Firm Formation Research Articles

Regional determinants of the small and medium size manufacturing firm entry in a developing country: evidence from Turkey

Purpose- This study investigates regional determinants of the small and medium size firm entry in the manufacturing sector for a developing country, Turkey, in which regional economic development disparities are common. Methodology- Panel data was collected for the period between 2004 and 2009 and analysed by using Feasible GLS estimation technique. Findings- The results show that entrepreneurship culture, the structure of the industry, industry agglomeration overall are the most important factors stimulating the entry rates. However, the number of patent application as a supply-side variable seems to be the main deterrent of new firm entry by working as a fence in front of new firms. The average wage and low skill labor in labor force are the other factors that negatively influence new firm formation in demand and supply side of the economy. Conclusion- Some of these regional variables affecting business formation in developed countries have no influence on the small and medium size firm formation in developing countries. This suggests that the determinants could be country specific. Therefore, policy makers should be careful while using evidence from developed countries to stimulate firm start-ups in developing countries.

A quantitative theory of tax evasion

I present a simple, unified approach to study the tax evasion practices often observed in developing countries. I develop a general equilibrium model where heterogeneous establishments optimally select themselves into informality, tax compliance, and formal tax evasion. Informal firms evade taxes by staying small, while larger, formal firms can engage in costly tax evasion. In equilibrium, tax revenues rely on medium-sized firms, which are scarce. In a calibration exercise using data from Mexico, I find that reducing the returns to tax evasion by formal firms increases tax revenues by up to 68%. However, economies where such returns are too high face a trade-off between tax collection and aggregate efficiency, as cracking down on formal tax-evading firms pushes some firms into informality. Last, as the economy develops, the informal sector shrinks, while the tax-evading sector expands, thus limiting potential collection. If lower informality is a byproduct of development, and not vice versa, a solid tax base can be achieved by fiscal authorities effectively by focusing on formal tax evasion.

Blocked But Not Tackled: Who Founds New Firms When Rivals Dissolve?

Research summary: This article examines the role of competitive shocks in creating opportunities for new firm foundings. I argue that the sudden dissolution of rival firms may release resources that create opportunities for firm formation, particularly among employees facing impediments to capturing value in their current organizations. Analyzing microdata from the legal services industry, I use unexpected deaths of solo-practicing attorneys as quasi-exogenous sources of rival dissolution. Results indicate that these shocks increase the odds of founding by about 30%, with stronger effects among attorneys with weaker social connections or higher competition for promotion. The article thus highlights the role that founders play in reallocating dissolved rivals' resources while demonstrating that founding may be an important outlet for “blocked” employees to capture value from opportunities. Managerial summary: This article finds that the shutdown and dissolution of a rival organization may spur employees to found new firms. As a consequence, managers may find it valuable to pay attention to employees' turnover intentions following the dissolution of a rival. Findings suggest that employees who are having trouble advancing in the firm may be the most likely to found a new organization when a rival dissolves, so managers may want to focus retention efforts on these individuals. To the extent that managers wish to capture customers, employees, and other resources that were formerly attached to a dissolved rival, managers may wish to be aware that they could be in competition with their own employees for these resources and opportunities. Copyright © 2017 John Wiley & Sons, Ltd.

Sub-national technology policy and commerce: evaluating the impacts of the California Institute for Regenerative Medicine

