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Families, Human Capital, and Small Business: Evidence from the Characteristics of Business Owners Survey
June 2005
Working Paper Number:
CES-05-07
An important finding in the rapidly growing literature on self-employment is that the probability of self-employment is substantially higher among the children of business owners than among the children of non-business owners. Using data from the confidential and restricted-access Characteristics of Business Owners (CBO) Survey, we provide some suggestive evidence on the causes of intergenerational links in business ownership and the related issue of how having a family business background affects small business outcomes. Estimates from the CBO indicate that more than half of all business owners had a self-employed family member prior to starting their business. Conditional on having a self-employed family member, less than 50 percent of small business owners worked in that family member's business suggesting that it is unlikely that intergenerational links in self-employment are solely due to the acquisition of general and specific business capital and that instead similarities across family members in entrepreneurial preferences may explain part of the relationship. In contrast, estimates from regression models conditioning on business ownership indicate that having a self-employed family member plays only a minor role in determining small business outcomes, whereas the business human capital acquired from prior work experience in a family member's business appears to be very important for business success. Estimates from the CBO also indicate that only 1.6 percent of all small businesses are inherited suggesting that the role of business inheritances in determining intergenerational links in self-employment is limited at best.
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The Geographic Concentration of New Firm Formation and Human Capital: Evidence from the Cities
February 2003
Working Paper Number:
CES-03-05
The role of education and human capital externalities is a key variable in theories of economic growth. However, the mechanism by which these externalities are realized has not been fully investigated. We examine the relationship between area differences in the levels of human capital and subsequent differences in new firm start-up rates. Firm start-ups are usually based on an innovation (in product, process, or market) that derives from utilization of new knowledge. We find that the new firm start-up rates in areas that function as integrated labor and consumer markets (city plus surrounding commuter area) are (1) positively related to the share of adults with college degrees, and also (2) positively related to higher levels of existing establishments in the same industry and area sector. The finding that higher concentrations of existing establishments in the same industry segment were strongly associated with higher startup rates suggests that spillover of relevant knowledge from other local business owners/managers and researchers within each industry contributes to greater innovation and growth in the area.
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Endogenous Growth and Entrepreneurial Activity in Cities
January 2003
Working Paper Number:
CES-03-02
Recent theories of economic growth have stressed the role of externalities in generating growth. Using data from the Census Bureau that tracks all employers in the whole U.S. private sector economy, we examine the impact of these externalities, as measured by entrepreneurial activity, on employment growth in Local Market Areas. We find that differences in levels of entrepreneurial activity, diversity among geographically proximate industries, and the extent of human capital are positively associated with variation in growth rates, but the manufacturing sector appears to be an exception.
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Analysis of Young Small Firms That Have Closed: Delineating Successful from Unsuccessful Closures
October 2002
Working Paper Number:
CES-02-24
This study of small businesses created between 1989 and 1992, and then closed down between 1993 and 1996, reveals that owners often described their firms as 'successful' when the disclosure decision was made. . Theoretical explanations consistent with this pattern are explored in this study. One view describes successful closures as rational outcomes of learning processes undertaken by entrepreneurs opening firms amidst considerable uncertainty. Another approach sees the seeming paradox of successful closure in terms of alternative opportunities: if something better comes along, the entrepreneur may close down. Empirically, successful closure owners are found to be moving on to more attractive alternatives.
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Business Success: Factors Leading to Surviving and Closing Successfully
January 2001
Working Paper Number:
CES-01-01
This paper focuses on the startup factors that lead to new firms remaining open, and if they close, the factors leading to whether the owner considered the firm successful at closure. Two independent logit models were developed for closure and success characteristics using the Bureau of the Census' Characteristics of Business Owners (CBO). Business Information Tracking Series (BITS, formerly the LEEM), also from the Bureau of the Census, was used to evaluate business survival rates as the CBO had non-response bias with respect to closure. About half of new employer firms survive at least four years (an estimated one-third of non-employer firms survive this period), and of the firms that closed, owners of about a third felt the firm was successful at closure. Major factors leading to remaining open are having ample capital, having employees, having a good education, and starting for personal reasons (freedom for family life, or wanting to become one's own boss). If the firm closed, major factors leading to owners perceiving the business successful at closure are having no start-up capital or ample capital, having previous ownership experience, and avoiding the retail trade industry. Owners of firms with and without employees had similar rates of believing closed businesses were successful at closure. Owners who were young or started without capital had a higher likelihood of closure but when they closed, they were more likely to consider the firm successful. Gender, race and being older play a small, if any, role in survivability or in owners' perception that the closed firm was successful. Retail trade was the only variable that led to businesses being more likely to close, and more likely to be deemed unsuccessful by the owner at closure.
