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Lecture 6
What Makes an Entrepreneur?
Sociological Determinants of Entry into SelfEmployment: Theory & International Evidence
Vartuhi Tonoyan
May 20, 2008
© Vartuhi Tonoyan 2008 All rights reserved. No reproduction, copy or transmission of these slides may
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“What Makes an Entrepreneur?”A Sociological Approach
2.1. Social embeddedness of the decision to become selfemployed: On the role of “strong” & “weak” ties
2.1.1. Intergenerational transmission of self-employment
2.1.2. Inter-spousal transmission of self-employment
2.1.3. Weak ties & the decision to become self-employed
2.2. Age & gender
2.2.1. Age & the decision to become self-employed
2.2.2. Gender & the decision to become self-employed (lecture 7)
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2.1. Social embeddedness of the decision to become entrepreneur (1)
Theoretical background:
 Granovetter, M. (1991) „Economic Action & Social Structure:
The Problem of Embeddedness“, American Journal of
Sociology 3: 481-519
 Granovetter, M. (1992) „Economic Institutions as Social
Constructions: A Framework for Analysis“, Acta Sociologica
35:311-315
 Granovetter criticizes that economic theories neglect the
social structure and embeddedness of economic actions
The „social embeddedness of the economic actions“ theory
argues that most economic decisions are socially embedded (!)
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3 basic assumptions are neglected from economic theories:
1) Individuals do not only pursue economic goals, but also noneconomic goals such as sociability, approval, status & power
2) Economic action (e.g. setting up an enterprise) cannot be
explained by individual motives alone; it is embedded in
networks of personal relations rather than carried out by atomized
actors
3) Economic institutions do not arise automatically, but are socially
constructed (Berger & Luckmann 1966)
An example from Bali: the fledgling firm is often swamped by the
claims of friends & relatives for favors & support, when firms
„turn into relief organizations rather than businesses“.
 This example shows that sometimes the welfare of the local
community is put ahead of the welfare of the business as such
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Entrepreneurs are NOT considered as „atomized“,
„isolated“ actors pursuing only their self-interest,
independently of the social context they live in (Brüderl et
al. 1996).
Rather, entrepreneurship is seen as “embedded in a social
context, channelled and facilitated or constrained and
inhibited by people’s position in social networks”
(Aldrich & Zimmer 1986)
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Social capital consists of „strong“ & „weak“ ties (see the theory of
the „strength of weak ties“ by Granovetter (1973))
Characteristics
Strong Ties
Weak Ties
(parents, partner/husband,
neighbors, close friends,
etc.)
(relatives, acquaintances,
remote friends, former
employer etc.)
- long contact duration
- short contact duration
- emotional closeness
- no emotional closeness
- reciprocity of the
relationship
- no explicit anticipation of
reciprocity
- high contact frequency
- low contact frequency
Source: Tonoyan & Strohmeyer (2004)
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2.1.1.Intergenerational transmission of self-employment (1)
Sociologists argue that the decision to become
entrepreneur is influenced by one‘s family background
(„family embeddedness“), e.g. one‘s own parents
More specifically, the offspring of self-employed parents
(either self-employed father or self-employed mother) are
highly likely to become self-employed
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What are the mechanisms behind the intergenerational
transfers of self-employment?
i)
The transfer of the family business runs from parents to
offspring (German: “Unternehmensnachfolge”)
ii) Parents relax the liquidity constraints (e.g. parents provide
their offspring collateral for borrowing money from the bank or
they give start-up capital to the offspring)
iii) Parents transmit valuable work experience or other
managerial human capital to their offspring
iv) Parents (as successful entrepreneurs) serve as role-models for
their offspring (“if my parents can do it, so can I”), thus
increasing the offspring’s perceived feasibility of becoming selfemployed
(Recall the “learning by imitation” model by Bandura 1977)
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Laferrere, Anne (2001)
“Self-Employment & Intergenerational Transfers.
Liquidity Constraints & Family Environment”,
International Journal of Sociology 31 (1): 3-26
The analysis of the determinants of becoming self-employed
with focus on intergenerational transfer of self-employment
 Data: 1991-1992 French Household Survey of Financial Assets
 Central Result: Having a self-employed father or father-in-law
increases the probability of becoming self-employed for the
offspring for 1,5 times in France
Family background plays a twofold role. First, parents help offspring to get
access to bank credit by providing collateral thus relaxing the liquidity
constraints. Second, parents give a taste for self-employment, a knowledge of the enterprise from the inside & use of the family network)
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Dunn, Thomas & Douglas, Holtz-Eakin (2000)
“Financial Capital, Human Capital and the Transition to SelfEmployment: Evidence from Intergenerational Links”,
Journal of Labor Economics 18 (2): 282-305
The analysis of the determinants of becoming self-employed
with focus on intergenerational transfer of self-employment
Data:US National Longitudinal Surveys (1966, 1971, 1976&1981)
Central Results:
i) young men’s own financial assets exert a statistically significant, but
quantitatively modest effect on the transition to selfemployment from wage-and-salaried work
ii) Parents’ strongest effect runs not through financial means, but
rather through parents’ own self-employment experience &
business success
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Dunn & Holtz-Eakin’s Study (2)
Why does parents’ self-employment exhibit positive effects
on the offspring’s likelihood of switching into selfemployment?
