Exam Prep Entrepreneurship
Week 7
Parker (2009) Why do small firms produce the entrepreneurs?
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Which three theories are put forward?
What is the empirical strategy? Why is it important to use panel data?
How does Parker try to measure risk aversion?
Sorgner & Fritsch (2018) Entrepreneurial career paths
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What are opportunity costs?
How do income/earnings factors potentially impact swithces into self-employment?
Why does high skills variety lead to higher probability of self-employment?
Kautonen, van Gelderen and Fink (2015) Robustness of the theory of planned behavior in predicting entrepreneurial
intentions and actions
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Which gap in the literature is this study trying to address?
What are the three dimensions of the Theory of Planned Behavior?
Do the results support the Theory of Planned Behavior?
1)​ Parker
Parker’s (2009) paper explores why people who work in small firms are more likely to become
entrepreneurs. He looks at three main theories: transmission theory, selection theory, and
blocked mobility theory. The transmission theory suggests that small firms help employees
develop entrepreneurial skills and expose them to role models, making them more likely to start
their own businesses. The selection theory argues that people who are naturally more willing to
take risks tend to choose both small firms and entrepreneurship. Lastly, the blocked mobility
theory claims that employees in small firms may turn to entrepreneurship because they don’t
have many opportunities for promotion​.
To test these ideas, Parker uses panel data from the British Household Panel Survey (BHPS),
covering the years 1991 to 2003. He applies a random effects probit model, which helps control
for differences between individuals that might affect their likelihood of becoming entrepreneurs.
Using panel data is important because it tracks the same people over time, rather than just
looking at a single moment. This makes the results more reliable and reduces the risk of
drawing incorrect conclusions from one-time observations​.
Parker also tries to measure risk aversion, since it's a key factor in the selection theory. Instead
of directly asking people how much risk they’re willing to take, he looks at wage volatility and
trade union membership. The idea is that people working in jobs with unpredictable wages or
those who don’t join trade unions (which offer more job security) are probably more comfortable
with risk, making them more likely to start their own businesses​.
In the end, Parker’s findings mostly support the selection theory. It seems that small firms don’t
necessarily "produce" entrepreneurs—rather, they attract people who are already inclined to
take risks and start their own businesses​.
1. Which three theories are put forward?
Parker (2009) presents three main theories explaining why employees from small firms are
more likely to become entrepreneurs:
●​ Transmission Theory: This theory suggests that small firms provide employees with a
broad range of skills and expose them to entrepreneurial role models. Unlike large firms,
where work is more specialized, small firms often require employees to take on multiple
roles, helping them develop diverse competencies that are useful for entrepreneurship.
Additionally, working closely with business owners may inspire employees to start their
own ventures.
●​ Selection Theory: This theory argues that individuals with lower risk aversion are more
likely to choose employment in small firms as well as entrepreneurship. Rather than
small firms actively shaping future entrepreneurs, they simply attract people who already
have entrepreneurial traits, such as a willingness to take risks and a preference for
independence.
●​ Blocked Mobility Theory: This theory suggests that small firms offer fewer career
progression opportunities compared to large firms. Employees who feel stuck in their
roles without prospects for advancement may turn to self-employment as an alternative
career path. In this view, entrepreneurship is a necessity-driven choice rather than an
opportunity-driven one​.
2. What is the empirical strategy?
Parker uses an econometric approach to test these theories, relying on data from the British
Household Panel Survey (BHPS) from 1991 to 2003. His empirical strategy includes:
●​ Using a Random Effects Probit Model: This statistical method helps analyze
transitions from paid employment to self-employment while accounting for individual
differences that are not directly observable (such as personality traits or risk tolerance).
●​ Controlling for Unobserved Heterogeneity: Since certain individual characteristics
(e.g., ambition, financial resources) might influence both the choice to work in a small
firm and the likelihood of becoming an entrepreneur, Parker controls for these factors to
isolate the effects of firm size on entrepreneurship.
●​ Distinguishing Between Necessity-Driven and Opportunity-Driven
Entrepreneurship: By analyzing different motivations behind self-employment, Parker
tests whether individuals become entrepreneurs because they lack career growth
opportunities (blocked mobility theory) or because they seek entrepreneurial experiences
(transmission theory)​.
