Does entrepreneurship ecosystem influence business re-entries after failure?

Business “exit” or “failure” has been analysed from different perspectives: economic-financial, accounting, legal, strategic, organisational, and business. The interpretation of this phenomenon depends on the adopted theoretical approach. Hessels et al. (2011, p. 450) describe business exit as the permanent closure, sale, discontinuance, or abandonment of a business. Complementary to this, Ucbasaran et al. (2013, p. 175) describe business failure as the cessation of involvement in business because of the lack of achievement of the minimum economic expectations stipulated by the entrepreneur. Both definitions are related to the cessation of an entrepreneurial initiative derived from individual decisions, organisational characteristics, and contextual conditions. From business success/failure perspectives, different internal and external elements conditioned the occurrence of both events across the entrepreneurial process (Zacharakis & Meyer, 1999; Sheppard and Chowdhury, 2005). Table 1 shows the internal and external determinants of business failure.

The majority of studies have focused on individual and organisational factors as the crucial determinants of a business exit/failure decision (Ucbasaran et al., 2009, 2010, 2013). Individual characteristics (age, education, experience, the propensity to risk, confidence, resources, capabilities) shape entrepreneurs’ decisions (Cardon et al., 2011; Walsh & Cunningham, 2016). Therefore, the lack of skills and the lack of liquidity have been the leading causes of business failure or exit (Gaskill et al., 1993; Hayward et al., 2010; Hessels et al., 2011; Walsh, 2017; Walsh & Cunningham, 2016). Although the academic debate primarily focused on internal and organisational factors (Cardon et al., 2011; Gaskill et al., 1993; Liao et al., 2008), a few studies have associated business failure with external conditions as the level of unemployment, tax, per capita income, percentage of business entries/exits, government changes, technology, and market conditions. Previous studies have also identified that the lack of regulatory, fiscal, and financial frameworks that support business creation and development (Stephen & Wilton, 2006), as well as the poor quality of institutions (Vaillant & Lafuente, 2007), have been associated with failure and exit. In this vein, Sheppard & Chowdhury (2005) identified the critical role of organisational interactions and managers’ strategic adjustments on business failure instead of contextual conditions.

The entrepreneurial process presents events and interactions between the entrepreneur, the organisation, and the context in a determined space and time. According to Kang & Uhlenbruck (2006), entrepreneurial actions depend on cyclical and dynamic processes of exploration and exploitation of business opportunities. Consequently, entrepreneurs decide the entrepreneurial trajectory of their initiatives: the continuity, the exit, or the re-entry. In general, the entrepreneurial process begins with an exploration of opportunities (discovering, searching, selecting) that can move towards the exploitation (organisation, negotiation, strategy, and learning) and then to a potential survival (re-investment, strategical orientations, growth), decline (liquidation, de-investment) or re-entry into the process (Kang & Uhlenbruck, 2006, p. 49). Along the entrepreneurial process, entrepreneurs may move from exploration to exit without going through exploitation or even move from exploration to re-entry without going through an exit (DeTienne, 2010; Shepherd et al., 2019). Consequently, an exit or business failure will modify individuals’ motivations. Some entrepreneurs would focus on stable employment alternatives, while other entrepreneurs would assume higher risks looking for self-employment alternatives like becoming investors or re-entering the entrepreneurial process (Parker & Van Praag, 2012; Kang & Uhlenbruck, 2006; Ucbasaran et al., 2006, 2013; Parker, 2013; Burton et al., 2016). Both cases have provided insights into the positive and negative effects of business failures (Table 2).

Regarding the positive effects of business failure, previous studies have shown favourable effects of business failure on entrepreneurs. First, business failure helps to identify personal strengths and weaknesses (i.e., skills, attitudes, knowledge, and beliefs) that are very useful across the entrepreneurial process (Jenkins et al., 2014). Second, business failure represents an opportunity to identify organisational strengths and weaknesses (i.e., customer information, market, liquidity, production, and innovation) that are useful in the exploration of business opportunities and the reduction of exploitation costs (Atsan, 2016). Third, business failure contributes to building strategic networks and social relationships that may be transformed into dynamic capabilities in future ventures (Cope, 2011). Four, previous business experiences reveal the need for leadership and managerial roles as well as the notion of high-level learning due to the occurrence of discontinuous events of small organisations (Cope, 2003).² Fifth, the serial entrepreneurship literature has evidenced higher (but temporal) economic-financial benefits due to the previous failure learning processes as well as the spillover effects (Parker, 2013; Khelil, 2016). In this respect, Parker (2013) highlighted the importance of public policies that promote/strengthen the re-entry into entrepreneurship even if they generate performance indicators lower than their previous companies. Public policies oriented to support re-entries after failure should consider the entrepreneur’s experiences and trajectories (Corner et al., 2017). It implies that not all re-entrepreneurs demand public/private support to face failure (Williams et al., 2019).

