Entrepreneurship, Financial Capital, and Social Capital

Two interesting new papers on entrepreneurship. The first deals with financial capital — specifically, the degree to which entrepreneurship (defined as self-employment) is constrained by credit availability. As regular readers know, I’ve been crusading against the idea that entrepreneurship consists of recognizing opportunities, in favor of the alternative idea that entrepreneurship involves putting assets at risk. The latter view directs our attention to how entrepreneurial activities are funded; rather than assuming that all positive-NPV opportunities are exploited, we should focus on the investor’s decision to allocate risk capital to one or another potential project. Put simply, “entrepreneurship is exercised not only by founders, but by funders.”

Funders care about collateral, which suggests that self-employment is constrained by the availability of durable personal assets like housing. In a new NBER working paper, “Housing Collateral and Entrepreneurship,” Martin Schmalz, David Sraer, and David Thesmar find a strong correlation between self-employment and house prices. “Our empirical strategy uses variations in local house prices as shocks to the value of collateral available to individuals owning a house and controls for local demand shocks by comparing entrepreneurial activity of homeowners and renters operating in the same region. We find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral create larger firms and more value added, and are more likely to survive, even in the long run.”

My Missouri colleague Colleen Heflin, along with Seok-Woo Kwon and Martin Ruef, have a new paper in the American Sociological Review on social capital and self-employment. Many papers have examined how an individual’s “social capital” — defined as networks of social and professional relationships — affects various economic outcomes, including the propensity to start a firm. Colleen and her colleagues focus at the community level and find that “individuals in communities with high levels of social trust are more likely to be self-employed compared to individuals in communities with lower levels of social trust. Additionally, membership in organizations connected to the larger community is associated with higher levels of self-employment, but membership in isolated organizations that lack connections to the larger community is associated with lower levels of self-employment.”

Of course, self-employment is only a crude proxy for entrepreneurship in the functional sense, but it is a widely used proxy in the empirical literature. I suppose entrepreneurship researchers, like other social scientists, resemble the drunk looking for his car keys under the lamppost. Who am I to complain?

Interview in eTalks

images (1)I am interviewed in the latest edition of Entrepreneurial Talks, better known as eTalks. “It’s a multi-disciplinary community of entrepreneurs, innovators and leaders who share a common denominator to create a better world with innovative entrepreneurial ideas.” Interviewer Niaz Uddin asks me about entrepreneurship in theory and practice, how economics and other academic disciplines fit into entrepreneurship education, the role of institutions and public policies in fostering entrepreneurship, and more.

Per Bylund to Baylor

Congratulations to McQuinn Center Fellow Per Bylund for his new position as Research Professor in the Department of Management & Entrepreneurship and the Baugh Center for Entrepreneurship & Free Enterprise at Baylor University’s Hankamer School of Business. We’re looking forward to Per bringing the “Missouri approach” to the great state of Texas.

Mokyr on Cultural Entrepreneurship

I am wary of adding yet another conceptual margin for entrepreneurial action but I highly recommend a new (and for the moment, ungated) paper in the Scandinavian Economic History Review by the distinguished economic historian Joel Mokyr on “cultural entrepreneurship.” Starting from a broadly Schumpeterian perspective, Mokyr focuses on individuals who introduce and disseminate novel ideas:

[E]ach individual makes cultural choices taking as given what others believe. It is not a priori obvious how that affects one’s choices. It may affect them positively because conformism implies that there is some social cost associated with deviancy, or because people may reason that if the majority believes a certain thing, there may be wisdom in it (thus saving on information costs). But there can be a reverse reaction as well, with non-conformists perversely rebelling against existing beliefs. What matters for my purposes is that for a small number of individuals, the beliefs of others are not given but can be changed. I shall refer to those people as cultural entrepreneurs. Their function is much like entrepreneurs in the realm of production: individuals who refuse to take the existing technology or market structure as given and try to change it and, of course, benefit personally in the process. Much like other entrepreneurs, the vast bulk of them make fairly marginal changes in our cultural menus, but a few stand out as having affected them in substantial and palpable ways.

