L26 Entrepreneurship
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What Makes an Employer?
(2019)
As the policy debate on entrepreneurship increasingly centers on firm growth in terms of job creation, it is important to better understand which variables influence the first hiring decision and which ones influence the subsequent survival as an employer. Using the German Socio-economic Panel (SOEP), we analyze what role individual characteristics of entrepreneurs play in sustainable job creation. While human and social capital variables positively influence the hiring decision and the survival as an employer in the same direction, we show that none of the personality traits affect the two outcomes in the same way. Some traits are only relevant for survival as an employer but do not influence the hiring decision, other traits even unfold a revolving door effect, in the sense that employers tend to fail due to the same characteristics that positively influenced their hiring decision.
Predicting entrepreneurial development based on individual and business-related characteristics is a key objective of entrepreneurship research. In this context, we investigate whether the motives of becoming an entrepreneur influence the subsequent entrepreneurial development. In our analysis, we examine a broad range of business outcomes including survival and income, as well as job creation, expansion and innovation activities for up to 40 months after business formation. Using self-determination theory as conceptual background, we aggregate the start-up motives into a continuous motivational index. We show – based on a unique dataset of German start-ups from unemployment and non-unemployment – that the later business performance is better, the higher they score on this index. Effects are particularly strong for growth oriented outcomes like innovation and expansion activities. In a next step, we examine three underlying motivational categories that we term opportunity, career ambition, and necessity. We show that individuals driven by opportunity motives perform better in terms of innovation and business expansion activities, while career ambition is positively associated with survival, income, and the probability of hiring employees. All effects are robust to the inclusion of a large battery of covariates that are proven to be important determinants of entrepreneurial performance.
Start-up incentives targeted at unemployed individuals have become an important tool of the Active Labor Market Policy (ALMP) to fight unemployment in many countries in recent years. In contrast to traditional ALMP instruments like training measures, wage subsidies, or job creation schemes, which are aimed at reintegrating unemployed individuals into dependent employment, start-up incentives are a fundamentally different approach to ALMP, in that they intend to encourage and help unemployed individuals to exit unemployment by entering self-employment and, thus, by creating their own jobs. In this sense, start-up incentives for unemployed individuals serve not only as employment and social policy to activate job seekers and combat unemployment but also as business policy to promote entrepreneurship. The corresponding empirical literature on this topic so far has been mainly focused on the individual labor market perspective, however. The main part of the thesis at hand examines the new start-up subsidy (“Gründungszuschuss”) in Germany and consists of four empirical analyses that extend the existing evidence on start-up incentives for unemployed individuals from multiple perspectives and in the following directions:
First, it provides the first impact evaluation of the new start-up subsidy in Germany. The results indicate that participation in the new start-up subsidy has significant positive and persistent effects on both reintegration into the labor market as well as the income profiles of participants, in line with previous evidence on comparable German and international programs, which emphasizes the general potential of start-up incentives as part of the broader ALMP toolset. Furthermore, a new innovative sensitivity analysis of the applied propensity score matching approach integrates findings from entrepreneurship and labor market research about the key role of an individual’s personality on start-up decision, business performance, as well as general labor market outcomes, into the impact evaluation of start-up incentives. The sensitivity analysis with regard to the inclusion and exclusion of usually unobserved personality variables reveals that differences in the estimated treatment effects are small in magnitude and mostly insignificant. Consequently, concerns about potential overestimation of treatment effects in previous evaluation studies of similar start-up incentives due to usually unobservable personality variables are less justified, as long as the set of observed control variables is sufficiently informative (Chapter 2).
Second, the thesis expands our knowledge about the longer-term business performance and potential of subsidized businesses arising from the start-up subsidy program. In absolute terms, the analysis shows that a relatively high share of subsidized founders successfully survives in the market with their original businesses in the medium to long run. The subsidy also yields a “double dividend” to a certain extent in terms of additional job creation. Compared to “regular”, i.e., non-subsidized new businesses founded by non-unemployed individuals in the same quarter, however, the economic and growth-related impulses set by participants of the subsidy program are only limited with regard to employment growth, innovation activity, or investment. Further investigations of possible reasons for these differences show that differential business growth paths of subsidized founders in the longer run seem to be mainly limited by higher restrictions to access capital and by unobserved factors, such as less growth-oriented business strategies and intentions, as well as lower (subjective) entrepreneurial persistence. Taken together, the program has only limited potential as a business and entrepreneurship policy intended to induce innovation and economic growth (Chapters 3 and 4).
