variable Constant Y T Ms R-square R-square Adjusted

Coefficient Std. Error 0,625022 27,5512 5,04365E-7 0,00000151313 0,0000035147 -0,0000097484 6,61003E-7 0,00000118739 Unweighted Statistics 0,600925 Sum squared resid 0,5305 Durbin-Watson stat

t-Statistic 44,0804 3,00008 -2,77361 1,79635

Prob. 0.0000 0.0081 0.0130 0.0902 0.0011 2,21957

Sources: World Bank and GEM (2005).

CONCLUSION In the previous sections, we have analyzed the relationship between entrepreneurial activity and the most relevant economic policy objectives, mainly economic growth and progress. Several modern studies consider that both objectives are the same, or if we achieve 2

We acknowledge the help supplied by Professor José Luis Alfaro Navarro to develop this estimation.

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a certain economic growth it is possible to obtain an improvement in progress. However, a relevant difference can be considered: economic growth is centered on the quantity of product, and progress on quality. In both cases, entrepreneurship has a relevant role in the process. The introduction of new technologies and innovations would enhance economic growth and progress. Several models and approaches confirm this statement. On the other hand, we have shown that better expectations and expansive monetary and fiscal policies would have a positive effect on such activity, and the empirical study developed confirms this idea.

REFERENCES Baumol, W. J. (1990). “Entrepreneurship: Productive, Unproductive and Destructive”. Journal of Political Economy, 80, pp. 893-921. Bull, I. & Willard, G. E. (1993). “Towards a theory of entrepreneurship”. Journal of Business Venturing, 8, pp. 183-195. Galindo Martín, M. A. (2006). “ ‘Entrepreneurship’, crecimiento económico y ética”, Estudios de Economía Aplicada. Vol. 24-2, agosto, pp. 389-406. Galindo Martín, M. A. (2005). “La inversión directa internacional como instrumento de política económica”. Información Comercial Española, n. 825, sept.-oct., pp. 19-30. GEM (2005). Informe Ejecutivo 2005, Madrid. Harper, D. A. (1998). “Institutional conditions for Entrepreneurship”, in Boettke, P. J., Kirzner, I. M. & Rizzo, M. J. (Eds.). Advances in Austrian Economics, vol. 5, Connecticut: JAI Press, pp. 241-275. Herbert, R. F. & Link, A. N. (1989). “In search of meaning of entrepreneurship”. Small Business Economics, 1, pp. 39-49. Holcombe, R. (1998). “Entrepreneurship and Economic Growth”. The Quarterly Journal of Austrian Economics, 1, pp. 45-62. Holcombe, R. G. (2007). Entrepreneurship and Economic Progress. London: Routledge. Keynes, J. M. (1930). “Economic Possibilities for our children”, in The Collected Works of John Maynard Keynes, vol. IX, London: MacMillan, [1977], pp. 321-332. Kirzner, I. M. (1973). Competition & Entrepreneurship. Chicago: University of Chicago Press,. Kirzner, I. M. (1999). “Creative and/or alertness: A reconsideration of the Schumpeterian entrepreneur”. The Review of Austrian Economics, 11, pp. 5-17. Knight, F. (1921). Risk, Uncertainty, and Profit. New York: Houghton Mifflin Company. Lumpkin, G. T. & Dess, G.G. (1996). “Clarifying the entrepreneurial orientation construct and linking it to performance”. Academy of Management Review, 21, pp. 135-172. North, D. C. (1994). “Economic performance through time”. The American Economic Review, 84, pp. 359-368. Olson, M. (1996). “Big bills left on the sidewalk: Why some nations are rich and others poor”. Journal of Economic Perspectives, 10, pp. 3-24. Schumpeter, J. A. (1934). The Theory of Economic Development. New York: Oxford University Press.

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Schumpeter, J. A. (1950). Capitalism, Socialism and Democracy. New York: Harper & Brother Publishers. Schumpeter, J. A. (1954). History of Economic Analysis. New York: Oxford University Press. Solomon, R. C. (2002). “Business ethics and virtue”, in Frederick, R. E. (Ed.). A Companion to Business Ethics. Oxford: Basil Blackwell, pp.30-37. Swedberg, Richard (1998). Max Weber and the Idea of Economic Sociology. Princeton: Princeton University Press. Swedberg, Richard (2000). “The Social science View of Entrepreneurship”, in Swedberg, R. (Ed.) Entrepreneurship. The Social Science View. Oxford: Oxford University Press, pp. 7-44. Weber, M. (1978). Economy and Society, 2 vols. Berkeley: University of California Press. Weber, M. (1988). The Protestant Ethics and the Spirit of Capitalism. Gloucester: Peter Smith,. Wennekers, A.R.M. & Thurik, A. R. (1999). “Linking Entrepreneurship and economic growth”. Small Business Economics, 13, pp. 27-55.

In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Chapter 13

INNOVATION POLICIES AND VC MANAGEMENT TO SUPPORT ENTREPRENEURIAL FINANCING Jarunee Wonglimpiyarat* National Innovation Agency, Ministry of Science and Technology 73/1 Rama VI Road, Rajdhevee, Bangkok, 10400, Thailand

ABSTRACT With the exception of the United States, no other country in the world could manage to create successful high-tech venture capital (VC)-backed industries. The government of developed and developing countries have placed importance on the government financial policies to boost high-tech investment capacity. This chapter is concerned with the innovation policies to support the development of the VC industry. There are difficulties in terms of access to finance for start-up firms. The governments around the world have initiated the government investment programmes and laws to support early-stage investments in start-ups. This chapter explores the differences across countries in respect of tax measures to support the development of the VC industry and proposes the National System of Innovation-based model of VC financing. This chapter is organised as follows. Section 1 presents an introductory section. Section 2 reviews the literature on the national system of innovation, management of VC financing and the Triple Helix model for innovation development. Section 3 explores the innovation policies and tax measures to support the development of the VC industry. Section 4 discusses the initiatives and challenges to create effective VC financing system. Section 5 concludes this chapter by drawing useful implications for policy makers attempting to provide an environment conducive to high-tech industry.

*

Corresponding author. PhD., CPA, CIA, CFSA. Tel: (662) 644-6000; Fax: (662) 644-8444; Email: [email protected]

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1. INTRODUCTION Venture capital (VC) in the United States is a popularised model for early-stage financing. VC has had an increasingly important impact on corporate innovation, job creation and economic growth (Birch 1979, Dushnitsky and Lenox 2005, Global Insight 2007, Kortum and Lerner 2000). Small and medium-sized enterprises (SMEs) have assumed a growing influence in the policy actions and instruments of many countries. Given a major contribution of SMEs to total employment and to the net creation of new jobs (Gallagher and Steward 1986, Storey, Watson and Wynarczyk 1989), SMEs are now a major focus of many countries’ economic policies. The government has initiated the venture capital fund as a means of providing equity financing to help viable SMEs in product/process commercialisation. Although the VC industries in many countries are immature and inexperienced (unlike the successful cases of the United States and the United Kingdom), many developing countries have tried to use VC as a financing mechanism to help early-stage firms. Given the increasing importance of entrepreneurial financing in developed and developing countries, this chapter is concerned with the innovation policies to promote the venture capital industry.

2. THEORETICAL FRAMEWORK 2.1. The National System of Innovation (NSI) The concept of the National System of Innovation (NSI) or national policies of innovation, particularly in the industrialised countries in the Northern hemisphere, can be traced back to the work of Lundvall at Aalborg University and Chris Freeman in the mid 1980s (Freeman 1987; Lundvall 1988, 1992, 1998, 1999, 2003; Nelson 1988). NSI is the interactive system of institutions, private and public firms, universities and government agencies, aiming at the production, diffusion and exploitation of knowledge within national borders. Interaction can be achieved through both market mechanisms and non-market mechanisms such as collaboration and long-term network arrangements. The NSI concept is a dynamic tool to investigate, formulate, plan and position the national economic and social development by using technology and innovation as the main driving force. The level of resources devoted by each nation to research and development (R&D) and innovative activities represents a basic characteristic of NSI (Lundvall 1992, Nelson 1993, MjØset 1992). Determinants of national economic performance and technological capabilities are the size of a country, R&D intensity and market structure (Freeman 1987, Archibugi and Michie 1997). The studies of NSI provide insights into the role of various institutions in the innovation system. University research, research organisations, technology transfer offices, public and private funding organisations are the main elements of NSI whereby linkages and interactions among them are important in shaping the innovation system (Cooke et al. 1997, Lundvall 1993). The concept of NSI helps explain the technological development and industrial innovation. Lundvall (1992) argued that the most fundamental resource in the modern economy is knowledge, and, accordingly, the process of learning should be taken into consideration in the context of interactions among institutions. To promote economic growth

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in developing countries, the government needs to enthusiastically strengthen technological capability to support the transition to the knowledge-based economy or the learning economy (Lundvall and Borràs 1999, Gregersen and Johnson 2001). Table 1. Definitions of the National System of Innovation (NSI) “A system of innovation is constituted by elements and relationships which interact in the production, diffusion and use of new and economically useful knowledge.” Lundvall (1992) “A national innovation system is the national institutions, their incentive structures and competencies that determine the rate and direction of technological learning (or the volume and composition of change-generating activities) in a country.” Patel and Pavitt (1994) “A national system of innovation is the system of interacting private and public firms (either large or small), universities and government agencies, aiming at the production of Science and Technology within national borders. Interaction among these units may be technical, commercial, legal, social and financial in as much as the goal of the interaction is the development, protection, financing or regulation of new Science and Technology.” Niosi and Bellon (1995)

2.2. MANAGEMENT OF VC FINANCING Venture capital (VC) is a high-risk, potentially high-return investment to support business creation and growth. It is a source of funds that typically finance new and rapidly growing companies through equity participation (Bygrave and Timmons 1992, Gompers and Lerner 2001). In other words, VC provides a vital source of external finance for growing companies, generally in return for a share in the company. In the tech economy, financing innovative businesses with venture capital is a key challenge facing entrepreneurs and SMEs. The VC financing at California’s Silicon Valley can be viewed as a successful case in inducing hightech innovation. Substantial venture funds were set up to draw venture investment into the local economy, thereby transforming the US economies. The successful high-technology companies in the US economy are, for example, Microsoft, Intel, Cisco Systems, and Genentech (Gompers and Lerner 2001, Wonglimpiyarat 2005a). The importance of VC financing in the configuration of a geographical concentration is the regional capacity to engender economic advantages. In other words, the VC investment (clustering) plays a vital role in creating phenomenal economic growth. The impact of firms’ development through the use of VC financing is the rise of industrial innovation (Bygrave and Timmons 1992, Gompers and Lerner 2001, Gompers et al. 2008, Roberts 1991). The structure of venture capital financing generally comprises the stage of financing, ex post refinancing and exit monitoring (IPO, acquisitions, new financing, failure) to achieve high efficiency ventures (Gompers 1998, Marx 1998, Cornelli and Yosha 2001, Schmidt 2002, King 2008).

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VC markets are influenced by many factors including a country’s legal and institutional structure, the size and liquidity of the stock market, investor sophistication and ability to supply VC finance to entrepreneurial firms (Cumming et al. 2005). In other words, regulatory variables including tax and legal measures affect VC investment in terms of supply and demand of venture capital finance (Keuschnigg 2002, Wonglimpiyarat 2005b). It is a policy to assist firms at early stage of development by using risk capital that provides a potential to economic change. VC markets are of particular interest to policy makers since this type of investment is used to fund high-tech companies with the potential to grow rapidly and therefore could create a positive impact on regional development (Bottazzi and Da Rin 2002).

2.3. The Triple Helix Model for Innovation Development The Triple Helix model enables the nation to realise collaborative potential for economic growth, efficiency and innovations. The model could enhance economic development by fostering international, interdisciplinary collaborations amongst the public and private sectors. Figure 1 shows the Triple Helix model emphasising the integration of 3 institutional spheres (university-industry-government relations). Indeed, firms benefit from networks of collaborations among universities, research centres, small and large firms along several activities such as R&D, production and marketing. The networks connecting the productive sector and the government would enhance economic development and competitiveness. In high technology sectors, the Triple Helix model provides a platform for innovators through university-industry-government relations. The model postulates an interaction among the institutional spheres to foster the condition for innovation (Etzkowitz and Leydesdorff 1998, 2000; Etzkowitz 2002; Etzkowitz 2004; Cowan and Jonard 2004; McEvily et al. 2004, Smith and Lohrke 2008). In high technology sectors, the Triple Helix model provides a platform for innovators through university-industry-government relations. Technological advantages appear when the innovation system is formed in clusters (R&D coordination among researchers, innovators and entrepreneurs) (Porter 1990, 1998, 2001). The emergence of scientific and technological research fields with commercial potential provides a basis for the growth of science-based clusters. It is argued that the government policies should support these interactions for knowledge generation and industrial development (Etzkowitz and Leydesdorff 2000, Gay and Dousset 2005). Early stage investments in high-technology companies are of high risk and thus need the government support programmes for venture development. According to Leleux and Surlemont (2003), governments can influence private equity markets given that they have rights to determine legal and fiscal environments and could directly intervene the by providing funding. Tax incentives for R&D expenditures represent an important public policy towards VC market development. Given the capital gap to support entrepreneurial companies, the governments around the world have initiated the government investment programmes and laws to fill such gap, for example, tax savings when providing investments to VC funds, government tax subsidies, capital gains tax rate reduction (Cumming and MacIntosh 2004, Wonglimpiyarat 2006). The next section will describe the innovation policies to support the development of the VC industry in Thailand.

