The effect of risk taking propensity on employee-growth-ambition

Transcription

1 Faculty of Economics and Business The effect of risk taking propensity on employee-growth-ambition Eline Out Abstract The focus of this paper is on small firms, and their owner s ambition to hire external labour. The factors that influence ambition and realization to hire (additional) employees are separately investigated for entrepreneurs without employees (Own-Account Workers) and with employees (Employers). Data is collected by means of a survey among entrepreneurs in a cooperation between Bureau Onderzoek en Statistiek Amsterdam and the Amsterdam Center for Entrepreneurship. As expected, general risk taking propensity has a positive and significant influence on achieving and having employee-growth-ambition for both Own- Account Workers and Employers. General risk taking propensity does not exclusively influence employee-growth-ambition but also influences other entrepreneurial ambitions. The perception of barriers to employee-growth-ambition differs between Own-Account Workers and Employers, and between entrepreneurs with and without employee-growth-ambition. Master Thesis Supervisor: Prof. Dr. C.M. van Praag Master in Business Economics, specialization Organization Economics

2 2 Preface I would like to thank my supervisor prof. dr. Mirjam van Praag for her guidance during my thesis process. Furthermore I would like to thank Bureau Onderzoek en Statistiek Amsterdam for providing me the opportunity to cooperate with them. In special I would like to thank Carine van Oosteren, Sanna de Ruiter and Ilona Vierveijzer for their overall support and for their help in designing the survey, their constructive comments were very useful.

3 3 Table of Contents 1 Introduction Related literature Heterogeneity Factors influencing the decision to hire employees Risk taking propensity Owner-manager motivation Financial capital Human capital Miscellaneous factors Barriers to (employee-)growth Concluding remarks from the literature Research methodology Data Measures Dependent variables Main independent variable Control variables Reasons for employee growth and barriers Entrepreneurial ambitions Estimation method Results and analysis Descriptive statistics Factors influencing EGA Entrepreneurial stage Having employees Ambition to become Employer Ambition to hire additional employees Exclusivity check Reasons (not) to hire employees.33

4 4 Table of Contents (continued) Reasons to hire employees Barriers to hiring employees 37 5 Discussion and limitations 41 6 Conclusion 43 References.45 Appendix I - Tables Appendix II - Survey. 62

5 5 1 Introduction Given the focus in the economy on growth, it seems almost natural to assume that every entrepreneur has a desire to let his business grow bigger. Entrepreneurs are considered to be engines of economic growth and coherently creators of jobs (Minniti, 2008; Carree et al., 2002; Audretsch and Thurik, 2001). However, although the number of entrepreneurs in the Netherlands has increased from to nearly 1.1 million during , the increase was mainly caused by a rise of self-employed without employees (CBS, 2012; CBS, 2009). A CPB study in 2012 forecasts a further increase of self-employed without personnel in the future (CPB, 2012). The increase of self-employed without employees suggests that not every entrepreneur has ambition to hire (additional) employees. This leads to the following research question: What determines the ambition and realization of an entrepreneur to hire (additional) external labour and does this differ for own-account workers and employers? In this paper the terms entrepreneur and self-employed are alternately used. Both terms capture the same meaning, namely (co-)owner of an enterprise. Self-employed are subdivided in a similar means as Earle and Sakova (2000): entrepreneurs who currently have no employees are referred to as Own-Account Workers (OAW) and entrepreneurs who currently have one or more employees are referred to as Employers. Firstly, investigating the existence of employee-growth-ambition (EGA) among entrepreneurs is useful for policy-makers. For example for calculation of employment predictions. Furthermore it is useful to know whether barriers to employee growth are consisting of individual preferences or external factors which potentially can be altered. Secondly, the investigation is also relevant for future entrepreneurship research. Entrepreneurs are often, for simplicity, defined as individuals who are self-employed (Román et al., 2013). Thereby not making a difference between OAW and Employers, nor making a difference between self-employed who have ambition to grow and those who do not have such an ambition. Therefore, there exists heterogeneity in the people regarded as entrepreneurs, possibly causing misleading research results and conclusions (Henrekson and Sanandaji, 2013). For instance, past studies on personality differences between entrepreneurs and wage-employees find little and mixed results. 1 Perhaps this lack of distinguishable features is partly caused by heterogeneity in the group of entrepreneurs. Van Es and van Vuuren (2011, p. 1666) furthermore point out the issue of false self-employment caused by 1 See for example: Brown et al. (2011), Beugelsdijk and Noorderhaven (2005), Miner and Raju (2004) and Blanchflower and Oswald (1998).

