Determinants of Successful Immigrant Entrepreneurship in the Federal Republic of Germany

Transcription

1 Determnants of Successful Immgrant Entrepreneurshp n the Federal Republc of Germany Inaugural-Dssertaton zur Erlangung des Doktorgrades der Wrtschaftswssenschaftlchen Fakultät der Eberhard-Karls-Unverstät Tübngen vorgelegt von Nkolnka Fertala aus Razgrad 2006

2 II Dekan: Professor Dr. pub. oec. Jörg Baten Erstberchterstatter: Professor Dr. pub. oec. Jörg Baten Zwetberchterstatter: Professor Dr. rer. pol. Kerstn Pull Tag der Dsputaton: 11. November, 2005

3 III Nkolnka Fertala Determnants of Successful Immgrant Entrepreneurshp n the Federal Republc of Germany The entrepreneur s at the same tme one of the most ntrgung and one of the most elusve characters n economc analyss. He has long been recognsed as the apex of the herarchy that determnes the behavour of the frm and thereby bears a heavy responsblty for the vtalty of the free enterprse socety. W. J. Baumol (1968: 64)

4 IV Acknowledgements Durng my research years n Tübngen, I receved generous assstance from many people and nsttutons all over the world. I am partcularly grateful to my supervsor Professor Jörg Baten for hs persstent support durng the days of obscurty and sufferng, whch are the nseparable companons of each and every PhD scholar. Even more mportantly, he encouraged me as well to apply for and attend several nternatonal conferences, and to present my research there. I wsh to thank Professor Werner Neus for hs valuable comments, crtcal questons, and hs actve role n the dscusson when I presented my workng papers n the colloquum organsed by the graduate school n Tübngen. My dssertaton project s based on fve workng papers, whch contrbute to one sngle story; namely, what are the factors drvng mmgrants n Germany to establsh ther own busnesses, and on the other hand whch are the crucal determnants leadng to entrepreneural success. All fve papers were presented at nternatonal conferences, thus I wsh to express my grattude for the varous comments I receved. I am much ndebted to Professor Leo Dana who agreed to publsh my study enttled Do human and socal captal nvestments nfluence survval? A study of mmgrant entrepreneurshp n Upper Bavara as nvted paper n the Internatonal Journal of Entrepreneurshp and Small Busness. He even gave me the freedom to wrte a chapter n the edted book Ethnc Mnortes n Entrepreneurshp, London, Edward Elgar, whch I enttled Immgrant entrepreneurshp n Germany: Workng on the frnges or delberate self-decson. Whle correspondng wth hm, I mentoned my study on homophly and economc performance of mmgrant entrepreneurs, thus he became fascnated and approved to publcaton the paper enttled Do brds of a feather flock together and perform economcally better? A study of homophly paradox among mmgrant entrepreneurs n Germany. My frst paper Immgrant s propensty to self-employment n Germany was presented at the 3 rd Internatonal Conference Entrepreneurshp, Employment, and Beyond n Krakow Thus, I wsh to thank Professor Jan Targalsk and Professor Karl Gratzer for the challengng debates and excellent comments. My paper Do human and socal captal nvestments nfluence survval? A study of mmgrant entrepreneurshp n Upper Bavara was presented at the 24 th Babson Kaufmann Entrepreneurshp Research Conference, the most world-wde recognsed conference n

5 V the feld of entrepreneurshp research, whch took place n Glasgow I owe specal thanks to Professor Teresa Menzes and Professor Howard E. Aldrch who contrbuted remarkably to the qualty and ntensty of the dscusson. Ths paper was also presented at the 2 nd Interdscplnary European Conference on Entrepreneurshp Research n Regensburg Thus, I wsh to thank Professor Mchael Dowlng who organsed the conference for hs actve role n the dscussons. My paper Do brds of a feather flock together and perform economcally better? A study of homophly paradox among mmgrant entrepreneurs n Germany was presented at the 25 th Babson Kaufmann Entrepreneurshp Research Conference, whch was held n Boston, the US, 2005, specal annversary year, and at the 2 nd AGSE Internatonal Entrepreneurshp Research Exchange n Melbourne, Australa, I hghly apprecated the opportunty to present my research there. Furthermore, the scholarshp from the German Research Foundaton (DFG) supported my research objectves notceably and helped me consderably to mtgate the fnancal burden mposed by attendng nternatonal conferences and workshops. The encouragng atmosphere n the graduate school and n the research group at the department of economc hstory facltated my work progress tremendously. Therefore, I wsh to thank all members of the graduate school and our research group for ther persstent support, especally for the excellent advce of Domnque Adey Balnova concernng language and style as well as for close frendshp. My greatest debt s to my husband Walter Fertala and my mother Argra for ther warmth and mental support durng my research years n Tübngen. Ths thess would not have been feasble wthout ther generosty and understandng for my not beng at home n Venna.

6 VI Preface Before I begn wth the serous research ssues, I wsh to emphasse several basc consderatons regardng entrepreneurshp as a subject matter, cted lterature, language and nherent problems whle employng emprcal methods to data sets. I do strongly beleve n these consderatons, and thus I am fully convnced of the fact that they do contrbute to the qualty of research. Entrepreneurshp s a subject that s commonly taught and researched n busness schools, but seldom f at all n economcs departments. Consequently, most studes on entrepreneurshp tend to be wrtten from a busness or management perspectve. Such research often downplays, or gnores altogether, the contrbuton of modern economcs to our understandng of the subject. Indeed, t s common to fnd references to the contrbuton of economcs manly n terms of the treatses of Frank Knght (1921) and Josef Schumpeter (1934). It s unclear to me why entrepreneurshp plays such a margnal role n most economcs departments. It s possble that economsts are suspcous of a subject wth an avowedly mongrel provenance, whch reflects a multplcty of dfferent, and often non-quanttatve, perspectves. From a personal standpont, the multdscplnary nature of entrepreneurshp posed one of the greatest challenges n wrtng ths dssertaton. It also offered me some of the greatest rewards. My own vew s that the multdscplnary nature of entrepreneurshp s a potental strength, rather than a weakness. But ths potental wll be acheved only f we, students and researchers, take the trouble of breakng the boundares of narrow scholarshp, an deal to whch my dssertaton s dedcated. Gven the multdscplnary nature of entrepreneurshp, fortunately, t s a broad feld of research that creates ples of lterature every year; thus, I restrcted myself to essental contrbutons publshed n peer-revewed journals and outstandng edted volumes. My research also ncludes topcs from econometrcs, socology, and psychology, whch ncrease addtonally the quantty of related lterature avalable. Consequently, I cte only mportant sources that are of sgnfcant relevance to my research. In general, I concentrate on the workng paper style, whch avods longwnded revews of lterature. Conversely, my data sets, methods and results are of man nterest. Moreover, the prmary objectve of each and every scentfc work s to mantan readablty. Studyng the book wrtten by Woodward (1997) helped me to approach ths