3. Why is it important to use panel data?
Panel data is crucial for Parker’s study because it tracks the same individuals over time rather
than providing just a snapshot of different people at a single moment. The benefits of panel data
include:
●​ Observing Career Transitions Over Time: This allows Parker to see whether
individuals who worked in small firms actually became entrepreneurs later, rather than
just comparing current employees and entrepreneurs.
●​ Reducing Bias from Individual Differences: If only cross-sectional data were used,
results could be skewed by individual traits that make someone both more likely to work
in a small firm and to start a business. By following the same individuals over multiple
years, Parker can better control for these factors.
●​ Improving Causal Inference: With repeated observations, the study can better
determine whether small firm employment causes entrepreneurship or if it simply
attracts people predisposed to self-employment​.
4. How does Parker try to measure risk aversion?
Since risk aversion is not directly observable, Parker uses proxy variables to infer individuals'
attitudes toward risk:
●​ Wage Volatility: Employees who experience greater fluctuations in their wages are
assumed to be more comfortable with financial uncertainty, a trait that is also important
for entrepreneurs. If individuals who transition from small firms to entrepreneurship tend
to have had more unstable earnings, this suggests they are less risk-averse.
●​ Trade Union Membership: Parker assumes that individuals who join trade unions value
job security and are therefore more risk-averse. Conversely, those who avoid trade
unions may be more comfortable taking risks, making them more likely to become
entrepreneurs.
By using these indirect measures, Parker provides empirical support for the selection theory,
showing that small firms don’t necessarily “produce” entrepreneurs, but instead attract
individuals who are already inclined toward self-employment​.
2) Summary of Sorgner & Fritsch (2018) – Entrepreneurial Career Paths
Sorgner and Fritsch (2018) examine how different career paths influence the likelihood of
individuals becoming self-employed. They focus on the role of prior work experience, skills
variety, and income factors in shaping entrepreneurial decisions. Using German
Socio-Economic Panel (SOEP) data, they analyze how career patterns impact transitions
into self-employment and business success. The study finds that diverse work experience
and broad skill sets increase the probability of switching to self-employment, while
income considerations play a key role in the decision-making process. The paper emphasizes
that entrepreneurship is often the result of long-term career development rather than a
sudden shift​.
1. What are opportunity costs?
Opportunity costs refer to the forgone benefits of choosing one option over another. In the
context of entrepreneurship, it means the income and career benefits that individuals give up
when they leave paid employment to start their own business. If someone has a high-paying
job, the opportunity cost of switching to self-employment is greater, as they risk losing a stable
income and career growth. Conversely, if someone has low earnings or poor job prospects,
their opportunity costs are lower, making self-employment a more attractive option​.
2. How do income/earnings factors potentially impact switches into
self-employment?
Income and earnings influence self-employment decisions in multiple ways:
●​ Higher earnings in employment discourage self-employment, as individuals are
reluctant to give up a stable and well-paying job.
●​ Lower wages or job instability make self-employment more appealing, as
individuals have less to lose and may seek better income opportunities through
entrepreneurship.
●​ Savings and financial security provide a cushion for self-employment, enabling
individuals to take risks without immediate financial pressure.
●​ Expected earnings from self-employment also play a role—if entrepreneurship offers
higher long-term income potential, individuals may be more willing to switch​.
3. Why does high skills variety lead to a higher probability of
self-employment?
A diverse skill set increases the chances of becoming self-employed because:
●​ Entrepreneurs need to manage multiple roles, including finance, marketing,
operations, and customer relations. Those with varied work experience are better
equipped to handle these challenges.
●​ People with a broader skill base have more business opportunities, as they can
identify and act on different market needs.
●​ A variety of skills reduces dependency on specialized employment, making
self-employment a more viable career path.
●​ Learning from different job roles increases adaptability and problem-solving
skills, which are crucial for business success​.
In summary, Sorgner and Fritsch (2018) show that career background, income
considerations, and skill varietysignificantly influence entrepreneurial career choices. Those
with lower opportunity costs, unstable incomes, and diverse work experience are more
likely to transition into self-employment.
