Emergence and Survival of New Businesses Contributions to Management Science www.springer.com/series/1505 A.Scholl M.J.Thannhuber BalancingandSequencing TheIntelligentEnterprise ofAssemblyLines 2005.ISBN978-3-7908-1555-9 1999.ISBN978-3-7908-1180-3 C.Clarke E.Canestrelli(Ed.) AutomotiveProductionSystems CurrentTopics andStandardisation inQuantitativeFinance 2005.ISBN978-3-7908-1578-8 1999.ISBN978-3-7908-1231-2 M.LütkeEntrup W.Bühler/H.Hax/R.Schmidt(Eds.) AdvancedPlanning EmpiricalResearch inFreshFoodIndustries ontheGermanCapitalMarket 2005.ISBN978-3-7908-1592-4 1999.ISBN978-3-7908-1193-3 U.M.Löwer M.Bonilla/T.Casasus/R.Sala(Eds.) InterorganisationalStandards FinancialModelling 2006.ISBN978-3-7908-1653-2 2000.ISBN978-3-7908-1282-4 G.Reepmeyer S.Sulzmaier Risk-sharing Consumer-OrientedBusinessDesign inthePharmaceuticalIndustry 2001.ISBN978-3-7908-1366-1 2006.ISBN978-3-7908-1667-9 C.Zopounidis(Ed.) 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EconomicsandManagement HartmutHübner ofFranchisingNetworks TheCommunicatingCompany 2004.ISBN978-3-7908-0202-3 2007.ISBN978-3-7908-1928-1 K.Jennewein JanM.Deepen IntellectualPropertyManagement LogisticsOutsourcingRelationships 2004.ISBN978-3-7908-0280-1 2007.ISBN978-3-7908-1916-8 Oliver Falck Emergence and Survival of New Businesses Econometric Analyses With13Figuresand31Tables Physica-Verlag ASpringerCompany Dr.OliverFalck IfoInstituteforEconomicResearch Poschingerstr.5 81679München Germany [email protected] LibraryofCongressControlNumber:2007929535 ISSN1431-1941 ISBN978-3-7908-1947-2Physica-VerlagHeidelbergNewYork Thisworkissubjecttocopyright.Allrightsarereserved,whetherthewholeorpartofthematerial is concerned, specificallythe rights of translation, reprinting, reuseof illustrations, recitation, broadcasting,reproductiononmicrofilmorinanyotherway,andstorageindatabanks.Duplication ofthispublicationorpartsthereofispermittedonlyundertheprovisionsoftheGermanCopyright LawofSeptember9,1965,initscurrentversion,andpermissionforusemustalwaysbeobtained fromPhysica-Verlag.ViolationsareliabletoprosecutionundertheGermanCopyrightLaw. Physica-VerlagisapartofSpringerScience+BusinessMedia springer.com ©Physica-VerlagHeidelberg2007 Theuseofgeneraldescriptivenames,registerednames,trademarks,etc.inthispublicationdoes notimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. Production:LE-TEXJelonek,Schmidt&VöcklerGbR,Leipzig Cover-design:WMXDesignGmbH,Heidelberg SPIN12025022 42/3180YL-543210 Printedonacid-freepaper Preface The topic of new business formation and survival has generated extensive empirical research, covering numerous countries as well as varying time periods. However, there is still little evidence for business formation proc- esses in Germany due to a lack of comprehensive data on new businesses. In this book, a unique dataset – provided by the Institute for Employment Research (IAB) - consisting of the population of all businesses with at least one employee under social security in Germany in all private indus- tries is used to analyse the determinants of new business formation and survival in Germany. In doing this, this book contributes to the literature of international entrepreneurship research. The chapters of this book are partially based on papers previously pub- lished. The permissions to reprint these papers granted by Taylor & Fran- cis and by Springer Science and Business Media are gratefully acknowl- edged. The chapters can be read independently of each other. Chapter 3 is based on joint work with Stephan Heblich, chapter 4 on joint work with Michael Fritsch, and chapter 5 on joint work with Udo Brixy and Michael Fritsch. I profited enormously from these fruitful coop- erations. Many people have provided further helpful comments. I especially thank John Addison, Lutz Bellmann, Gerhard Kleinhenz, as well as my colleagues and referees of the papers on which some chapters are based. The single chapters of this book were mainly written during my work at the Research Unit for Economic and Social Policy headed by Gerhard Kleinhenz at the University of Passau. I am grateful, that Gerhard Klein- henz made this book possible by providing a generous print subsidy. Furthermore, I want to thank Deborah Willow for providing careful ed- iting and proofreading, and Angelika Wacker and Ingrid Grübl for their continuous support. Finally, Barbara Fess and Gabriele Keidel at Springer have been tre- mendously helpful and encouraging in realising this book project. Oliver Falck Contents Preface.......................................................................................................V 1 Introduction, Summary, and Conclusions............................................1 1.1 Basic Conditions in Germany: A Stylized Review...........................1 1.2 Data and Methods of Analysis..........................................................2 1.3 Growth and Employment Effects of New Business Formation........4 1.4 Determinants of the Emergence and Survival of New Businesses...6 1.5 Summary and Policy Conclusions....................................................8 2 The Effects of New Business Formation on Industry Growth..........11 2.1 Introduction....................................................................................11 2.2 Long-Run Effects of New Business Formation on Growth............12 2.3 Data.................................................................................................13 2.4 Estimation Procedure......................................................................20 2.5 Results............................................................................................21 