Entrepreneurship, Financial Capital, and Social Capital

5 December 2013 at 9:55 am 1 comment

| Peter Klein |

Two interesting new papers on entrepreneurship. The first deals with financial capital — specifically, the degree to which entrepreneurship (defined as self-employment) is constrained by credit availability. As regular readers know, I’ve been crusading against the idea that entrepreneurship consists of recognizing opportunities, in favor of the alternative idea that entrepreneurship involves putting assets at risk. The latter view directs our attention to how entrepreneurial activities are funded; rather than assuming that all positive-NPV opportunities are exploited, we should focus on the investor’s decision to allocate risk capital to one or another potential project. Put simply, “entrepreneurship is exercised not only by founders, but by funders.”

Funders care about collateral, which suggests that self-employment is constrained by the availability of durable personal assets like housing. In a new NBER working paper, “Housing Collateral and Entrepreneurship,” Martin Schmalz, David Sraer, and David Thesmar find a strong correlation between self-employment and house prices. “Our empirical strategy uses variations in local house prices as shocks to the value of collateral available to individuals owning a house and controls for local demand shocks by comparing entrepreneurial activity of homeowners and renters operating in the same region. We find that an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, entrepreneurs with access to more valuable collateral create larger firms and more value added, and are more likely to survive, even in the long run.”

My Missouri colleague Colleen Heflin, along with Seok-Woo Kwon and Martin Ruef, have a new paper in the American Sociological Review on social capital and self-employment. Many papers have examined how an individual’s “social capital” — defined as networks of social and professional relationships — affects various economic outcomes, including the propensity to start a firm. Colleen and her colleagues focus at the community level and find that “individuals in communities with high levels of social trust are more likely to be self-employed compared to individuals in communities with lower levels of social trust. Additionally, membership in organizations connected to the larger community is associated with higher levels of self-employment, but membership in isolated organizations that lack connections to the larger community is associated with lower levels of self-employment.”

Of course, self-employment is only a crude proxy for entrepreneurship in the functional sense, but it is a widely used proxy in the empirical literature. I suppose entrepreneurship researchers, like other social scientists, resemble the drunk looking for his car keys under the lamppost. Who am I to complain?

Entry filed under: - Klein -, Entrepreneurship, Recommended Reading. Tags: .

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

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