nep-ent New Economics Papers
on Entrepreneurship
Issue of 2016‒02‒23
seventeen papers chosen by
Marcus Dejardin
Université de Namur

  1. Do initial financial conditions determine the fate of start-up firms? By Yuji Honjo; Masatoshi Kato
  2. Stock Option Taxation and Venture Capital Activity: A Cross-Country Comparison By Henrekson, Magnus; Sanandaji, Tino
  3. Entrepreneurial culture and start-ups: Could a cultural shift in favour of entrepreneurship lead to more innovative start-ups? By Röhl, Klaus-Heiner
  4. Entrepreneurship vulnerability to business cycle. A new methodology for identification pro-cyclical and counter-cyclical patterns of entrepreneurial activity. By Lechman, Ewa; Dominiak, Piotr
  5. When Entrepreneurs Meet Financiers: Evidence from the Business Angel Market By Angela, Cipollone; Paolo E., Giordani
  6. The Economic Significance of Business Angels - Towards Comparable Indicators By Avdeitchikova, Sofia; Landström, Hans
  7. Venture Capital and Knowledge Transfer By Dessí, Roberta; Yin, Nina
  8. Venture Capital and the Performance of Incumbents By Dore, Timothy E
  9. Bank Lending and Income Inequality: Evidence from Indonesia By Putra Pamungkas; Clovis Rugemintwari; Amine Tarazi; Irwan Trinugroho
  10. The Bright Side of Patents By Farre-Mensa, Joan; Hegde, Deepak; Ljungqvist, Alexander P.
  11. Determinants of innovation in Croatian SMEs: Comparison of service and manufacturing firms By Bozic, Ljiljana; Mohnen, Pierre
  12. Impacts of geographical locations and sociocultural traits on the Vietnamese entrepreneurship By Quan-Hoang Vuong
  13. Entrepreneurship Failure: Case of Low Productivity in Nigeria By Sapovadia, Vrajlal
  14. Business as unusual. An explanation of the increase of private economic activity in high-conflict areas in Afghanistan By Tommaso Ciarli; Chiara Kofol; Carlo Menon
  15. Utilisation of Existing ASEAN FTAs by Micro-, Small- and Medium-Sized Enterprises   By Tulus Tambunan
  16. The (Displacement) Effects of Spatially Targeted Enterprise Initiatives: Evidence from UK LEGI By Einiö, Elias; Overman, Henry G
  17. The non-economic outcomes of social entrepreneurship in Luxembourg By Sarracino, Francesco; Gosset, Andrea

  1. By: Yuji Honjo (Faculty of Commerce, Chuo University); Masatoshi Kato (School of Economics, Kwansei Gakuin University)
    Abstract: Using a survival analysis approach, this paper investigates the impact of initial financial conditions on the post-entry performance of firms. We examine whether initial financial conditions affect the duration of survival among start-up firms in Japan, distinguishing between failure and merger. We provide evidence that start-up firms that rely more on equity than debt financing are less likely to fail within a shorter period, but we find little evidence that initial equity size has a significant effect on the likelihood of failure. Moreover, we find the negative effect of equity financing on the likelihood of failure to be greater for start-up firms founded following the abolition of regulations governing a minimum paid-in capital requirement. Furthermore, the results reveal that start-up firms with larger initial equity are more likely to exit through merger. Overall, the findings suggest that initial capital structure is a critical determinant of exit route.
    Keywords: Business failure, Competing risk, Equity financing, Initial financial conditions, Merger
    JEL: C24 G32 M13
    Date: 2016–01
  2. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Sanandaji, Tino (Institute for Economic and Business History Research (EHFF), Stockholm School of Economics)
    Abstract: One response to uncertainty and transactions costs in VC-finance is to compensate founders (and other key personnel) with stock options under complex contracts. Entrepreneurs are granted stock options contingent on firm performance, vesting and other criteria. While most countries tax stock options as labor earnings, the United States allow them to be taxed at a low capital gains tax rate. The interaction of favorable tax treatment and inherent advantages has led to near universal use of stock options in American venture capital deals, while this remains less common in Europe. The effective tax treatment of stock options depends on tax practices and is not readily observed using statutory tax rates. We asked the local offices of the tax consultancy firm PwC to calculate the effective tax rate for a standardized entrepreneurial case in 22 countries, finding that countries with favorable tax treatment have more VC activity. One advantage of this tax policy is that it narrowly targets entrepreneurial startups without requiring broad tax cuts.
