Business Exits entail greater future levels of entrepreneurship? An empirical analysis at country level

Using Global Entrepreneurship Monitor data for 41 countries this study investigates the impact of business exit on entrepreneurial activity at the country level. The paper distinguishes between two types of entrepreneurial activity according with the motive to start a new business: entrepreneurs driven by opportunity and necessity motives. The findings indicate that exits have a positive impact on future levels of entrepreneurial activity in a country. For each exit in a given year, a larger proportion of entrepreneurial activity the following year. Moreover, this e ffect turns out to be higher for opportunity entrepreneurs. The findings indicate that both types of entrepreneurial activity rates are influenced by the same factors and in the same direction. However, for some factors we find a di fferential impact on the entrepreneurship. The results show some important implications given that business exit may be overcome when there is a necessity motivation. This has important implications for both researchers and policy makers. JEL codes: L26. Keywords: Entrepreneurship, business exit, social values

Iniciativa emprenedora i immigració: característiques diferenciadores i factors d'èxit

 L’emprenedoria és una de les àrees de recerca que han tingut un major creixement en les dècades recents. En aquest camp, l’anàlisi del comportament dels emprenedors immigrants ha estat reconeguda com un dels temes amb un important increment d’estudis relacionats. En aquests moments, el fenomen de la immigració és un dels processos socials més importants i amb una major repercussió en el continent europeu, i el fet que hi hagi més iniciatives emprenedores liderades per immigrants que per nadius fa que l’anàlisi i l’exploració d’aquest tema tinguin un atractiu especial. Malgrat tot, i encara que en els darrers anys el nombre d’estudis que pretenen donar una explicació a aquest fenomen ha incrementat, la majoria dels estudis l’han analitzat des d’un punt de vista qualitatiu i centrant-se en situacions regionals específiques i grups concrets, sense que se n’hagin pogut extreure conclusions generals sobre el comportament emprenedor immigrant. De manera que uns dels aspectes clau que un estudi en profunditat requereix són ressaltar aquells factors que contribueixen a distingir el comportament emprenedor immigrant del nadiu, així com aquells factors que podrien motivar l’èxit o el fracàs d’aquest tipus d’iniciatives i com aquests factors condicionarien la resta del teixit empresarial. En aquest context, el principal objectiu d’aquest projecte consisteix en l’anàlisi de les característiques distintives del procés emprenedor dels immigrants. Es pretén abordar aquest objectiu desenvolupant diferents metodologies i combinant diferents fonts d’informació que permetin captar la situació i assolir una comprensió més rica del fenomen estudiat. Els principals resultats obtinguts ens han portat a entendre aspectes que afavoreixen l’emprenedoria immigrant, tals com una menor aversió al risc i un major control percebut. A més, s’han posat de manifest algunes barreres legals amb les que s’han d’enfrontar els emprenedors immigrants a Catalunya.

Studying the micro-angels approach to micro-investment decisions

Purpose: The paper analyzes the micro-angels investment behaviour, looking both to the criteria used in the selection of their investment projects and to the characteristics of their guidance role during the investment period. Design/Methodology/Approach: The paper focuses on a double bottom line movement of French micro-angels clubs that has been operating since 1983. Our primary source of data is an online survey carried out during March 2012, asking members of clubs all over France for different aspects of their procedures. Findings: Our findings suggest that micro-angels are interested in small, socially or environmentally friendly projects having the potential to contribute to the development of their neighbourhood. We find that women are even more interested than men in such projects. Educated micro-angels value entrepreneurial motivation and understanding of the project more than less-educated micro-angels. We also point out the factors that micro-angels consider important in accompanying enterprises. Here we find that gender makes little difference. However, retired micro-angels value financial diagnosis made conjointly with entrepreneurs, while both active micro-angels and educated micro-angels value more the use of their network to help micro-entrepreneurs. Practical/Social Implications: Given the potential benefits of micro-angels investing and guiding the development of micro-enterprises, a social micro-angel investment on a major scale in developing countries could help in tackling some of the problems faced by the development of microfinance, such as the over-indebtedness of micro-entrepreneurs. Practitioners and new initiatives would gain from understanding what adaptations need to be made. Originality/value: We expect to add to the venture capital theory to take into account non-economic motives.

