Context and Entrepreneurship

1. Context and Entrepreneurship Paul Reynolds Florida International University 14 February 2005 MAN6805‑Lecture 05_A

2. The Entrepreneurial Process Social, Political, Economic Context Adult Population Growth NE Firm Birth Persist Start-up Processes ? Business Firm Population NI Quit ? ? MAN6805‑Lecture 05_A

3. Initial Focus • Who enters the start-up process? MAN6805‑Lecture 05_A

4. Entering the Business Start-Up Process National Social, Political, Economic Context Personal Attributes Personal Background, Experience Immediate Social Context Neighborhood, regional context Economic sector Adult Population NE Start-up Processes NI Business Firm Population MAN6805‑Lecture 05_A

5. Then considered two additional issues • What happens in the start-up process? • What affects transition to an operating business – the firm birth? MAN6805‑Lecture 05_A

6. The Entrepreneurial Process Social, Political, Economic Context Define beginning Define “Birth” Start-up Processes WHAT HAPPENS HERE? Firm Birth ? Define “quit” When do people drop-out? ? MAN6805‑Lecture 05_A

7. The Entrepreneurial Process Social, Political, Economic Context Adult Population Start-up Team Personal Context, Assistance Start-up Activities, Strategy Industry & Competitive Response General Economic Conditions NE Firm Birth Start-up Processes ? Business Firm Population NI ? ? MAN6805‑Lecture 05_A

8. Next stage of the firm life course • What about operating firm survival? • What about firm growth? • How are survival and growth related? • [Grow or die?] • Practical implications MAN6805‑Lecture 05_A

9. The Entrepreneurial Process Social, Political, Economic Context Growth [gazelles, real entrepreneurship] Firm Birth Persist [steady-state, lifestyle, mice] Quit [terminate, discontinue, death, fail] MAN6805‑Lecture 05_A

10. The Entrepreneurial Process Social, Political, Economic Context • Expertise • Industry • Larger teams • Growth in • Industry • Region • Manage • Money • Operations Strategic Focus Present Growth [gazelles, real entrepreneurship] (patterns may be erratic) Firm Birth Persist [steady-state, lifestyle, mice] Quit [discontinue, death, fail] MAN6805‑Lecture 05_A

11. How to think about context? • Consider how to break up the overall process • Consider major transition “events” • Conceptual framework used by others • Framework for the way they have designed the research MAN6805‑Lecture 05_A

12. Social, Political, Economic Context Adult Population Growth NE Firm Birth Business Firm Population Start-up Processes Persist ? NI Quit MAN6805‑Lecture 05_A

13. Social, Political, Economic Context Entry Adult Population Growth NE Firm Birth Business Firm Population Start-up Processes Persist ? NI Quit MAN6805‑Lecture 05_A

14. Social, Political, Economic Context Entry Gestation Adult Population Growth NE Firm Birth Business Firm Population Start-up Processes Persist ? NI Quit MAN6805‑Lecture 05_A

15. Social, Political, Economic Context Entry Firm Birth Gestation Adult Population Growth NE Firm Birth Business Firm Population Start-up Processes Persist ? NI Quit MAN6805‑Lecture 05_A

16. Social, Political, Economic Context Survival, Growth Entry Firm Birth Gestation Adult Population Growth NE Firm Birth Business Firm Population Start-up Processes Persist ? NI Quit MAN6805‑Lecture 05_A

17. Two Research Paradigms related to Context and Impact on the Process • Market Entry Research • Economists • Based on Classical Model of an Economic Market • Research compares markets • Regional Comparisons • Consider comparisons of different geographic units • Each unit considered an autonomous system • Lots of different disciplines give attention to this MAN6805‑Lecture 05_A

18. Market Entry Research • Very popular with economists • Tend to focus on “firm birth/firm death” • Not much attention to the rest of the process • Very narrow focus • What conceptual framework would lead to this focus? MAN6805‑Lecture 05_A

19. Classical Model of Economic Exchange Price Quantity (amount) MAN6805‑Lecture 05_A

20. Classical Model of Economic Exchange Price Supply Demand Quantity (amount) MAN6805‑Lecture 05_A

21. Classical Model of Economic Exchange Price • Intellectual objective Supply Demand Quantity (amount) MAN6805‑Lecture 05_A

