Small Business Economics Research Articles

Creating good public policy to support high-growth firms

Writing in Small Business Economics Scott Shane argues that policy-makers should stop subsidising start-ups and instead focus on supporting the small subset of new businesses with high growth potential. However, both Shane and other scholars who have made the same argument only offer broad-brush proposals to achieve this objective. The aim of this article, in contrast, is to engage in a detailed discussion of how to create appropriate policies for high-growth firms (HGFs). Drawing on research in Scotland, we argue that policy-makers are looking for HGFs in the wrong places. The heterogeneous nature of HGFs in terms of sector, age, size and origins makes in impractical to target support on particular sectors, technologies or types of firms (e.g., new or R&D intensive). The article proposes a reorientation of HGFs, both in terms of appropriate targeting and forms of support. Public policy also needs to focus on the retention of HGFs which are acquired by non-local businesses. Finally, policy-makers need to properly reflect upon the specificities of their entrepreneurial environment when devising appropriate policy interventions.

Firm capabilities and firm size: the case of Korean apparel manufacturers

This study assessed firm capabilities as critical resources used by Korean apparel firms to achieve sustainable competitive advantages using Rangone's resource-based approach to small- and medium-sized enterprises' (SMEs) strategy analysis (Rangone, A., 1999. A resource-based approach to strategy analysis in small-medium sized enterprises. Small Business Economics, 12 (3), 233–248). It also compared the similarities and differences in firm capabilities between large firms and SMEs in the Korean apparel industry. Content analysis of Web-based communication data and multivariate analysis showed that a total of 15 firm capabilities emerged under the three SME capability categories: innovation, production and market management capabilities. In addition, compared to large firms, SMEs seemed to lack the capabilities to emphasise integrity/honesty, to offer quick response, and to receive government awards. The findings may help firms in other countries whose apparel industries are currently undergoing a similar phase in the life cycle by allowing these firms to prepare for ‘what will come next’. The study findings may also help government agencies provide relevant and necessary support for SMEs.

Growth beyond Gibrat: firm growth processes and strategies

Firm growth studies have been focused on the question of whether firm growth is independent of firm size. This shadow of Gibrat’s Law has drawn attention to the randomness in firm growth. However, it has also clouded relevant research avenues that enquire into the role of firm growth processes and strategies. This paper takes stock of the current state of the art of firm growth studies in small business economics, and makes a plea for more specific research approaches that highlight the nature of the firm, organization, and growth paths. This rejuvenation of firm growth studies comprises a search for necessary mechanisms and contingent conditions for the growth of firms.

Social Capital, Distance, Borders and Levels of Space: Conclusions and Further Issues

Click to increase image sizeClick to decrease image size Notes This section is partly based on ideas originally developed in Westlund and Bolton (2003) Westlund, H. and Bolton, RE. 2003. Local social capital and entrepreneurship. Small Business Economics, 21(1): 77–113. [Crossref], [Web of Science ®] , [Google Scholar].

The direct employment effects of new businesses in Germany revisited: an empirical investigation for 1976–2004

Based on an improved and extended database, the Establishment History Panel, we extend the analysis of Fritsch and Weyh [Small Business Economics 27(2), 245–260 (2006)] by investigating the development of employment in German start-up cohorts for the period 1976 to 2004. We confirm the typical pattern found in start-up cohorts: an initial increasing number of employees that is soon followed by a decreasing number. We also provide some of the first evidence for the “liability of aging” phenomena in Germany. Older firms face a relatively high risk of exit. We find that most entries with relatively large initial employment grow substantially in the first two decades. However, these businesses suffer from a considerable employment decline after 25 years.

