nep-ent New Economics Papers
on Entrepreneurship
Issue of 2006‒10‒28
twenty papers chosen by
Marcus Dejardin
Facultes Universitaires Notre-Dame de la Paix

  1. The entrepreneur’s mode of entry: Business takeover or new venture start? By Simon C. Parker; C. Mirjam van Praag
  2. Conditional Allocation of Control Rights in Venture Capital Firms By Gebhardt, Georg; Schmidt, Klaus M.
  3. Why So Many Local Entrepreneurs? By Michelacci, Claudio; Silva, Olmo
  4. Venture Capital Financing: The Role of Bargaining Power and the Evolution of Informational Asymmetry By Koskinen, Yrjö; Rebello, Michael; Wang, Jun
  5. Legal Status at Entry, Economic Performance and Self-Employment Proclivity: A Bi-National Study of Immigrants By Constant, Amelie; Zimmermann, Klaus F
  6. Entrepreneurship in China and Russia Compared By Djankov, Simeon; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
  7. Who Are China's Entrepreneurs? By Djankov, Simeon; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
  8. Entrepreneurship: First Results from Russia By Djankov, Simeon; Miguel, Edward; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
  9. Multi-Product Firms and Product Switching By Bernard, Andrew; Redding, Stephen J; Schott, Peter
  10. Market Coditions and Venture Capitalist Experience in Start-Up Financing By Koskinen, Yrjo; Rebello, Michael J.; Wang, Jun
  11. Does business succession enhance firms’ innovation capacity? Results from an exploratory analysis in Italian SMEs By Andrea GANZAROLI; Gianluca FISCATO; Luciano PILOTTI
  12. A.-R.-J. Turgot and the Construction of an Economic Agent called Entrepreneur By José M. Menudo; José Mª O’kean
  13. Understanding the processes of firm Growth - a closer look at serial growth rate correlation. By Alex Coad
  14. Investigating the Impact of Firm Size on Small Business Social Responsibility: a Critical Review By J. LEPOUTRE; A. HEENE
  15. Financing a Portfolio of Projects By Inderst, Roman; Mueller, Holger M; Muennich, Felix
  16. Innovation and firm growth in "complex technology" sectors : a quantile regression approach. By Alex Coad; Rekha Rao
  17. Competition, Innovation and Growth with Limited Commitment By Marimon, Ramon; Quadrini, Vincenzo
  18. On the explanation of horizontal, vertical and cross-sector R&D partnerships – evidence for the German industrial sector By Uschi Backes-Gellner; Frank Maass; Arndt Werner
  19. Technology replaces culture in microcredit markets: the case of Italian MAGs By F. Calidoni-Lundberg; A. Fedele
  20. Smithian Growth through Creative Organization By Legros, Patrick; Newman, Andrew; Proto, Eugenio

  1. By: Simon C. Parker; C. Mirjam van Praag
    Abstract: We analyse the decision to become an entrepreneur by either taking over an established business or starting a new venture from scratch. A model is developed which predicts how several individual- and firm-specific characteristics influence entrepreneurs'entry mode. The new venture creation mode is associated with higher levels of schooling and wealth, whereas managerial experience, new venture start-up capital requirements and risk promote the takeover mode. Entrepreneurs whose parents run a family firm are predicted to invest the least in schooling, since schooling reduces search costs and these individuals have the lowest probability of needing to search for a business opportunity outside their family. A sample of data on entrepreneurs from the Netherlands provides broad support for the theory; implications for policy-makers concerned about the survival of family firms lacking within-family successors are discussed.
    Date: 2006–10
  2. By: Gebhardt, Georg; Schmidt, Klaus M.
    Abstract: When a young entrepreneurial firm matures, it is often necessary to replace the founding entrepreneur by a professional manager. This replacement decision can be affected by the private benefits of control enjoyed by the entrepreneur which gives rise to a conflict of interest between the entrepreneur and the venture capitalist. We show that a combination of convertible securities and contingent control rights can be used to resolve this conflict efficiently. This contractual arrangement is frequently observed in venture capital finance.
