Knowing the Who: Identifying the effect of entrepreneurs on firms

Do entrepreneurs matter?

Sascha O. Becker (s.o.becker@warwick.ac.uk), CAGE University of Warwick

Hans K. Hvide (hans.hvide@econ.uib.no), University of Bergen, CEPR and University of Aberdeen

Abstract

Within the broad literature on firm performance, economists have given little attention to entrepreneurs. We use deaths of more than 500 entrepreneurs as a source of exogenous variation, and ask whether this variation can explain shifts in firm performance. Using longitudinal data, we …find large and sustained effects of entrepreneurs at all levels of the performance distribution. Entrepreneurs strongly affect firm growth patterns of both very young firms and for firms that have begun to mature. We do not find significant differences between small and larger firms, family and non-family firms, nor between firms located in urban and rural areas, but we do find stronger effects for founders with high human capital. Overall, the results suggest that an often overlooked factor –individual entrepreneurs plays a large role in affecting firm performance.

URL: http://d.repec.org/n?u=RePEc:wrk:warwec:1002&r=his
Review by Beatriz Rodriguez-Satizabal

Promoting entrepreneurship has been fashionable since the 1980s and there are no signs of it going away. Messages about the importance of becoming your own boss, giving something back to the society, and be an active agent of the economy are there to be seen everywhere on a daily basis. Governments around the world are constantly discussing new ways to increase the number of entrepreneurs and we also see on a regular basis articles within broadsheet newspapers and the popular media trying to identify and challenge those who see themselves grow by creating firms and markets.

In this paper, distributed by NEP-HIS on 2013-01-28, Hvide and Becker question the outcomes of investments to promote entrepreneurship during the last 20 years: Do the entrepreneurs really deliver technological change? Is it sustainable for an emerging country to allow a growing number of entrepreneurs? Is the longevity of the firm related to the characteristics of the founder? Should entrepreneurs be employees in their firms?

The idea of the entrepreneur as an important agent is not entirely new. But studying the role of the entrepreneur within the firm and its effect over its performance has been neglected. In this regard evidence documented in this paper is a step towards a better understanding of the effect of the entrepreneur over the performance of the firm.

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Based on the assumption that the death of an entrepreneur has an immediate effect on the firm due to the changes in corporate governance that it implies, Becker and Hvide constructed a database of Norwegian firms consisting of incorporated, limited liability companies for the period 1999 to 2007. The authors identified a total of 500 firms where the founding entrepreneurs died, providing an opportunity to quantify whether entrepreneurs have a causal effect on firm performance or not.

As a result of a thorough statistical analysis, the authors find that the effects are large and strong. The entrepreneur shapes the firm and affects its growth patterns. Entrepreneurs matter because of the loss of human capital (but, interestingly, the effect could be also negative as higher performance takes place after death of the founder). Surprisingly, Becker and Hvide do not find any difference between small and large firms, family and non-family owned, nor between firms located in rural or urban areas. This last result is certainly, in my view, an open call to bring the individual characteristics of the entrepreneur to the study of the firm, which is a unit that needs the human capital factor to success.

This paper is a valuable contribution to those studying entrepreneurship because it positions the role of the individual deep into the nature of firm performance rather than having it as a separate unit. It calls our attention over the widely spread assumption that entrepreneurs also innovate within the organization (Schumpeter) and have effects in and out of it (Baumol). If entrepreneurs matter, then knowing the who, why and how must be part of the discussion on public policy to promote entrepreneurship. Moreover, when in emergent countries the close relationship between the successful entrepreneurs and the government still persists.

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4 thoughts on “Knowing the Who: Identifying the effect of entrepreneurs on firms

  1. Paloma Fernández

    Very interesting study, and discussion. Only an issue to discuss: collective dynamism of businesses beyond individuals is not correctly measured, and compared to static effects of immediate death of founder. If institutions and cultural path dependence could be taken into account, maybe authors could analyze that there may be in some places, periods and sectors longer business lyfe beyond death of founder. Family business historians, and business demography, have long time ago demonstrated the thesis of this working paper: that only a minority of businesses survive the founder. But this conclusion is often an average of businesses from different sectors and territories. Endurance and longevity, as competitiveness, often have a close relationship with sector specialization and embeddedness of that specialization in a territory. Districts are craddle for business survival, not always under the same legal name. What do we want to measure? Longevity of a given registered company, or entrepreneurship of the people working on a business and how they use tacit and intangible know how if one firm in other firms. Entrepreneurial sectors, in a territory, with a dynamic evolutionary perspective could provide more real knowledge about flows of entrepreneurs from one business to another. The reinvention of old districts like those in the Lancashire or Catalonia are good examples about the need to see entrepreneurship in an aggregated dynamic perspective. Companies can disappear, but we still see entrepreneurship in some sectors, and regions old and new. Literature about how innovation (is not that the key idea of entrepreneurship?) often takes place in communities of knowledge, provides many examples about how collective entrepreneurship is what a sector or territory really needs. In many communities there are leading figures, but they need teams, and teams can survive and must survive leaders. We should measure the creation of conditions that favour succession of entrepreneurship between individuals and groups. A founder that is not able tocreate teams can create short-term entrepreneurship. A business founder that creates teams creates conditions for the transfer of long-term entrepreneurship.

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  2. Russell Pittman

    I remember hearing — don’t know if it’s true — that the price of the stock of the Disney Company surged on the news of Walt’s death, since he had refused to re-release old movies for which there was a continuing demand. Same for Giant Foods — when old Izzy Cohen died, the company immediately discontinued the bulk product aisle that had been his personal project. Of course, 2 anecdotes — even if true — do not a dataset make.

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  3. Pingback: The incentives for entrepreneurs | Johan Fourie's blog

  4. Pingback: The incentives for black and white entrepreneurs in South-Africa | Real-World Economics Review Blog

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