And third, an empirical analysis on the level of German regional labor markets yields that there is a high regional variation in subsidized start-up activity relative to overall new business formation. The positive correlation between regular start-up intensity and the share among all unemployed individuals who participate in the start-up subsidy program suggests that (nascent) unemployed founders also profit from the beneficial effects of regional entrepreneurship capital. Moreover, the analysis of potential deadweight and displacement effects from an aggregated regional perspective emphasizes that the start-up subsidy for unemployed individuals represents a market intervention into existing markets, which affects incumbents and potentially produces inefficiencies and market distortions. This macro perspective deserves more attention and research in the future (Chapter 5).
Self-efficacy reflects the self-belief that one can persistently perform difficult and novel tasks while coping with adversity. As such beliefs reflect how individuals behave, think, and act, they are key for successful entrepreneurial activities. While existing literature mainly analyzes the influence of the task-related construct of entrepreneurial self-efficacy, we take a different perspective and investigate, based on a representative sample of 1,405 German business founders, how the personality characteristic of generalized self-efficacy influences start-up performance as measured by a broad set of business outcomes up to 19 months after business creation. Outcomes include start-up survival and entrepreneurial income, as well as growth-oriented outcomes such as job creation and innovation. We find statistically significant and economically important positive effects of high scores of self-efficacy on start-up survival and entrepreneurial income, which become even stronger when focusing on the growth-oriented outcome of innovation. Furthermore, we observe that generalized self-efficacy is similarly distributed between female and male business founders, with effects being partly stronger for female entrepreneurs. Our findings are important for policy instruments that are meant to support firm growth by facilitating the design of more target-oriented offers for training, coaching, and entrepreneurial incubators.
We investigate the effect of the COVID-19 pandemic on self-employed people’s mental health. Using representative longitudinal survey data from Germany, we reveal differential effects by gender: whereas self-employed women experienced a substantial deterioration in their mental health, self-employed men displayed no significant changes up to early 2021. Financial losses are important in explaining these differences. In addition, we find larger mental health responses among self-employed women who were directly affected by government-imposed restrictions and bore an increased childcare burden due to school and daycare closures. We also find that self-employed individuals who are more resilient coped better with the crisis.
The German start-up subsidy (SUS) program for the unemployed has recently undergone a major make-over, altering its institutional setup, adding an additional layer of selection and leading to ambiguous predictions of the program’s effectiveness. Using propensity score matching (PSM) as our main empirical approach, we provide estimates of long-term effects of the post-reform subsidy on individual employment prospects and labor market earnings up to 40 months after entering the program. Our results suggest large and persistent long-term effects of the subsidy on employment probabilities and net earned income. These effects are larger than what was estimated for the pre-reform program. Extensive sensitivity analyses within the standard PSM framework reveal that the results are robust to different choices regarding the implementation of the weighting procedure and also with respect to deviations from the conditional independence assumption. As a further assessment of the results’ sensitivity, we go beyond the standard selection-on-observables approach and employ an instrumental variable setup using regional variation in the likelihood of receiving treatment. Here, we exploit the fact that the reform increased the discretionary power of local employment agencies in allocating active labor market policy funds, allowing us to obtain a measure of local preferences for SUS as the program of choice. The results based on this approach give rise to similar estimates. Thus, our results indicating that SUS are still an effective active labor market program after the reform do not appear to be driven by “hidden bias”.