    Keywords: Business taxation; Corporate governance; Entrepreneurship; Innovation; Institutions; Tax policy; Venture capital
    JEL: H25 H30 K34 L26
    Date: 2016–01–11
  3. By: Röhl, Klaus-Heiner
    Abstract: Europe is lagging behind the United States and Israel in the number of successful start-ups. Highly innovative start-ups that grow to become global companies the size of Google or Amazon within just a few years are not being founded here. Many of Europe’s countries and regions are experiencing persistent low growth with high unemployment, which is something a boom in new companies implementing new creative ideas could help alleviate. Even in Germany, which has a much better macroeconomic performance, the number of companies being founded has been falling for several years. There are strong indicators that Europe’s aforementioned weakness when it comes to the starting of new companies may also have a cultural dimension. Regions which are seeing particularly strong numbers of innovative start-ups being founded appear to have a strong entrepreneurial spirit. This policy paper will therefore examine what defines the entrepreneurial culture of successful start-up regions and to what extent different entrepreneurial cultures contribute to the differences in entrepreneurial activity between large areas of continental Europe and other highly developed economies, especially the United States, the United Kingdom, and Israel. This paper will examine both the societal and institutional framework that exists in an entrepreneurial culture and the personality structure of successful entrepreneurs. Following an international comparison of enterprise birth rates, this paper will review the different start-up systems in Europe, the United States, and Israel, which are also expected to have a connection to differences in the availability of venture capital. Finally, this paper considers the role of the education system in transferring business knowledge and entrepreneurship. This is followed by a conclusion in which recommendations are given regarding how to develop an entrepreneurial culture and a willingness to take risks.
    Abstract: Europa hinkt im Vergleich zu den Vereinigten Staaten oder Israel bei der Zahl erfolgreicher Startups hinterher. Innovationsstarke Gründungen, die innerhalb weniger Jahre zu globalen Konzernen wie Google oder Amazon heranwachsen, finden nicht hier statt. In vielen Staaten und Regionen Europas gibt es eine hartnäckige Wachstumsschwäche mit hoher Arbeitslosigkeit, zu deren Überwindung auch ein Gründungsboom zur Umsetzung neuer kreativer Ideen beitragen könnte. Selbst in Deutschland, das eine gute makroökonomische Performance vorweist, sinken die Gründungszahlen seit mehreren Jahren. Vieles weist darauf hin, dass die konstatierte Gründungsschwäche Europas auch eine kulturelle Dimension besitzen könnte. Besonders gründungsstarke Regionen, die auf innovative Start-ups konzentriert sind, haben offenbar einen starken 'Entrepreneurial Spirit'. In diesem Policy Paper wird deshalb der Frage nachgegangen, was die 'Entrepreneurial Culture' erfolgreicher Gründungsregionen ausmacht und inwieweit eine unterschiedliche Gründungskultur zu den Differenzen im Gründungsgeschehen zwischen weiten Teilen Europas und anderen hoch entwickelten Volkswirtschaften, speziell den Vereinigten Staaten, Großbritannien und Israel, beiträgt. Neben den gesellschaftlichen und institutionellen Rahmenbedingungen einer Gründerkultur wird auch auf die Persönlichkeitsstruktur erfolgreicher Entrepreneure beleuchtet. Nach einem internationalen Vergleich der Gründungsquoten wird auf die unterschiedlichen Startup-Systeme in Europa, Amerika und Israel eingegangen, die auch auf Unterschiede in der Verfügbarkeit von Wagniskapital zurückzuführen sein dürften. Abschließend wird die Rolle des Bildungssystems in der Vermittlung von wirtschaftlichen Kenntnissen sowie Entrepreneurship beleuchtet, bevor im Fazit Empfehlungen zum Ausbau von Gründerkultur und Risikobereitschaft gegeben werden.
