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Incomplete Contracts and
the Allocation of Entrepreneurship in Society
Erik Stam
Utrecht University School of Economics
Jo...
Global Entrepreneurship Monitor:
people who are involved in setting up an
independent business or
owners-managers of new b...
Arthur Fry
Ken Kutaragi
Jef Raskin (#31)
Paul Buchheit (#23)
Key question
• What explains the allocation of
entrepreneurship over new and established
organizations in society? (cf. Ba...
Entrepreneurship
• Recognition, evaluation and pursuit of
entrepreneurial opportunities by individuals
(Shane & Venkatamar...
Schumpeter (1934: 74-75)
• ‘(...) in the first place we call entrepreneurs
not only those “independent”
businessmen in an ...
Arthur Fry
Ken Kutaragi
Jef Raskin (#31)
Paul Buchheit (#23)
...employees developing new business activities
for their employer
e.g. establishing a new outlet or subsidiary
and launch...
Entrepreneurial
Employee Activity
Independent
Entrepreneurship
Share of Entrepreneurial Employee Activity = EEA / (EEA+IE)...
Theory of the Firm
• Default corporate governance situation in
entrepreneurship studies = independent
entrepreneurship: no...
Arthur Fry
Ken Kutaragi
Jef Raskin (#31)
Paul Buchheit (#23)
Proxy entrepreneurs: derived judgement
(Knight 1921 -> Foss e...
Incompleteness of labour contracts
• Positively related with returns productive proxy
entrepreneurship (but with diminishi...
Incompleteness
of the contract
Costsandbenefits
Opportunity costs
Employer
P: Productive proxy
entrepreneurship
D: Destruc...
• Opportunistic behavior will lead to higher
prevalence of complete, on the spot, contracting
in a product market (i.e. in...
Key micro-macro assumption
• The degree of incompleteness of labor
contracts in organizations is reflected in
the share of...
The share of entrepreneurial employee activity is
positively associated with the level of generalized trust
in society.
Hy...
Effect of increasing levels of generalized trust
on benefits and costs curves
and preferred degree of incompleteness
Incom...
DATA
70,000 employees were asked about their entrepreneurial activities;
52 countries (GEM sample):
Operational definitions
• Independent entrepreneurship: GEM
– People who are involved in setting up an
independent busines...
TEA vs EEA
TEA
• 37% product innovative
• 15% growth ambitious
(>20 jobs)
EEA
• 64% product innovative
• 45% growth ambiti...
US
RU
ZA
GR
NL
BE
FR
ES
HU
RO
SW
UK
DK
SE
PL
DE
PE
MX
AR
BR
CL
CO
MY
AU
SG
TH
JP
KR
CN
TR
PK
IR
DZ BB
PT
IE
FI
LT
LV
HR
SI...
Dependent variable - II
UE
TW
JM
TT
UY
VE
SK
CZ
BA
SI
HR
LV
LH
FI
IE
PT
BBDZ
IR
TR
CN
KR
JP
TH
SG
AU
MY
CO
CL
BR
AR
MX PE
...
Independent variables
• Interpersonal trust (World Values Survey)
• Social security favoring employees (Global
Entrepreneu...
Dependent variable: share of entrepreneurial employee activity
Conclusions
• The share of entrepreneurial employee activity is
positively associated with the level of generalized trust ...
Issues to discuss
• Measures of institutions
– Informal (+ Hofstede’s culture indicators,…)
– Formal (+ measures of employ...
Incomplete Contracts and the
Allocation of Entrepreneurship in Society
Erik Stam
Utrecht University School of Economics
Jo...