22. Classical Model of Economic Exchange Price • Intellectual objective • Predict Price and Quantity at equilibrium • Equilibrium – steady state solution Supply P Demand Quantity (amount) Q MAN6805‑Lecture 05_A

23. What conditions are required to make the prediction?What conditions lead to more accurate predictions? Hint: Based on the model of an European farmer’s market! MAN6805‑Lecture 05_A

24. Conditions for classic economic market! 1) Commodity products: all identical MAN6805‑Lecture 05_A

25. Conditions for classic economic market! • 1) Commodity products: all identical • Buyers: identical, none large enough to have a major impact on P or Q • Sellers: identical, none large enough to have a major impact on P or Q MAN6805‑Lecture 05_A

26. Conditions for classic economic market! • 1) Commodity products: all identical • Buyers: identical, none large enough to have a major impact on P or Q • Sellers: identical, none large enough to have a major impact on P or Q • Full, complete information about products, payments MAN6805‑Lecture 05_A

27. Conditions for classic economic market! • 1) Commodity products: all identical • Buyers: identical, none large enough to have a major impact on P or Q • Sellers: identical, none large enough to have a major impact on P or Q • Full, complete information about products, payments • Fully acceptable medium of exchange MAN6805‑Lecture 05_A

28. Conditions for classic economic market! • 1) Commodity products: all identical • Buyers: identical, none large enough to have a major impact on P or Q • Sellers: identical, none large enough to have a major impact on P or Q • Full, complete information about products, payments • Fully acceptable medium of exchange • Commodity volume, payment amounts ratio scale • Lots of small incremental units MAN6805‑Lecture 05_A

29. Conditions for classic economic market! • 1) Commodity products: all identical • Buyers: identical, none large enough to have a major impact on P or Q • Sellers: identical, none large enough to have a major impact on P or Q • Full, complete information about products, payments • Fully acceptable medium of exchange • Commodity volume, payment amounts ratio scale • Lots of small incremental units • All participants maximizing utility at exchange • Pay the least money, get the most goods • Sell the fewest goods, get the most money • Indifferent with regards who they deal with! MAN6805‑Lecture 05_A

30. Conditions for classic economic market! • 1) Commodity products: all identical • Buyers: identical, none large enough to have a major impact on P or Q • Sellers: identical, none large enough to have a major impact on P or Q • Full, complete information about products, payments • Fully acceptable medium of exchange • Commodity volume, payment amounts ratio scale • Lots of small incremental units • All participants maximizing utility at exchange • Pay the least money, get the most goods • Sell the fewest goods, get the most money • Indifferent with regards who they deal with! • 8) Market clears during trading period-instant “equity” MAN6805‑Lecture 05_A

31. Why is this attractive? • Sounds good—everybody gets an equal shot at “maximizing utility” • No person [persons] controls outcome • No person to blame if don’t like outcome • INVISIBLE HAND LEADS TO OPTIMUM OUTCOME FOR ALL ULTIMATE EQUALITY ULTIMATE INDIVIDUAL AUTONOMY ULTIMATE “FREEDOM FROM GOVERNMENT”(?) MAN6805‑Lecture 05_A

32. What is wrong with this! • Real world examples of when this occurs? • Very rare.. • None of the conditions are usually present • Best classic example is the stock market • E-Bay might be a good current example, but takes some computer skills to play in the market. • Much of economic policy prescriptions designed to create the conditions of a classic economic price sensitive market • Why are conditions so hard to maintain? MAN6805‑Lecture 05_A

33. Which conditions are met? • Commodity products: all identical • Rare • Buyers: identical, none have a major impact on P or Q • People yes, but businesses (Wal-Mart example) • Sellers: identical, none have a major impact on P or Q • Varies dramatically by “commodity” • Full, complete information about products, payments • Varies by “commodity,” sales practices MAN6805‑Lecture 05_A

34. Which conditions are met? • Fully acceptable medium of exchange • Trusting money solved in some countries • 6) Commodity volume, payment amounts ratio scale • Varies dramatically (pencils vs space vehicles) • 7) All participants maximizing utility at exchange • Issues of trust—required for complex commodities • Issues of expected “recropocity” • Social networks get in the way, non-economic values • 8) Market clears during trading period-instant “equity” • Rare—serial equity more common MAN6805‑Lecture 05_A

35. Why do we care? • Represents the world view behind the research and assessments of economists related to new firm creation • Given this model, when would you expect a new supplier to enter the “market” • They call it market entry • Don’t use term to refer to a new customer in the market, only a new producer! MAN6805‑Lecture 05_A