6 6 OAW who behave like employees, in the sense that they carry out work that can also be done by a normal employee. It remains highly speculative, but if only entrepreneurs with growthambitions are considered as true entrepreneurs, differences might be found between wageworkers and these true entrepreneurs. In order to investigate the factors that can help explain differences in ambition (and realization) to hire (additional) external labor, a survey is designed and online distributed among entrepreneurs by bureau of Onderzoek en Statistiek Amsterdam 2 (O+S) together with The Amsterdam Center for Entrepreneurship (ACE). In total 833 responses are used, concerning 536 responses from OAW and 297 responses from Employers. The focus of the paper is on small enterprises, the largest firm in the dataset employed 125 employees, the average (median) number of employees was 3.3 (0) for all firms and 9.3 (4) for all firms given they had at least one employee. My contribution to the literature consists of getting an insight in the relationship between risk attitude and EGA, which is not yet covered in the current literature. Moreover my research is a valuable contribution to policy-makers by giving them insights into barriers to employee growth. As expected, the results indicate that general risk taking propensity has a positive and significant influence on achieving and having EGA for both OAW and Employers. The results also confirm that self-employed are a heterogeneous group, since only 16% of the responding OAW has EGA, while 62% of the Employers aims to hire an additional employee. In addition the marginal influence of risk taking propensity differs between OAW and Employers, and there are also differences in other factors that are of influence. However, general risk taking attitude is not exclusively influencing EGA. The results indicate that for both OAW and Employers, general risk taking propensity has a positive and significant influence on ambition to increase turnover in the next five years by hiring other self-employed and/ or cooperate with other self-employed for the fulfilling of projects. Additionally the results indicate that for Employers general risk taking propensity has a significant positive influence on ambition to increase profits within the next five years. There is thus an overall correlation between risk taking propensity and ambition. The paper is organized as follows. Paragraph 2 discusses relevant insights from the literature. Thereafter paragraph 3 contains information on the set up of the empirical research. Paragraph 4 contains the results and analysis of the data. Paragraph 5 contains a discussion of the results, limitations and suggestions for future research. At last paragraph 6 contains the conclusion. 2 Translated to English: Bureau Research and Statistics Amsterdam.

7 7 2 Related literature This section gives an overview of relevant insights from the literature on entrepreneurship. In order to understand the importance of distinguishing between different categories of selfemployed, paragraph 2.1 discusses literature on heterogeneity among self-employed. There is more research on factors influencing realization rather than the ambition of hiring (additional) employees. Paragraph 2.2 reviews both types in order to determine which variables should be included in the empirical analysis. Thereafter paragraph 2.3 discusses literature on barriers to employee-growth. Finally paragraph 2.4 contains concluding remarks. 2.1 Heterogeneity In empirical research entrepreneurs are for simplicity often defined as self-employed. However, a large number of scholars recognize that self-employment is a biased proxy for entrepreneurship, since individuals who are included in the self-employment category differ widely on all kind of features (Henrekson and Sanandaji, 2013; Román et al., 2013; Levine and Rubinstein, 2012; Cowling et al., 2004; Gundry and Welsch, 2001; Earle and Sakova, 2000; Stewart et al., 1999; Carland et al., 1984). According to Henrekson and Sanandaji (2013), using self-employment to proxy for entrepreneurship often leads to misleading inferences. As a consequence of the recognition that entrepreneurs are a heterogeneous group, scholars distinguish between different categories of self-employed. Earle and Sakova (2000) for example distinguish between Employers, who create jobs for others, and Own-Account Workers (OAW), who work on their own or with the support only of unpaid family helpers (2000, p. 576). Their empirical research in East-European transition economics shows that Employers differ from OAW on features such as earnings, family background and schooling. Empirical results by Román et al. (2013), based on data from the European Community Household Panel for the EU-15, confirm the notion that self-employed should be considered as a heterogeneous group. Cowling et al. (2004) use different terminology to make a similar distinction as Earle and Sakova (2000). Cowling et al. (2004) label self-employment with employees as job-creating self-employed and those without employees as individual selfemployment. Cowling et al. (2004) argue that in entrepreneurship research, both groups should be treated as related, but distinct groups. Distinctions are also made regarding differences in growth-orientations of entrepreneurs, or in different terms, ambition levels. Carland et al. (1984) for example

8 8 distinguish between small business owners and entrepreneurs. Small business owners can be interpreted as establishers and managers of a business for the principal purpose of furthering personal goals. While entrepreneurs are driven by innovation, profit and growth (Carland et al., 1984). Stewart et al. (1999) empirically find that self-employed who are labeled as entrepreneurs score significantly higher in achievement motivation, risk taking propensity and preference for innovation compared to both corporate managers and small business owners. While entrepreneurs were found to differ significantly from corporate managers, the only different feature between small business owners and corporate managers appeared to be a higher propensity to take risks among small business owners (Stewart et al., 1999). Gundry and Welsch (2001) investigate differences between high-growth-oriented ( ambitious ) and low-growth-oriented ( status quo ) entrepreneurs. Their empirical findings indicate that ambitious entrepreneurs indeed differed from status quo entrepreneurs among several dimensions. Overall, ambitious entrepreneurs were found to have a more structured approach to organizing their business (Gundry and Welsch, 2001). Stam et al. (2007) found that entrepreneurs who are ambitious regarding expected firm growth, contribute more strongly to macro-economic growth than entrepreneurial activity in general. Alternatively Levine and Rubinstein (2012) distinguish between incorporated and unincorporated self-employed. The results of their empirical study in the USA indicate that incorporated self-employed have distinct (non)cognitive traits. Incorporated self-employed are more educated, score higher on learning aptitude tests, exhibit greater self-esteem and engage in more aggressive, illicit and risk-taking activities. In summary, empirical evidence shows that self-employed are a heterogeneous group and should be treated as such in empirical research. 2.2 Factors influencing the decision to hire employees The decision process regarding hiring an (additional) employee is complex and influenced by multiple factors. First the factor of most interest for this study is discussed, the personality trait risk taking propensity. Thereafter the influence of owner-manager motivation, financial capital, human capital and miscellaneous factors are discussed.