    JEL: L25 L26 M13 M14
    Date: 2016
  4. By: Lechman, Ewa; Dominiak, Piotr
    Abstract: In literature, there is ongoing discussion whether entrepreneurial activity, approximated by, for instance, changes in self-employment, tends to behave pro-cyclically, counter-cyclically or rather is a-cyclical. Thus far, both theoretical and empirical evidence, where various multiple methodological approaches are used, does not provide clear answer to the latter; while widely offered explanations are scattered and lack robustness. Regarding the latter, some evidence may be traced in works of Kollinger and Thurik (2012), which using data for 22 OECD countries over the period 1972-2007, use Granger-causality tests to verify if entrepreneur activities are leading or lagging indicator over the business cycles; and their findings they show that entrepreneurship is leading indicator of the business cycle. Rampini (2004), using canonical real business cycle model, finds that entrepreneurship behaves pro-cyclical, which is associated with changes in risk aversion during respective phases of business cycle. Carmona et al. (2010), using quarterly data for self-employment and GDP in Spain and the United States, over the period 1987-2004, adopt the cross-correlations and VAR models to demonstrate that the hypothesis on pro-cyclicality of self-employment cannot be confirmed. At the same time, they present rather mixed results for various groups of self-employed. Klapper et al. (2014), using data for 109 countries over the period 2002-2012, find that entrepreneurial behavior demonstrates strong pro-cyclical patterns. More recent evidence may be also found in works of, inter alia, Parker (2002), Parker et al. (2012a,b), Milan et al. (2012), Baptista and Preto (2011). This paper is designed to contribute to the present state of the art, by presenting a novel methodological approach to identification of the relationship between the intensity of entrepreneurial activity and business cycle. Put differently, we aim unveil if entrepreneurship (approximated by changes in self-employment) behaves pro-cyclically, counter-cyclically or a-cyclically. To exemplify our new conceptual approach, we use quarterly data on deflated gross domestic product and self-employment. The empirical evidence presents the case of Italy. The period of analysis is restricted to the years 1995-2014. All statistics are extracted from OECD datasets on Annual Labor Force and Gross Domestic Product.
    Keywords: entrepreneurship, self-employment, vulnerability, small and medium sized enterprises, business cycle, economic growth
    JEL: A1 B41 D22 E3
    Date: 2016
  5. By: Angela, Cipollone; Paolo E., Giordani
    Abstract: This paper estimates the process of search and matching between entrepreneurs and financiers in the business angel (BA) market. We hand-collect a new dataset from the BA markets of 17 developed countries for the period 1996-2014, and we estimate the aggregate matching function, which captures the number of successful deals as a function of the number of potential entrepreneurs and of business angels. Empirical findings confirm the technological features assumed in the theoretical literature: positive and decreasing marginal returns to both inputs (stepping on toes effect), technological complementarity across the two inputs (thick market effect) and constant returns to scale (CRS). As we show, evidence on CRS rules out equilibrium multiplicity in the BA market. We discuss the policy implications of these findings.
    Keywords: Entrepreneurial finance, innovation, matching function, business angels.
    JEL: C78 L26 O3
    Date: 2016–02–15
  6. By: Avdeitchikova, Sofia (The Ratio institute); Landström, Hans (Lund University)
    Abstract: Due to their importance for fostering high-growth entrepreneurship, business angels have over the last decades attracted considerable interest among policy-makers around the world. However, most of the policy initiatives to support business angel investing have been made without any strong empirical basis to guide them. Thus, the research results so far have done little to inform policy-makers regarding – what is the state of business angel market and what (if any) policy action is required? In this paper, we take one step in the direction of “making sense” of the existing evidence. We make a differentiation between the scope of the business angel investing and the significance of business angel investing and relate the recent empirical estimates of the business angel activity to the supply of venture finance on the one hand and the demand for venture finance on the other. In this respect, we move beyond talking about the scope of the business angel market and discuss the importance or potential impact of this source of finance for new and growing ventures.
    Keywords: business angels; entrepreneurship policy; indicators; supply-side; demand-side.
    JEL: G18 M13 M20 O16
    Date: 2014–12–31
  7. By: Dessí, Roberta; Yin, Nina
    Abstract: This paper explores a new role for venture capitalists, as knowledge intermediaries. A venture capital investor can communicate valuable knowledge to an entrepreneur, facilitating innovation. The venture capitalist can also communicate the entrepreneur's innovative knowledge to other portfolio companies. We study the costs and benefits of these two forms of knowledge transfer, and their implications for investment, innovation, and product market competition. The model also sheds light on the choice between venture capital and other forms of finance, and the determinants of the decision to seek patent protection for innovations. Our analysis provides a rationale for the use of contingencies (specifically, patent approval) in VC contracts documented by Kaplan and Stromberg (2003), and for recent evidence on patterns of syndication among venture capitalists.
