Entrepreneurship and Economic Growth
October 14-15, 2016
Jean-Noel Barrot, MIT, and Ramana Nanda, Harvard University and NBER
In 2011, the federal government accelerated payments to their small business contractors, spanning virtually every county and industry in the US. Barrot and Nanda study the impact of this reform on county-sector employment growth over the subsequent three years. Despite firms being paid just 15 days sooner, the researchers find payroll increased 10 cents for each accelerated dollar, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings. Importantly, however, the researchers document substantial crowding out of non-treated firms employment, particularly in counties with low rates of unemployment. Their results highlight an important channel through which financing constraints can be alleviated for small firms, but also emphasize the general-equilibrium effects of large-scale interventions, which can lead to a substantially lower net impact on aggregate outcomes.
Konrad B. Burchardi, Stockholm University; Thomas Chaney, University of Chicago; and Tarek Alexander Hassan, University of Chicago and NBER
Burchardi, Chaney, and Hassan use 130 years of data on historical migrations to the United States to show a causal effect of the ancestry composition of U.S. counties on foreign direct investment (FDI) sent and received by local firms. To isolate the causal effect of ancestry on FDI, the researchers build a simple reduced-form model of migrations: migrations from a foreign country to a U.S. county at a given time depend on (i) a push factor, causing emigration from that foreign country to the entire United States, and (ii) a pull factor, causing immigration from all origins into that U.S. county. The interaction between time-series variation in origin-specific push factors and destination-specific pull factors generates quasi-random variation in the allocation of migrants across U.S. counties. The researchers find that a doubling of the number of residents with ancestry from a given foreign country relative to the mean increases by 4 percentage points the probability that at least one local firm engages in FDI with that country, and increases by 29% the number of employees at domestic recipients of FDI from that country. This effect operates mainly through the descendants of migrants rather than migrants themselves and increases in size with the ethnic diversity of the local population, the distance to the origin country, and the quality of its institutions.
Sabrina T. Howell, New York University
Why do people become entrepreneurs? Evidence of low returns to entrepreneurship is puzzling. Cognitive biases like overconfidence or nonpecuniary benefits may explain why people start firms. An alternative view emphasizes the real option value of launching or abandoning a new firm, and characterizes entrepreneurship as rational experimentation. These perspectives have different predictions for whether and how entrepreneurs learn from new information; in the experimentation view, founders should be more responsive to new information. Howell uses novel data from nearly 100 new venture competitions to show that negative feedback increases the chances a venture is abandoned. Further, learning in the sense of improvement is predictive of subsequent financing and employment. Howell finds heterogeneity that is relevant to understanding innovation and firm dynamics. The cost of experimentation, the stage of the venture and its founder in their respective lifecycles, geography, and the founder's personal background are all important determinants of learning. The results are broadly consistent with the experimentation view. However, founders with degrees from elite schools and social impact ventures are unresponsive to feedback and may, respectively, be overconfident and garner large non-pecuniary benefits.
Titan M. Alon, Northwestern University; David W. Berger, Northwestern University and NBER; and Robert C. Dent and
Benjamin Pugsley, Federal Reserve Bank of New York
Since 2005, there has been a dramatic slowdown in aggregate productivity growth in the U.S. In this paper, Alon, Berger, Dent, and Pugsley examine whether this relatively recent decline in aggregate productivity is a consequence of more longstanding decline in the gross business entry rate since the 1980s. To establish this link, the researchers extend the Dynamic Olley-Pakes (DOP) decomposition technique of Melitz and Polanec (2015) to allow log productivity growth to vary over the lifecycle of the firm. The researchers implement this decomposition on U.S. Census firm-level microdata and find labor revenue productivity growth is sharply decreasing in firm age. Remarkably, this lifecycle pattern has changed little since the beginning of the aggregate productivity slowdown in 2005. These results motivate a counterfactual to quantify the effects of a change in firm entry vis-à-vis shifts in the firm age distribution on average industry revenue productivity growth. This entry-related "aging" channel explains roughly one-third of the slowdown, with the remainder following from a decline in the gains from reallocation (allocative efficiency) among mature (20+ years) incumbent firms.
