nep-ent New Economics Papers
on Entrepreneurship
Issue of 2006‒05‒20
nine papers chosen by
Marcus Dejardin
Facultes Universitaires Notre-Dame de la Paix

  1. Inferring the unobserved human capital of entrepreneurs By Arnab Bhattacharjee (University of-St Andrews); Jean Bonnet (CREM – CNRS); Nicolas Le Pape (CREM – CNRS); Régis Renault (THEMA – CNRS)
  2. Self-Selection and Advice in Venture Capital Finance By Christian Keuschnigg; Soren Bo Nielsen
  3. A relational theory of relationship lending under contractual incompleteness By Vinicius Carrasco; João Manoel Pinho de Mello
  4. The Pharmacia Story of Entrepreneurship and as a Creative Technical University - An Experiment in Innovation, Organizational Break Up and Industrial Renaissance By Eliasson, Gunnar; Eliasson, Åsa
  5. Towards an explanation of the exponential distribution of firm growth rates. By Alex Coad
  6. Persistence of innovation, technological change and quality-adjusted patents in the US pharmaceutical industry. By Gautier Duflos
  7. Sequential Innovation, Patents, and Innovation By James Bessen; Eric Maskin
  8. "The Social Capital of Regional Dynamics: A Policy Perspective" By Hans Westlund
  9. Industrial Renewal and Growth through Nanotechnology ? - An Overview with Focus on Finland By Christopher Palmberg; Tuomo Nikulainen