    Keywords: control rights; convertible securities; corporate finance; venture capital
    JEL: D23 G24 G32
    Date: 2006–07
  3. By: Michelacci, Claudio; Silva, Olmo
    Abstract: We document that the fraction of entrepreneurs who work in the region where they were born is significantly higher than the corresponding fraction for dependent workers. This difference is more pronounced in more developed regions and positively related to the degree of local financial development. Firms created by locals are more valuable and bigger (in terms of capital and employment), operate with more capital intensive technologies, and are able to obtain greater financing per unit of capital invested, than firms created by non-locals. This evidence suggests that there are so many local entrepreneurs because locals can better exploit the financial opportunities available in the region where they were born. This can help in explaining how local financial development causes persistent disparities in entrepreneurial activity, technology, and income.
    Keywords: economic and financial development; entrepreneurship; social capital
    JEL: J23 O12 O16 Z13
    Date: 2006–09
  4. By: Koskinen, Yrjö; Rebello, Michael; Wang, Jun
    Abstract: We model a situation where the entrepreneur has an informational advantage during the early stages of an investment project while the venture capitalist has the informational advantage during the later stages. We examine how this evolution of informational asymmetry affects venture investment and the nature of financing contracts under two different scenarios with regard to the distribution of bargaining power between the venture capitalist and entrepreneur: when the venture capitalist has the bargaining advantage and when the entrepreneur has the bargaining advantage. Our results demonstrate that the distribution of bargaining power has a profound influence both on the terms of contracts and on investments in venture-backed projects. Changes in bargaining power can completely alter the payoff sensitivity of contracts offered to entrepreneurs, and, as witnessed in the recent past, when entrepreneurs hold the bargaining advantage, venture capitalists may acquiesce to excessive investments in early stages of projects and subsequently terminate a larger number of projects.
    Keywords: asymmetric information; bargaining power; financial contracting; investment distortions; venture capital
    JEL: D82 G24 G32
    Date: 2006–08
  5. By: Constant, Amelie; Zimmermann, Klaus F
    Abstract: There are concerns about the attachment of immigrants to the labor force, and the potential policy responses. This paper uses a bi-national survey on immigrant performance to investigate the sorting of individuals into full-time paid-employment and entrepreneurship and their economic success. Particular attention is paid to the role of legal status at entry in the host country (worker, refugee, and family reunification), ethnic networks, enclaves and other differences among ethnicities for their integration in the labor market. Since the focus is on the understanding of the self-employment decision, a two-stage structural probit model is employed that determines the willingness to work full-time (against part-time employment and not working), and the choice between full-time paid work and self-employment. The choices are determined by the reservation wage for full-time work, and the perceived earnings from working in paid-employment and as entrepreneur, among other factors. Accounting for sample selectivity, the paper provides regressions explaining reservation wages, and actual earnings for paid-employment and self-employment, which provide the basis for such an analysis. The structural probit models suggest that the expected earnings differentials from working and reservation wages and for self-employment and paid-employment earnings matter much, although only among a number of other determinants. For Germany, legal status at entry is important; former refugees and those migrants who arrive through family reunification are less likely to work full-time; refugees are also less self-employed. Those who came through the employment channel are more likely to be in full-time paid work. In Denmark, however, the status at entry variables do not play any significant role. This suggests that the Danish immigrant selection system is ineffective.
    Keywords: asylum seekers; citizenship; discrimination; entrepreneurship; ethnicity; family reunification; migrant workers; migration; refugees; self-employment
    JEL: C25 F22 J15 J23 J31 J61 J82
    Date: 2006–06
  6. By: Djankov, Simeon; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
    Abstract: We compare results from a pilot study on entrepreneurship in China and Russia. Compared to non-entrepreneurs, Russian and Chinese entrepreneurs have more entrepreneurs in their family and among childhood friends, value work more relative to leisure and have higher wealth ambitions. Russian entrepreneurs have a better educational background and their parents were more likely to have been members of the communist party but Chinese entrepreneurs are more risk-taking and greedy and have more entrepreneurs among their childhood friends.
