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The experience of the founder and self-employment duration: a comparative advantage approach

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Abstract

This paper investigates how the initial experience of a founder affects self-employment duration in a competing risks setting. The analysis uses survey data that provide new perspectives on the role of the founder’s experience. The analysis concentrates on the importance of a balanced skill set for self-employment duration. The results show that most self-employed individuals find themselves unemployed upon ending their self-employment. Firm-level characteristics are less significant in explaining self-employment duration, while experience and motivation appear to be driving forces for self-employment longevity. The findings support the importance of combined practical experience and adequate skills. Having broad experience combined with competence in sales/business is one of the most important factors for self-employment duration. Contrary to most other studies, the results show that previous self-employment experience is associated with early exits.

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Notes

  1. An exception can be found in Jovanovic (1979, 1982).

  2. Skills may degenerate due to a lack of practice in working conditions characterized by a high division of labor or they may simply become redundant if the opportunity to participate in (highly specialized) technological change is missed. Bruce and Schütze (2004) show that experience in self-employment has limited value with respect to wages, and Hyytinen and Rouvinen (2008) argue that self-employment in this context tends to be unemployment in disguise. However, Price (1988) notes that human capital decay mainly applies to highly skilled individuals. In fact, on average, people who enter self-employment are usually better qualified than the average, which is also true for the population of formerly unemployed founders observed here.

  3. For example, the variation may be induced on the basis of changes in the price policy or production technology.

  4. Müller (2009), for example, suggests an inverse sigmoid pattern of an individual’s human capital development for academic knowledge following entry into the employment market, which implies a sigmoid depreciation function.

  5. Note that the results presented by Hinz and Jungbauer-Gans (1999) and Pfeiffer and Reize (2000) indicate only a few differences between those start-ups that received support in the form of bridging allowances as compared with ordinary self-employment entries.

  6. The bridging allowance was part of active labor market policy until 2006. During the time span under observation the program provided a 6-month payment of unemployment benefits during the setting up of a business. It was only granted if the business concept passed an evaluation by a competent authority. For further details, see Caliendo and Kritikos (2009).

  7. The survey consisted of two waves with a reminder. In 500 cases we were unable to find a valid mailing address. The applications were identified on the basis of document research in six regional employment offices of the administrative district of Lüneburg in summer 2001. The survey was conducted in fall 2002. We also conducted a database inquiry to proof the accuracy of the initially collected data and to update mailing addresses.

  8. In particular, based on these restrictions, we expect to reduce biases related to retrospective answers and to reduce problems concerning selectivity in survey participation.

  9. Note that, due to data confidentiality concerns, it was not possible to carry out more in-depth analysis to investigate issues of sample selection and representation. As far as possible, descriptive analyses show that males had a lower participation rate than did females and that the participation probability increased slightly with age and income. We did not find a bias concerning the spatial representation of the region.

  10. For previous results concerning the balancing profile of nascent entrepreneurs, see Wagner (2003, 2006). In the 2003 study, Wagner shows that about 31% (12%) of the nascent entrepreneurs had changed their occupations once (twice or more). Wagner (2006) reports that, on average, nascent entrepreneurs are experienced in about 3.6 (distinct) occupational fields/types of competence.

  11. The share of founders who started their business with higher assets (over €25,000) was less than 24%, and around 38% started with less than €5,000. Almost 28% started with employees (28%). Wießner (2001) and Hinz and Jungbauer-Gans (1999) reported a higher proportion of founders who started with low assets (<€5,000) (Wießner: 52%; Hinz and Jungbauer-Gans: 45%).

  12. Taylor (1999) found a share of 48% for exits into wage work (male, cohort of 79); Johansson (2000) found a share of 39%. Cueto and Mato (2006) did not report the shares of exits by type. In fact, their reported results allow no clear interpretation: 10% finished their self-employment period with a transition into wage work, and 52.5% terminated the self-employment voluntarily. Andersson and Wadensjö (2007) only reported the share of exits into wage work and other types of exits. They found the second lowest share of exits into wage work for the unemployed population.

  13. Survival and hazard functions account for right-censoring of the event of interest. In detail, the survival function estimates (for each time interval) the probability that those who have survived to the beginning will survive to the end. Therefore it is defined as the product of the conditional probabilities of surviving each time interval. Accordingly, the hazard function is defined as the risk of a failure event in a given time interval conditional on the population that is at risk of failure in that given time interval.

  14. Reize (2004): 75% after 2 years; Wießner (2001): 85% after 2 years; Caliendo and Kritikos (2007): 68% after 2 years.

  15. We also used hazard model specifications which use a different logic to describe time-dependent events. The most flexible form is the Cox proportional-hazard function (Cox 1972). However, the proportionality assumption does not hold for the data used here (Schoenfeld 1981).

  16. We also tested other model specifications (log-logistic, gamma distributions). The lognormal performs best using the BIC criteria for model selection (Rodriquez 2005). In addition, we also used a flexible specification of the sigma parameter and tested for the existence of unobserved heterogeneity (Guiterrez 2002). However, the test statistics did not reveal statistical significance for unobserved heterogeneity or superiority of the flexible sigma specification.

  17. Results of other model specifications (e.g., including the field of occupation and position and models with reduced sets of attributes) are not displayed. However, the results of the displayed models are quite comparable to those not displayed. It may be noted that introducing the attributes (en bloc) “master craftsman,” “manager,” and “high pull motivation” yields a statistically significant model improvement based on the likelihood ratio test statistics (the basic model includes all standard individual characteristics such as “age,” “gender,” “formal schooling” and controls for firm-specific information). Finally, including “commercial competence,” “broad skills,” “self-employment experience,” and “product experience” also yields significant model improvements at the common level of statistical significance. More detailed information on these estimation results and on alternative model specifications is available from the author.

  18. For example, problems may arise in cases in which exits into unemployment increase the individual’s re-employment chances, because this increases their chance of becoming subject to potential interventions on the part of active labor market policy. Therefore, the observed exits risks (employment and unemployment) may be less valid for identification of distinct exit states which harm the interpretation related to the competing risks setting.

  19. This may also include the ability to identify unsuccessful projects at an earlier point in time.

  20. It is interesting to note that studies that are not focused on start-ups from a position of unemployment report a negative effect of an unemployment spell on the expected self-employment duration (Taylor 1999; Johansson 2000).

  21. See Brüderl et al. (1992), Cressy (1996), and Parker and van Praag (2006) for the nexus between financial endowment and the founder’s qualification.

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Acknowledgments

The study uses data collected within the research project “New Business Start Ups from Unemployment—Success Factors and Evaluating the Support Program implemented in accordance with Sect. 75 of the German Social Code III,” which was funded by the Ministry of Culture and Science in Lower Saxony.

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  1. Social Science Research Centre Berlin, Berlin, Germany

    Dirk Oberschachtsiek

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Correspondence to Dirk Oberschachtsiek.

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Stata 10.1 was used in all calculations. Do-files and results discussed, but not reported, are available from the author. All remaining errors are my own.

Appendix

Appendix

See Tables 4, 5, and 6 and Fig. 2.

Table 4 Definition of the variables
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Table 5 Descriptive statistics
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Table 6 Table of correlations
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Oberschachtsiek, D. The experience of the founder and self-employment duration: a comparative advantage approach. Small Bus Econ 39, 1–17 (2012). https://doi.org/10.1007/s11187-010-9288-1

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