2.6 Discussion and Policy Conclusions................................................25 3 New Businesses and Regional Development.......................................29 3.1 Introduction....................................................................................29 3.2 “New” Location Factors.................................................................31 3.3 Regional Growth Regimes..............................................................36 3.4 Findings..........................................................................................47 3.5 Implications....................................................................................49 4 New Business Formation by Industry over Space and Time............51 4.1 Introduction....................................................................................51 4.2 Hypotheses and Main Empirical Findings......................................53 4.3 Overview of New Business Formation in Germany.......................56 4.4 New Business Formation by Industry over Space and Time..........63 4.5 Multivariate Analysis......................................................................65 4.5.1 Estimation Procedure...............................................................65 4.5.2 Variables..................................................................................67 4.6 Results............................................................................................74 VIII Contents 4.7 Conclusions....................................................................................81 5 New Business Survival by Industry over Space and Time................85 5.1 Introduction....................................................................................85 5.2 Hypotheses.....................................................................................86 5.3 Data and Measurement Issues........................................................90 5.4 The General Survival Pattern..........................................................92 5.5 Multivariate Analysis.....................................................................98 5.5.1 Variables and Estimation Procedure........................................98 5.5.2 Results...................................................................................101 5.6 Conclusions..................................................................................106 6 Micro-Econometric Survival Analysis of New Businesses..............109 6.1 Introduction..................................................................................109 6.2 Theoretical Framework and Hypotheses......................................110 6.3 The Survival Pattern of New Businesses in Germany..................114 6.3.1 Data.......................................................................................114 6.3.2 Liabilities in a Business’s Life..............................................116 6.3.3 Explaining the Liability of Young Adults.............................117 6.4 Estimation Procedure....................................................................118 6.5 Multivariate Analysis...................................................................120 6.5.1 Variables................................................................................120 6.5.2 Results...................................................................................123 6.6 Conclusions..................................................................................125 References...............................................................................................127 Index.......................................................................................................137 1 Introduction, Summary, and Conclusions 1.1 Basic Conditions in Germany: A Stylized Review Germany’s job market is in a deep crisis.1 Economists are in general agreement that unemployment in Germany is not the result of economic cycles but is, instead, rooted in structural causes. The original German model of social market economy (Soziale Marktwirtschaft) emphasized the principle of subsidiarity and thus self-help. However, the development of unions and employer associations, and the resulting actions of political parties interested in the patronage of such entities, have changed the origi- nal German model into one of an all-embracing welfare state that guaran- tees individuals their acquired standard of living. This evolution is partly due to Germany’s history of being a protected industrial society where la- bor agreements could be negotiated between employers and employees that promised noncompetitive wages regardless of the employees’ produc- tivity, a situation particularly true for unskilled and semi-skilled employ- ees. Employers profited from conflict-free relations with their employees and thus from relatively few strike days. Individuals who remained unem- ployed due to non-market-clearing wages and excessive individual reser- vation wages did not suffer much, if at all, due to the elaborate welfare state that guaranteed them a high standard of living. In fact, there was very little incentive to seek full- or even part-time employment. The world has changed dramatically in the last couple of decades, how- ever. Globalization is on the steady increase due to improvement of trans- portation infrastructure and communication, increasing international capi- tal mobility, and the collapse of the Eastern Bloc, as well as the reduction of trade barriers (e.g., the European Union). Enterprises are increasingly under pressure from international competition. Companies use their con- nections and networks to shift labor-intensive production to areas of the globe that can offer competitive wages, a situation that has had an espe- 1 As the following analyses widely refer to West Germany (except for chapter 3), this short review will not focus on East-German-specific problems. 