Innovation, Globalization and Firm Dynamics

Lessons for Enterprise Policy

Anna Ferragina, Erol Taymaz, Kamil Yilmaz

• Publisher: Taylor & Francis
• Year: 2014
• Print ISBN: 9780415836777
• eBook ISBN: 9781317810223
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book is about the relationship between firm dynamics, innovation and globalization, the processes that are essential for long term economic growth and welfare creation. This volume deals with these three issues in three sections titled respectively: entrepreneurship, new firm formation and growth; productivity-innovation-growthnexus; globalization, multinational firms and producers' dynamics. The book presents new studies written by distinguished researchers in the field, who use state-of-the-art methodologies and extensive sources of firm- and plant-level longitudinal data to analyze and understand these major economic issues facing modern economies.

In the first section, the book proposes two comprehensive introductory surveys which explore in detail the underpinnings of entrepreneurship, new firm formation and growth in advanced and developing countries. The second fundamental issue, productivity-innovation and firm dynamics, is approached by examining key drivers of selection mechanisms such as size, scale elasticity, innovative efforts, financial fragility of the firms, barriers to entry and exit, capital and financial market distortions, institutional inefficiencies and other market imperfections which affect the ability of firms to expand or enter. The third section examines differences, linkages and intertwined evolution of foreign and domestic firms in their dynamics of survival and growth in different institutional contexts and periods.

Each chapter includes a detailed discussion of the implications of the respective analyses for enterprise policy. In a concluding chapter the overall implications for enterprise policy of the analyses presented in the different chapters are drawn by the Editors. This approach ensures that the book is integrated around a coherent central theme in comprehensive framework.

The book responds to a growing concern among scholars, professionals, and policy makers over the recent decades about firm ability to survive and compete in a context of increasing globalization and international competition. The approach adopted is both theoretical and empirical with consideration of paradigmatic case studies in Europe, Africa and Asia, providing new evidence on developed, developing and transition economies in a comparative perspective. The cases selected represent different levels of development, different firms strategies and paths, with distinct outcomes. The book is an essential reading for scholars and students concerned with industry development, public policy and globalization, as well as to all those involved professionally in such issues.

Part I

Entrepreneurship, new firm formation and growth

1 Entrepreneurship and post-entry performance

The microeconomic evidence

Marco Vivarelli

1.1 Introduction

In recent years a strong belief that ‘entrepreneurship’ is a crucial driver of economic growth has emerged among both scholars and policy makers (see, for instance, Audretsch et al. 2006; Koellinger and Thurik, 2012; and, for a comprehensive survey, Van Praag and Versloot, 2007). However, moving from macro-economic scenarios to the micro foundations of entrepreneurship, since the seminal contributi on by Baumol (1990) we have known that ‘Shumpeterian innovative entrepreneurs’ coexist with ‘defensive and necessity entrepreneurs’, the latter being those who enter a new business not because of market opportunities and innovative ideas, but merely because they need an income to survive.

Empirically a world-wide research project, the ‘Global Entrepreneurship Monitor’ (GEM), has been collecting survey data using standardized definitions and collection procedures on potential and actual entrepreneurship since 1999, and now covers 60 countries (see Zacharakis et al., 2000; Reynolds et al., 2005; Acs et al., 2008b). This project reports the rates of business start-up and of self-employment across different countries of the world, but makes it clear that these statistics comprise both ‘opportunity-motivated’ entrepreneurs and those driven by necessity, the latter being defined as those who have started their own firms as a consequence of the following personal situation: ‘because they cannot find a suitable role in the world of work, creating a new business is their best available option’ (Reynolds et al., 2005, p. 217).

Within this context, the purpose of this chapter is to provide a contribution to the identification of the role of entrepreneurship in economic growth by mapping out: (1) the different microeconomic determinants of new firm formation; (2) the relationship between ex-ante characteristics (of the founder) and post-entry performance (of the new firm); and (3) the possible scope for economic policy aimed at distinguishing progressive entrepreneurship from defensive and regressive forms of firm formation.