7 VII objectve more swftly. To avod roundabout sentence constructons, whch n turn sound more mpressve, Woodward (1997) suggested the actve voce n the common use. I and We as well as He and She are alternately chosen n my dssertaton. Fnally, emprcal researchers wsh repeatedly to produce sgnfcant results, and generally only these results are publshed. Do we not run, therefore, nto the troubles of publcaton selectvty bas? However, I strongly beleve that statng the lmtatons of data sets and methods employed s an essental part of each emprcal research.

8 VIII TABLE OF CONTENTS 1. INTRODUCTION Relevance of the subject mmgrant entrepreneurshp Objectve of the thess Postonng n the scentfc feld A defnton of successful entrepreneurshp and measurement ssues Who s an mmgrant entrepreneur? How should we measure entrepreneural success? The structure of the thess 9 2. IMMIGRATION TO GERMANY AND LABOUR MARKET Extended abstract Introducton Managng mgraton n Germany: hstorcal background From emgraton to guest workers recrutment Ethnc Germans and asylum: New guest workers and green cards Labour market partcpaton of mmgrants to Germany Trends among the mmgrant populaton snce Employments ssues: A bref overvew Self-employment actvtes of mmgrants to Germany General legal condtons for mmgrant s self-employment Dstrbuton of self-employed mmgrants by natonalty Dstrbuton of start-ups: A comparatve overvew Concluson WILLINGNESS TO START AS AN IMMIGRANT ENTREPRENEUR Extended abstract Introducton Former studes on the propensty to entrepreneurshp What makes my analyss specal? Models wth qualtatve dependent varables: A methodologcal revew_ 46

9 IX 3.3 Data and hypotheses under estmaton The German soco-economc panel as a data source Constructon of explanatory varables and workng hypotheses Characterstcs of the sample populatons Predctng mmgrants propensty to be an entrepreneur The self-employment decson Emprcal results of the entrepreneural decson What has changed durng the perod ? Concluson THE IMPACT OF HUMAN AND SOCIAL CAPITAL INVESTMENTS ON SURVIVAL IN UPPER BAVARIA Extended abstract Introducton Determnants of survval n mmgrant entrepreneurshp Human captal hypothess Socal captal hypothess Specfcty of nvestment n human captal Immgrant and natve entrepreneurs Patterns of survval performance n Upper Bavara Data set employed n the survval analyss Dmenson and lkelhood of survval by mmgrant s natonalty Regonal locaton Industral sectors Causes for lqudaton Indvdual characterstcs of the mmgrant entrepreneur Models for duraton data Theoretcal background: A bref overvew Parametrc models of the hazard rate Why should I choose the Gompertz-Makeham model? Where should I attach the covarates? Emprcal results Results for the human captal endowment Results for the socal captal endowment Dfferences n survval among the mmgrant entrepreneurs Lmtaton of the study on Upper Bavara Concluson 129

10 X 5. A DYNAMIC MODEL OF BEHAVIOUR CHANGE: HOW FAST DO IMMIGRANT ENTREPRENEURS ADJUST THEIR BELIEFS? Extended Abstract Introducton How mportant s behavour change for entrepreneural success? Former studes on the learnng context n entrepreneural ventures What makes my theoretcal formulaton unque? Structure of ths chapter The theoretcal model of entrepreneur s behavour change Specfcaton of the theoretcal model Theoretcal robustness of the model Are there alternatve nterpretatons of autoregressve effort? Incorporatng observable characterstcs What can we learn from belef adjustng? Concluson THE IMPACT OF HOMOPHILY ON ENTREPRENEURIAL PERFORMANCE: CASE STUDY OF HAMBURG CITY Extended Abstract Introducton Homophly as a basc organsng prncple Studes of homophly across the twenteth century Types of relatonshps among ndvduals The salent dmensons of gender and natonalty The mpact of homophly on entrepreneural performance Employee customer homophly Workplace homophly Entrepreneur suppler homophly Research desgn of the case study Hamburg cty Desgn of the random sample How representatve s the drawn sample? Patterns of mmgrant entrepreneurshp: descrptve analyss Year of enterprse establshment and age of entrepreneur Educaton and German language sklls Volume of sales by country of orgn and ndustral sector Employment structure at the workplace Co-natonal economc relatonshps 180

11 XI 6.6 Emprcal results for the homophly mpact on the entrepreneural performance Determnants of entrepreneural performance: constructon of varables Entrepreneur s captal endowment and economc performance Homophly and entrepreneural performance Lmtaton of the case study Concluson CONCLUDING REMARKS The determnants of nclnng towards entrepreneurshp The success of mmgrant entrepreneurs to Germany Whch factors extend the survval of enterprses? How fast do mmgrant entrepreneurs adjust ther belefs? Do brds of a feather flock together and perform better? Contrbuton of my research MATHEMATICAL AND TECHNICAL APPENDIX Mathematcal appendx Dervaton of optmal effort and equaton (5.10) Proof of equaton (5.14) Techncal appendx Questonnare desgn General questons wth regards to the enterprse The preparaton of the enterprse establshment The consultng pror to enterprse establshment The fnancng of the enterprse establshment The obstacles wth regards to the German authorty The problems subsequent to the enterprse establshment The employment ssues The entrepreneur s personalty and performance Retrospect REFERENCES Cted lterature Law texts and data sources Law Texts Data Sources 240

