nep-ent New Economics Papers
on Entrepreneurship
Issue of 2020‒10‒26
eleven papers chosen by
Marcus Dejardin
Université de Namur

  1. The Impact of COVID-19 on Small Business Owners: The First Three Months after Social-Distancing Restrictions By Robert W. Fairlie
  2. The Effects of COVID-19 on U.S. Small Businesses: Evidence from Owners, Managers, and Employees By Georgij Alekseev; Safaa Amer; Manasa Gopal; Theresa Kuchler; JW Schneider; Johannes Stroebel; Nils Wernerfelt
  3. Competing for Search Traffic in Query Markets: Entry Strategy, Platform Design, and Entrepreneurship By Wei Zhou; Zidong Wang
  4. Ethnic Differences in Long-Term Self-Employment By Aldén, Lina; Bastani, Spencer; Hammarstedt, Mats; Miao, Chizheng
  5. Firm-bank “Odd Couples” and trade credit: Evidence from Italian SMEs By Jérémie BERTRAND; Pierluigi MURRO
  6. Dynamic financial landscapes and entrepreneurial cultures on new firm formation in different industries By Sin Tian Ho, Cynthia; Fili, Andreas
  7. Institutions, Financial Development, and Small Business Survival: Evidence from European Emerging Markets By Ichiro Iwasaki; Evzen Kocenda; Yoshisada Shida
  8. Bank Liquidity Provision Across the Firm Size Distribution By Gabriel Chodorow-Reich; Olivier Darmouni; Stephan Luck; Matthew C. Plosser
  9. The Rise of Fintech: A Cross-Country Perspective By Oskar KOWALEWSKI; Paweł PISANY
  10. Determinants of debt ratio levels among small-scale manufacturing enterprises in Ethiopia: Do government policies matter? By Melesse, Wondemhunegn Ezezew
  11. Lessons from Innovation Economics for Digital Platform Policy By Bauer, Johannes M.; Prado, Tiago S.

  1. By: Robert W. Fairlie
    Abstract: Social distancing restrictions and health- and economic-driven demand shifts from COVID-19 are expected to shutter many small businesses and entrepreneurial ventures, but there is very little early evidence on impacts. This paper provides the first analysis of impacts of the pandemic on the number of active small businesses in the United States using nationally representative data from the April 2020 CPS – the first month fully capturing early effects. The number of active business owners in the United States plummeted by 3.3 million or 22 percent over the crucial two-month window from February to April 2020. The drop in active business owners was the largest on record, and losses to business activity were felt across nearly all industries. African-American businesses were hit especially hard experiencing a 41 percent drop in business activity. Latinx business owner activity fell by 32 percent, and Asian business owner activity dropped by 26 percent. Simulations indicate that industry compositions partly placed these groups at a higher risk of business activity losses. Immigrant business owners experienced substantial losses in business activity of 36 percent. Female business owners were also disproportionately affected (25 percent drop in business activity). Continuing the analysis in May and June, the number of active business owners remained low – down by 15 percent and 8 percent, respectively. The continued losses in May and June, and partial rebounds from April were felt across all demographic groups and most industries. These findings of early-stage losses to small business activity have important implications for policy, income losses, and future economic inequality.
    Keywords: small business, entrepreneurship, business owners, self-employment, COVID-19, coronavirus, shelter in place restrictions, social distancing restrictions, minority business, female business
    JEL: J15 J16 L26
    Date: 2020
  2. By: Georgij Alekseev; Safaa Amer; Manasa Gopal; Theresa Kuchler; JW Schneider; Johannes Stroebel; Nils Wernerfelt
    Abstract: We analyze a large-scale survey of owners, managers, and employees of small businesses in the United States to understand the effects of the early stages of the COVID-19 pandemic on those businesses. The survey was fielded in late April 2020 among Facebook business page administrators, frequent sellers on Facebook’s e-commerce platform Marketplace, and the general Facebook user population. We observe more than 66,000 responses covering most sectors of the economy, including many businesses that had stopped operating due to the pandemic. The survey asks 136 questions covering topics such as changes in business operations and employment, changes in financing patterns, and the interaction of household and business responsibilities. We characterize the adjustments implemented to survive the pandemic and explore the key challenges to continue operating or to re-open. We show how these patterns differ across industry, firm size, owner gender, and other firm characteristics.