3) Summary of Kautonen, van Gelderen, and Fink (2015)
Kautonen, van Gelderen and Fink (2015) Robustness of the theory of planned behavior in predicting entrepreneurial
intentions and actions
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○​
○​
Which gap in the literature is this study trying to address?
What are the three dimensions of the Theory of Planned Behavior?
Do the results support the Theory of Planned Behavior?
Kautonen, van Gelderen, and Fink (2015) explore whether the Theory of Planned Behavior
(TPB) can reliably predict not just entrepreneurial intentions but also actual entrepreneurial
actions. Their study addresses a key gap in the literature—the intention-action gap—by
using longitudinal data from Finland and Austria to track whether people who express an
intention to start a business actually follow through. Previous research had focused mainly on
measuring entrepreneurial intentions, but this study provides empirical evidence linking
intentions to real business creation. The Theory of Planned Behavior consists of three
main dimensions: attitude toward the behavior, which refers to how positively or negatively
someone views entrepreneurship; subjective norms, which involve social pressures from
family and peers to pursue self-employment; and perceived behavioral control, which reflects
how confident a person feels about successfully starting a business. Their findings strongly
support the TPB, as entrepreneurial intentions were shown to be a significant predictor of
later business start-ups. Among the three TPB dimensions, perceived behavioral control
had the strongest impact, meaning that individuals who believed they had the skills and
resources to start a business were the most likely to take action. While subjective norms and
attitudes also influenced intentions, they had a weaker effect on actual business creation.
Overall, this study reinforces the reliability of the TPB in explaining not just why people intend
to become entrepreneurs, but also whether they actually follow through with their plans.
Kautonen, van Gelderen, and Fink (2015) investigate the Theory of Planned Behavior (TPB)
and its ability to predict entrepreneurial intentions and actual business start-ups. They use
longitudinal data from two different countries (Finland and Austria) to test whether people who
express an intention to become entrepreneurs actually follow through with their plans. Their
study provides strong evidence that entrepreneurial intentions significantly predict later
entrepreneurial action, reinforcing the robustness of the TPB in explaining entrepreneurial
behavior​.
1. Which gap in the literature is this study trying to address?
The study addresses the intention-action gap in entrepreneurship research. While many
studies focus on entrepreneurial intentions, fewer have examined whether these intentions
actually lead to business creation. The authors aim to test whether the TPB, which is widely
used to predict intentions, is also effective in predicting real entrepreneurial behavior over
time. By using longitudinal data, they provide empirical evidence that strengthens the link
between entrepreneurial intentions and actual entrepreneurial action​.
2. What are the three dimensions of the Theory of Planned Behavior?
The Theory of Planned Behavior (TPB), developed by Ajzen (1991), consists of three key
dimensions that influence intentions and behavior:
1.​ Attitude Toward the Behavior – The degree to which a person has a positive or
negative evaluation of becoming an entrepreneur. If someone believes entrepreneurship
will bring personal and financial success, they are more likely to intend to start a
business.
2.​ Subjective Norms – The perceived social pressure from family, friends, or society to
engage in entrepreneurship. If significant others encourage self-employment, an
individual is more likely to form entrepreneurial intentions.
3.​ Perceived Behavioral Control – The belief in one’s ability to successfully start and
manage a business. Higher confidence in entrepreneurial skills and fewer perceived
obstacles increase the likelihood of forming strong entrepreneurial intentions​.
3. Do the results support the Theory of Planned Behavior?
Yes, the results strongly support the Theory of Planned Behavior. The study finds that:
●​ Entrepreneurial intentions significantly predict later business start-ups in both
Finland and Austria.
●​ Perceived behavioral control has the strongest effect on actual entrepreneurial action,
meaning that individuals who believe they have the skills and resources are more likely
to follow through.
●​ Subjective norms and attitudes also influence intentions, but their impact on actual
business creation is weaker compared to perceived behavioral control.
Overall, the study confirms that TPB is a robust framework for predicting not just
entrepreneurial intentions but also real entrepreneurial behavior over time
“Note: Tahsin, affected by his family entrepreneurial background and the situation of his family,
forced him to start his entrepreneurial journey. After he becomes successful as an entrepreneur
he also understands that being an entrepreneur matches with his abilities and he has skills and
resources for further entrepreneurial actions.”