The Small Firm Effect and the Entrepreneurial Spawning of Scientists and Engineers

Abstract

Scientists and engineers in small firms are far more likely than their large firm counterparts to enter entrepreneurship. We label this phenomenon the small firm effect and explore its origins. In particular, we identify four classes of explanations for the small firm effect--preference sorting, ability sorting, opportunity cost, and the possibility that workers in small firms develop entrepreneurial human capital--and examine the empirical evidence for each. We find that preference sorting does play a role in generating the small firm effect: small firms attract those with prior preferences for autonomy who are similarly drawn into entrepreneurship. Similarly, ability sorting plays a role: those who ultimately become entrepreneurs may be drawn first to small firms because they offer tighter pay-for-performance links and can subsequently improve their expected earnings by becoming entrepreneurs, or because the skills required for success in small firms are also valuable in entrepreneurship. Evidence suggests that although those with the very least to lose do enter entrepreneurship with greater frequency, opportunity cost has at best a modest role to play in explaining the small firm effect. Finally, we interpret evidence that prior experience in small firms predicts positive performance outcomes in the early stages of entrepreneurship as suggesting that workers in small firms may develop entrepreneurial human capital that makes them better entrepreneurs. This effect may be largest among those of high ability.entrepreneurship, employee mobility, human capital, small firms, spawning

The value of an educated population for an individual's entrepreneurship success

“…Empirical evidence abounds (Ashenfelter et al, 1999). However, they have to be remunerated accordingly by entrepreneurs so the effect on the performance of the entrepreneur's venture when employing personnel with higher levels of education is not (Haltiwanger et al, 1999, p. 97) Survey evidence strongly suggests that, in general, small and medium-sized enterprises have difficulties finding and attracting personnel with higher levels of education, among others due to the well known phenomenon of the employer size wage effect (e.g., Elfenbein et al, 2010;Schmidt and Zimmermann, 1991;Brown and Medoff, 1989), especially for workers with higher levels of education (Hollister, 2004). Thus, highly educated employees are scarce in SMEs and those entrepreneurs who are able to attract sufficient numbers of employees with higher levels of education perform better than those who do not succeed in attracting these employees (Haltiwanger et al, 1999).…”

Balanced skills among nascent entrepreneurs

“…Because small (and especially young and small) firms usually lack complex hierarchical structures and highly-specialized work places, working conditions are characterized by the opportunity for employees to conduct a variety of tasks (Parker 2009;Bublitz and Noseleit 2011;Elfenbein et al 2010). Exposure to different tasks subsequently leads to balanced skills via learning-by-doing.…”

Observations and recommendations for the women enterpreneurship in information technology

“…Studies by Burton et al (2002), Wagner (2004), Dobrev and Barnett (2005), Gompers et al (2005), Sorensen and Nanda (2013), Elfenbein et al (2010), Parker (2009) provided evidence of the importance of the workplace in the entrepreneurial process. Workplace is particularly important source of entrepreneurial influence in modern societies; therefore, the workplace becomes the setting for unexpected influences, and for the serendipitous flow of information and ideas that may spark entrepreneurial activity (Nanda and Sorensen, 2010) Even though workplace is the setting for unexpected influences, and for serendipitous flow of information and ideas that may spark entrepreneurial activity; we see less women entrepreneurs in IT sharing workplaces such as in incubation centers, teknoparks or universities in Turkey and therefore having less opportunity to increase the impact of social composition and workplace peer to the mechanics of entrepreneurship process.…”