    Keywords: competition; contracts; innovation; knowledge intermediaries; patents; venture capital
    JEL: D82 D86 G24 L22
    Date: 2015–02
  8. By: Dore, Timothy E (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: I study the effect of investment in young, private firms by venture capitalists (VC) on public firms in the same industry. I construct an instrument for VC investment that relies on individual VC's investment histories, holdings of equity stakes in IPO firms, and aggregate market returns immediately following those IPOs. I find that increased VC investment has a large effect on incumbent profitability. The effect arises due to higher costs and not depressed sales. The effect is short lived as firms respond by reallocating resources away from treated markets and by reducing their use of labor.
    Keywords: Corporate finance; Financial markets; Venture Capital
    Date: 2015–09–25
  9. By: Putra Pamungkas (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Clovis Rugemintwari (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société); Irwan Trinugroho (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)
    Abstract: This paper investigates the relationship between financial development and income inequality by using a broad range of loan categories as proxies for financial development. Our unique data set allows us to identify loans to micro, small and medium-sized enterprises (MSMEs). It also allows us to distinguish business loans and consumer loans. Using panel data for 33 provinces in Indonesia during the 2007-2013 period, we find that lending to MSMEs reduces income inequality while businesses loans, either for working capital or investment purposes, but also consumer loans increase income inequality. Our results indicate that boosting loans to micro, small, and medium-sized enterprises could significantly contribute to reduce income inequality.
    Keywords: Income Inequality,Gini Index,Bank Lending,Indonesia
    Date: 2016–01–06
  10. By: Farre-Mensa, Joan; Hegde, Deepak; Ljungqvist, Alexander P.
    Abstract: Motivated by concerns that the patent system is hindering innovation, particularly for small inventors, this study investigates the bright side of patents. We examine whether patents help startups grow and succeed using detailed micro data on all patent applications filed by startups at the U.S. Patent and Trademark Office (USPTO) since 2001 and approved or rejected before 2014. We leverage the fact that patent applications are assigned quasi-randomly to USPTO examiners and instrument for the probability that an application is approved with individual examiners’ historical approval rates. We find that patent approvals help startups create jobs, grow their sales, innovate, and reward their investors. Exogenous delays in the patent examination process significantly reduce firm growth, job creation, and innovation, even when a firm’s patent application is eventually approved. Our results suggest that patents act as a catalyst that sets startups on a growth path by facilitating their access to capital. Proposals for patent reform should consider these benefits of patents alongside their potential costs.
    Keywords: entrepreneurship; innovation; patents; R&D; venture capital
    JEL: D23 G24 L26 O34
    Date: 2016–02
  11. By: Bozic, Ljiljana (Institute of Economics, Zagreb); Mohnen, Pierre (UNU-MERIT, SBE, Maastricht University)
    Abstract: In this paper we focus on SMEs in Croatia operating in the manufacturing and services sectors and seek to compare them in terms of their involvement in innovation activities, the factors that determine their decision to innovate in general and in four types of innovations in particular: product/service, process, organisational and marketing innovations. The analysis relies on the Croatian Community Innovation Survey 2010 (CIS 2010) data. To find out whether innovations have a different pattern of drivers in manufacturing and in services, we estimate the probit and multivariate probit models separately on these two groups of firms. The findings reveal that despite some differences, service and manufacturing SMEs are not that different from one another when it comes to innovation activities. Service SMEs are somewhat less likely to introduce technological innovations, but manufacturing and service SMEs do not significantly differ from each other when it comes to non-technological innovations. One noteworthy difference between manufacturing and service SMEs is that the latter rely much more than the former on acquired knowledge.