Entrepreneurial persistence is demonstrated by an entrepreneur’s continued positive maintenance of entrepreneurial motivation and constantly-renewed active engagement in a new business venture despite counter forces or enticing alternatives. It is thus a crucial factor for entrepreneurs when pursuing and exploiting their business opportunities and to realize potential economic gains and benefits. Using rich data on a representative sample of German business founders, we investigate the determinants of entrepreneurial persistence. Next to observed survival we also construct a hybrid persistence measure capturing also the motivational dimension of persistence. We analyze the influence of individual-level (human capital and personality) and business-related characteristics on both measures as well as their relative importance. We find that the two indicators emphasize different aspects of persistence. For the survival indicator, the predictive power is concentrated in business characteristics and human capital, while for hybrid persistence, the dominant factors are business characteristics and personality. Finally, we show that results are heterogeneous across subgroups. In particular, formerly-unemployed founders do not differ in survival chances, but they are more likely to lack a high psychological commitment to their business ventures.
The self-employed faced strong income losses during the Covid-19 pandemic. Many governments introduced programs to financially support the self-employed during the pandemic, including Germany. The German Ministry for Economic Affairs announced a €50bn emergency-aid program in March 2020, offering one-off lump-sum payments of up to €15,000 to those facing substantial revenue declines. By reassuring the self- employed that the government ‘would not let them down’ during the crisis, the program had also the important aim of motivating the self-employed to get through the crisis. We investigate whether the program affected the confidence of the self-employed to survive the crisis using real-time online-survey data comprising more than 20,000 observations. We employ propensity score matching, making use of a rich set of variables that influence the subjective survival probability as main outcome measure. We observe that this program had significant effects, with the subjective survival probability of the self- employed being moderately increased. We reveal important effect heterogeneities with respect to education, industries, and speed of payment. Notably, positive effects only occur among those self-employed whose application was processed quickly. This suggests stress-induced waiting costs due to the uncertainty associated with the administrative processing and the overall pandemic situation. Our findings have policy implications for the design of support programs, while also contributing to the literature on the instruments and effects of entrepreneurship policy interventions in crisis situations.
We estimate the long-term effects of start-up subsidies (SUS) for the unemployed on subjective outcome indicators of well-being, as measured by the participants’ satisfaction in different domains. This extends previous analyses of the current German SUS program (“Gründungszuschuss”) that focused on objective outcomes – such as employment and income – and allows us to make a more complete judgment about the overall effects of SUS at the individual level. This is especially important because subsidizing the transition into self-employment may have unintended adverse effects on participants’ well-being due to its risky nature and lower social security protection, especially in the long run. Having access to linked administrative-survey data providing us with rich information on pre-treatment characteristics, we base our analysis on the conditional independence assumption and use propensity score matching to estimate causal effects within the potential outcomes framework. We find long-term positive effects on job satisfaction but negative effects on individuals’ satisfaction with their social security situation. Further findings suggest that the negative effect on satisfaction with social security may be driven by negative effects on unemployment and retirement insurance coverage. Our heterogeneity analysis reveals substantial variation in effects across gender, age groups and skill levels. The sensitivity analyses show that these findings are highly robust.
Divergent thinking is the ability to produce numerous and diverse responses to questions or tasks, and it is used as a predictor of creative achievement. It plays a significant role in the business organization’s innovation process and the recognition of new business opportunities. Drawing upon the cumulative process model of creativity in entrepreneurship, we hypothesize that divergent thinking has a lasting effect on post-launch entrepreneurial outcomes related to innovation and growth, but that this relation might not always be linear. Additionally, we hypothesize that domain-specific experience has a moderating role in this relation. We test our hypotheses based on a representative longitudinal sample of 457 German business founders, which we observe up until 40 months after start-up. We find strong relative effects for innovation and growth outcomes. For survival we find conclusive evidence for non-linearities in the effects of divergent thinking. Additionally, we show that such effects are moderated by the type of domain-specific experience that entrepreneurs gathered pre-launch, as it shapes the individual’s ideational abilities to fit into more sophisticated strategies regarding entrepreneurial creative achievement. Our findings have relevant policy implications in characterizing and identifying business start-ups with growth and innovation potential, allowing a more efficient allocation of public and private funds.