12 XIII COMMONLY USED SYMBOLS AND ABBREVIATIONS SYMBOLS a, b, c Vectors of parameters α, β, γ, δ, λ, υ ( ) Vectors of parameters c, c Cost functon of entrepreneur at tme t t E Ε t Φ ( ) f ( ), F ( ) Wage/Salary employment The expectatons operator The dstrbuton functon of the standard normal The densty and dstrbuton functons of a random varable h0 ( t ) The baselne hazard rate at tme t h ( t ) I The hazard rate of entrepreneur at tme t A bnary observed ndcator varable: equal to one f ndvdual s self-employed, otherwse zero * I An unobserved bnary ndcator varable: the probablty ndvdual chooses to be self-employed I t Invested effort of entrepreneur at tme t I Invested effort of entrepreneur at tme t 1 t 1 I L n Ω t p t Entrepreneur s level of dslke workng beyond certan pont The lkelhood functon Number of ndvduals n the sample The nformaton set of entrepreneur at tme t True unobserved underlyng productvty of entrepreneur at tme t p ˆt π t S Sgnal of unobserved productvty of entrepreneur at tme t Observed operatng proft of entrepreneur at tme t Self-Employment as occupatonal choce

13 XIV 2 σ θ t t T U ( ) u, W, X, Z Varance of a stochastc regresson dsturbance term Margnal operaton costs of entrepreneur at tme t Tme The number of tme perods A cardnal utlty functon Stochastc regresson dsturbance term Vectors of observable characterstcs INDEXES j t Subscrpt ndexes an ndvdual Subscrpt ndexes an occupaton, usually self-employment versus wage/salary employment Subscrpt ndexes a pont n tme ABBREVIATIONS AuslG CEEC EEA EU GewO GSOEP GZR IfM ML NACE OLS ZfT Germany s Foregners Act, German Abbrevaton Central and Eastern European Countres European Economc Area European Unon Trade, Commerce and Industry Regulaton Act, German Abbrevaton German Soco-Economc Panel Central Regster of Trade, Commerce and Industry, German Abbrevaton Insttute for Medum-Szed Busness Research, German Abbrevaton Maxmum Lkelhood Estmaton Method Classfcaton of Economc Actvtes n the European Communty Ordnary Least Square Method Centre for Studes of Turkey n Essen, German Abbrevaton

14 XIV LIST OF TABLES CHAPTER TWO Table 2.1: Dstrbuton of Immgrants n Germany by Country of Orgn n Percentage of the Total Foregn Populaton, Table 2.2: Dstrbuton of Immgrants by Federal States n Percentage of the Total German Populaton, Table 2.3: Dstrbuton of Economcally Actve Immgrants by Occupatonal Status n Percentage of the Immgrant Labour Force, Table 2.4: Self-Employment by Varous Natonaltes n Thousand and n Percentage, Table 2.5: Dstrbuton of Immgrant versus German Founders by Number of Employees Engaged n Percentage, CHAPTER THREE Table 3.1: Selected Characterstcs of Self-Employed and Salared Immgrants n Germany 59 Table 3.2: Estmaton Results on the Propensty to Self-Employment: Immgrants n Germany, 1984 (Logt Models) 65 Table 3.3: Estmaton Results on the Propensty to Self-Employment: Immgrants n Germany, 2000 (Logt Models) 66 CHAPTER FOUR Table 4.1: Natonalty of the Frst Ffteen Immgrant Founders n Upper Bavara, Table 4.2: Survval Performance of Companes Establshed by European Immgrants n Years, Table 4.3: Survval Performance of Immgrant and German Founders by Admnstratve Dstrcts n Years, Table 4.4: Composton of Data Accordng to Industral Sector, Table 4.5: Survval Performance of Immgrant and German Founders by Industral Sectors n Years, Table 4.6: Causes for Lqudaton n Absolute Numbers and n Percentage of Total Lqudatons,

15 XV Table 4.7: Composton of Immgrant and German Founders at Enterprse Establshment by Varous Age-Groups, Table 4.8: Impact of Human Captal on the Survval Performance of Immgrant Entrepreneurs n Upper Bavara 113 Table 4.9: Impact of Industry-Specfc Human Captal on the Survval Performance of Immgrant Entrepreneurs n Upper Bavara 118 Table 4.10: Man Characterstcs of the Generated Clusters n Upper Bavara 121 Table 4.11: Impact of Share of Foregn Populaton on the Survval Performance of Immgrant Entrepreneurs n Upper Bavara 125 Table 4.12: Impact of Natonalty on the Survval Performance of Immgrant Entrepreneurs n Upper Bavara 128 CHAPTER SIX Table 6.1: Dstrbuton of the Employment Structure by Sze-Classes n Percentage 166 Table 6.2: Dstrbuton of the Establshed Immgrant Enterprses by Industral Sector167 Table 6.3: Dstrbuton of the Establshed Immgrant Enterprses by Natonalty 169 Table 6.4: Year of Enterprse Establshment and Age of Entrepreneur by Country of Orgn 171 Table 6.5: Receved Educaton n Germany by Country of Orgn n Percentage 172 Table 6.6: Vocatonal Educaton by Country of Orgn n Percentage 174 Table 6.7: Vocatonal Educaton by Industral Sectors n Percentage 175 Table 6.8: Volume of Sales Structure n Percentage 178 Table 6.9: Number of Employees by Country of Orgn and Industral Sector 178 Table 6.10: Defnton of Varables Selected 182 Table 6.11: OLS Estmaton of the Regresson Equaton (6.1) 188 Table 6.12: OLS Estmaton of the Regresson Equatons (6.2) and (6.3) 192 Table 6.13: OLS Estmaton of the Regresson Equatons (6.4) and (6.5) 195

