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Starting a business doesn’t make you an entrepreneur: study

Tuesday, 21 January 2014 | By Myriam Robin

Starting a small business doesn’t make you an entrepreneur, according to a study by two Swedish academics from the country’s Research Institute of Industrial Economics.


Instead, Magnus Henrekson and Tino Sanandaji found, the higher the rate of self-employment in a country, the lower the rate of billionaire entrepreneurs. Countries with high incomes, low taxes, venture capital investment and low regulatory burdens were more likely to have game-changing entrepreneurs, but less likely to have high rates of self-employment.


Many academics and business leaders do not view “mum and dad businesses” as entrepreneurship, the authors note. However, self-employment, a legal instrument, is typically seen as a proxy for entrepreneurialism, particularly in the academic literature on the subject.


Henrekson and Sanandaji wanted to test whether this was a reasonable assumption, and so scoured the Forbes billionaires rich list for 966 entrepreneurs who became rich by founding new firms. These, the authors write, are “high-impact entrepreneurs”, who shook up their industries and amassed a fortune in the process. Individuals who made their fortune by being hired by then start-ups, like Microsoft’s Steve Ballmer, were not counted as entrepreneurs.


After adjusting for factors like country size and wealth, the researchers then looked for a correlation between the presence of such entrepreneurs, and the rate of self-employment in a country. They found a correlation, but it went the opposite way to what you would expect. Countries with lots of successful entrepreneurs in fact had lower rates of self-employment, and not the other way round.


The authors offer a clue as to why this can happen.


“Former JC Penney employee and retail franchise operator Sam Walton founded Walmart in 1962, when his idea for establishing discount stores in small town America was rejected by his employer. By 1985 Sam Walton was the richest man in America according to the Forbes Magazine ranking,” they write. “Walmart grew to be the largest private employer in the world, and has been estimated to have contributed to a non-negligible share of productivity growth in recent years.


“The Walmart story illustrates the impact that creative entrepreneurship can have on self-employment rates. Its growth was accompanied by, and indeed required, the replacement of thousands of smaller mom-and pop retail operations. Between 1963 and 2002, when the U.S. population increased by 53%, the number of single-store retailers in the U.S. declined by over half.


“This pattern is not unique to Walmart; firms such as Home Depot, Gap, Ikea, H&M and Amazon have similarly reduced the number of self-employed in their industry. Nor is the process unique to the retail sector. Starbucks replace operations that before their entry, and in other countries where they have not yet entered, are managed by a multitude of self-employed. Even the growth of firms such as Intel, Microsoft and Google, which do not directly compete with a large number of small businesses, reduce self-employment. In their case the mechanism is offering better career prospects for employees, thus raising the opportunity cost of self-employment.


“It is natural that entrepreneurship reduces the small-business share of employment, since each successful entrepreneurial venture results in an increase in the number of large firms.”


A better measure of entrepreneurialism, the authors suggest, is the number of billionaires in a country.


This article first appeared on SmartCompany.