Skip to main content
SpringerLink
Log in

The experience of the founder and self-employment duration: a comparative advantage approach

  • Published:
Small Business Economics Aims and scope Submit manuscript

Abstract

This paper investigates how the initial experience of a founder affects self-employment duration in a competing risks setting. The analysis uses survey data that provide new perspectives on the role of the founder’s experience. The analysis concentrates on the importance of a balanced skill set for self-employment duration. The results show that most self-employed individuals find themselves unemployed upon ending their self-employment. Firm-level characteristics are less significant in explaining self-employment duration, while experience and motivation appear to be driving forces for self-employment longevity. The findings support the importance of combined practical experience and adequate skills. Having broad experience combined with competence in sales/business is one of the most important factors for self-employment duration. Contrary to most other studies, the results show that previous self-employment experience is associated with early exits.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. An exception can be found in Jovanovic (1979, 1982).

  2. Skills may degenerate due to a lack of practice in working conditions characterized by a high division of labor or they may simply become redundant if the opportunity to participate in (highly specialized) technological change is missed. Bruce and Schütze (2004) show that experience in self-employment has limited value with respect to wages, and Hyytinen and Rouvinen (2008) argue that self-employment in this context tends to be unemployment in disguise. However, Price (1988) notes that human capital decay mainly applies to highly skilled individuals. In fact, on average, people who enter self-employment are usually better qualified than the average, which is also true for the population of formerly unemployed founders observed here.

  3. For example, the variation may be induced on the basis of changes in the price policy or production technology.

  4. Müller (2009), for example, suggests an inverse sigmoid pattern of an individual’s human capital development for academic knowledge following entry into the employment market, which implies a sigmoid depreciation function.

  5. Note that the results presented by Hinz and Jungbauer-Gans (1999) and Pfeiffer and Reize (2000) indicate only a few differences between those start-ups that received support in the form of bridging allowances as compared with ordinary self-employment entries.

  6. The bridging allowance was part of active labor market policy until 2006. During the time span under observation the program provided a 6-month payment of unemployment benefits during the setting up of a business. It was only granted if the business concept passed an evaluation by a competent authority. For further details, see Caliendo and Kritikos (2009).

  7. The survey consisted of two waves with a reminder. In 500 cases we were unable to find a valid mailing address. The applications were identified on the basis of document research in six regional employment offices of the administrative district of Lüneburg in summer 2001. The survey was conducted in fall 2002. We also conducted a database inquiry to proof the accuracy of the initially collected data and to update mailing addresses.

  8. In particular, based on these restrictions, we expect to reduce biases related to retrospective answers and to reduce problems concerning selectivity in survey participation.

  9. Note that, due to data confidentiality concerns, it was not possible to carry out more in-depth analysis to investigate issues of sample selection and representation. As far as possible, descriptive analyses show that males had a lower participation rate than did females and that the participation probability increased slightly with age and income. We did not find a bias concerning the spatial representation of the region.

  10. For previous results concerning the balancing profile of nascent entrepreneurs, see Wagner (2003, 2006). In the 2003 study, Wagner shows that about 31% (12%) of the nascent entrepreneurs had changed their occupations once (twice or more). Wagner (2006) reports that, on average, nascent entrepreneurs are experienced in about 3.6 (distinct) occupational fields/types of competence.

  11. The share of founders who started their business with higher assets (over €25,000) was less than 24%, and around 38% started with less than €5,000. Almost 28% started with employees (28%). Wießner (2001) and Hinz and Jungbauer-Gans (1999) reported a higher proportion of founders who started with low assets (<€5,000) (Wießner: 52%; Hinz and Jungbauer-Gans: 45%).

  12. Taylor (1999) found a share of 48% for exits into wage work (male, cohort of 79); Johansson (2000) found a share of 39%. Cueto and Mato (2006) did not report the shares of exits by type. In fact, their reported results allow no clear interpretation: 10% finished their self-employment period with a transition into wage work, and 52.5% terminated the self-employment voluntarily. Andersson and Wadensjö (2007) only reported the share of exits into wage work and other types of exits. They found the second lowest share of exits into wage work for the unemployed population.

  13. Survival and hazard functions account for right-censoring of the event of interest. In detail, the survival function estimates (for each time interval) the probability that those who have survived to the beginning will survive to the end. Therefore it is defined as the product of the conditional probabilities of surviving each time interval. Accordingly, the hazard function is defined as the risk of a failure event in a given time interval conditional on the population that is at risk of failure in that given time interval.

  14. Reize (2004): 75% after 2 years; Wießner (2001): 85% after 2 years; Caliendo and Kritikos (2007): 68% after 2 years.

  15. We also used hazard model specifications which use a different logic to describe time-dependent events. The most flexible form is the Cox proportional-hazard function (Cox 1972). However, the proportionality assumption does not hold for the data used here (Schoenfeld 1981).