16 XV LIST OF FIGURES CHAPTER TWO Fgure 2.1: Resdent Populaton n the Federal Republc of Germany by Natonalty n Thousand Inhabtants, Fgure 2.2: Dstrbutons of Immgrant Labour Force, Dependent Employment, Self- Employment and Unemployment n Thousand, Fgure 2.3: Dstrbuton of Immgrants Start-Ups by Natonalty, Fgure 2.4: Dstrbuton of Start-up Founders by Immgrants versus Germans Sector n Percentage, Fgure 2.5: Dstrbuton of Start-Ups by Immgrant s versus German s Fundng Structure n Percentage, CHAPTER FOUR Fgure 4.1: Survval of Enterprses n Upper Bavara, Fgure 4.2: Survval of German and Immgrant Enterprses, Fgure 4.3: Dstrbuton of Immgrant and German Entrepreneurs at Enterprse Establshment by Age 94 Fgure 4.4: Emprcal Hazard Rate of Immgrant and German Enterprses, Fgure 4.5: Illustratons of the Gompertz-Makeham Model for Covarates Attached to the Three Vectors 106 Fgure 4.6: Survval Performance of Enterprses by Varous Founders Age Groups, Fgure 4.7: Survval Performance of Immgrant and German Enterprses by Varous Age-Groups, Fgure 4.8: Survval Performance of Immgrant Enterprses by Age-Groups and Industral Sectors, Fgure 4.9: Survval Performance of German Enterprses by Age-Groups and Industral Sectors, Fgure 4.10: Survval of Immgrant Enterprses by Foregn Populaton n the Regon,

17 XVI Fgure 4.11: Survval of Immgrant Enterprses n Cluster One by Share of Foregn Populaton 122 Fgure 4.12: Survval of Immgrant Enterprses n Cluster Three by Share of Foregn Populaton 123 Fgure 4.13: Survval of Immgrant Enterprses n Cluster Four by Share of Foregn Populaton 124 CHAPTER FIVE Fgure 5.1: The Dynamc Model of Entrepreneur s Behavour Change 139 CHAPTER SIX Fgure 6.1: Average Years of Schoolng Receved n Germany and Language Sklls 173 Fgure 6.2: Volume of Sales Structure by Country of Orgn n Thousand Euros 176 Fgure 6.3: Volume of Sales Structure by Industral Sector n Thousand Euros 177 Fgure 6.4: Predomnant Employment of Co-Natonals n Percentage of the Respectve Country of Orgn 179 Fgure 6.5: Orgn of Employees, Customers, and Supplers 181 CHAPTER SEVEN Fgure 7.1: Estmated Gompertz-Makeham Hazard Rate of Immgrant and German Enterprses n Upper Bavara,

18 1 1. Introducton 1.1 Relevance of the subject mmgrant entrepreneurshp By the end of the twenteth century, Europe had evolved nto a great magnet for mllons of mmgrants dsplaced from ther homelands by poltcal and economc crcumstances and at the same tme attracted by sustanable economc development, lberal democraces and the socal polces of the majorty of Western European countres. Wth the recent growth of the new mmgrant populaton n the emergng post-ndustral urban economes, mmgrant self-employment as an effectve form of entrepreneurshp s no longer smply a research subject relegated to strctly hstorcal nterest, nor s t the eptome of the Amercan dream for mmgrants and natves alke. Whle busness ownershp and self-employment may be rsky undertakngs, they offer an ntrnsc ncentve by affordng economc agents a sense of ndependence, hgher self-esteem and lfe satsfacton. Entrepreneurshp as such not only njects new dynamsm nto an economy, but t s also of great mportance for the economc wealth and the future economc development of a partcular country. It s also a sgnfcant element n combatng unemployment and welfare dran through job creaton, at the very least for the self-employed themselves. Entrepreneural actvtes serve further as a route of economc advancement and socal moblty for most of the successful mmgrant groups n ther new host countres. In addton to the varyng human captal, the venturng behavour of mmgrants depends to a great extent on the characterstcs of the labour market n the country of settlement as well as on the type of mmgrant s resdence place (urban and rural). The effects, therefore, are lkely to shft over tme as mmgrants feature new experences and acqure new sklls n the local market. Interdependences between locaton and natonalty specfc factors such as dvson of responsbltes, relgon, gender specfc roles due to country of orgn, mght mpact the entrepreneural actvtes of mmgrants. In ths sense, I completely dsagree wth the most mgraton and labour market models whch tend to assume that mmgrants are unsklled labour (O Rourke and Wllamson, 1999); n ths way they underestmate the dynamc component of the human and socal captal formaton. Although Germany was among the dstngushed countres acceptng mmgrants (the so-called guest workers ), self-employment actvtes n Germany are stll very low

19 2 n comparson to the flourshng mmgrant entrepreneurshp n the Unted States (US) and other countres wth a hgh proporton of mmgrants. Recently, nascent mmgrant enterprses show that a growng busness culture exsts n Germany, and ths n turn has attracted the government s attenton to ensure ts support. In ths context, t s noteworthy that after a long perod of declne the proporton of the labour force that s self-employed has ncreased snce the mddle of the 1970s n several Western countres, ncludng Germany. As a result, on the one hand almost every twelfth entrepreneur n the Federal Republc of Germany s not a German ctzen, and on the other hand every tenth mmgrant ventures hs or her own economc subsstence and establshes a busness. Moreover, whle durng the last ten years the number of German enterprses ncreased by 14.5 per cent, the number of mmgrant-owned ventures n Germany rose by 75.0 per cent, and the trends are stll upwards (Lecht and Luber, 2002). As a consequence, the group of self-employed mmgrants has ganed mportance both n an economc and a poltcal sense, and the mmgrant entrepreneurshp has attracted the attenton of many socal scence researchers due to the fact that Germany s facng the problem of ncreasng unemployment and economc stagnaton at the same tme. On the other hand, nstruments are needed to obtan fscal, socal, nformatonal and/or educatonal polcy measures to mprove the effcency n the market of mmgrant entrepreneurs. Market effcency s mproved whenever the number of successful startups ncreases and/or the number of unsuccessful start-ups decreases. The determnants of entrepreneural start-ups and success by mmgrants to Germany can serve as these nstruments. 1.2 Objectve of the thess Despte the cumulatng lterature on mmgrant entrepreneurshp and so-called ethnc enclaves 1 n general, there are only prelmnary answers to questons such as why mmgrants to Germany establsh own busnesses and engage n self-employment, and on the other hand, whch are the drvng factors leadng to ther economc success. One mght argue that t s a combnaton of ndvdual attrbutes, for nstance human, socal and cultural captal, and opportunty structure regardng the host country, whch 1 The ethnc nche or enclave theory was frst developed by Wlson and Portes (1980) n ther study of the Cuban economy n Mam. Accordng to ths theory, the success of mmgrant entrepreneurshp les n ther very solaton from the market. Ths solaton protects them from the competton of natve busnesses, and provdes good and servce opportuntes to new mgrants who would not be able to ntegrate nto the manstream labour market. The current consensus seems to be that the enclave hypothess s both redundant and msguded (Werbner, 2001).

