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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. 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.
  2. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  3. Lee, Lung-Fei, 1983. "Generalized Econometric Models with Selectivity," Econometrica, Econometric Society, vol. 51(2), pages 507-12, March.
  4. 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.
  5. repec:cup:etheor:v:8:y:1992:i:1:p:127-31 is not listed on IDEAS
  6. 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.
  7. 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.
  8. 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.
  9. Reid, Gavin C., 1991. "Staying in business," International Journal of Industrial Organization, Elsevier, vol. 9(4), pages 545-556, December.
  10. Blanchflower, David G. & Oswald, Andrew J., 2007. "What Makes a Young Entrepreneur?," IZA Discussion Papers 3139, Institute for the Study of Labor (IZA).
  11. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  12. Frank, Murray Z, 1988. "An Intertemporal Model of Industrial Exit," The Quarterly Journal of Economics, MIT Press, vol. 103(2), pages 333-44, May.
  13. Arulampalam, W. & Robin A. Naylor & Jeremy P. Smith, 2002. "University of Warwick," Royal Economic Society Annual Conference 2002 9, Royal Economic Society.
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