    Date: 2006–06
  7. By: Djankov, Simeon; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
    Abstract: Social scientists studying the determinants of entrepreneurship have emphasized three distinct perspectives: the role of institutions, the role of social networks and the role of personal characteristics. We conduct a survey from five large developing and transition economies to better understand entrepreneurship in view of these three perspectives. Using data from a pilot study with over 2,000 interviews in 7 cities across China, we find that controlling for institutional environment entrepreneurs in China are much more likely to have family members who are entrepreneurs as well as childhood friends who became entrepreneurs, suggesting that social environment plays an important role in entrepreneurship. Entrepreneurs also differ strongly from non-entrepreneurs in their attitudes toward risks and their work-leisure preferences, echoing Schumpeter. Finally, failed entrepreneurs score the worst on aptitude tests, but have the best self-reported performance in school and perceive the business environment as least favourable.
    Date: 2006–06
  8. By: Djankov, Simeon; Miguel, Edward; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
    Abstract: Studies of the determinants of entrepreneurship have emphasized three distinct perspectives: market institutions, social networks and personal characteristics. Using data from a pilot survey with over 2,000 interviews in 7 cities across Russia, we find evidence for a particularly strong effect of social networks: individuals whose relatives and childhood friends are entrepreneurs are more than twice as likely to be entrepreneurs. Mothers’ characteristics play a significant role in determining future entrepreneurs.
    Date: 2006–06
  9. By: Bernard, Andrew; Redding, Stephen J; Schott, Peter
    Abstract: This paper examines the frequency, pervasiveness and determinants of product switching among U.S. manufacturing firms. We find that two-thirds of firms alter their mix of five-digit SIC products every five years, that one-third of the increase in real U.S. manufacturing shipments between 1972 and 1997 is due to the net adding and dropping of products by survivors, and that firms are more likely to drop products which are younger and have smaller production volumes relative to other firms producing the same product. The product-switching behaviour we observe is consistent with an extended model of industry dynamics emphasizing firm heterogeneity and self-selection into individual product markets. Our findings suggest that product switching contributes towards a reallocation of economic activity within firms towards more productive uses.
    Keywords: heterogeneous firms; product differentiation; product market entry and exit
    JEL: D21 E23 L11 L60
    Date: 2006–06
  10. By: Koskinen, Yrjo (Boston University School of Management and CEPR); Rebello, Michael J. (Tulane University); Wang, Jun (Baruch College)
    Abstract: We examine how the relative bargaining power of privately informed venture capitalists and entrepreneurs - determined either by market conditions or by prior experience - affects both the willingness of venture capitalists to invest and the terms of their financing contracts. Our results demonstrate that shifts in the venture capitalists' bargaining power have a profound influence both on the terms of contracts and on investments in venture-backed projects. As witnessed in the recent past, when the bargaining advantage lies with entrepreneurs, venture capitalists may acquiesce to both investing in negative NPV projects and excessive investments in early stages of projects. Further, they will subsequently terminate poor projects. An improvement in the bargaining position of venture capitalists increases the payoff sensitivity of their financing contracts. It also completely attenuates their incentive to overinvest, limiting the need for excessive project terminations arter the initial round of financing.