    Keywords: Croatia, innovation, services, manufacturing, SME, multivariate probit
    JEL: O31 L80
    Date: 2016–02–16
  12. By: Quan-Hoang Vuong
    Abstract: This paper presents new results that are obtained from investigations into a 2015 Vietnamese entrepreneurs survey data, containing 3071 observations. Evidence found from the estimations using multinomial logits supports relationships between several sociocultural factors and entrepreneurshiprelated performance or traits has been found. Specifically, those relationships include: a) Active participation in entrepreneurs' social networks and reported value of creativity; b) CSR-willingness and reported entrepreneurs' perseverance; c) Transforming of sociocultural values and entrepreneurs' decisiveness; and, d) Lessons learned from others' failures and perceived chance of success. Using geographical locations as control variate, evaluations of the baseline-category logits models indicate their varying effects on the outcomes when combined with the sociocultural factors that are found statistically significant. Empirical probabilities that help to learn in details about behavioral patterns are provided; and toward the end, the paper offers a discussion on some striking insights and useful explanations on this entrepreneurship data set.
    Keywords: Entrepreneurship; creativity; perseverance; cultural changes; transitional economies
    JEL: L26 M13 O33
    Date: 2016–02–04
  13. By: Sapovadia, Vrajlal
    Abstract: We study the role of entrepreneurs in low productivity in manufacturing firms of Nigeria. Federal Executive Council while adopting the National Policy of Productivity in 2012 emphasized that transformation of Nigeria to become strong economy will never be realized until the nation adopts the culture of productivity, innovation, improvements and proper management of resources. The policy is to guide the public and private sectors in enhancing productivity to stimulate national development. Thus policy framework appreciated role of private sector management in enhancing productivity, the dire need for national development. Enhanced national productivity is at the heart of any economic development and progress.
    Keywords: Nigeria, Productivity, Industrial, Entrepreneurship
    JEL: A1 M20
    Date: 2015–11–01
  14. By: Tommaso Ciarli; Chiara Kofol; Carlo Menon
    Abstract: In this paper we use a unique dataset that combines spatial detailed information on conflict events and on households' activity, to show a positive and significant correlation between violent conflict and entrepreneurship in Afghanistan. We build spatial and IV identifications to estimate the effect of different measures of conflict on the investment in a range of private economic activities of nearby households. The results consistently show that the level of conflict, its impact, and to a lesser extent its frequency, increase the probability that a household engages in self-employment activities with lower capital intensity and in activities related to subsistence agriculture, and reduce the probability of investing in higher capital self-employment. Overall, by increasing entrepreneurship, conflict pushes the country towards a regressive structural change. However, the magnitude of most of the effects is quite small. The paper contributes to a literature that, due to data constraints and identification issues, has not yet delivered conclusive evidence.
    Keywords: violent conflict; entrepreneurship; development
    JEL: D74 O12 R12
    Date: 2015–07
  15. By: Tulus Tambunan (Trisakti University)
    Abstract: This policy brief examines the extent to which micro-, small-, and medium-sized enterprises (MSMEs) have benefited from the conclusion of trade agreements involving ASEAN member states.
    Keywords: Micro-, small-, and medium-sized enterprises, free trade agreements, rules of Origin
    JEL: F1
    Date: 2015–05
  16. By: Einiö, Elias; Overman, Henry G
    Abstract: We investigate the impacts of a significant area-based intervention (LEGI) that aimed to increase employment and entrepreneurial activity in 30 disadvantaged areas across England. We examine the spatial pattern of effects at a fine spatial scale using panel data for small geographic units and a regression discontinuity design that exploits the programme eligibility rule. The results indicate considerable local displacement effects. Employment increases in treated areas close to the treatment area boundary at the cost of significant employment losses in untreated localities just across the boundary. These differences vanish quickly when moving away from the boundary and do not persist after the programme is abolished. These findings support the view that area-based interventions may have considerable negative displacement effects on untreated parts of the economy. This displacement can substantially reduce (or in this case eliminate) any net benefits.
    Keywords: displacement; employment; place-based policy; programme evaluation
    JEL: H25 J20 O40 R11
    Date: 2016–02
  17. By: Sarracino, Francesco; Gosset, Andrea
    Abstract: We provide a first assessment of the ability of social enterprises to meet their non economic goals. The study takes advantage of unique data on social enterprises and well-being available for Luxembourg. Results suggest that social enterprises contribute to well-being and alleviate the bad-being of most vulnerable people. Such evidence supports policies in favour of social enterprises to promote social integration among socially vulnerable people.
    Keywords: social enterprises; outcomes; subjective well-being; solidarity;
    JEL: D0 D64 I31 L31 M14 M21 Z18
    Date: 2015–06–24

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