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The Winner's Curse of Human Capital
February 1999
Working Paper Number:
CES-99-05
We extend a model developed by Evans) to explain when start-ups are credit constrained. We show that the magnitude of the credit constraint is conditioned by the relative productivity of human capital in both wage work and self employment. Empirical analysis reveals that entrepreneurs with greater levels of human capital and entrepreneurial abilities have both greater financial wealth and greater levels of start-up capital pointing to the endogenous nature of credit constraints. Start-ups are generally financially constrained when measured by the impact on start-up capital of predicted household income. Greater levels of human capital relaxes financial constraints, apparently due to greater productivity of human capital in wage work than in self-employment. Paradoxically, then, those who are the least likely to be credit constrained in self-employment are those that are least likely to switch into self-employment, and vice versa.
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MICROENTERPRISE AS AN EXIT ROUTE FROM POVERTY:* RECOMMENDATIONS FOR PROGRAMS AND POLICY MAKERS
November 1998
Working Paper Number:
CES-98-17
The objective of this study is to shed light on whether and how microenterprise programs can be used as an economic development strategy to enable low-income people to achieve self-sufficiency through self-employment. Our findings provide little support for the notion that hard work and a small loan are sufficient ingredients for business success. Viable small firms are usually headed by well-educated owners and/or those possessing specific skills that serve as a basis for successful business creation and operation. Potential entrepreneurs lacking assets, skills, and support networks are unlikely to support themselves through self-employment earnings alone. As a poverty alleviation strategy, microenterprise is not a panacea. Nevertheless, programs targeting the poor who do have skills, resources, and support networks can be useful vehicles for helping some to escape poverty.
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Exiting Self-Employment: An Analysis of Asian Immigrant-Owned Small Businesses
November 1998
Working Paper Number:
CES-98-13
Part of the uniqueness of the immigrant Asian business community in the U.S. lies in the fact that many among the highly educated pursue self-employment in small-scale, low-yielding retail and personal service fields. This study analyzes owner departure for a nationwide sample of small businesses owned by Asian Indian and Filipino immigrants and a comparison group of Asian nonimmigrant firm owners. Controlling for firm and owner traits, highly educated Asian immigrant owners are more likely than others to exit self-employment over the 1987-1991 period; exit from traditional fields (retail and personal services) is pronounced. These exit patterns do not typify the comparison group. Findings are consistent with the hypothesis that self-employment is often a form of underemployment among Asian immigrants.
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Survival Patterns Among Newcomers To Franchising
May 1997
Working Paper Number:
CES-97-05
This study analyzes survival patterns among franchisee firms adn establishments that began operations in 1986 and 1987. Differing methodologies and data bases are utilized to demonstrate that 1) franchises have higher survival rates than independents, and 2) franchises have lower survival rates than independent business formations. Analyses of corporate establishment data generate high franchisee survival rates relative to independents, while analyses of young firm data generate the opposite pattern. In either case, the franchise trait is one of several determinants of survival prospects. The larger-scale, more established firms consistently stay in operation more frequently than smaller-scale, younger firms. Analysis of all corporate establishment restaurant units opened in 1986 or 1987 that use paid employees in 1987 helps to reconcile the seeming inconsistencies reported above. Most of the young franchisee units were not owned by young firms: rather, their parents were multi-establishment franchisees, and most of them were mature firms. Among the true newcomers, franchise survival rates are low; among the entrenched multi-establishment franchisees, survival rates were high.
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Survival Patterns Among Newcomers to Franchising
January 1997
Working Paper Number:
CES-97-01
This study analyzes survival patterns among franchisee firms and establishments that began operations in 1986 and 1987. Differing methodologies and data bases are utilized to demonstrate that 1) franchises have higher survival rates than independents, and 2) franchises have lower survival rates than independent business formations. Analyses of corporate establishment data generate high franchisee survival rates relative to independents, while analyses of young firm data generate the opposite pattern. In either case, the franchise trait is one of several determinants of survival prospects. The larger-scale, more established firms consistently stay in operation more frequently than smaller-scale, younger firms. Analysis of all corporate establishment restaurant units opened in 1986 or 1987 that use paid employees in 1987 helps to reconcile the seeming inconsistencies reported above. Most of the young franchisee units were not owned by young firms: rather, their parents were multi-establishment franchisees, and most of them were mature firms. Among the true newcomers, franchise survival rates are low; among the entrenched multi-establishment franchisees, survival rates were high.
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