Possible answers to this question might be as follows:
i)
the intergenerational transfer of self-employment may
reflect the transmission of skills & other aspects of human
capital between parents & offspring
ii) it may also indicate similarities in tastes for autonomy or
self-employed lifestyle (with parents serving as “role
models” for the offspring)
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Dunn & Holtz-Eakin’s Study (3)
To discriminate between alternative explanations i) & ii), the
authors measure parental success in self-employment as parents’
working time in self-employment (first), their business income
from self-employment (second) & average value of business
assets from self-employment (third)
The authors find that sons of more successful entrepreneurs
are more likely to enter self-employment than sons of less
successful entrepreneurs
Moreover, the majority of sons enter different industries and
occupations than their fathers
Consequently, expertise being passed on within families is not
entirely job- or industry-specific. Rather, “role models” & tastes
for self-employment as offspring’s determinants of becoming
self-employed are at stake
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2.1.2. Inter-spousal transmission of self-employment (1)
Marriage is assumed to be a valuable asset for both
spouses (Gary S. Becker 1976) and thus to provide a
suitable background for risky self-employment.
Collectively, a married couple can put more finance,
social contacts, human capital & emotional support
etc. for starting one’s own business
Consequently, a married woman is more willing to take the
risk of self-employment (of course, this also holds true for
married men!)
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2.1.2. Inter-spousal transmission of self-employment (2)
Conclusive empirical evidence exists on inter-spousal
transmission of self-employment
Having a husband with some exposure to self-employment nearly
doubles the wife’s probability of entering self-employment (see
e.g. Blanchflower & Oswald 1990, Bruce 1999 for the US &
Canada; Strohmeyer & Lauxen-Ulbrich 2003 and Lohmann &
Luber 2004 for Germany; Amosse & Goux 2004 for France)
i)
The US studies by Bruce (1999) & Caputo & Dolinsky
(1998) find that having a self-employed husband is the
most important determinant of the wife’s likelihood of
entering self-employment. More specifically, the
husband’s earnings from self-employment & his business
knowledge/experience contribute greatly to the wife’s
probability of becoming self-employed
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2.1.2. Inter-spousal transmission of self-employment (3)
Conclusive empirical evidence exists on inter-spousal
transmission of self-employment
ii) For Germany, Strohmeyer & Lauxen-Ulbrich (2003) find that if
the partner (husband) is self-employed himself, the wife’s
probability of switching into self-employment is 10 times higher
compared to a woman married to an unemployed person.
A longitudinal analysis by Lohmann & Luber (2004:57) reveals
that having a self-employed partner is an important factor for a
woman’s entry into skilled self-employment in Germany.
iii) Similarly, having an employed partner (opposed to an
unemployed one) increases the probability of switching into
self-employment in France, an effect which is statistically
stronger if the partner is self-employed himself (Amosse &
Goux 2004:90)
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2.1.3. Weak ties & the decision to become self-employed (1)
Sociologists argue that the decision to become entrepreneur is
influenced by the composition of social networks, more
specifically, by the presence of „weak ties“
(Aldrich et al. 1999)
The higher the number of weak ties, the higher the likelihood of
becoming entrepreneur
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2.1.3. Weak ties & the decision to become self-employed (2)
Why are weak ties likely to increase the probability of becoming
self-employed?
!! Entrepreneurs with structurally diverse networks are more likely
to encounter promising opportunities, since they get access to nonredundant information, e.g. about market niches, demand structure,
high-skilled labor etc.
 Studying female graduates from an MBA program, Burt & Raider
(2002) found higher rates of transitioning to self-employment
among those with structurally diverse networks
 Renzulli, Aldrich & Moody (2000) showed that „would-be
entrepreneurs“ with networks that spanned „multiple domains of
social life“ founded new firms with greater frequency
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2.2.1. Age & the decision to become self-employed (1)
Age has a curvilinear relationship with the likelihood of
becoming self-employed
Figure 2.1: Age of New Entrepreneurs by Age Groups
in Germany & Worldwide Average
% in the respective age group
18%
16,3%
16%
14%
12%
12,4%
10,5%
10%
8,7%
World
8%
5,9%
6,1%
6%
4,4%
3,9%
2,8%
4%
Germany
1,0%
2%
0%
< 18
18 - 24
25 - 34
35 - 44
45 - 54
55 - 64
> 64
Age groups
Source: De 2005:38, Basis: Global Entrepreneurship Monitor (GEM) 2002
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On the one hand, age incorporates the positive effect of
career experience, which increases with age: people gather
much of the information and skills as well as financial capital
necessary to exploit opportunities over their lives. Moreover,
age provides credibility in transmitting information to other
people when seeking to obtain resources or design
organizations (Shane 2003: 89-91)
On the other hand, when people become older, the effect of
age on the propensity to step into self-employment turns
negative
- the willingness to bear uncertainty declines with age,
because time horizons shorten
- opportunity costs go up with time, because income
tends to increase as people age
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References
1) Dunn, T. & D. Holtz-Eakin (2000) “Financial Capital, Human
Capital and the Transition to Self-Employment: Evidence from
Inter-generational Links”, Journal of Labor Economics 18(2):
300-303.
2) Laferrere, A. (2001) “Self-Employment & Intergenerational
Transfers. Liquidity Constraints & Family Environment”,
International Journal of Sociology 31 (1): 3-36.
3) Stuart, T. E. & O. Sorenson (2005) “Social Networks and
Entrepreneurship”, Alvarez, S. et al. (eds.) Handbook of
Entrepreneurship Research, pp. 233-242.
4) Case Study on Weak Ties, also downloadable from the webpage
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