Regarding the adverse effects of business failure, previous studies have identified four adverse effects of business failure on entrepreneurs. First, individuals’ attitudes and behaviours have negatively influenced by the cultural stigma of failure in sanctioned societies (Cardon et al., 2011; Simmons et al., 2014). Second, the socialisation process has negatively influenced individuals’ risk-taking and career decisions as re-starting a venture or seeking paid work (Cope et al., 2004). Third, the adverse effects on specific procedures or regulations associated with the restricted access to credits or grants after a business failure (Kerr & Nanda, 2009; Haselmann & Wachtel, 2010). Fourth, re-entrepreneurs will have to face structural barriers like access to innovation/knowledge, cost disadvantages, capital requirements, government licenses, financial risks, as well as strategic barriers such as strategic behaviours, collusion, information asymmetries, and lack/excess of capacities (Lutz et al., 2010).

The entrepreneurship literature has given the context an indisputably important role in the promotion of entrepreneurial activity as well as in the impact on the economic development of a territory (Hoskisson et al., 2011). According to the institutional theory (North, 1990:3), institutions are “the rules of the game in a society” that can be formal (laws, regulations) and informal (attitudes, values, social norms). By adopting this approach, it is possible to identify formal and informal conditions that have influenced entrepreneurial entries and re-entries. An institutional framework is required to facilitate/promote entrepreneurial culture in a territory as well as interrelations/cooperation between entrepreneurs, organisations and other agents (Brown & Mason, 2017). The called “entrepreneurial ecosystem” (Acs et al., 2017a and b) has emerged based on these relationships. This terminology has been used to understand the interconnected group of entrepreneurs (potential, nascent and existing), financing agents (companies, venture capitalists, business angels, banks), and promoting organisations (universities, public sector agencies) that converge to support entrepreneurial initiatives (social, inclusive, high growth potential, serial) oriented to generate value in the territory (Mason & Brown, 2014, p.5). The analysis of entrepreneurial ecosystems has been crucial to the development of public agendas (Acs et al., 2017a and b). According to Stam (2015, p. 6), an entrepreneurial ecosystem is configured by institutional pillars (formal institutions, culture, physical infrastructure, and demand) and systemic elements (networks, leadership, financing, talent, knowledge, and intermediaries) that support the development of high-growth entrepreneurial initiatives (technology-based entrepreneurship or corporate entrepreneurship) to generate productivity, income, employment and well-being in the region. Table 3 describes the entrepreneurial ecosystem pillars that reinforce the individual and organisational determinants of entrepreneurial initiatives (Herrmann et al., 2012; WEF, 2014; Simón-Moya et al., 2014). Indeed, an entrepreneurial ecosystem is a dynamic and evolutionary process that ensures the creation of high-potential entrepreneurship that generates growth, productivity, and well-being (Stam & Spiger, 2016).

An entrepreneurial ecosystem has an appropriate regulatory framework for strengthening high-growth entrepreneurs. The regulatory framework represents governmental policies and programmes oriented to reinforce innovative collaborations and technology transfer processes and to foster the development of high-growth entrepreneurship that generates societal value and spillover effects (Stam, 2015). Regarding re-entrepreneurship after a business failure, regulatory frameworks should be oriented to reduce the stigma of failure (Walsh, 2016). Extant investigations have identified public policy initiatives oriented to provide adequate fiscal, financial, and legal conditions for re-entrepreneurs (Gentry & Hubbard, 2000; Cuthbertson & Hudson, 1996; Kerr & Nanda, 2009; Parker, 2013; Walsh, 2016). Regarding taxes, Gentry & Hubbard (2000) found that higher levels of taxes affect the entrepreneurs’ entries or re-entries, as well as the significant relationship between higher taxes and business failure. Therefore, if the lack of fiscal incentives explains adverse effects on entrepreneurship, regulatory frameworks should understand this negative effect on business entry/exit and include efficient regulations to promote saving and investments. Regarding financial regulations, Kerr & Nanda (2009) and Parker (2013) emphasizes on the revaluation of practices of financial organisations. These organisations must give more value to the track record of the re-entrepreneur independently if he/she changed the industrial sector in the new entrepreneurial initiative (Kerr & Nanda, 2009). Also, these organisations must change bankruptcy laws regarding the depreciation of the financial trajectory in cases of re-entrepreneurship (Cuthbertson & Hudson, 1996). Regarding legal conditions, the design and implementation to support re-entrepreneurship should also be as part of the regulatory framework within an entrepreneurial ecosystem (Hoskisson et al., 2011; Ucbasaran et al., 2003). Based on these assumptions, we propose the following proposition:

