How young firms achieve growth: reconciling the roles of growth motivation and innovative activities

This special issue focuses on entrepreneurship, innovation and enterprise dynamics, as these key components of any prospering economy are at the heart of the current policy discussion. It gathers the latest national and comparative cross-country evidence about: new business venture formation and the role of framework conditions in fostering entrepreneurial activities; the determinants and outcomes of firms’ innovative activities and, more generally, of business and innovation dynamics; and the determinants and patterns of post-entry firm growth performance. The contributions synthesised in this introductory piece all rely on sound micro-level data and robust econometrics and propose novel findings that are relevant for policy making. Among them, that risk aversion encourages individuals to invest in balanced skill profiles, making them more likely to become entrepreneurs; and that while micro firms may grow when they are young, they are less likely to do so when old.     

Entrepreneurship: skills and financing

This article analyzes an occupational choice model with risk-averse agents who are heterogeneous in terms of skills and wealth in a setting with financial frictions. We show that high- and middle-wealth individuals endowed with a balanced portfolio of skills upgrade their skills so that the resulting portfolio of skills is more balanced and choose entrepreneurship. In contrast, middle-wealth individuals endowed with an unbalanced portfolio of skills and low-wealth individuals specialize in the skill in which they have an absolute advantage and choose paid employment. Deeper financial development, a more balanced portfolio of skills, lower entrepreneurial risk, and a higher liquidation value for projects result in more entrepreneurship and higher welfare, while wealth redistributions and financial subsidies to entrepreneurs have an ambiguous effect on welfare.     

Entrepreneurship as a utility maximizing response

Research on entrepreneurship has investigated what entrepreneurs do, what happens when they act as entrepreneurs, and why they act as entrepreneurs. This paper contributes to the latter investigation, and specifically asks why some people choose to be entrepreneurs, while others choose to be employees. Responding to prior literature recognizing the lack of a coherent theory of entrepreneurship and calling for a rigorous examination of the decision to become an entrepreneur, this paper presents an economic model of the career decision. We postulate that the individual chooses an entrepreneurial career path, or a career as an employee, or some combination of the two, according to which career path promises maximal utility (or psychic satisfaction).We assume that the individual's utility from any particular occupation, whether self-employed or employed, depends on income (which depends in turn on ability), as well as working conditions such as decision-making control, risk exposure, work effort required, and other working conditions (net perquisites) associated with that occupation. Individuals will exhibit either preference or aversion towards each of the specified working conditions, and it is the degree of that preference or aversion, in conjunction with the quantum of each working condition, which determines the total utility that the individual will derive from each particular occupation.We show that all employees will have an incentive to be self-employed (if they could assemble the same resources as their employer). Also, the greater their managerial and entrepreneurial ability, the greater will be their incentive to be self-employed, other things being equal. Next, we show that a more positive attitude to work (i.e., a lesser aversion to work effort required) provides a greater incentive to be self-employed.The individual's degree of risk aversion also influences the choice to be an entrepreneur. The more tolerant one is of risk bearing, the greater the incentive to be self-employed. Similarly, the greater the preference for independence, or decision-making control, the greater the incentive to be self-employed. Finally, it is noted that perquisites (and avoidance of irksome elements) can potentially be controlled to a greater degree when self-employed, so the individual will consider the differences in these other working conditions when contemplating a career choice.But it is the sum of the utility and disutility from these sources which determines the career decision. Thus, we demonstrate that positive attitudes toward risk, work, and independence are neither necessary nor sufficient conditions for a person to want to be an entrepreneur. Entrepreneurial abilities and attitudes are desirable in employment situations, therefore, an employer may choose to bribe an entrepreneurial individual to be an employee by offering more income and greater independence, for example.We demonstrate that firms recruiting employees, or venture capitalists considering funding an entrepreneur, should in their own best interests investigate the person's attitudes toward income, risk, work, and independence as well as their abilities, as these attitudes underpin the person's worth as an employee and their incentive to be self-employed. Management educators should design programs which enhance the entrepreneurial abilities and attitudes of individuals, and the individuals themselves should consider their `attitudinal' make-up before committing to entrepreneurship.     