In Partnership with The Global Award for Entrepreneurship Research

As Editors-In-Chief of Small Business Economics Journal (SBEJ), we are happy to announce that the journal and Springer Publishing have entered into an agreement with the three organizations behind ‘‘The Global Award for Entrepreneurship Research’’: the Swedish Entrepreneurship Forum (formerly FSF), the Research Institute of Industrial Economics (IFN), and the Swedish Agency for Economic and Regional Growth. As a result of this agreement, we now formally have the honor of publishing an expert evaluation of the award winner’s contribution to entrepreneurship research as well as the award lecture given by the winner upon receipt of the prize. Since 2003, SBEJ has been proud to publish the award lectures of winners of the ‘‘International Award for Entrepreneurship and Small Business Research’’, which is known colloquially as ‘‘The FSF-NUTEK Award’’, and the evaluations of these lectures. With the recent upgrading of the award, the existing agreement has been formalized. The formal cooperation was initiated in the January 2009 issue of SBEJ with Magnus Henrekson and Anders Lundstrom’s article on ‘‘The Global Award for Entrepreneurship Research’’, which not only served to introduce the new award and its rules and regulations for the nomination, evaluation, and selection of winners, but also presented a retrospective look at previous winners. The first winner of new ‘‘Global Award for Entrepreneurship Research’’ was announced on January 29, 2009: Professor Scott A. Shane of Case Western Reserve University in Cleveland, Ohio. With this issue of SBEJ we are pleased to publish the first set of papers related to the new award. Per Davidsson and Johan Wiklund have provided an excellent evaluation of Scott Shane’s contributions to entrepreneurship research in their article ‘‘Scott A. Shane: winner of the Global Award for Entrepreneurship Research’’. Scott A. Shane’s prize lecture, ‘‘Why encouraging more people to become entrepreneurs is bad public policy’’, which was presented at the award ceremony in Stockholm on May 14, 2009, is published immediately following the evaluation. As Editors of SBEJ we are convinced that deepening our insights into the conditions, characteristics, drivers, and effects of entrepreneurship and formulating policy recommendations are of immense value. Thus, within the context that the ‘‘Global Award for Entrepreneurship Research’’ facilitates the dissemination of research results to scholars, practitioners, and individuals/groups involved in small business development, considerable good will be achieved with the publication of the award lecture and an expert evaluation of this lecture. At the same time, the publication of the prize lecture and an evaluation of this lecture by experts will provide a Z. Acs D. B. Audretsch (&) Max Planck Institute of Economics, Kahlaische Strase 10, 07745 Jena, Germany e-mail: sbejmeditor@gmail.com

Entrepreneurship, developing countries, and development economics: new approaches and insights

This paper provides an introduction to this special issue of Small Business Economics dealing with the (long-postponed) integration of entrepreneurship into the discipline of development economics and casting a formal light on the role of entrepreneurship in developing countries. The paper departs from the premise that with more than a billion people living in absolute poverty, it is of great practical importance to understand if and when entrepreneurship is a binding constraint on economic development and catching up in developing countries. This in turn requires at least a deeper theoretical modeling of the entrepreneur in development economics. This special edition contains a number of contributions emanating from the UNU-WIDER project on Promoting Entrepreneurial Capacity, which integrates the disciplines of entrepreneurship and development economics. These contributions model and explore the role of the entrepreneur in key areas of concern for development economics, such as structural change and economic growth, income and wealth inequalities, welfare, poverty traps, and market failures. This introduction discusses and contextualizes these various contributions and their implications for further theoretical and empirical work.

Small Business Economics of the Lakota Fund on the Native American Indian Reservation

Poverty rates on Native American Indian reservations are triple the US average. Small business incubation programs, available elsewhere in the US, are sparse on the reservations. Small businesses are potent drivers of US economic growth. Some 25.5 million entrepreneurs generate more than 50% of the GDP, are 26% of the exporters, and create 80% of the total net new job formation. The Small Business Administration (SBA), an independent agency of the federal government created in 1953, maintains and strengthens the nation's economy by aiding, counseling, assisting, and protecting the interests of small businesses and by assisting families and businesses to recover from national disasters. SBA services hardly exist on the Native American Indian Reservations (NAIRs), however. Studies have linked micro entrepreneurial activities to economic growth and poverty reduction. Our study tests the effects of the Lakota Fund (LF), a small business development initiative, on the NAIRs to determine whether SBA-like programs (loans, training, and consulting) can improve economic conditions on the NAIRs. The LF, a private micro loan and business training initiative on the Pine Ridge Reservation in South Dakota, is tested for its effectiveness in generating income. The 1980-2006 annual county-level data (Shannon Co. is 'treatment', Todd Co. is 'control') are a natural experiment; the counties are similar otherwise. Using the real per capita income (RPCI) dependent variable, and controlling for other factors, our regression results indicate that the LF initiative and its duration (intensity) raised RPCI significantly - suggesting the success of a privately funded small business incubation initiative targeted at isolated impoverished groups within the highly developed US economy. Suggestions for future research and program replication ideas are explored.

The alert and creative entrepreneur: a clarification

Israel M. Kirzner is the 2006 winner of The International Award for Entrepreneurship and Small Business Research (the FSF-Nutek Award). In this Prize Lecture he argues that a number of those who have commented on his work have misunderstood certain aspects of his theoretical system, and as a result the common distinction in the literature between “Schumpeterian” and “Kirznerian” entrepreneurs is flawed. He also argues that his understanding of the market process (set in motion by entrepreneurial decisions) provides a theoretical underpinning for public policy vis-a-vis entrepreneurship. Professor Kirzner’s main contributions to the economics of entrepreneurship were also presented and evaluated by Douhan et al. [Small Business Economics 29(1–2):213–223, 2007].