36. When to expect market entry? MAN6805‑Lecture 05_A

37. When to expect market entry? • Produce the goods more cheaply than others, sell at a lower price • New productive technology • Cheaper sources of supply MAN6805‑Lecture 05_A

38. When to expect market entry? • Produce the goods more cheaply than others, sell at a lower price • New productive technology • Cheaper sources of supply • Be willing to take a lower profit and cut the price • Related to other options for the supplier MAN6805‑Lecture 05_A

39. When to expect market entry? • Produce the goods more cheaply than others, sell at a lower price • New productive technology • Cheaper sources of supply • Be willing to take a lower profit and cut the price • Related to other options for the supplier • Introduce new goods or services, create new markets • Does not fit assumptions • Cannot handle with conceptual scheme MAN6805‑Lecture 05_A

40. Market Entry Research [½] • Define markets? • By different Industry Sector codes • Usually comparing different manufacturing sectors • “Entry” is the presence of a new source of the goods or services • Could be autonomous start-up • Could be a new branch, subsidiary of large firm • Could be an expansion of the product line of existing firm, no new business entity created MAN6805‑Lecture 05_A

41. Market Entry Research [2/2] • Exit is the disappearance from the market of a supplier • Challenge • Collecting data on existing firms • Collecting data on features of the “market” • Collect data on entry and exit MAN6805‑Lecture 05_A

42. Empirical Generalizations [Stylized facts][P.A. Geroski, Int.J.Indus.Org. 1195, 13:421-440] • Entry common • Level about same across “industries” • Compare manufacturing sectors • Entry/exit highly correlated • Survival rate low • Autonomous [de novo] more common but less success than “diversification” • Some variation over time • Large, high growth new entrants spend more to enter market MAN6805‑Lecture 05_A

43. Common Interpretations [Stylized results:1/2][P.A. Geroski, Int.J.Indus.Org. 1195, 13:421-440] • New entry not related to high profits in “market” • Market entry barriers are quite high [for manufacturing] • Hard to predict entry rates based on market profits and entry barriers • Entry rates do not reduce average market profits • High entry often reflects innovation and increases in efficiency MAN6805‑Lecture 05_A

44. Common Interpretations [Stylized results:2/2][P.A. Geroski, Int.J.Indus.Org. 1195, 13:421-440] • Incumbents reaction to entry is “selective” (hard to predict) • Incumbents usually do not lower prices to block entry • Larger and older new entrants more likely to survive • Not autonomous new [de novo] • Conclude • entry is easy, survival is not • entry affects products, processes, but not profits MAN6805‑Lecture 05_A

45. Is this “helpful?” [1/2] • How does this treat “firm creation?” • Co mingles new businesses, new branches, and new product lines • What is being emphasize in the process? • Post “gestation” and beyond • Is “exit” bad? • Who knows, no measure of outcome for those that “exit’ MAN6805‑Lecture 05_A

46. Is this “helpful?” [2/2] • What is the measure of “social good” ? • Average industry profits • Less is better for society • What independent variables affect “entry”? • Expected profits in the industry • Barriers to entry • Research tends to support conceptual scheme MAN6805‑Lecture 05_A

47. Other option: geographic comparisons • Try to identify a number of “regional markets” • Compare the markets in terms of • Firm creation, firm termination • Various characteristics related to business activity • Measures of social benefits: jobs, GDP, etc. MAN6805‑Lecture 05_A

48. US Regional Comparisons • “New Firm” • New entries in commercial credit rating file • Recent “exits” from same file • Separate three types • Independent start-ups (70%) • Headquarters (5%) • Branch or subsidiaries (25%) MAN6805‑Lecture 05_A

49. Firm Organizational Structure Enterprise A Enterprise B FIRM A [Establishment] HEADQUARTERS B [Establishment] BRANCH B-1 [Establishment] BRANCH B-2 [Establishment] BRANCH B-3 [Establishment] MAN6805‑Lecture 05_A

50. Complication • U.S. Federal Data organized around establishments (or plants) • Much research does not treat the firm, or enterprise • US Current structure • 10 million (+/-) self-employed businesses entities • 3.5 million single site employer firms • 2.0 million multi site employer firms • 0.020 million large firms, over 500 jobs – half of all jobs MAN6805‑Lecture 05_A