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What makes an entrepreneur?
A Brazilian entrepreneur, that is. First and foremost, entrepreneurship is predicted by family characteristics, most of all having other entrepreneurs in the family and coming from a large family. What predicts finding a successful entrepreneur?: "the individual's smartness and higher education in the family." Entrepreneurs are not more self-confident than non-entrepreneurs and overconfidence is a big danger. Social networks predict who becomes an entrepreneur but not who becomes a successful entrepreneur. Entrepreneurs in Brazil exhibit more trust but this result does not seem to generalize across countries.
Here is the paper, from the World Bank. I thank Russ Roberts for the pointer.
Posted by Tyler Cowen on February 6, 2008 at 06:39 AM in Data Source | Permalink
Comments
"Social networks predict who becomes an entrepreneur but not who becomes a successful entrepreneur."
Given as written, since a successful one can only come from its general pool - then it stands to reason that social networks
do indeed determine the subset outcome too ... it's just that other factors within the general pool kick in for that further
successful state to occur. Point of clarification, that's all.
Posted by: TomG at Feb 6, 2008 7:26:48 AM
I agree with Chris Dillow's alternative interpretation at http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2008/02/entrepreneurshi.html
Posted by: tom s. at Feb 6, 2008 9:38:10 AM
I find the commentary at the link provided by tom s. interesting but ironic.
If the core criticism of the critics of capitalism is that of "access to capital," then what are the alternatives to capitalism for appropriate allocation of capital to capable managers?
Besides, just because an entrepreneur's parents are high in an organization does not prove access to capital, nor disprove hereditary intelligence as a predictor of success as either an independent entrepreneur or someone who rises within an organization partly due to entrepreneurial skills. I am one who doesn't really believe there is a thick line between entrepreneurs and non-entrepreneurs. The skill sets that make one successful are probably the same that makes the other successful.
What separates capitalism is the ease with which people can obtain capital. But the capital providers are loathe to throw it away, lest they have less capital next time. Under capitalism, those without capital can obtain it by borrowing it from those willing to put it at risk. To ease the investor's mind, the borrower (the entrepreneur) needs to have many qualities the investor values. Previous success is the most important proxy, but other predictors, appropriate or not, of future success are used. Connections is just another proxy.
What those without the "access to capital" under the current capitalist structure need to do is hone those qualities and find those investors that value them. If you don't have the connections, get 'em. The purer the capitalism, the more open to diversity. I was at an angel investor meeting and they were really proud to be funding a black single mom.
Posted by: Andrew at Feb 6, 2008 11:48:10 AM
Family links matter more for success as an entrepreneur in Brazil because it is easier to raise capital if there are other successful businesspeople in the family. There is more of a presumption down south that business success is an inheritable trait. Therefore lining up investors become much easier.
Access to education is also very unequally distributed so if you are well educated in generally means you come from a wealthy family to begin with.
Another important link of course is that if you are from a large successful family you have significantly greater access to the political machine.
But this isn’t much different from a lot of emerging economies were wealth has been concentrated in a small number of very wealthy and very well connected families over several generations. You will find the same holds true in Mexico, the Philippines or Saudi Arabia.
Posted by: asiequana at Feb 6, 2008 12:39:01 PM
The following excerpt would seem to directly attack the "access to capital" critique.
"Note that inheritance of a business has a significant negative coefficient. There are two
alternative interpretations of that coefficient, however. On the one hand, it might reflect a
higher initial size of business (which might thus grow slower). On the other hand, this
may be an indication of lower competence and lower motivation of the business ownermanager
if he or she inherited rather than started business herself. This results is
consistent with the Bertrand et al. (2004) findings for performance of family firms in
Thailand."
Even when granted a "business in a box," people bestowed instant access to capital within a proven successful business perform below trend. Real capitalism is characterized by the ability of newcomers to enter competition and undermine stodgy businesses, some run by heirs. As I recall, most of the people on the richest lists started with little. And the point is that number continues to grow. We had aristocracy, and aristocracy is dying. The "access to capital" critique seems to me to be the last flailing death throes of a discredited ideology frantically grasping for plausible deniabilty.
Posted by: Andrew at Feb 6, 2008 12:49:17 PM
My central theme might well be: Who your relatives are matters.
Posted by: Steve Sailer at Feb 7, 2008 1:53:28 AM
Yes, they matter. But the above negative correlation associated with inheriting a business might be what Thomas Gilovich would term "regression to the mean."
Free market capitalism is all about undermining establishments. Aristocracy is an establishment. Entrepreneurism is creative destruction. Having money only builds a wall of defense, it is not creative of offense. Heirs given businesses are predictably (by theory), and in realty (according to this report) undermined by hungry up-and-coming competition. Their "alternative" explanations and other alternatives should be explored, but I'm pretty sure the obvious explanation (obvious to those who understand the nature of creative destruction) is the right one.
Read Warren Buffett, Charlie Munger, and Charles Koch. What about their approach to business is about "access to capital?" They are about slow, methodical compound interest- through rationality, incentives, morality and ethics. Sure, they started with good opportunities, but their wild success is not due to their privilege. If you compound success over 70 years you can get rich. If you give your money to your heirs, yes they have access to capital, but if they lack the qualities of the producers they will lose it competition with those qualities. That is destructive of wealth. But what is the better alternative for allocating capital to capable managers?
I guess this stuff isn't so obvious. Even Warren Buffett is for the inheritance tax based on the meritocracy fallacy (he should stick to business and leave policy to experts). Who is best equipped to judge merit? Bureaucracy or the market? Buffett should know better.
Posted by: Andrew at Feb 7, 2008 7:04:59 AM
Koch, by the way, has eschewed the additional capital available for "going public."
Buffett and Munger prefer companies with little or no debt, i.e. capital. Their conglomerate is basically a capital allocation franchise. They provide access to capital to success stories. These success stories receive capital for being good, they are not good because they received capital.
Posted by: Andrew at Feb 7, 2008 7:07:52 AM
Posted by: 深圳翻译公司 at Feb 23, 2008 10:04:18 AM
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Posted by: Laurence Limley at Jul 10, 2008 10:15:49 PM