In the last 20 years, state governments have funded a large number of science-based economic development programs. Remarkably, there have been few evaluations of either their economic impact or their prospects for economic impact. The 2004 decision by California voters to issue bonds to fund $3 billion of research on human pluripotent stem cells is an ideal case study for introducing an evaluation methodology for the progress by state programs in developing and transferring research results. In the process of evaluating the California stem cell initiative, we make three methodological contributions to the study of the impacts of sub-national science-based economic development programs. First, the following data sources are introduced as indicators of the prospective economic benefits of these programs: changes in targeted federal research funding, patenting, small business investment research grants, venture capital investment, new firm formations, and clinical trials. Second, the use of regional or industrial controls is introduced. In the case study of the California stem cell initiative the regional control is the comparison of the two dominant California stem cell research and firm clusters, San Diego and the San Francisco Bay Area, to the other dominant cluster, Boston. The biotechnology industry, as a whole, is used to control for exogenous shocks such as changes in the overall interest in new life science technologies. Third, because technology transfer is predicated upon commercialization, a value chain perspective can visualize commercialization obstacles. In this study, a stylized human stem cell therapy value chain is compared to the existing biotechnology value chain and the differences suggest areas where human stem cell therapies are likely to face difficulties. The discussion and conclusion evaluates the progress of the California stem cell initiative and suggests that the evaluation methodology developed can improve the evaluation and guidance of science-based economic development programs.

Spatial Heterogeneity, Broadband, and New Firm Formation

Purpose: This paper examines the spatial heterogeneity associated with broadband Internet and new firm formation in a number of U.S. states.Methodology/Approach: Both ordinary least-squares regression and Geographically Weighted Regression are used for the estimation purpose.Findings: The global coefficient estimates of ordinary least-squares regression account for the marginal change in a phenomenon, but such a global measure cannot reveal the locally-varying dynamics. Using Geographically Weighted Regression, it was found that at the aggregate and economic sector levels, the association between single-unit firm births and the provision of broadband Internet varies across counties in Florida and Ohio.Originality/Value of paper: There are numerous studies on broadband Internet in the U.S., but this is the first that explicitly examines broadband provision and new firm formation by taking into account spatial heterogeneity across countries.

Spatial Heterogeneity, Broadband, and New Firm Formation

This paper examines the spatial heterogeneity associated with broadband Internet and new firm formation. The global coefficient estimates of ordinary least-squares regression account for the marginal change in a phenomenon, but such a global measure cannot reveal the locally-varying dynamics. Using Geographically Weighted Regression, it was found that at both the aggregate and economic sector levels, the association between single-unit firm births and the provision of broadband varies across counties in Florida and Ohio and that the global measures do not uncover such a relationship. Hence, policy makers need to take into account such spatial variations while formulating broadband and economic development policies.

Carriers of Change and Continuity: New Restaurants in Amsterdam

AbstractThis paper analyses new firm formation in the Amsterdam restaurant industry, on the basis of an in‐depth research of 37 new restaurants, through the lens of the theory of evolutionary economic geography. The findings show that restaurateur‐chefs largely replicate the kitchen of their parent firms whereas restaurateur‐managers can more easily switch to a different type of kitchen. It means that replication of individual knowledge and skills are more important than replication of routines. Restaurateurs who came from other related industries did not bring something special from their former jobs in their restaurants. In addition, new restaurants benefit differently from extra‐firm relations (with respect to attracting capital, monitoring other restaurants, finding chefs and cooks, relations with suppliers and media) during their start‐up process and thereafter. Those extra‐firm relations are found at the local, national, and global scale.

Signalling, Reputation and Spinoffs

Employees often leave their firm to form a new firm (spinoff) of their own. Recent literature attributes most of these spinoffs to asymmetric information after the worker gets a private new idea (worker knows more about idea's profitability than employer). In this paper, I propose a different channel for new firm formation based on signalling and reputation concerns. If high ability workers are mistakenly perceived to be low type then they would like to signal their ability to earn more. Consider a two period principal-worker model where the worker's type is his private knowledge. If the prior belief about the worker's type is that he is low type with high probability then, despite the principal's ability to offer contracts to persuade the worker to stay, there may exist a separating equilibrium where the high type worker signals his ability by forming his own firm. This result provides theoretical support to the findings of Skogstrom (2012), who observed high rates of entrepreneurship amongst Norwegian workers with low education and high ability. When moral hazard is introduced in the environment, I show that the separating equilibrium may generate the highest incentives to work. This may have policy implications for non-compete clauses.

