The Entrepreneurial Process: : Economic Growth, Men, Women and Minorities

Citation

Mason, C. (1999), "The Entrepreneurial Process: : Economic Growth, Men, Women and Minorities", International Journal of Entrepreneurial Behavior & Research, Vol. 5 No. 2, pp. 64-67. https://doi.org/10.1108/ijebr.1999.5.2.64.1

Governments around the globe, in recognising that small firms are the main source of new employment, are pursuing policies to make their economies more entrepreneurial. For example, the UK’s Competitiveness White Paper ‐ Our Competitive Future: Building the Knowledge Driven Economy ‐ published in December 1998, emphasises the importance of the innovation of entrepreneurs in promoting growth, increasing productivity and creating jobs and devotes considerable space to a discussion of how to build the UK’s entrepreneurial capabilities. Much of the rationale for policies to encourage the entrepreneurship rests with the pioneering studies of David Birch in the 1970s and 1980s, culminating in the publication of Job Creation in America (Free Press) in 1987. This book by Reynolds and White is probably the most important book to be published on new firm formation and job generation since then. Based on detailed empirical research, it makes important contributions to our understanding of the entrepreneurial process and the job generation debate, and has much to say to governments about how to stimulate entrepreneurship.

The core of the book is an attempt to answer five questions:

1. 1

   How many people are trying to start new businesses and how many succeed?

2. 2

   What distinguishes those who succeed from those who do not?

3. 3

   What proportion of start‐ups fail?

4. 4

   What is the influence of the gestation process on the subsequent fortunes of the firm?

5. 5

   Should policy focus on encouraging more people to initiate start‐up efforts, assist those who are involved in the gestation process or only support those businesses that have been established?

The model of the entrepreneurial process which underpins this study is very simple. It comprises four stages and three transitions. The stages are as follows:

1. 1

   conception ‐ when someone in the population decides to start a new firm;

2. 2

   gestation ‐ trying to put the business in place;

3. 3

   infancy ‐ the fledgling new firm starts trading;

4. 4

   adolescence ‐ the new firm becomes established.

The transitions are as follows:

1. 1

   when people commit time and resources in an attempt to found a firm;

2. 2

   when the gestation process is completed and the new firm is successfully launched; and

3. 3

   the start‐up business becomes established.

Reynolds and White argue that previous research has concentrated on the birth and establishment phases, whereas little is known about the conception and gestation phases: hence, “how individuals create new firms is one of the least understood features of modern societies” (p. 39). Their study fills this important gap, and in so doing is able to indicate what proportion of the adult population are trying to start a business at any point in time (a category they term nascent entrepreneurs), the proportion who succeed, and whether the profile of those who successfully start new firms is in any way different from those are unsuccessful or who do not try. This focus is also able to indicate whether the actions taken during the gestation process influence whether or not a business will be established, and the subsequent performance of that business. Reynolds and White argue that such information is important if governments want to encourage more people to start new firms and to increase the proportion of new firms that grow. Specifically, they argue that intervention needs to be directed to the various transition points:

1. 1.

   encouraging more people to initiate start‐up efforts;

2. 2.

   assisting start‐up efforts;

3. 3.

   support fledgling firms; and

4. 4.

   encouraging growth.

The design of programmes will vary for these different stages. Moreover, evidence on the various transition rates can point to where policy might be most effective.

Identifying nascent entrepreneurs and tracking the gestation process are extremely data demanding and require innovative methodologies. This study is based on a formidable amount of data collection over several years. The approach adopted here was to take a representative sample of adults (18 years and over) who were asked if they were trying to start a new firm. Those who were taking explicit steps to start a business were considered to be nascent entrepreneurs. They were asked about their start up activities, and their success was then tracked in follow‐up surveys. This survey was conducted in Wisconsin, USA, but was complemented by a another, small scale, survey of the 48 contiguous US states. These surveys provided information on the first and second transitions. Information on the third transition was derived from new firm data sets that were constructed for Minnesota and Pennsylvania from Dun & Bradstreet files and for Wisconsin from unemployment insurance files, and surveys based on a representative sample of new firms on these listings. One of the main criticisms that can be levelled at this book is that the data collection methodologies, especially as pertaining to nascent entrepreneurs, is not described in sufficient detail.

