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Empirical Economics

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15-07-2019

Can social capital explain business performance in Denmark?

Authors: Cong Wang, Bodo Steiner

Published in: Empirical Economics | Issue 4/2020

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Abstract

Motivated by the limited evidence on the positive link between social capital and firm performance, this paper explores this potential driver of firm performance at the firm rather than macro-level by employing a novel approach: we capture social capital at a community level rather than focus on the narrow aspect of entrepreneurs’ own social network. Using principal component analysis to aggregate various trust, norm and network-related variables to construct social capital variables with more than 150,000 firm-level observations for firm performance variables, this paper identifies an overall positive and significant effect of social capital on firm performance in Denmark. These effects are robust to firm-level social capital measures, different sampling years and alternative measures of firm performance (return on asset, current ratio, solvency ratio and profit margin) and network perspectives (Putnam and Olson).

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There were 1023 and 1507 individuals being surveyed in the 1999 and 2009 waves of Danish Value Studies, respectively. Regional identifier (Amter) and Postal codes are available for regional-level social capital aggregation. Due to the low observations for each postal code area (1–2 at most), to meaningfully calculate regional-level social capital, we decided to aggregate individual values to the 14-Amter regional level. Therefore, firms located in the same region (Amter) share the same social capital environment with same trust, norm and network societal values.

There are in total 739,588 Danish firms registered with Orbis and Amadeus from the year 2000 to 2013. Observations for return on assets, current ratio and solvency ratio are 178,886, 192,637 and 200,427, respectively. Profit margin has only 20,617 observations, therefore is used as a robustness check.

Subscript i represents the firm level information, and subscript j represents the unique social capital observation that is augmented for firm-level information (it should also be noted that apart from firm size, all other explanatory variables are measured at regional level).

It should be noted that we have also considered aggregating firm-level performance data onto the 14-region level, but decided to drop it later, since the regional-level regressions have only 14 observations and therefore in many cases have less observations than the number of regressors, which renders these results unreliable.

The R² from the regional-level regressions are unreliable at 0.99, due to extreme low observations as compared with number of variables.

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Title: Can social capital explain business performance in Denmark?
Authors: Cong Wang
Bodo Steiner
Publication date: 15-07-2019
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 4/2020
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-019-01731-3

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