nep-ent New Economics Papers
on Entrepreneurship
Issue of 2006‒07‒21
six papers chosen by
Marcus Dejardin
Facultes Universitaires Notre-Dame de la Paix

  1. Liquidity Constraints, Household Wealth, and Entrepreneurship Revisited By Robert W. Fairlie; Harry A. Krashinsky
  2. Innovation and the Determinants of Firm Survival By Hielke Buddelmeyer, Paul H. Jensen and Elizabeth Webster; Paul H. Jensen; Elizabeth Webster
  3. The Scarring Effect of Recessions By Min Ouyang
  4. Small and Medium Enterprise in India - Overcoming Policy Constraints to Achieving Rapid Growth in a Globalizing Economy By Morris Sebastian; Basant Rakesh
  5. Plant Life Cycle and Aggregate Employment Dynamics By Min Ouyang
  6. Regional Disparity in ICT Adoption: an Empirical Evaluation of The Effects of Subsidies in Italy By Gianfranco E. Atzeni; Oliviero A. Carboni

  1. By: Robert W. Fairlie (University of California, Santa Cruz and IZA Bonn); Harry A. Krashinsky (University of Toronto)
    Abstract: Hurst and Lusardi (2004) recently challenged the long-standing belief that liquidity constraints are important causal determinants of entry into self-employment. They demonstrate that the oft-cited positive relationship between entry rates and assets is actually unchanging as assets increase from the 1st to the 95th percentile of the asset distribution, but rise drastically after this point. They also apply a new instrument, changes in house prices, for wealth in the entry equation, and show that instrumented wealth is not a significant determinant of entry. We reinterpret these findings: first, we demonstrate that bifurcating the sample into workers who enter self-employment after job loss and those who do not reveals steadily increasing entry rates as assets increase in both subsamples. We argue that these two groups merit a separate analysis, because a careful examination of the entrepreneurial choice model of Evans and Jovanovic (1989) reveals that the two groups face different incentives, and thus have different solutions to the entrepreneurial decision. Second, we use microdata from matched Current Population Surveys (1993-2004) to demonstrate that housing appreciation measured at the MSA-level is a significantly positive determinant of entry into selfemployment. Our estimates indicate that a 10 percent annual increase in housing equity increases the mean probability of entrepreneurship by roughly 20 percent and that the effect is not concentrated at the upper tail of the distribution.
    Keywords: entrepreneurship, liquidity constraints, self-employment
    JEL: J23
    Date: 2006–07
  2. By: Hielke Buddelmeyer, Paul H. Jensen and Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research and Centre for Microeconometrics, The University of Melbourne and IZA Bonn); Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne and Intellectual Property Research Institute of Australia, The University of Melbourne); Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne and Intellectual Property Research Institute of Australia, The University of Melbourne)
    Abstract: While many firms compete through the development of new technologies and products, it is well known that new-to-the-world innovation is inherently risky and therefore may increase the probability of firm death. However, many existing studies consistently find a negative association between innovative activity and firm death. We argue that this may occur because authors fail to distinguish between innovation investments and innovation capital. Using an unbalanced panel of over 290,000 Australian companies, we estimate a piecewise-constant exponential hazard rate model to examine the relationship between innovation and survival and find that current innovation investments increase the probability of death while innovation capital lowers it.
    Date: 2006–07
  3. By: Min Ouyang (Department of Economics, University of California-Irvine)
    Abstract: Recessions often coincide with intensified restructuring. The conventional Schumpeterian view argues that recessions promote allocative efficiency by driving out less productive firms and freeing resources for more productive uses. This paper proposes that the conventional cleansing effect is offset by a scarring effect. Recessions impede the development of potentially superior firms, which might put innovations to better uses, but which are destroyed during their infancy, and never realize their potential. A model of industry dynamics that combines Schumpeterian creative destruction with firm learning is developed to capture both the cleansing and scarring effects. Calibrating the model with data from the U.S. manufacturing sector demonstrates that the scarring effect is likely to dominate the cleansing effect, and accounts for the procyclicality of average labor productivity, a phenomenon at odds with conventional cleansing models.
    Keywords: Business cycles; Cleansing effect; Scarring effect; Creative destruction; Learning; Job flows
    JEL: E32 L16 C61
    Date: 2005–11
  4. By: Morris Sebastian; Basant Rakesh
    Abstract: Sustained very high rate of growth (above 8% in the context today in India) would be able to achieve (since a labour productivity growth of 4 to 4.5 % is to be factored in) a labour absorption rate of 3.5 to 4% which is about a percent above the growth in the rate of the workforce. But slower growth of around 6% which is what India seems to be achieving in the 90s on an average would keep disguised unemployment alive for long. Similarly, the transformation of firms and especially SMEs which have little autonomous capacity is itself a function of growth oriented policies. In the nineties labour has been sufficiently flexible to allow rapid growth whenever demand was high. In any case the unorganised workers, did not have the ability to resist hire and fire. Demand has been lower than possible otherwise since the rupee especially in comparison to the East Asian currencies has not been aggressively priced. Lacking a very rapid growth in the market sufficient to overcome disguised unemployment, the transformation of these industries has itself been affected. Similarly the continuation of tariff inversion, high and uncompensated energy taxes hurt manufacturing and especially the small and medium sector whose dependence on relative factor cost is higher. The slow movement towards de-reservation has further attenuated the process. The dynamic inefficiencies and distortions are far more significant than the static efficiency penalty that the economy pays in the