nep-ent New Economics Papers
on Entrepreneurship
Issue of 2010‒01‒16
twelve papers chosen by
Marcus Dejardin
Notre-Dame de la Paix University

  1. Institutions and Entrepreneurship: The Role of The Rule of Law By André van Stel; David Storey; Chantal Hartog
  2. Firm Growth, Institutions and Structural Transformation By Henrekson, Magnus; Johansson, Dan
  3. Patents, Entrepreneurship and Performance By Christian Helmers; Mark Rogers
  4. Submarket Dynamics and Innovation: The Case of the U.S. Tire Industry By Guido Buenstorf; Steven Klepper
  5. Understanding the Entrepreneur: An Index of Entrepreneurial Success By Fried, Harold O.; Tauer, Loren W.
  6. R&D-intensive SMEs in Europe:What do we know about them? By Raquel Ortega-Argilés; Lesley Potters; Peter Voigt
  7. Patterns of innovatin networking in Dutch small firms By Jeroen de Jong; Willem Hulsink
  8. Growth in Post-Soviet Russia: A Tale of Two Transitions? By Daniel Berkowitz; David DeJong
  9. Investor Abilities and Financial Contracting: Evidence from Venture Capital By Bengtsson, Ola; Sensoy, Berk A.
  10. Bank relationships and firms’ financial performance: the Italian experience By Castelli , Annalisa; Dwyer, Gerald P; Hasan, Iftekhar
  11. Asset Inequality, Relative Efficieny of Formal Credit Markets and Choice of Organizational Form By Alper Duman
  12. Changing the Nexus: The Evolution and Renegotiation of Venture Capital Contracts By Bengtsson, Ola; Sensoy, Berk A.

  1. By: André van Stel; David Storey; Chantal Hartog
    Abstract: This paper examines variations in entrepreneurship across twenty developed countries, using three measures of entrepreneurship which we broadly describe as prestart, early-stage and established enterprises. It then links these measures to the economic institutional framework, holding constant a range of other factors. Two groups of conclusions emerge. The first is that the factors that influence pre-start, early-stage and established enterprises differ often quite sharply. Second, our results broadly confirm earlier work suggesting that social security entitlements, taxes, and employment protection legislation are negatively associated with (different forms of) entrepreneurial activity. However, our novel finding is that countries with a "better" rule of law have lower entrepreneurship. We explain this apparently counter-intuitive finding by arguing that in developed economies the benefits of the rule of law accrue primarily to large enterprises.  
    Date: 2010–01–07
  2. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Johansson, Dan (Ratio)
    Abstract: This essay argues that the economic contribution of certain firms – be they small, young or rapidly growing – has to be understood in a broader context of creative destruction. Growth of some firms requires contraction and exit of some other firms to free up resources that can be reallocated to expanding firms. Entry and expansion are flip sides to exit and contraction and the process through which the factors of production are put into different use defines structural transformation. We analyze institutions and policies conducive to structural transformation, in particular the expansion of high-growth firms (HGFs), since they have empirically been shown to contribute disproportionately to economic development. <p> Firm growth is viewed as resulting from the continuous discovery and use of productive knowledge. Rapid firm growth requires a set of economic actors with complementary competencies that work together to identify and commercialize novel business ideas. The institutional framework determines the incentives for these individuals to acquire and utilize knowledge. We identify a number of institutions that encourage the creation of HGFs and promote structural transformation. In particular, our analysis points to the key roles played by tax structures, labor market regulation, and the contestability of service markets. Even in advanced economies, there is a large untapped economic potential which can be unleashed by institutional changes, such as the opening up of closed markets for entrepreneurial competition. However, there is no “quick-fix” that will boost the frequency of HGFs and structural transformation. Our analysis suggests that policymakers need to adopt a broad approach and implement a wide array of complementary institutional reforms to increase the prevalence of HGFs and to facilitate structural transformation.
    Keywords: Entrepreneurship; Firm growth; Gazelles; High-growth firms; High-impact firms; Institutions; Job creation; Rapidly growing firms
    JEL: D21 L25 M13 O10 O40
    Date: 2010–01–07
  3. By: Christian Helmers; Mark Rogers
    Abstract: This paper provides an overview of a new database that uses intellectual property data to track the innovative activity of firms in the UK. The paper looks at the extent and nature of patenting activity, focusing on micro firms and SMEs. Over the period 2000 to 2007, SME patenting has increased whereas large firm patenting has fallen and micro firm patenting has been roughly con- stant. Most micro and SMEs patent while relatively young (aged ten or less) and this tendency is becoming more pronounced over time. The paper provides a descriptive analysis on micro firms and SMEs that become high growth firms (defined as having greater than 20 percent growth per annum). Overall, 28.0 percent of young micro and SMEs achieve high growth (over 2002 to 2007). In comparison, 29.4 percent of young micro or SMEs that patent achieve high growth. This difference is much greater for firms in the high-tech industries. Moreover, the analysis shows that due to the skewed nature of the firm-level growth distribution, standard conditional mean estimators may fail to uncover important differences in the association between patenting and firm growth across the conditional growth distribution.
