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What Makes a New Business Start-Up Successful?

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  • Gavin C Reid
  • Julia A Smith

Abstract

This paper seeks a good measure of new business performance, and then explains this measure by various dimensions of business strategy. Three criteria are used to create a one dimensional ordinal ranking of high, medium and low performance for new business starts: employment growth; return on capital employed;and labour productivity. It is shown that statistical cluster analysis provides a convincing separation of a sample of new business starts into high, medium and low performance categories, using a minimum distance criterion for clustering. An ordinal logit model (with selection) is then used to explain this performance ranking. The results indicate that many widely discussed features of small business strategy have little, or even negative, impact on performance. Of the numerous aims that owner managers may adopt (survival, growth etc), only one appears to have a major impact on performance; the pursuit of the highest rate of return on investment. Many entrepreneurial perceptions of their own capabilities appear false or unimportant, with the exception of organisational features and systems.

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Bibliographic Info

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9618.

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Date of creation: Oct 1996
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Handle: RePEc:san:crieff:9618

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Keywords: New businesses; performance; ordered logit with selection; cluster analysis;

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References

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  1. Reid, Gavin C., 1991. "Staying in business," International Journal of Industrial Organization, Elsevier, vol. 9(4), pages 545-556, December.
  2. Frank, Murray Z, 1988. "An Intertemporal Model of Industrial Exit," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 333-44, May.
  3. Blanchflower, D. & Oswald, A., 1990. "What Makes A Young Entrepreneur?," Papers 373, London School of Economics - Centre for Labour Economics.
  4. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  5. Gavin C Reid, 1998. "Making Small Firms Work: Policy Dimensions and the Scottish Context," CRIEFF Discussion Papers 9811, Centre for Research into Industry, Enterprise, Finance and the Firm.
  6. Becker, William E. & Kennedy, Peter E., 1992. "A Graphical Exposition of the Ordered Probit," Econometric Theory, Cambridge University Press, vol. 8(01), pages 127-131, March.
  7. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 26-60, January.
  8. Beggs, S. & Cardell, S. & Hausman, J., 1981. "Assessing the potential demand for electric cars," Journal of Econometrics, Elsevier, vol. 17(1), pages 1-19, September.
  9. repec:cup:etheor:v:8:y:1992:i:1:p:127-31 is not listed on IDEAS
  10. Lee, Lung-Fei, 1983. "Generalized Econometric Models with Selectivity," Econometrica, Econometric Society, vol. 51(2), pages 507-12, March.
  11. Arulampalam, W. & Robin A. Naylor & Jeremy P. Smith, 2002. "University of Warwick," Royal Economic Society Annual Conference 2002 9, Royal Economic Society.
  12. Lee, Lung-Fei, 1982. "Some Approaches to the Correction of Selectivity Bias," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 355-72, July.
  13. Gavin C Reid, 1996. "Capital Structure at Inception and the Short-Run Performance of Micro-Firms," CRIEFF Discussion Papers 9607, Centre for Research into Industry, Enterprise, Finance and the Firm.
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Citations

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Cited by:
  1. Michele Cincera & Lydia Greunz & Jean-Luc Guyot & Olivier Lohest, 2006. "Capital humain et processus de création d'entreprise: le cas des primo-créateurs wallons," DULBEA Working Papers 06-11.RS, ULB -- Universite Libre de Bruxelles.
  2. Esther Hormiga PEREZ & Rosa M. Batista CANINO, 2009. "The Importance of the Entrepreneur’s Perception of “Success”," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 10(5), pages 990-1010, December.
  3. T Quince, 2001. "Entrepreneurial Collaboration: Terms of Endearment or Rules of Engagement?," ESRC Centre for Business Research - Working Papers wp207, ESRC Centre for Business Research.
  4. Gavin C. Reid, 1999. "The application of principal-agent methods to investor-investee relations in the UK venture capital industry," Venture Capital, Taylor and Francis Journals, vol. 1(4), pages 285-302, October.
  5. Harada, Nobuyuki, 2003. "Who succeeds as an entrepreneur? An analysis of the post-entry performance of new firms in Japan," Japan and the World Economy, Elsevier, vol. 15(2), pages 211-222, April.
  6. Barringer, Bruce R. & Jones, Foard F. & Neubaum, Donald O., 2005. "A quantitative content analysis of the characteristics of rapid-growth firms and their founders," Journal of Business Venturing, Elsevier, vol. 20(5), pages 663-687, September.
  7. Bernadette Power & Gavin C. Reid, 2002. "Turbulence, Flexibility and Performance of the Long-lived Small Firm," CRIEFF Discussion Papers 0207, Centre for Research into Industry, Enterprise, Finance and the Firm.
  8. Domingo Soriano & Gary Castrogiovanni, 2012. "The impact of education, experience and inner circle advisors on SME performance: insights from a study of public development centers," Small Business Economics, Springer, vol. 38(3), pages 333-349, April.
  9. Marco van Gelderen & Marco van Gelderen & Niels Bosma & Niels Bosma & Roy Thurik & Roy Thurik, 2001. "Setting up a business in the Netherlands," Scales Research Reports H200013, EIM Business and Policy Research.
    • Gelderen, A.M. van & Bosma, N. & Thurik, A.R., 2001. "Setting Up a Business in the Netherlands," Research Paper ERS-2001-15-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  10. Bernadette Power & Gavin C. Reid, 2003. "Performance, Firm Size and the Heterogeneity of Competetive Strategy for Long-lived Small Firms: A Simultaneous Equations Approach," CRIEFF Discussion Papers 0307, Centre for Research into Industry, Enterprise, Finance and the Firm.
  11. Gavin C Reid, 1998. "New Business, New Life; A Perspective on Business and Economics, with Ilustrations from Small Business Inception," CRIEFF Discussion Papers 9818, Centre for Research into Industry, Enterprise, Finance and the Firm.
  12. Tiago Oliveira & Maria Fraga O. Martins, 2011. "Understanding the determinant factors of Internet business solutions adoption: the case of Portuguese firms," Applied Economics Letters, Taylor and Francis Journals, vol. 18(18), pages 1769-1775, December.
  13. Soriano, Domingo Ribeiro, 2010. "Management factors affecting the performance of technology firms," Journal of Business Research, Elsevier, vol. 63(5), pages 463-470, May.
  14. Gavin C Reid, 1997. "Dynamics of Small Business Financial Structure," CRIEFF Discussion Papers 9722, Centre for Research into Industry, Enterprise, Finance and the Firm.
  15. Reid, Gavin C & Xu, Zhibin, 2009. "Growth and Survival Determinants of Chinese Private Firms: Fieldwork evidence and econometric estimates," SIRE Discussion Papers 2009-60, Scottish Institute for Research in Economics (SIRE).
  16. Kostas Tsekouras & Dimitris Skuras & Irene Daskalopoulou, 2008. "The role of productive efficiency on entry and post-entry performance under different strategic orientation: the case of the Greek plastics and rubber industry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 37-55.
  17. Gavin C Reid, 1997. "Small Firms' Actions and their Survival Probabilities," CRIEFF Discussion Papers 9721, Centre for Research into Industry, Enterprise, Finance and the Firm.
  18. Fischer, Justina A.V., 2012. "The choice of domestic policies in a globalized economy: Extended Version," MPRA Paper 37816, University Library of Munich, Germany.

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