Chuck Eesley and Yong Suk Lee, Stanford University
Recently, many universities have developed programs to promote student entrepreneurship. However, relatively little is known about the impacts of such university initiatives. Lee and Eesley examine how Stanford University's entrepreneurship programs affected entrepreneurial activity using the Stanford Innovation Survey, a unique survey that asks the entrepreneurship activities of Stanford degree-holders. The researchers examine Stanford University's two major initiatives that were established in the mid 1990s - the Stanford Center for Entrepreneurial Studies at the Business School and the Stanford Technology Venture Program at the Engineering School. OLS regressions find that program participation is positively related to entrepreneurship activities. However, selection of more entrepreneurial students into program participation hinders causal interpretation. The researchers utilize the fact that the initiatives were implemented at the school level, i.e., only students in the respective schools were primarily affected by each program, to examine the programs' impacts. Using the introduction of each school's program as an instrument for program participation the researchers find that the business school program has a negative to zero impact on entrepreneurship. Participation in the engineering school program has no impact on entrepreneurship. However, there is evidence that the business school initiative decreases the probability that the startup fails and increases firm revenue. Again, there is no significant impact on firm performance from the engineering school program. Overall0, the findings imply that business school entrepreneurship programs may not increase entrepreneurship, but help students to better identify their potential as entrepreneurs and improve the quality of startups.
Jorge Guzman, MIT, and Scott Stern, MIT and NBER
While official measures of business dynamism have seen a long-term decline, early-stage venture financing of new companies has reached levels not observed since the late 1990s, resulting in a sharp debate about the state of American entrepreneurship. Building on Guzman and Stern (2015a; 2015b), this paper offers new evidence to inform this debate by estimating measures of entrepreneurial quality based on predictive analytics and comprehensive business registries. Guzman and Sterns estimates suggest that the probability of a significant growth outcome (either an IPO or high-value acquisition) is highly skewed and predicted by observables at or near the time of business registration: 69% of realized growth events are in the top 5% of their estimated growth distribution. This high level of skewness motivates the development of three new economic statistics that simultaneously account for both the quantity as well as the quality of entrepreneurship: the Entrepreneurial Quality Index (EQI, measuring the average quality level among a group of start-ups within a given cohort), the Regional Entrepreneurship Cohort Potential Index (RECPI, measuring the growth potential of firms founded within a given region and time period) and the Regional Entrepreneurship Acceleration Index (REAI, measuring the performance of a region over time in realizing the potential of firms founded there). The researchers use these statistics to establish several new findings about the history and state of U.S. entrepreneurship using data for 15 states (covering 51% of the overall U.S. economy) from 1988 through 2014. First, in contrast to the secular decline in the aggregate quantity of entrepreneurship observed in series such as the Business Dynamic Statistics (BDS), the growth potential of start-up companies (RECPI relative to GDP) has followed a cyclical pattern that seems sensitive to the capital market environment and overall economic conditions. Second, while the peak value of RECPI is recorded in 2000, the level during the first decade during this century was actually higher than the late 1980s and first half of the 1990s, and also has experienced a sharp upward swing beginning in 2010. Even after controlling for changes in the overall size of the economy, the second highest level of entrepreneurial growth potential is registered in 2014. Third, the likelihood of start-up firms for a given quality level to realize their potential (REAI) declined sharply in the late 1990s, and did not recover through 2008. These findings suggest that divergent assessments of the state of American entrepreneurship can potentially be reconciled by explicitly adopting a quantitative approach to the measurement of entrepreneurial quality.
Mark Curtis, Wake Forest University, and Ryan Decker, Board of Governors of the Federal Reserve System
Entrepreneurship plays an important role in labor markets, productivity growth, and occupational choices. While a large and growing literature studies patterns in entrepreneurial activity in the U.S., there exists little well-identified research into the policy determinants of entrepreneurial outcomes and the differing effects of policies on firms of different ages. Using the recently developed Quarterly Workforce Indicators dataset, Curtis and Decker consider three state-level policies corporate income taxes, minimum wages, and personal income taxes and study their effects on new firm activity by comparing continuguous counties that lie across state borders. The researchers estimate the effect of changes in these policies on employment and job flows at new firms. They find significant negative effects of corporate tax increases on the level of entrepreneurial activity, and they find that new firms account for a disproportionate share of the response of aggregate employment growth to such tax changes. The effects of minimum wages are of moderate size but largely dissipate after accounting for cross border spillovers. Finally, the authors find no statistically significant impact of personal tax rates.