9 Risk taking propensity Many scholars attempted to identify personality traits of successful entrepreneurs, however in their literature review Driessen and Zwart (2007) come to the conclusion that results are mixed. Nevertheless they conclude that it seems that on average successful entrepreneurs, compared to individuals who do not own a (successful) business, have a higher score on the following traits: need for achievement, risk taking propensity, internal locus of control, need for autonomy, need for power, tolerance of ambiguity, need for affiliation and endurance. In my empirical research only the trait risk taking propensity is taken into account, since most other traits require a more extensive measurement process. 3 Zhao et al. (2010) conclude in a meta-analysis that risk propensity is the best predictor of entrepreneurial intentions among the traits that they investigated. Risk taking propensity can be defined as the perceived probability of receiving the rewards associated with the success of a proposed situation (Brockhaus, 1980, p. 513). The view of entrepreneurs as risk takers dates back to Cantillon (1755). He distinguished between undertakers (entrepreneurs) who took the risk of demand and price uncertainty, and hired people, who earned a fixed wage. Knight (1921) evolved the risk taking theory by separating uncertainty from risk. Risk concerns recurring events whose relatively frequency can be known from past experience, while uncertainty is caused by unique events which can only be subjectively estimated (Wu and Knott, 2006, p. 1316). Wu and Knott (2006) explain that the role of entrepreneur as bearer of risk has led to the inference in most theoretical literature 4 that entrepreneurs have greater risk tolerance than wage earners. Yet empirical research on the difference in risk tolerance between entrepreneurs and wage-workers has generated mixed results. 5 Hsieh et al. (2011) propose an opposing theory, by arguing that risk aversion encourages individuals to invest in balanced skill profiles, which makes them more likely to become entrepreneurs. Empirical data on Dutch university graduates provides evidence for this theory. To date little research has been conducted to differences in risk attitude within the group of entrepreneurs. Block et al. (2009) performed an empirical study on the risk attitude of different types of entrepreneurs in Germany. Firstly Block et al. (2009) investigate whether 3 An example of a valid measurement method is the Entrepreneur Scan developed by Driessen and Zwart, which measures necessary traits and capabilities for entrepreneurship (Driessen and Zwart, 2007). 4 Such as: Kanbur (1979), Kihlstrom and Laffont (1979), Lucas (1978) and McClelland (1961). 5 See for example: Brown et al. (2011), Caliendo et al. (2009), Miner and Raju (2004), Stewart et al. (1999) and Brockhaus (1980).

10 10 the risk attitude of necessity and opportunity entrepreneurs differs. Secondly the authors investigate the relationship between work motivation and risk attitude. Work motivation is measured by three dimensions: motivation by creativity, motivation by independence and motivation by income. The results indicate that necessity entrepreneurs have a lower risk tolerance than opportunity entrepreneurs. Additionally entrepreneurs motivated by a high level of creativity are found to be less risk averse than other types of entrepreneurs. The measurement of risk taking propensity in my study is similar to the method used by Block et al. (2009), yet Block et al. (2009) also use two other measures. Another difference is that my study uses another categorization of entrepreneurs. Block et al. (2009) do not take into account the number of employees an entrepreneur has. As mentioned earlier, Stewart et al. (1999) incorporated a measure for risk taking propensity in their study on differences between different types of self-employed 6 and corporate managers. Their findings show that small business owners are significantly less risk oriented as compared to entrepreneurs. In addition, scholars have argued that successful entrepreneurs have a higher risk tolerance than less successful entrepreneurs (Driessen and Zwart, 2007). However, Rauch and Frese (2007) conclude from their meta-analysis that the effect of risk taking propensity on entrepreneurial success is rather small. Zhao et al. (2010) even argue that risk taking propensity is not significantly related to entrepreneurial performance. In contrast, the results by Caliendo et al. (2010) indicate that the relationship between risk attitude and entrepreneurial survival is inversely U-shaped. Entrepreneurs with particularly low or particularly high risk attitudes have a lower survival rate than entrepreneurs with a medium-level risk attitude. Whether an individual s risk taking propensity is fixed or can convert over time remains subject to debate. For example Stewart et al. (1999, p. 194) argue that risk taking is predispositional and not simply a situational variable, based upon studies by Jackson et al. (1972) and Plax and Rosenfeld (1976). Contrarily, McCarthy (2000, p. 567) claims that risk attitude is not just a static personality trait forged by nature or nurture, but seems to reflect learning in a business context. His view is supported by earlier findings that risk taking propensity varies during different stages of business development (Brockhaus, 1987; O'Farrell, 1986). Sitkin and Weingart (1995) argue that risk taking propensity is a stable trait but can change over time as a result of experience. The authors stress that an individual s risk perception is partly determined by outcome history, which they define as the degree to 6 Steward et al. (1999) divide self-employed into entrepreneurs and small business owners based on the theory of Carland et al. (1984).