  16. We also tested other model specifications (log-logistic, gamma distributions). The lognormal performs best using the BIC criteria for model selection (Rodriquez 2005). In addition, we also used a flexible specification of the sigma parameter and tested for the existence of unobserved heterogeneity (Guiterrez 2002). However, the test statistics did not reveal statistical significance for unobserved heterogeneity or superiority of the flexible sigma specification.

  17. Results of other model specifications (e.g., including the field of occupation and position and models with reduced sets of attributes) are not displayed. However, the results of the displayed models are quite comparable to those not displayed. It may be noted that introducing the attributes (en bloc) “master craftsman,” “manager,” and “high pull motivation” yields a statistically significant model improvement based on the likelihood ratio test statistics (the basic model includes all standard individual characteristics such as “age,” “gender,” “formal schooling” and controls for firm-specific information). Finally, including “commercial competence,” “broad skills,” “self-employment experience,” and “product experience” also yields significant model improvements at the common level of statistical significance. More detailed information on these estimation results and on alternative model specifications is available from the author.

  18. For example, problems may arise in cases in which exits into unemployment increase the individual’s re-employment chances, because this increases their chance of becoming subject to potential interventions on the part of active labor market policy. Therefore, the observed exits risks (employment and unemployment) may be less valid for identification of distinct exit states which harm the interpretation related to the competing risks setting.

  19. This may also include the ability to identify unsuccessful projects at an earlier point in time.

  20. It is interesting to note that studies that are not focused on start-ups from a position of unemployment report a negative effect of an unemployment spell on the expected self-employment duration (Taylor 1999; Johansson 2000).

  21. See Brüderl et al. (1992), Cressy (1996), and Parker and van Praag (2006) for the nexus between financial endowment and the founder’s qualification.

References

  • Addison, J. T., Centeno, M., & Portugal, P. (2004). Reservation wages, search duration and accepted wages in Europe. Bonn: Institute for the Study of Labor. (IZA-Discussion Paper, No. 1252).

  • Andersson, P., & Wadensjö, E. (2007). Do the unemployed become successful entrepreneurs? A comparison between the unemployed, inactive and wage-earners. International Journal of Manpower, 28, 604–626.

    Article  Google Scholar 

  • Arias, O., & Khamis, M. (2008). Comparative advantage, segmentation and informal earnings: A marginal treatment effects approach. Bonn: Institute for the Study of Labor. (IZA-Discussion Paper, No. 3916).

  • Bates, T. (1990). Entrepreneur human capital inputs and small business longevity. The Review of Economics and Statistics, 72, 551–559.

    Article  Google Scholar 

  • Benz, M., & Frey, B. S. (2008). Being independent is a great thing: Subjective evaluations of self-employment and hierarchy. Economica, 75, 362–383.

    Article  Google Scholar 

  • Block, J., & Sandner, P. (2009). Necessity and opportunity entrepreneurs and their duration in self-employment: Evidence from German micro data. Journal of Industry, Competition and Trade, 9, 117–137.

    Article  Google Scholar 

  • Bruce, D., & Schütze, H. J. (2004). The labor market consequences of experience in self-employment. Labour Economics, 11, 575–598.

    Article  Google Scholar 

  • Brüderl, J., Preisendörfer, P., & Ziegler, R. (1992). Survival chances of newly founded business organizations. American Sociological Review, 57, 227–242.

    Article  Google Scholar 

  • Brüderl, J., & Schüssler, R. (1990). Organizational mortality: The liabilities of newness and adolescence. Administrative Science Quarterly, 35, 530–547.

    Article  Google Scholar 

  • Caliendo, M., & Kritikos, A. S. (2007). Start-ups by the unemployed: Characteristics, survival and direct employment effects. Bonn: Institute for the Study of Labor. (IZA-Discussion Paper, No. 3220).

  • Caliendo, M., & Kritikos, A. S. (2009). Die reformierte Gründungsförderung für Arbeitslose: Chancen und Risiken. Perspektiven der Wirtschaftspolitik, 10, 189–213.

    Article  Google Scholar 

  • Carrasco, R. (1999). Transitions to and from self-employment in Spain: An empirical analysis. Oxford Bulletin of Economics and Statistics, 61, 315–341.

    Article  Google Scholar 

  • Chandler, G. N., & Hanks, S. H. (1998). An examination of the substitutability of founders and financial capital in emerging ventures. Journal of Business Venturing, 13, 353–369.

    Article  Google Scholar 

  • Cleves, M. A., Gould, W. W., & Guiterrez, R. G. (2004). An introduction to survival analysis using stata-revised edition. College Station: Stata Corporation.

    Google Scholar 

  • Cooper, A. C., Gimeno-Gascon, J., & Woo, C. Y. (1994). Initial human capital and financial capital as predictors of new venture performance. Journal of Business Venturing, 9, 371–395.

