1. From Farming to International Business: The Social Auspices of Entrepreneurship in a Growing Economy Kaivan Munshi Brown University and NBER

2. 1. Introduction  Business success depends on: Credit Connections  Credit and connections are determined by: Family background Community networks  Business communities cannot satisfy additional demand for entrepreneurs  Entrepreneurs without business background will fill the gap Networks grow most vigorously in communities with poor outside options once they do crystallize  Test this hypothesis with new data from the diamond industry

3. The Survey  List firms: GJEPC database 2001-03 Exit information 1995-2000

5. Organization of the business  Key step is accessing rough diamonds on credit  Network provides referrals 10 rough suppliers/year vs. 40 polished buyers 70% of firms have a dominant supplier 70% of roughs sourced from Antwerp 75% of roughs received on supplier credit 6% of transactions have a written agreement

6. Theoretical framework  Production technology  Network technology  Selection into the industry Entry condition:

7. Growth of the network  ω t j declines more steeply in L-community implies network strengthens more rapidly in that community  Solving recursively, can show that this will be the case if: i.Density is non-decreasing as we move down the ability distribution ii.Network technology is not too concave  Firm performance: Controlling for ω i j with firm fixed effects, performance increases more steeply in the L- community

8. Average entrant’s ability Assume linear network technology and uniform ability distribution Same result can be obtained for

9. Alternative distributional assumptions  Multiple cohorts Ability distribution F(ω) constant across cohorts Individuals enter industry at a fixed age Receive referrals from preceding cohort  Ability distribution varies across communities

10. Selection into the network Payoff inside the industry: Entry conditions: Selection thresholds:

12. Additional results  Investment in the network, measured by intra-industry marriage increases more rapidly in the L-community  More non-network firms are drawn from the H-community and this gap widens over time  Predictions for characteristics and performance unchanged

13. Empirical analysis  Changes in firm characteristics Allow for secular changes in outside options Control for age effects  Changes in firm performance Allow outside options to change across communities and over time Control for changing returns inside the industry

23. Conclusion  No reason why such entry by outsiders could not be replicated elsewhere  Infusion of bank credit can have unexpected negative consequences