Effect of credit guarantee policy on survival and performance of SMEs in Republic of Korea

Effect of credit guarantee policy on survival and performance of SMEs in Republic of Korea (Small Business Economics DOI 10.1007/s11187-007-9049-y) [Erratum]

Are good or bad borrowers discouraged from applying for loans? Evidence from US small business credit markets

This paper takes the concept of a discouraged borrower originally formulated by Kon and Storey [Kon, Y., Storey, D.J., 2003. A theory of discouraged borrowers. Small Business Economics 21, 37–49] and examines whether discouragement is an efficient self-rationing mechanism. Using US data it finds riskier borrowers have higher probabilities of discouragement, which increase with longer financial relationships, suggesting discouragement is an efficient self-rationing mechanism. It also finds low risk borrowers are less likely to be discouraged in concentrated markets than in competitive markets and that, in concentrated markets, high risk borrowers are more likely to be discouraged the longer their financial relationships. We conclude discouragement is more efficient in concentrated, than in competitive, markets.

Longitudinal analysis of entrepreneurship and competitiveness dynamics in Latin America

This study analyzes the relationship between entrepreneurial dynamics in Latin-American countries and the level of competitiveness these countries show. Based on the research conducted by Wennekers et al. [Small Business Economics, 24(3):293–309, 2005] that demonstrates a U-shaped relationship between the country’s rate of entrepreneurship and its level of competitiveness and economic development, we hypothesize that Latin-American countries have a descending behaviour under the U-shaped curve approach. The results from three regression models support this hypothesis and suggest that competitiveness and economic growth deter entrepreneurial dynamics on Latin-American countries. We discuss that Latin-American countries need to improve some structural factors to achieve a high level of entrepreneurial dynamics.

William J. Baumol: An Entrepreneurial Economist on the Economics of Entrepreneurship

William J. Baumol is the 2003 winner of the International Award for Entrepreneurship and Small Business Research. Throughout his career Baumol has urged the profession to pay attention to the instrumental role of entrepreneurship in economic renewal and growth. At the same time he has insisted that economists continue to use their usual tool box when the purview of analysis is extended to entrepreneurship. Hence, Baumol can be characterized as a revolutionary from within. In this article we present and discuss Baumol's research contribution in the areas of entrepreneurship and small business economics, notably from a growth perspective. In addition to placing his work in these areas into the wider context of his full contribution, we emphasize Baumol's findings that growth cannot be explained by the accumulation of various factors of production per se; human creativity and productive entrepreneurship are needed to combine the inputs in profitable ways. As a result, an institutional environment that encourages productive entrepreneurship and human experimentation becomes the ultimate determinant of economic growth.

The Ethnic Minority‐Majority Income Gap in Rural China during Transition

The Ethnic Minority‐Majority Income Gap in Rural China during Transition

Getting Off to a Good Start: The Effects of Upper Echelon Affiliations on Underwriter Prestige

The initial public offering (IPO) is one of the most critical events in the lifetime of a young firm. Prior research has shown that firms tend to have successful IPOs if they go public with the endorsement of a prestigious lead underwriter. This paper examines the antecedents to receiving endorsement by a prestigious underwriter and links this to the experience base of a firm's upper echelon. We theorize that the amount and type of upper echelon experience serve as important symbols of a young firm's legitimacy to critical outsiders. We introduce a typology of upper echelon experience that distinguishes between upper echelon upstream, horizontal, and downstream employment-based affiliations and suggest that these different types of upper echelon affiliations allay different types of endorser concerns regarding firm legitimacy, affecting the endorsement process. Further, we theorize that the relationships between upper echelon experience and investment bank prestige will be moderated by technological uncertainty. We test our assertions on a comprehensive sample of public and private biotechnology firms that were founded between 1961 and 1994 and that went public between 1979 and 1996. Analyses of the five-year career histories of the over 3,200 executives and directors that make up the upper echelons of these firms show that firms with upper echelons with affiliations with prominent downstream organizations (i.e., pharmaceutical and/or healthcare companies) and with prominent horizontal organizations (i.e., biotechnology companies) are more likely to attract the endorsement of a prestigious investment bank. We also find that the greater the range of upper echelon affiliations across the categories of upstream, horizontal, and downstream affiliations, the more prestigious the firm's lead underwriter. We also find that these latter results are moderated by technological uncertainty. The present research has implications for the study of organizational legitimacy, interorganizational endorsements, and entrepreneurship.

