1 Determinants of entrepreneurial engagement levels in Europe and US Determinants of entrepreneurial engagement levels in Europe and US Isabel Grilo and Roy Thurik DG Enterprise (European Commission), GREMARS (Lille) and CORE (Louvain), CASBEC (Erasmus University Rotterdam), EIM (Zoetermeer) and Max Planck Institute (Jena) Understanding Entrepreneurship: Issues and Numbers OECD, October 26 and 27, 2005

2 Determinants of entrepreneurial engagement levels in Europe and US Determinants of entrepreneurial engagement levels in Europe and US Isabel Grilo and Roy Thurik DG Enterprise (European Commission), GREMARS (Lille) and CORE (Louvain), CASBEC (Erasmus University Rotterdam), EIM (Zoetermeer) and Max Planck Institute (Jena) Nascent Entrepreneurship: the Hidden Potential, Durham Business School, September 21-23, 2005

3 Determinants of entrepreneurial engagement levels in Europe and US Determinants of entrepreneurial engagement levels in Europe and US Isabel Grilo and Roy Thurik DG Enterprise (European Commission), GREMARS (Lille) and CORE (Louvain), CASBEC (Erasmus University Rotterdam), EIM (Zoetermeer) and Max Planck Institute (Jena) Economics`of Entrepreneurship, Erasmus School of Economics, October 13, 2005

4 The relation between entrepreneurship and growth changing role of entrepreneurial activity definition of entrepreneurship the dismal science origins of entrepreneurship dual causality intermediary variables

5 Two economies: Schumpeter revisited Schumpeter mark I regime: “entrepreneurial economy” –innovating entrepreneur –creative destruction –‘public basin’ –competitive market environment Schumpeter mark II regime: “managed economy” –innovation by large and established firms –creative accumulation –appropriability –high degree of concentration

6 Two economies: Schumpeter revisited Schumpeter I regime: “entrepreneurial economy” –innovating entrepreneur –creative destruction –transformation - exploration Schumpeter II regime: “managed economy” –innovation by large and established firms –creative accumulation –rationalisation - exploitation

7 The relation between entrepreneurship and growth changing role of entrepreneurial activity definition of entrepreneurship the dismal science origins of entrepreneurship dual causality intermediary variables

Business ownership rate across 23 OECD countries in 2002

Total entrepreneurial activity according to GEM 2002

Total entrepreneurial activity according to Eurobarometer 2002/3

11 The relation between entrepreneurship and growth changing role of entrepreneurial activity definition of entrepreneurship the dismal science origins of entrepreneurship dual causality intermediary variables

12 Stylized fact per capita income Business ownership per workforce

13 Stylized fact per capita income Business ownership per workforce

14 Stylized fact per capita income Business ownership per workforce

15 The relation between entrepreneurship and growth changing role of entrepreneurial activity definition of entrepreneurship the dismal science origins of entrepreneurship dual causality intermediary variables

16 Two relationships

17 ΔU t ΔE t ΔU t ΔE t Two relationships

18 Playing with lags ΔUtΔUt ΔU t+n ΔE t ΔE t+n =0

19 Playing with lags ΔUtΔUt ΔU t+n ΔE t ΔE t+n ΔE t ΔE t+n ΔUtΔUt ΔU t+n >0 <0

20 Playing with lags ΔUtΔUt ΔU t+n ΔE t ΔE t+n ΔE t ΔE t+n ΔUtΔUt ΔU t+n >0 <0 shopkeeperSchumpeter

21 The relation between entrepreneurship and growth changing role of entrepreneurial activity definition of entrepreneurship the dismal science origins of entrepreneurship dual causality intermediary variables

Business ownership rate BEL NL GER SP

NZ BEL UK NL GER SP

Entrepreneurship and economic development in 2002

25 Back to the present paper determinants definition –(process=conception; gestation; infancy; adolescence; maturity; decline) cross-section no time series given covariates

26 What do we do? different engagement levels7 individual data20,000 multi-level19 eclectic flavor8

27 Determinants of entrepreneurship three giants (Schumpeter, Kirzner, Knight) economic theory (income choice) empirical literature our set-up

Theory of income choice Ability - entrepreneurial efficiency –Jovanovic, 1982 and 1994; Lucas, 1978; Murphy, Shleifer and Vishny, 1991; Holmes and Schmitz, 1990 and Lazear, 2004 Risk - risk attitudes –Kihlstrom and Laffont, 1979 and Parker, 1996 and 1997 Liquidity constraints - polymorphe –Lucas, 1978; Jovanovic, 1982; Evans and Jovanovic, 1989 and Hurst and Lusardi, 2004 Eclectic add-ons –Bates, 1990; Blanchflower, 2004; Blanchflower and Meyer, 1994; Blanchflower and Oswald, 1998; Blau, 1987; Douglas and Shepherd, 2002; Evans and Leighton, 1989 and 1990; Grilo and Irigoyen, 2005; Grilo and Thurik, 2005; Lin, Picot and Compton, 2000; Rees and Shah, 1986; Reynolds, 1997; Wagner, 2003 and Wit and van Winden, 1989

29 Empirical literature gender, age, educational attainment financial situation employment status experience minority, immigrant behavior family firm effects attitudes perceptions