Succinctly expressed: “cultural entrepreneurs are the creators of epistemic focal points that people can coordinate their beliefs on.”

Mokyr’s focus, like Schumpeter’s, is not entrepreneurship per se, but its effects, particularly on long-run economic growth, and his entrepreneurship construct is somewhat undertheorized. But he provides fascinating examples, ranging from Mohammed and Luther to Francis Bacon, Isaac Newton, and Adam Smith. He focuses in particular on Bacon and Newton, describing Bacon’s work as “the coordination device which served as the point of departure for thinkers and experimentalists for two centuries to come. The economic effects of these changes remained latent and subterranean for many decades, but eventually they erupted in the Industrial Revolution and the subsequent processes of technological change.” Newton and the Royal Society “raise[d] the social standing of scientists and researchers as people who should be respected and supported and [provided] them with a comfortable material existence.” (Mostly good.)

I’m not an expert on cultural theory or history and am not sure how much the “cultural entrepreneur” construct ads to our understanding of cultural change (other than relabeling, a frequent worry in entrepreneurship studies). But the paper is a great read, highly provocative and informative, and addresses big questions. Check it out.

[Cross-posted from Organizations and Markets]

Review of Organizing Entrepreneurial Judgment

The forthcoming Autumn 2013 issue of Policy, published by the Centre for Independent Studies, features a nice review of my Organizing Entrepreneurial Judgment (with Nicolai Foss).

Foss and Klein . . . focus on what the entrepreneur brings to economic production and the skills that must be exercised in creating a profit-making enterprise — the firm or organisation. Their contribution, and it is a major and well-argued one, is full of historical and theoretical detail that drives their theme of the entrepreneur as not just an “ideas” man or woman, but one who creates, when successful, an organisation that finds and orders the capital and processes appropriate to the tasks of producing goods and services at a profit.

Reviewer Barry Maley says the book explains “the essential intertwining of entrepreneurship with the firm” and offers, for the general reader, “an accessible insight into a subject central to economic production,” and is “relatively light on jargon and technicalities.”

Clusters of Entrepreneurship and Innovation

That’s the title of a new review paper by Aaron Chatterji, Ed Glaeser, and William Kerr (a gated NBER working paper, unfortunately). Agglomeration has been a huge issue in the entrepreneurship, technology strategy, innovation policy, and economic growth literatures and it’s nice to have an up-to-date, not-very-technical review paper. (Hopefully there is an ungated copy out there somewhere.)

Clusters of Entrepreneurship and Innovation
Aaron Chatterji, Edward L. Glaeser, William R. Kerr
NBER Working Paper No. 19013, May 2013

This paper reviews recent academic work on the spatial concentration of entrepreneurship and innovation in the United States. We discuss rationales for the agglomeration of these activities and the economic consequences of clusters. We identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation. While arguments exist for and against policy support of entrepreneurial clusters, our understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.

[Cross-posted at Organizations and Markets]

Job Opening in Regional Economics

Missouri’s DASS and Truman School are looking for an assistant professor specializing in regional and spatial economics:

We seek applicants working in the modeling, integration, and assessment of regional economies to inform public and private decision-making.  Applicants’ substantive training and expertise may be in any discipline relevant to regional economics, including applied or agricultural economics, public policy, state and local public finance or similar fields. Applicants should have a strong scholarly record in spatial econometrics and regional analysis.  Dynamic simulation modeling methods for regional analysis is desirable.  The successful candidate will have a strong record of applied research and working collaboratively across policy areas as they affect regions, i.e., policies and their impacts on regions, regional governance, state and local public finance, infrastructure and the built environment, agriculture, environment and natural resources, food security, and public health, as examples.

See this link for full details and application instructions. Please circulate to potentially interested parties.

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