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Tri-lateral networks

State

Industry

Academia

Source: Etzkowitz and Leydesdorff (2000). Figure 1. Triple Helix model.

3. INNOVATION POLICIES TO SUPPORT THE DEVELOPMENT OF THE VENTURE CAPITAL INDUSTRY In many developing countries, venture capital is part of the government financial policies to boost high-tech investment capacity. Currently, the Thai government has undertaken the project to study the policy measures to support the VC investment. The Ministry of Science and Technology has worked with the Ministry of Finance to devise the innovation policies aimed at supporting entrepreneurial financing. The project seeks to identify and model the key policies which would impact on the growth of small businesses and VC industry. Given the difficulties of access to finance for start-up firms, a range of tax incentives and financial measures is initiated to support early-stage investments in start-ups. In order to finance and stimulate innovation of SMEs, the Thai government has proposed tax measures to support entrepreneurial financing and boost investments of VC funds. There are differences in national regulations on tax measures to support VC investment. Table 2 explores the differences across countries in respect of VC tax measures to support the development of the VC industry. Table 3 summarises the results with regard to the innovation policy on VC tax measures. From Table 2 and 3, it can be seen that many countries have used the tax measures to support the VC development. Realising the potential of innovation-driven growth, the countries around the world attempt to manage the national VC industry in order to invigorate the national system of innovation. The next section will discuss the initiatives and challenges to create effective VC financing system and reduce market imperfections in allocating capital to early-stage firms.

Table 2. Cross-country comparison of tax measures to promote the VC industry Country Thailand

Beneficiaries Investors in VCs VCs

Tax measures Tax exemption for capital gains and dividend Tax exemption for capital gains and dividend for VCs investing in SMEs

Tax rate 0% 0%

UK

Investors in VCs

Tax credits for small investors or business angels making equity investments in qualified VC firms Tax exemption for dividend received from VC firms Tax exemption for capital gains/profits from selling VC shares Tax credits for the capital loss incurred in selling VC shares Tax credits when the capital gains are reinvested

20% of total investment not exceeding 150,000 GBP

Large companies investing directly in small and risky businesses VCs

South Korea

Investors in VCs

Corporation tax credits Tax credits when the capital gains are reinvested Tax credits for the capital loss incurred in selling VC shares Tax credits for VC firms investing in appropriate companies Tax exemption for capital gains from selling shares of invested companies Tax exemption for dividend Tax credits for reinvestment of capital gains. Corporation tax credits Dividend from VC investments would not be included in the tax base but would be tax withheld

0% 0% Maximum of 100,000 GBP Equal to the loss amount 20% of the capital gains reinvested but not limit the maximum amount Tax rate reduced to 20% 0% Equal to the loss amount Tax rate reduced to 20% but not exceeding 150,000 GBP 0% 0% No limit 15% of total investment

Table 2. Continued Country

Israel

Canada

Beneficiaries

Tax measures Tax exemption for capital gains VCs Tax exemption for dividend received from startup firms Tax credits when invested firm incurs capital loss Tax exemption for capital gains Corporation tax credits Start-up firms and high risk businesses Exemption for local acquisition tax and registration tax Property taxes credits Tax exemption for the increase in share price during IPOs Investors in VCs Capital gains exemption for foreign investors investing in local VCs or high-tech start-ups Tax credits for dividends Tax credits for interest income Investors in VCs Federal tax credits for investments in LabourSponsored Venture Capital Corporation (LSVCCs) Provincial tax credits for of investments in LSVCCs Tax credits available to employees buying shares directly from the company Tax credits available to employees buying shares in a company via the Employee Venture Capital Corporation (EVCC) VCs EVCCs are eligible for federal tax credits

Tax rate 0%

Maximum not exceeding 50% of the loss 0% 50% 0% 50% Maximum of 30 million won 0% Maximum not exceeding 25% Maximum not exceeding 45% 15% of the investment Maximum of 3,500 CAD 15-30% of the investment 20% of the investment 15% of the investment

20% Maximum of 1,000 CAD

Table 2. Continued Country USA

Beneficiaries Investors in VCs

Spain

Investors in VCs VCs

Portugal

Investors in VCs

VCs

Start-up firms investing in R&D

Tax measures Tax credits for capital gains Federal tax credits for business angel investors Federal tax credits for qualified investors Tax credits for insurance companies investing in certified capital companies (CAPCOs) Federal tax credits for investors investing corporate entities located in a low income community Federal tax credits Tax credits for capital gains Tax exemption for dividends and capital gains Tax exemption for capital gains from IPO sales Tax credits for capital gains Tax credits for capital gains for VC investors Tax credits for capital gains and dividends for VC investors (FCRs) Capital gain tax exemption for VC companies Tax exemption when dividends are reinvested in VC shares Tax exemption for capital gains and dividends received from VC funds R&D expenses of the companies can be accounted for 20% of expenses. The companies could get additional 50% deduction when the incremental expenses are greater than the average expenses incurred in the last 2 years.

Tax rate

20 – 30% of the investment value 100 – 120 % of the investment value 39% of the investment value 100% of the investment value From 18% to 15% 0% 0% 0% 10% 50% of the capital gains (short-term) from 32% to 0% from 32% to 0%

Table 2. Continued Country Taiwan

Beneficiaries Investors in VCs

Tax measures Tax credits for small investors and institutional investors

Tax rate Maximum not exceeding 20%

VCs Investors in VCs

Tax credits for investments in VC Fund Capital loss from investment can be expensed 10-year tax credits for gains on VC Fund investments 10-year tax credits for interest income/gains on investments Tax exemption for management fees and performance bonuses that VC firms’ executives received for a period of 10 years Capital loss from investment can be expensed Capital gains tax charged Capital gains tax charged Capital gains on VC investments

20%

Singapore

Denmark

VCs Investors in VCs VCs Provident Funds

Sweden

Investors in VCs

Australia

VCs Investors in VCs

Tax exemption for capital gains Tax exemption when the capital gains are reinvested Tax exemption for capital gains Tax exemption for capital gains and dividends from Pooled Development Fund (PDF) investments Tax credits for Pooled Development Fund (PDF) investments Tax exemption for capital gains received from Provident Funds investing in VCs

0%

43% 32% Tax reduced from 26% to 15% Tax reduced from 30% to 0% 0% 28% 0%

0%

Table 2. Continued Country China

Germany

Beneficiaries Investors in VCs

Tax measures Tax credits for capital gains

Tax rate Tax reduced from 33% to 25%

VCs

Corporation tax credits

70% of total investment

Tax credits for investments

17.5%

Tax credits for capital gains of VCs abroad

10-20%

Tax exemption for capital gains

0%

Capital gains tax exemption for investments on Management Buy-Ins and Management Buy-Outs

0%

Tax exemption for capital loss

Substitute payment not exceeding 50% of the loss

Tax exemption for capital gains received in the form of stock options

0%

Tax exemption for capital loss

Substitute payment not exceeding 70% of the loss

Corporation tax rate

56%

Investors in VCs

VCs

Source: The research report to the Ministry of Finance of Thailand, Kenney, et al. (2002), OECD (2002, 2003, 2004).

Table 3. Summary of tax measures to support the VC industry Countries

Thailand UK South Korea Israel Canada USA Spain Portugal Taiwan Singapore Denmark Sweden Australia China Germany

Venture capitalists Tax Tax exemption

VC corporations Tax exemption

Dividend

Capital gains

Capital losses

Reinvestment

deduction

Tax credits

3 3 2

3 3 3

2 3 2

2 3 2

2 3 3

2 2 2

3 3 3

3 3 3

2 3 3

2 2 2 2 3 2 2 2 2 3 2 2

3 2 2 2 3 2 2 2 3 3 2 3

2 2 2 2 2 2 3 2 2 2 2 2

2 2 2 2 2 2 2 2 3 2 2 2

2 2 3 2 2 3 2 3 2 2 2 2

2 3 3 2 2 2 2 3 2 3 2 2

2 2 2 3 3 2 2 2 2 2 2 2

2 2 2 3 3 2 2 2 2 2 2 3

2 2 2 2 2 2 3 2 2 2 2 2

Tax deduction

Tax credits

2 3 2

2 3 3

2 2 2

2 2 2 2 2 2 2 2 2 2 2 2

2 2 2 2 2 2 2 3 2 2 3 2

2 3 2 2 2 3 2 3 2 2 3 2

Dividend

Capital gains

Capital losses

Reinvestment

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4. INITIATIVES AND CHALLENGES TO CREATE EFFECTIVE VC FINANCING SYSTEM In the development of the VC industry, the tax measures are important measures but not sufficient to induce an economic development. The model presented in Figure 2 is developed to assist the development of VC system in Thailand. In other words, this model presents the NSI-based model of entrepreneurial network to assist the development of the national VC system. In effectively developing the VC system, it needs strategic collaboration among national organisations like the Ministry of Science and Technology, Ministry of Commerce, Ministry of Industry, Ministry of Education. The model suggests an initial state intervention to mitigate the problems of market imperfections in VC financing. From the model, the national VC system functions like a central administrative unit in VC management. This unit is responsible in devising policies to administer the public and private VC corporations. The unit also undertakes policy making, manages the public and private VC corporations, which would help overcome problems regarding the duplicity of activities. Given that the risk in early stage investments is high, many government-based VC funds (including new seed capital funds) are developed to provide financial supports to promote the genesis and development of innovative SMEs. Taking the role of public VC corporations, the objective of public VC financing is to alleviate/attenuate market failure in early-stage investments. The VC corporation with fundof-funds management is designated to manage the VC portfolio. The VC corporation is a holding company that provides investments to the national strategic industrial clusters (clusters of food, fashion, tourism, automotive, software according to the national competitiveness agenda). The Investment Committee and Audit Committee have been set up to oversee the VC management system and ensure the soundness of equity investments. In addition to financial support, the fund would provide technical assistance to investees such as production techniques, management support, legal and marketing advice. The set up of VC corporation would thereby help alleviate economic constraints on investment and provide high value added management services to support SMEs.

5. POLICY RECOMMENDATIONS AND CONCLUSIONS Policy measures to improve the formation and growth rates of new entrepreneurial businesses are important in developing economies worldwide. The VC tax programmes have come to be recognised as a potentially important constituent of innovation policies to support the economic development. The lessons learnt from the study of policy measures to support the VC investment undertaken by the Ministry of Science and Technology and the Ministry of Finance in Thailand would be useful to other countries attempting to strengthen the national VC system. The government of any country might consider taking the following measures to provide an environment conducive to innovation.

Innovation Policies and VC Management to Support Entrepreneurial Financing

Ministry of Finance

+

217

Strategic alliances Ministry of Science and Technology – supports the development of the national system of innovation, the business incubation system towards VC-backed spin-offs. Ministry of Commerce – assists the implementation of accounting system at the standard level and the intellectual property protection system. Ministry of Industry – assists the development of new SMEs and entrepreneurs.

Ministry of Education – supports the curriculum development to meet business needs and encourages the university-based VC spin-offs

National VC System/Central Administrative Unit in VC Management

The operation of the unit functions like the central banking system in devising policies to administer the public and private VC corporations. 1. Policies to develop the new businesses via VC management system 2. Policies to develop human capital specialising in VC system 3. Policies to develop the financing mechanisms to support SME development 4. Policies to develop VC mechanisms to support technology-based businesses

Public VC corporations

Private VC corporations

National network of venture capitalists

Investment Committee

VC Corporation with Fund-of-Funds Management

Audit Committee

The set up of VC corporation is in the form of holding company aimed at investing in the national strategic industrial clusters. The set up of VC Corporation is under the management of the Ministries responsible for the development of the national system of innovation. Strategic Partners

Company A

VC Fund 1

Company B

VC Fund 2

Company C

VC Fund n

Company Z

Source: The author’s design. Figure 2. The NSI-based model of entrepreneurial network development.

•

The government might consider intervening the VC system in order to catalyse the generation of new investments, given that the private sectors are generally risk averse. When the VC system is developed to a certain stage, the government should encourage the private sectors to share investment risks. This would thereby force the

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•

•

•

•

•

entrepreneurs to take the responsibilities of managing the businesses to survive and compete successfully in the market. The government should act as a catalyst to follow up the performance of the VCbacked companies. Indeed, the government should share the risks involved with SMEs rather than insist on repayment of investment funds. The request for repayment of funds would make the severity of SMEs’ problems worse. In the years after the financial crisis (after 1997), the government insistence on capital repayment clearly shows that the government does not have the risk-sharing policy to assist the creation of new innovative businesses. The government should help SMEs find appropriate partners regarding investment, sales and marketing. Such network would attract lead investors to co-invest in the new project development. Further, the government should provide training and consulting services to solve the SMEs problems. The Securities and Exchange Commission (SEC)’s rules and regulations governing listed companies should be relaxed in order to facilitate the VC management system. The stipulation of Sarbanes-Oxley Act 2002 has increased the compliance costs and should be reviewed and relaxed for small firms. The accounting system of SMEs should be prepared in accordance with the Generally Accepted Accounting Principles: GAAP) to increase transparency and accountability. The adoption of international accounting and reporting standards would help increase financing options to SMEs. In an initial development of VC system, the government might consider implementing the business angel system to catalyse the economic growth at the regional level (the angel investor network all over the country). The business angel investors network would be beneficial to entrepreneurs starting new businesses as well as the VC system.

