Latent entrepreneurship across nations

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Abstract

The paper studies latent entrepreneurship across nations. There are three main findings. First, large numbers of people in the industrial countries say they would prefer to be self-employed. Top of the international ranking of entrepreneurial spirit come Poland (with 80% saying so), Portugal and the USA; bottom of the table come Norway (with 27% saying so), Denmark and Russia. Second, for individuals the probability of preferring to be self-employed is strongly decreasing with age, while the probability of being self-employed is strongly increasing with age. Third, we show that self-employed individuals have noticeably higher job satisfaction than the employed, so people's expressed wish to run their business cannot easily be written off as mistaken. We speculate on why so much entrepreneurial spirit lies dormant.

Introduction

It is sometimes argued that nations differ in their underlying entrepreneurial spirit. The United States, in particular, is often singled out as a country with an inherently large number of people who are keen to start firms. Europe, it is sometimes asserted, lacks entrepreneurial individuals. While some politicians argue that Eastern Europe is in particular need of people who wish to run their own businesses, there is especially little information about the potential supply of entrepreneurs in that region of the world.

Few economists have attempted to measure entrepreneurial spirit across countries. We use newly available data to create an international league table of what might be thought of as the simplest measure of entrepreneurial drive. There are obvious difficulties in attempting to measure something so subtle, but the topic appears important.

We focus in the paper on self-employment. This is the simplest form of entrepreneurial activity. Such people have made a job for themselves, and often for others. Medium-size companies tend to have grown from a small business organized by a self-employed man or woman. Self-employment also has the advantage that it can be defined fairly consistently across countries. Although there are people inside giant corporations who may be entrepreneurial on certain definitions, it is not easy to know how to identify them.

The paper is also interested in microeconomic patterns. It examines the micro-econometric structure of both the preference for, and the attainment of, self-employment across nations. Hence, two kinds of probit equations are estimated using data on individuals. One is for being self-employed; the other is for answering yes to a question asking people whether they would prefer to be self-employed. There are strong differences in the age structure of the two equations.

Some measure of potential or latent entrepreneurship is needed. The paper measures entrepreneurial spirit by using the question:

“Suppose you were working and could choose between different kinds of jobs. Which would you prefer:

being an employee

being self-employed?”

It is possible to think of many objections to this wording (from an economist's point of view it is vague on the constraints under which people are assumed to make their hypothetical choice), but it has the merit of simplicity. Moreover, because the wording is chosen deliberately to be consistent across countries, and our concern is to produce international comparisons, some of the question's drawbacks are reduced. If there are biases in the question's wording, those biases may be similar across nations and thus still give useful cross-country information.

The question is asked in a newly released International Social Survey Programme data set. Information on more than 20 countries is available.

Individuals in ISSP are chosen randomly. They were interviewed face-to-face in a period spanning 1997 and 1998.

For the analysis reported here, the sample size is approximately 25,000 individuals across 23 nations. Blanchflower (2000) and OECD (2000) look at related international self-employment statistics for OECD countries. But information on self-employment preferences in the 1990s has until now been sparse.

Section snippets

Means

Table 1 contains the mean responses by country.

To fix preliminary ideas, it is clear that an economist would not expect a large proportion of people to answer in favour of self-employment. The vast majority of workers (almost nine out of 10, in most nations) in the industrial countries are conventional employees: they draw a pay check from a firm that someone else began. There is one small exception. In heavily agricultural sectors, and nations, the numbers of self-employed individuals tend to

Micro-econometric patterns

It is natural to look a little more closely at the data. To set the scene, Table 2 presents the simplest kind of self-employment probit equation. We report estimated derivatives from these models that can be interpreted as the effect on the probability of being self-employed of an infinitesimal change in each independent continuous variable and the discrete change in the probability for dummy variables. Table 2 takes as its sample all those in work (of any kind) in the ISSP data for 1997. Here

Are people simply mistaken to prefer the idea of self-employment?

A traditional economist might reason in the following way. One possible explanation for the high numbers in Table 1 is that people are simply mistaken. Perhaps they have an unrealistically rosy view of what it is like to be running one's own business rather than have the comparative security of being an employee. One reason economists are often wary of subjective data is because people are sometimes thought to be unable to judge what will be in their own interest.

But Table 4 provides counter

One possible interpretation

Why, then, are there so many frustrated entrepreneurs (especially among the young) in economies of this sort?

It is not easy to know what lies behind the paper's numbers, but recent research leads us to one possibility. Economists have amassed considerable evidence that potential entrepreneurs are held back by lack of capital.

Blanchflower and Oswald (1998), for example, look at three kinds of evidence. First, the receipt of an inheritance or gift seems to increase a typical individual's

Conclusions

This paper is an attempt to study entrepreneurial spirit across nations. Its approach is a simple one. The paper uses the answers to a survey question about people's desire to be self-employed. Using random samples of individuals, large differences are found across 23 countries. Poland tops the international ranking of latent entrepreneurial spirit. Norway is lowest.

The paper also estimates separate probit equations for being self-employed and preferring to be self-employed. They reveal

Acknowledgements

For their helpful ideas, we thank the editor and Marc Cowling, Chris Pissarides and David Storey.

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