    Article  Google Scholar 

  • Cox, D. R. (1972). Regression models and life tables. Journal of the Royal Statistical Society: Series B, 34, 187–220.

    Google Scholar 

  • Cressy, R. (1996). Are business startups debt-rationed? The Economic Journal, 106, 1253–1270.

    Article  Google Scholar 

  • Cueto, B., & Mato, J. (2006). An analysis of self-employment subsidies with duration models. Applied Economics, 38, 23–32.

    Article  Google Scholar 

  • Evans, D., & Jovanovic, B. (1989). An estimated model of entrepreneurial choice under liquidity constraints. The Journal of Political Economy, 97, 808–827.

    Article  Google Scholar 

  • Evans, D., & Leighton, L. (1989). Some empirical aspects of entrepreneurship. American Economic Review, 79, 519–535.

    Google Scholar 

  • Gimeno, J., Folta, T. B., Cooper, A. C., & Woo, C. Y. (1997). Survival of the fittest? Entrepreneurial human capital and the persistence of underperforming firms. Administrative Science Quarterly, 42, 750–783.

    Article  Google Scholar 

  • Gutierrez, R. G. (2002). Parametric frailty and shared frailty survival models. The Stata Journal, 2, 22–44.

    Google Scholar 

  • Harrington, D. (2005). Linear rank tests in survival analysis standard article. Encyclopedia of Biostatistics. doi:10.1002/0470011815.b2a11047.

  • Hinz, T., & Jungbauer-Gans, M. (1999). Starting a business after unemployment: Characteristics and chances of success: Empirical evidence from a regional German labour market. Entrepreneurship and Regional Development, 11, 317–333.

    Article  Google Scholar 

  • Holtz-Eakin, D., Joulfaian, D., & Rosen, H. S. (1994). Sticking it out: Entrepreneurial survival and liquidity constraints. Journal of Political Economy, 102, 53–75.

    Article  Google Scholar 

  • Hyytinen, A., & Ilmakunnas, P. (2007). Entrepreneurial aspirations: Another form of job search? Small Business Economics, 29, 63–80.

    Article  Google Scholar 

  • Hyytinen, A., & Rouvinen, P. (2008). The labour market consequences of self-employment spells: European evidence. Labour Economics, 15, 246–271.

    Article  Google Scholar 

  • Johansson, E. (2000). Determinants of self-employment duration—evidence from Finnish micro-data. Essays on the determinants of self-employment. Working paper of the Swedish school of economics and business administration no. 85 Helsinki.

  • Jørgensen, R. (2005). A duration analysis of Danish start-ups. Copenhagen: Centre for Economic and Business Research at the University of Copenhagen. (CEBR Discussion Paper, No. 2005-08).

  • Jovanovic, B. (1979). Job-matching and the theory of turnover. The Journal of Political Economy, 87, 972–996.

    Article  Google Scholar 

  • Jovanovic, B. (1982). Selection and the evolution of industry. Econometrica, 30(3), 649–670.

    Article  Google Scholar 

  • Kaplan, E. L., & Meier, P. (1958). Nonparametric estimation from incomplete observations. Journal of the American Statistical Association, 53, 457–481.

    Google Scholar 

  • Kremer, M. (1993). The O-ring theory of economic development. The Quarterly Journal of Economics, 108, 551–575.

    Article  Google Scholar 

  • Lancaster, T. (1990). The econometric analysis of transition data. Cambridge: Cambridge University Press.

    Google Scholar 

  • Lazear, E. P. (2004). Balanced skills and entrepreneurship. American Economic Review, 94, 208–211.

    Article  Google Scholar 

  • Lazear, E. P. (2005). Entrepreneurship. Journal of Labor Economics, 23, 649–680.

    Article  Google Scholar 

  • Lückgen, I., Oberschachtsiek, D., Sternberg, S., & Wagner, J. (2006). Nascent entrepreneurs in German regions: Evidence from the regional entrepreneurship monitor (REM). In M. Fritsch & J. Schmude (Eds.), Entrepreneurship in the region (pp. 7–34). Springer: Berlin.

    Chapter  Google Scholar 

  • Metzger, G. (2007). Personal experience: A most vicious and limited circle!? Mannheim: Zentrum für Wirtschaftsforschung. (ZEW Discussion Paper, No. 07-046).

  • Müller, K. (2009). Employment growth in newly established firms—is there evidence for academic entrepreneur’s human capital depreciation? Mannheim: Zentrum für Wirtschaftsforschung. (ZEW-Discussion Paper, No. 09-050).

  • Parker, S. C., & van Praag, M. C. (2006). Schooling, capital constraints, and entrepreneurial performance: The endogenous triangle. Journal of Business & Economics Statistics, 24, 416–431.

