Elsevier

European Economic Review

Volume 86, July 2016, Pages 52-72
European Economic Review

Industry structure, entrepreneurship, and culture: An empirical analysis using historical coalfields

https://doi.org/10.1016/j.euroecorev.2015.08.012Get rights and content

Abstract

There is mounting evidence demonstrating that entrepreneurship is spatially clustered and that these spatial differences are quite persistent over long periods of time. However, especially the sources of that persistence are not yet well-understood, and it is largely unclear whether persistent differences in entrepreneurship are reflected in differences in entrepreneurship culture across space as it is often argued in the literature. We approach the cluster phenomenon by theorizing that a historically high regional presence of large-scale firms negatively affects entrepreneurship, due to low levels of human capital and entrepreneurial skills, fewer opportunities for entry and entrepreneurship inhibiting formal and informal institutions. These effects can become self-perpetuating over time, ultimately resulting in persistent low levels of entrepreneurship activity and entrepreneurship culture. Using data from Great Britain, we analyze this long-term imprinting effect by using the distance to coalfields as an exogenous instrument for the regional presence of large-scale industries. IV regressions show that British regions with high employment shares of large-scale industries in the 19th century, due to spatial proximity to coalfields, have lower entrepreneurship rates and weaker entrepreneurship culture today. We control for an array of competing hypotheses like agglomeration forces, the regional knowledge stock, climate, and soil quality. Our main results are robust with respect to inclusion of these control variables and various other modifications which demonstrates the credibility of our empirical identification strategy. A mediation analysis reveals that a substantial part of the impact of large-scale industries on entrepreneurship is through human capital.

Introduction

Paul Krugman (1991, p. 5) motivated the need to systematically analyze economic geography by asking, and then answering, the following question: “What is the most striking feature of the geography of economic activity? The short answer is surely concentration… production in many industries is remarkably concentrated in space.” The economics literature was quick to respond that there is considerably more than just production that varies significantly across geographic space. In particular, entrepreneurship activities, as measured and reflected by the start-up of new firms also tends to be much more highly concentrated in certain locations than in others (Audretsch and Fritsch, 1994, Klepper, 2010, Glaeser and Kerr, 2009, Rosenthal and Strange, 2003). Considerable efforts have been made to link the distribution of entrepreneurial activity across geographic space to variations in spatial characteristics, such as knowledge, creativity and innovations (Obschonka et al., 2015a, Stuetzer et al., 2014), income levels (Reynolds et al., 1995), agglomeration effects (e.g., Glaeser et al., 2010) and input costs (Fritsch and Falck, 2007) – to name a few.

In this paper, we focus on the regional industry structure. More precisely, we analyze the impact of the concentration of large-scale industries on entrepreneurship. We use entrepreneurship as an umbrella term comprising the actual entrepreneurial activity (measured in this paper by means of regional start-up rates and self-employment rates) and the more latent entrepreneurship culture (measured by psychological traits). Our research builds on Chinitz (1961) who tried to explain the higher prevalence of entrepreneurship in New York compared to Pittsburgh with different processes of economic development. The large-scale physical capital driven economy of production was less conducive to entrepreneurship because the culture, attitudes and values were shaped from the work place of mass production and not decentralized and independent decision making. By contrast, the high prevalence of independent and autonomous small businesses in New York was more conducive to entrepreneurial attitudes and cultures. In particular, Chinitz (1961) argued that because of the large-scale structure of the Pittsburgh economy there were fewer independent business owners with the experience and capabilities to transfer entrepreneurial values and attitudes to the next generation of potential entrepreneurs, which in turn would lead to persisting lower levels of entrepreneurship. In recent years, the belief that economic behavior in general is imprinted from a longer-term and more fundamental cultural and institutional context has gained ground in the research community (Acemoglu and Robinson, 2012, Diamond and Robinson, 2010).

We test Chinitz’s insight by hypothesizing that the historical presence of large-scale industries in regions negatively impacts regional entrepreneurship activities and the regional entrepreneurship culture jointly. While other studies have already reported negative correlations between large-scale industries and entrepreneurship, these studies employ cross-regional static settings (e.g., Armington and Acs, 2002; Davidsson, 1995; Fotopoulos and Spence, 2001; Lee et al., 2004; Reynolds et al., 1994) which is clearly not what Chinitz had in mind in his seminal paper. Furthermore, these papers almost exclusively focus on entrepreneurship activities as the dependent variable, but do not provide empirical evidence regarding the relationship with entrepreneurship culture (Davidsson, 1995 being an exception). Obviously, serious data and measurement challenges have precluded studies from exploring the long-term effects of a large-scale industry structure on both entrepreneurship activities and entrepreneurship culture.

In order to test our hypothesis, we draw on the historical context of the Industrial Revolution in Great Britain by using the distance to coalfields as an instrument for the presence of large-scale industries in the 19th century (for example, textiles and metal). These industries dominated certain parts of Great Britain (e.g., northern and midland England, south of Wales and the central parts of Scotland) over a period of more than 100 years but have now lost their dominating role in the economy. We find that regions with a high historical employment share in large-scale industries have significantly and substantially lower entrepreneurship rates and a weak entrepreneurship culture. Beyond the direct relationship of industry structure and entrepreneurship, we also test for channels of causality about how the local presence of large-scale industries negatively affects entrepreneurship. We find that 13% of the effect of large-scale industries on regional start-up rates is mediated via human capital. This figure increases to 34% when looking at entrepreneurship culture as dependent variable.