 Incomplete contracts allocation eship society. Erik Stam
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Incomplete contracts allocation eship society. Erik Stam

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ERC Understanding Small Business Growth conference 2015. Erik Stam presentation

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Incomplete contracts allocation eship society. Erik Stam

  1. 1. Incomplete Contracts and the Allocation of Entrepreneurship in Society Erik Stam Utrecht University School of Economics Joint with Niels Bosma & Sander Wennekers
  2. 2. Global Entrepreneurship Monitor: people who are involved in setting up an independent business or owners-managers of new businesses
  3. 3. Arthur Fry Ken Kutaragi Jef Raskin (#31) Paul Buchheit (#23)
  4. 4. Key question • What explains the allocation of entrepreneurship over new and established organizations in society? (cf. Baumol 1990)
  5. 5. Entrepreneurship • Recognition, evaluation and pursuit of entrepreneurial opportunities by individuals (Shane & Venkatamaran, 2000) • Only in independent start-ups or owner- managed businesses, for own risk and reward (Knight 1921; Jensen & Meckling 1976)? Or… • Governed within established organizations, as entrepreneurial employee activity (intrapreneurship)?
  6. 6. Schumpeter (1934: 74-75) • ‘(...) in the first place we call entrepreneurs not only those “independent” businessmen in an exchange economy who are usually so designated, but all who actually fulfill the function by which we define the concept, even if they are, as is becoming the rule, “dependent” employees of a company’.
  7. 7. Arthur Fry Ken Kutaragi Jef Raskin (#31) Paul Buchheit (#23)
  8. 8. ...employees developing new business activities for their employer e.g. establishing a new outlet or subsidiary and launching new products or new product-market combinations
  9. 9. Entrepreneurial Employee Activity Independent Entrepreneurship Share of Entrepreneurial Employee Activity = EEA / (EEA+IE) Entrepreneurial Activity
  10. 10. Theory of the Firm • Default corporate governance situation in entrepreneurship studies = independent entrepreneurship: no separation of ownership and management • Employees will not pursue entrepreneurial activities because: – The employer perceives this to be too risky (probable big losses); destructive entrepreneurship – The employee expects rewards to be creamed off by the employer
  11. 11. Arthur Fry Ken Kutaragi Jef Raskin (#31) Paul Buchheit (#23) Proxy entrepreneurs: derived judgement (Knight 1921 -> Foss et al. 2007)
  12. 12. Incompleteness of labour contracts • Positively related with returns productive proxy entrepreneurship (but with diminishing returns) • Positively related with costs destructive proxy entrepreneurship (with increasing costs) • Positively related to opportunity costs (loss of productive routine work) • Negatively related to probability of independent (spin-off) entrepreneurship
  13. 13. Incompleteness of the contract Costsandbenefits Opportunity costs Employer P: Productive proxy entrepreneurship D: Destructive proxy entrepreneurship I* Theoretical model: benefits and costs, incompleteness of contract
  14. 14. • Opportunistic behavior will lead to higher prevalence of complete, on the spot, contracting in a product market (i.e. independent entrepreneurship); even more so in societal settings in which levels of generalized trust are low • In a societal setting in which social obligations and reciprocity dominate, i.e. high levels of generalized trust, more incomplete contracts are prevalent, e.g. within organizations Trust & Theory of the Firm
  15. 15. Key micro-macro assumption • The degree of incompleteness of labor contracts in organizations is reflected in the share of Entrepreneurial Employee Activity in the economy. Institutions Incompleteness of contracts Share of EEA in society EEA
  16. 16. The share of entrepreneurial employee activity is positively associated with the level of generalized trust in society. Hypothesis
  17. 17. Effect of increasing levels of generalized trust on benefits and costs curves and preferred degree of incompleteness Incompleteness of the contract Costsandbenefits P D0 I0* D1 I1* Opportunity costs employer