    Article  Google Scholar 

  • Pfeiffer, F., & Reize, F. (2000). Business start-ups by the unemployed–an econometric analysis based on firm data. Labour Economics, 7, 629–663.

    Article  Google Scholar 

  • Price, S. (1988). Unemployment and worker quality. In R. Cross (Ed.), Unemployment, hysteresis and the natural rate hypothesis. Oxford & New York: Basil Blackwell.

    Google Scholar 

  • Rauch, A., & Frese, M. (2000). Psychological approaches to entrepreneurial success: A general model and an overview of findings. In C. L. Cooper & I. T. Robertson (Eds.), International review of industrial and organizational psychology (Vol. 15, Chap. 3) (pp. 100–135). Chichester, Sussex: Wiley.

    Google Scholar 

  • Reize, F. (2004). Leaving unemployment for self-employment: An empirical study. Heidelberg: Physica.

    Book  Google Scholar 

  • Rodriquez, C. C. (2005). The ABC of model selection: AIC, BIC and the New CIC. Bayesian Inference and Maximum Entropy Methods in Science and Engineering, 803, 80–87.

  • Schoenfeld, D. (1981). The asymptotic properties of nonparametric tests for comparing survival distributions. Biometrika, 68, 316–319.

    Article  Google Scholar 

  • Silva, O. (2007). The Jack-of-All-Trades entrepreneur: Innate talent or acquired skill? Economics Letters, 97, 118–123.

    Article  Google Scholar 

  • Strotmann, H. (2007). Entrepreneurial survival. Small Business Economics, 28, 87–104.

    Article  Google Scholar 

  • Taylor, M. P. (1996). Earnings, independence or unemployment: Why become self-employed? Oxford Bulletin of Economics and Statistics, 58, 253–266.

    Article  Google Scholar 

  • Taylor, M. P. (1999). Survival of the tittest? An analysis of self-employment duration in Britain. Economic Journal, 109, 140–155.

    Article  Google Scholar 

  • Tervo, H., & Haapanen, M. (2009). Self-employment duration in urban and rural locations. Applied Economics, 41, 2449–2461.

    Article  Google Scholar 

  • Thomas, J. M. (1996). On the interpretation of covariate estimates in competing-risks models. Bulletin of Economic Research, 48, 27–39.

    Article  Google Scholar 

  • Van Praag, M. C. (2003). Business survival and success of young small business owners. Small Business Economics, 21, 1–17.

    Article  Google Scholar 

  • Wagner, J. (1994). The post-entry performance of new small firms in German manufacturing industries. Journal of Industrial Economics, 42, 141–154.

    Article  Google Scholar 

  • Wagner, J. (2003). Testing Lazear’s Jack-of-All-Trades view of entrepreneurship with German micro data. Applied Economics Letters, 10, 687–689.

    Article  Google Scholar 

  • Wagner, J. (2006). Are nascent entrepreneurs Jacks-of-All-Trades? A test of Lazear’s theory of entrepreneurship with German data. Applied Economics, 38, 2415–2419.

    Article  Google Scholar 

  • Wießner, F. (2001). Arbeitslose werden Unternehmer. Eine Evaluation der Förderung von Existenzgründungen vormals Arbeitsloser mit Überbrückungsgeld nach §57 SGB III (vormals §55a AFG). Beiträge zur Arbeitsmarkt- und Berufsforschung, BeitrAB 241, Nürnberg: Institut für Arbeitsmarkt- und Berufsforschung.

  • Williams, D. R. (2000). Consequences of self-employment for women and men in the United States. Labour Economics, 7, 665–687.

    Article  Google Scholar 

Download references

Acknowledgments

The study uses data collected within the research project “New Business Start Ups from Unemployment—Success Factors and Evaluating the Support Program implemented in accordance with Sect. 75 of the German Social Code III,” which was funded by the Ministry of Culture and Science in Lower Saxony.

Author information

Authors and Affiliations

  1. Social Science Research Centre Berlin, Berlin, Germany

    Dirk Oberschachtsiek

Authors
  1. Dirk Oberschachtsiek
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dirk Oberschachtsiek.

Additional information

Stata 10.1 was used in all calculations. Do-files and results discussed, but not reported, are available from the author. All remaining errors are my own.

Appendix

Appendix

See Tables 4, 5, and 6 and Fig. 2.

Table 4 Definition of the variables
Full size table
Table 5 Descriptive statistics
Full size table
Table 6 Table of correlations
Full size table

Rights and permissions

Reprints and permissions

About this article

Cite this article

Oberschachtsiek, D. The experience of the founder and self-employment duration: a comparative advantage approach. Small Bus Econ 39, 1–17 (2012). https://doi.org/10.1007/s11187-010-9288-1

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11187-010-9288-1

Keywords

JEL Classifications

Search

Navigation