30 Empirical literature gender, age, educational attainment financial situation employment status experience minority, immigrant behavior family firm effects attitudes (preference; risk tolerance) perceptions (adm. complexity; financial constraints)

Eclectic framework Risk-reward profile G G1G1 G5G5 G4G4 G2G2 E E * E-E* entry / exit Opportunities Resources Abilities / traits Preferences DEMAND SUPPLY G3G3

32 Data and eclectic framework Risk-reward profile G G1G1 G5G5 G4G4 G2G2 E E * E-E* entry / exit Opportunities Resources Abilities / traits Preferences DEMAND SUPPLY G3G3 gender, age, education adm. complexity, fin. support, preference risk tolerance country effects

33 An example using Eurobarometer 2002/3 Aim –Disentangle the role of demographic and perception variables and of country specific effects on various measures of entrepreneurship Multinomial logit using –20,000 observations –19 countries –8 variables –7 engagement levels

34 The seven entrepreneurial engagement levels Have you started a business recently or are you taking steps to start one? “It never came to your mind" “No, you thought of it or had already taken steps to start a business but gave up" “No, but you are thinking about it" “Yes, you are currently taking steps to start a new business" “Yes, you have started or taken over a business in the last 3 years and still active" “Yes, you started or took over a business more than 3 years ago and still active" “No, you once started a business, but currently you are no longer an entrepreneur"

Percentages per engagement level per country Never consideredGave upThinking Taking stepsBusiness<3yrs Business>3 yrsNo longerNo of Obs. Belgium Denmark Germany Greece Spain France Ireland Italy Luxembourg Netherlands Austria Portugal Finland Sweden UK Iceland Norway Liechtenstein US

Percentages per engagement level per country Never consideredGave upThinking Taking stepsBusiness<3yrs Business>3 yrsNo longerNo of Obs. Belgium Denmark Germany Greece Spain France Ireland Italy Luxembourg Netherlands Austria Portugal Finland Sweden UK Iceland Norway Liechtenstein US

37 Status and preference of active population

38 Perception of lack of financial support

39 Perception of administrative complexities

40 Risk tolerance

41 Method Categories of dependent variable –Level of engagement in entrepreneurial activity Multinomial logit –Non-linear model for estimating categorical dependent variables Eight explanatory variables plus country dummies How to read the table of estimation results? –Effect on odds of unit change in explanatory variable –Odds relative to base category (“never came to your mind”)

42 Multinomial logit Gave up ThinkingTaking steps Business <3 years Business >3 years No longer Men Age0,9980,9620,9560, Low education0,8230,7240,8860,5810,6660,969 High education Preferences Lack finance1.0280,9190,9540,8720,8760,937 Complexities ,7570,6990,7340,786 Risk tolerance

43 Gender Relative to “not thinking about it” the odds of any other option are higher for men This effect is stronger for “having an active business” than for any other category

44 Administrative complexities Perception of administrative complexities has no effect on the odds of “currently thinking”, “gave up” or ”taking steps” relative to “never thought about it” Perception of administrative complexities plays a negative role for higher levels of “engagement”

45 Lack of financial support Perception of lack of administrative support has no discriminative effect across the categories

46 European countries and US European countries have lower odds than the US for levels of engagement up to “having a young business” European countries have higher odds than the US for the category “having an older business”

47 Conclusions Gender differential - act at both levels –women’s attitudes –obstacles specifically faced by women Administrative complexities – important to address this obstacle Financial support: learn more before spending money in the policy domain

48 The next steps: what is The next steps: what is behind country differences: cultural aspects, sector composition of economic activity, market legislation, tax environment, bankruptcy law, job security, social security regimes, etc? the role of the level and speed of economic development? –disequilibrium situations aspiration levels, for instance expressed by engagement level averages? the role of wage level relative to self-employment income in shaping entrepreneurial activity? –other liquidity situations

49 Determinants and consequences of entrepreneurship engagement levels U-shape and country differences occupational choice preferences what is the market?

50 Determinants of entrepreneurial engagement levels in Europe and US Determinants of entrepreneurial engagement levels in Europe and US Isabel Grilo and Roy Thurik DG Enterprise (European Commission), GREMARS (Lille) and CORE (Louvain), CASBEC (Erasmus University Rotterdam), EIM (Zoetermeer) and Max Planck Institute (Jena) Economics`of Entrepreneurship, Erasmus School of Economics, October 13, 2005

Determinants of entrepreneurial engagement levels in Europe and US Determinants of entrepreneurial engagement levels in Europe and US Isabel Grilo and Roy Thurik DG Enterprise (European Commission), GREMARS (Lille) and CORE (Louvain), CASBEC (Erasmus University Rotterdam), EIM (Zoetermeer) and Max Planck Institute (Jena) Nascent Entrepreneurship: the Hidden Potential, Durham Business School, September 21-23, 2005

52 Determinants of entrepreneurial engagement levels in Europe and US Determinants of entrepreneurial engagement levels in Europe and US Isabel Grilo and Roy Thurik DG Enterprise (European Commission), GREMARS (Lille) and CORE (Louvain), CASBEC (Erasmus University Rotterdam), EIM (Zoetermeer) and Max Planck Institute (Jena) Understanding Entrepreneurship: Issues and Numbers OECD, October 26 and 27, 2005