Tag Archives: open access

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.

Do banks facilitate economic growth? If so, what type?

Banks, free banks, and U.S. economic growth

Matthew Jaremski (Colgate University)
Peter Rousseau (Vanderbilt University)

Abstract

The “Federalist financial revolution” may have jump-started the U.S. economy into modern growth, but the Free Banking System (1837-1862) did not play a direct role in sustaining it. Despite lowering entry barriers and extending banking into developing regions, we find in county-level data that free banks had little or no effect on growth. The result is not just a symptom of the era, as state-chartered banks seem to have strong and positive effects on manufacturing and urbanization.

URL: http://econpapers.repec.org/paper/vanwpaper/vuecon-12-00012.htm
Review by Chris Colvin

Do banks facilitate economic growth, and if so, what type of banks do so best? Matthew Jaremski and Peter Rousseau attempt to answer this question by looking at the economic impact of the entry of “free banks” to the US market for banking services in the mid-nineteenth century.

Free banks, so called because they required no charter, were an early form of financial liberalisation which in the long-run proved to be unsuccessful; by 1863, one third of all the free banks ever created had closed.

The advent of free banking laws lowered entry barriers because any group of individuals could establish a bank, as long as they fulfilled certain requirements set down by the state in which they operated. The incumbent charter banks, by contrast, required significant political lobbying before they were permitted to open.

Jaremski and Rousseau look at a period of US history in which both types of bank operated side-by-side. Using county-level social, financial and economic data, they are able to track the impact, if any, of a bank opening on its locality.

Jaremski and Roussasu find that free banking had little effect on growth

Jaremski and Roussasu find that free banking had little effect on growth

Overall, they find that banks of any kind had a strong effect on local growth, especially in manufacturing. But when differentiating the impact by bank type (charter versus free), charter banks had a positive effect while free banks had little or no effect on growth.

So in conclusion, banks appear to facilitate economic growth, but free banks not so much. Why? The authors reckon it has something to do with: (1) what they were investing in (agriculture rather than manufacture); (2) what backed their note issues (some states required very little stable collateral); and (3) new banking legislation in the 1860s (which saw the advent of national banking).

The Open Access Debate and Economic History

This paper, which was distributed by NEP-HIS 2013-02-03, is an example of an alternative use of working paper series: the distribution of soon-to-be-published journal articles that have already gone through peer review. Jaremski and Rousseau are about to have this article published in Economic Inquiry; it is already available there on Early View.

Why do authors use working paper series for this purpose? Well, probably to improve the access to their work.

Improving access to academic work is a very live political issue here in the UK. There is much talk about ways to make academic research available to the general public. The UK government seems to be in favour of something called Gold Access, where researchers pay to have their work published in journals (see here). This strikes me as a way to prop up the status quo, to support publishers’ existing business models, which in my opinion have come under incredible pressure from digital paper archiving and distribution services like RePEc.

An alternative mooted by others has been dubbed Green Access, and is very much the spirit of what Jaremski and Rousseau do here: in addition to publishing work in the standard way, through an established journal with peer review, academics make a version of their article available free-of-charge through their own website or their institution’s online archive, perhaps after some time delay. Many publishers seem dead against this route, perhaps because it threatens their business model more than Gold Access would. But I think putting pressure on their business is a good idea; I reckon that the likes of Elsevier need this pressure in order to curb their market power.

The Economic History Society has recently sent at letter to the UK government committee tasked with looking into the issue of Open Access (see here). It is written from the perspective of not-for-profit academic publisher, and has a different assessment of the situation than me. I urge economic historians to read it and debate its implications, also those located outside of the UK.