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2 Tnbergen Insttute The Tnbergen Insttute s the nsttute for economc research of the Erasmus Unverstet Rotterdam, Unverstet van Amsterdam and Vrje Unverstet Amsterdam. Tnbergen Insttute Amsterdam Kezersgracht EG Amsterdam The Netherlands Tel.: +31.(0) Fax: +31.(0) Tnbergen Insttute Rotterdam Burg. Oudlaan PA Rotterdam The Netherlands Tel.: +31.(0) Fax: +31.(0) Most TI dscusson papers can be downloaded at

3 The Value of Human and Socal Captal Investments for the Busness Performance of Startups Nels Bosma EIM Busness and Polcy Research, P.O. Box 7001, 2701 AA Zoetermeer, the Netherlands, tel , e-mal: Mrjam van Praag Faculty of Economcs and Econometrcs, Unversty of Amsterdam, Roeterstraat 11, 1018 WB Amsterdam, The Netherlands, tel , e-mal: Roy Thurk Centre for Advanced Small Busness Economcs (CASBEC), Erasmus Unversty Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, the Netherlands, tel , and EIM Busness and Polcy Research, P.O. Box 7001, 2701 AA Zoetermeer, the Netherlands, tel , e-mal: Gerrt de Wt EIM Busness and Polcy Research, P.O. Box 7001, 2701 AA Zoetermeer, the Netherlands, tel , e-mal: ABSTRACT: We nvestgate the manfold posed queston: To what extent does nvestment n human and socal captal, besdes the effect of talent, enhance entrepreneural performance? We dstngush between three dfferent performance measures: survval, profts, and generated employment. On the bass of the emprcal analyss of a rch Dutch longtudnal data set of frm founders, we conclude that specfc nvestments ndeed affect the three performance measures substantally and sgnfcantly. Specfc attenton s pad to the unobserved talent bas. Moreover, the effect of the emergence of so called knowledge ndustres s explored. Verson: March 2002 JEL code: M13, D92, J24 Keywords: entrepreneurshp, human captal, socal captal, small busness, startups, performance. Acknowledgement: Ths paper has been wrtten n the framework of the research programme SCALES (Scentfc AnaLyss of Entrepreneurshp and SMEs), whch s fnanced by the Dutch Mnstry of Economc Affars. We acknowledge the support of Hessel Oosterbeek and the comments of Jan de Kok and Lorrane Uhlaner. Earler versons of the paper have been read at the RENT Conference n Prague, November 2000 and the Babson Conference n Jönköpng, Sweden, June

4 1. Introducton Investments n human and socal captal are wdely beleved to mprove the performance of employees (Arthur, 1994; Bshop, 1994; Bosele, Paauwe and Jansen, 2001; Gelderblom and de Konng, 1996; Huseld, 1995; MacDuffe, 1995). Smlarly, many authors advocate that ths s also the case for entrepreneural performance (Blanchflower and Oswald, 1998; Brüderl and Presendörfer, 1998; Cooper, Gmeno-Gascon and Woo, 1994; Pennngs, Lee and Van Wtteloostujn, 1998; Van Praag and Cramer, 2001; Van Praag, 2002). Ths s easy to understand snce entrepreneurshp s a fundamental characterstc of modern knowledge-based economc actvtes. Ths s because the potental value of new deas and knowledge s nherently uncertan. Ths uncertanty can be absorbed by a large amount of people startng new frms to pursue, explore and mplement new deas (Audretsch and Thurk, 2000, 2001). The objectve of the present paper s to answer the queston: to what extent does nvestment n human and socal captal, besdes the wdely beleved determnng effect of talent, enhance entrepreneural performance? We dstngush between three types of nvestment n both human and socal captal: general, ndustry-specfc and entrepreneurshp-specfc nvestment. We wll nvestgate to what degree these types of ntal nvestment contrbute to the performance of the small busness founder, our emprcal equvalent of the entrepreneur. The analyss s based on a representatve panel survey amongst almost 1,000 new busness founders n the Netherlands n the years We employ three measures of performance: survval, proft, and generated employment. Our man fndng s that the endowed level of talent of a small busness founder s not the unque determnant of performance. Rather, nvestment n ndustry-specfc and entrepreneurshpspecfc human and socal captal contrbutes sgnfcantly to the explanaton of the cross-sectonal varance of the performance of small frm founders. More precsely: ndustry-specfc nvestments n human captal such as experence n the specfc ndustry enhance performance, rrespectve of the performance measure used. In addton, human and socal entrepreneurshp-specfc captal nvestments, such as earler