    Keywords: small businesses, COVID-19, working from home, small business finance
    JEL: E30 L26 M13
    Date: 2020
  3. By: Wei Zhou (Eller College of Management, University of Arizona); Zidong Wang (Alibaba Group)
    Abstract: E-commerce platforms guide consumers’ search traffic toward online retailers that are classified into different product categories. An online retailer can either list itself under a broad category to reap larger search traffic, or choose a narrow category, often a subcategory of a broad category, to target a niche audience. In collaboration with, China’s largest e-commerce platform, we exploit a change in the platform’s search algorithm to study online retailors’ location decisions in the digital world. In our framework, each market is defined by a search query, which matches an online retailer’s product either closely or distantly. The platform allocates search traffic into different categories, and online retailers compete for the search traffic in each product category with heterogeneous abilities to convert search traffic into revenue. Using detailed data on search queries, search exposure, and seller revenue, we find that an online retailer faces a tradeoff between market size and competition intensity, and a retailer is better at converting closely matched search traffic into revenues. By refining a broader category into narrow subcategories, the e-commerce platform gives retailers the flexibility to forgo higher volumes of search traffic in order to gain a better conversion rate. Eliminating category refinement would lead to about 17% revenue losses for sellers in product categories we study, with incidence mostly on sellers that specialize in niche products. Our results suggest that e-commerce platforms as entrepreneurial incubators can help small business owners thrive on the platform through targeted search traffic allocation.
    Keywords: E-commerce, Search, Entry, Platform Design, Entrepreneurship
    JEL: D83 L11 L26 L81
    Date: 2020–10
  4. By: Aldén, Lina (Department of Economics and Statistics, Linnaeus University); Bastani, Spencer (Institute for Evaluation of Labour Market and Education Policy (IFAU)); Hammarstedt, Mats (Department of Economics and Statistics, Linnaeus University); Miao, Chizheng (Department of Economics and Statistics, Linnaeus University)
    Abstract: We study ethnic differences in long-term self-employment in Sweden combining population-wide register data and a unique survey targeting a large representative sample of the total population of long-term self-employed. Using the registers, we analyze the evolution of labor and capital income during the first ten years following self-employment entry. We find that, while ethnic differences in labor income become smaller over time, ethnic differences in capital income grow stronger during the course of self-employment. These findings are robust to controlling for factors such as organizational form and type of industry. We use the survey data to gain further insights into these differences, and show that immigrant self-employed experience more problems, earn less, but work harder than native self-employed. They also have a less personal relation to their customers, do not enjoy their work as much as natives, and appear to have different perspectives on self-employment in general.
    Keywords: Self-employment; Immigration; Integration; Long-term; survey
    JEL: D31 J15 J24 L26
    Date: 2020–10–06
  5. By: Jérémie BERTRAND (IESEG School of Management, Finance Department 3, rue de la digue, 59000 Lille - France); Pierluigi MURRO (LUISS University, Department of Business and Managemen, Viale Romania, 32 00197 Rome – Italy)
    Abstract: We analyze the use of trade credit as a substitute for relationship lending credit when firms cannot otherwise obtain such credit. Using a sample of SMEs from the Survey of Italian Manufacturing Firms, we show that when opaque firms seeking relationship credit encounter transactional banks, they use a greater portion of trade credit. This findings suggest that opaque firms substitute their missing relationship credit with trade credit, because trade creditors are more able to evaluate soft information. The results depend on firm characteristics, the nature of the bank, and the size of the firms’ banking pool.
    Keywords: Banks, Lending Technologies, Small Business, Trade Credit
    JEL: G21 L14 L22
    Date: 2020–10
  6. By: Sin Tian Ho, Cynthia (Department of Real Estate and Construction Management, Royal Institute of Technology); Fili, Andreas (Department of Real Estate and Construction Management, Royal Institute of Technology)
    Abstract: In this paper, the effect of local entrepreneurial attitudes and proximity to bank branches on new firm formation in different industries is analysed using spatial Durbin models for a panel dataset of two years — 2007 and 2013 on the municipal level. Previous studies have shown that a high level of regional social legitimacy increases the demand for entrepreneurship due to perceivably better access to resources and the entrepreneur has also higher confidence in his ability to run a business in the area (Kibler, Kautonen, and Fink 2014). Furthermore, previous studies has also shown that the proximity of banks is important for local entrepreneurial activity (Agarwal and Hauswald 2010; Backman 2015; Backman and Wallin 2018; Ho and Berggren 2020). It is also noted that every entrepreneurial ecosystem in each municipality is unique and can be industry specific. The results from our spatial models show that an increase in the local public attitudes has positive significant effects on new firm formation in these following industries: manufacturing, construction and ‘financial and business services’ industries. Our results also show that when weighted mean distance to the nearest bank branch doubled, there is a 4.5% decrease in the total number of new firms formed. Weighted mean distance to the nearest bank branch has also been shown to lower new firm formation especially in two industries — ‘financial and business services’ and ‘education, health and others’.