11 11 which the decision maker believes that previous risk-related decisions have resulted in successful or unsuccessful outcomes (Sitkin and Weingart, 1995, p. 1576). Baron (2007, cited in Zhao et al., 2010, p. 389) notes that attention to the types of outcomes associated with different stages of entrepreneurship may help reconcile conflicting findings regarding the role of risk propensity in entrepreneurship. In summary, psychological factors in the form of personality traits might influence the decision to hire (additional) employees. Little is known with certainty about the influence of risk propensity on job creation ambition and realization Owner-manager motivation Another psychological factor of influence is owner-manager motivation, which is related to but distinguishable from personality traits. An owner-manager s aspiration to expand is regarded as an important factor in the explanation the growth of a business venture (Hansen and Hamilton, 2011; Delmar and Wiklund, 2008; Wiklund and Shepherd, 2003; Smallbone et al., 1995). Empirical findings by Davidson (1989) in Sweden indicate that once firms reach a size of about 5-9 employees, willingness for additional growth by the owner-manager decreases. On the contrary, Delmar and Wiklund (2008), also using Swedish data, argue that achieving growth reinforces future growth motivation. Willingness to expand is positively influenced by the personality trait need for achievement (Davidson, 1989). Ambition to expand can arguably be negatively influenced by perceived barriers to growth, however Doern (2011) claims that the relationship between barriers and intentions has not been examined explicitly. Paragraph 2.3 Barriers to (employee-) growth explores the concept of (perceived) barriers in more detail. In my research the motivation of the entrepreneur to expand is measured by several statements that reflect entrepreneurial ambitions Financial capital Obviously one of the requirements for hiring (additional) external labour is availability of sufficient financial means in order to pay the worker s salary and to potentially make necessary investments so that the newly hired worker can be productive. Although according

12 12 to financial theory business owners would have no trouble financing investments if expected cash flows are positive, this is not always the case for small business owners. 7 Empirical research on the influence of financial capital on job creation is limited but it seems that financial capital has a positive influence on job creation. For example Henley (2005) finds that housing has a positive influence on the ability of self-employed to create jobs, as housing is an important source of collateral in acquiring external finance. Likewise Wiklund and Shepherd (2003) find that access to financial capital has a positive direct effect on growth. Congregado et al. (2010) find that incomes of OAW in prior periods has a positive effect on becoming an Employer. However, research on the influence of financial capital suffers from lack of reliable and representative data. Therefore, this factor is not included in my empirical research. Yet, the amount of financial capital of an entrepreneur is found to be positively influenced by the amount of his human capital (Bates, 1990), for which indicators are included Human capital High levels of informal and formal human capital are necessary for OAW to become Employers (Cowling et al., 2004). Human capital can be measured by indicators such as achieved educational level, age and (business) experience. Sluis et al. (2008) conclude from their meta-analysis that the relationship between human capital and entrepreneurial success is higher for knowledge/skills which are outcomes of human capital investments, compared to experience/schooling which are direct human capital investments. Meta-analysis studies have shown that schooling has a positive influence on entrepreneurial performance (Unger et al., 2011; Sluis et al., 2008). Additionally Henley (2005) and Congregado et al. (2010) find, by using data for the UK and EU-15 respectively, that level of formal education has a positive influence on the likelihood of OAW to become an Employer. Yet both Cowling et al. (2004) and Burke et al. (2002), using British data, find that the positive influence of education only applies to men. Wiklund and Shepherd (2003) furthermore find in Sweden that level of education itself has no effect on growth, but education does positively influence the relationship between aspiration and growth. 7 Cagetti and de Nardi (2006) show that tightness of borrowing constraints is one of the main forces in determining the number of entrepreneurs in a society; Van Praag and van Ophem (1995) have shown that availability of capital is typically the most constraining factor in the decision to start a business. See furthermore Fairlie and Krashinsky (2012) for a discussion on liquidity constraints and problems with measuring methods.

