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Small Business Economics

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01.06.2015 | Original Research

Entry and exit dynamics of nascent business owners

verfasst von: Vera Rocha, Anabela Carneiro, Celeste Amorim Varum

Erschienen in: Small Business Economics | Ausgabe 1/2015

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Abstract

This paper reports a comprehensive study on the dynamics of nascent business owners using a unique longitudinal matched employer–employee dataset. We follow over 157,000 individuals who leave paid employment and become business owners during the period 1992–2007. The contributions of this paper are twofold. First, we analyze both entry and exit, identifying and characterizing different profiles of individuals leaving paid employment to become business owners, and distinguishing exits by dissolution from exits by ownership transfer. Second, we provide new evidence on how particular experiences in the labor market and entry modes shape the post-entry dynamics of nascent business owners. By differentiating between different entry and exit routes, this paper provides new evidence on different human capital patterns among nascent business owners and on key determinants of entrepreneurial survival. Our results suggest that different exit modes can be predicted by business owners’ entry route. Furthermore, different exit modes exhibit different duration dependence patterns according to the entry mode. Additionally, the paper shows that businesses started after a displacement episode are not necessarily less successful. Those individuals entering entrepreneurship after being displaced due to previous employer closure are found to persist longer.

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Our definition of nascent business owners is “all those individuals who leave paid employment and become business owners of new or existing businesses for the first time.” Those who only have the intention of becoming a business owner, but do not make the transition, are not considered to be nascent business owners in our analysis, as we are not able to identify entrepreneurship intentions in our data.

There is increasing evidence that both high-ability and low-ability agents become BOs (e.g., Joona and Wadensjö 2013; Poschke 2013).

We should highlight that this paper focuses on nascent (i.e., novice or first time) business owners. Even though some studies on entrepreneurial exit frequently use samples of both nascent and serial entrepreneurs (e.g., Taylor 1999; Haapanen and Tervo 2009; Millán et al. 2012), serial entrepreneurs are documented to be significantly different than nascent entrepreneurs (e.g., Hyytinen and Ilmakunnas 2007; Plehn-Dujowich 2010), so they may also be dissimilar in their exit patterns. Consequently, we leave those experienced entrepreneurs out of our current analysis.

Quadros de Pessoal dataset has been used by several authors to study workers (e.g., Sofka et al. 2014), serial entrepreneurs (e.g., Amaral et al. 2011), and the success of former entrepreneurs in the labor market (e.g., Baptista et al. 2012).

We restrict to transitions from 1992 on, and exclude those occurring in 2002, because we need data on the year prior to transition to verify where each worker comes from. We exclude transitions occurring after 2007 due to the criteria adopted to identify BOs’ exits (Sect. 3.3).

We restrict the analysis to workers aged between 16 and 65 years.

As we are interested in transitions from paid employment to entrepreneurship, we focus on transitions of individuals who were in paid employment in t − 1, t – 2, or t − 3 and who became BOs in t. We thus allow for a maximum interval of two years of absence between the last record in paid employment and the first record as BO.

The literature has been using the terms intrapreneurship, corporate entrepreneurship, and corporate venturing interchangeably, commonly referring to the development of a new venture within an existing organization (see Parker 2011; Martiarena 2013). We use a wider definition of intrapreneurship in this study: a worker becomes an intrapreneur if he/she becomes the unique BO of the firm where he/she was employed (employee buyout), or if he/she leaves the “paid employee” status and enters the ownership of the business, becoming one of the BOs of the employer firm (partnership). Part of these transitions into intrapreneurship may correspond to ownership transfers within family firms. Unfortunately, QP data do not allow the identification of family businesses in particular.

We also identified a residual group of individuals who became BOs in two or more different firms in the same year (portfolio BOs). These multiple entries could include both start-up and acquisition experiences, or simultaneous entrepreneurship and intrapreneurship. As they corresponded to less than 1 % of the total number of transitions, we excluded these cases from the current analysis.

Temporary exits from the dataset may occur for a number of reasons, a very likely reason being that the survey form was not received in the Ministry of Employment before the date when the recording operations were closed. Temporary absences of one year were therefore not classified as definitive exits of the BO.

We define firm exit as firm closure. Despite the comprehensiveness of the QP dataset, we are not able to identify the motives for firm exit [e.g., bankruptcy, mergers & acquisitions (M&A)]. Regarding M&A, earlier studies (e.g., Geroski et al. 2010) have documented that fewer than 1 % of the total number of liquidations in Portugal were due to M&A, thus suggesting that our inability to identify mergers in QP is not likely to affect our results.

Alternative estimations using the competing-risks model proposed by Fine and Gray (1999) did not produce qualitatively different results from those obtained by estimating cause-specific hazard functions with unobserved heterogeneity.