experence n startng up a busness and the membershp of an assocaton for small busness founders generate more promsng start-ups. Ths paper attempts to further our understandng about effectve general and specfc nvestments n human and socal captal of small busness founders. We seek to contrbute to a polcyrelevant and ongong debate n the entrepreneurshp lterature. Emprcal studes nto the effect of human captal (Cooper, Gmeno-Gascon and Woo, 1994; Van Praag and Cramer, 2001) and socal captal (Brüderl and Presendörfer, 1998; Pennngs, Lee and Van Wtteloostujn, 1998) on the performance of busness founders are no novelty. The same holds for the dstncton between the effect on performance of general and specfc nvestments (Cooper, Gmeno-Gascon and Woo, 1994; Pennngs, Lee and Van Wtteloostujn, 1998) n human and socal captal. The contrbuton of ths study s twofold. Frst, we systematcally test the effect of general, ndustry-specfc and entrepreneurshp-specfc human and socal captal on three dstnct performance measures whle controllng for a rch set of other factors. Second, we explctly analyze the meanng of our result by explorng alternatve explanatons that are often not consdered (Pennngs, Lee and Van Wtteloostujn, 1998; Cooper, Gmeno-Gascon and Woo, 1994). 2. Theory and hypotheses It s argued that the frm founder s performance s determned not only by hs talent, the crcumstances and good luck, but also by hs human, socal, and fnancal captal. We measure the mpact of human, socal and fnancal captal on the frm s performance, whle we control as much as possble for the other factors mentoned. In our vew frm performance can be used as a proxy for the performance of the frm s founder because usually no other human captal than that of the sngle founder s present n the frst year of a busness startup. Pennngs, Lee and Van Wtteloostujn (1998) propose two reasons for a postve assocaton between ownershp share and the relatve contrbuton of captal to frm performance: Frst, owners are resdual clamants and therefore have a stronger ncentve to use ther human captal to the beneft of the frm. Second, the rents 2

5 assocated wth nvestments n general assets completely accrue to the frm n case of an owner, whereas ths s less so n case of a fxed clamant wth outsde optons. Our focus s on the mpact of human and socal captal. We are partcularly nterested n the entrepreneurshp-specfc and ndustry-specfc nvestments n these types of captal. Human captal The postve mpact of human captal on employee performance s well accepted and was formalzed by Mncer (1974). Van Praag and Cramer (2001) made a frst attempt to formalze ths mpact for the busness founder s case. Several authors, ncludng Cooper, Gmeno-Gascon and Woo (1994), Pennngs, Lee and Van Wtteloostujn (1998), Van Praag (2002, 1999, 1996) as well as De Wt and Van Wnden (1989) have put forth emprcal support for the theoretcal foundaton. Hypothess 1. Hgher levels of human captal are assocated wth stronger performance by busness founders Socal captal As far as we know, the mpact of socal captal on a busness founder s performance has not yet been put n a proper theoretcal perspectve. However, ts mpact has been supported emprcally by Blumberg and Pfann (1999), Brüderl and Presendörfer (1998) and Pennngs, Lee and Van Wtteloostujn (1998). A theory of nvestment n ndvdual socal captal has recently been developed by Glaeser, Labson and Sacerdote (2000). For the beneft of dentfyng determnants of socal captal formaton, Glaeser, Labson and Sacerdote frst seek to understand the socal captal nvestment decson of ndvduals. Ths understandng leads to seven propostons of whch a subset s relevant: () a ratonal ndvdual s nvestment n socal captal s hgher n occupatons wth greater returns to socal sklls, () socal captal declnes wth expected moblty, () people who nvest n human captal also nvest n socal captal. Snce small busness founders need to have stronger or weaker tes wth all the (prospectve) stakeholders n ther frm, such as clents, nvestors, debtors and, subcontractors, the expected benefts pertanng to socal sklls are hgh n the occupaton of busness foundng. Furthermore, we know that busness founders are less moble than employees are (Blanchflower, 2000). Ths mples by proposton () of Glaeser, Labson and Sacerdote that the expected returns to socal captal are hgher than average for busness founders. The thrd proposton of Glaeser, Labson and Sacerdote mples that ndvduals for whom the net return to human