nep-ent New Economics Papers
on Entrepreneurship
Issue of 2020‒11‒23
eleven papers chosen by
Marcus Dejardin
Université de Namur

  1. Extreme Events, Entrepreneurial Start-Ups, and Innovation: Theoretical Conjectures By Gries, Thomas; Naudé, Wim
  2. Demographics and the Decline in Firm Entry: Lessons from a Life-Cycle Model By Röhe, Oke; Stähler, Nikolai
  3. Industrialization under Medieval Conditions? Global Development after COVID-19 By Naudé, Wim
  4. It's a man's world? The rise of female entrepreneurship during privatization in Serbia By Ivanović, Vladan; Kufenko, Vadim
  5. Discrimination in the Venture Capital Industry: Evidence from Two Randomized Controlled Trials By Ye Zhang
  6. EU start-up calculator: impact of COVID-19 on aggregate employment: Scenario analysis for Denmark, Estonia, Finland, France, Latvia, Lithuania, Portugal and Sweden By Cristiana Benedetti Fasil; Petr Sedlacek; Vincent Sterk
  7. Finance, Gender, and Entrepreneurship: India's Informal Sector Firms By Gang, Ira N.; Natarajan, Rajesh Raj; Sen, Kunal
  8. Monetary Policy and Firm Dynamics By Matthew Read
  9. Start-up Acquisitions and Innovation Strategies By Schmutzler, Armin; Letina, Igor; Seibel, Regina
  10. Corporate Governance, Business Group Governance and Economic Development Traps By Luis Dau; Randall Morck; Bernard Yeung
  11. Naive Analytics Equilibrium By Berman, Ron; Heller, Yuval

  1. By: Gries, Thomas (University of Paderborn); Naudé, Wim (RWTH Aachen University)
    Abstract: In light of the COVID-19 pandemic, we scrutinize what has been established in the literature on whether entrepreneurship can cause and resolve extreme events, the immediate and long-run impacts of extreme events on entrepreneurship, and whether extreme events can positively impact (some) entrepreneurship and innovation. Based on this, we propose a partial equilibrium model to provide several conjectures on the impact of COVID-19 on entrepreneurship and derive policy recommendations for recovery. Our model's comparative statics shows that entrepreneurship recovery will benefit from aggregate demand-side support measures, combined with direct subsidies for start-ups, firms' revenue losses, and loan liabilities, as well as from actions that promote income redistribution.
    Keywords: entrepreneurship, innovation, COVID-19, extreme events, development
    JEL: I18 L26 L53 M13
    Date: 2020–11
  2. By: Röhe, Oke; Stähler, Nikolai
    Abstract: Since the mid-1970s, firm entry rates in the United States have declined significantly. This also holds for other OECD countries over the past years. At the same time, these economies experienced a gradual process of population aging. Applying a tractable life-cycle model with endogenous firm dynamics, we show that falling US firm entry rates can be explained by demographic transition. Specifically, our model simulations suggest that aging can account for up to one third of the observed decrease in US firm entry rates. In addition to the negative effects of a slowdown in working-age population growth on firm entry, our analysis points out that an increase in longevity may also be an important factor contributing to the decline in business dynamism, weighing on both firm entry and exit rates.
    Keywords: Life expectancy,Demographic transition,Endogenous firm dynamics
    JEL: H25 L52 E20 E62 L10 O30
    Date: 2020
  3. By: Naudé, Wim
    Abstract: Industrialization is vital for inclusive and sustainable global development. The two engines of industrialization - innovation and trade - are in danger of being compromised by the COVID-19 pandemic, under conditions increasingly reminiscent of the medieval world. It comes at a time when innovation had already been stagnating under guild-like corporate concentration and dominance, and the multilateral trade system had been buckling under pressure from a return to mercantilist ideas. The COVID-19 pandemic may cause a permanent reduction in innovation and entrepreneurship and may even bring the 4th industrial revolution (4IR) to a premature end. Hence the post-COVID-19 world may be left with trade as the only engine for industrialization for the foreseeable future. If the global community fails to fix the multilateral trade system, the world may start to resemble the Middle Ages in other, even worse, aspects.