A tale of two life stages: The imprinting effect of macroeconomic contractions on later life entrepreneurship

Studies argue that macroeconomic contractions create immediate incentives for individuals to pursue entrepreneurship. However, research has not addressed whether past macroeconomic contractions imprint on individuals and influence their future entrepreneurship. Integrating literature on the business cycle and imprinting with insights from lifespan psychology, we develop and test competing theoretical arguments aligned to two distinct life stages about when a macroeconomic contraction will imprint on individuals to influence their future entrepreneurship, and how such effects are imprinted. Our findings show that only contractions experienced during early adulthood influence entrepreneurship and this effect is transmitted culturally via country-level preferences for time discounting.     

Part-time entrepreneurship and financial constraints: evidence from the Panel Study of Entrepreneurial Dynamics

To date, entrepreneurship literature overlooks part-time entrepreneurs, i.e., those who devote time to entrepreneurial ventures and wage employment at the same time. In contrast, recent evidence from the Global Entrepreneurship Monitor, a large cross-national study on the level of entrepreneurial activity, establishes that 80% of nascent entrepreneurs also hold regular wage jobs. This paper offers a model of entrepreneurial entry under financial constraints where individuals choose between wage employment, part-time, and full-time entrepreneurship. Those who become nascent entrepreneurs must further decide how much capital to invest and what proportion of time to spend in business. I test this model using data from the Panel Study of Entrepreneurial Dynamics, which covers start-ups and nascent entrepreneurs. My findings show that part-time entrepreneurs are not affected by financial constraints. The analysis suggests that industry barriers, risk aversion, and learning by doing might be other factors worth investigating.     

The influence of people on the performance of IPO firms

Until the mid-1990s, the study of initial public offerings (IPOs) fell mainly under the purview of the finance literature. Within the last 10 years, however, management and entrepreneurship scholars have delved more into this subject area, as well. This article summarizes research examining IPO firms that has appeared in management and entrepreneurship journals, highlighting in particular the influence of individuals (namely executives and boards of directors) on IPO firm outcomes.     

International entrepreneurial SMEs in the muslim world: The role of religion in the GCC countries

Recent studies examining the internationalisation of SMEs in emerging economies have observed that religion affects international market entry, which suggests that specific cultural aspects, such as religion, have not hitherto received enough attention. Hence, this study examines a theme that has seemingly escaped the research agenda: how does religion affect SMEs’ internationalisation? The study draws empirical evidence from 10 manufacturing SMEs located in the Gulf Cooperation Council (GCC) region. Through an embedded approach to case study research, the study queries the role of religion in the development of intra-Muslim internationalisation and contributes to the scant literature that examines the impact of Islamic values on international business activities. The findings show three dimensions of Islamic entrepreneurship, viz. regional rather than international networking orientation, risk aversion and proactiveness.     

Only the lonely? The influence of the spouse on the transition to self-employment

Previous research showed that married individuals are overrepresented among the self-employed. Few studies proposed skill-spillover between the spouses within the marriage as an explanation. This paper deviates from the previous research by exploring different relationship contexts (e.g., cohabitation, being married or divorced, a widow(er) or single) and the role of partner influences under these contexts. It argues that the interaction between gender and relationship status implies variation in not only resources but also constraints, and hence sorts individuals into two different types of self-employment: entrepreneurial self-employment (i.e., incorporated business) and unincorporated self-employment. Using “Panel Study of Income Dynamics (PSID) 1965–2005” data, results of the competing risk models show that marital status contributes to both types of self-employment transitions, especially for men, but also for women. Cohabitation is a less supportive context for entrepreneurship and a partner’s self-employment experience increases only women’s likelihood of entering into entrepreneurship. These results suggest that skill-spillover between partners might be context dependent and only in one direction (from men to women).     

How Do Risk Attitudes Differ within the Group of Entrepreneurs? The Role of Motivation and Procedural Utility

Starting a business involves risk and, thus, requires a risk‐taking attitude. The concept of risk and entrepreneurship has been widely discussed in the entrepreneurship literature; most studies compare entrepreneurs with nonentrepreneurs such as managers or bankers. So far, little research exists on the risk attitudes of the different types of entrepreneurs—those who pursue a new business because of opportunity and those who do so through necessity. This study aims to fill this gap. Our particular focus is on individuals' motivations to start their businesses and the nonmonetary returns from entrepreneurship. The results show that opportunity entrepreneurs are more willing to take risks than necessity entrepreneurs. In addition, those who are motivated by creativity are more risk tolerant than other entrepreneurs. The study contributes to the literature about both risk attitudes of entrepreneurs and necessity and opportunity entrepreneurship.     