REFERENCES Archibugi, D. & Michie, J. (1997). Technological Globalisation or National Systems of Innovation, Futures, Vol. 29(2), pp. 121-137. Birch, D. (1979). The Job Creation Process, in MIT Program on Neighbourhood and Regional Change. Cambridge, MA: MIT Press. Bottazi, L. & Da Rin, M. (2002). Venture capital in Europe and the financing of innovative companies, Economic Policy, Vol. 34, pp. 229-269. Bygrave, W.D. & Timmons, J.A. (1992). Venture Capital at the Crossroads. Boston, M.A.: Harvard Business School Press. Cooke, P., Uranga, M.G. & Etxebarria, G. (1997). Regional innovation systems: Institutional and organisational dimensions, Research Policy, Vol. 26, pp. 475-491. Cornelli, F. & Yosha, O. (2001). Stage financing and the role of convertible securities, IFA Working Paper No. 253-1997, London Business School. Cowan, R. & Jonard, N. (2004). Network structure and the diffusion of knowledge, Journal of Economic Dynamics and Control, Vol. 28(8), pp. 1557-1575.

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Cumming, D. & MacIntosh, J. (2004). Canadian Labour Sponsored Venture Capital Corporations: Bane or Boon? In: Ginsberg, A. & Hasan, I. (Eds.), New Venture Investment: Choices and Consequences, Amsterdam, Boston: Elsevier Science Academic Press. Cumming, D., Fleming, G. & Suchard, J. (2005). Venture capitalist value-added activities, fundraising and drawdowns, Journal of Banking & Finance, Vol. 29, pp. 295-331. Dushnitsky, G. & Lenox, M.J. (2005). When do incumbents learn from entrepreneurial ventures? Corporate venture capital and investing firm innovation rates, Research Policy, Vol. 34 (5), pp. 615–639. Etzkowitz, H. (2002). Incubation of Incubators: Innovation as a Triple Helix of UniversityIndustry-Government Networks Science and Public Policy, April. Etzkowitz, H. (2004), The evolution of the entrepreneurial university, International Journal of Technology and Globalization, Vol. 1(1), pp. 64-77. Etzkowitz, H. & Leydesdorff, L. (1998). A Triple Helix of University-Industry-Government Relations, Industry and Higher Education, August. Etzkowitz, H. & Leydesdorff, L. (2000). The dynamics of innovation: from National Systems and “Mode 2” to a Triple Helix of university-industry-government relations, Research Policy, Vol. 29, pp. 109-123. Freeman, C. (1987). National Systems of Innovation: the Case of Japan Technology Policy and Economics Performance: Lessons from Japan. London: Pinter Publishers. Gallagher, C. & Steward, H. (1986). Jobs and the Business Life Cycle in the UK, Applied Economics. Gay, B. & Dousset, B. (2005). Innovation and network structural dynamics: Study of the alliance network of a major sector of the biotechnology industry, Research Policy, Vol. 34, pp. 1457-1475. Global Insight (2007). Venture impact: the economic importance of venture capital backed companies to the U.S. Economy. National Venture Capital Association, 3rd Ed. Gompers, P. (1998). Venture Capital growing pains: should the market diet, Journal of Banking and Finance, Vol. 22(6-8), pp. 1089-1104. Gompers, P. & Lerner, J. (2001). The Money of Invention, Boston, M.A.: Harvard Business School Press. Gompers, P., Kovner, A., Lerner, J. & Scharfstein, D. (2008). Venture capital investment cycles: The impact of public markets, Journal of Financial Economics, Vol. 87(1), pp. 123. Gregersen, B. & Johnson, B. (2001). Learning Economy, Innovation Systems and Development, Paper prepared for the Converge Project (“Strategies and policies for systemic interactions and convergence in Europe - Converge”). Kenney, M., Han, K. & Tanaka, S. (2002). The Globalization of Venture Capital: The Cases of Taiwan and Japan, Conference proceedings of the International Conference on Financial Systems, Corporate investments in innovation and venture capital, UNU/INTECH and EU-DG, Brussels, 7-8 November 2002. Keuschnigg, C. (2002). Taxation for a venture capitalist with a portfolio of firms, Oxford Economic Papers. King, B.L. (2008). Strategizing at Leading Venture Capital Firms: of Planning, Opportunism and Deliberate Emergence, Long Range Planning, Vol. 41(3), pp. 345-366.

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Kortum, S. & Lerner, J. (2000). Assessing the contribution of venture capital to innovation, Rand Journal of Economics, Vol. 31 (4), pp. 674–692. Leleux, B. & Surlemont, B. (2003). Public versus private venture capital: seeding or crowding out? A Pan-European analysis, Journal of Business Venturing, Vol. 18, pp. 81-104. Lundvall, B. (1988). Innovation as an Interactive Process: From User-Producer Interaction to the National Systems of Innovation. In: Dosi, G. et al. (Eds.), Technical Change and Economic Theory: London: Pinter Publishers. Lundvall, B. (1992). National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning. London: Pinter Publishers. Lundvall, B. (1993). User-producer relationships, national systems of innovation and internationalisation. In: Foray, D. and Freeman, C. (Eds.), Technology and the Wealth of Nations. London: Pinter Publishers. Lundvall, B. (1998). Why study national systems and national styles of innovation?, Technology Analysis & Strategic Management, Vol. 10(4), pp. 407-422. Lundvall, B. (1999). National Business Systems and National Systems of Innovation, Special Issue on Business Systems, International Studies of Management and Organisation. Lundvall, B. (2003). National Innovation System: History and Theory. Aalborg University, Aalborg, Denmark. Lundvall, B. & Borràs, S. (1999). The Globalising Learning Economy: Implications for Innovation Policy. Brussels, DG XII. Marx, L. (1998). Efficient venture capital financing combining debt and equity, Review of Economic Design,Vol. 3, pp. 371-387. McEvily, S.K., Eisenhardt, K.M. & Prescott, J.E. (2004). The global acquisition, leverage, and protection of technological competencies, Strategic Management Journal, Vol. 25, pp. 713-722. MjØset, L. (1992). The Irish Economy in a comparative International Perspective, Dublin, National Economic and Social Council. Nelson, R. (1988). Institutions Supporting Technical Change in the United States. In Dosi, G. et al. (Eds.), Technical Change and Economic Theory, London: Pinter Publishers. Nelson, R. (1993). National Systems of Innovation: A Comparative Study. Oxford: Oxford University Press. Niosi, J. & Bellon, B. (1995). Une interpretation evolutionniste des politiques industrielles. (With English summary), Revue d’Economie Industrielle, 0(71): 213-226. Organisation for Economic Co-operation and Development (2002). Entrepreneurship and Growth: Tax Issues, OECD STI Working Paper, Paris. Organisation for Economic Co-operation and Development (2003). Venture Capital Policy Review, OECD STI Working Paper, Paris. Organisation for Economic Co-operation and Development (2004). Evaluating State Venture: Capital Tax Incentives, OECD Economic Survey, Paris. Patel, P. & Pavitt, K. (1994). National Innovation Systems: Why They Are Important, and How They Might Be Measured and Compared, Economics of Innovation and New Technology, Vol. 3 (1), pp. 77-95. Porter, M. (1990). The Competitive Advantage of Nations, London: Macmillan. Porter, M. (1998). Clusters and the New Economics of Competition, Harvard Business Review, November-December 1998.

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In: Entrepreneurship and its Economic Significance… ISBN 978-1-60692-669-7 Editors: M. V. Bradshaw and P. T. Carrington © 2009 Nova Science Publishers, Inc.

Short Communication

FROM ENTREPRENEUR TO MANAGER: A BRIEF CONSIDERATION OF ECONOMIC TRANSITION Scott A. Beaulier1,*, Joshua C. Hall2,† and William S. Mounts1,‡ 1

Stetson School of Business and Economics Mercer University, Macon, GA 31207, USA 2 Department of Economics and Management Beloit College, Beloit, WI 53511, USA

ABSTRACT Both change and persistence matter in economics. Change ultimately leads to persistence. In economics, marginal analysis, disequilibrium, and market entry and exit highlight the importance of change. Persistence, on the other hand, can be seen in equilibrium—the assumption of zero (i.e., normal) profits is an example. Entrepreneurs are agents of change. Yet, on-going competitive firms must learn to survive in the long run setting of normal returns. If entrepreneurs bring both change and manage to persist, then there is no reason to read further. If they do not, then how does the transition from change to persistence occur? In this paper we discuss the importance of the transition from entrepreneurial information to managerial information. We argue that both entrepreneurs and managers have specialized sets of information and that firms require each type of information at different stages of their existence.

*

Tel: (478) 301-2832; E-mail: [email protected] Corresponding author. (608) 363-2376; E-mail: [email protected] ‡ Tel: (478) 301-2837; E-mail: [email protected] †

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1. INTRODUCTION Both change and persistence matter in economics. The introduction of change ultimately leads to persistence. The use of marginal analysis, disequilibrium conditions, market entry and exit are things that bring home the importance of change. Persistence, on the other hand, can be seen in equilibrium. The inevitable state of normal profit is an appropriate example. In the context of this brief note, entrepreneurs are seen as agents of change. Yet, on going competitive firms must learn to survive in the long run setting of normal returns. If entrepreneurs bring both change and manage to persistence, then there is no reason to read further. If they do not, then how does the transition from change to persistence occur? In this note, we briefly consider this question and if answering it matters.

2. THE POINT TO BE CONSIDERED Economists are wont to emphasize the role of decentralized markets and prices in conveying information about scarcity. However, business firms are internally organized and controlled by direction and authority, rather than by relative prices (Coase 1937), since arranging them hierarchically reduces transaction costs and uncertainty. When such a centralized business approach is used in place of a market-based approach though, other sources of information must be used in decision-making because company executives and managers do not have clear information about market prices to guide their decisions. As Coase explains, a firm is “a system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur” and, in general, a firm is viewed as a nexus of contracts characterized by administrative decision-making (Coase 1937, p. 393; Jensen and Meckling 1976).1 From the perspectives of Coase (1937) and Schumpeter (1936), an entrepreneur provides new information concerning place and purpose. The entrepreneur identifies a market niche and tries to fill the niche by creating a marketable product. What is not addressed by economists, however, is whether the entrepreneur continues to provide or even should provide information and direction to the firm after the initial “organizational innovation” (Williamson 1983) has occurred. Once the entrepreneurial information of place and purpose has been identified, should the entrepreneur continue to provide the organization with managerial information? In other words, should entrepreneurs also be day-to-day managers? Should the introduce change and then lead to persistence? In this paper, we place the transition from entrepreneurial to managerial information into a simple model of a firm. Is there an optimal duration to entrepreneurship? How much entrepreneurial information should be supplied to any one firm? When should a firm shift their focus from an entrepreneurial to a managerial focus? Over time, business value depends, in part, on the use of information provided by entrepreneurs and manager.

1

Baumol (1993) and Holmes and Schmitz (1990) stress the importance of the entrepreneur in a market economy, but their analysis does not offer a definition of the entrepreneur. Others have discussed the lack of a generally accepted definition of an entrepreneur (Demsetz 1983; Rosen 1983; Baumol 1993). On a formal level, Holmes and Schmitz (1990) developed a rigorous, theoretical model of entrepreneurship.

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225

3. THE PRIORS IN THE LITERATURE A direct discussion of whether or not entrepreneurs should also be managers of the companies they create has not been fully developed in the literature. Baumol (1993, pp 2-5) separates managerial responsibilities from entrepreneurship, but the distinction he draws is not incorporated into his analysis of entrepreneurship.2 Elsewhere, Holmes and Schmitz (1990) model a specialized “entrepreneurial task” but assume homogeneity in management skills across all individuals; that is, they assume all people are equally skilled managers.3 More importantly, Holmes and Schmitz do not distinguish between the entrepreneurial and managerial tasks; nor do they discuss the optimal mix of managerial and entrepreneurial know-how over a firm’s life cycle. Since the informational interplay between entrepreneurial and managerial information is a significant determinant of business value, more attention should be paid to the value managers and entrepreneurs add to firms. Entrepreneurial knowledge is unlike managerial knowledge. According to Kirzner (1973), entrepreneurship is the act of discovering an unexploited profit opportunity. Entrepreneurs look at the existing allocation of production processes and figure out a way to redirect or reallocate these processes to satisfy consumer demands. For Kirzner, entrepreneurs are operating outside of the normal production process. They create (i.e., production functions) what managers manipulate. Managers, meanwhile, take an existing production function as given and try to figure out the profit-maximizing combination of capital, labor, and land. As Holcombe (2007, p. 30) puts it, “Good management means doing what one is doing as efficiently as possible. Entrepreneurship means implementing something new.”

