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The Small Firm Effect and the Entrepreneurial Spawning of Scientists and Engineers

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Author Info

  • Daniel W. Elfenbein

    ()
    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Barton H. Hamilton

    ()
    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Todd R. Zenger

    ()
    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

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    Abstract

    Scientists and engineers in small firms are far more likely than their large firm counterparts to enter entrepreneurship. We label this phenomenon the small firm effect and explore its origins. In particular, we identify four classes of explanations for the small firm effect--preference sorting, ability sorting, opportunity cost, and the possibility that workers in small firms develop entrepreneurial human capital--and examine the empirical evidence for each. We find that preference sorting does play a role in generating the small firm effect: small firms attract those with prior preferences for autonomy who are similarly drawn into entrepreneurship. Similarly, ability sorting plays a role: those who ultimately become entrepreneurs may be drawn first to small firms because they offer tighter pay-for-performance links and can subsequently improve their expected earnings by becoming entrepreneurs, or because the skills required for success in small firms are also valuable in entrepreneurship. Evidence suggests that although those with the very least to lose do enter entrepreneurship with greater frequency, opportunity cost has at best a modest role to play in explaining the small firm effect. Finally, we interpret evidence that prior experience in small firms predicts positive performance outcomes in the early stages of entrepreneurship as suggesting that workers in small firms may develop entrepreneurial human capital that makes them better entrepreneurs. This effect may be largest among those of high ability.

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    File URL: http://dx.doi.org/10.1287/mnsc.1090.1130
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 56 (2010)
    Issue (Month): 4 (April)
    Pages: 659-681

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    Handle: RePEc:inm:ormnsc:v:56:y:2010:i:4:p:659-681

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    Related research

    Keywords: entrepreneurship; employee mobility; human capital; small firms; spawning;

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    Cited by:
    1. Geraldine Ryan & Bernadette Power & Noreen McCarthy & Paul Braidford, 2011. "Regional Influences oBusiness Transfers within the British Isles," ERSA conference papers ersa10p1094, European Regional Science Association.
    2. Michael Fritsch & Ronney Aamoucke, 2013. "Regional public research, higher education, and innovative start-ups: an empirical investigation," Small Business Economics, Springer, vol. 41(4), pages 865-885, December.
    3. Åstebro, Thomas & Bazzazian, Navid & Braguinsky, Serguey, 2012. "Startups by recent university graduates and their faculty: Implications for university entrepreneurship policy," Research Policy, Elsevier, vol. 41(4), pages 663-677.
    4. Jose Maria Millan & Emilio Congregado & Concepcion Roman & Mirjam van Praag & Andre van Stel, 2011. "The Value of an Educated Population for an Individual's Entrepreneurship Success," Tinbergen Institute Discussion Papers 11-066/3, Tinbergen Institute.
    5. Rider, Christopher I. & Thompson, Peter & Kacperczyk, Aleksandra & Tåg, Joacim, 2013. "Experience and Entrepreneurship," Working Paper Series 970, Research Institute of Industrial Economics.
    6. Stuetzer, Michael & Obschonka, Martin & Schmitt-Rodermund, Eva, 2012. "Balanced skills among nascent entrepreneurs," MPRA Paper 37524, University Library of Munich, Germany.
    7. Elisabeth Bublitz & Michael Fritsch & Michael Wyrwich, 2013. "Balanced Skills and the City: An Analysis of the Relationship between Entrepreneurial Skill Balance, Thickness and Innovation," Jena Economic Research Papers 2013-010, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
    8. Lööf, Hans & Nabavi, Pardis, 2012. "Exporters, Spin-outs and Firm Performance," Working Paper Series in Economics and Institutions of Innovation 262, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    9. Alina Sorgner & Michael Fritsch, 2013. "Occupational Choice and Self-Employment: Are They Related?," SOEPpapers on Multidisciplinary Panel Data Research 533, DIW Berlin, The German Socio-Economic Panel (SOEP).
    10. Christian Cordes & Peter J. Richerson & Georg Schwesinger, 2011. "A Corporation's Culture as an Impetus for Spinoffs and a Driving Force of Industry Evolution," Papers on Economics and Evolution 2011-11, Max Planck Institute of Economics, Evolutionary Economics Group.
    11. Backes-Gellner, Uschi & Moog, Petra, 2013. "The disposition to become an entrepreneur and the jacks-of-all-trades in social and human capital," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 47(C), pages 55-72.
    12. Edward L. Glaeser & Sari Pekkala Kerr & William R. Kerr, 2013. "Entrepreneurship And Urban Growth:An Empirical Assessment With Historical Mines," Working Papers 13-15, Center for Economic Studies, U.S. Census Bureau.
    13. Tåg, Joacim & Åstebro, Thomas & Thompson, Peter, 2013. "Hierarchies, the Small Firm Effect, and Entrepreneurship: Evidence from Swedish Microdata," Working Paper Series 954, Research Institute of Industrial Economics.
    14. André van Stel & Mirjam van Praag & José Maria Millán & Emilio Congregado & Concepcion Roman, 2013. "The value of an educated population for an individual's entrepreneurship success," Scales Research Reports H201103, EIM Business and Policy Research.
    15. Wennberg, Karl & Wiklund, Johan & Wright, Mike, 2011. "The effectiveness of university knowledge spillovers: Performance differences between university spinoffs and corporate spinoffs," Research Policy, Elsevier, vol. 40(8), pages 1128-1143, October.
    16. Dick Johannes & Hussinger Katrin & Blumberg Boris & Hagedoorn John, 2011. "Is Success Hereditary? Evidence on the Performance of Spawned Ventures," Research Memorandum 034, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    17. Åstebro, Thomas & Chen, Jing, 2014. "The entrepreneurial earnings puzzle: Mismeasurement or real?," Journal of Business Venturing, Elsevier, vol. 29(1), pages 88-105.
    18. Henry Sauermann & Michael Roach, 2011. "Not All Scientists pay to be Scientists:," DRUID Working Papers 11-03, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.

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