captal s hgh also mght expect a relatvely hgh net return to socal captal. Taken together, these three propostons mply that socal captal should enhance the performance of a busness founder. Hypothess 2. Hgher levels of a busness founder s socal captal are assocated wth greater performance of the frm. Productvty and sgnalng The mpact of human and socal captal on the performance of the frm s lkely to be caused by two underlyng forces: productvty and sgnalng. Frst, the more captal s embedded n the frm s founder, the greater s the frm s productvty, and second, prospectve stakeholders such as clents, subcontractors, and nvestors are lkely to have mperfect nformaton about the type of frms they consder dealng wth. Therefore, these partes evaluate frms (and the prces nvolved n for nstance buyng ther servces) based on observable characterstcs that they presume to be correlated wth the unobserved type/qualty of the frm and ts founder. Investment n socal and human captal mght be a sgnal (Spence, 1974) as long as a hgh nvestment n these types of captal s the preferred choce of talented people, whereas a low level of nvestment s the most preferred choce for people wth less talent (Mlgrom and Roberts, 1992). We shall return to ths nterpretaton when dscussng the self-selecton nterpretaton. Specfcty of nvestments We dfferentate the frm founder s captal nvestments wth respect to the specfcty of the nvestment. It s well known both from human captal theory (Becker, 1964) and from resourcebased theores of the frm (Montgomery, 1995) that the more specfc an nvestment s to ts cur- 3

6 rent use, the hgher the expected returns,.e., ts contrbuton to frm performance should be. Accordng to the human captal theory, the returns to a delberate specfc nvestment n a current actvty should be suffcently large to outwegh the cost attached to the nvestment. Contrarly, the returns to an nvestment n a more general asset mght accrue to the nvestor durng a longer perod of tme whle performng varous actvtes. Moreover, accordng to resource-based theores of the frm, success of frms s determned by the extent to whch Rcardan rents are earned by the accumulaton and deployment of non-mtable resources. The probablty of resources to be nonmtable s hgher when they are obtaned through specfc nvestment than when by more general nvestment. We contrast general nvestments wth two types of specfc nvestments n human and socal captal: ndustry-specfc next to entrepreneurshp-specfc nvestments. Industry-specfc nvestments lose (part of) ther value outsde the ndustry n whch the busness venture s started whereas entrepreneurshp-specfc nvestment loses ts return outsde the entrepreneural envronment. Our next hypothess results: Hypothess 3. Industry-specfc and entrepreneurshp-specfc nvestments n the busness founder s human and socal captal are more nfluental on frm performance than are general nvestments n human and socal captal. Self-selecton and unobserved heterogenety Theoretcally, nvestment behavor s n lne wth the comparatve advantages hypothess: ndvduals who experence more than average net gans from a partcular nvestment, are more lkely to choose that nvestment opton. In other words, ndvduals self-select themselves nto certan treatment groups. The comparatve advantage underlyng the type of nvestment decsons that we study depends on ndvdual characterstcs that reman partly unobserved. The unobserved part of these characterstcs about whch the nvestor has prvate nformaton, such as talent and ntellgence, however, probably not only affects the outcome of the nvestment decson but also the performance of the busness venture. From a more techncal pont of vew, the above mples that the unexplaned part of the crosssectonal varaton n busness founders performance s correlated wth the levels that these ndvduals nvest n human and socal captal. Ths correlaton can be postve or negatve. Most probably, the cost pertanng to the nvestment s lower for busness founders wth hgher abltes than for busness founders wth lower abltes. Therefore, gven a fxed dfference n benefts accrung to the busness founder of ether ablty level, a postve correlaton between the error term and the nvestment levels n human and socal captal s expected. If the level of benefts has the same assocaton wth the unobserved factors as busness performance has, the correlaton s surely postve. However, f lower ablty busness founders expect hgher benefts from ther nvestment than do hgher ablty entrepreneurs, because