Hard cash underpins the spirit of independence

24th April, 2010

Energy. Ambition. Confidence. Patience. Fearlessness. All these traits are associated with that mysterious quality of “entrepreneurialism”. Self-made men, such as Richard Branson and Alan Sugar, seem to exude different qualities from ordinary wage slaves.

But that is not the way things look to economists. It’s not that we are blind to the very idea that personality matters; it’s just that the evidence suggests a different story.

Andrew Oswald of Warwick University and David Blanchflower, a former member of the UK’s monetary policy committee, have assembled an intriguing picture of entrepreneurialism. They conclude that it is less a matter of character and more a matter of opportunity. The first piece in the puzzle is that many people who aren’t entrepreneurs claim that they wanted to be. Across Europe, 10-20 per cent of workers are typically self-employed, but 30-60 per cent say they’d like to be.

Oswald and Blanchflower also looked at evidence on happiness and concluded that the self-employed tend to be happier. In short, people say they want to be self-employed, and are more satisfied when they are self-employed, but frequently do not take the plunge.

Is this just because they lack that essential entrepreneurial spirit? Probably not. Oswald and Blanchflower originally intended to study the psychological make-up of entrepreneurs. That work went nowhere, because it seems that there is nothing distinctive about the psychological make-up of entrepreneurs.

What matters instead is capital. In surveys, would-be entrepreneurs identify lack of finance as the key obstacle. And in a clever piece of analysis, Oswald and Blanchflower compared people who had recently received a substantial bequest with those who had not. They found that such bequests – essentially twists of fate – were good predictors of whether people became entrepreneurs. They were especially influential on the decisions of people to become entrepreneurs early in life, presumably because older people have other ways to acquire funding.

Another substantial influence on entrepreneurship seems to be family background. People with at least one self-employed parent are two or three times more likely to be self-employed themselves.

Recent research by Simeon Djankov, Yingyi Qian, Gérard Roland and Ekaterina Zhuravskaya examines entrepreneurs in Brazil, with similar results. Unlike Oswald and Blanchflower, the Brazilian research looked at entrepreneurs who employed at least six people. Yet, again, they find that family background matters. If you have entrepreneurs in your extended family, you are much more likely to become one yourself.

There is some evidence that personality matters, although the data do not always reinforce the entrepreneurial stereotype. Djankov and his colleagues find that entrepreneurs tend to be more patient and more intelligent. There was no evidence that entrepreneurs were more confident than non-entrepreneurs, and entrepreneurs actually seem to be more averse to taking risks. Separate research by Djankov and different colleagues suggests that low taxes and efficient regulations are hugely important in encouraging the overall prevalence of new businesses.

The lesson I draw is that entrepreneurs learn from example and can be helped by social connections. The business environment – whether access to capital or freedom from too much bureaucracy – matters a great deal, too.

But the entrepreneurial spirit? Don’t look too hard for it. It may not exist.

Also published at ft.com.

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