What makes an entrepreneur
David g blanchflower
Andrew j Oswald
Journal of labor economics ,1998.
What makes an entrepreneur
• Entrepreneurship = self employment
=>50%people prefer self employment
Only 15% of people are self employed( in usa,
Germany, uk).
What factors determine the becoming of an
entrepreneur?
Past research reveals:
Lack of capital( Evans and Leighton 1989)
Possession of family assets facilitates self
employment
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What makes an entrepreneur
• Family assets arise due to:
1. Inherent ability to accumulate
2. Inheritance
This paper develops a model which looks at
• Lack of capital and its effect on
entrepreneurship– finance constraint
hypothesis.
• Looks at psychological factors
• Uses survey data, data from interviews to
support its propositions
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What makes an entrepreneur
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Theoretical perspectives– two main schools
Classical-creative theory ( knight 1921,
schumpter 1939, kitzner 1973, casson 1982)-most individuals are not alert to business
opportunities– are ordinary
opportunities cannot be assigned
probabilities-- are uncertainty bearing
attitude to risk is not central
entrepreneur receives higher expected utility
over a worker employed
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What makes an entrepreneur
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Neo classical approach—discovery theory(
khilstrom and laffont 1979, kanbur 1982,
Grossman 1984, Shane 2003)
All individuals are able to identify business
opportunities– are unique– traits exist
Opportunities can be assigned probabilities–
are objective and exist
Entrepreneurs receive same expected utility
as workers
Has unusually low risk aversion—risk bearing
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What makes an entrepreneur
• This paper follows the classical approach
• Builds on eight assumptions:
• Beta–proportion of population with
entrepreneurial vision
• K– amount of capital required by a project
• П(k) – amount of profit
• F(k)–distribution of capital endowments(0<k<1)
• Z-probability of obtaining an unsecured loan
• Utility =u = П +i( self employment) u=wage
• i=non pecuniary utility from independence
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What makes an entrepreneur
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Assumption – no probabilistic business risk
Liquidity constraint limit potential entrepreneurs
Equilibrium reached when
Capital constraints are binding in aggregate(
profit (k) +i>w)
Or wage= utility from entrepreneurship
No of entrepreneurs in an economy =
Beta*p (no of people with capital>k) + beta *z*
no of people with capital<k
This also gives the probability that a person is
self employed
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What makes an entrepreneur
• Propositions:
• When (profit f (k) +i=w) then
• Increase in beta, i , z raise equilibrium number
of entrepreneurs and wage rates
• When (profit f (k) +I >w) then
• Increase in beta, z and decrease in k, raise
equilibrium number of entrepreneurs and wage
rates. i( utility from independence) has no effect
• Entrepreneurs get higher utility than workers
• Larger the z smaller is the utility gap
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What makes an entrepreneur
• The study used data from national child development
survey( 1981 and 1991)
• Focus on people who were either employed or self
employed
• factors tested in the study:
• Set of personal characteristics- measures associated
with persons assets
• Regional and industrial characteristics
• Access to Capital –inheritances( exogenous)
• Employment status
• Dv : probability that a person reports himself as self
employed
• Test effects of inheritance on probability of being self
employed
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What makes an entrepreneur
• Findings
• An increase in the number of self employed as
% of population ( 9.9%(1981) to 15%(1991)
• The receipt of an inheritance gift increases an
individuals probability of being self employed(
other factors remaining constant)
• Large no of people would like to be self
employed
• Self employed people are more satisfied
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What makes an entrepreneur
• Shortage of capital is the most frequently cited
reason for not becoming self employed
• Most small businesses are begun with own or
family money. Obtaining capital is the single
biggest concern.
• Impact of psychological traits were not
significant
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What makes an entrepreneur
• Issues
• The issue of risk taking as a central trait of
entrepreneur
• Will no of jobs in a market decrease the
entrepreneurial ability of a population
• i – is it related to risk taking ability
• i- can it be got from employment
• Given the ability to get capital does it mean that
anybody can be an entrepreneur.
• Given the capital what bout risk less
opportunities to earn rents
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What makes an entrepreneur
• Burns 1999
• A successful entrepreneur utilizes four key
principles
• Belief in ones ability to succeed
• Prioritized relevant learning
• Proactive approach
• perseverance
• To this add (bill Bolton 2000)
• Talent , temperament and technique
What makes an entrepreneur
• The factors can be classified as
• Personality factors
• Motivation and emotion– gives the drive and
purpose and self confidence (whybrow 1999)
• High need for achievement( Roberts 1991)
• Competitiveness – main motivator
• Need for independence
• Behavioral characteristics( kuratko and
hodgetts 1998)– perseverance, determination,
take calculated risks, creativity, honesty and
integrity, initiative, taking responsibility
What makes an entrepreneur
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Environmental factors( Roberts 1991)
Family background – fathers career, inheritance
Education – not important, start at early age
Work experience– important
Action factors– what entrepreneurs do
Are creative and innovative
Spot and exploit opportunities
Find resources to exploit opportunities
Manage risk, create capital
are good net workers, determined