the latter group mght judge that they don t need these nvestments and, f ths effect s stronger than the opposte effect at the costsde, a negatve correlaton between the error term and the nvestment mght result. Summarzng, falng to mplement the delberate nvestment decson n the emprcal model could generate a msspecfed model wth based estmates. Hypothess 4. The choce of frm founders for specfc nvestments s partly dependent on unobserved talent of the frm founders. Ths would lead to based estmates of the effect of these nvestments. Knowledge ndustres The relatve contrbuton to producton of human captal and knowledge has rapdly ncreased over the past decade (Audretsch and Thurk, 2000). Ths s the case partcularly n the so-called knowledge ndustres, such as the ICT ndustry. Hence, one mght argue that specfc nvestments n human and socal captal are partcularly relevant n these knowledge ndustres. In the most extreme case, the effect of human captal on performance that we nterpret as a general effect, mght be the pure result of the supposedly strong effect n ths growng ndustry, whereas the effect of human captal on performance n other ndustres mght be nsgnfcant. 4

7 Hypothess 5. Industry-specfc and entrepreneurshp-specfc nvestments n the busness founder s human and socal captal are more nfluental n the knowledge ndustres than they are n other ndustres. 3. Method Sample The panel conssts of annual questonnares conducted on a sample of Dutch entrepreneurs that started ther busness n The sample was taken from all newly regstered frms n the frst quarter of 1994 as reported n the database of the Dutch Chamber of Commerce. Intally 10,627 frms were contacted by telephone. A total of 3,000 frm founders agreed to partcpate n the survey. Approxmately 2,000 frm founders fnally completed the 1994 questonnare. From 1995 onwards, a questonnare was sent to the remanng group of busness founders. The 1997 questonnare was completed by over 1,100 respondents, mplyng a cumulatve attrton rate of 45%. The frm sze and sector dstrbuton of the 1994 and 1997 respondents were comparable to those of the ntal sample. As nearly half of the frm founders left the panel between 1994 and 1997, ether due to nonrespons or the frm s ext, one could suspect that ths could lead to based results. We constructed an explct model to nvestgate possble bases and found no sgnfcant ones. The measures for entrepreneural performance are constructed from the questonnares n 1995, 1996 and 1997, whereas the possble determnants are derved solely from the 1994 questonnare. In ths way we prevent problems of reversed causalty. Measures of entrepreneural performance The dataset used provdes three performance measures. The frst one deals wth proft and s equated to the proft made n The entrepreneur has then been actve for three years. Especally n the frst two years proft may be somewhat msleadng, as ntal (sunk) costs often have to be ganed back, whch reduces proft. For entrepreneurs that are known to have termnated ther busnesses the proft varable s equated to zero. The second measure used s the cumulatve employment created n the perod Whle proft s manly an ndvdual performance measure, the employment created by an entrepreneur can be seen as a socety performance measure. The thrd performance measure s the hazard out of busness ownershp. Informaton s avalable on the survval tme of the frms n the panel. We have constructed a varable measurng the number of months that a frm has been actve. A survval model wll be appled when nvestgatng ths performance measure. Determnants of entrepreneural performance From the 1994 frm founders questonnare, we derved possble determnants of performance as set out n Table 1. The varables are grouped horzontally by measure of specfcty and vertcally by the form of captal. Followng the arguments made earler, we focus on the fve varables lsted n talcs n Table 1. 1 Other employment measures have also been nvestgated. These nclude employment growth and the employment n Both measures produced results that dd not dffer sgnfcantly from those pertanng to the performance measure cumulated employment. We therefore ncluded cumulated employment as the sngle employment measure n ths paper. 5