13 13 According to findings by Henley (2005) and Cowling et al. (2004) age has a positive effect on becoming a job creator. Contrarily, the findings by Wiklund and Shepherd (2003) suggest that owner s age has no impact on growth. Likewise Carroll et al. (2000) find that age itself does not increase the probability of becoming a job creator, but age does increase the number of jobs created among self-employed with personnel. A positive influence of business experience on hiring employees is found by Congregado et al. (2010), Cowling et al. (2004) and Burke et al. (2000). In contrast, Wiklund and Shepherd (2003) find no direct relationship between experience and growth, yet they do find that experience affects growth when accompanied by owner s growth aspirations. To sum up, even though results are somewhat mixed, human capital seems to have a positive impact on the likelihood to hire (additional) employees, although the strength of the influence may differ for males and females and for Employers and OAW Miscellaneous factors There are a couple more factors of interest on the decision to hire (additional) employees that are included in my empirical research. Firstly, number of weekly working hours by the entrepreneur is of importance. Working part-time decreases the likelihood of becoming an Employer (Congregado, 2010) and is characterized by having significantly fewer employees (Burke et al, 2000). Differences in employment creation are also related to gender, as several studies find that female entrepreneurs have lower job creation rates (Henley, 2005; Burke et al., 2002; Cooper et al., 1994). Furthermore for both Employers and OAW, entering selfemployment from unemployment has a negative influence on the probability of survival (Millán et al., 2012; Millán et al., 2011; van Praag, 2003) and thus perhaps also on job creation. Another control factor that is often taken into account in empirical research is industry. 8 However empirical results are too inconsistent to make predictions about differences in sectors (Millán et al., 2012). Additionally there are a number of control factors that are sometimes taken into account but given the scope of my empirical research are not included. These control factors are for example macro economical factors such as unemployment rate, business failure rate and GDP growth 9, and institutional factors such as tax rates 10. Again empirical results for these factors are mixed (Millán et al., 2012). 8 For example industry variables are used by: Millán et al. (2012) and van Praag (2003). 9 For example macro economical variables are used by: Millán et al. (2012) and van Praag (2003).

14 Barriers to (employee-)growth An entrepreneur can perceive several barriers to employee growth which may prevent him to have EGA in the first place. Even whenever the entrepreneur has no perception of barriers or does not let the perceived barriers stop him to pursue hiring (additional) employees, he might not be able to accomplish his ambition because of the real existence of those barriers. According to Robson and Obeng (2008), the literature on constraints to SME (employee) growth is less extensive than research on explanations of firm success. Some scholars focus on investigating the existence of a specific barrier, whereas other scholars investigate multiple barriers with the purpose of defining the most constraining barriers. The most investigated barrier is lack of finance. 11 There are however more barriers, take for example employment protection legislation, which is found to be negatively related to the decision of OAW to become an Employer depending on its strictness (Millán et al., 2013). Another governmental barrier is regulatory pressure, yet research indicates that perception of regulatory pressure varies widely among entrepreneurs (Avans, 2010). De Jong and van Witteloostuijn (2011) investigate (perceived) administrative burdens in northern provinces of the Netherlands. They find that administrative burdens are negatively perceived and have indeed a significant negative real influence on business performance. This negative effect is especially strong for enterprises with 6-10 employees and companies within the construction and industry sector (De Jong and van Witteloostuijn, 2011). Empirical research taking multiple barriers into account are more inclined to focus on non-western countries. 12 Nevertheless some of the research on (perceived) barriers is also focused on Western countries. For example, findings by Davidson (1989) indicate that among small business owner-managers the most important growth deterrents are employee wellbeing and loss of supervisory control. Vroonhof et al. (2007) investigate why Dutch OAW are not willing to hire employees. According to their findings the most important reason concerns business is not large enough and the second most indicated reason concerns wanting to remain total control. According to another Dutch research, the most important reasons concern limited distribution market and state of the economy (De Vries and Span, 2013). The current economic crisis can be a barrier to growth. The negative impact of the crisis is 10 For example Carroll et al. (2000) include entrepreneurs personal taxes and Millán et al. (2012) include Statutory tax rates on dividend income. 11 See paragraph Financial capital 12 For example: Aidis (2005) investigates barriers to SME operations in East-European transition countries; Robson and Obeng (2008) investigate barriers to growth in Ghana; Coad and Tamvada (2012) investigate firm growth and barriers to growth among small firms in India.

15 15 more severe for SME than larger enterprises, in 2012 turnover decreased by 1.75% for SME while it decreased by 0.5% for larger enterprises in the Netherlands. As a result employment in SME decreased with approximately jobs in 2012 and for 2013 employment in SME was expected to decrease with approximately jobs (Bangma and Snel, 2012). According to a survey by the Chamber of Commerce, in the 1 st quarter of % of the entrepreneurs said to be hindered by the economic climate. This number increased to 65% in Yet according to the same survey entrepreneurs are in 2013 less negative about profitability, 19% of the entrepreneurs are negative about profitability compared to 25% in the 4 th quarter of 2012 (COEN, 2013). In my study the investigated barriers are chosen such that they capture lack of business opportunities, financial factors, macro-economic factors, regulatory factors, employee availability and personal preferences. 2.4 Concluding remarks from the literature In conclusion, from this literature review it can be argued that self-employed are a heterogonous group, differing in having employees or not and having future growth intentions or not. The literature on the decision to hire (additional) employees is focused on achieved outcomes rather than future ambitions. An entrepreneur s decision to hire (additional) employees is influenced by multiple factors. Stam et al. (2007, p. 3) neatly summarize this complex process: In order to grow a new business, growth intentions, resources and opportunities are necessary conditions. Arguably these conditions still apply when enterprises exist for a longer period of time. In addition, the employee-hiring decision can be restrained by several (perceived) barriers. My empirical research focuses on ambition to hire (additional) employees in order to contribute to the relative lack in the literature on this topic. More specifically, one of the aims of the empirical research is to gain a better insight in the relationship between risk-attitude and entrepreneurial ambition. Moreover clear distinctions are made between OAW and Employers. Previously discussed factors on the decision to hire (additional) employees which are included in my analysis are: risk taking propensity, owner-manager motivation, human capital, weekly working hours, gender, previous employment status and industry. Additionally the analysis also takes into account perceived barriers to employee-growth. Previously discussed factors that are not (directly) taken into account in my analysis are:

