CRIW Measuring Entrepreneurial Businesses: Current Knowledge and Challenges

December 16-17, 2014
John Haltiwanger, University of Maryland; Erik Hurst, University of Chicago; Javier Miranda, Bureau of the Census; and Antoinette Schoar, MIT, Organizers

Measuring Entrepreneurship

John Haltiwanger; Ron Jarmin, Bureau of the Census; Robert Kulick, University of Maryland, and Javier Miranda

High Growth Young Firms: Contribution to Job Growth, Revenue Growth and Productivity

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 revenue growth and productivity. In this paper, Haltiwanger, Jarmin, Kulick, and Miranda explore these issues using the U.S. Census Bureau Longitudinal Business Database combined with evidence from the Census Business Register to explore the role of high growth and young firms further. In exploring these issues, the researchers use new real revenue and productivity measures developed from the integration of these comprehensive databases tracking U.S. firms and establishments.

Jorge Guzman,MIT, and Scott Stern, MIT and NBER

Nowcasting and Placecasting Entrepreneurial Quality and Performance

A central challenge in the measurement of entrepreneurship is accounting for the wide variation in entrepreneurial quality across firms. This paper develops a new approach for estimating entrepreneurial quality by linking the probability of a growth outcome (e.g., achieving an IPO or a significant acquisition) as a function of start-up characteristics observable at or near the time of initial business registration (e.g., the firm name or filing for a trademark/patent). Stern and Guzman's approach allows them to characterize entrepreneurial quality at an arbitrary level of geographic granularity (placecasting) and in advance of observing the ultimate growth outcomes associated with any cohort of start-ups (nowcasting). They implement this approach in Massachusetts from 1988-2014, yielding several key findings. First, consistent with Guzman and Stern (2014), the authors find that a small number of observable start-up characteristics allow them to distinguish the potential for a significant growth outcome: in an out-of-sample test, more than 75% of growth outcomes occur in the top 5% of their estimated quality distribution. Second, the researchers propose two new economic statistics for the measurement of entrepreneurship: the Entrepreneurship Quality Index (EQI) and the Regional Entrepreneurship Cohort Potential Index (RECPI). They use these indices to offer a novel characterization of changes in entrepreneurial quality across space and time. For example, they are able to document changes in entrepreneurial quality leadership between the Route 128 corridor, Cambridge and Boston, as well as more granular assessments that allow them to distinguish variation in average entrepreneurial quality down to the level of individual addresses. Third, they find a high correlation between an index that depends only on information directly observable from business registration records (and so can be calculated on a real-time basis) with an index that allows for a two-year lag that allows the estimate of entrepreneurial quality to incorporate early milestones such as patent or trademark application or being featured in local newspapers. Finally, the authors find that the most significant "gap" between their index and the realized growth outcomes of a given cohort seem to be closely related to investment cycles: while the most successful cohort of Massachusetts start-ups was founded in 1995, the year 2000 cohort registered the highest estimated quality.

Christopher Goetz, Henry Hyatt, Erika McEntarfer, and Kristin Sandusky, Bureau of the Census

New Public Use Data to Study Entrepreneurship from Linked Employer-Employee Data

Financing and Entrepreneurship

Steven Kaplan, University of Chicago and NBER, and Josh Lerner, Harvard University and NBER

Venture Capital Data: Opportunities and Challenges

Arthur Kennickell, Federal Reserve Board, and Myron Kwast and Jonathan Pogach, Federal Deposit Insurance Corporation

Small Businesses and Small Business Finance During the Financial Crisis and the Great Recession: New Evidence From the Survey of Consumer Finances

Kennickell, Kwast, and Pogach use the Federal Reserve's 2007, 2009 re-interview of 2007 respondents, and 2010 Surveys of Consumer Finances (SCFs) to examine the experiences of small businesses owned and actively managed by households during these turbulent years. This is the first paper to use these SCFs to study small businesses even though the surveys contain extensive data on a broad cross-section of firms and their owners. The researchers find that the vast majority of small businesses were severely affected by the financial crisis and the Great Recession, including facing tight credit constraints. The authors document numerous and often complex interdependencies between the finances of small businesses and their owner-manager households, including a more complicated role of housing assets than has been reported previously. They find that workers who lost their job responded in part by starting their own small business, and that factors correlated with the survival of a small business differed greatly depending upon whether the firm was established or new. The results strongly reinforce the importance of relationship finance to small businesses, and the primary role of commercial banks in such relationships. The authors find that both cross-section and panel data are needed to understand the complex issues associated with the creation, survival and failure of small businesses.