20 3 facltates or hnders the development of mmgrant entrepreneurshp (L, 2001). In other words, due to restrcted opportuntes n the open market, some mmgrants nclne towards busness venturng to take advantage of the mmgrant enclave. I only partally agree wth ths vew as t apples to stuatons where large mmgrant concentratons have produced what many scholars have referred to as enclave economy. However, there exst varous types of mmgrant entrepreneurshp and self-employment actvtes that need to be consdered. In the contrast, the conjecture of the neo-classcal human captal theory mples that mmgrants are a self-selected group of ratonal ndvduals who are wllng to undertake rsks pursung the objectves of maxmsng ther lfetme earnngs and mprovng ther lves. They are charactersed by a strong ncentve to nvest n human captal and have the nner drve to succeed n the host country s labour market. By vrtue of ther wllngness to assume the rsk of mgraton, both pecunary and psychc, and undertake ths new and often rsky venture they become the frst entrepreneurs 2. In other words, mmgrants as rsk takers are more dynamc and nherently more prone to nclne towards self-employment compared wth any other group. For nstance, mmgrants have hgher self-employment rates than natves n North Amerca (see Yuengert, 1995, for the US and L, 2001, for Canada). Yuengert (1995) nvestgates the determnants of these dfferences and fnds that mmgrants from countres wth larger self-employment sectors have hgher self-employment rates. Mgrants n the US cluster more n hgh-tax states, and encounter greater opportuntes for tax deductons and avodance as entrepreneurs than as salared employees. Hs study s not supportve to the ethncty enclave hypothess. In the feld of economcs, the prevalng framework s that of ncome choce (Lucas, 1978). More specfcally, an mmgrant chooses between self-employment and salared work based on the monetary rewards of hs partcular choce. Ths thess s supported by varous emprcal studes on mmgrant assmlaton. For nstance, Borjas s (1986) research on the self-employment experence of mmgrants n the US shows that not only do self-employed mmgrants have hgher annual ncome than salared workers, but they also have hgher ncome than comparable self-employed natve workers. Ths lne of research s extended by Lofstrom (2002), who fnds substantal dfferences between mmgrant workers and self-employed mgrants n 2 In ths context, an entrepreneur s an ndvdual who organses, operates, and assumes the rsks of a busness venture by defnton.

21 4 earnngs and educatonal attanment. He concludes that entrepreneurs have a better educaton and earn more than other workng mmgrants. However, besdes the drve for fnancal rewards, ndvduals mght choose selfemployment as a correctve measure to occupatonal msmatch or as an opton for ndependence and psychologcal mprovement of ther self-worth. For mmgrants, one mght argue that mpedments to well-pad jobs and to upward occupatonal moblty as well as unemployment and dscrmnaton n the labour market mpel them to undertake the self-employment opportunty. In ths context, Clark and Drnkwater s fndngs (1998) suggest that self-employment s an escape from dscrmnaton n the pademployment sector for mmgrants n Great Brtan. Brtan s non-whtes suffer an earnngs dsadvantage n self-employment as well as that n pad-employment, whch has been documented. Indeed the dsadvantage, relatve to whtes, s greater n selfemployment. Ther analyss mples that ths dfferental n earnngs cannot be explaned by dfferences n human captal endowment, but rather s the result of how these endowments are rewarded. A dearth of both emprcal and theoretcal evdence s noted on mmgrant entrepreneurshp n Europe and especally n Germany. Germany s known to have a comparatvely low rate of self-employment, but mgrants exhbt an even lower rate despte the fact that self-employed mmgrants reach earnngs party wth self-employed natves, and earn a premum of 30 per cent over mmgrant workers n the blue-collar category (Constant, 1998). Hence, t s unclear to me why n a country wth a relatvely hgh unemployment rate and rather nsttutonalsed labour market entry, one does not observe more self-employment among mmgrants. Ths stuaton, for nstance, could be explaned to a certan extent by the start-up specfc human captal constrants faced by prospectve mmgrant entrepreneurs n Germany. In ths context, my frst research objectve s to hghlght emprcally the entrepreneural behavour of varous mmgrant groups n Germany. In partcular, my target s to provde evdence to the queston: whch factors contrbute to the observaton that some mmgrants have a hgher propensty to engage n entrepreneural actvtes than others do? In other words, whch soco-economc characterstcs accelerate the decson-makng process wth regard to mmgrant self-employment? Venturng a new enterprse and beng successful as an entrepreneur n a new economc and socal envronment after a certan perod of tme are two congregatonal matters. Unfortunately, a large proporton of enterprses do not survve as dentfable

