Media Briefings

BIG BUSINESSES SPAWN BETTER ENTREPRENEURS

  • Published Date: July 2009

Successful entrepreneurs typically have a past as discontented employees in large, resourceful but bureaucratic organisations, according to research by Professor Hans Hvide, published in the July 2009 Economic Journal. The foundation of the new firm is unrealised ideas from the big company that the entrepreneur left.

Hvide asks: why do some new businesses create innovative new products and thousands of new jobs, while others cease to exist after a short and brutish life? His study suggests that the quality of entrepreneurs – and hence the performance of their new enterprises – is largely driven by the size of the firms they leave behind.

Entrepreneurs who leave large companies through lack of opportunity are likely to be more skilled than those who leave smaller companies, where their abilities are better known and they are better paid.

Analysis of data on 1,000 Norwegian companies reveals that entrepreneurs from big businesses have more successful start-ups in terms of survival, growth and profit. Increasing the size of an entrepreneur’s previous employer from the smallest quarter of firms to the largest quarter raises yearly profit by 6%.

This finding helps to explain what makes the best entrepreneurs – a fundamental driver of economic growth and a possible reason for the strong performance of the US economy compared with the UK and continental Europe. The flight of top quality employees can also explain why multinational firms do not grow quickly despite their large resources and market share.

Consider two highly skilled employees – one at a large firm, one at a small firm. In the small firm, senior managers will recognise the high skills and offer a high wage to keep the employee. In the large firm, managers may not recognise the high skills and may not offer as a high a wage, giving the employee more incentive to leave and start up his or her own company.

Thus, entrepreneurs from large companies are often highly skilled workers who were undervalued. Entrepreneurs from smaller companies – where their skills are better appreciated – are less likely to be as highly skilled.

The author notes:

‘A large firm is, from a technical perspective, more efficient, in that it can exploit returns to scale. But it is also less informed about the progress and content of the projects the workers are engaged in than in a small firm.’

This appears to drive the result that start-ups led by former employees of large companies perform better. Another reason for this finding could be that start-ups from large companies may use the large company as a client, or offer a complementary product, making them more successful.

The study controls for a number of factors, such as employees of larger firms typically being more highly educated, older and earning higher wages.

The research also suggests that the ideal size of a company depends on the strength of property rights. When property rights are weak, the best way to stop employees using the company’s intellectual property in their own start-ups is to pay them a high enough wage – hence being a small company is best. If property rights are strong, employees do not have this option, and the superior technical efficiency makes large companies preferable.

ENDS

Notes to editors: ‘The Quality of Entrepreneurs’ by Hans Hvide is published in the July
2009 issue of the Economic Journal.

Hans Hvide is at the University of Aberdeen.

The dataset consists of 1,000 incorporated companies founded between 1994 and 2002 in Norway. The data are compiled from three sources: Dun and Bradstreet’s database of accounting figures, Statistics Norway and the Norwegian government agency Brønnysundregistert.

The research was funded by the Economic and Social Research Council (ESRC).

For more details: contact Hans Hvide on 01224-273411 (email: hans.hvide@abdn.ac.uk);
or Romesh Vaitilingam on 07768-661095 (email: romesh@vaitilingam.com).