A correlation matrix for these variables can be found in the Electronic Supplementary Material (Appendix A).

Using one of the three most conventional ways of measuring overeducation (e.g., Kiker et al. 1997), an individual was considered to be overeducated if he/she had an educational attainment higher than the mode of the educational attainment of recently hired workers in the same three-digit occupation. These comparisons were performed after converting both variables in the following categories of education: 4, 6, 9, 12 years of schooling and college education.

Given that, by definition, intrapreneurs never suffer a job loss immediately before their transition, we cannot include this variable in the estimation. Otherwise, the model would suffer from identification problems. We study the potential effect of recent displacement episodes in the next section, after excluding intrapreneurs from the estimation of the extended model.

We report the average marginal effects obtained after the estimation of our multinomial logit model in the Electronic Supplementary Material (Appendix B).

We also tested the validity of the independence of irrelevant alternatives (IIA), though this assumption is less of a problem when the alternatives are reasonably distinct (Amemiya 1981). The fact that according to the Wald test we are unable to combine any pair of choices emphasizes the dissimilar structure of the alternatives under study. Even so, we have performed a series of Hausman tests, by sequentially omitting each of the categories of BOs from the choice set and re-estimating the model of Table 2 and then comparing the results from the full model and the several restricted models. We do not obtain systematic evidence to reject the IIA assumption.

To test the consistency of our results, we re-estimated the multinomial logit model for different subsamples, restricting our attention to younger individuals (aged up to 30 years), in order to reduce potential left censoring issues related to possible experiences in the labor market prior to 1986. Additionally, we repeated the analysis for those who directly transit from paid employment in t − 1 to business ownership in t. We also re-estimated the model for the separate subsamples of males and females, single BOs and entrepreneurial teams, as well as those previously employed in services and manufacturing industry. We report the results on the main variables of interest in the Electronic Supplementary Material (Appendix C). Overall, the main results on previous experiences in the labor market remain consistent across the several subsamples.

Average marginal effects are presented in the Electronic Supplementary Material (Appendix D). As a robustness check, we have also re-estimated this extended model for several subsamples of individuals. All these additional results can be found in Appendix E of the Electronic Supplementary Material.

We did not take into account this disaggregation when studying entry decisions because additional estimations showed that no significant differences exist between the determinants of entry of BOs entering alone and those sharing the ownership of the firm.

As we are mainly concerned with the specific hazards of exiting by dissolution or by ownership transfer, we do not present the results obtained from the single-risk model. The results are available upon request.

In order to allow different groups of BOs to have different duration dependencies, we included in the estimation interaction terms between the duration dummies and each type of BO of interest. The first year in the business is the reference year in our estimations.

However, we must emphasize that our analysis is confined to recent job losses. The literature often argues that entrepreneurs coming from unemployment are more likely to fail because their human capital, knowledge, and skills tend to depreciate during longer unemployment periods, or because they look at entrepreneurship as a last resort solution for their problems in finding a job. In contrast, individuals losing their job due to an exogenous shock such as firm closure, and immediately reacting by becoming BOs, may correspond to high-ability unemployed individuals. Therefore, we should not generalize our results, given that we focus on the effect of recent displacement episodes and our data do not allow an accurate identification of all types of unemployed individuals (namely long-term unemployed individuals).

As a robustness check, similar to what we have done for entry, we re-estimated the competing-risks model for several subsamples (young individuals, males, females, individuals directly transiting from paid employment to business ownership, those operating in manufacturing and services, as well as single BOs and entrepreneurial teams). A summary of the results for the main variables of interest can be found in the Electronic Supplementary Material (Appendix F).

To estimate these models, we used a random sample of around 550,000 Never BOs. The results for the selection equation are presented in the Appendix H, made available through the Electronic Supplementary Material. Previous wage job characteristics are used as exclusion restrictions in order to overcome identification issues. Models with selection were estimated using the program DURSEL (version 2.0) for Stata, for right-censored survival time data, written by F. Boehmke, D. Morey, and M. Shannon, and available at: http://myweb.uiowa.edu/fboehmke/methods.html (see also Boehmke et al. 2006). We assumed a bivariate exponential distribution to link the selection equation and the continuous duration outcome of interest. Alternative estimations allowing for Weibull duration dependence did not produce results qualitatively different than those reported here.

We also re-estimated these duration models, with and without selection, separately for the subsamples of start-up entrepreneurs, acquisition entrepreneurs, and intrapreneurs, in order to check the consistency of our results. The estimation results were not qualitatively different, and the conclusions remained consistent for the several subsamples analyzed.

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Titel: Entry and exit dynamics of nascent business owners
verfasst von: Vera Rocha
Anabela Carneiro
Celeste Amorim Varum
Publikationsdatum: 01.06.2015
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 1/2015
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-015-9641-5

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