22 5 unts beyond ther frst few years, and only a small proporton acheves sgnfcant growth. As the postve mpact of the human and socal captal nvestments on the venture s performance has been repeatedly confrmed n the exstng entrepreneurshp lterature n general, my second objectve s to answer the queston: do nvestments n human and socal captal enhance the survval of enterprses establshed by mmgrants? Based on the fndngs that companes founded by mmgrants compared to those of natves n Germany survve on average shorter (see my conference paper, Fertala, 2004), I develop a theoretcal model explanng how fast mmgrant entrepreneurs adjust ther belefs, whch was so far not done. More precsely, ssues such as to what degree do entrepreneurs rely on past experence when makng decsons about ther busness ventures, and to what extent do they utlse new nformaton about ther venture's performance to learn about ther true (but unknown) abltes and tradng envronment, I explore n theoretcal context. Encouraged by the results of Baten (2001, b, c), I also contrbute to data collecton on companes establshed by sx dfferent mmgrant groups n the cty of Hamburg, and test the effect of the smlar-to-me hypothess 3 on the economc performance. The answers of the above-stated questons mply an answer to the underlyng composte questons: What are the determnants of successful mmgrant entrepreneurshp n Germany? Overall, my research contrbutes to scant, both emprcal and theoretcal, evdence of mmgrant entrepreneurshp n the Federal Republc of Germany. 1.3 Postonng n the scentfc feld As other behavoural dscplnes such as socology and socal psychology are concerned wth entrepreneurshp as well, t would be nave not to nclude ther frutful scentfc results n the analyss. I consder some of the common results, but at the same tme, I do not wsh to assert that I, as an economst, am n a poston to address well the psychologcal approaches to entrepreneurshp. Therefore, my thess can be postoned as an economc one wthn the feld of socal scences. Wthn the feld of economc research, my dssertaton project can be seen as mcroeconomcs as opposed to macroeconomcs. The central unt s the ndvdual 3 Byrne (1971) proposed the smlar-to-me hypothess accordng to whch, ndvduals rate other people more postvely the more smlar they are to themselves or the more smlar the ratng expert beleves they are.

23 6 mmgrant entrepreneur who s compared to other mmgrant as well as natve entrepreneurs. I do not study the fracton of mmgrant entrepreneurs n a specfc country and year, and compare t to fractons n other countres and years. However, ndcatons of the macroeconomc envronment are ncorporated as explanatory factors for ndvdual behavour. Regardng the area of mcroeconomcs, the approach s rather labour marketorented than busness-orented: I focus on the entrepreneur s occupatonal choce and success rather than on the enterprse s performance. Nevertheless, enterprse related varables are consdered n my research as explanatory varables for mmgrants entrepreneural success. Fnally, someone who expects only case studes and qualtatve dscussons mght be dsapponted, as my thess s orented towards emprcal analyss and favours to a great extent a rgorous mplementaton of the appled econometrc technques. 1.4 A defnton of successful entrepreneurshp and measurement ssues The problem of defnng the word entrepreneur and establshng the boundares of the feld entrepreneurshp has not been solved yet (Bruyat and Julen, 2001). My frst and most pressng task, therefore, s to defne mmgrant entrepreneurs and entrepreneurshp for the purpose of my dssertaton. Unfortunately, ths happens to be one of the most challengng and ntractable tasks faced by researchers workng n the feld. There s a prolferaton of theores, defntons and taxonomes of entrepreneurshp whch often conflct and overlap, resultng n confuson and dsagreement among researchers and practtoners about precsely what entrepreneurshp s (Parker, 2002). For nstance, consder the followng llustratve and abbrevated vewpont. In appled econometrc work, labour economsts often equate entrepreneurs wth the self-employed, on the grounds that self-employment fulfls the entrepreneural functon of beng rsk-bearng resdual clamants. However, others are of the opnon that ths defnton s too broad, clamng that only busness owners who co-ordnate factors of producton, n partcular, those who employ workers, are really entrepreneurs. Conversely, others thnk the economst s defnton s too narrow, because t excludes entrepreneurshp n the corporate and socal spheres. Then there are those steeped n the Schumpeteran tradton who argue that entrepreneurshp s charactersed prmarly by the ntroducton of new paradgm-shftng nnovatons. Others agan have emphassed psychologcal trats and atttudes supposedly pecular to entrepreneurshp. When t comes to the

24 7 subject matter mmgrant entrepreneurshp, the task becomes even more complcated as addtonal dmensons are nvolved n the dscusson. Are only ndvduals foundng enterprses who were not born n the host country, n partcular n Germany, mmgrant entrepreneurs? And so the lst of theores, defntons and taxonomes of entrepreneurshp goes on Who s an mmgrant entrepreneur? Gven the above-addressed problems along wth the not yet establshed boundares of the feld entrepreneurshp, wthn the course of my study, I defne the mmgrant entrepreneur as follows: () an entrepreneur s someone who ndcates ether that he has establshed a busness venture or has acqured a (famly) busness alone or wth a group of partners; or () an entrepreneur s someone who ndcates hmself to be selfemployed n an ncorporated versus unncorporated busness. 4 Addtonally, I operatonalse the mgraton component wthn the entrepreneurshp feld ether by country of orgn, f avalable for the data appled n the emprcal analyss, or by holdng non-german ctzenshp n the common case. The selecton of these defntons s motvated by ther avalablty n German data, and on the other hand they allow for the possblty of a plausble comparson to other emprcal mcro-orented studes of mmgrant entrepreneurshp. I have readly to admt that the above-gven as well as other defntons of an mmgrant entrepreneurshp are not perfect. In realty, the dfference between an entrepreneur and non-entrepreneur does not clearly exst. There s rather a contnuum of labour market postons stretchng from totally non-entrepreneural to heavly entrepreneural. Therefore, t s dffcult to defne a cut-off pont on ths contnuum such that an mmgrant s consdered an entrepreneur to one sde of the pont and not to the other. The concept tself s not that unformly and undmensonally defned. By utlsng the above defntons, we crcumvent the problem of havng to decde whether an mmgrant s labour poston s suffcently entrepreneural and label hm as an entrepreneur. In representatve surveys or case studes, respondents ndcate themselves whether they are entrepreneurs or not. In ths respect, the defntons are 4 De Wt (1993) uses a smlar defnton for self-employed persons and entrepreneurs alke, whose approprateness he motvates n detal (pp. 2-3). Addtonally, as the emprcal analyss n the chapter three s based on the German Soco-Economc Panel (GSOEP), I focus on ts defnton that n turn does not dffer from that of the German Federal Statstc Offce, whch reads: self-employed ndvduals are ndvduals that earn no wage or salary, but derve ther ncome by exercsng ther professon or busness on ther own account and/or for ther own rsk.