Measuring entrepreneurship over time

This article is a review of three measurement issues that impact the study of entrepreneurship over time: (1) level of analysis difference between firms and individuals, (2) differences between rate and stock measures, and (3) the effects of choosing particular time frames on subsequent analytical results. Based on theory that views entrepreneurship as depending on ownership rights (Hawley 1907), this article develops a longitudinal measure of entrepreneurship in the United States—the number of organizations per capita. The problems and advantages of using a measure based on organizations per capita as an indicator of entrepreneurship is examined.Understanding how and what is being measured in studies of changes in entrepreneurship over time is an important issue for academic researchers and public policy makers. Measurement of changes in entrepreneurship over time can shed light on important research questions and public policy issues about entrepreneurship. For example, is entrepreneurship increasing in the United States? If entrepreneurship is increasing, is this trend comparable to any previous time periods, or is the current increase in entrepreneurship a new or unique social phenomenon? What influences changes in entrepreneurship over time?The choice of certain measures of entrepreneurship is likely to influence the answers to these questions. For example, the measures used in an entrepreneurship study are an implicit specification of one's views of entrepreneurship (e.g., entrepreneurship as self-employment or firm creation), and few measures of entrepreneurship reflect critical changes in important environmental influences (e.g., technological change) because of short measurement time frames. Therefore, determining the contribution of entrepreneurship to the well-being of an economy is dependent on understanding what measures of entrepreneurship are utilized for making these evaluations and the time frame used for these measures.We review three measurement issues that impact the study of entrepreneurship over time: (1) level of analysis differences between firms and individuals, (2) differences between rate and stock measures, and (3) the effects of choosing particular time frames on subsequent analytical results. Based on theory that views entrepreneurship as depending on ownership rights (Hawley 1907) this article develops a longitudinal measure of entrepreneurship in the United States—the number of organizations per capita.Studies of entrepreneurship focus on either individual level activity (e.g., self-employment) or on firm level activity (e.g., new incorporations). Self-employment research focuses on individuals who employ themselves; that is, individuals who report wages, but not wages paid to them by other individuals or organizations. In most studies of the self-employed, firm founders would, therefore, be classified as wage earners and not as entrepreneurs. New firm research focuses on the rate of new firm entrants, typically measured as new incorporations, so such businesses as proprietorships or partnerships will not be counted.A rate is a change from one state to another (e.g., the number of people who become self-employed for a specific year, or the number of new firms created for a specific year), whereas a stock specifies a particular level (e.g., much like a stock of inventory), such as the number of self-employed, or a particular number of firms, for a specific time period. It is important to recognize that entry into business does not necessarily guarantee remaining in business. For example, although the number of people who become self-employed may increase for a specific year, the number of people who remain self-employed may actually decrease if more of the self-employed fail to remain in business than those that enter. The stock of the self-employed can decrease if the outflow of self-employed is greater than the inflow. For those persons interested in whether entrepreneurial activity results in wealth creation (either individually or societally), the realization that entry into business may not lead to a sustainable business (and therefore no creation of wealth) should be a signal that measuring rates of business formation and rates of self-employment may not be appropriate for this type of research.The factors that drive changes in the rate of entrepreneurship are not likely to be manifest over short timeperiods. Changes in values, attitudes, technology, government regulations, and world economic and social changes have a significant influence on changes in entrepreneurship over time. Studies that have measured entrepreneurship over recent time periods are, therefore, likely to miss the influence of these variables.We introduce a measure of entrepreneurship (organizations per capita) based on a theory of entrepreneurship as ownership. This measure shows the stock of organizations in the U.S. economy over time (from 1857 to 1992). The problems and advantages of using a measure based on organizations per capita as an indicator of entrepreneurship is examined. We conclude with some suggestions for improving entrepreneurship research by recognizing the limitations of particular longitudinal entrepreneurship measures and by challenging the field to seek convergent validity among measures.     

