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Who Gains from Creative Destruction? Evidence from High-Quality Entrepreneurship in the United States
October 2019
Working Paper Number:
CES-19-29
The question of who gains from high-quality entrepreneurship is crucial to understanding whether investments in incubating potentially innovative start-up firms will produce socially beneficial outcomes. We attempt to bring new evidence to this question by combining new aggregate measures of local area income inequality and income mobility with measures of entrepreneurship from Guzman and Stern (2017). Our new aggregate measures are generated by linking American Community Survey data with the universe of IRS 1040 tax returns. In both fixed effects and IV models using a Bartik-style instrument, we find that entrepreneurship increases income inequality. Further, we find that this increase in income inequality arises due to the fact that almost all of the individual gains associated with increased entrepreneurship accrue to the top 10 percent of the income distribution. While we find mixed evidence for small positive effects of entrepreneurship lower on the income distribution, we find little if any evidence that entrepreneurship increases income mobility.
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Gender Differences in Self-employment Duration: the Case of Opportunity and Necessity Entrepreneurs
September 2019
Working Paper Number:
CES-19-24
A strand of the self-employment literature suggests that those 'pushed' into self-employment out of necessity may perform differently from those 'pulled' into self-employment to pursue a business opportunity. While findings on self-employment outcomes by self-employed type are not unanimous, there is mounting evidence that performance outcomes differ between these two self-employed types. Another strand of the literature has found important gender differences in self-employment entry rates, motivations for entry, and outcomes. Using a unique set of data that links the American Community Survey to administrative data from Form 1040 and W-2 records, we bring together these two strands of the literature. We explore whether there are gender differences in self-employment duration of self-employed types. In particular, we examine the likelihood of self-employment exit towards unemployment versus the wage sector for five consecutive entry cohorts, including two cohorts who entered self-employment during the Great Recession. Severely limited labor-market opportunities may have driven many in the recession cohorts to enter self-employment, while those entering self-employment during the boom may have been pursuing opportunities under favorable market conditions. To more explicitly test the concept of 'necessity' versus 'opportunity' self-employment, we also examine the wage labor attachment (or weeks worked in the wage sector) in the year prior to becoming self-employed. We find that, within the cohorts we examine, there are gender differences in the rate at which men and women depart self-employment for either wage work or non-participation, but that the patterns are dependent on pre self-employment wage-sector attachment and cohort effects.
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Statistics on the Small Business Administration's Scale-Up America Program
April 2019
Working Paper Number:
CES-19-11
This paper attempts to quantify the difference in performance, of 'treated' (program participant) and 'non-treated' (non-participant) firms in SBA's Scale-Up initiative. I combine data from the SBA with administrative data housed at Census using a combination of numeric and name and address matching techniques. My results show that after controlling for available observable characteristics, a positive correlation exists between participation in the Scale-Up initiative and firm growth. However, publicly available survey results have shown that entrepreneurs have a variety of goals in-mind when they start their businesses. Two prominent, and potentially contradictory ones are work-life balance and greater income. That means that not all firms may want to grow and I am unable to completely control for owner motivations. Finally, I do not find a statistically significant relationship between participation in Scale-Up and firm survival once other business characteristics are accounted for.
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IMMIGRANT ENTREPRENEURS AND INNOVATION IN THE U.S. HIGH-TECH SECTOR
February 2019
Working Paper Number:
CES-19-06
We estimate differences in innovation behavior between foreign versus U.S.-born entrepreneurs in high-tech industries. Our data come from the Annual Survey of Entrepreneurs, a random sample of firms with detailed information on owner characteristics and innovation activities. We find uniformly higher rates of innovation in immigrant-owned firms for 15 of 16 different innovation measures; the only exception is for copyright/trademark. The immigrant advantage holds for older firms as well as for recent start-ups and for every level of the entrepreneur's education. The size of the estimated immigrant-native differences in product and process innovation activities rises with detailed controls for demographic and human capital characteristics but falls for R&D and patenting. Controlling for finance, motivations, and industry reduces all coefficients, but for most measures and specifications immigrants are estimated to have a sizable advantage in innovation.
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Hiring through Startup Acquisitions:
Preference Mismatch and Employee Departures
September 2018
Working Paper Number:
CES-18-41
This paper investigates the effectiveness of startup acquisitions as a hiring strategy. Unlike conventional hires who choose to join a new firm on their own volition, most acquired employees do not have a voice in the decision to be acquired, much less by whom to be acquired. The lack of worker agency may result in a preference mismatch between the acquired employees and the acquiring firm, leading to elevated rates of turnover. Using comprehensive employee-employer matched data from the US Census, I document that acquired workers are significantly more likely to leave compared to regular hires. By constructing a novel peer-based proxy for worker preferences, I show that acquired employees who prefer to work for startups ' rather than established firms ' are the most likely to leave after the acquisition, lending support to the preference mismatch theory. Moreover, these departures suggest a deeper strategic cost of competitive spawning: upon leaving, acquired workers are more likely to found their own companies, many of which appear to be competitive threats that impair the acquirer's long-run performance.