Access to sources of finance or capital is usually one of the main barriers for entrepreneurs at each stage of their entrepreneurial initiative (Chakrabarty & Bass, 2013; Kehlil, 2016). Therefore, in re-entry into entrepreneurship, this entrepreneurial ecosystems pillar is crucial to create a new business as well as to reduce the social stigma of failure. Previous experiences about (un)successful economic-financial management reinforce the ability to anticipate difficulties during the creation of new business in similar or different sectors (Atsan, 2016; Kerr & Nanda, 2009). Consequently, the experience gained from business failure should be an advantage instead of a disadvantage when entrepreneurs are applying for a loan or presenting the project to investors (Atsan, 2016). Previous business failure experiences represent knowledge acquired regarding accounting, economic, financial, strategic management, and social networks, and thus, the opportunity to reduce the social stigmatisation of business failure (Stam, Audretsch, & Meijaard, 2008). In the European context, investing/granting in entrepreneurial activity from individuals who have experienced business failures represents a high risk of return on investment or credit (Cuthbertson & Hudson, 1996; Zacharakis et al. 1999). Directly or indirectly, due to the stigmatisation of failure, the perception of European investors represents a barrier for entrepreneurs when the investors’ decision should be based on the proposal: quality, feasibility, expectations and limitations/risks (Cope et al. 2004). At the financial pillar, it is crucial to modify the stigma of considering business failure has a negative mark for the entrepreneur when they are presenting a new proposal to the business capital community or in the financial market (Parker, 2013). From the legal perspective, studies on corporate liquidation have found legal loopholes as well as the lack of legitimacy during the liquidation of a company (Cuthbertson & Hudson, 1996). Business failure or exit should be seen as a natural stage of any dynamic and entrepreneurial process. Based on these arguments, we propose the following proposition:

Physical and professional infrastructures (incubators/accelerators) are critical pillars within the entrepreneurial ecosystem (Stam, 2015). These infrastructures have mentors who provide their services in strategic areas (strategic, legal, accounting, financial, marketing, innovation, and production) for re-entrepreneurs. An example of good practices has been the participation of entrepreneurs who have experienced business failures through talks, networks or workshops as part of the advisory work team.³ Cope (2011) considers that this type of actions facilitates the learning process after a business failure based on feedback and collaborative reflection about business, social, emotional and intellectual aspects among the participants. In this respect, Cannon & Edmondson (2001, 2005) also found that working in groups mitigates the negative perception of business failure because people transform into personalised mentors who transfer experience and knowledge to those who are facing critical events. In this vein, Walsh (2016) suggested the formalisation of professional assistance and mentoring for re-entrepreneurs by providing access to networks, resources, and support structure. Corner et al. (2017) also suggested that there are types of resilient entrepreneurs who do not require a process of recovery and support, as they quickly move on from the experience of failure to re-start a business. In this regard, Williams et al. (2019) found that these types of entrepreneurs may have learned very little from the experience of failure and, therefore, replicate some decisions/behaviors that increase the likelihood of further failure. Based on these arguments, we propose the following proposition:

Human capital (experiences, skills, education) is a relevant determinant of business failure/success associated with the education pillar of the entrepreneurship ecosystem (Guerrero & Peña-Legazkue, 2019). The learning process after business failure represents the opportunity to transform the skills, experiences, and knowledge that should be required in new business re-entries. Previous studies have found a negative perception due to the social stigmatisation of failure (Stam et al., 2008). In this vein, Amaral et al. (2011) conducted a longitudinal study of serial entrepreneurs, and they found differences between general human capital (education and previous work experience) and specific human capital (entrepreneurial experience, the management, or investment). Amaral et al. (2011) found that generic human capital slows down the decision to re-enter. In this scenario, previous business failure experience plays a significant role in deciding to re-enter due to the opportunity cost of choosing another occupation (Walsh, 2017). Therefore, the pillar of higher education of an entrepreneurial ecosystem may contribute to reinforcing re-entry decisions (WEF, 2014).

Training and entrepreneurship capacity building programmes reinforced the weaknesses identified in the learning process and linked them with the exploration and exploitation of entrepreneurial opportunities (Ucbasaran et al., 2006, 2009). Similarly, Cope (2003) points out that discontinuous events (i.e., business failure) represented high-level entrepreneurial learnings in terms of understanding rules, defining new actions, and implementing new changes. Previous experiments have also found that the re-entry intention is experiential on entrepreneurs with a moderated self-confidence (Hsu et al., 2017). It implies that the design of training programs or training in entrepreneurship could include/reinforce strategic areas. For example, the analysis of business success/failure cases and the transference of business failure knowledge from higher-level learners to new learners. Based on these arguments, we propose the following proposition:

Previous studies suggest that regions with the highest levels of entrepreneurial culture tend to be the highest growth-oriented regions (Stuetzer et al., 2018). The social context has a positive/negative influence on the entrepreneurship phenomenon. Generally, after a business failure, the individual tried to interpret/understand the causes (Shepherd & Wiklund, 2006). In this questioning process, the individual had a sense of loss, low self-confidence, and absence of an optimistic future (Atsan, 2016; Khelil, 2016). In this regard, the individual’s social context could reinforce these attitudes or behaviours (Yamakawa et al., 2015). The social perception of failure must be understood as a learning/experience rather than a sanction (Cardon et al., 2011). Given the nature of cultural factors across generations, it takes time to transform the social sanction of business failure towards a more conducive entrepreneurship culture. Social media, education, and entrepreneurship programs play a crucial role in the stigmatisation of business failure. A strategy could be focusing on the economic, societal, and regional contributions of entrepreneurs who re-entry into the market with new entrepreneurial initiatives after a business failure (Ravindran & Baral, 2014). Based on these arguments, we propose the following proposition: