Originally Published - 1 Feb 1997
A major new study says that simply having a little start up cash, rather than possesing an entrepreneurial personality, is the key factor in making people into successful entrepreneurs. The study, entitled What Makes an Entrepreneur? by University of Warwick Economics Professor Andrew Oswald, has just been published in the prestigious American economics journal Journal of Labor Economics. It concludes that being able to get hold of a spare 5000 pounds sterling doubles someone's chance of being able to run their own business. Psychological factors matter much less.
Professor Oswald concludes that lack of capital holds back millions of British people who would like to run their own businesses. An individual's psychology or personality, by contrast, is not a key influence on entrepreneurship. The article is jointly written with a British economist, David Blanchflower, who now teaches at Dartmouth College in the United States.
The two researchers followed all the babies born in Britain in the week beginning March 3rd, 1958. Out of eleven thousand who can be traced, 1300 of them are now adults running their own business in some kind of self-employment. They discovered three things:
- The results of a battery of psychology tests administered when the people were children do not give any useful predications about who ends up running their own business.
- Inheriting or being given cash is a good predictor of who sets up a business.
- Self-employed Britons are happier than the employed. This is consistent with the idea that there many frustrated potential entrepreneurs, who have never been able to access start up funds.
Professor Oswald says that:-
"This analysis, which follows large numbers of Britons from birth, may tell us how to encourage more entrepreneurship in this country. Surprisingly, genes and psychology may not be much to do with it. Getting hold of some money, early on, seems crucial."
Western governments are keen to see more people become self- employed and run businesses. But the forces that affect the supply of entrepreneurship are widely viewed as poorly understood.
The authors' point out that entrepreneurial projects are, by their nature, difficult for bankers to assess. Hence those bankers are likely to require collateral, and that in turn holds back potential entrepreneurs. Even some good ideas will be blocked. The researchers reach four main conclusions:-
- The receipt of an inheritance or gift greatly increases a typical individual's probability of later being self-employed. This emerges from National Child Development Survey data. The early-inheritance affect is found both when the people were age 23 and again at age 33. It is an especially good predictor among the younger group (perhaps because older people have other ways to acquire capital).
- International data reveal that surprisingly large numbers of people in the industrialised countries say they would prefer to be self-employed.
- Faced with the questions "Why did you not become self- employed?", the most common survey response given by a random sample of workers in the British Social Attitudes survey was to cite shortage of capital and money.
- Other data indicate that most small businesses were begun not with bank loans but with own or family money, that individual entrepreneurs felt they had needed most help with finance, and that the single biggest concern of potential entrepreneurs was with where to obtain capital.
For further details please contact:
Professor Andrew Oswald
Department of Economics
University of Warwick, Coventry CV4 7AL, UK
Tel: 01203 523510 (Office), 01367 860005 (Home)