    Keywords: COVID-19,innovation,trade,development,industrialization,industrial policy
    JEL: F01 F13 L26 L52 O25 O30
    Date: 2020
  4. By: Ivanović, Vladan; Kufenko, Vadim
    Abstract: The relationship between female empowerment and economic development is one of the most complex examples of reverse causality, yet multiple scholars acknowledge that female empowerment promotes economic progress. One of the crucial aspects of female empowerment is female entrepreneurship; however, the literature on the emergence of female entrepreneurship is scarce. We focus on the rise of female entrepreneurship in Serbia and collect an extensive biographical dataset of women, who took part in privatization. Although women enjoyed the same de jure rights as men, they faced a number of informal restrictions such as i) patriarchal values, limiting the role of women in the society and ii) occupations in low-wage sectors, making it difficult to accumulate capital. Analyzing the determinants of failures of the newly privatized firms during 2002-2019 we find a significant negative relationship between the risks of failure and the cases of own independent entrepreneurial success of women prior to privatization as well as the cases, in which only the entrepreneurial success of husbands of these women was registered. This relationship is robust to controlling for diverse characteristics of firms and to inclusion of ownership duration. We also find that the presence of influential husbands in the background was not significantly related to the subsequent change of ownership. Although the ownership change was registered for the majority of firms in our sample, we find that during the Serbian privatization women managed to build up on their own entrepreneurial success, which contributed to female empowerment. These findings can be relevant for understanding the aftermath of privatizations with respect to gender inequality in other transition countries.
    Keywords: entrepreneurship,female entrepreneurship,economics of gender,political,economy,transition
    JEL: J16 L26 D72 P26
    Date: 2020
  5. By: Ye Zhang
    Abstract: This paper examines discrimination based on startup founders' gender, race, and age by early-stage investors, using two randomized controlled trials with real venture capitalists. The first experiment invites U.S. investors to evaluate multiple randomly generated startup profiles, which they know to be hypothetical, in order to be matched with real, high-quality startups from collaborating incubators. Investors can also donate money to randomly displayed startup teams to show their anonymous support during the COVID-19 pandemic. The second experiment sends hypothetical pitch emails with randomized startups' information to global venture capitalists and compares their email responses by utilizing a new email technology that tracks investors' detailed information acquisition behaviors. I find three main results: (i) Investors are biased towards female, Asian, and older founders in "lower contact interest" situations; while biased against female, Asian, and older founders in "higher contact interest" situations. (ii) These two experiments identify multiple coexisting sources of bias. Specifically, statistical discrimination is an important reason for "anti-minority" investors' contact and investment decisions, which was proved by a newly developed consistent decision-based heterogeneous effect estimator. (iii) There was a temporary, stronger bias against Asian founders during the COVID-19 outbreak, which started to fade in April 2020.
    Date: 2020–10
  6. By: Cristiana Benedetti Fasil (European Commission – JRC); Petr Sedlacek (University of Oxford, UK, CFM-LSE & CEPR); Vincent Sterk (University College London, UK, CFM-UCL & CEPR)
    Abstract: Early data show that the COVID-19 pandemic has affected particularly strongly start-up business activity. This may have dramatic and lasting effects on aggregate employment which persist as the cohort of new firms age. To assess such an impact, we developed the EU start-up calculator. A first application targeted to Austria, Belgium, Germany, Hungary, Italy and Spain is discussed in Benedetti Fasil, SedláÄ ek and Sterk (2020). The EU start-up calculator is an empirical tool that allows to conduct scenario analysis to compute the impact that the disruption of start-up activity has on aggregate employment on EU Member States and their economic sectors. In this paper, we simulate the effects of a strong (i.e. of magnitude equivalent to the Great Recession of 2008 and 2009) but short-lived (i.e. lasting one-year) crisis in Denmark, Estonia, Finland, France, Latvia, Lithuania, Portugal and Sweden. This shock generates important and persistent job losses in all the countries ranging between 0.9 (Portugal) and 4.5% (Latvia) from the employment trend in 2020 and results in a computed potential cumulative loss of jobs for the period 2020-2030 ranging from 59,000 (Estonia) to 798,000 (France). The potential negative impact is particularly high in Estonia, France, Latvia, Lithuania and Portugal, as well as in the service sector, which are characterized by a high firm turnover and a reliance on start-ups and young firms for job creation. We also find that in most countries the deterioration of the survival rate of young firms plays an important role in driving employment, seconded by the number of new entrants. As a consequence, policies aimed at supporting young firms and incentivizing the creation of new ones may significantly mitigate the medium-term effect of the pandemic. In fact, when we simulate bounce-back scenarios where the number of firms entering the economy rapidly increases in 2021, in every country the outlook is significantly improved, the recovery is faster and the aggregate job loss is lower.