Sequential Movement Pattern of Firm Births and Deaths Over the Business Cycles

This paper documents, at business cycle frequencies, the sequential pattern of firm births and deaths and the aggregate economic condition in the US. On the aggregate level, firm formation leads economic conditions and positively affects subsequent firm deaths, suggesting that startups have a delayed crowding-out effect. The pattern is mainly driven by young firms and it is observed in all major sectors. Then, a simple, tractable theoretical model is built, featuring the role of imperfect information, to illustrate how standard firm dynamics models can accommodate these new findings.

Employment lotteries, endogenous firm formation and the aspiration core

The paper shows that the aspiration core of a TU-game coincides with the set of competitive wages arising in a labor market economy in which time is indivisible, but workers and firms can sign contingent labor contracts and trade in employment lotteries. The set of firms that are active in the market is endogenously determined at equilibrium and it coincides with the generating collection of the corresponding aspiration core allocation.

An Agent Based Macroeconomic Model with Social Classes and Endogenous Crises

This paper proposes an agent based macroeconomic model in which income distribution and wealth accumulation depend on the role that agents play in productive activities, that is capitalists or workers. In this framework, social class dynamics underlie the endogenous process of firm formation. The focus is on the interplay between the evolution of social structure and macroeconomic dynamics and on how business cycles and crises may endogenously emerge as the result of the interaction between financial and real factors underlying the process of capitalist production.

Corporate governance implications of new methods of entrepreneurial firm formation

Corporate governance implications of new methods of entrepreneurial firm formation

Spatial heterogeneity, industry heterogeneity, and entrepreneurship

The prevalence of entrepreneurship varies not only across regions but also among industries. Using a unique panel dataset of 60 two-digit industries across 64 provinces from 2000 to 2010 in Vietnam, we investigate the importance of spatial and sectoral heterogeneity in an analysis of the determinants of entrepreneurship and empirically explore the interaction effect of geographic conditions and industry dynamism. Overall, our results confirm the significance of industry structural variables and their joint effect with geographic conditions in fostering new firm formation. Particularly, (i) growth-driven entries are generally higher in provinces that offer higher salaries; (ii) technology-intensive industries within regions that have strong knowledge spillover effects are appealing to new entries. Others noteworthy findings include: (i) ‘necessity entrepreneurship’ is prevalent in Vietnam, but limited to extractive and service industries that are typically labor intensive; (ii) firms tend to concentrate more in agglomerated locations. This effect, however, evaporates for high-tech industries; and (iii) industry profitability and niche dynamism all play a crucial role in stimulating new start-ups. We apply the system generalized method of moments to obtain empirical evidence in the study.

INCENTIVOS ECONÓMICOS EN LA DECISIÓN DE INDIVIDUOS Y EMPRESAS PARA OPERAR EN EL SECTOR FORMAL O INFORMAL: SEGURO POPULAR Y EFICIENCIA RECAUDATORIA

Las empresas e individuos se enfrentan a incentivos económicos que influyen en la decisión de operación entre los sectores formal e informal. El Seguro Popular en México actúa como incentivo a favor de la informalidad, ya que al ser de origen gratuito, reduce el costo de enfermarse y permite un nivel de consumo mayor; esto revierte el sesgo formado naturalmente por las presta­ciones laborales ofrecidas en la formalidad. Por otro lado, la eficiencia recau­datoria baja reduce el costo de las empresas por operar en la informalidad, creando un incentivo para este sector. Asimismo, las empresas formales de­mandarán mano de obra informal, derivado de la amenaza no creíble de castigo. El objetivo del documento es modelar el mercado laboral considerando estos incentivos económicos. Se encuentra que es necesario revisar los programas sociales que sustituyen las prestaciones formales como el Seguro Popular, al tiempo que se mejora la eficiencia recaudatoria para salir de equilibrios no óptimos en términos de empleo y crecimiento económico.