16 16 financial capital 13, personality traits other than risk taking propensity, macro-economic factors 14 and institutional factors 15.With the main explanatory variable being risk taking propensity, the main hypothesis is the following: There is a positive relationship between risk taking attitude and ambition (realization) to hire (additional) employees. 3 Research methodology This paragraph provides information about the set-up of the empirical research. In order to determine the factors that can help explain differences in ambition (and realization) to hire (additional) external labor, a survey is designed (see Appendix) and online distributed among entrepreneurs by bureau of Onderzoek and Statistiek Amsterdam (O+S). First paragraph 3.1 discusses the data. Thereafter paragraph 3.2 explains the dependent, independent and control variables and other measures. Finally paragraph 3.3 describes the estimation method. 3.1 Data A survey was sent out online to a panel of 2409 entrepreneurs by O+S in May O+S is a non-profit research agency of the municipality of Amsterdam which regularly sends out questionnaires to their panel of entrepreneurs. 905 entrepreneurs have completed the survey, resulting in an overall response rate of 37.6%. Participants are not necessarily (co-)owners of the company for which they fill in the questionnaire. It is only meaningful to investigate the relationship between risk taking attitude and entrepreneurial ambitions for those people who are in control of realizing these ambitions. Therefore, 54 respondents who indicated not to be a (co-)owner are excluded from analysis. Additionally 18 responses are excluded because these were considered to be inadequate 16. From the remaining 833 responses, 536 (64%) are from OAW and 297 (36%) are from Employers. An OAW is defined as having zero employees. Entrepreneurs who employ one or more people are defined as Employers. All 13 However financial capital is indirectly taken into account as possibly perceived barriers to employee growth. Also because financial capital is related to human capital (Bates, 1990), financial capital is indirectly taken into account by including human capital factors. 14 However macro-economical factors are indirectly taken into account by the possibly perceived barrier no opportunity to increase turnover which is related to the state of the economy. 15 However institutional factors are indirectly taken into account by possibly perceived barriers regarding employee protection legislation and administrative burdens respondents did not submit their number of employees, 1 respondent s age of 99 seemed questionable and 3 respondents indicated to have respectively 300, 310 and 7000 employees. According to European Union guidelines a company can only be defined as an SME if it employes less than 250 employees (EC, 2013).

17 17 companies are located in Amsterdam. Finally it is worth mentioning that not all survey questions are relevant for my research, but these are nevertheless asked because of the interest for O+S. 3.2 Measures Dependent variables There are four different regressions models conducted to investigate EGA. Each model has a different dependent variable. These four dependent variables are: entrepreneurial stage, having employees, having ambition to become Employer and having ambition to hire additional employees. The first dependent variable, entrepreneurial stage, can take four different values, representing the different stages of (achieved) EGA an enterprise can go through. The respondents are divided among the stages based upon their number of employees and EGA. EGA is measured by asking the entrepreneur whether it is his ambition to hire one or more (additional) employee(s) within the next five years. The answering possibilities were: yes, no and I do not know/ no answer. Respondents who answered I do not know/ no answer are excluded from this regression analysis, which resulted in a loss of 102 responses. The first stage, coded 1, consists of entrepreneurs who have currently no employees and have no ambition to change this within the next five years. The second stage, coded 2, consists of entrepreneurs who have currently no employees, but ambition to hire one or more employee(s) within the next five years has emerged. The third stage, coded 3, consists of entrepreneurs who have achieved their ambition to hire one or more employee(s) by becoming an Employer and are satisfied in the sense that they have no ambition to hire (an) additional employee(s) within the next five years. The fourth stage, coded 4, consists of entrepreneurs who have achieved their ambition to hire one or more employee(s), but still have a remaining ambition to hire (an) additional employee(s) within the next five years. Of main interest in my research are the determinants for progressing to the next stage, which is ultimately an endless process. Due to lack of longitudinal data actual changes are not observed, yet observing the current stage of an enterprise is also informative. The second dependent variable, having employees, can take two values, either the respondent is an OAW and thus has no employees, or the respondent is an Employer and thus has at least one employee. Having no employees is coded 0 and having at least one employee is coded 1. Having employees essentially means having achieved a prior EGA.