    Keywords: Firm growth, patents
    JEL: L25 O12
    Date: 2009–12
  4. By: Guido Buenstorf; Steven Klepper
    Abstract: Beginning in 1922, the rate of exit of U.S. tire producers increased sharply and the industry began a severe and protracted shakeout. Just five years earlier, the tire industry experienced a surge in entry that led to a rise of over 80% in the number of producers. We propose an explanation for this episode based on the idea of industry submarkets, which we incorporate in a model of shakeouts. We test this theory and alternative explanations for the surge in entry and exit and the shakeout using a novel data set on patenting in tires and production in the early 1920s of the cord tire, a key innovation we feature in our theory. Our analysis suggests that the development of a new submarket can open up opportunities for entry but also stimulate innovation and in the process reinforce the advantages of the leading incumbents, accentuating the shakeout of producers.
    Keywords: Submarkets, Innovation, Shakeouts Length 31 pages
    JEL: L65 R12 R30
    Date: 2009–12
  5. By: Fried, Harold O.; Tauer, Loren W.
    Abstract: A measure of entrepreneur success is important to identify current and future successful ventures, to further our understanding of the entrepreneurial process and to guide public policies to improve the success rate of start-ups. In this paper we propose an index of entrepreneur success that accommodates multiple inputs and outputs, that is predicated on inputs and that mitigates the impact of outliers. We relate the index to characteristics of the entrepreneur and the venture: age, experience, gender, race, competitive advantage, education, and birthplace. The data are from the Kauffman Firm Survey. The index is calculated for 2,863 firms in 2006.
    Keywords: entrepreneur, Kauffman Survey, Financial Economics, Productivity Analysis,
    Date: 2009–10–16
  6. By: Raquel Ortega-Argilés (JRC-IPTS); Lesley Potters (JRC-IPTS); Peter Voigt (JRC-IPTS)
    Abstract: The importance of SMEs in Europe’s innovation process can be seen in both the academic and the political arena. Adopted in June 2008, the ‘Small Business Act’ for Europe reflects the Commission’s political will to recognise the central role of SMEs in the EU economy and was the first to put in place a comprehensive SME policy framework for the EU and its Member States. One of its main aims is to promote growth among SMEs by helping them to tackle problems that hamper their development. This kind of policy calls for a more in-depth look into the nature of the SME population in Europe. Several attempts have been made in recent years to draw taxonomies of firms, but mostly they do not control for size effects within the defined groups of firms. The purpose of this paper is to typify different groups of R&D-intensive SMEs distinguished according to their inputs into the innovation process. In particular, we draw attention to SMEs that contribute the most to the industrial R&D investment in the EU. To do so, we run a cluster analysis on a sample of top European R&D SME investors based on a unique dataset made up of the different waves of the European R&D Investment Scoreboard. The results show that several clusters of R&D-intensive SMEs can be defined by certain characteristics, but that the diversity between clusters calls for a more careful understanding before developing measures to support European R&D-intensive SMEs. For companies labelled as ‘corporate laboratories’ according to the cluster analysis, it would be legitimate to question support for R&D, as these firms do not seem to have significant problems in finding investors that believe in their business model. On the other hand, e.g. the ‘Gazelles’ do in fact grow, but struggle with the high capital investment needed to become and remain large. In this case, it seems it would be more effective to focus on the weaknesses (physical expansion) of these firms rather than supporting their strengths (knowledge, R&D).
    Keywords: SMEs; innovation inputs; cluster analysis
    JEL: O33
    Date: 2009–12
  7. By: Jeroen de Jong; Willem Hulsink
    Abstract: Small firms may rely on a variety of network partners, and in various roles, to identify and exploit opportunities for innovation. This paper adds to the literature on innovation networking by developing a typology at the level of innovation objects, rather than at the firm or industry level.  