    Keywords: Venture capital; asymmetric information; bargaining power; financial contracting; investment distortions
    JEL: D82 G24 G32
    Date: 2006–09–15
  11. By: Andrea GANZAROLI; Gianluca FISCATO; Luciano PILOTTI
    Abstract: Our main objective with this paper is to explore business transfer as as potential source of innovation in Small and Medium-sized Enterprises (SMEs). The literature on the subject has mainly focused to business succession as process through which ownership and control is transferred between generation of entrepreneurs. In this paper we argue that nowadays the aim of business succession should not only replace existing entrepreneurial resources, but enhancing firms’ innovation capacity. Our contribution moves into two major directions. The first explores the relationhip between business succession and innovation from a theoretical point of view. The second deepens such an understanding by assessing it on a sample of micro and small enterprises located in Emilia Romagna. We show that business transfer/succession in SMEs is not perceived as potential source of innovation. Business transfer still takes place mainly within the family. SMEs show little propensity to saparte ownership form management as way to enhance firms’ likelihood to survive to business transmission. Senior entrepreneurs’ show little propensity to invest on juniors’ training. As result juniors lack of an autonomous business vision and do not perceive themselves as the main driver of innovation. Such a perspective is even supported by seniors, who do not expect business succession to make any difference on the way business is currently managed
    Keywords: family business, succession, small and medium-sized enterprise, innovation
    JEL: G30 G32 G34
    Date: 2006–10
  12. By: José M. Menudo (Department of Economics, Universidad Pablo de Olavide); José Mª O’kean (Department of Economics, Universidad Pablo de Olavide)
    Abstract: The entrepreneurial function as just one factor of production is actually being the point of a depth discussion in entrepreneurship research. It could be the cause of some confusion which impeders theoretical developments and it also makes difficult the effectiveness of pro-entrepreneurial programs. The aim of this article is to analyse the origin of this factor of production. For this purpose, we look back to the 18th century in order to analyze Turgot’s works (1727-1781) by means of a new conceptual framework that distinguishes between different productive agents. A series of analytical problems are exposed when the entrepreneurship is linked to a separate economic agent.
    Keywords: Entrepreneurship, History of economic thought, Turgot, methodology.
    JEL: M13 B1 B11 B41
    Date: 2006–10
  13. By: Alex Coad (Panthéon-Sorbonne Economie et LEM)
    Abstract: Serial correlation in annual growth rates carries a lot of information on growth processes - it allows us to directly observe firm performance as well asto test hypotheses. Using a 7-year balanced panel of 10 000 French manufacturing firms, we observe that small firms typically are subject to negative correlation of growth rates, whereas larger firms display positive correlation. Furthermore, we find that those small firms that experience extreme positive or negative growth in any one year are unlikely to repeat this performance in the following year.
    Keywords: Serial correlation, firm growth, quantile regression.
    JEL: L11 L25
    Date: 2006–06
    Abstract: The impact of smaller firm size on corporate social responsibility is ambiguous. Some contend that small businesses are socially responsible by nature, while others argue that a smaller firm size imposes barriers on small firms that constrain their ability to take responsible action. This paper critically analyses recent theoretical and empirical contributions on the size – social responsibility relationship among small businesses. More specifically, it reviews the impact of firm size on four antecedents of business behaviour: issue characteristics, personal characteristics, organizational characteristics and context characteristics. It concludes that the small business context does impose barriers on social responsibility taking, but that the impact of the smaller firm size on social responsibility should be nuanced depending on a number of conditions. From a critical analysis of these conditions, opportunities for small businesses and their constituents to overcome the constraining barriers are suggested.
    Date: 2006–06
  15. By: Inderst, Roman; Mueller, Holger M; Muennich, Felix
    Abstract: This paper shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems. While competition for scarce informed capital at the refinancing stage increases the investor’s ex post bargaining position, it may nevertheless improve entrepreneurs’ ex ante incentives. This is because projects funded by investors with 'shallow pockets' must have not only a positive NPV at the refinancing stage, but one that is higher than that of competing portfolio projects. We also show that, besides mitigating moral hazard, committing to shallow pockets may have benefits in dealing with adverse selection problems. Our paper may help to understand provisions used in venture capital finance that limit a fund’s initial capital and make it difficult to add on more capital once the initial venture capital fund is raised. Our paper also provides a number of empirical implications, some of which have not yet been tested.
    Keywords: deep versus shallow pockets; venture capital portfolio
    JEL: G31 G32
    Date: 2006–06
  16. By: Alex Coad (Panthéon-Sorbonne Economie); Rekha Rao (S. Anna School of Advanced Studies, Pisa, Italy)
    Abstract: Innovation is commonly seeb as the principal engine of economic development. In this paper, we investigate the microfoundations of economic growth by relating innovation to sales growth at the firm-level, for incumbent firms in four "complex technology" sectors. The average firm, which experiences only modest growth, may grow for a number of reasons that may not be related to "innovativeness". However, given that firms are heterogeneous and that growth rates distributions are typically heavy-tailed, it may be misleading to use regression techniques that focus on the average firm. Using a quantile regression approach, we observe that innovativeness is of crucial importance for a handful of "superstar" fast-growth firms.