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When Liability Becomes Potential: Intermediary Entrepreneurship in Dynamic Market Contexts
April 2018
Working Paper Number:
CES-18-21
This paper analyzes how entrepreneurs fare in an intermediary market segment when the segment is closely attached to a single supplier market. While focusing on two structural constraints, organizational structure and competitive pressure, I build off of the fact that in the past thirty years in the U.S. beer industry, as the number of beer producers (i.e. brewers) proliferated, their intermediaries (i.e. wholesalers) declined. Using establishment-level restricted-access economic microdata from the Longitudinal Business Database, I examine what happens with intermediaries when (some) producers start competing on product variety instead of competing on scale. Piecewise exponential survival models show that Stinchcombe's 'liability of newness' principle can get suspended and certain newcomers have better survival chances than industry incumbents. I call this effect the potential of newness under which entrepreneurial establishments fare better if they are part of well-resourced multiunit firms. Furthermore, I show that these resource-rich entrepreneurs benefit from the potential of newness especially in areas with competition-laden history and where the industry experiences shakeouts. For market incumbents, the more competition-laden the history of the local market, the higher the hazards of current time establishment failure. For multiunit entrepreneurs, however, a more competition-laden history of the local market is associated with a decrease in the hazards of current time establishment failure. This paper highlights that market structure not only enables but sometimes traps already existing organizations and make them less adaptive to changing logics of competition. The results highlight how organizational factors and geography create inequalities among intermediary organizations.
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Age and High-Growth Entrepreneurship
April 2018
Working Paper Number:
carra-2018-03
Many observers, and many investors, believe that young people are especially likely to produce the most successful new firms. We use administrative data at the U.S. Census Bureau to study the ages of founders of growth-oriented start-ups in the past decade. Our primary finding is that successful entrepreneurs are middle-aged, not young. The mean founder age for the 1 in 1,000 fastest growing new ventures is 45.0. The findings are broadly similar when considering high-technology sectors, entrepreneurial hubs, and successful firm exits. Prior experience in the specific industry predicts much greater rates of entrepreneurial success. These findings strongly reject common hypotheses that emphasize youth as a key trait of successful entrepreneurs.
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Innovation, Productivity Dispersion, and Productivity Growth
February 2018
Working Paper Number:
CES-18-08
We examine whether underlying industry innovation dynamics are an important driver of the large dispersion in productivity across firms within narrowly defined sectors. Our hypothesis is that periods of rapid innovation are accompanied by high rates of entry, significant experimentation and, in turn, a high degree of productivity dispersion. Following this experimentation phase, successful innovators and adopters grow while unsuccessful innovators contract and exit yielding productivity growth. We examine the dynamic relationship between entry, productivity dispersion, and productivity growth using a new comprehensive firm-level dataset for the U.S. We find a surge of entry within an industry yields an immediate increase in productivity dispersion and a lagged increase in productivity growth. These patterns are more pronounced for the High Tech sector where we expect there to be more innovative activities. These patterns change over time suggesting other forces are at work during the post-2000 slowdown in aggregate productivity.
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High Growth Young Firms: Contribution to Job, Output and Productivity Growth
February 2017
Working Paper Number:
carra-2017-03
Recent research shows that the job creating prowess of small firms in the U.S. is better attributed to startups and young firms that are small. But most startups and young firms either fail or don't create jobs. A small proportion of young firms grow rapidly and they account for the long lasting contribution of startups to job growth. High growth firms are not well understood in terms of either theory or evidence. Although the evidence of their role in job creation is mounting, little is known about their life cycle dynamics, or their contribution to other key outcomes such as real output growth and productivity. In this paper, we enhance the Longitudinal Business Database with gross output (real revenue) measures. We find that the patterns for high output growth firms largely mimic those for high employment growth firms. High growth output firms are disproportionately young and make disproportionate contributions to output and productivity growth. The share of activity accounted for by high growth output and employment firms varies substantially across industries - in the post 2000 period the share of activity accounted for by high growth firms is significantly higher in the High Tech and Energy related industries. A firm in a small business intensive industry is less likely to be a high output growth firm but small business intensive industries don't have significantly smaller shares of either employment or output activity accounted for by high growth firms.
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High-Growth Entrepreneurship
January 2017
Working Paper Number:
CES-17-53
We study the patterns and determinants of job creation for a large cohort of start-up firms. Analysis of the universe of U.S. employers reveals strong persistence in employment size from firm birth to age seven, with a small fraction of firms accounting for most employment at both ages, patterns that are little explained by finely disaggregated industry controls or amount of finance. Linking to data from the Survey of Business Owners on characteristics of 54,700 founders of 36,400 start-ups, and defining 'high growth' as the top 5% of firms in the size distribution at age zero and seven, we find that women have a 30% lower probability of founding high-growth entrepreneurships at both ages. A similar gap for African-Americans at start-up disappears by age seven. Other differences with respect to race, ethnicity, and nativity are modest. Founder age is initially positively associated with high growth probability but the profile flattens after seven years and even becomes slightly negative. The education profile is initially concave, with advanced degree recipients no more likely to found high growth firms than high school graduates, but the former catch up to those with bachelor's degrees by firm age seven, while the latter do not. Most other relationships of high growth with founder characteristics are highly persistent over time. Prior business ownership is strongly positively associated, and veteran experience negatively associated, with high growth. A larger founding team raises the probability of high growth, while diversity (by gender, age, race/ethnicity, or nativity) either lowers the probability or has little effect. More start-up capital raises the high-growth propensity of firms founded by a sole proprietor, women, minorities, immigrants, veterans, novice entrepreneurs, and those who are younger or with less education. Perhaps surprisingly, women, minorities, and those with less education tend to choose high growth industries, but fewer of them achieve high growth compared to their industry peers.
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