    Date: 2010–01–05
  8. By: Daniel Berkowitz; David DeJong
    Abstract: In the early stages of post-Soviet Russia’s economic transition, small-scale entrepreneurial activity appeared to be a strong engine of growth. Moreover, striking regional variations in initial conditions and adopted policy reforms appeared useful in accounting statistically for observed regional variations in entrepreneurial activity. Here, we investigate whether these relationships have persisted as Russia’s transition has continued to evolve, and find that they have not. We then document that the emergence of bank-issued credit, virtually non-existent outside of Moscow prior to 2000, has been an important engine of growth since 2000. Thus to date, Russia’s post-Soviet development appears as a tale of two distinct transition paths.
    Date: 2009–12
  9. By: Bengtsson, Ola (University of Illinois at Urbana-Champaign); Sensoy, Berk A. (Ohio State University)
    Abstract: Using a large, new database of contractual provisions governing the allocation of cash flow rights
    Abstract: between venture capitalists (VCs) and entrepreneurs, we investigate how contract design is impacted by VC abilities to monitor and provide value-added services to the entrepreneur. In doing so, this paper is the first to demonstrate that VC characteristics, in addition to portfolio company characteristics, have a significant impact on VC contract design in the U.S. We find that more experienced VCs, who have superior monitoring and value-added abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. This result is robust to extensive controls and several methods to account for endogenous selection effects. The relation between VC experience and downside protections is weaker when entrepreneurial agency problems are less severe and stronger when VC ownership is greater. The results, together with the existing literature, suggest that VCs with better governance abilities optimally focus less on obtaining
    Abstract: downside protections, which are costly from a risk-sharing perspective, and more on upside payoffs and obtaining board representation during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with
    Abstract: high-quality VCs are overstated.
    Date: 2009–11
  10. By: Castelli , Annalisa (University of Rome, Italy); Dwyer, Gerald P (Federal Reserve Bank of Atlanta, USA); Hasan, Iftekhar (Rensselaer Polytechnic Institute, USA and Bank of Finland)
    Abstract: We examine the connection between the number of bank relationships and firms’ performance using a unique data set on Italian small firms for which banks are a major source of financing. Our evidence indicates that return on equity and return on assets decrease as the number of bank relationships increases, the effects being stronger for small firms than for large firms. We also find that the ratio of interest expense to assets increases as the number of relationships increases. Particularly for small firms, these results are consistent with finding that suggest that having fewer bank relationships reduces the information asymmetries and agency problems and outweighs the hold-up problems.
    Keywords: bank relationships; small business lending; firms’ performance
    JEL: D21 G21 G32
    Date: 2009–12–16
  11. By: Alper Duman (Department of Economics, Izmir University of Economics)
    Abstract: We model the organizational choice of a small firm given formal and informal credit market parameters. We observe a positive relationship between the size of the informal sector and the spread across countries. We take spread as relative inefficiency of the formal credit markets. Furthermore we also witness a convex positive relationship between the start-up costs and the size of the informal sector. The start-up costs are extremely important sunk costs for the micro and/or small enterprises. We argue that both the spread and the start-up costs are important parameters for the small enterprises in terms of the organizational choice. We provide a simple model to account for these main empirical regularities.
    Keywords: Organizational forms, Formal and Informal Credit Markets
    JEL: F21 O17
    Date: 2009–12
  12. By: Bengtsson, Ola (University of Illinois at Urbana-Champaign); Sensoy, Berk A. (Ohio State University)
    Abstract: We study empirically how financial contracts evolve and are renegotiated as venture capital (VC)-backed companies secure new rounds of financing. Because VC contract designs vary considerably between companies according to their economic circumstances, it is plausible to expect that the contracts governing successive financing rounds of a quickly-evolving company should often be dissimilar. The data offer little support for this intuitive hypothesis. In fact, the majority of cash flow provisions in a new round contract are recycled from the previous round contract, even when the company has evolved substantially. Such recycling may be beneficial in typical situations because it alleviates information problems in negotiations and reduces the complexity of the company's nexus of financial contracts (Fama, 1980). However, in some situations restructuring contract design may be necessary to entice investors to provide new capital. Consistent with debt overhang arguments (Myers, 1977), we show that venture capital contracts evolve to include more investor-friendly cash flow provisions when the valuation of the company has not increased since the previous round, when new investors join the new round, or when new round investors hold larger debt-like claims. Although major renegotiations of previous round contracts are rare, minor renegotiations appear to be more common and almost uniformly result in making the previous round contract more similar to the new round contract. Overall, our findings suggest that the tradeoff relevant for changing a company's nexus of financial contracts is different from the tradeoffs relevant for the initial structuring of this nexus.
    Date: 2009–09

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