    Keywords: Innovation, firm growth, quantile regression.
    JEL: O31 L25
    Date: 2006–06
  17. By: Marimon, Ramon; Quadrini, Vincenzo
    Abstract: We study how barriers to competition - such as, restrictions to business start-up and strict enforcement of covenants or IPR - affect the investment in knowledge capital when contracts are not enforceable. These barriers lower the competition for human capital and reduce the incentive to accumulate knowledge. We show in a dynamic general equilibrium model that this mechanism has the potential to account for significant cross-country income inequality.
    Keywords: contract enforcement; economic growth; human capital
    JEL: L14 O4
    Date: 2006–09
  18. By: Uschi Backes-Gellner (Institute for Strategy and Business Economics, University of Zurich); Frank Maass (Institut für Mittelstandsforschung Bonn (IfM Bonn), (Institute for Small and Medium Size Enterprises, Bonn)); Arndt Werner (Institut für Mittelstandsforschung Bonn (IfM Bonn), (Institute for Small and Medium Size Enterprises, Bonn))
    Abstract: This paper investigates the determinants of inter-firm cooperation in research and development (R&D). We analyse the impact of structural and firm specific characteristics, market performance, access to resources and managerial techniques on different types of inter-firm R&D cooperation. Based on a survey of 886 enterprises in manufacturing and industry/business-related services located in Germany, we estimate several models with different types of R&D partnerships as a dependent variable to find out which types of enterprises are more or less likely to form or join either type of R&D partnership. The findings suggest that the availability and the quality of a firm’s own R&D resources are common factors driving R&D cooperation in general. Differentiating between cooperation activities in R&D among enterprises on the same production level on the one hand and vertical cooperation between enterprises and suppliers/customers or cross-sector alliances between enterprises and public research institutes on the other hand, we find cooperation type specific determinants of entry. The size of a firm, its location, access to financial resources and network experience seem to be most important.
    Keywords: cross-sector alliances, inter-firm cooperation; R&D cooperation; SME
    Date: 2005–02
  19. By: F. Calidoni-Lundberg; A. Fedele
    Abstract: We collect data from three Italian microcredit institutions which operate in urban areas by granting individual loans to two categories of wealthless borrowers: single entrepreneurs and organizations (cooperatives and associations).Evidence shows that organizations repay with higher probability and are charged a lower average interest rate than individuals. We use these findings to construct a lending scheme which consists of granting loans provided that borrowers form production teams (i.e. organizations). We consider a microcredit market with adverse selection à la De Meza- Webb and we verify that repayment rate increases, while interest rate falls with respect to individual lending if the above scheme, which we refer to as production team lending, is implemented. Our instrument, like joint liability implemented in rural economies, extracts information from borrowers through a peer selection mechanism but, differently from joint liability, fits to urban contexts where borrowers are less likely to know each other and social sanctions are weak.
    Keywords: Microcredit, Urban areas, Production Team Lending, Adverse Selection
    JEL: D82 L31 O12 O16
    Date: 2006
  20. By: Legros, Patrick; Newman, Andrew; Proto, Eugenio
    Abstract: We consider an endogenous growth model in which appropriate organization fosters innovation, but because of contractibility problems, this benefit cannot be internalized. The organizational design element we focus on is the division of labour, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation and growth depends on the interaction of the markets for labour and for inventions. Because of a credit market imperfection, the relative scarcity of entrepreneurs and workers depends on the wealth distribution. A high level of specialization is chosen when the wage share is low, i.e. when there are few wealthy. But in this case there are also few entrepreneurs and a consequent small market for innovations, which discourages inventive activity. When there are many wealthy, the innovation market is large, but the rate of invention is low because there is little specialization. Sustained technological progress and economic growth therefore require only moderate levels of inequality. The model also suggests that the growth rate need not be monotonic in the "quality of institutions," such as the degree of credit market imperfection.
    Keywords: division of labour; organization theory; technical change
    JEL: O3
    Date: 2006–06

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