Endogenous Credit Cycles and Financial Dampening in an Adverse Selection Economy

We propose an adverse selection framework in which the financial sector has a dual role. It amplifies or dampens exogenous shocks and also generates endogenous fluctuations. We fully characterize constrained optimal contracts in a setting in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. First, we show how endogenous regime switches in financial contracts may generate fluctuations in an economy that exhibits no dynamics under full information. Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment. Secondly, the model shows the different implications of adverse selection as opposed to pure moral hazard. In particular, and contrary to standard results in the macroeconomic literature, the financial system may dampen exogenous shocks in the presence of adverse selection.

Adverse Selection, Credit, and Efficiency: the Case of the Missing Market

We analyze a standard environment of adverse selection in credit markets. In our envi- ronment, entrepreneurs who are privately informed about the quality of their projects need to borrow from banks. As is generally the case in economies with adverse selection, the competitive equilibrium of our economy is shown to be ine¢ cient. Under adverse selection, the choices made by one type of agents limit what can be o¤ered to other types in an incentive-compatible manner. This gives rise to an externality, which cannot be internalized in a competitive equilibrium. We show that, in this type of environment, the ine¢ ciency associated to adverse selection is the consequence of one implicit assumption: entrepreneurs can only borrow from banks. If an additional market is added (say, a .security market.), in which entrepreneurs can obtain funds beyond those o¤ered by banks, we show that the e¢ cient allocation is an equilibrium of the economy. In such an equilibrium, all entrepreneurs borrow at a pooling rate in the security market. When they apply to bank loans, though, only entrepreneurs with good projects pledge these additional funds as collateral. This equilibrium thus simultaneously entails cross- subsidization and separation between di¤erent types of entrepreneurs.

Adverse selection, credit, and efficiency: the case of the missing market

We analyze a standard environment of adverse selection in credit markets. In our environment, entrepreneurs who are privately informed about the quality of their projects need to borrow in order to invest. Conventional wisdom says that, in this class of economies, the competitive equilibrium is typically inefficient. We show that this conventional wisdom rests on one implicit assumption: entrepreneurs can only access monitored lending. If a new set of markets is added to provide entrepreneurs with additional funds, efficiency can be attained in equilibrium. An important characteristic of these additional markets is that lending in them must be unmonitored, in the sense that it does not condition total borrowing or investment by entrepreneurs. This makes it possible to attain efficiency by pooling all entrepreneurs in the new markets while separating them in the markets for monitored loans.

Excess Entry, Ambiguity Seeking, and Competence: An Experimental Investigation

Excess entry refers to the high failure rate of new entrepreneurial ventures. Economic explanations suggest 'hit and run' entrants and risk-seeking behavior. A psychological explanation is that people (entrepreneurs) are overconfident in their abilities (Camerer & Lovallo, 1999). Characterizing entry decisions as ambiguous gambles, we alternatively suggest following Heath and Tversky (1991) that people seek ambiguity when the source of uncertainty is related to their competence. Overconfidence, as such, plays no role. This hypothesis is confirmed in an experimental study that also documents the phenomenon of reference group neglect. Finally, we emphasize the utility that people gain from engaging in activities that contribute to a sense of competence. This is an important force in economic activity that deserves more explicit attention.

Endogenous credit cycles

I develop an overlapping-generations framework in which changes in lending standards generateendogenous cycles. In my economy, entrepreneurs who are privately informed about thequality of their projects need to borrow funds. Intermediaries screen entrepreneurs both throughthe amount of investment undertaken and through the level of entrepreneurial net worth.I show that endogenous regime switches in financial contracts from pooling to separatingand vice-versa may generate fluctuations even in the absence of exogenous shocks. Whenthe economy is in the pooling (separating) regime, lending standards seem lax ( tight ) andinvestment is high (low). Differently from the existing literature, my model does not requireentrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregateinvestment.

New ideas need new space

We develop a setting with weak intellectual property rights, where firms' boundaries, location and knowledge spillovers are endogenous. We have two main results. The first one is that, if communication costs increase with distance, entrepreneurs concerned about information leakage have a benefit from locating away from the industry center: distance is an obstacle to collusive trades between members andnon-members. The second result is that we identify a trade-off for the entrepreneur between owning a facility (controlling all its characteristics) and sharing a facility with a {\it non-member} (an agent not involved in production), therefore losing control over some of its characteristics. We focus on ``location" as the relevant characteristic of the facility, but location can be used as a spatial metaphor for other relevant characteristics of the facility. For theentrepreneur, sharing the facility with non-members implies that the latter, as co-owners, know the location (even if they do not have access to it). Knowledge of the location for the co-owners facilitates collusion with employees, what increases leakage. The model yields a benefit for new plants from spatial dispersion (locating at the periphery of the industry), particularly so for new plants of new firms.We relate this result with recent empirical findings on the dynamics of industry location.