The effect of human capital, social capital, and perceptual values on nascent entrepreneurs�� export intentions

This study investigates the influence of human capital, social capital, and cognition on nascent entrepreneurs' export intentions. The results indicate that while human capital and social capital influence the level of intended export, cognitive characteristics, such as self-efficacy and risk aversion, do not seem to influence entrepreneurs' intended level of export. The study makes three original contributions to international entrepreneurship research. The first one is the focus on “Real” Born Globals, i.e. entrepreneurs who express export intentions in the prefounding phase. The second is the focus on the individual-level factors rather than firm-level factors that explain export. Finally, the effect of experience is investigated from a path-dependency perspective rather than a “the-more-the-better” perspective. Our study suggests that it may be productive for researchers to look further into the concept of intention, as entrepreneurs' decision to internationalize presupposes a conscious intention of carrying out the action. Thus, the factors influencing the decision to internationalize may have been present prior to the founding of the venture.     

Risk attitudes of nascent entrepreneurs–new evidence from an experimentally validated survey

The influence of risk aversion on the decision to become self-employed is a much discussed topic in the entrepreneurial literature. Conventional wisdom asserts that being an entrepreneur means making risky decisions; hence more risk-averse individuals are less likely to become entrepreneurs. In contrast to previous research, we are able to examine empirically whether the decision of starting a business is influenced by objectively measurable risk attitudes at the time when this decision is made. Our results show that in general, individuals with lower risk aversion are more likely to become self-employed. Sensitivity analysis reveals, however, that this is true only for people coming out of regular employment, whereas for individuals coming out of unemployment or inactivity, risk attitudes do not seem to play a role in the decision process.

Predictors and financial outcomes of corporate entrepreneurship: An exploratory study

Today, there is considerable scholarly and managerial interest in corporate entrepreneurship; that is, those activities that enhance a company's ability to innovate, take risk, and seize opportunities in its markets. Corporate entrepreneurship centers on creating new business by penetrating new markets, pursuing new business, or both.Despite the growing recognition and use of corporate entrepreneurship, little empirical research has been done on its antecedents and potential association with company financial performance. To fill this gap in the literature, this study proposes a model that identifies potential environmental, strategic, and organizational factors that may spur or stifle corporate entrepreneurship. The model also highlights the potential associations between corporate entrepreneurship and corporate financial performance.Building on the existing literature, the study advances five hypotheses that operationalize the model. The hypotheses are tested using data from 119 of the Fortune 500 industrial firms, covering the period 1986 to 1989. This exploratory study's results indicate that: (1) environmental dynamism, hostility, and heterogeneity (multiplicity and complexity of environmental components) intensify corporate entrepreneurship; (2) growth-oriented strategies are associated with increased corporate entrepreneurship, whereas a strategy of stability is not conducive to corporate entrepreneurship; (3) the scanning, formal communication, and integration components of formal organizational structure are positively related to corporate entrepreneurship—increased differentiation and extensive controls stifle corporate entrepreneurship; (4) clearly defined organizational values, whether relating to competitors or employees, are positively associated with corporate entrepreneurship; and (5) corporate entrepreneurship activities are associated with company financial performance and reduced systematic risk.     

Strategic intent and performance: The role of resource allocation decisions

The notion that a firm's strategic intent can affect its performance through managerial actions has become prominent in the organization literature. In this research, we propose that strategic aggressive firms will foster decisions that favor holding low levels of slack and low levels of R&D investments, resulting in increased firm ROI, and that a firm's risk preference will moderate the indirect effect of strategic intent on performance. Findings from moderated mediation analyses on data from 130 firms in manufacturing industries support our hypotheses. Specifically, the indirect effect of a firm's strategic intent on a firm's performance is moderated by its risk aversion, such that when risk aversion is high, the indirect effect of strategic intent on performance through slack is strengthened. Similarly, the indirect effect of strategic intent on firm performance through R&D investments is strengthened, when risk aversion is high.     

Entrepreneurship and Risk Aversion

Evans and Jovanovic (1989, Journal of Political Economy 97(4), 808–827) find that wealth is an important determinant of business startups due to liquidity constraints. However, Cressy (2000, Economic Letters 66, 235–240) argues that if risk aversion is a negative function of wealth, Evans and Jovanovic’s empirical results could be spurious and the positive effect of wealth could be due to the omission of risk aversion in the regression equation. In other words, according to Cressy, one’s wealth does not have any effect on business startups once the degree of risk aversion is accounted for. This paper attempts to investigate the validity of Cressy’s conjecture. We empirically examine the effect of wealth on the transition into self-employment, while allowing for the effect of risk aversion. Our empirical findings show that Evans and Jovanovic’s (1989) results are robust, i.e., wealth has a positive effect on business startups even allowing for the confounding effects of risk aversion.     