  18. 18. DATA
  19. 19. 70,000 employees were asked about their entrepreneurial activities; 52 countries (GEM sample):
  20. 20. Operational definitions • Independent entrepreneurship: GEM – People who are involved in setting up an independent business or owners-managers of new businesses • EEA: employees developing new business activities for their employer, including establishing a new outlet or subsidiary and launching new products or new product- market combinations – Leading role in idea development and/or preparation and implementation of new activities
  21. 21. TEA vs EEA TEA • 37% product innovative • 15% growth ambitious (>20 jobs) EEA • 64% product innovative • 45% growth ambitious (>20 jobs) Macro level: Intrapreneurship is much more strongly (positively) related to innovation than independent entrepreneurship is (Stam 2013 SBE)
  22. 22. US RU ZA GR NL BE FR ES HU RO SW UK DK SE PL DE PE MX AR BR CL CO MY AU SG TH JP KR CN TR PK IR DZ BB PT IE FI LT LV HR SI BA CZ SK PA VE UY TTJM BD TW AE R² = 0.1742 0 2 4 6 8 10 12 14 16 0 5 10 15 20 25 30 %of18-64populationinvolvedinEmployeeEntrepreneurialActivity % of 18-64 population involved in Total early-stage independent Entrepreneurial Activity Algeria DZ Hungary HU Russia RU Argentina AR Iran IR Singapore SG Australia AU Ireland IE Slovakia SK Bangladesh BD Jamaica JM Slovenia SI Barbados BB Japan JP South Africa ZA Belgium BE Korea KR Spain ES Bosnia & Herz. BA Latvia LV Sweden SE Brazil BR Lithuania LT Switzerland SW Chile CL Malaysia MY Taiwan TW China CN Mexico MX Thailand TH Croatia HR Netherlands NL Trinidad & Tobago TT Czech Republic CZ Pakistan PK Turkey TR Denmark DK Panama PA United Arab Emir. UE Finland FI Peru PE United Kingdom UK France FR Poland PL United States US Germany DE Portugal PT Uruguay UY Greece GR Romania RO Venezuela VE
  23. 23. Dependent variable - II UE TW JM TT UY VE SK CZ BA SI HR LV LH FI IE PT BBDZ IR TR CN KR JP TH SG AU MY CO CL BR AR MX PE DE PL SEDK UKSW RO HU ES FR BE NL GR SA RU US 0% 10% 20% 30% 40% 50% 60% 70% 80% 0 5 10 15 20 25 Independent Entrepreneurial Activity ShareofEEAinOEA Algeria DZ Hungary HU Russia RU Argentina AR Iran IR Singapore SG Australia AU Ireland IE Slovakia SK Bangladesh BD Jamaica JM Slovenia SI Barbados BB Japan JP South Africa ZA Belgium BE Korea KR Spain ES Bosnia & Herz. BA Latvia LV Sweden SE Brazil BR Lithuania LT Switzerland SW Chile CL Malaysia MY Taiwan TW China CN Mexico MX Thailand TH Croatia HR Netherlands NL Trinidad & Tobago TT Czech Republic CZ Pakistan PK Turkey TR Denmark DK Panama PA United Arab Emir. UE Finland FI Peru PE United Kingdom UK France FR Poland PL United States US Germany DE Portugal PT Uruguay UY Greece GR Romania RO Venezuela VE
  24. 24. Independent variables • Interpersonal trust (World Values Survey) • Social security favoring employees (Global Entrepreneurship Monitor – National Expert Survey) • Share of knowledge workers in total employment (International Labour Organization) • Prevalence of employment in large organizations (Global Entrepreneurship Monitor – Adult Population Survey)
  25. 25. Dependent variable: share of entrepreneurial employee activity
  26. 26. Conclusions • The share of entrepreneurial employee activity is positively associated with the level of generalized trust in society. • Generalized trust lowers the level of destructive proxy entrepreneurship, allowing more incomplete labor contracts, which leads entrepreneurial action to be allocated more to established organizations in society (EEA)
  27. 27. Issues to discuss • Measures of institutions – Informal (+ Hofstede’s culture indicators,…) – Formal (+ measures of employment protection, …) • Too small number of cases (sensitivity to outliers) • Causality (comparative static framework) – Endogeneity: EEA –> large organizations – Longitudinal research • Theory (too narrow; too micro; better than no theory…) • Study contracts • Multilevel analysis: regional, organizational conditions (and consequences) • …
  28. 28. Incomplete Contracts and the Allocation of Entrepreneurship in Society Erik Stam Utrecht University School of Economics Joint with Niels Bosma & Sander Wennekers

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