The ethics of creative accounting

The term 'creative accounting' can be defined in a number ofways. Initially we will offer this definition: 'a processwhereby accountants use their knowledge of accounting rulesto manipulate the figures reported in the accounts of abusiness'.To investigate the ethical issues raised by creativeaccounting we will:- Explore some definitions of creative accounting.- Consider the various ways in which creative accounting can be undertaken.- Explore the range of reasons for a company's directors to engage in creative accounting.- Review the ethical issues that arise in creative accounting.- Report on surveys of auditors' perceptions of creative accounting in the UK, Spain and New Zealand.

Adverse selection, credit and efficiency: The case of the missing market

We analyze a standard environment of adverse selection in credit markets. In our environment,entrepreneurs who are privately informed about the quality of their projects need toborrow from banks. Conventional wisdom says that, in this class of economies, the competitiveequilibrium is typically inefficient.We show that this conventional wisdom rests on one implicit assumption: entrepreneurscan only borrow from banks. If an additional market is added to provide entrepreneurs withadditional funds, efficiency can be attained in equilibrium. An important characteristic of thisadditional market is that it must be non-exclusive, in the sense that entrepreneurs must be ableto simultaneously borrow from many different lenders operating in it. This makes it possible toattain efficiency by pooling all entrepreneurs in the new market while separating them in themarket for bank loans.

Does foreign direct investment crowd out domestic entrepreneurship?

In analyzing firm entry and exit across Belgian manufacturing industries,this paper presents evidence that import competition and foreign directinvestment discourage entry and stimulate exit of domestic entrepreneurs.These results are in line with theoretical occupational choice modelsthat predict foreign direct investment would crowd out domesticentrepreneurs through their selections in product and labor markets.However, the empirical results also suggest that this crowding out effectmay be moderated or even reversed in the long-run due to the long termpositive effects of FDI on domestic entrpreneurship as a result oflearning, demonstration, networking and linkage effects between foreignand domestic firms.

Entrepreneurial success and failure: Confidence and fallible judgement

Excess entry or the high failure rate of market-entry decisions is often attributed tooverconfidence exhibited by entreprene urs. We show analytically that whereas excess entryis an inevitable consequence of imperfect assessments of entrepreneurial skill, it does notimply overconfidence. Judgmental fallibility leads to excess entry even when everyone isunderconfident. Self-selection implies greater confidence (but not necessarilyoverconfidence) among those who start new businesses than those who do not and amongsuccessful entrants than failures. Our results question claims that entrepreneurs areoverconfident and emphasize the need to understand the role of judgmental fallibility inproducing economic outcomes.

Adverse selection, credit and efficiency: The case of the missing market

We analyze a standard environment of adverse selection in credit markets. In our environment,entrepreneurs who are privately informed about the quality of their projects needto borrow in order to invest. Conventional wisdom says that, in this class of economies, thecompetitive equilibrium is typically inefficient.We show that this conventional wisdom rests on one implicit assumption: entrepreneurscan only access monitored lending. If a new set of markets is added to provide entrepreneurswith additional funds, efficiency can be attained in equilibrium. An important characteristic ofthese additional markets is that lending in them must be unmonitored, in the sense that it doesnot condition total borrowing or investment by entrepreneurs. This makes it possible to attainefficiency by pooling all entrepreneurs in the new markets while separating them in the marketsfor monitored loans.

Excess entry, ambiguity seeking and competence: An experimental investigation

Excess entry refers to the high failure rate of new entrepreneurial ventures. Economic explanations suggest 'hit and run' entrants and risk-seeking behavior. A psychological explanation is that people (entrepreneurs) are overconfident in their abilities (Camerer & Lovallo, 1999). Characterizing entry decisions as ambiguous gambles, we alternatively suggest following Heath and Tversky (1991) that people seek ambiguity when the source of uncertainty is related to their competence. Overconfidence, as such, plays no role. This hypothesis is confirmed in an experimental study that also documents the phenomenon of reference group neglect. Finally, we emphasize the utility that people gain from engaging in activities that contribute to a sense of competence. This is an important force in economic activity that deserves more explicit attention.