    Keywords: COVID-19, start-ups, employment
    Date: 2020–10
  7. By: Gang, Ira N. (Rutgers University); Natarajan, Rajesh Raj (Sikkim University); Sen, Kunal (University of Manchester)
    Abstract: How does informal economic activity respond to increased financial inclusion? Does it become more entrepreneurial? Does access to new financing options change the gender configuration of informal economic activity and, if so, in what ways and what directions? We take advantage of nationwide data collected in 2010/11 and 2015/16 by India's National Sample Survey Office on unorganized (informal) enterprises. This period was one of rapid expansion of banking availability aimed particularly at the unbanked, under-banked, and women. We find strong empirical evidence supporting the crucial role of financial access in promoting entrepreneurship among informal sector firms in India. Our results are robust to alternative specifications and alternative measures of financial constraints using an approach combining propensity score matching and difference-in-differences. However, we do not find conclusive evidence that increased financial inclusion leads to a higher likelihood of women becoming entrepreneurs than men in the informal sector.
    Keywords: entrepreneurship, financial constraints, gender, informal sector, difference-in-differences, India
    JEL: O12 G28 L26
    Date: 2020–11
  8. By: Matthew Read
    Abstract: Do firm dynamics matter for the transmission of monetary policy? Empirically, the startup rate declines following a monetary contraction, while the exit rate increases, both of which reduce aggregate employment. I present a model that combines firm dynamics in the spirit of Hopenhayn (1992) with New-Keynesian frictions and calibrate it to match cross-sectional evidence. The model can qualitatively account for the responses of entry and exit rates to a monetary policy shock. However, the responses of macroeconomic variables closely resemble those in a representative-firm model. I discuss the equilibrium forces underlying this approximate equivalence, and what may overturn this result.
    Date: 2020–11
  9. By: Schmutzler, Armin; Letina, Igor; Seibel, Regina
    Abstract: This paper provides a theory of strategic innovation project choice by incumbents and start-ups. We apply this theory to identify the effects of prohibiting start-up acquisitions. We differentiate between killer acquisitions (when the incumbent does not commercialize the acquired start-up's technology) and acquisitions with commercialization. A restrictive acquisition policy reduces the variety of research approaches pursued by the firms and thereby the probability of discovering innovations. Furthermore, it leads to strategic duplication of the entrant's innovation by the incumbent. These negative innovation effects of restrictive acquisition policy have to be weighed against the pro-competitive effects of preserving potential competition.
    Keywords: innovation,acquisitions,mergers,competition,start-ups
    JEL: O31 L41 G34
    Date: 2020
  10. By: Luis Dau; Randall Morck; Bernard Yeung
    Abstract: Every firm in a developed economy relies on the mere existence of countless other firms to keep prices competitive up and down all supply chains. Without this network externality, no firm forms; and without many firms, no network forms; locking in a low-income trap. Business group governance supersedes corporate governance in most developing economies and in the rapid catch-up development phases of most high-income economies by hierarchically coordinating firms in multiple industries, internalizing this network externality. High-income economies grow via creative destruction - creative firms imposing a negative externality upon firms they destroy or disrupt, but a larger positive innovation-related externality upon the whole economy. Business groups avoid creative self-destruction, innovation by one group firm that disrupts another. Corporate governance supersedes business group governance in high-income economies to facilitate productivity growth. If business group governance does not retreat, productivity growth is impaired and a middle-income trap can result.
    JEL: B26 G3 N20 O1 P12
    Date: 2020–11
  11. By: Berman, Ron; Heller, Yuval
    Abstract: We study interactions with uncertainty about demand sensitivity. In our solution concept (1) firms choose seemingly-optimal strategies given the level of sophistication of their data analytics, and (2) the levels of sophistication form best responses to one another. Under the ensuing equilibrium firms underestimate price elasticities and overestimate advertising effectiveness, as observed empirically. The misestimates cause firms to set prices too high and to over-advertise. In games with strategic complements (substitutes), profits Pareto dominate (are dominated by) those of the Nash equilibrium. Applying the model to team production games explains the prevalence of overconfidence among entrepreneurs and salespeople.
    Keywords: Advertising, pricing, data analytics, strategic distortion, strategic complements, indirect evolutionary approach.
    JEL: C73 D43 M37
    Date: 2020–10–28

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