8 Table 1: Potental determnants of entrepreneural performance Entrepreneurshpspecfc nvestments Industry-specfc nvestment General nvestment Human Captal Socal Captal Fnancal Captal Controls Experence n busness Contact wth Experenced prob- ownershp entrepreneurs n lems gettng start Experence n actvtes networks captal relevant to Way of nforma- busness ownershp ton gatherng Experence n ndustry Age Age squared Hgh educaton Experence as an employee Emotonal support from spouse Presence of spouse Other ncome sources Varous controls such as gender, roots of the frm, ntal objectves and ambtons of the founder, labor market hstores, etc. We nclude seven human captal varables. Experence of the busness founder s measured n dfferent dmensons: experence n busness ownershp tself, experence n actvtes related to busness ownershp (e.g. experence n leadershp), and experence n the ndustry n whch the founded busness s actve. For analyzng the effect of age, the ncluson of age and age squared enables a nonlnear relaton. Educaton enters the analyses as a dummy varable, dfferentatng the hgh-educated busness founders from the less educated ones. Lke n many other studes, a dummy varable ndcatng whether the respondent has experence as an employee s also ncluded. The three socal captal varables are the followng. If the busness founder s engaged n an organzed network of entrepreneurs (lke a rotary club) ths s ndcated. Also, the emotonal support of the busness founder s spouse may be mportant for entrepreneural performance. To measure ths effect properly, the presence of a spouse s also ncluded as a dummy varable. Fnally, the way the entrepreneur plans hs way of nformaton gatherng may be nfluental for hs performance. In the questonnare ten possble actons were shown to the entrepreneurs. The respondents ndcated whether they frequently, sometmes or never made use of these actons. Some of these actons are closely related. Factor analyss revealed four major strateges wth respect to planned nformaton gatherng among the Dutch busness founders: 1. Focus on the branch n general (man actons: keep up wth lterature; attendng conferences, courses and ndustry exchanges); 2. Focus on drect busness relatons (man actons: nformaton from customers and supplers); 3. Focus on commercal relatons (man actons: nformaton from banks; commercal cooperaton; advse from experts); 4. Focus on fellow entrepreneurs. From the fnancal angle, two varables are dstngushed. The amount of the remanng ncome avalable n the household of the busness founder may affect hs/her performance. Thus, we nclude the amount of remanng ncome receved by the busness owner. We also dentfy the busness founders that experenced a fnancal captal constrant by a unque dummy varable wth value 1 f the busness founder experenced problems obtanng start captal. Estmaton methods Both the proft and the employment measure have a zero lower bound. Negatve profts are not observed, whle negatve employment s non-nterpretable. Therefore, both equatons are estmated usng tobt regressons. For the expected survval tme, we apply a dfferent model than for proft and employment. In ths survval model the (logarthm of the) expected survval tme s modelled as a functon of the characterstcs of the entrepreneurs. For the underlyng expected dstrbuton of the probablty to ext, we assume a log-logstc dstrbuton (Lancaster, 1992, p. 8). See the Appendx to ths paper for detals. 6

9 4. Results Estmaton results are presented n Table 2. From ths table we wll draw some conclusons concernng hypotheses 1, 2 and 3 of secton 2. We wll also make some addtonal observatons. Secton 5 wll deal wth addtonal analyses meant to test the remanng hypotheses 4 and 5. Table 2: Estmaton results: Impact of Human and Socal Captal on Performance human captal Survval tme Proft Employment Experence n busness ownershp (0.40) Experence n actvtes relevant to busness ownershp 0.50 Experence n ndustry Age dvded by 10 Age dvded by 10, then squared Hgh educaton 0.25 Experence as an employee 1.18 socal captal Contact wth entrepreneurs n net Way of nformaton gatherng: - general channels drect busness relatons - commercal relatons (0.20) fellow entrepreneurs 0.15 Emotonal support from spouse Presence of spouse (-0.59) (0.81) fnancal captal Other ncome avalable (-0.05) Experenced problems gettng start control varables Gender No afflatons wth other busnesses Goal: employment growth Motve: hgher ncome (0.26) Number of hours worked at the start Constant (3.71) # observatons Log lkelhood Busness founders spendng 40 hours or more on other pad actvtes are left out. Only sgnfcant results are presented. Results are sgnfcant at the 5%-level unless they are n parentheses n whch case they are only