4. A GENERAL SCHEMATIC Distinguishing between managerial information, which is the information necessary to operate a viable, on-going business, and entrepreneurial information, which is concerned with the identification of market opportunities, is necessary for at least two reasons.4 First, the characteristics (skills, traits, knowledge, propensities, etc.) successful entrepreneurs bring to an activity are not the same as the characteristics brought by competent managers. Entrepreneurs are often thought to be creative, independent, risk-takers, while managers are relatively conservative, inflexible, risk-averse, and have the skills that can minimize average costs over the long run. Since there is little overlap between the skills needed to be a good entrepreneur and the skills needed to be a good manager, there is some degree of specialization in the knowledge,

2

Evans and Jovanovic (1989) revisited the entrepreneur/capitalist distinction. Holmes and Schmitz (1990, p. 283) relax the homogeneity assumption in footnote 13, but their general results are not appreciably altered. 4 Our principal interest is in the change from an entrepreneurial focus to a managerial focus. Clearly, our information dichotomy oversimplifies the complexity of the informational margins a firm is trying to clear. In our analysis, the entrepreneurial event comes first in a firm’s life. Complexity may be added by seeing Miller (1993) and Lumpkin and Dees (1995), as well as many others. 3

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talents, and information offered by entrepreneurs and by managers. 5 The fact that the entrepreneurial and managerial tasks are highly specialized means that a proper allocation of these two talents is crucial to firm survival. Second, a firm’s long-run survival, as well as its market value, depend, in part, on the use of managerial information and not entrepreneurial information. Therefore, the information required by directed resources (i.e., the Coasian firm) is specialized in time, changes over time, and reflects changes in personnel or organizational emphasis or both.6 The importance of matching required information with the appropriate supplier of information is amplified further because actual decision-making in business, especially in small firms, is often characterized by simplicity or inertia. Even when consumer demands change or competition intensifies, firms often get stuck in patterns where decisions are based on what worked well in the past (Miller 1993; Lumpkin and Dees 1995). As we will explain in the next two subsections, both entrepreneurial and managerial information are crucial for a firm’s survival and success. The allocation of this talent should be understood as a flow, rather than a stock. That is, at each point in time, firms face different internal needs. Sometimes firms need to be “shaken up” and broken out of their old ways of doing things; other times, firms need to be stabilized by good managers.

4a. A Start-up Firm It may be useful to think of the information required by a start-up firm. Diagram 1 is relevant to all firms because they were all “start-ups” at some point in time.

┌>place and purpose->-┐ ┌--->-process----->--┐ 1. potential firm-------->2. realized firm---------->3. continuing firm └-->-entrepreneur->--┘ └--->-manager---->--┘ Diagram 1.

As shown, a firm progresses through three basic stages. Early on, while an entrepreneur tries to identify “arbitrage opportunities” (Evans and Jovanovic 1989), the firm exists only in a potential state. Here, the entrepreneur sees a link between a product and a market niche through “organizational innovation.” As argued by Coase (1937), the entrepreneur controls the firm’s direction and makes key business decisions to create a realized or stable firm early on because he or she has the specialized knowledge of the product and the latent consumer demand for this product. This initial stage, which Holmes and Schmitz (1993) describe as the “entrepreneurial task,” requires the skills and knowledge of the entrepreneur. The act of entrepreneurship is clearly unique and “…entails the use of imagination, boldness, ingenuity,

5

See Churchill (1983), Smith and Milner (1983), Carland, Hoy, Boulton, and Carland (1984), and Shaver and Scott (1991). Ronen (1983) offers an economic analysis of entrepreneurs. Whether or not entrepreneurship can be taught is still being discussed in the literature. See Shapero (1975) and Block and Strumpf (1992). 6 The entrepreneur can sell out, hire a manager, or create new divisions. Holmes and Schmitz (1990, 1995) address the issues associated with business transfers and the turnover of managers.

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leadership, persistence, and determination in the pursuit of wealth, power, and position…” (Baumol 1993, p. 8). Once the firm is realized, the product is sold in the niches discovered during the potential firm stage. The realized stage occurs when a product begins to be offered to the market. The entrepreneurial or “start-up” stage was the stage when potential market demands were discovered. This “realized stage” of production is when firms figure out a way to meet these demands while, at the same time, avoiding economic losses. The entrepreneur is still playing an active role in the business during this stage of the firm’s evolution, but near the end of this stage products are becoming commoditized, repetitive processes introduced, and the main problems for the firm are managerial ones. In some sense, in this stage there is a call for bureaucracy. Next, a realized firm must become capable of sustaining itself over time. The information necessary to maintain—or continue—a firm, however, is different from the information needed to create a firm. Increased attention must be given to control and coordination, to the creation of procedural guidelines, and to the delegation of decision-making. In general, the “continuing firm” stage is associated with the creation of repetitive systems, which are required of a firm trying to minimize average costs over time in a competitive market. The manager works to minimize costs within an established firm, and he ...oversees the ongoing efficiency of continuing processes. It is the manager’s task to see that available processes and techniques are combined in proportions appropriate for current output levels and for the future outputs… The manager sees to it that inputs are not wasted, that schedules and contracts are met… In sum, the manager takes charge of the activities and decisions encompassed in the traditional models of the firm. (Baumol 1993, p. 3)

In contrast to the entrepreneur, then, the manager is more of a problem solver and less of a creator. He/she is the purveyor of process. As the life of a business evolves, there are convergent pressures between an entrepreneurial focus and a managerial focus. The owners of the firm must decide which focus or combination of focuses should be employed at each stage of development, and, depending on the focus chosen, the firm will enjoy a steady stream of profits or suffer immediate economic losses. When owners place a significant emphasis on entrepreneurial talent within a firm, they are choosing to forgo additional managerial talent. Likewise, the opportunity cost of a managerial focus within the firm is less of an entrepreneurial culture. As a result, some information, which could have produced benefits to the firm, is foregone. In order to maximize profits, the residual claimants of the firm must try to determine the point at which the firm’s focus should be switched from entrepreneurial to managerial. As stated, benefits accrue to a firm whenever appropriate information is supplied to its management personnel. In economics and management literature, an entrepreneurial focus is observed in the start-up stage of a firm. Here, entrepreneurial know-how produces significant benefits. One might expect the benefits to increase as additional entrepreneurial information is supplied, but the marginal benefits from an entrepreneurial focus begin to fall as the organization evolves and moves into a realized form. As such, while the total benefits from an entrepreneurial focus in the initial stage of development increase, they do so at a decreasing rate. In other words, there are diminishing returns to the information entrepreneurs provide.

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There are also costs to an entrepreneurial focus. As a firm evolves, different information is required. Areas in which others types of information might be needed are neglected by an entrepreneurial focus (Holt 1992; Churchill 1983). The entrepreneurial focus is costly because it sometimes crowds out managerial information within a firm. The longer an entrepreneurial focus is maintained, the more benefits of a managerial focus are being forgone.

4b. An On-going Firm The evolution depicted in the diagram above may also occur within existing firms as they identify new niches. The literature on “intrapreneurship” (Pinchot 1985) describes the entrepreneurship occurring within existing firms as shifts in market demand create new entrepreneurial opportunities. In some established firms, intrapreneurship is exhibited by a department or an individual charged with finding new niches, while overall continuing operations are left to others. An extreme version of intrapreneurship is “market based management” (Cowen and Parker 1997; Koch 2007), where workers and managers within a firm are residual claimants. Hierarchy is discouraged and knowledge is decentralized and dispersed. By making all workers entrepreneurs, the knowledge problems described by Hayek (1945) and Coase (1937) can be better managed. Once a firm decides to adopt an intrapreneurial idea, the firm may restructure in order to utilize new production technologies. Restructuring occurs when new sets of repetitive arrangements of resources offer greater profitability. The managers gather the requisite information and apply the new production technology. Thus, even if entrepreneurship is occurring within firms in the form of intrapreneurship, an entrepreneurial focus can only hold for so long; at some point, the firm’s approach must shift once again to a more managerial one.

5. SUGGESTIVE EVIDENCE AND AN ECONOMETRIC APPROACH Overall, the rewards to entrepreneurship are found in the conversion of business ideas and plans into reality. Successful entrepreneurs produce products that enjoy high levels of market demand and deliver economic profits. By contrast, the returns of management are internal to the firm and occur when actions are taken to lower average total costs. If organizational emphasis is not placed on the management task once a firm is fully realized, the value of the firm to others will fall. When entrepreneurial information is applied to an environment in which local, managerial knowledge is more useful, information gaps are created, and this information gap between entrepreneurial and managerial knowledge will ultimately reduce a business’s value. Successful businesses respond to the informational inflection point by transitioning activities from entrepreneurial to managerial; firms unable to shift focus fail. While previous research on business transfers offers some insight into the informational transition described above, data limitations prevent a typical econometric analysis. Sources of individual firm data do not offer the details about internal business structure and personnel

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changes needed for careful econometric analysis.7 In addition, many firms are not publicly held or traded and, as such, are not subject to typical disclosure requirements. Afriat (1967), Varian (1990), and Ley and Steele (1996) address deviations from optimizing behavior, and their work could be tested econometrically. According to this literature, a firm moves away from optimizing behavior if an entrepreneurial emphasis is maintained for too long a period. By identifying indicators of entrepreneurial/managerial transition, one could estimate movements away from an efficiency frontier described by a firm’s objective function. Initial evidence suggestive of an optimal duration to entrepreneurship is found in Holmes and Schmitz’s (1995, pp. 1035-1037) analysis of business turnover. Using the 1982 Characteristics of Business Owners, Holmes and Schmitz found businesses (proprietorships and S-type corporations) five years of age and older to be more likely to be of “good quality” when owned by non-founders relative to firms still owned by their founders. 8 On the other hand, when compared to similar businesses owned by non-founders, younger founder-owned businesses (those aged zero to two years) were more likely to be of “good quality.” For the moment, if one assumes the founder/non-founder distinction is similar to the entrepreneur/manager distinction, business values suffer if the entrepreneur remains as the manager over an extended period of time.9

6. CONCLUSION We have discussed the importance of the transition from entrepreneurial information to managerial information. Both entrepreneurs and managers have specialized sets of information. Firms require each type of information at different stages of their existence. The failure to obtain the required type of information at the appropriate stage of business development can result in a decline in business value, possibly mitigating the benefits of previous entrepreneurial activities. Even though managers require different information than entrepreneurs, and even though firms require different mixes of entrepreneurial and managerial talent at different points in their evolution, economists tend to sidestep this dynamic interplay. Given the central role of the entrepreneur in Schumpeter’s (1936) model of growth and innovation, a more precise understanding of the evolution of firms and the decision-makers within firms is needed.

REFERENCES Afriat, Sidney. 1967. “The Construction of a Utility Function from Expenditure Data,” International Economic Review 8: 67-77. Baumol, William J. 1993. Entrepreneurship, Management, and the Structure of Payoffs. Cambridge, MA: MIT Press. 7

See Holmes and Schmitz (1990, 1995) for a discussion of the limitations of business census data. U.S. Census Bureau (U.S. Department of Commerce), 1987. 9 The authors do not mean to excessively abuse ceteris paribus conditions. 8

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Block, Zenas and Stephen A. Strumpf. 1992. “Entrepreneurship Education Research: Experience and Challenge,” in Sexton, Donald L. and John D. Kasarda (eds.) The State of the Art of Entrepreneurship, Boston: PWS- Kent: 17-42. Carland, James W., Frank Hoy, William R. Boulton, and Jo Ann C. Carland. 1984. “Differentiating Entrepreneurs from Small Business Owners: A Conceptualization,” Academy of Management Review 9 (2): 354-359. Churchill, N. 1983. “Entrepreneurs and the Enterprises: A Stage Model”, in Hornaday, et al. (eds.) Frontiers of Entrepreneurship Research, Wellesley, MA: Babson College Center of Entrepreneurial Studies. Coase, Ronald H. 1937. “The Nature of the Firm”, Economica 4: 386-405. Cowen, Tyler and David Parker. 1997. Markets in the Firm. London: Institute of Economic Affairs. Demsetz, Harold. 1983. “The Neglect of the Entrepreneur,” in Ronen (ed.) Entrepreneurship, Lexington, MA: Lexington Books. Evans, David S., and Boyan Jovanovic. 1989. “An Estimated Model of Entrepreneurial Choice under Liquidity Constraints,” Journal of Political Economy 97: 808-827. Hayek, F.A. 1945. “The Use of Knowledge in Society,” American Economic Review 35: 519530. Holcombe, Randall. 2007. Entrepreneurship and Economic Progress. New York: Routledge. Holmes, Thomas J., and James A. Schmitz, Jr. 1990. “A Theory of Entrepreneurship and Its Application to the Study of Business Transfers,” Journal of Political Economy 98: 265294. _____. 1995. “On the Turnover of Business Firms and Business Managers,” Journal of Political Economy 103: 1005-1038. Hornaday, J. A., J. A. Timmons, and K. H. Vesper (eds.). 1983. Frontiers of Entrepreneurship Research. Wellesley, MA: Babson College Center of Entrepreneurial Studies. Jensen, Michael, and William Meckling. 1976. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3: 305-360. Kirzner, Israel. 1973. Competition and Entrepreneurship. Chicago: University of Chicago Press. Koch, Charles. 2007. The Science of Success. Hoboken, NJ: John Wiley & Sons. Ley, Eduardo, and Mark F. J. Steel. 1996. “On the Estimation of Demand Systems Through Consumption Efficiency,” Review of Economics and Statistics 78 (3): 539-43. Lumpkin, G. T., and Gregory G. Dees. 1995. “Simplicity as a Strategy-making Process: The Effects of Stage of Organizational Development and Environment on Performance,” Academy of Management Journal 38 (5): 1386-1407. Miller, Danny. 1993. “The Architecture of Simplicity,” Academy of Management Review 18 (1): 116-138. Pinchot, Gifford. 1985. Intrapreneuring. New York: Harper & Row. Ronen, Joshua (ed.). 1983. Entrepreneurship. Lexington, MA: Lexington Books. Rosen, Sherwin. 1983. “Economics and Entrepreneurs,” in J. Ronen (ed.) Entrepreneurship, Lexington, MA: Lexington Books. Schumpeter, Joseph A. 1936. The Theory of Economic Development. Cambridge, MA: Harvard University Press.