The book contains a wealth of detailed findings on the entrepreneurship process, and only a few of the more significant can be highlighted here. First, the study adds to the weight of existing evidence that new firms have a major impact on the economy, not least in terms of their contribution to the job generation process. Reynolds and White report that about one in five new jobs come from the birth of autonomous new firms, and one‐third or more came from local firm expansions (in situ expansion and local branch openings). Second, attitudes to the local (i.e. state) entrepreneurial climate vary with an individual’s involvement in the entrepreneurial process: the greater the involvement the more negative is the judgement. However, contact with sources of business assistance influences for the better the view of the entrepreneurial climate. This could, in turn, be influential in the rate at which nascent entrepreneurs transform into new business owners. Third, involvement in a new business start‐up is by no means a rare event: at any point in time approximately one in 25 adults in the USA are involved in trying to start a business. Moreover, those who are involved in such activities are not social misfits but are “mainstream, mid career adults seeking new options” (p. 27). Men are twice as likely as women to be engaged in a start‐up activity and the 25‐44 age group has the highest level of involvement. Fourth, just under half of all nascent entrepreneurs succeed in establishing a new business. However, the emergence of new firms is not instantaneous: typically it takes up to a year for a business to be successfully put in place. Men are twice as likely as women to make this transition. Intermediate education and more start‐up activities are also associated with a successful transition. Fifth, only a small proportion of firms achieve rapid growth: the largest 10 per cent account for 50 per cent of jobs and 60 per cent of sales. The link between team starts and rapid growth is confirmed. But whereas previous research has emphasised the importance of the growth of new firms, this study has found that it is the initial size of the firm that is of greater significance in terms of its economic contribution. Sixth, and controversially, survival rates of new firms is high: more than 90 per cent survive the first year and around 70 per cent continue for seven years. Seventh, men outnumber women in the entrepreneurship process: not only do a smaller proportion of women try to start businesses, but those who do have a lower likelihood of succeeding in getting a new firm started. Nevertheless, men and women encounter many of the same problems in establishing new ventures, although one issue that is more significant for women is financing. Finally, ethnicity only has an influence at the first stage of the entrepreneurial process, with fewer non‐whites attempting to start a business because of the greater prevalence of inhibiting factors (e.g. not completing high school, recent arrivals in the county, small social networks). However, non‐whites who do participate in the entrepreneurial process are no less likely than whites to become new firm founders.

This book has contributed to our understanding of the entrepreneurial process in three ways:

1. 1

   providing new information on previously unresearched aspects of the entrepreneurial process;

2. 2

   enriching our knowledge of other aspects where information did exist; and

3. 3

   challenging some existing findings.

On the debit side, three criticisms can be made. First, the generalisability of the study can be questioned. The findings on new firms are based on evidence from a maximum of just three states, while much of the evidence on nascent entrepreneurship is based on a sample drawn from the state of Wisconsin. So, just how much geographical variation is being overlooked? Reynolds and White seem to be unsure, arguing that “patterboth within and between states. We do not know whether the findings applicable in other countries. However, Reynolds is directing an international consortium of researchers in several countries (the Entrepreneurship Research Consortium) who are undertaking large‐scale household surveys, using common definitions and methodologies to identify and track over time representative samples of nascent entrepreneurs. Second, the analytical approach is based on seeking regularities and emphasises the role of structural factors to explain variations. The role of non‐economic factors is given little consideration. Third, having emphasised the relevance of the book for policy makers, Reynolds and White do not fully live up to this. The book certainly has a lot of useful things to say to policy‐makers, but this is at a fairly high level of abstraction. There is no discussion of either the design or delivery of policy. Indeed, the authors conclude that there are only a limited range of actions available to policy‐makers to enhance the start‐up process and are sceptical about what such actions can achieve.