In particular, the macroeconomic and sectoral scenarios are discussed in Section 1.2, where we attempt to throw some light on the concept of entrepre-neurship, extending what has already been mentioned in this Introduction. Section 1.3 shifts to the core of our analysis, which is microeconomic in nature; factors determining the foundation of a new firm are discussed, distinguishing between ‘progressive’ and ‘regressive’ entry drivers. Section 1.4 is devoted to investigating newborn firms’ patterns of learning, survival and growth, and the possible links between ex-ante entrepreneurial features and post-entry performance. Finally, Section 1.5 briefly discusses some possible policy implications.

1.2 What is entrepreneurship?

According to Schumpeter (1934), entrepreneurship is a driving force of innovation, and more generally an engine for economic development. As detailed by Wennekers and Thurik (1999) and Dejardin (2011), new firm formation may play a crucial role in fostering competition, inducing innovation and fostering the emergence of new sectors; in this framework, the entrepreneurs leading the new, small firms may compensate the restructuring of mature sectors and the downsizing of larger incumbent firms. Ultimately, new firms may substantially contribute to job creation, provided that the net effect of new entrants brings about overall market growth (see Malchow-Møller et al., 2011).¹

Indeed, while endogenous growth theorists (see Lucas, 1988; Romer, 1990; Aghion and Howitt, 1997) highlighted the importance of human capital and R&D as additional explanations for increasing returns in the aggregate production function, more recently several scholars have proposed entrepreneurship as a third driver of economic growth and employment generation. In particular, entrepreneurs, through their new companies, would be able to exploit the opportunities provided by new knowledge and ideas that are not fully understood and commercialized by the mature incumbent firms (see Acs et al., 2005, 2012; Carree and Thurik, 2006; Audretsch et al., 2006; Braunerhjelm et al. 2010). Thus, according to these authors, entrepreneurship represents the missing link between investment in new knowledge and economic development, serving as a conduit for both entirely new knowledge and knowledge spillovers (see Carlsson et al., 2009; Audretsch and Keilbach, 2011; for a very recent comprehensive survey based on this view, see Braunerhjelm, 2011).

In particular, as well articulated by Baptista and Preto (2011, pp. 421–2), knowledge spillovers brought about by new entrepreneurial firms are generated – directly – through the introduction of new knowledge-based products and the improvement of the variety and quality of existing products, and – indirectly – through the stimulus towards the incumbents which have to cope with the tougher competition through innovation and increasing productivity.

However, before continuing, the question of what is intended by entrepre-neurship and how it can be measured needs to be addressed. In the industrial organization literature the answer is unequivocal: entrepreneurship is the process by which new enterprises are founded and become viable. In this approach, the most common way of measuring entrepreneurship is to look at new firm formation, i.e. at entry rates (either gross or net, i.e. entry flows minus exit flows). Indeed, according to the OECD (2003), industrial dynamics (i.e. the entry and exit of firms) would account for between 20 and 40 per cent of total productivity growth in eight selected OECD countries, therefore supporting the idea that entrepreneurs represent one of the driving forces of economic growth and structural change (see Foster et al., 2008; Fritsch, 2011). The reasoning is that new entrants can displace obsolescent firms in a process of ‘creative destruction’ (see Schumpeter, 1939, 1943; for an account in an endogenous growth framework, see Aghion and Howitt, 1992), which may be considered an important micro determinant of productivity dynamics, eventually resulting in economic growth. From such a perspective, entrepreneurs are those individuals Schumpeter labelled ‘energetic types’ who display their ‘essential features’ by introducing the ‘new’ into various activities and by ‘breaking with the established routines’ usually adhered to by managers (see Santarelli, 2006, p. xii).