sgnfcant at the 10%-level. Human captal appears to nfluence our entre set of performance measures. To be more specfc, former experence of the busness founder n the ndustry n whch he starts hs busness appears to mprove all performance measures. Moreover, experence n actvtes relevant to busness ownershp (e.g. experence n leadershp) ncreases the frm s survval tme. Age appears to affect none of the performance measures. Fnally, hgh-educated people make more profts, whle those who have experence as an employee create more employment. Leavng out the human captal varables results n a model that accordng to the lkelhood rato tests performs sgnfcantly worse for all three performance measures. We conclude that hypothess 1 - human captal nfluences the performance - s confrmed, though the specfc aspects of human captal that nfluence each performance measure are not smlar. Socal captal also appears to nfluence performance. If busness owners plan to gather ther nformaton va commercal relatons, ths mproves several performance measures. Furthermore, 7

10 nformaton gatherng va general channels further ncreases the survval tme and the generated employment. Contact wth other entrepreneurs n networks, such as rotary clubs, has a postve effect on the employment the busness founder generates. The effect of these formal networks s nsgnfcant on the other performance measures. Fnally, the emotonal support of a spouse appears also to be of mportance: those who enjoy t earn approxmately 40% more than ther fellow entrepreneurs who experence no support. On the whole, we conclude that there s suffcent support for hypothess 2: socal captal postvely affects entrepreneural performance. The specfc nvestments n human and socal captal are prnted n talcs n Table 2. It appears that makng specfc nvestments matters n explanng performance. Excluson of varables related to specfc nvestments results n a model wth a sgnfcantly lower lkelhood than the model wth these varables ncluded. However, as can be seen from the table, general nvestments n human and socal captal are also of mportance be t somewhat less. 2 Thus, there s some support for hypothess 3: specfc nvestments are more nfluental than general nvestments. Wth respect to the nfluence of fnancal captal, we fnd that captal constrants at the start have a negatve mpact on survval tme and earnngs. Those busness owners who already have another source of fnance perform worse as regards to generatng employment. They are probably not as dedcated to ther busness than ther fellow entrepreneurs. Wth respect to our controls, the followng results are worth mentonng. Gender matters, at least for ths partcular sample of 1994 Dutch busness founders. Male busness founders perform better on all performance measures. Havng no afflatons wth other busnesses works out postve: t ncreases the survval tme as well as the profts generated. Fnally, people ndcatng that one of ther goals s achevng employment growth, ndeed generate more employment and people who ndcate that a hgher expected ncome s an mportant motve to become self-employed ndeed make more profts. 5. Fnal dscusson In the prevous secton we found that specfc nvestments of frm founders n human or socal captal enhance ther performance. However, as explaned n secton 2, wthout further exploratons one cannot be sure whether ths postve effect s solely due to the nvestment tself or partly due to the fact that more talented frm founders nvest more n ther human and socal captal. In the latter case t would be ncorrect to assgn the credts of the better performance solely to the nvestment. In other words, we would have found an upwardly based effect. Ths problem s wdely recognzed n the schoolng lterature (Ashenfelter, Colm and Oosterbeek, 2000) and can be solved wth nstrumental varables estmaton technques. In ths technque, the model s enhanced wth an addtonal equaton descrbng the nvestment decson of the frm founders n a partcular form of human or socal captal. The addtonal nvestment equaton should contan at least one varable, the nstrument, whch () has a sgnfcant effect on the nvestment decson, whle () t cannot nfluence the performance of the frm founder on theoretcal grounds. In ths way t s possble to sort out the real nvestment effect. For, f the nstrument s found to have an effect n the performance equaton, t s then clear that ths effect can only be due to the nvestment because by assumpton the nstrument has no drect effect on performance. Unfortunately, as