  1. By: Arnab Bhattacharjee (University of-St Andrews); Jean Bonnet (CREM – CNRS); Nicolas Le Pape (CREM – CNRS); Régis Renault (THEMA – CNRS)
    Abstract: The goal of this paper is to study the role of unobserved human capital in entrepreneurial choice and its impact on the survival of newly created firms. Our starting point is that, when starting a new business, an entrepreneur’s labor market situation (e.g. employed or not) reflects how his human capital may be valuated through salaried labor. This in turn affects the entrepreneurial decision so that, an entrepreneur’s human capital should be correlated with the state at which he decided to start a new firm. We illustrate this point with descriptive statistics computed from a survey of French startups. These statistics show that the impact of education on the new firm’s survival is most pronounced for firms created by individuals salaried in their preferred branch of activity while it is rather limited if the entrepreneur was in the wrong branch or newly unemployed. In this paper we argue, both theoretically and empirically, that these results may be explained by some unobserved heterogeneity in the entrepreneur’s human capital that is correlated both with the initial labor market situation and with some observable measures of human capital such as education or experience. We first present a simple model of entrepreneurial choice that provides predictions about an entrepreneur’s actual human capital as a function of human capital observed by the econometrician as well as the individual’s state in the labor market when the firm was created. The model allows for some information asymmetry on the labor market as well as other sources of inefficiencies such as incentive problems due to moral hazard. It also allows in a simple way for some dynamic considerations on the part of the entrepreneur regarding potential depreciation of his human capital. We argue that the data may be best explained by a model where employer’s information on employee’s human capital is sufficiently poor and where there is a strong concern about human capital depreciation for those with a high level of observed human capital. We then run some duration analysis on our data on new firms’ survival by estimating a proportional hazard Cox model with partial maximum likelihood. The estimation results are coherent with the descriptive statistics on the impact of education on survival for different initial states of the entrepreneur. This econometric analysis will be completed with additional regressions that allow for correcting for unobserved heterogeneity in order to evaluate its magnitude and nature. We have done some preliminary work where unobserved heterogeneity is modelled through random effects (frailties) for different subgroups of individuals according to education level and experience that have a gamma distribution. Our preliminary results show that there is significant unobserved heterogeneity but the estimates of the frailties are consistent with the results obtained by running a standard Cox estimation.
    Keywords: Entrepreneurship, Labor Market, Human Capital Valuation, Information Asymmetries, Duration of the New Firm
    JEL: J24 L25 D8 C41
    Date: 2006
  2. By: Christian Keuschnigg; Soren Bo Nielsen
    Abstract: In financing start-up firms, venture capitalists carefully select among alternative projects, design incentive compatible financial contracts and support portfolio companies with value enhancing managerial advice. This paper considers how venture capitalists can induce self-selection among entrepreneurial firms with different qualities and growth potential by designing appropriate contracts and offering managerial support. We study the efficiency of the competitive market equilibrium with respect to the level and quality of entrepreneurship and the level of effort by entrepreneurs and venture capitalists. We also provide comparative static results with respect to basic preference and technology parameters.
    Keywords: Venture capital, entrepreneurship, self-selection, moral hazard
    JEL: D82 G24 M13
    Date: 2006–03
  3. By: Vinicius Carrasco (Department of Economics PUC-Rio.); João Manoel Pinho de Mello (Department of Economics PUC-Rio)
    Abstract: While the literature has focused on relationships as a technology for solving hidden information problems in credit markets, hidden action has been very little explored as an explanation for the existence of relational lending. In this paper, we propose a theory in which relationships are driven by the problem of contractual incompleteness in instances in which a borrower, by taking ex-ante actions, magnifies the hazards related to ex-post bargaining over returns. A relationship commits the borrower to take actions that minimize the ex-post conflict of interests resulting from contractual incompleteness. We show that a robust feature of an optimally designed lending relationship (i.e., the best Public Perfect Pure Strategy Equilibrium in a repeated lending game) is that a sufficiently patient entrepreneur, upon choosing his actions, ignores his privately observed contingencies. This commitment solves the credit rationing problem that arises in a one-shot (arm’s length) interaction, and reduces, when compared to arm’s length financing, the interest rate that a bank charges for a credit line. Although in a less acute fashion, we also show that the same features just described appear in an optimal lending relationship for the case in which the entrepreneur is impatient.
    Date: 2006–05
  4. By: Eliasson, Gunnar (The Ratio Institute); Eliasson, Åsa (IBMP, CNRS, Strasbourg and VitiGen AG, Siebeldingen)
    Abstract: While innovative technology supply has been the focus of much neo Schumpeterian modeling, few have addressed the critical and more resource demanding commercializing of the same technologies. The result may have been a growth policy focused on the wrong problem. Using competence bloc theory and a firm based macro to macro approach we abandon the assumed linear relation between technology change and economic growth of such models, and demonstrate that lack of local commercialization competences is likely to block growth even though innovative technology supplies are abundant. The break up, reorganization and part withdrawal of Pharmacia from the local Uppsala (in Sweden) economy after a series of international mergers illustrate. Pharmacia has “released” a wealth of technologies in local markets. Local commercialization competence, notably industrially competent financing has, however, not been sufficient to fill in through indigenous entrepreneurship the vacuum left by Pharmacia. Only thanks to foreign investors, attracted by Pharmacia technologies, that have opted to stay for the long term the local Uppsala economy seems to be heading for a successful future. The Pharmacia case also demonstrates the role of advanced firms as “technical universities” and the nature of an experimentally organized economy (EOE) in which business mistakes are a natural learning cost for economic development.
    Keywords: Competence Bloc Theory; Commercialization of Innovations; Experimentally Organized Economy; Innovation and Entrepreneurship; Pharmaceutical industry
    JEL: L20 L65 M10
    Date: 2006–05–11
  5. By: Alex Coad (Centre d'Economie de la Sorbonne et LEM)
    Abstract: A robust feature of the corporate growth process is the exponential distribution of firm growth rates. This striking empirical regularity has been found to hold for a number of different datasets and at different levels of aggregation. In this paper, we propose a simple theoretical model capable of explaining this observed exponential distribution. We do not attempt to generalize on where growth opportunities come from, but rather we focus on how firms build upon growth opportunities. We borrow ideas from the self-organizing criticality literature to explain how the interdependent nature of discrete resources may lead to the triggering off a series of additions to a firm's resources. In a formal model we consider the case of employment growth in a hierarchy, and observe that growth rates follow an exponential distribution.
    Keywords: Firm growth rates, exponential distribution, hierarchy.
    JEL: L1 C1
    Date: 2006–03
  6. By: Gautier Duflos (Centre d'Economie de la Sorbonne et CREST-LEI)
    Abstract: This paper analyzes American pharmaceutical firms' persistence in innovating just before the wave of mergers and acquisitions that accompanied the "Biotech revolution". We evaluate the impact of past innovative activity on firms' innovation propensities using a non-linear GMM estimator for exponential models that allows for predetermined regressors and linear feedback. We find that innovative activity at the firm level depends strongly on the scope of past innovations. Breakthroughs in particular depend largely on past quality innovation made by firms, and this effect may likely deter further pioneering discoveries rather than strengthen incentives to invest on non cumulative R&D. The results also shed light on the importance of small firms in the dynamics of innovation in pharmaceutical industry, and suggest that large firms persist in using patents strategically to remain dominant.
    Keywords: Patent citations, pharmaceutical industry, persistence in innovation.
    JEL: O31 L12 C23
    Date: 2006–01
  7. By: James Bessen; Eric Maskin
    Date: 2006–05–10
  8. By: Hans Westlund (National Institute for Working Life)
    Abstract: This paper deals with social capital as an extra-market externality, and its role for innovations and growth. It analyses the changes of innovation activity over time, from early industrialism to the global knowledge economy, how the relations between the actors of today's innovation systems have developed and the role of social networks for innovations. The different kinds of networks built by the three constructers of social networks: the individual, the organizations and the (public and civic) society are discussed. The role of public policy in building social capital for innovations and growth is analyzed.
    Date: 2006–05
  9. By: Christopher Palmberg; Tuomo Nikulainen
    Keywords: nanotechnology, general purpose technology, industrial renewal, Finland
    Date: 2006–05–17

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