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Shapero, Albert. 1975. “The Displaced, Uncomfortable Entrepreneur,” Psychology Today (Nov.): 8-13. Shaver, Kelly G., and Linda R. Scott. 1991. “Person, Process, Choice: The Psychology of New Venture Creation,” Entrepreneurship Theory and Practice (Winter): 23-45. Smith, N. R. and J. B. Miner. 1983. “Type of Entrepreneur, Type of Firm, and Managerial Innovation: Implications for Organizational Life”, in Hornaday, et al. (eds.) Frontiers of Entrepreneurship Research, Wellesley, MA: Babson College Center of Entrepreneurial Studies. Varian, Hal R. 1990. “Goodness-Of-Fit in Optimizing Models,” Journal of Econometrics, 46: 125-140. Williamson, Oliver E. 1983. “Organizational Innovation: The Transaction-Cost Approach”, in J. Ronen (ed.) Entrepreneurship, Lexington, MA: Lexington Books.

INDEX A AC, 113 academic, 3, 51, 58, 63, 115, 116, 126, 127, 130, 195 academics, viii, 41, 42, 43, 51, 116, 117, 119, 123 access, x, xii, 2, 4, 7, 34, 35, 47, 49, 79, 101, 114, 119, 133, 134, 135, 136, 142, 181, 184, 205, 209 accessibility, x, 133, 134 accidental, 100 accountability, 218 accounting, 4, 117, 121, 218 accuracy, 29, 188 achievement, 26, 32, 35, 197 achievement orientation, 32 acquisitions, 169, 207 activation, 98, 106 adaptation, 182 administrative, 31, 42, 148, 216, 224 adults, 7, 70, 76 affirmative action, 2 Africa, 187, 202 African American, 19, 20 African Americans, 20 African-American, 1, 2, 15, 19, 20 age, 5, 6, 20, 26, 30, 31, 53, 66, 70, 90, 159, 199, 229 agent, 98, 185, 189 agents, xi, xii, 44, 47, 48, 50, 97, 130, 137, 138, 180, 191, 195, 196, 197, 202, 223, 224 aggregate demand, 155 aggressiveness, 36 agricultural, 28 agriculture, 29, 84 aid, 88, 136, 138, 139, 140, 141, 142 air, 12 alertness, 97, 98, 100, 103, 111, 143, 203 alternative, 2, 46, 188 ambiguity, 99, 109, 134, 137 Amsterdam, 219

analytical techniques, 120 anatomy, 108 AP, 144, 166 appendix, 158, 159 application, 89, 120, 135, 138 arbitrage, 183, 184, 185, 226 Argentina, 90, 202 argument, xi, 44, 66, 86, 114, 148, 179, 180, 184, 185, 187, 189 articulation, 108 ascetic, 196 Asia, vii, 21, 22, 37, 53, 186, 190 assessment, 6, 47, 74, 99, 101, 103, 123, 127, 136, 178 assets, 2, 184 assimilation, 23, 198 assumptions, 25, 49, 91, 181, 183 asymmetric information, 98 asymmetry, 100, 148, 150, 151 Athens, 95, 110, 128, 129, 130 atmosphere, 22, 122 attitudes, viii, 4, 18, 22, 24, 29, 35, 44, 49, 51, 53, 97, 103, 106, 107 attractiveness, 90, 136, 138, 139, 140, 141, 142 Australia, 25, 202, 213, 215 Austria, 130 authority, 32, 224 automation, 184 autonomous communities, 45 autonomy, 4, 45 availability, 123 average costs, 181, 225, 227 average total costs, 228 aversion, 104, 109, 148 awareness, 47, 48, 58, 103

234

Index

B Balkans, 96 Baltic States, 38 bankruptcy, 150 banks, 2, 4 barriers, 28, 51, 92, 136, 138, 139, 140, 141, 142, 148 barriers to entry, 148 Bayesian, 103 behavior, iv, 24, 35, 36, 57, 110, 181, 195, 197, 198, 200, 229 behaviours, 44, 99, 102, 107 Belarus, 42 Belgium, 42, 52, 187, 189, 202 beliefs, 25, 144 benchmark, 87 benchmarking, 130 benefits, 4, 14, 15, 17, 143, 190, 201, 227, 228, 229 Best Practice, 129 biotechnology, 117, 122, 127, 219 birth, 92 births, 73 Blacks, 9, 10, 11, 17 blocks, 80, 97, 123 bonding, 73 Boston, 19, 37, 38, 52, 67, 143, 177, 218, 219, 230 Brazil, 202 Britain, 165, 166, 167, 169, 170, 171, 172 brothers, 185, 186 Brussels, 219, 220 building blocks, 97 bureaucracy, 196, 201, 227 business cycle, 19, 148 business environment, 22, 26 business management, 20 business policy, 52

C CAD, 211 campaigns, 139, 140, 141, 142 Canada, 166, 176, 202, 211, 215 Candida, v, 69 candidates, 180, 188 capacity, xi, 25, 43, 194, 205, 207, 209 capital accumulation, 97, 106, 107 capital gains, 208, 210, 211, 212, 213, 214 capital markets, 149 capitalism, 23, 110 Capitalism, 37, 91, 109, 196, 204 capitalist, 219, 225

Caribbean, 1 case study, viii, 41, 45, 46, 52, 53, 117 case-studies, 45 cash flow, 76 catalyst, 24, 218 Catholic, 118, 147 causal relationship, 168 CDT, 128 cell, 107 Census, 2, 5, 6, 20, 229 Census Bureau, 2, 5, 6, 20, 229 Central Asia, vii, 21, 22 Central Europe, 27 centralized, 224 channels, 97, 198 chicken, 5 children, 2, 3, 4, 5, 6, 13, 16, 26, 203 China, 22, 38, 129, 214, 215 Chi-square, 8, 30, 31, 82 Chi-square analyses, 8 CIA, 205 circulation, 198 citizens, 50 civilian, 20 CL, 37 classes, 200 classical, 193, 199 classical economics, 193, 199 classification, 76, 99 classrooms, 19 clients, 49 clustering, 207 clusters, 208, 216 Co, 111, 115, 128, 130, 220 codes, 27, 44, 49 coffee, 187 cognition, 38, 52, 71, 142, 143, 144 cognitive, 24, 36, 71, 72, 74, 86, 99, 102, 103, 109, 134, 135, 136, 137, 142, 143, 144 cognitive biases, 99 cognitive perspective, 143 cognitive process, 24, 72, 102, 103, 109, 136 cognitive style, 137 cognitive variables, 137 collaboration, 100, 206, 216 colleges, 15 Colombia, 186 Columbia, 90 Columbia University, 90 commerce, x, 66, 117, 134, 135, 138, 141, 142, 192 commodity, 189 communication, 117, 129, 136 communism, 32

Index communist countries, 27 communities, 45 community, 2, 3, 6, 12, 45, 47, 75, 76, 97, 106, 127, 130, 212 comparative advantage, x, 147 competence, 186 competition, ix, x, 70, 72, 74, 77, 78, 79, 81, 82, 83, 84, 86, 87, 88, 89, 90, 108, 133, 134, 148, 169, 186, 188, 191, 226 competitive advantage, 57, 58, 67, 104 competitive conditions, 73 competitiveness, 17, 24, 50, 109, 191, 192, 195, 198, 199, 208, 216 complement, 35 complementarity, 56 complexity, 135, 185, 225 compliance, 125, 218 components, 57, 71, 106, 188 composition, 207 comprehension, 29, 118 computation, 83 computing, 122, 155 concentrates, 142 concentration, 23, 71, 198, 207 conception, ix, 24, 85, 113, 115, 127 conceptual model, 36 conceptualizations, 191 concrete, 126, 127 confidence, 32, 120, 122 configuration, 207 conflict, 23 confusion, 98 Congress, iv Connecticut, 129, 203 consensus, 148 consolidation, 42, 47, 49 constant rate, 157 Constitution, 45 constitutional law, 27 constraints, 4, 44, 134, 160, 216 construction, 7, 28, 84, 99, 102, 118, 120 consultants, 119 consulting, 218 consumers, 169 consumption, 150, 156, 157, 198, 199, 201 content analysis, 120 contingency, 36, 91, 99, 108 continuity, 105 contracts, 44, 119, 224, 227 control, 16, 32, 99, 106, 110, 144, 183, 191, 227 convergence, 101, 219 conversion, 228 coordination, 70, 208, 227

235

corporate governance, 148 corporation tax, 201 corporations, 215, 216, 229 correlation, 15, 16, 79, 103, 171 correlations, 15, 77, 78 costs, x, 26, 27, 72, 97, 98, 104, 106, 114, 147, 148, 149, 150, 151, 155, 160, 181, 184, 188, 201, 218, 224, 225, 227, 228 costs of production, 181 country of origin, 24 covariate, 80, 81 coverage, 166, 170, 171, 172, 173, 174 covering, 26, 165, 168 CPA, 205 creativity, 57, 58 credit, 4, 18, 19, 20, 34, 137, 148 credit market, 4, 148 critical analysis, 42 cross-country, 39, 165, 168, 169, 173 cross-cultural, 24, 35, 36 crowding out, 220 crystals, 188 CT, 91, 92, 144 cultural differences, 25, 148 cultural values, 24, 107 culture, 23, 25, 35, 38, 44, 49, 51, 53, 57, 197, 198, 227 customers, 73, 75, 76, 89, 137, 186, 189 cycles, 148, 219

D Dallas, 92 data analysis, 7, 17, 19, 46 data collection, 46, 76 data set, 77 database, viii, 46, 55, 59, 60, 63, 172 death, 17, 91 death rate, 91 deaths, 73 debt, 220 decision making, 32 decision-making process, 134, 135 decisions, x, 26, 30, 67, 71, 72, 76, 85, 99, 102, 107, 108, 133, 135, 147, 195, 196, 224, 226, 227 decomposition, 165, 167 deduction, 212, 215 definition, 2, 97, 101, 102, 194, 195, 224 demand, 42, 49, 104, 105, 151, 155, 156, 159, 160, 181, 184, 185, 198, 208, 226, 228 democracy, 36 demographic characteristics, 137 demographics, 99

236

Index

Denmark, 202, 213, 215, 220 density, 170 Department of Commerce, 128, 229 dependent variable, 79, 80 depreciation, 100 depressed, 2 desire, 26, 35, 184, 194 destruction, 195 determinism, 71 developed countries, 96, 173, 184, 194, 196 developing countries, xi, 129, 193, 194, 205, 206, 207, 209 developing nations, 28 deviation, 173 dichotomy, 225 diet, 219 differentiation, x, 84, 104, 147, 161, 196 diffusion, 206, 207, 218 diminishing returns, 97, 98, 227 direct foreign investment, 38 direct investment, 135 directionality, 83 disclosure, 229 discount rate, 156 discounting, 102 discourse, 143 Discovery, 72 discrimination, 2, 18, 19 disequilibrium, xii, 26, 101, 182, 223, 224 dispersion, 60 disposable income, 201 disposition, 137 dissatisfaction, 31, 33 disseminate, 51 distribution, 28, 45, 84, 97, 98, 200 diversification, 97, 98, 107 diversity, x, 73, 116, 133, 134, 139 dividends, 211, 212, 213 division, 96, 98 divorce, 6, 17 domestic demand, 104 domestic economy, 198 dominance, 181, 189, 190 duality, 192 duplication, 72 duration, 101, 224, 229

E earnings, 19, 198 Eastern Europe, 37, 38, 130 ecological, 73, 90, 91 ecology, 90

econometric analysis, 228 economic activity, 118, 119, 120, 121, 122, 181, 198 economic boom, 20 economic change, xi, 22, 179, 182, 189, 208 economic development, xi, 22, 27, 38, 42, 52, 109, 111, 114, 127, 179, 180, 181, 182, 183, 184, 187, 189, 191, 192, 208, 216 economic efficiency, 181, 197 economic globalisation, 142 economic growth, vii, viii, x, xi, 21, 22, 23, 24, 25, 28, 36, 39, 41, 42, 96, 109, 110, 147, 148, 149, 161, 163, 164, 172, 173, 174, 175, 180, 192, 193, 194, 196, 197, 198, 199, 200, 201, 202, 203, 204, 206, 207, 208, 218 economic growth model, 194, 200 economic growth rate, 164, 194 economic losses, 227 economic performance, 38, 148, 172, 206 economic policy, xi, 165, 193, 194, 196, 201, 202 economic problem, 200 economic security, 35 economic systems, 34 economic theory, 46, 191 economics, xi, xii, 21, 96, 129, 147, 149, 179, 180, 181, 192, 193, 199, 200, 223, 224, 227 educated women, 14 Education, 51, 87, 90, 133, 216, 219, 230 educational attainment, 79 educational institutions, 6 efficiency level, 184 egg, 5 elaboration, 60, 61, 62, 64, 65, 138 elasticity, 104, 156 electric field, 188 elephant, 91 emotional, 75 emotions, 135 employability, 18 employees, 18, 43, 49, 50, 73, 115, 119, 121, 122, 123, 126, 150, 169, 189, 211 employment, x, xi, 2, 3, 4, 5, 9, 12, 15, 17, 18, 19, 25, 26, 28, 29, 33, 43, 47, 50, 51, 90, 93, 104, 163, 164, 165, 167, 168, 169, 170, 171, 172, 173, 174, 175, 193, 194, 196, 206 employment growth, xi, 90, 93, 163, 164, 165, 168, 169, 170, 171, 175 employment status, 12 encouragement, 24, 75, 168 energy, 23, 28, 75 engagement, 100, 123 England, 221 enlargement, 105