s commonly known, t s notorously dffcult to fnd approprate nstruments. Although we tred varous ones, we were not able to fnd satsfyng nstruments. So potental bases n ths way cannot be ruled out. Nevertheless, we do not suspect large bases to occur because of the followng two reasons. Frst, usng our rch data set we already control for talent n our regresson wth several proxes. Ths leaves less room for unobserved talent correlated wth the nvestment decson of the frm founder. Second, on theoretcal grounds we do not suspect large bases for most of our nvestments varables. For example, we fnd that frm founders wth experence n the ndustry n whch they start ther busnesses, perform better. It s unlkely that ths ef- 2 More precsely, excluson of the varables related to general nvestments decreases the lkelhood less than excluson of the varables related to specfc nvestments. 8

11 fect would be due largely to unobserved talent of these frm founders. Hence, though we are not able to reject hypothess 4 unreservedly there are bases because of unobserved talent we are not afrad for large bases n our results because of t. An obvous compettor for the nfluence of human and socal captal on performance s the use of strateges whch agan needs to be controlled for types of uncertanty (Van Gelderen, Frese and Thurk, 2000). A certan strategy may dctate what types and levels of human and socal captal are needed. Alternatvely, avalable types and levels of human and socal captal may nduce to applcaton of certan strateges. Future research needs to take nto account the nterrelatonshps between the portfolo of human and socal captal, types of strategy, forms of uncertanty and performance. For explorng the role of the knowledge ndustres n explanng performance (hypothess 5), dummy varables for these ndustres (.e. busness servces and other servces) are mplemented. For the specfc nvestment varables, cross products are generated and ncluded n the analyss. However, the hypotheszed ndustry effects does not emerge from the estmaton results. On these grounds, we reject hypothess 5. We conclude that specfc nvestments n human and socal captal enhance entrepreneural performance substantally. Ths s true for all three dstngushed performance measures: survval, profts, and generated employment. 9

12 References Arthur, J.B. (1994) "Effects of human resource systems on manufacturng performance and turnover", Academy of Management Journal 37(3), Ashenfelter, O., H. Colm and H. Oosterbeek (1999) A revew of estmates of the schoolng/earnngs relatonshp, wth tests for publcaton bas, Labour Economcs (6)4, Audretsch, D.B. and A.R. Thurk (2000) Captalsm and democracy n the 21st century, from the managed to the entrepreneural economy, Journal of Evolutonary Economcs 10, Audretsch, D.B. and A.R. Thurk (2001) What s new about the new economy: sources of growth n the managed and entrepreneural economes, Industral and Corporate Change 10(1), Becker, G. S. (1964) Human Captal, New York: Columba Unversty Press. Bshop, J. (1994) The mpact of prevous tranng on productvty and wages, n L. Lynch (ed), Tranng and the Prvate Sector, Chcago: Unversty of Chcago Press, Blanchflower, D.G. (2000) Self-employment n OECD countres, Labor Economcs 7, Blanchflower, D.G., and A. J. Oswald (1998) What makes an entrepreneur? Journal of Labor Economcs 16(1), Blumberg, B.F. and G.A. Pfann (1999) Socal captal and the self-employment decson, unpublshed manuscrpt Maastrcht Unversty, Busness Investment Research Center. Bosele, P., J. Paauwe and P. Jansen (2001) Human resource management and performance: lessons from the Netherlands. Internatonal Journal of Human Resource Management, 12(7), Brüderl, J. and P. Presendörfer (1998) Network support and success of newly founded busnesses, Small Busness Economcs 10, Cooper, A.C., F.J. Gmeno-Gascon and C.Y. Woo (1994) Intal human and fnancal captal as predctors of new venture performance, Journal of Busness Venturng 9, Gelderblom, A. and J. de Konng (1996) Evaluatng effects of tranng wthn a company: methods, problems and one applcaton, Labour 10, Gelderen, M. van, M. Frese and A.R. Thurk (2000) Strateges, uncertanty and performance of small startups, Small Busness Economcs 15(3), Glaeser, E.L., D. Labson and B. Sacerdote (2000) The economc approach to socal captal, NBER Workng Paper No Greene, W. H. (1997), Econometrc Analyss fourth Edton, New Jersey: Prentce Hall, Huseld, M.A. (1995) The mpact of human resource management