25 8 subjectve ones as well. The possblty s acknowledged that two ndvduals mght have dentcal labour market postons, but one turns out to be an entrepreneur and the other does not. Fnally, to cut through a paralysng and ultmately frutless debate, and to acheve consstency, I adopt the followng conventon n my dssertaton. At the conceptual level, the terms mmgrant entrepreneur and mmgrant entrepreneurshp wll be used; at the emprcal level, where ssues of measurement and estmaton are nvolved, I use the closest approxmaton to the manfestaton of mmgrant entrepreneurshp that appears to be sutable, as I have already defned above How should we measure entrepreneural success? Determnants of and, as a result, approprately derved measures of entrepreneural success, regardless of the defnton of success, can be found n the hstory of the entrepreneurshp thoughts, the most relevant of whch I wll brefly overvew n the followng subchapter. Say states that success n entrepreneurshp requres qualtes such as judgement, perseverance and a knowledge of the world as well as of busness (Say, 1971). In addton, success requres knowledge of the ndustry and the occupaton gathered through experence. But an entrepreneur may also fal wthout any fault of hs own, whle ths chance of falure depends on good luck and general busness condtons. Marshall s (1930) successful entrepreneur has command over general and specalsed abltes, and also over captal and good fortune. Accordng to hs vew, general ablty s essental to attan success n any pursut. It depends on famly background, educaton and talent. Specalsed ablty nvolves vast knowledge of a specfc trade as well as leadershp qualtes. Addtonally, an entrepreneur who possesses own captal surely has an advantage when establshng and runnng a busness. Fnally, good fortune s also mportant for the Marshallan entrepreneur. The functon of Schumpeter s entrepreneur (1934) s to nnovate and frms whch cease to nnovate wll not survve for a long perod of tme. Successful nnovaton requres leadershp, and on the other hand success n entrepreneurshp demands strong and scarce motvatons to nnovate pror to engagement n an entrepreneural endeavour. Success as a Knghtan entrepreneur requres the power of effectve control (1921), and t calls, furthermore, for self-confdence and the dsposton to act on one s

26 9 own opnon. An entrepreneur should be venturesome and have foresght. The demand for ablty to forecast vares wth ndustral sectors dependng on the tme length of the producton process and on the varablty of consumer wants the product satsfed; the more basc the wants, the more stable and predctable they are. A successful entrepreneur should also have superor manageral ablty, and belef n hs own good luck. Consderng the debate on determnants of successful entrepreneurshp from the hstorcal pont of vew, I derve varous measures of success, whch are utlsed n my dssertaton. Frst, the longer an mmgrant entrepreneur survves as such, the more successful he s. More precsely, the tme span of survval before extng the entrepreneural state voluntarly or nvoluntarly characterses the busness success of an mmgrant entrepreneur. 5 Second, I use the extent to whch mmgrant entrepreneurs utlse new nformaton about ther venture's performance to learn about ther true (but unknown) abltes and tradng envronment. In other words, the faster the process of ncorporatng new nformaton than relyng on past experence, the more successful the entrepreneur s. Thrd and last n the analyss, I employ the nomnal volume of sales per employee as operatonal measure, whch takes nto account the personnel an entrepreneur has to control, and thus, ndcates hs effcency. 1.5 The structure of the thess The remander of my dssertaton can be splt nto three major parts, whch are organsed as follows. Chapter two dscusses the basc legal condtons for the mmgrants labour partcpaton, n partcular, the legal precondton for establshng an enterprse and beng self-employed as an mmgrant to Germany. Addtonally, I analyse the labour market ntegraton and the development trends n a long-term perspectve. The dea s to provde the reader wth an understandng of the opportuntes exstng n the host country, and on the other hand to hghlght the actvtes of mmgrants from a labour economc standpont. Chapter three develops an emprcal dscrete-choce model to fnd the determnants, whch nfluence the propensty of mmgrants n Germany to engage n self-employment or to reman a salared employee. An ndvdual s defned to be 5 A voluntary ext does not necessarly mean a lack of entrepreneural success.

27 10 wllng to nclne towards self-employment f the valuaton of beng self-employed versus remanng n wage/salary employment (or any unemployed), for otherwse dentcal stuatons, s postve. In other words, one s wllng to start whenever entrepreneurshp s seen as the best avalable career opton. Consequently, the wllngness depends on both ndvdual preferences for the specal features of selfemployment as well as on the avalable outsde optons. Therefore, categores of observed varables, whch potentally mpact ths decson-makng process, are psychologcal, human captal and stuatonal varables. Chapters four, fve and sx nvestgate the success of mmgrant entrepreneurs n Germany measured by the ndcatons outlned n the prevous subchapter. More precsely, Chapter four quantfes ndvdual-specfc determnants of entrepreneurshp duraton. I estmate a parametrc hazard model to predct the survval chance of an mmgrant establshng an own busness. In Chapter fve I propose a theoretcal jont model of entrepreneural adjustment of belefs, effort, and performance, whch lnks all of these phenomena together n a unfed way. Addtonally, I provde an econometrc formulaton of the model that enables to estmate the extent to whch entrepreneurs explot new nformaton when adjustng ther expectatons, and n ths sense, to derve concluson about ther success as entrepreneurs. Thereafter, Chapter sx explores the process of workng team composton wthn a specfc company, and test the effect of the smlar-to-me hypothess on the mmgrants entrepreneural performance measured by volume of sales per employee. Fnally, Chapter seven summarses the man fndngs and conclusons of the precedng chapters, and draws together some suggestons for future research where our understandng of partcular ssues s especally ncomplete.

