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Small Business Economics

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20.07.2017

Entrepreneurship: skills and financing

verfasst von: Felipe Balmaceda

Erschienen in: Small Business Economics | Ausgabe 4/2018

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Abstract

This article analyzes an occupational choice model with risk-averse agents who are heterogeneous in terms of skills and wealth in a setting with financial frictions. We show that high- and middle-wealth individuals endowed with a balanced portfolio of skills upgrade their skills so that the resulting portfolio of skills is more balanced and choose entrepreneurship. In contrast, middle-wealth individuals endowed with an unbalanced portfolio of skills and low-wealth individuals specialize in the skill in which they have an absolute advantage and choose paid employment. Deeper financial development, a more balanced portfolio of skills, lower entrepreneurial risk, and a higher liquidation value for projects result in more entrepreneurship and higher welfare, while wealth redistributions and financial subsidies to entrepreneurs have an ambiguous effect on welfare.

Vorheriger Artikel Entrepreneurial personalities in political leadership

Nächster Artikel Foreign direct investment and entrepreneurship: gender differences across international economic freedom and taxation

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Cantillon (1755) argue that entrepreneurship main function is to bear risk under uncertainty in exchange for high rewards, Adam Smith (1776) emphasized that entrepreneurs spur improvements in living standards, Say (1803) emphasized the vital and creative roles of the entrepreneur in the economy as a forecaster, project appraiser and risk taker, and Schumpeter (1911) argued that entrepreneurs drive economic growth by creating and introducing new goods, services, and production processes that displace old businesses.

The empirical evidence is discussed in details in Section 6.

The evidence points to the fact that a great majority of firms are born from workers from other firms. Bhide (1994) finds that 71% of the entrepreneurs found their start-ups by innovating or copying an idea they learned at their previous employment. Garvin (1983) documents that firms started by former employees are the most frequent source of entrepreneurial firms especially in the high-tech and human capital intensive sector. Gompers et al. (2005) carefully document the process by which firms located in Silicon Valley and Massachusetts greatly contribute to the creation of new firms by training, educating and preparing their workers for entrepreneurship. They report that 45% of the start-ups come from workers from publicly traded established firms.

This assumption is not as restrictive as it appears at first glance. If the technology is of constant returns to scale and inputs can be freely adjusted, the marginal contribution of a worker will be independent of the other inputs. The reason is that profit maximizing firms will keep the ratio between inputs constant.

None of the results in this article depends on the task-specific skill profile having two dimensions. This is adopted just to simplify the exposition.

We could have chosen to model this by assuming that k ₁ + k ₂ ≤ 1. It is straightforward to show, given the production technology adopted, that in equilibrium the time constraint binds. To avoid the extra algebra that this implies we have adopted the simpler form in which we assume that the time constraint always binds.

This assumption can be easily modify to either consider that output is positive but independent of the initial skill endowment or increasing in either or both skills.

This together with the fact that there is no discounting implies that there is no role for saving in the model. Thus, income in period 1 is equal to the wealth endowment, and income in period 2, which is fully consumed, is equal to the return to entrepreneurship for entrepreneurs and the wage plus initial wealth for paid employees.

We could assume instead that the marginal productivity of capital is given by the random variable η, where the shock η is drawn from a distribution function F(⋅), with full support \([0,\bar {\eta }]\) and mean μ. We could also assume more general production functions in each case, any submodular function of (h ₁(k ₁), h ₂(k ₂)) in the case of paid employment and any supermodular function of (h ₁(k ₁), h ₂(k ₂)) in the case of entrepreneurship will yield the same results. We could also assume that the investment is complementary to skills or that productivity is a concave function of the amount invested I. None of these generalizations change the main results, but they do increase the mathematical burden.

By investing all his wealth into the project an individual maximizes the size of the loan he can obtain.

Observe that k ₋ = 0 if u(h ₂(1) + A) ≤ p u(π(0, 1)) and k ₊ = 1 if u(h ₁(1) + A) ≤ p u(π(1, 0)).

https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction.

See http://www.nzvif.co.nz/what-we-offer/seed-co-investment-fund.

The working paper version of this paper deals with the case in which there are firm-specific shocks and wages are determined by bargaining with outside options by adopting the model in Balmaceda (2005). That model provides a cross-section selection explanation of the entrepreneurship puzzle.

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Titel: Entrepreneurship: skills and financing
verfasst von: Felipe Balmaceda
Publikationsdatum: 20.07.2017
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 4/2018
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-017-9915-1

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