continuation of reservation. Without these corrections the move to have “free-trade” agreements with the ASEAN countries would hurt manufacturing in India and especially the SMEs. Many of the traditional small firms are in clusters, and a cluster oriented approach would be important for their success. A strategy based on leveraging trade names /brand names, many of which could be argued to be "geographic indicators", with much equity world wide, would require immediate changes in our intellectual property rights regime. Costs of excise registration and dealing with excise authorities are too large, and there is a 'fixed' component to this cost which cannot be spread over a large value of turnover. Only significantly lower excise rates for small firms could compensate them sufficiently. The criteria of "with and without the use of power" in the Factories Act, be entirely dispensed with. All units with more than 50 employees including the entrepreneur and family labour, be brought /retained under (all) the provisions of the Factories Act. And all other units be entirely exempt from its provisions. Credit is the single most important constraint for small firms. Incentivisation of priority sector targets is the solution. The policy of directed lending to small firms (the targets for priority sector lending) ought to shift from targets or quotas to incentives to banks for lending to small firms. Responsible risk taking in lending would have to re-emerge. Tax based incentives for banks and financial intermediaries are possible. Statutory Reserves based incentives for banks too are possible. Concessions on interest rates are dysfunctional, though the margin above PLR rates ought to be subject to a ceiling. State Finance Corporations which could play a crucial role in financing of SMEs would have to go through quick restructuring and refocus on promotion of new enterprises typically where vast positive external effects are anticipated, such as in technology based small firms, promising industries, nodal industries, industrial estate corporations, in exchanging specific infrastructural support to existing clusters of small firms, etc. Investments in infrastructure especially general roads, power, railways, and water supply would help to improve the performance of small firms significantly. For all small firms power and water continue to remain constraints shamefully after nearly 10 years of reform. These can easily come down at least for export industries if the taxes and cross subsidies on them are made vattable. Despite the Electricity Act 2003, it is shameful that open-access has not been extended to SMEs. Technology based and skill labour using industries such as IT, BT, pharmaceuticals and auto oriented industries, also need to be exploited. In automobiles taxes are still very large and the inverted tariffs / high cost of materials and energy that are uncompensated hurt the prospects of India emerging as a base for manufactures. In IT, Biotechnology, pharmaceutical industries and other related offshoring activities the challenges lie in bringing about better IPR regimes that reduces the risk faced by foreign firms in their operations in India. IPR regimes requiring much insight would have to be worked work out that is able to balance the interest of Indian firms and yet lead to much industrial relocation. The addition of a petty patent register could considerably enhance the extraction of value from the many innovations that take place in the SME sector. Municipal infrastructure is inadequate and its correction in at least a few cities is of crucial importance to the growth of the off-shoring activities and growth in these industries. Financial institutions could usefully develop strong venture capital arms to finance innovative small firms that have a good potential to emerge in the near future in many industries. Problems with government procurement which are ‘designed to fail’ keeps alive a very large market for shoddy goods among SMEs. Merging of the umpteen laws and regulations into one wherever feasible can reduce the currently large costs of SMEs in dealing with government.
    Keywords: Small-Firms; Industry-structure; India; SME; International-Trade; Globalisation; Country-studies; economic-development
    JEL: O1
    Date: 2006–07–11
  5. By: Min Ouyang (Department of Economics, University of California-Irvine)
    Abstract: Past empirical studies have repeatedly found the link between plant life cycle and aggregate employment dynamics: cross-section aggregate employment dynamics differ significantly by plant age. Interestingly, the dynamics of plant-level productivity distribution also display a strong age pattern. This paper develops a model of plant life cycle with demand fluctuations, to capture both of these empirical regularities. We model plants to differ by vintage, and an idiosyncratic component that is not directly observable, but can be learned over time. We show that this model, developed to match the observed dynamics of plant-level productivity distribution, introduces two driving forces for job flows: learning and creative destruction. The resulting job flows can match, both qualitatively and quantitatively, the differences between young and old plants in their job-flow magnitude and cyclical responses observed in the U.S. manufacturing sector.
    Keywords: Plant life cycle; Employment dynamics; Heterogeneous employers; Job creation; Job destruction; Productivity dynamics; Demand fluctuations
    JEL: E32 L16 C61
    Date: 2006–07
  6. By: Gianfranco E. Atzeni; Oliviero A. Carboni
    Abstract: This paper investigates on a marked case of regional inequality concerning the information and communication technology adoption process and the role of subsidies in Italy. There is a consolidated and persistent gap between the industrialized North and the sensibly backward South. Econometric results show that adoption of ICT is affected by the geographical location, the industry and firm characteristics. A matching estimator is applied to explore subsidies effectiveness. We find that subsidies have a significant impact but only for small firms. Given the firm system in Italy, we conclude that, to limit the acceleration of Italian North-South dualism, subsidies should only be granted to small firms.
    Keywords: Information and Communication Technologies, Regional Disparities, Digital Divide, Subsidies, Treatment Effect, Nearest Neighbour Matching Estimator
    JEL: C21 D21 L2 O18
    Date: 2006

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