    Keywords: Attitudes; Banks; New Firm Formation; Industries; Spatial Analysis
    JEL: C23 G21 L26
    Date: 2020–10–12
  7. By: Ichiro Iwasaki (Institute of Economic Research, Hitotsubashi University, Tokyo, Japan); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Czech Academy of Sciences, Prague, Czech Republic; CESifo, Munich, IOS, Regensburg); Yoshisada Shida (Economic Research Institute for Northeast Asia (ERINA), Niigata, Japan)
    Abstract: In this paper, we traced the survival status of 94,401 small businesses in 17 European emerging markets from 2007–2017 and empirically examined the determinants of their survival, focusing on institutional quality and financial development. We found that institutional quality and the level of financial development exhibit statistically significant and economically meaningful impacts on the survival probability of the SMEs being researched. The evidence holds even when we control for a set of firm-level characteristics such as ownership structure, financial performance, firm size, and age. The findings are also uniform across industries and country groups and robust beyond the difference in assumption of hazard distribution, firm size, region, and time period.
    Keywords: small business; institutions; financial development; survival analysis; European emerging markets
    JEL: C14 D02 D22 G33 M21
    Date: 2020–10
  8. By: Gabriel Chodorow-Reich; Olivier Darmouni; Stephan Luck; Matthew C. Plosser
    Abstract: Using loan-level data covering two-thirds of all corporate loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. We test the model's prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020Q1 and 2020Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. Differences in demand for liquidity cannot fully explain the differences in drawdown rates by firm size, as we show that large firms also exhibited much higher sensitivity of drawdowns to industry-level measures of exposure to the COVID recession. Finally, we match the bank data to a list of participants in the Paycheck Protection Program (PPP) and show that SME recipients of PPP loans reduced their non-PPP bank borrowing in 2020Q2 by between 53 and 125 percent of the amount of their PPP funds, suggesting that government-sponsored liquidity can overcome private credit constraints.
    JEL: E51 G21 G32
    Date: 2020–10
  9. By: Oskar KOWALEWSKI (IESEG School of Management & LEM-CNRS 9221); Paweł PISANY (Institute of Economics, Polish Academy of Sciences)
    Abstract: This study investigates the determinants of fintech company creation and activity using a cross-country sample that includes developed and developing countries. Using a random effect negative binomial model and explainable machine learning algorithms, we show the positive role of technology advancements in each economy, quality of research, and more importantly, the level of university-industry collaboration. Additionally, we find that demographic factors may play a role in fintech creation and activity. Some fintech companies may find the quality and stringency of regulation to be an obstacle. Our results also show the sophisticated interactions between the banking sector and fintech companies that we may describe as a mix of cooperation and competition.
    Keywords: fintech, innovation, start up, developed countries, developing countries
    JEL: G21 G23 L26 O30
    Date: 2020–07
  10. By: Melesse, Wondemhunegn Ezezew
    Abstract: Businesses, consumers, and individual investors rely on a host of debt instruments when their internal resources are insufficient. This paper explores the determinants of debt financing choices among small-scale manufacturing enterprises in Ethiopia—with special focus on the role of government policies. The study exploits survey data gathered from 1321 enterprises in the Amhara region of Ethiopia and employs conditional mixed process (CMP) estimation technique to isolate the key drivers of firm debt levels. The major econometric findings confirm that enterprises that had some debt mix in their startup capital are more likely to be in higher debt categories than those enterprises that kick start exclusively with their own internal resources. In addition, the results also reveal that self-reported profitability, firm age, ownership structure, access to business development services, and receipt of bureaucratic support during enterprise formation process have strong effects on the degree of firms’ indebtedness. However, firm size, gender, and owner-manager’s education have no discernible correlation with reported debt levels in the sampled firms.
    Keywords: debt financing, small-scale enterprises, ordered probit, conditional mixed process, Ethiopia
    JEL: D04 G28 M21
    Date: 2020–09–20
  11. By: Bauer, Johannes M.; Prado, Tiago S.
    Abstract: This paper relates to current concerns about the high concentration of digital platform markets and the effects of large companies such as Amazon, Facebook, Google, and Microsoft, on innovation. Several stakeholders and analysts assert that digital platforms have become so dominant that they slow the speed of innovation and that regulatory and antitrust intervention is needed to protect the public interest. Despite the strong claims, few systematic studies have examined the positive and negative effects of digital platforms on innovation. This paper seeks to contribute to closing this gap by pursuing three overarching objectives. First, it develops a theoretical framework to deepen our understanding of the multi-faceted relations between digital platforms and innovation. Second, it discusses which empirical evidence could be used to examine the multitude of potential, positive and negative, impacts. Third, the paper discusses the implications of these largely conceptual arguments for the design of policies toward digital platforms. In contrast to traditional regulatory theory and practice, which often uses static economic optimization models, much of innovation economics emphasizes that incentives to introduce new processes, create new products, services, designs, and business models are strongest in out-of-equilibrium processes. However, there are conditions under which market power and the interests of large companies do not align well with the broader goals of vibrant innovation. The paper argues that the most promising instruments to address these issues affect the constitution of digital markets.
    Keywords: Digital platforms,innovation economics,innovation ecosystems,market power,regulation,competition policy
    JEL: L86 L96
    Date: 2020

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