Note that historical coal mines were used as an instrument for entrepreneurship in a recent paper by Glaeser et al. (2015) that investigated the causal effect of entrepreneurship on employment growth across U.S. regions. Glaeser et al. instrument regional entrepreneurship around 1980 with the presence of historical mines in close proximity of a region in 1900. Their argument is that the presence of coal mines was an important determinant for the location decision of large-scale industries. Their main finding is that regions with relatively more mines in close proximity in 1900, had less entrepreneurship in 1980 and therefore less growth in the time period between 1982 and 2002. Our approach differs from their approach as we focus on the link between entrepreneurship in an area and the distance to coalfields through a direct assessment of the historical concentration of large-scale industries and their role in the emergence of low levels of entrepreneurship activity and entrepreneurship culture. Another related paper in the field by Fritsch and Wyrwich (2014), shows that German regions that had a high level of entrepreneurship in the 1920s had higher rates of entrepreneurship at the beginning of the 21st century despite several historical shocks. Due to the many structural breaks (World War II, socialist regime in East Germany) the 1925 entrepreneurship rate can be interpreted as an indicator for entrepreneurship culture. However, the study does not explain where these regional differences in entrepreneurial tradition come from. Our paper offers explanations of the emergence of regional differences in entrepreneurship activities and entrepreneurship culture.

Our paper makes two main contributions to the literature. First, we present causal evidence for a regional determinant of entrepreneurial activity – industry structure. While research into entrepreneurship has certainly advanced our understanding about regional differences in this phenomenon, much of these results are rather correlative in nature. Research applying causal methods such as (natural) experiments and instrumental variables (e.g., Bauernschuster et al., 2010; Wyrwich, 2013; Glaeser et al., 2015) contributes to a body of verified knowledge and thus strengthens legitimacy for a research field in adolescence.

A second main contribution is to look at the determinants of regional entrepreneurship culture. Few studies have looked at the historical roots of cultural regional characteristics (see for an overview, Nunn, 2009). For example, Guiso et al. (2008) study variations in social capital among Italian cities and find that cities that experienced self-government in the Middle Ages have higher levels of social capital. Greif (1994) analyzes cultural differences between traders from different Mediterranean regions in the Middle Ages, and finds that Genoese traders outperformed Maghribi traders because of institutions based on individualist cultural beliefs. Talhelm et al. (2014) look at the relationship between different agricultural systems (rice vs. wheat) and personality traits. They find that individuals living in regions which have a history of rice agriculture were more holistic in their thinking and interdependent. In a paper related to this article, Obschonka et al., (2015b) investigate the effect of historical socio-economic factors on the emergence of regional personality traits. Their results suggest that, in particular, the regional presence of the heavy industries is related to factors associated with an “unhappy personality” (that predict lower well-being in the region) – higher regional levels of neuroticism and lower levels of conscientiousness. Investigating the roots of entrepreneurship culture is important because cultural characteristics can persist over an extended time and can shape the future trajectories of regions. For example, with respect to entrepreneurship, Obschonka et al., (2015a) find empirical evidence that regional knowledge predicts regional start-up rates only if the region has a strong entrepreneurship culture.

The remainder of the paper is organized as follows. 2 The effect of large-scale industries on entrepreneurship activities, 3 The effect of large-scale industries on entrepreneurship culture present theory of how large-scale industries negatively affect regional entrepreneurship activities and entrepreneurship culture. Section 4 describes the data and the estimation approach. Section 5 presents and interprets the results, and Section 6 concludes the paper.

Section snippets

Entrepreneurial activity and the nature of firms and employees in large-scale industries

The characteristics of firms in large-scale industries (such as mining) determine the scope of entrepreneurial activity for many reasons that are grounded in different strands of literature. First, there is the “classical” approach of industrial organization (IO) toward entrepreneurship (e.g., for overviews, see Siegfried and Evans, 1994; Geroski, 1995). According to the IO perspective, “market entries” depend on industry characteristics such as the level of capital intensity, the average

What is regional entrepreneurship culture?

An entrepreneurship culture can be defined as a “positive collective programming of the mind” (Beugelsdijk, 2007, p. 190) or an “aggregate psychological trait” (Freytag and Thurik, 2007, p. 123) of the population oriented toward entrepreneurial values such as individualism, independence, and achievement (e.g., McClelland, 1961; Hofstede and McCrae, 2008). From an institutional perspective, such a culture mainly comprises informal institutions (e.g., traits, norms, values, and codes of conduct)

Data and estimation approach

We aim to explain current regional variation in entrepreneurial activity and culture with the historical presence of large-scale industries during the Industrial Revolution in Great Britain. Our basic model for this investigation isEr2011=βLargescaler1891+Zr+εrwhere E stands for the indicators for entrepreneurship activities and culture in 2011 in region r, Largescale stands for the indicator of large-scale industries in region r in 1891 and Z is a vector of regional control variables and ε is

IV-results

We employed the Huber–White procedure in all IV-regressions to account for heteroskedasticity. Note that the variables regarding entrepreneurship activities, the employment share in large-scale industries, the distance to coalfields, and number of watermills are log transformed for the analysis in order to assist interpretation of the regression coefficients.5

Conclusion

This article adds to the growing literature on the regional determinants of entrepreneurial activity and also sheds light on the still dormant domain of the origins of entrepreneurship culture. Generally the existing literature on determinants of the regional variation in entrepreneurship has focused on cross-sectional empirical evidence, thus impeding causal analysis. Following others, we try to make a contribution by applying a causal method (IV regressions) – which is why this study looks

Acknowledgments

Financial support by the Fritz-Thyssen-Stiftung (Az. 20.14.0.051) is gratefully acknowledged. The authors are grateful to John Watson for helpful comments on an earlier version of this paper, and Valeriya Mikhaylova, Patrick Schratz, Marie Karehnke, Manuel Beßler, and Lara Quick for excellent research assistance. An earlier version of this paper was presented at the National Academy of Sciences, Washington, DC (Workshop “The economics of entrepreneurship”, June 29, 2015).

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