practces on turnover, productvty, and corporate fnancal performance, Academy of Management Journal 38(3), Lancaster, T. (1992) The Econometrc Analyss of Transton Data, Cambrdge: Cambrdge Unversty Press. MacDuffe, J. P. (1995) Human resource bundles and manufacturng performance: organzatonal logc and flexble producton systems n the world auto ndustry, Industral and Labor Relatons Revew 48(2), Mlgrom, P. and J. Roberts, J. (1992) Economcs, Organzaton and Management, Englewood Clffs. Mncer, J. (1974) Schoolng, Experence, and Earnngs, New York: Columba Unversty Press Montgomery, C. A. (1995) Resource-Based and Evolutonary Theores of the Frm: Towards a Synthess, Boston/Dordrecht/London: Kluwer Academc Publshers. Pennngs, L., K. Lee and A. van Wtteloostujn (1998) Human captal, socal captal, and frm dssoluton, Academy of Management Journal, Praag, C.M. van (1996) Determnants of Successful Entrepreneurshp, dssertaton, Amsterdam: Thess Publshers. Praag, C.M. van (1999) Some classc vews on entrepreneurshp, De Economst 147(3), Praag, C.M. van and J.S Cramer (2001) "The roots of entrepreneurshp and labor demand: ndvdual ablty and low rsk averson", Economca 269, Praag, C.M. van (2002), "Busness Survval and Success of Young Small Busness Owners: An Emprcal Analyss", Small Busness Economcs, forthcomng. Spence, Mchael A. (1974) Job Market Sgnalng: Informatonal Transfers n Hrng and Related Processes, Cambrdge: Harvard Unversty Press. Wt, G. de and F. van Wnden (1989) An emprcal analyss of self-employment n the Netherlands, Small Busness Economcs 1,

13 APPENDIX: ESTIMATION OF THE MODELS Let Π be the proft for respondent n 1997, and x j respondent s value of determnant j n We specfy the logarthm of proft as the dependent varable rather than proft t self because we argue that changes n the determnants nfluence relatve proft rather than absolute proft (n e.g. euros). The model to be estmated then reads as follows: J Π Π Π Π 2 ln Π = α + β j xj + ε, where ε ~ N(0, σ Π ). j= 1 The model for employment s analogous to that for proft. Let L be the cumulated employment (n full tme equvalents) generated by respondent between 1994 and 1997, and x j respondent s value of determnant j n The regresson equaton then reads: J L L α + β j xj + j=1 L L 2 ln L = ε, where ~ N(0, σ L ) ε. Both the proft and the employment measures have zero as the lower bound. Negatve profts are not observed, whle negatve employment s non-nterpretable. Therefore, both equatons are estmated usng tobt regressons. For duraton, we apply a dfferent model than for proft and employment, vz., a survval model. In ths model the (logarthm of the) expected survval tme s modelled as a functon of the characterstcs of the entrepreneurs. A descrpton of ths model s gven below. In the survval model, frm founders start ther busness at tme t=0. Exts are descrbed by a random process governed by a probablty densty functon f(t) and adjonng dstrbuton functon F(T). Thus, the probablty of a frm extng between t and t+dt s denoted by f(t)dt and the chance that a frm exts n the frst T months s denoted by F(T). Consequently, the survvor functon S(T), defned as the probablty that a frm survves the frst T months, s equvalent to 1-F(T). Also, the hazard rate θ(t), specfyng the condtonal probablty that a frm that has remaned n busness for a perod from 0 to t, exts n the short nterval [t, t+dt], s equvalent to ( t ) = f ( t) S( t) θ. The hazard functon s modelled as a functon of a set of exogenous person specfc regressors, the vector x, and of tme t to permt duraton dependence. Assumng the absence of regressors, the hazard s a non-monotonc functon of t. The assumpton was shown to hold by a frst nspecton of the duraton data. A smple hazard specfcaton that permts non-monotonc behavor s the log-logstc (Lancaster, 1992, p. 44): α 1 k( x) α t θ ( t, x) = α 1+ k( x) t k( x) exp( β x. Let = ). Then, t can be demonstrated that [ ln t x ] = β x E 3. These are the coeffcents (.e. -β) that are shown for duraton n Table 2. The lkelhood functon to be maxmzed s the followng: d L = S( t ) θ ( t ), where d =1 f ndvdual s ext s observed at t and equaton (1) can be rewrtten as d ln S( t) ( t) = d( t) θ, t follows that t S( t) = exp θ ( u) du. 0 d =0 f s length of tme n busness s rght censored. As The logarthm of the lkelhood functon can now be wrtten n terms of the hazard functon as ln L t = θ ( u) du + d lnθ ( t ). 0 3 See Greene (2000), page

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