Employment Lotteries, Endogenous Firm Formation and the Aspiration Core

The paper shows that the aspiration core of a TU-game coincides with the set of competitive wages arising in a labor market economy in which time is indivisible, but workers and firms can sign contingent labor contracts and trade in employment lotteries. The set of firms that are active in the market is endogenously determined at equilibrium and it coincides with the generating collection of the corresponding aspiration core allocation.

Competition and corporate tax evasion: An institution-based view

Why do firms evade taxes? We tackle this question by studying firms in the formal sector operating in countries with different institutional backgrounds, and comparing the incentives and constraints of staying within the formal sector against the competitive pressures originating from the informal sector. We argue that it is the combination of these factors that largely explains formal firms’ tax evasion decisions. Our findings highlight the dark side of competition, particularly when it originates from perceivably unfair sources (i.e. from the informal sector). We also shed light on how this effect is moderated by the institutional conditions of the environment.

Revisiting the Roles of the University in Regional Economic Development: A Triangulation of Data

AbstractThere is a general understanding that university plays a crucial role in regional development under the current age of knowledge economy. At the same time, we have observed a fair number of counter‐evidentiary studies, demonstrating several regions that do not thrive despite strong research universities or other patterns of development in the absence of research universities. However, they are based on case studies of individual universities or regions, and the findings currently cannot be generalized. Another set of studies that have challenged the effect of universities at the nationwide scale and demonstrated its disproportionately small impact of universities, but their scope is limited to spin‐offs, patents, and license activities. In this article, we propose to investigate this subject more systematically by triangulating three methods: 1) national‐scale regression models with Business Dynamics Statistics and National Establishment Time Series data, 2) a regional survey of IT and life science firms in four so‐called “second tier regions,” and 3) a microeconomic firm‐level analysis based on interviews with founders of technology intensive firms. Furthermore, we test the roles of university beyond those explicit, direct measures of spin‐offs and patents by analyzing the firm formation rate and firm growth rate at the regional level, as well as the sources of growth at the company level. All results point in the same direction: The research function of the university has been overstated, and the teaching function of the university has been underappreciated. These findings provide profound implications for the policy of regional development.

Measuring entrepreneurship: Type, motivation, and growth

Policymakers rely on entrepreneurs to create jobs, provide incomes, innovate, pay taxes to support public revenues, create competition in industries, and much more. Due to its highly heterogeneous nature, the choice of entrepreneurship measures is critically important, impacting the diagnosis, analysis, projection, and understanding of potential and existing policy. Some key aspects to measure include the how (self-employment, new firm formation), why (necessity, opportunity), and what (growth). As such, gaining better insight into the challenges of measuring entrepreneurship is a necessary and productive investment for policymakers.

Framework for Explaining the Formation of Knowledge Intensive Entrepreneurial Born Global Firm: Ent

The nature of the knowledge based entrepreneurship relates to its essential reliance on research and development, deployment and maximization of research and development returns via technology development, and its commercialization via venturing. The paper aims to provide the empirically grounded framework for the analysis of the key determinants leading to the formation of R&D intensive entrepreneurial born global firm with a special focus on entrepreneurial firm and network theories. The unit of analysis chosen is the firm, while the focus is set on the firm behavior and strategic choices rather the business conditions per se. The paper aims to propose the definition of a born global firm as a specific form of entrepreneurial firm that forms while combining entrepreneurial, strategy and network constituents in a specific globally oriented constitution. Method of analysis applied is a multiple case study that was applied in order to build evidence on the interplay of strategy, networks and entrepreneurial constituents in the formation of knowledge intensive entrepreneurial born global firm. The small catching up country perspective adds on dynamics of the constituents as the framework and competitive conditions rapidly change in an uncertain direction.

The Effect of Disaggregate Information on the Expectation Formation of Firms

The Effect of Disaggregate Information on the Expectation Formation of Firms