18 18 The third dependent variable, having ambition to become Employer, can take two values and is only applicable to OAW. Having no ambition to become Employer by hiring one or more employee(s) within the next five years is coded 0 and having this ambition is coded 1. Respondents whose EGA is unknown are excluded, which resulted in a loss of 74 responses. The fourth dependent variable, having ambition to hire additional employees, can take two values and is only applicable to Employers. Having no ambition to hire one or more additional employee(s) within the next five years is coded 0 and having such an ambition is coded 1. Again, respondents whose EGA is unknown are excluded from the regression, which resulted in a loss of 28 responses Main independent variable The main independent variable is general risk taking propensity, measured by a question originated from the German Socio-Economic Panel (SOEP) which directly asks respondents to give a global assessment of their willingness to take risks. The wording (translated) is as follows: How do you see yourself: are you generally a person who is fully prepared to take risks or do you try to avoid taking risks? Please indicate your answer on the scale below, where the value of 0 means not at all willing to take risks and the value of 10 means very willing to take risks. (Dohmen et al. 2011, p. 525). The behavioral validity of this survey measure is verified by Dohmen et al. (2011) and the same measure is for example used by Caliendo et al. (2009) and Block et al. (2009). The risk taking attitude variable is divided into eleven levels. The lowest risk taking propensity is coded 0 (corresponding with an answer of 0) and the highest risk taking propensity is coded 10 (corresponding with an answer of 10) Control variables Several other independent variables are included in the regressions as control variables. These variables are chosen based upon a possible influence on the dependent variable according to the literature review in paragraph 2.2. All information on the control variables are measured by the survey or are gathered by a previous survey. The first control variable is gender, a dummy variable which equals 1 for females. Another control factor is human capital, which is captured by the variables age of the entrepreneur, education and additionally for OAW only, previous experience as Employer. Age of the entrepreneur is measured in number of years.

19 19 Based upon suggestion by Carroll (2000, p. 336) a quadratic term in age is also added in the regression. Education concerns the highest obtained diploma of the entrepreneur, divided into seven categories. The lowest form of education, primary school, is coded 1 and the highest, university (dr), is coded 7. Previous experience as Employer by OAW is a dummy variable which equals 1 if an OAW answered yes to the question whether he used to have employees in his current or in a previous venture. Another independent variable is prior occupation. Respondents were asked what their most important occupation was directly prior to their current occupation. Prior wage employee is a dummy variable which equals 1 for individuals whose main occupation prior to their current occupation was being a wage employee. The other dummy variables for prior occupation are: Prior self-employed, Prior family business, Prior unemployed, Prior student, Prior housemaker, Prior retired, Prior volunteer and Prior other. Another control variable is weekly working hours, measured by the weekly average number of working hours as indicated by the respondent. Finally another type of control factors are venture characteristics, consisting of venture age, number of employees, sector and in case of Employers, phase of hiring first employee. Venture age is the age of the business and is measured by the reported number of years since the venture is located in Amsterdam. Data on actual venture age is unknown, yet it is likely to assume that in most cases the venture is originally established in Amsterdam. In previous research venture age is sometimes regarded as an indicator of human capital (Cowling et al., 2004). However, in this case venture age is an inaccurate indicator of human capital because it might be possible that a responding entrepreneur was not the founder of his company. Sector concerns the industry in which the main activity of the business takes place. AFF sector is a dummy variable which equals 1 for individuals whose main activity of the venture concerns agriculture, forestry and fishing. In addition the other dummy variables for sector are: Industrial sector, Construction sector, Trade sector, Distribution sector, Hospitality sector, Communication sector, Financial institutions sector, Real estate sector, Business services sector, CSR Sector (=Culture, Sports and Recreation), Other services sector and Other sectors. Finally, phase of hiring first employee is divided into three categories. The first category, coded 1, is a dummy variable for ventures which hired their first employee within a year after the company was founded. The second category, coded 2, is a dummy variable for ventures which hired their first employee between one and two years after the company was founded. The third category, coded 3, is a dummy variable for ventures which hired their first employee more than two years after the company was founded. Table A1 (in the appendix) gives an overview of all variables.

20 Reasons for employee growth and barriers Besides previously discussed variables, the questionnaire investigates two other measures that are of interest to this paper, namely reasons for aspiring employee growth and barriers to employee growth. Respondents who indicated to have EGA, are asked what their main reasons are for having EGA. This is an open question, so that the mind of the entrepreneur cannot be influenced by provided answer categories. The disadvantage of an open question however is that not every respondent is likely to answer and answers might be difficult to categorize. As discussed in paragraph 2.3, entrepreneurs can experience several barriers to employee growth. In order to get a better insight into the barriers to employee growth that are perceived in Amsterdam, questions regarding these barriers are included in the questionnaire. All respondents were presented possible barriers and were asked to express whether each of these barriers were applicable to them by means of answering yes, no or I do not know/ no answer. The advantage of phrasing the questions with provided answer possibilities is convenience in comparability of responses between different subgroups. The presented barriers capture both individual and external factors. Most barriers are arguably not distinctively internally or externally influenced. The barrier Having sufficient access to external financial means depends for example on internal factors such as having collateral (Henley, 2005) and human capital (Bates, 1990), and on external factors such as tightness of borrowing constraints (Cagetti and de Nardi, 2006). The presented barriers differed between OAW and Employers, and within this groups depending on indicated ambition. The reasons for presenting them different barriers is that not every barrier is applicable for every subgroup. For both OAW and Employers with EGA, the presented barriers are: foreseeing insufficient additional turnover, having insufficient private financial means, having insufficient access to external financial means, legislation concerning protection against dismissal, legislation concerning continued payment in case of employee s sickness and disabilities, additional administrative burdens and not being able to find (a) suitable employee(s). In addition to these barriers, entrepreneurs without EGA and with unknown EGA were also presented the following reason not to hire employees: satisfaction with current situation. Furthermore both OAW without EGA and OAW with unknown EGA were also presented the following reasons not to hire employees: wanting to maintain complete control over the enterprise and not willing to take responsibility over