Trust, Membership in Groups, and Household Welfare: Evidence from KwaZulu‐Natal, South Africa

Unfortunately these two literatures have remained largely unconnected. The group and network literature concludes that participation has important economic benefits even when the stated function of the group is noneconomic. In most cases however the mechanisms by which groups and networks achieve this are unclear. The determinants-of-trust and participation-in-groups literature highlights the importance of income and social homogeneity. What remains less understood is whether—and how—trust can be generated for example via participation in groups. This article links the empirical literatures referenced above by exploring the relationship between membership in groups and trust. Specifically using longitudinal data from KwaZulu-Natal Province South Africa we examine (1) the importance of trust in the decision to join groups; (2) the subsequent ability of groups to generate trust; and (3) the effect of group membership and trust on a measure of well-being per capita household income. In addition we disaggregate groups into financial and nonfinancial and we categorize “trust in people” by agent or actor. Therefore we can explore whether trust in different kinds of actors is important for participation in different kinds of groups and whether participation in different kinds of groups is important for generating trust in different kinds of actors. (excerpt)

Violent Crime: Does Social Capital Matter?

This paper examines empirically the effect of some commonly used indicators of social capital, such as the prevalence of trust on community members and the participation in voluntary secular and religious organizations, on the incidence of violent crimes. This is a cross-country study whose basic sample consists of 39 developed and developing countries and whose dependent variable is the national intentional homicide rate. The paper identifies and deals with three challenges in the empirical estimation of the effect of social capital on the incidence of violent crimes. The omittedvariable problem is dealt with by including income inequality and economic growth as additional determinants of a country’s violent crime rate. The joint endogeneity (or reverse-causation) problem is accounted for by using instrumental variables for social capital in the crime regression. The specificity problem, that is the potentially opposite effects of group-specific and society-wide social capital, is noted and addressed only indirectly by emphasizing the results applied to the social capital indicators that have application for society as a whole. The main result of the paper is that only the component of social capital measured by trust on community members has the effect of reducing the incidence of violent crimes. The results regarding measures of other indicators of social capital are rather unclear. This may be due to a combination of limited samples, inability to fully control for reverse causation, and most likely, the opposite effects that society-wide and group-specific social capital may have on violent crime. ∗ Lederman and Menendez are economists with the Office of the Chief Economist for Latin America and the Caribbean of the World Bank. Loayza is a senior economist with the research department of the Central Bank of Chile, and he is currently on leave from the Development Economics Research Group of the World Bank. The opinions expressed herein should not be attributed to the World Bank. The authors are grateful to Ed Glaeser, Jeff Grogger, Gale Johnson, Sanjay Marwah, Steve Messner, Nicholas Sambanis, and an anonymous referee for invaluable comments and suggestions. The authors are responsible for any remaining errors.

Networks, Internationalization & Policy

This is the introduction to this special issue of Small Business Economics, dedicated to networks, opportunity, internationalization and policy. As the drivers of globalization are removing barriers, which traditionally segmented the competitive environments of small and large firms, firms of all sizes are joining international networks. Former competitors are now working together and this symbiosis is enhancing competitiveness. Consequently, networking is giving rise to unprecedented opportunities, facilitating internationalization. Simultaneously, new realities are creating the need for new policies.

Subsistence Crises, Managerial Corruption and Labour Protests in China

Subsistence Crises, Managerial Corruption and Labour Protests in China

Gender Inequalities and Economic Growth: A Longitudinal Evaluation

This longitudinal evaluation of gender inequalities and economic growth addresses key questions in the evolving debate over the character of gender differentiation and the goals of womens empowerment. These questions include: 1) whether the impact of strategies of economic growth served to enhance or undermine the status of women; 2) whether changes in the status of women were accompanied by significant changes in gender inequality; and 3) the implications for existing debates. Section I reviews several sets of literature pertinent to the questions using three general approaches: modernization-neoclassical women in development and gender and development. Section II presents the data and methods used in the evaluation. The research assessed the contending interpretations reviewed in the first section by combining another set of cross-sectional and longitudinal data on womens status and inequalities between men and women with other existing indicators. Section III discusses the results in the following order: 1) cross-sectional patterns in womens status; 2) trends in womens status; 3) cross-sectional patterns in inequality between men and women; 4) trends in inequality between men and women; and 5) conclusion. Finally section IV presents an overall discussion of the findings of the whole longitudinal evaluation.