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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 be made without written permission 1 “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) © Vartuhi Tonoyan 2008 2 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 (!) © Vartuhi Tonoyan 2008 3 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 © Vartuhi Tonoyan 2008 4 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) © Vartuhi Tonoyan 2008 5 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) © Vartuhi Tonoyan 2008 6 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 © Vartuhi Tonoyan 2008 7 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) © Vartuhi Tonoyan 2008 8 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) © Vartuhi Tonoyan 2008 9 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 © Vartuhi Tonoyan 2008 10 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) © Vartuhi Tonoyan 2008 11 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 © Vartuhi Tonoyan 2008 12 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!) © Vartuhi Tonoyan 2008 13 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 © Vartuhi Tonoyan 2008 14 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) © Vartuhi Tonoyan 2008 15 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 © Vartuhi Tonoyan 2008 16 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 © Vartuhi Tonoyan 2008 17 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 © Vartuhi Tonoyan 2008 18 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 © Vartuhi Tonoyan 2008 19 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 © Vartuhi Tonoyan 2008 20