J. David Brown, Bureau of the Census; John S. Earle, George Mason University; and Yana Morgulis, University of California at San Diego

Job Creation, Small vs. Large vs. Young, and the SBA

Using a linked database based on a list of all Small Business Administration (SBA) loans in 1992 to 2011 and annual information on all U.S. employers from 1976 to 2012, Brown, Earle, and Morgulis apply detailed matching and regression methods to estimate the variation in SBA loan effects on job creation across firm age and size groups. The firm-level proportional impact of loan receipt is estimated to fall with pre-loan firm size and age, and is largest for start-ups and very young and very small firms. The number of jobs created per million dollars of loans is also estimated to be highest for start-ups but otherwise generally increases with size and age. The estimated survival impact of loan amount is larger for smaller and younger firms.

Characteristics of Entrepreneurs

Erik Hurst, and Benjamin Pugsley, Federal Reserve Bank of New York

Wealth, Tastes, and Entrepreneurial Choice

The non-pecuniary benefits of managing a small business are a first order consideration for many nascent entrepreneurs, yet the preference for business ownership is mostly ignored in models of entrepreneurship and occupational choice. In this paper, Hurst and Pugsley study a population with varying entrepreneurial tastes and wealth in a simple general equilibrium model of occupational choice. This choice yields several important results: (1) entrepreneurship can be thought of as a normal good, generating wealth effects independent of any financing constraints, (2) non-pecuniary entrepreneurs select into small scale firms, (3) subsidies designed to stimulate more business entry can have regressive distributional effects. Despite abstracting from other important considerations such as risk, financing constraints, and innovation, the researchers show that non-pecuniary compensation is particularly relevant in discussions of small businesses.

Victor Bennett, Duke University; Megan Lawrence, Harvard University; and Raffaella Sadun, Harvard University and NBER

Are Founder CEOs Good Managers?

Bennett, Lawrence, and Sadun investigate the management practices adopted by firms where the founders are also the CEOs using data from the World Management Survey. The researchers find that founder CEO firms have the lowest management scores of any owner-manager pair types and that this difference is associated with significant performance differentials. The authors propose three possible reasons for the managerial gap of founder CEO firms: a) informational problems preventing a clear understanding of the weakness of their firm's managerial practices; b) institutional factors dampening the incentive to adopt managerial practices; and c) non-pecuniary returns to potentially inefficient but power-preserving practices. The initial findings presented in the paper provide support for a) and c), while the authors do not find evidence that the management practices of founder CEO firms vary with respect to the characteristics of the institutional environments in which they are embedded.

Entrepreneurship and Economic Performance

Johan Hombert and David Thesmar, HEC Paris; Antoinette Schoar; and David Sraer, Princeton University and NBER

Can Unemployment Insurance Change the Selection into Entrepreneurship?

Tiantian Yang, Duke University, and Rebecca Zarutskie, Federal Reserve Board

How Did Young Firms Fare During the Great Recession? Evidence from the Kauffman Firm Survey

Zarutskie and Yang examine the evolution of several key firm economic and financial variables in the years surrounding and during the Great Recession using the Kauffman Firm Survey, a large panel of young firms founded in 2004 and surveyed for eight consecutive years. The researchers find that these young firms experienced slower growth in revenues, employment, and assets and faced tighter financing conditions during the recessionary years. While they find some evidence that firm growth picked up following the recession, it is not clear that it returned to the levels it would have been absent the recessionary shock. The authors find little evidence that financing conditions for young firms loosened following the recession and show that financing constraints, in addition to diminished demand, may have contributed to these firms' slower growth. They discuss the strengths and the limitations of the Kauffman Firm Survey in measuring the impact of the Great Recession on young firms and their founders and consider features of future data collection and measurement efforts that would be useful in studying entrepreneurial activity over the business cycle.

Sari Kerr, Wellesley College, and William Kerr, Harvard University and NBER

Immigrant Entrepreneurship

This chapter examines immigrant entrepreneurship and the survival and growth of immigrant-founded businesses over time relative to native-founded companies. Kerr and Kerr quantify immigrant contributions to new firm creation in a wide variety of fields and using multiple definitions. While significant research effort has gone into understanding the economic impact of immigration into the United States, comprehensive data for quantifying immigrant entrepreneurship are difficult to assemble. The researchers combine several restricted-access U.S. Census Bureau data sets to create a unique longitudinal data platform that covers 1992-2008 and many states. The authors describe differences in the types of businesses initially formed by immigrants and their medium-term growth patterns. They also consider the relationship of these outcomes to the immigrants' age at arrival to the United States.