In more general terms, it has been argued that new firm formation can be beneficial for economic growth (see Van Stel et al., 2005), employment generation and unemployment reduction (see Hart and Oulton, 2001; Thurik, 2003). However, recent studies based on GEM evidence have identified a U-shaped relationship between a country’s rate of entrepreneurial activity and its level of economic development (see Reynolds et al., 2001; Wennekers et al., 2005). Indeed, this evidence that new firm formation is very high in both highly developed and extremely poor countries (where most of the so-called entrepreneurs are street vendors and people self-employed in traditional personal services) opens the way to considering entrepreneurship as a multi-faceted concept, not necessarily associated with innovation, productivity growth and economic development. Indeed, only when ‘opportunity entrepreneurs’ (those motivated by innovative and progressive drivers) are distinguished from ‘necessity entrepreneurs’ (those who are self-employed and pushed by defensive and regressive drivers, such as the fear of unemployment), a positive linear relationship between economic development and entrepreneurship seems to be restored (see Carree et al., 2007; Acs et al., 2008a; Acs, 2008).²

Turning our attention from the macroeconomic to the sectoral level, the empirical evidence concerning industrial dynamics also casts much doubt on the progressive potentialities of business start-ups. First, survival rates for new firms are strikingly low: according to Bartelsman et al. (2005), who worked on data for ten OECD countries, about 20–40 per cent of entering firms fail within the first two years of life, while only 40–50 per cent survive beyond the seventh year (see also OECD, 2003, p. 145). The econometric evidence at the sectoral and microeconomic levels is largely consistent with this outcome; studies on different countries and different sectors reveal that more than 50 per cent of new firms exit the market within the first five years of activity (see Dunne et al. 1988; Reid 1991; Geroski, 1995; Mata et al. 1995; Audretsch and Mahmood, 1995; Audretsch et al. 1999a; Johnson, 2005).³

Second, entry and exit rates are significantly correlated; this is one of the uncontroversial ‘stylized facts’ of the entry process according to Geroski (1995, p. 424), who pointed out that the ‘mechanism of displacement, which seems to be the most palpable consequence of entry, affects young, new firms more severely’ (see also Baldwin and Gorecki, 1987, 1991). Indeed, entry and exit rates have been found to be positively correlated across industries in both OECD countries (see Bartelsman et al., 2005) and in developing countries (see Bartels-man et al., 2004).⁴

This evidence opens the way to some considerations regarding the alleged role of entry as a vehicle for technological upgrading, productivity growth and employment generation. If entry were indeed driven mainly by technological opportunities, growing sales and profit expectations, one would observe a negative cross-sectional correlation between entry and exit rates, in particular over short time intervals. On the contrary, entry and exit rates are positively and significantly correlated and market ‘churning’ emerges as a common feature of industrial dynamics across different sectors and different countries. This means that economic sectors are characterized by a fringe of firms operating at a suboptimal scale where the likelihood of survival is particularly low and where ‘revolving door’ firms are continuously entering and exiting the market.

Obviously, industry-specific characteristics such as scale economies and the endowment of innovative capabilities (see Audretsch, 1991; Agarwal and Audretsch, 2001) exert a significant impact on entry, exit and the likelihood of survival of newborn firms. For example, in industries characterized by a higher minimum efficient scale (MES), small newborn firms face higher costs, which are likely to push them out of the market within a short period after start-up (see Lotti and Santarelli, 2004). Therefore, in many sectors new firm start-ups may simply originate what has correctly been called ‘turbulence’ (a term first introduced by Beesley and Hamilton, 1984; see also Caves, 1998; Baptista and Karaöz, 2011). By the same ...

Table of contents

• Cover Page
• Half Title page
• Title page
• Copyright Page
• Contents
• Figures
• Tables
• Contributors
• Acknowledgements
• Introduction
• I Entrepreneurship, new firm formation and growth
• II Productivity—innovation—growth nexus
• III Globalization, multinational firms and producers' dynamics
• IV Conclusions
• Index