21 21 employees. Finally all respondents were also given the opportunity to report another barrier themselves. Thereby the disadvantage of missing out on important barriers is reduced Entrepreneurial ambitions An entrepreneur can have several ambitions, ambition to hire (additional) employees is only one element. It could be possible that risk taking propensity does not have a specific influence on employee-growth-ambition, but that there is merely a general correlation between risk attitude and ambition. In the survey four other entrepreneurial ambitions are also measured. With these entrepreneurial ambitions it can be tested whether risk taking propensity specifically influences EGA, or whether risk taking propensity has an influence on entrepreneurial ambitions in general. The four entrepreneurial ambitions which are measured are: ambition to remain active with the enterprise in the next five years (RAA), ambition to increase turnover within the next five years by hiring other self-employed and/ or cooperate with other self-employed for the fulfilling of projects (SECA), ambition to contribute significantly to society within the next five years (SCA) and ambition to increase profits within the next five years (PGA). Again respondents could answer yes, no or I do not know/ no answer. The remaining-active ambition indicates the entrepreneur s long-term perspective. The self-employed-cooperation-ambition is relevant to ask because hiring other self-employed on a project basis is an alternative to hiring employees. It is also possible for entrepreneurs to enter a more equal (and possibly less official) cooperation with other selfemployed. By measuring this ambition it can be analyzed whether respondents who want to achieve profit growth without hiring (additional) employees, want to achieve profit growth by hiring other self-employed and/ or cooperating with other self-employed. The societycontribution-ambition is included because not every entrepreneur is (solely) profit-driven. Finally the profit-growth-ambition indicates whether the respondent is satisfied with his current profit level or wants to increase his profit level. 3.3 Estimation method Different estimation methods are used for the different dependent variables. The first dependent variable, entrepreneurial stage, can considered to be ordered response data and therefore an ordered probit regression model is used for analysis. Ordered response data arise when mutually exclusive qualitative categories have a natural ordering, but do not have

22 22 natural numerical values which makes OLS inappropriate (Stock and Watson, 2011, p. 460). The values that the variable entrepreneurial stage can take are four mutually exclusive levels, which have a natural ordering. A higher stage indicates a higher entrepreneurial level. The three other dependent variables, having employees, having ambition to become Employer and having ambition to hire additional employees, can considered to be binary variables. Probit regression models are used for analysis of these three dependent variables since these models are specifically designed for binary dependent variables (Stock and Watson, 2011, p. 429). 4 Results and analysis In this section results of the empirical study are analysed. First paragraph 4.1 discusses the descriptive statistics. Thereafter paragraph 4.2 analyses the results of the four different regressions that are executed to investigate which factors influence ambition and realization of an entrepreneur to hire (additional) external labor. Thereafter paragraph 4.3 compares the regression outcomes on EGA with regressions on other entrepreneurial ambitions in order to check for exclusivity. Finally paragraph 4.4 discusses reasons (not) to hire employees. 4.1 Descriptive statistics As discussed in paragraph 3, in total 833 responses to the survey were found adequate for analysis. The results confirm that entrepreneurs are a heteregenous group, since features differ per subgroup. Table 1 summarizes the measured entrepreneurial ambitions. 84 (15.7%) OAW indicated to have ambition to become Employer, 378 (70.5%) OAW indicated to have no ambition to become Employer and 74 OAW (13.8%) indicated to not know whether they have ambition to become Employer or did not want answer. Employers are significantly more likely than OAW to have EGA (p <.01) (62.3%) Employers indicated to have the ambition to hire additional employees, 84 (28.3%) Employers indicated to have no EGA and 28 (9.4%) Employers indicated to have an unknown EGA. Among OAW the most prevalent ambition is to remain active (83.4%) and the least prevalent ambition is EGA (15.7%). This suggests that a large majority of OAW are satisfied with the entrepreneurial stage they are in. Among Employers the most prevalent ambitions are growth of profit (84.5%) and to remain active (83.8%), and the least prevalent is to cooperate with other self-employed (52.5%). 17 In this paper all statistical tests on differences concern two-sided t-tests, unless otherwise specified.