Insurance Demand Anomalies and Regulation

In recent years, it has become increasingly clear that risk aversion alone cannot explain individuals' demand for insurance. From the perspective of risk aversion, individuals tend to purchase insurance when they should not, refuse to purchase insurance when they should, prefer sub-optimal payouts and allow irrelevant considerations to influence their insurance preferences. This article considers the normative implications of these insurance demand anomalies. It argues that while they are generally the result of consumer mistakes, they may also reflect sophisticated decision making. Given these conflicting explanations, the article explores a spectrum of “libertarian paternalistic” regulatory interventions in insurance markets.     

Revisiting the risk-taking effect of executive stock options on firm performance

While the relation between equity-based compensation and firm performance has been widely discussed, the findings on how executive stock options (ESOs) affect firm value are still inconclusive. This research examines the risk-taking effect of ESOs on firm performance by taking into consideration managers' personal risk aversion. A three-stage-least-squares approach is adopted to examine a simultaneous system of equations describing option compensation, risk-taking, and firm performance. Evidence confirms that ESOs increase managerial risk-taking, but such risk-taking is constrained by managers' personal risk aversion. In addition, evidence indicates that managerial risk-taking induced by ESOs would increase both long-term and near-term stock returns. The negative impact on near-term and the positive impact on long-term returns on investment imply that it takes time for accounting performance to reflect the risk-taking effect of ESOs. These results further indicate that managers focus their concerns more on stock risk and return rather than near-term accounting results.     

Using fuzzy-set qualitative comparative analysis for a finer-grained understanding of entrepreneurship

Entrepreneurship theory has largely been developed and tested using symmetrical correlational methods, effectively describing the sample-average respondent and subsuming individual differences. Such methods necessarily limit investigation of asymmetries that are evident in entrepreneurship, and provide only a single explanation that belies the multiple pathways to entrepreneurship observed in practice. This paper employs a case-based approach—fuzzy-set Qualitative Comparative Analysis (fsQCA)—to identify configurations of antecedent attributes of individuals in groups within samples, thereby revealing asymmetries and multiple entrepreneurial pathways that are otherwise hidden in the data. We explain the application of fsQCA to reveal these common issues in entrepreneurship; demonstrate how fsQCA complements correlational methods and offers finer-grained understanding of individual entrepreneurial behavior; and offer a comprehensive research agenda to build new entrepreneurship theory.     

Active labor market programs’ effects on entrepreneurship and unemployment

Many countries are turning to active labor market programs (ALMP) to increase individuals’ incentive to start a business and to reduce unemployment, but research on the effectiveness of such programs has produced mixed results and is still inconclusive at the macroeconomic level. This article examines the importance of ALMP targeted at entrepreneurship to explain cross-country differences in aggregate entrepreneurship rate. By using GEM data over the period 2002–2013 on OECD countries, our results show a positive impact of ALMP on the rate of necessity entrepreneurship but no significant effect on the rate of opportunity entrepreneurship. We further established that generous unemployment benefits reduce the positive outcome of ALMP on the aggregate rate of necessity entrepreneurship. Moreover, because most businesses started out of necessity do not create new jobs, we find that the economic spin-off of such programs in terms of unemployment reduction is very limited.     

The missing pillar: the creativity theory of knowledge spillover entrepreneurship

Knowledge spillover theory of entrepreneurship and the prevailing theory of economic growth treat opportunities as endogenous and generally focus on opportunity recognition by entrepreneurs. New knowledge created endogenously results in knowledge spillovers enabling inventors and entrepreneurs to commercialize it. This article discusses that knowledge spillover entrepreneurship depends not only on ordinary human capital, but more importantly also on creativity embodied in creative individuals and diverse urban environments that attract creative classes. This might result in self-selection of creative individuals into entrepreneurship or enable entrepreneurs to recognize creativity and commercialize it. This creativity theory of knowledge spillover entrepreneurship is tested utilizing data on European cities.