Index enterprise, vii, ix, 21, 23, 25, 27, 30, 31, 33, 34, 43, 51, 52, 69, 70, 76, 114, 117, 128, 161 environment, vii, x, xii, 21, 22, 23, 25, 27, 28, 29, 34, 35, 38, 42, 50, 52, 71, 74, 81, 83, 84, 87, 90, 91, 92, 103, 121, 123, 133, 134, 135, 136, 149, 150, 151, 152, 153, 154, 161, 170, 196, 197, 198, 200, 205, 216, 228 environmental conditions, viii, 22, 43, 73, 74, 75 environmental context, 24, 36 environmental factors, 33, 43, 71 environmental resources, 73 equality, 154, 155 equating, 8 equilibrium, xii, 96, 99, 109, 110, 149, 150, 155, 159, 161, 173, 181, 182, 183, 192, 195, 197, 223, 224 equipment, 70, 119, 186 equity, 206, 207, 208, 210, 216, 220 equity market, 208 erosion, 150, 153, 154 estimating, 79 estimator, 80 ethics, 204 EU, 26, 42, 107, 167, 169, 171, 219 euphoria, 22 Europe, 27, 37, 38, 130, 148, 161, 187, 190, 199, 218, 219 European Commission, 116, 128, 148, 161 European Union, 23, 28 evolution, 44, 63, 66, 71, 90, 105, 114, 116, 128, 187, 189, 197, 201, 219, 227, 228, 229 evolutionary process, 129 exclusion, 79 exercise, 159 expenditures, 208 expert, iv, 34, 35 expertise, 98 exploitation, 57, 70, 71, 72, 73, 85, 86, 87, 97, 110, 126, 142, 206 export promotion, x, 134, 135, 141 exports, 135 external environment, ix, 42, 69, 71, 87 externalities, 97 eyes, 73, 184

F failure, ix, x, 16, 35, 69, 70, 79, 80, 90, 126, 147, 148, 149, 150, 152, 153, 154, 155, 158, 159, 160, 161, 199, 207, 216, 229 familial, 15 family, vii, 1, 3, 4, 5, 6, 13, 15, 17, 19, 23, 30, 33, 34, 75, 97, 106 family firms, 4

237

family history, 30 family members, 4 family structure, vii, 1, 3, 5, 6, 13, 15, 17 family units, 5 farming, 29 fast food, 186, 187, 189 fatigue, 135 fear, 148 February, 110, 120 feed-back, 197 fees, 88, 213 females, 3, 16 filters, 106, 118, 136, 144 finance, xii, 4, 147, 149, 201, 205, 207, 208, 209, 221 financial capital, 4, 74, 75, 90 financial crisis, 218 financial institution, 19, 89, 201 financial institutions, 19, 89, 201 financial performance, 39 financial resources, 22, 126 financial support, 51, 147, 216 financial system, 23 financing, xii, 34, 35, 47, 137, 198, 205, 206, 207, 209, 216, 218, 220 Finland, 202 firm size, 122, 143, 164, 168 first-time, 149 fiscal policy, 198, 201 flexibility, 99 flow, 28, 76, 186, 226 focusing, 13, 59, 136 food, 185, 186, 187, 189, 216 food industry, 189 foreign direct investment, 135 foreign firms, 167, 168 foreign investment, 38 formal education, 4, 74, 84 Formica, 129 FP, 165 framing, 99 France, 147, 148, 179, 187, 202 franchise, 184, 185, 186, 187 free enterprise, 30, 31 free trade, 198, 201 free trade agreement, 201 freedom, 33, 35 FSA, 205 full employment, 169 funding, vii, 19, 48, 117, 120, 133, 206, 208 fundraising, 219 funds, 4, 47, 77, 78, 79, 81, 82, 85, 89, 107, 196, 207, 208, 209, 212, 216, 218

238

Index

G GAAP, 218 gas, 28 GDP, 27, 29, 45, 164, 172, 174, 202 GDP per capita, 45 gender, 16, 18, 26, 28, 76 gene, 4, 35 generalization, 115 generalizations, 35 Generally Accepted Accounting Principles, 218 generation, 17, 28, 47, 52, 116, 208, 217 geography, 52 Germany, 170, 171, 172, 177, 202, 214, 215 gestation, 70, 71, 72, 76, 86, 92 global economy, 114, 180, 186 Global Insight, 206, 219 global markets, 188 globalization, 115, 180, 186, 192 Globalization, 53, 219 GNP, 174 goals, 31, 114, 116, 117, 118 goods and services, 26, 88, 100, 199 governance, 23, 57, 85, 148, 194 government, vii, viii, xi, 2, 6, 7, 25, 27, 41, 42, 43, 51, 53, 114, 116, 117, 128, 138, 200, 205, 206, 207, 208, 209, 216, 217, 218, 219 graph, 110 Great Britain, 165, 166, 167, 169, 170, 171, 172 Greece, 95 groups, 1, 5, 11, 16, 31, 48, 51, 56, 83 growth dynamics, 96 growth rate, ix, 95, 96, 104, 105, 106, 107, 149, 155, 156, 157, 158, 160, 161, 164, 172, 194, 216 guidance, 34, 35, 87, 190 guidelines, 44, 120, 227

H H1, 74, 81 H2, 75, 81 handicapped, 35 hands, 15 Harvard, 37, 38, 53, 61, 62, 64, 66, 67, 90, 108, 110, 192, 218, 219, 220, 230 hazards, 80 heart, 101 helix, 115, 128 Helix, xii, 129, 205, 208, 209, 219 hemisphere, 206 heterogeneity, 115, 184 heterogeneous, 184

high growth potential, 174, 175 high risk, 103, 208, 211 high school, 88 high tech, 84, 115, 120, 192, 208 higher education, 19, 74, 198 higher quality, 149 high-risk, 102, 103, 106, 207 high-speed, 49 high-tech, xi, xii, 91, 93, 191, 205, 207, 208, 209, 211 hip, xi, 99, 164, 168, 170, 173, 175 hiring, 169, 198 holding company, 216 Holland, 108 homogeneity, 225 homogenous, 151 horizon, 102 host, 186 hostile environment, 23 household, 6, 7, 14, 15, 17, 30 household income, 14 households, 3, 5, 6, 7, 8, 13, 14, 15, 17 HRM, 31 human, 4, 18, 19, 27, 28, 30, 44, 52, 71, 73, 74, 75, 81, 83, 85, 86, 87, 90, 91, 96, 97, 107, 108, 109, 116, 123, 199, 200 human capital, 4, 18, 19, 73, 74, 75, 83, 85, 86, 87, 90, 91, 96, 97, 107, 108, 199 Human Development Report, 29 human resources, 28, 30, 71, 123 human welfare, 200 hybrid, 187 hypothesis, 14, 121, 122, 194 hypothesis test, 122

I IASP, 129 ICE, 53, 144 ICT, 117, 122, 138, 139, 140, 141, 142, 148 id, 26, 137 identification, 48, 100, 103, 106, 108, 143, 225 idiosyncratic, 184, 190 IFA, 218 illusion, 99 imagination, 226 immigrants, 45, 51 implementation, 115 in transition, vii, 21, 22, 23, 26, 27, 37, 51, 53, 72, 128 incentive, 126, 197, 198, 207 incentives, 44, 161, 195, 208, 209 inclusion, 76, 101, 194

Index income, 14, 28, 77, 78, 80, 88, 104, 190, 200, 201, 202, 211, 212, 213 income distribution, 200 incomes, 201 increased competition, 169 increasing returns, 97 incubation, ix, 47, 113, 115, 116, 117, 118, 119, 120, 123, 126, 127, 128, 129 incubators, vii, ix, 27, 49, 113, 114, 115, 116, 117, 118, 120, 121, 122, 123, 126, 127, 128, 129, 130, 131 incumbents, 190, 192, 219 independence, 29, 31, 73, 120, 121, 122 independent variable, 80, 99 indicators, 72, 128, 229 indices, 164 indirect effect, 197 individual character, 148, 161 individual characteristics, 148, 161 individual differences, 26, 84 individual perception, ix, 69 individual personality, 25 industrial, 28, 47, 96, 103, 104, 107, 109, 117, 166, 171, 206, 207, 208, 216 industrial sectors, 166, 171 industrialization, 25 industry, x, xii, 4, 37, 73, 84, 88, 90, 91, 108, 110, 115, 116, 125, 128, 129, 130, 134, 144, 162, 165, 166, 167, 168, 169, 170, 171, 182, 183, 184, 185, 186, 187, 188, 189, 190, 205, 206, 208, 209, 210, 215, 216, 219, 221 inefficiency, 183, 197 inequality, 200 inertia, 70, 91, 226 infinite, 150 inflation, 198 information and communication technology, 117 information and communication technology (ICT), 117 information asymmetry, 100, 148 infrastructure, 33, 84, 116, 117, 184 inheritance, 19 inherited, 4, 182 initial state, 216 initiation, 28, 136 injury, iv innovation, x, xii, 24, 33, 46, 47, 52, 57, 67, 73, 96, 98, 107, 115, 116, 117, 126, 127, 128, 147, 148, 149, 151, 153, 159, 161, 164, 165, 168, 180, 182, 184, 185, 187, 188, 189, 195, 198, 199, 200, 205, 206, 207, 208, 209, 216, 218, 219, 220, 224, 226, 229

239

Innovation, v, vi, x, xii, 37, 46, 58, 62, 108, 114, 118, 128, 129, 130, 131, 147, 153, 161, 176, 178, 183, 185, 188, 205, 206, 207, 208, 209, 218, 219, 220, 221, 231 insight, 228 instability, 23, 28, 110 institutional change, 38, 97, 98, 111 institutional infrastructure, 23 institutions, 2, 6, 19, 27, 42, 44, 48, 49, 50, 51, 52, 53, 75, 85, 89, 97, 106, 116, 126, 129, 142, 148, 162, 195, 201, 206, 207 instruction, 116 instruments, 206 insurance, 137, 212 insurance companies, 212 intangible, 51, 150 integration, viii, 25, 55, 56, 57, 58, 59, 63, 65, 66, 143, 189, 208 Intel, 207 intellectual capital, 92, 116 intellectual property, 47, 115, 116, 126 intelligence, 144 intensity, 72, 84, 139, 206 intentions, 50, 70, 200, 202 interaction, ix, 12, 27, 43, 44, 91, 97, 99, 113, 116, 121, 123, 126, 130, 207, 208 interactions, 44, 75, 130, 206, 208, 219 interdependence, 190 interdisciplinary, 208 interest cover, 58 interest rates, 28 interface, 52, 126, 127 interference, 106, 138 intergenerational, 18 intermediaries, 48, 137 internal organization, ix, 69, 70, 87 international investment, 22 international markets, 186, 190 international trade, 184, 190 internationalization, xi, 57, 142, 144, 145, 179, 180, 185, 186, 187, 190, 191 Internet, 49 internship, 4 interpretation, 63, 97, 100, 106, 111, 134, 136, 137, 143, 220 interrelations, 103, 116 interrelationships, 98 interval, 79, 151, 153 intervention, 117, 123, 134, 135, 216 interview, 7, 118, 120 interviews, 7, 46, 76, 120, 125 intimidating, 26 inventions, 195

240

Index

inventors, 195 investment, xi, 25, 38, 87, 97, 98, 101, 103, 107, 135, 147, 200, 205, 207, 208, 209, 210, 211, 212, 213, 214, 215, 216, 217, 218, 219 investors, vii, 2, 23, 28, 123, 210, 211, 212, 213, 218 IP, 137, 187 IPO, 207, 212 IPOs, 211 Ireland, viii, 55, 56, 57, 58, 66, 67, 90, 202 IRES, 147 ISC, 113 Islam, 23 Islamic, 23 isolation, 24 Israel, 211, 215, 230 Italy, 128, 202 ivory, 128

J January, 57, 59, 61, 62, 109, 177 Japan, 202, 219 Japanese, 108, 184, 189 Jews, 19 job creation, 43, 206 jobs, 2, 27, 28, 31, 33, 50, 114, 168, 206 judgment, 6 Jun, 130

K Keynes, 199, 200, 203 King, 207, 219 Kirchhoff, 91, 110 knowledge-based economy, 115, 118, 207 Korea, 129, 210, 215 Kyrgyzstan, vii, 21, 22, 23, 24, 28, 29, 30, 31, 33

L labor, 2, 6, 19, 23, 27, 29, 148, 149, 150, 151, 152, 153, 154, 155, 156, 160, 184, 185, 188, 200, 225 labor force, 6, 19 labor force participation, 6, 19 labour, 96, 97, 98, 155, 165 land, 28, 225 language, 181 Latin America, 36 law, 27, 99, 197 laws, xii, 205, 208, 221 layoffs, 31

lead, 33, 66, 70, 73, 74, 75, 86, 87, 99, 107, 123, 218, 224 leadership, 18, 57, 126, 227 learning, 57, 70, 74, 108, 117, 206, 207 legal aspects, 47 legislative, 45 lending, 2, 75 liberalization, 27 liberty, 197 licensing, 38, 125 life cycle, 85, 91, 108, 225 life experiences, 97 life-cycle, 72, 79, 104 lifestyle, 23, 100 lifetime, 70 light industrial, 96 likelihood, ix, 13, 69, 71, 73, 74, 75, 76, 79, 80, 81, 83, 84, 85, 87 Likert scale, 138 limitation, 15, 16, 73, 87, 144 limitations, 3, 15, 16, 17, 34, 35, 134, 136, 180, 228, 229 linear, 93, 101, 148 linkage, 129 links, ix, 18, 35, 43, 86, 113, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 126, 127, 135, 149, 161 liquidity, 114, 208 literacy, 29 loans, 4, 34 local government, 42 localization, 195 location, 26, 34, 35, 70, 71, 72, 116 London, 36, 37, 52, 53, 66, 108, 109, 110, 129, 177, 203, 218, 219, 220, 221, 230 long period, 30, 42, 44, 100, 103, 106 longitudinal study, 76 long-term, 13, 17, 100, 101, 103, 104, 105, 107, 168, 169, 170, 174, 175, 206 losses, 99, 102, 215, 227 lower prices, 189 low-tech, 85