2 1 Introduction, Summary, and Conclusions cially strong impact on low-skill jobs in the home country. In contrast, at least in Germany, capital-intensive production is not affected by shifting employment to low-cost countries. Rather than cheap labor, a highly de- veloped infrastructure and a great degree of legal certainty are more impor- tant and beneficial to capital-intensive production. However, in the wake of the eastern enlargement of the European Union, even these factors will not be able to keep business in Germany as its neighbor states will also be able to guarantee these conditions. Under these circumstances, it is no surprise that the promotion of busi- ness start-ups has been the focus of economic policy. The goal is to en- courage employment-effective macroeconomic development. It is believed that innovative business start-ups, especially in the service sector, will cre- ate employment for those individuals whose jobs have been lost, particu- larly the secondary-sector employees. In addition to these direct job- creating effects, innovative business start-ups are expected to induce growth impulses (supply-side effects) due to the intensified competition they will engender, thus leading to efficiency gains and more innovation (cf. Fritsch and Mueller 2004; Fritsch et al. 2005). It is the emergence and survival of these new businesses that is the sub- ject of this introductory chapter, which proceeds as follows. Section 1.2 provides a short description of the data and the methods of analysis applied in this book. Section 1.3 summarizes the growth and employment effects of new business formation. Chapter 2 and 3 will treat these effects more extensively. Section 1.4 gives the main findings of chapters 4 through 6 on the determinants of the emergence and survival of new businesses. Sec- tion 1.5 summarizes the main theses of this book and draws some policy conclusions. 1.2 Data and Methods of Analysis Direct, comprehensive data on new business formation are unavailable in Germany. However, it is possible to extract this sort of information from the German Social Insurance Statistics of the Federal Employment Ser- vices.2 These statistics began to be collected in West Germany in 1973 and are derived from public health, pension, and unemployment insurance re- ports. Each business with at least one employee subject to social security receives a unique, permanently assigned code number; the code number is thus an identifier for the business. Thus, a code number occurring for the 2 See Fritsch and Brixy (2004) for a description of this data source. 1.2 Data and Methods of Analysis 3 first time in the file signals the emergence of a start-up business. A disap- pearing number represents a closure. On the basis of these code numbers, the German Social Insurance Statistics can be reformulated as an estab- lishment file, allowing analysis of business dynamics in the economy. The empirical data thus derived include two categories of new entities: new firm headquarters and new subsidiaries. For the purposes of this book, the term “new business” will be used to describe both types. The information on new businesses and their survival drawn from the establishment file of the German Social Insurance Statistics can be com- plemented by data from a sample called the establishment panel provided by the Institute for Employment Research (IAB).3 This data consists of the results of annual surveys of businesses that have been carried out in West Germany since 1993. The businesses are selected for survey according to the principle of optimum stratification of the random sample. The prob- ability of a business being selected increases with its size. Thus, the IAB establishment panel contains relatively more larger-scale businesses com- pared to their proportion in the entire population of businesses with at least one employee subject to social security. The surveyed businesses are an- nually given a catalogue of questions concerning their characteristics, such as number of employees and their qualifications, revenue, and investments. This catalogue guarantees the panel character of the survey. Additional sets of questions on, for example, working-time flexibility, overtime, and working-time accounts are included in selected annual catalogues. The analyses presented in this book widely deal only with West Ger- many4 for two reasons: (1) reliable data for East Germany are available only for a much shorter timespan and (2) East German business formation is driven by transformation processes and other factors that are substan- tially different from the factors that drive business start-up in West Ger- many. The data is structured as a time-series cross-section, or panel, which must be analyzed using advanced econometric methods that are capable of accounting for the heterogeneity between cross-sections and the dynamics over time. Many econometric methods have been developed for such a task, ranging from simple panel correction of the standard errors in stan- dard estimation methods like ordinary least squares to survival time analy- sis to panel distributed lag models and sophisticated panel error correction models.5 3 See Bellmann (1997) for a description of this data source. 4 Except for chapter 3. 5 For a nontechnical overview, see Beck (2001).