28 11 2. Immgraton to Germany and Labour Market 2.1 Extended abstract Do mmgraton polcy, labour market structure and legal regulatons nfluence mmgrants employment behavour, and n partcular, ther self-employment actvtes? My man am n ths chapter s to outlne brefly the mgraton polcy pursued by the German government over the last 50 years, and to llustrate how t mpacted the demographc and labour market dynamcs, whch I see as a major necessty for the further understandng of the phenomenon mmgrant entrepreneurshp. My man results confrm that nsttutonal characterstcs of the host country do mpact the labour market behavour of mmgrants to Germany. Most noteworthly, mmgrants from EU countres of orgn account for much hgher self-employment rates, whle those from non-eu countres prefer beng employees due to addtonal formal obstacles assocated wth the enterprse establshng procedure. 2.2 Introducton By the end of the mllennum, the mmgrant populaton n Germany has rsen to more than ten per cent, makng Germany a de facto mmgraton country. The recrutment ban, and on the other hand, the resdence authorsaton regulatons for mmgrants n Germany led to a mnmsaton of the nter-country fluctuatons and an ncreasng tendency towards permanent settlement among the foregn populaton. Addtonally, the ntroducton of a general legal framework for famly reunfcaton resulted n an enormous change to the poltcal and economc dedcaton of mmgrants to Germany. They started, for nstance, establshng own busnesses and nclnng towards entrepreneural actvtes. The self-employment structure of mmgrants n Germany has changed snce the 1970s. 6 Over the last decade, the absolute number of self-employed foregners developed more dynamcally than the number of self-employed Germans. The stock of self-employed foregners ncreased by 23.6 per cent between 1992 and 2001, whle the rse n self-employment was 17.0 per cent (Täubner, 2003). Overall, I beleve that the dosyncrases of the mmgraton and the naturalsaton laws n Germany have shaped consderably both the quantty (flow and stock) and qualty 6 In the early 1970s only 40,000 mmgrants were regstered as self-employed, and ther busnesses were ted to restaurants or to caterng to the needs of ther compatrots (Constant and Shachmurove, 2003).

29 12 (human captal endowment) of the mmgrants to Germany, and thus, ther labour market actvtes. 2.3 Managng mgraton n Germany: hstorcal background In the nneteenth century, Germany was prmarly a country of net emgraton and t remaned untl the 1950s the major source of mmgrants to the Unted States (Martn, 1997). More precsely, out of the 66 mllon mmgrants who arrved n the US between 1820 and 2000, over seven mllon were from Germany, followed by sx mllon from Mexco and fve mllon from Italy. Snce the late 1950s, Germany has experenced massve mgraton comparable to the level of the Frst Amercan Great Mgraton of the early 1900s, and has become one of the most mportant destnatons for mgrants from all over the world. In ths sense, t has been smlar to other ndustralsed countres such as the US, France and the Unted Kngdom, but strangely, on the contrary the entrepreneural actvtes of mmgrants have stayed behnd those n the countres ndcated above. The post-world War II mmgraton hstory of Germany s charactersed by the nature of ts parallel flows: ethnc Germans returnng from abroad, and foregners wth non-german ancestry, the so-called guest workers. 7 In ths subchapter, I hghlght the essental developments n the guest worker recrutment polcy as a sgnfcant determnant of the recent trends n the mmgrant entrepreneurshp n Germany. In addton, I dscuss brefly the mgraton stuaton of ethnc Germans after the fall of the ron curtan n the 1990s, the asylum polcy of the German government, and I conclude wth the new guest workers programmes and the ntroducton of green cards From emgraton to guest workers recrutment The second half of the 1950s was charactersed by the fact that the number of vacant postons exceeded those of regstered unemployed, and the employers requested permsson to recrut foregn workers. Hermann (1992), for nstance, concluded that there was no noteworthy dscusson of alternatves to employng guest workers, and socal scence analysts cte four reasons why recrutng guest workers seemed to be the rght decson. Frstly, the German labour force was shrnkng for demographc and 7 The word guest worker s the lteral translaton of the German word Gastarbeter and reflects the noton that those mmgrants were nvted to work n Germany, yet they were not expected to become permanent resdents.

30 13 related reasons n the early 1960s, ncludng a delayed baby boom, the greater avalablty of educatonal opportuntes that kept more adolescents n the school system as well as better pensons that prompted earler retrements. For famly poltcal reasons, alternatves to attractng guest workers, such as encouragng more women to seek jobs, were not pursued. Secondly, there was a reluctance to rsk what was perceved to be a fragle economc recovery on rsky mechansaton and ratonalsaton substtutes to foregn employees (Kndleberger, 1967). Trade unons dd not contest mportng foregn labour n that perod of full employment after securng a promse that foregners would be treated equally, and thus would not underbd German employees. Thrdly, Europe was unfyng n any case, and Germany had agreed that Italans and other European Communty (EC) natonals would have autonomy of movement rghts 8 after 1 January 1968 (Böhnng, 1972). Wth Italans soon able to come as they wshed to, Germany consdered t was smply regulatng unlaterally the rate at whch EC employees would arrve soon by any means. Fourthly, the early 1960s provded Western Europe wth a pecular economc envronment that lasted longer than assumed. Germany and other European natons n the 1960s had undervalued ther currences n a world of fxed exchange rates, so that domestc and foregn captal was nvested to manufacture commodtes for export markets. The ncentve to nvest and create employment n Germany was sgnfcantly hgh. Consequently, Amercan multnatonals poured enormous captal nto Europe, and on the contrary Germany had lttle encouragement to nvest and provde jobs abroad. However, guest worker recrutment expanded faster and grew larger than antcpated. After the Berln Wall closed the door from East to West Germany n 1961, blateral recrutment agreements were sgned wth seven non-ec countres: Greece, Morocco, Portugal, Span, Tunsa, Turkey, and Yugoslava. 9 The core of those agreements ncluded the enrolment of guest workers almost exclusvely n the ndustral sector, for vacances wth few qualfcaton requrements. Hence, that polcy pursued a dual ratonale: preventng settlement on the one hand, and exposng the largest possble number of mmgrant workers to the ndustral sector on the other hand. 8 Autonomy of movement n the area of the EC means that an employee from any member state may enter another, reman for up to three months n search of a vacancy, and then, f the mgrant fnds employment, the host country has to grant any necessary work and resdence permt. 9 Greece became a member of the EC n 1981, and Span and Portugal became members n Greece had to wat untl 1988 before ts ctzens got full freedom of movement rghts, and Span and Portugal, scheduled to have freedom of movement rghts, n 1993, got moblty rghts one year early n 1992.