M machines, 199, 200 magnetic, iv mainstream, 181 maintenance, 47 males, 3, 5, 16, 26 management, viii, xii, 6, 18, 20, 26, 31, 35, 55, 56, 57, 58, 59, 60, 63, 64, 65, 66, 67, 90, 108, 114, 116, 126, 131, 143, 192, 195, 205, 213, 216, 218, 225, 227, 228

Index Manhattan, 90 manners, 48 manufacturer, 189 manufacturing, 23, 31, 35, 84, 91, 143, 165, 166, 167, 168, 169, 170, 171, 184, 188 market concentration, 71 market economy, 28, 29, 224 market failure, 216 market prices, 224 market share, 73, 165 market structure, 206 market value, 154, 226 marketing, 31, 84, 143, 153, 189, 191, 208, 216, 218 markets, ix, x, 4, 26, 36, 69, 101, 106, 133, 134, 135, 136, 142, 148, 149, 169, 180, 181, 184, 185, 186, 187, 188, 189, 190, 191, 194, 195, 201, 208, 219, 224 marriage, 20 Marx, 207, 220 matrix, 79 meanings, 135 measures, x, xii, 2, 16, 42, 45, 52, 53, 79, 86, 125, 126, 127, 137, 160, 163, 164, 175, 194, 201, 205, 208, 209, 210, 211, 212, 213, 214, 215, 216 media, x, 133, 135, 138, 139, 142 meditation, 99 melting, 19 membership, 4, 28 men, 2, 3, 14, 15, 18, 19, 47 mentor, 5 mentoring, 13, 14, 15, 16, 47 mentoring program, 47 mergers, 169 messages, x, 133, 135, 137, 140 metallurgy, 29 Microsoft, 207 Middle East, 22 military, 7 mining, 29 Ministry of Education, 51, 133, 216 minorities, 17, 19, 20, 76 minority, 2, 18, 77 MIT, 19, 107, 176, 218, 229 modeling, 80, 81 models, 2, 5, 12, 15, 17, 36, 50, 80, 81, 83, 85, 91, 96, 101, 104, 194, 200, 203, 227 Moldova, 42 momentum, 65 monetary policy, 198, 201, 202 money, 33, 70, 76, 77, 78, 79, 81, 82, 85, 86, 87, 88, 89, 185, 201, 202 money supply, 202

241

monopoly, 149, 150, 151, 153, 154, 161, 181, 182, 188, 189, 191 monopoly power, 154 moral judgment, 6 mortality, 70, 73, 90 mortality rate, 70, 73 mothers, 5, 6, 8, 10, 12, 13, 14, 15, 16 motivation, 26, 37, 114, 184 motives, viii, 22, 24 movement, 72, 116 multidimensional, 164 multinational firms, 190 multiple regression, 79 multiplicity, 115 Muslim, 23 MV, 144

N nation, 17, 35, 206, 208 national, vii, xi, xii, 1, 2, 6, 7, 24, 25, 38, 39, 66, 76, 114, 116, 117, 130, 138, 141, 172, 179, 180, 184, 186, 189, 190, 191, 205, 206, 207, 209, 216, 220 national culture, 24, 38 national economies, 114, 180 National Science Foundation, 76 natural, x, 2, 22, 28, 71, 121, 127, 134, 142 natural gas, 28 natural resources, 22 natural selection, 71 negative consequences, 173 negative relation, xi, 99, 164, 168, 170, 173, 175 negotiation, 26 neighbourhoods, 114 Netherlands, 93, 167, 170 network, 30, 48, 75, 86, 97, 126, 127, 129, 206, 216, 217, 218, 219, 221 networking, 27 New York, iii, iv, 18, 19, 20, 37, 38, 90, 91, 92, 109, 110, 129, 143, 144, 161, 176, 203, 204, 221, 230 New Zealand, 202 next generation, 17 NGOs, vii NO, 176 Nobel Prize, 188 noise, x, 133, 134, 136 non-linear, 101 non-profit, 129 normal, xii, 223, 224, 225 norms, 25, 27, 44, 49, 87, 97, 148, 149, 161 Norway, 171, 179, 202 not-for-profit, 116, 125 novelty, 149

242

Index

NS, 138, 139, 140, 141, 142 null hypothesis, 121, 122

O obligations, 97, 106 observations, 12 obsolete, 15 occupational, 19 OECD, x, 114, 115, 116, 117, 125, 130, 147, 148, 149, 150, 161, 162, 165, 166, 172, 173, 174, 176, 177, 178, 180, 192, 214, 220 Ohio, 128, 129, 130 oil, 28 online, 47 operator, 123 opportunity costs, 72 optimism, 32, 74, 99 optimists, 75 optimization, 152, 156 Organisation for Economic Co-operation and Development, 220 organism, 47, 138, 141 organization, vii, 26, 71, 72, 75, 85, 92, 182, 183, 184, 187, 195, 224, 227 organizations, vii, ix, 6, 27, 69, 70, 71, 72, 73, 85, 91, 92, 108, 143, 144, 180, 181, 185 orientation, 48, 102, 103, 104, 105, 110, 117, 122, 203 orthodox, 194 overload, 135 ownership, 28, 126

P PA, 21, 36 Pacific, 53 paper, vii, ix, x, xi, xii, 1, 3, 13, 16, 38, 69, 71, 72, 87, 88, 92, 96, 98, 101, 105, 145, 149, 150, 163, 164, 165, 166, 175, 176, 178, 193, 194, 223, 224 Paper, 37, 92, 110, 161, 162, 176, 177, 218, 219, 220, 221 paradox, 48 parameter, 152, 153 parent-child, 3 parents, vii, 1, 3, 4, 12, 13, 15, 16, 17, 30 Paris, 130, 161, 176, 178, 179, 192, 220 partnerships, 35 patents, 47, 50, 89, 150, 164, 174, 175 pendulum, 66 Pennsylvania, 21, 128 per capita, 2, 45

perceived control, 110 perception, ix, 46, 53, 74, 79, 85, 95, 99, 100, 101, 102, 103, 104, 106, 110, 134, 135, 136, 137, 143, 148 perceptions, ix, 49, 50, 69, 72, 74, 75, 81, 83, 84, 87, 101 performance, 18, 23, 26, 27, 36, 37, 38, 39, 74, 80, 84, 87, 90, 91, 92, 107, 126, 129, 143, 148, 172, 192, 203, 206, 213, 218 permit, 135 personal, x, 2, 4, 7, 14, 23, 24, 34, 35, 46, 48, 75, 100, 102, 103, 106, 107, 110, 120, 133, 135, 138, 197 personal wealth, 4 personality, 25, 26, 29, 32, 36, 37, 100 personality characteristics, 25, 32, 37 personality traits, 26, 29, 100 PG, 144 philosophy, 48 phone, 76 pilot study, 29 planning, 26, 30, 79, 99, 172 plants, 171, 172 play, 6, 14, 23, 118, 185, 189, 201 Poisson, 153 Poland, 22, 27, 37, 38, 130 policy makers, viii, xii, 22, 205, 208 policy making, 216 policymakers, 51 political ideologies, viii, 41, 42 political instability, 23 political stability, 106, 107 politicians, 43, 114, 164 poor, 26, 114, 117, 203 population, ix, 2, 3, 6, 7, 17, 20, 28, 29, 31, 45, 46, 50, 69, 70, 73, 76, 80, 84, 85, 86, 87, 91, 155, 199 portfolio, 98, 105, 106, 216, 219 Portugal, v, 113, 114, 116, 117, 127, 129, 170, 171, 176, 212, 215 positive attitudes, 49 positive correlation, 171 positive relation, x, 23, 26, 73, 98, 148, 163, 167, 168, 169, 170, 171, 173, 174, 198 positive relationship, x, 23, 26, 73, 98, 148, 163, 167, 168, 169, 170, 171, 173, 174 Positive relationship, 167, 171, 174 posture, 137 poverty, 2 power, 17, 26, 154, 186, 196, 227 powers, 45 prediction, 35 predictor variables, 83 predictors, ix, 70, 73, 81, 90

Index pre-existing, ix, 113 preference, 100, 101, 110 premium, 98, 109, 159, 160 present value, 154 pressure, x, 133, 134, 135, 160 prestige, 64, 196 prices, 110, 181, 184, 185, 189, 190, 224 primary data, 16 primary sector, 45 prior knowledge, 100 priorities, 49 private, 14, 22, 28, 29, 31, 38, 42, 48, 52, 116, 117, 197, 206, 207, 208, 216, 217, 220 private education, 14 private property, 197 private sector, 28, 208, 217 privatization, 28 proactive, 137 probability, 7, 12, 81, 103, 136, 149, 153, 154, 155, 195 probability sampling, 7 problem-solving, 26 producers, 150, 153, 169 production, x, 26, 28, 31, 96, 97, 147, 149, 150, 151, 152, 153, 155, 157, 159, 160, 169, 181, 182, 184, 185, 186, 188, 189, 194, 195, 197, 200, 201, 206, 207, 208, 216, 225, 227, 228 production costs, x, 147, 149, 150, 151, 155, 160 production function, 153, 194, 200, 225 production technology, 184, 228 productivity, x, 74, 96, 104, 150, 162, 163, 164, 165, 166, 167, 169, 170, 172, 175, 182, 183, 185, 197, 201 productivity growth, xi, 104, 163, 165, 166, 167 profit, 26, 96, 116, 118, 125, 129, 182, 183, 184, 185, 190, 191, 195, 197, 224, 225 profitability, 73, 150, 228 profits, xii, 74, 98, 154, 181, 194, 196, 198, 200, 201, 210, 223, 227, 228 program, 85, 152 programming, 122 promote, viii, xi, 41, 42, 46, 47, 48, 50, 97, 117, 126, 127, 142, 159, 193, 199, 200, 201, 206, 210, 216 promote innovation, 159 promoter, 116 promotion campaigns, 139, 140, 141, 142 propagation, 71, 72 property, iv, 47, 115, 116, 126, 153, 197 property rights, 153 proportionality, 155 proposition, 44 prosperity, 24 protection, 197, 201, 207, 220

243

protocol, 46 prototype, 76, 87, 89, 101, 107 proxy, 42, 107, 168 psychology, 92, 110 public, x, 7, 28, 42, 43, 44, 45, 48, 50, 51, 52, 116, 117, 134, 135, 137, 138, 139, 140, 142, 201, 206, 207, 208, 216, 219 public administration, 42 public capital, 201 public markets, 219 public policy, 44, 51, 208 public sector, 28 public service, 201 public support, 50, 52 Puerto Rican, 19

Q qualitative research, 138 quartz, 184, 187, 188, 189, 190 questionnaire, viii, 22, 29, 46, 138, 142 questionnaires, viii, 22, 29, 138

R R&D, 98, 115, 116, 117, 119, 121, 122, 123, 126, 127, 128, 130, 150, 153, 154, 157, 164, 206, 208, 212 RA, 143, 144 race, 8, 12, 19, 20 radical, 23, 182, 190 random, ix, 70, 72, 87, 150, 190 range, ix, 14, 56, 58, 65, 102, 103, 114, 186, 187, 189, 209 rate of return, 106, 107 rationalisation, 97, 106 raw material, 184, 190 raw materials, 184 real time, 79 reality, 15, 44, 75, 85, 125, 136, 228 reasoning, 104, 191 reception, 136 recognition, viii, ix, 42, 55, 56, 57, 58, 59, 63, 64, 66, 70, 71, 75, 85, 100, 110, 134, 136, 137, 144 reconcile, 169 reconstruction, 51 reduction, 3, 28, 149, 201, 208 reference frame, ix, 56, 66 reflection, 13, 108 reforms, 28, 29 regional, x, 25, 42, 43, 91, 134, 135, 138, 141, 142, 167, 169, 170, 171, 172, 207, 208, 218

244

Index

regional economies, 43, 91 regression, vii, 1, 8, 12, 77, 79, 80, 81, 82, 83 regulation, 52, 207 regulations, 22, 26, 42, 148, 187, 209, 218 relationship, x, xi, 13, 15, 16, 18, 23, 26, 46, 73, 96, 98, 99, 105, 107, 116, 121, 127, 147, 148, 163, 164, 165, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 193, 194, 195, 197, 198, 202 relationships, x, 13, 15, 17, 24, 49, 50, 51, 75, 97, 99, 105, 106, 109, 130, 134, 135, 207, 220, 224 relative prices, 224 relevance, viii, ix, 41, 113, 200 reliability, 46 religion, 23, 196 rent, 181, 182, 183, 184, 191 replacement rate, 154 replication, 45 reproduction, 101, 107 reputation, 4 research and development, 206 researchers, viii, ix, 2, 4, 7, 13, 15, 17, 22, 24, 47, 48, 51, 56, 58, 60, 86, 99, 102, 119, 126, 127, 136, 150, 153, 168, 172, 175, 208 resilience, 32 resources, ix, 4, 22, 23, 24, 26, 28, 30, 57, 69, 70, 71, 72, 73, 74, 75, 84, 86, 87, 90, 100, 101, 105, 107, 114, 123, 126, 155, 169, 180, 181, 182, 183, 184, 186, 191, 195, 197, 200, 201, 206, 224, 226, 228 responsibilities, 218, 225 restaurant, 84, 184, 185, 186 retail, 84, 85, 90, 165, 166, 182 retention, 72, 90 returns, vii, x, xii, 97, 98, 105, 106, 107, 110, 147, 149, 150, 159, 160, 161, 223, 224, 227, 228 returns to scale, 97 revenue, 88 revolutionary, 23, 182 rewards, 228 Reynolds, 42, 53, 70, 72, 73, 76, 79, 80, 86, 90, 91, 92, 172, 174, 178 risk, ix, x, 4, 17, 35, 80, 95, 96, 98, 99, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 147, 148, 149, 150, 153, 154, 155, 158, 159, 160, 161, 195, 196, 198, 201, 207, 208, 211, 216, 217, 218, 225 risk aversion, 104, 109, 148 risk perception, 99, 102, 104, 110 risks, 26, 32, 38, 98, 99, 102, 108, 148, 217, 218 risk-taking, 99, 109, 110 roadblocks, 22 routines, 72, 84 RP, 64 rule of law, 197

rural, 28, 53 Russia, 26, 37 Russian, 29, 37

S S&T, 116 salaries, 31 sales, 71, 73, 74, 75, 76, 84, 87, 88, 150, 180, 185, 189, 212, 218 sample, ix, 3, 7, 12, 30, 35, 70, 73, 76, 77, 79, 80, 84, 86, 87, 113, 117, 118, 120, 138 sampling, 7, 77, 118 sampling error, 118 Sarbanes-Oxley Act, 218 savings, 181, 208 scarcity, 23, 70, 72, 224 school, xi, 4, 84, 88, 179, 180, 181, 182, 183, 184, 185, 192 scientific knowledge, 127 scientists, 200 scores, 107 scripts, 24, 120 SE, viii, ix, 51, 55, 56, 57, 58, 59, 60, 61, 62, 63, 65, 66, 163 search, x, 25, 26, 46, 58, 59, 60, 71, 72, 85, 100, 115, 133, 134, 136, 148, 150, 203 search terms, 59 searching, 196 secondary sector, 45 secular, 23 securities, 218, 221 Securities and Exchange Commission, 218 Securities and Exchange Commission (SEC), 218 security, 35 seed, 47, 87, 216 seeding, 220 selecting, 92, 135, 137 selective attention, x, 133, 135 Self, v, 1, 3, 6, 8, 9, 10, 11, 12, 18, 19, 30, 32, 171, 173, 174, 175, 176, 177 self employment, 26 self-confidence, 32 self-employed, vii, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 19, 26, 30 self-employment, xi, 2, 3, 4, 5, 8, 13, 15, 18, 19, 26, 164, 167, 169, 172, 173, 174, 175 self-esteem, 32 self-report, 79 semiconductor, 73, 91 sensitivity, 30, 100 series, ix, 45, 75, 76, 113, 136, 165, 173

Index services, iv, 26, 47, 84, 88, 100, 103, 105, 114, 116, 117, 119, 120, 123, 125, 126, 136, 148, 185, 186, 187, 196, 199, 201, 216, 218 SES, 116 severity, 218 sex, 20 shape, xi, 24, 27, 34, 44, 72, 106, 179, 188 shaping, 23, 66, 206 shares, 23, 104, 105, 106, 165, 210, 211, 212 sharing, 218 shock, 189 short period, xi, 17, 107, 163, 169 short run, 102, 165 shortage, 14 short-range, 102, 103 short-term, 100, 101, 104, 106, 107, 168, 212 SI, 206, 207 side effects, 169 sign, 202 signalling, 106 signals, x, 73, 76, 133, 137 signs, 202 Silicon Valley, 207, 221 Singapore, 25, 110, 202, 213, 215 single market, xi, 179 singular, 181 skilled labor, 29, 152, 153, 154, 155, 160, 188 skilled personnel, 186 skills, 4, 5, 14, 26, 72, 74, 83, 97, 98, 114, 148, 225, 226 small firms, 43, 130, 144, 164, 165, 168, 180, 198, 218, 226 SME, 42, 52, 53 SMEs, viii, ix, 41, 42, 52, 53, 113, 135, 142, 206, 207, 209, 210, 216, 218 SNS, 177 social awareness, 103 social capital, ix, 70, 72, 73, 75, 81, 83, 84, 86, 87, 91, 92, 95, 96, 97, 98, 100, 106, 107, 108, 109, 110, 111, 194 social change, 198 social comparison, 84 social construct, 7 social context, 24 social development, viii, 41, 42, 44, 206 social environment, 200 social factors, 23 social life, 23 social network, x, 75, 100, 101, 133, 144 social norms, 44, 97, 148, 149 social order, 85 social psychology, 110 social relations, 97

245

social stress, 200 social structure, 15 social welfare, xi, 193, 196 socialism, 22 socialist, 22, 36, 52 socioeconomic, 197 sociological, 196 sociologist, 196 software, 110, 216 Solow, 96, 110 solutions, 17, 26, 115 sorting, 104, 149 South Africa, 202 South Korea, 210, 215 Soviet Union, 22, 27, 28, 29, 31 Spain, viii, x, 41, 42, 45, 55, 133, 134, 167, 170, 176, 193, 202, 212, 215 Spanish Constitution, 45 specialization, 225 specificity, 139 speed, 32, 49, 114 spheres, 208 spin, 114, 116, 117, 121, 126, 127 spouse, 17 SPSS, 80 stability, 18, 83, 106, 107 stabilize, 181 stages, xii, 23, 26, 76, 92, 100, 114, 136, 196, 223, 226, 229 standards, 23, 27, 87, 218 state intervention, 216 statistics, 2, 5, 6, 7, 10, 12, 77, 79 statutes, 120 statutory, ix, 113, 121, 122, 123, 126, 127 steady state, 157 steady-state growth, 149, 155, 158 STI, 161, 220 stigma, x, 147, 148, 149, 150, 152, 153, 158, 159, 160, 161 stigmatization, 148, 149, 150, 151, 159 stigmatized, 151, 152, 153, 161 stimulus, 134, 136, 137 stock, 97, 106, 200, 208, 214, 226 strategic, viii, x, 4, 25, 28, 38, 55, 56, 57, 58, 59, 60, 63, 64, 65, 66, 67, 99, 108, 131, 133, 134, 135, 136, 143, 192, 216 strategic management, viii, 55, 56, 57, 58, 59, 60, 63, 64, 65, 66, 67 strategies, 49, 66, 73, 90, 92, 114, 120, 134, 137, 138 streams, 67 strength, ix, 32, 70, 72, 79, 81, 83, 84, 87, 115 stress, 34, 85, 142, 200, 224 structural changes, ix, 95, 96, 104, 105, 106, 195

246

Index

structural funds, 107 structuring, 118 students, 51, 181, 198 subgroups, 17, 86 subjective, 101, 102 subsidies, 208 subsidy, 137 substitutes, 144 substitution, 97, 103, 104, 105, 106, 156 substitution effect, 97 success rate, 114 summer, 37 superiority, 188 suppliers, 75, 189, 190 supply, 42, 49, 104, 105, 156, 160, 169, 181, 182, 184, 186, 202, 208 surprise, 190 survival, 51, 71, 72, 73, 74, 80, 86, 87, 90, 92, 169, 226 surviving, 70, 110, 169 sustainable development, 28, 38 sustainable economic growth, 196 sustainable growth, 96 swarm, 187 Sweden, 92, 163, 166, 167, 171, 176, 177, 178, 202, 213, 215 Switzerland, 188 symmetry, 183 synthesis, 111 systems, 23, 34, 143, 201, 218, 220, 227

T Taiwan, 213, 215, 219 talent, x, 52, 147, 149, 150, 159, 160, 226, 227, 229 tangible, 4, 44 tangible benefits, 4 target population, 46 targets, xi, 193 tax base, 210 tax credit, 210, 211, 212, 213, 214 tax credits, 210, 211, 212, 213, 214 tax incentive, 209 tax incentives, 209 tax reform, 28 tax system, 27 taxation, 42, 200 taxes, 201, 202, 211 taxonomic, 91 taxonomy, 122, 123, 127 teaching, 123, 126, 127 technical assistance, 216 technical change, 110, 129

technological change, 104, 166, 192 technological progress, 200 Technology Business Incubators, 130 technology transfer, ix, 113, 114, 116, 117, 123, 125, 126, 127, 128, 130, 206 telecommunications, 122 telephone, 8, 46, 76 tenure, 67 territorial, 45 tertiary sector, 45 Thai, 209 Thailand, 205, 208, 210, 214, 215, 216 theory, viii, ix, 7, 17, 18, 20, 38, 42, 43, 46, 50, 51, 53, 55, 56, 69, 70, 71, 72, 85, 87, 91, 97, 98, 100, 101, 108, 109, 110, 144, 175, 181, 182, 191, 192, 203 thinking, vii, 24, 70, 80, 86, 89, 104, 185 Thomson, ix, 56, 57, 58, 59 threat, 99 threats, 99, 102, 103, 137 time elements, 106 time periods, 149 time pressure, 135 time series, 165, 173 timing, 77, 79, 82 tolerance, 99, 137, 148 top management, 57 total costs, 228 total employment, 29, 171, 206 total factor productivity, 165 tourism, 52, 216 trade, 28, 57, 136, 166, 184, 190, 197, 198, 201 trade agreement, 197, 201 trade-off, 57 tradition, viii, 22, 28, 33, 42, 96, 139, 148, 181, 183, 191 traditional model, 227 training, 4, 14, 30, 47, 48, 74, 85, 103, 115, 116, 123, 126, 127, 137, 198, 218 training programs, 4 traits, 22, 24, 26, 29, 99, 100, 102, 103, 107, 225 trajectory, 19, 67 transaction costs, 106, 224 transfer, ix, 4, 5, 47, 113, 114, 115, 116, 117, 123, 125, 126, 127, 128, 130, 184, 191, 206 transformation, 52 transformations, 22, 23 transition, vii, ix, xii, 4, 18, 21, 22, 23, 27, 29, 33, 35, 37, 42, 53, 69, 70, 71, 72, 73, 80, 83, 85, 86, 87, 88, 127, 192, 207, 223, 224, 228, 229 transition countries, 22, 23, 26, 27, 35 transition economies, vii, 21, 22, 23, 27, 42, 53 transition period, 27, 33, 80

Index transitional economies, 37 transitions, 51 translation, 29 transparency, 97, 106, 218 transparent, 158, 159 transportation, 201 trend, 12, 14, 16, 127 triggers, 137, 187 trust, 32, 52, 72, 97, 106, 137 TT, 46, 47, 48, 50 turbulence, 148, 167 Turkey, vii, 21, 22, 23, 24, 28, 33, 35, 38 turnover, 148, 161, 226, 229

U U.S. economy, 2 UK, 39, 42, 52, 144, 177, 192, 210, 215, 219 Ukraine, 42 uncertainty, 23, 26, 27, 44, 75, 85, 97, 98, 99, 101, 102, 106, 108, 114, 135, 195, 224 UNDP, 29, 39 unemployment, 2, 18, 20, 28, 29, 149, 168, 175, 194, 200, 201 unemployment rate, 2, 194 unions, 200 unit cost, 104 United Kingdom, 202, 206 United States, ix, xi, 2, 19, 20, 69, 70, 76, 178, 199, 202, 205, 206, 220 universities, ix, 15, 47, 113, 114, 115, 116, 117, 118, 120, 122, 123, 126, 127, 198, 206, 207, 208 university incubators, 122, 127 USSR, 130

V validity, 46, 194 values, 11, 23, 24, 25, 27, 44, 49, 83, 101, 102, 106, 107, 200, 229 variable, 8, 9, 11, 12, 79, 80, 83, 123, 194, 199, 202 variables, xi, 8, 11, 18, 24, 25, 26, 79, 80, 83, 86, 87, 99, 107, 120, 121, 122, 123, 125, 126, 137, 149, 153, 193, 194, 199, 200, 202, 208

247

variance, 14 variation, 24, 72, 154 VC, vi, xi, xii, 205, 206, 207, 208, 209, 210, 212, 213, 215, 216, 217, 218 vein, 104 venture capital, vii, xi, 26, 49, 126, 205, 206, 207, 208, 209, 219, 220, 221 visible, 27, 28, 31 vision, 192, 195 vocational, 74, 114 voiding, 227

W wage rate, 151, 154, 155 wages, 31, 155, 198, 201 war, 188 watches, 188, 189, 190 wealth, 4, 57, 58, 66, 196, 227 web, 46 web pages, 46 websites, 7 welfare, xi, 149, 193, 196, 200 West Bank, 91 Western culture, 23 wine, 91 winning, 188 wireless, 192 Wisconsin, 76 wisdom, 83, 109 women, 2, 3, 6, 14, 18, 19, 34, 74, 76, 77, 90 work environment, 25 workers, 11, 19, 30, 121, 150, 151, 152, 153, 155, 156, 158, 159, 187, 198, 201, 228 workforce, 14, 25, 150, 155 working population, ix, 31, 69, 70 World Bank, 174, 202 writing, 70

Y yield, 16