Why do rates of entrepreneurship vary?

Why do societies vary in their rates of entrepreneurship and organizational founding? Drawing on the largest available longitudinal sample comprising 192 countries over 2001-2018, I examine the evidence in relation to several explanations, including variation in the density of established organizations, national investment in research and development (R&D), technology transfer to new companies, the quality of science, technology, engineering and math (STEM) education, venture capital (VC) availability, and governmental support and policies for entrepreneurship. Contrary to prevailing theories, there is limited empirical support for these explanations. Rather, the evidence shows that the strongest predictors of cross-national variation in entrepreneurial activity were normative, with social norms being the most strongly associated with entrepreneurialism and rates of organizational founding. This study further examines the relationship between norms and societal culture and finds that more gender-egalitarian societies and societies that value and reward performance and endorse status privileges had on average higher rates of organizational founding, net of differences in national income and economic growth. The paper discusses the implications of these findings in relation to research on the social determinants of entrepreneurship and organizational founding.

That is from a new paper by Valentina Assenova.  Let me just repeat one sentence in there, as it is one of the most important sentences in all of economics:

Rather, the evidence shows that the strongest predictors of cross-national variation in entrepreneurial activity were normative, with social norms being the most strongly associated with entrepreneurialism and rates of organizational founding.

Recommended.  Here is Assenova’s other new paper, showing entrepreneurship is correlated with higher innovation.

Via the excellent Kevin Lewis.

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Paper is gated, but if anybody finds a single mention of the term PATENT in it, I'd be surprised, and I'll voluntarily stop posting here for a month if anybody requests it.

It's like a comprehensive history of WWI that mentions every conceivable episode except the assassination of the Austro-Hungarian duke in Sarajevo. Never ceases to amaze me.

How do patents affect the rate of entrepreneurship? Increase it or decrease it? I could see it go either way.

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You keep harping about patents. Yet in one of the remaining bastions of entrepreneurship in the US, namely software and web companies, patents act as a significant brake on innovation.

Not to mention the whole bizarre "submarine patent" era exemplified by Jerome H. Lemelson, until these were finally overturned in a court judgment.

The patent office is a poster child for regulatory capture. Measuring the success of a patent office by the number of patents it issues is like measuring the success of a legislature by counting how many laws and regulations it passes.

+1

Yes, regulatory capture and rent seeking monopolies are a brake on innovation, as you say.

If you listen to venture capitalists evaluating a startup you will hear the "m" word often.

Many of my early adopter FB "friends" dropped FB altogether in favor of Instagram - which focused on one of the most important features of FB, photo sharing . Why FB was allowed to purchase Instagram without a challenge is a mystery to me.

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Assenova's second paper ("What is the Relationship between Entrepreneurship and Innovation Output? Evidence from 219 Economies over 1960-2018") mentions "patent" 80 times. From the abstract of that paper:

"The findings show that various measures of entrepreneurship, including rates of new company registration, were positively correlated with innovation within economies over time, after accounting for potential endogeneity in this relationship. Every 10 percent increase in the number of new companies registered per capita in a calendar year was associated with a 2.4 percent increase in the number of patent applications by residents and 34.6 percent increase in the value of high-technology exports per capita over the observation period."

You're on hiatus for the next month, Ray Lopez.

@Patent Troll - thanks! I will keep to my promise, starting next month. As for the rest of you, it's not important whether you agree with me that patents help innovation (even with today's imperfectly written laws), as Assenova points out, but that they are at least mentioned.

Bonus trivia: at least one famous historian of WWI failed to mention the role taxis played in the First Battle of the Marne in 1914 in WWI. It's because of the nearly 1M Allied combatants, taxis transported probably less than 1% of the total (most were carried by train). Still, regardless, since the taxis played such a prominent roll in propaganda for that battle, they should be mentioned. More here: https://www.smithsonianmag.com/history/fleet-taxis-did-not-really-save-paris-germans-during-world-war-i-180952140/

Likewise, most inventors don't make money off of their patents (another one of my beefs with present patent law; the benefits of patents largely accrue to patent attorneys and to patent owners, but mostly to society in the form of public knowledge) but use patents as morale boosters, as resume enhancers, and so on, analogous to TC's point that societal praise is what gives incentives to inventors. So patents should be mentioned in any discussion of innovation.

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Patents are for cucks.

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It's the culture stupid!

Patent protection is a necessary but insufficient condition.

Tyler was right to emphasize that one sentence, so I will do the same.

"Rather, the evidence shows that the strongest predictors of cross-national variation in entrepreneurial activity were normative, with social norms being the most strongly associated with entrepreneurialism and rates of organizational founding."

In the case of the USA, it is our individual ethos, despite it's associated pathologies, like mass murder, that drives innovation. Even the weirdest anti-social nerds like Bezos, Zuck, Dorsey, and Musk become culture heroes. We are fascinated by them because they reinforce our most precious myth - the Horatio Alger story.

Solid post, +5 internet points

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Absolutely, yes: But social norms are endogenous!

Yeah, that's the thing. Culture outweighs the economic and policy stuff they looked at, no surprise.

But what determines those norms?

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So, economics proves nurture is the way human behavior is determined?

You skipped a number of steps there.

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You can't be that dumb. OTOH ...

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https://www.youtube.com/watch?v=lHN5xMBH_go

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If this is true, then what are the social norms of underperforming regions in the US like the rust belt or coal country that work against entrepreneurship? States that get labeled as hostile against business like the blue states of NY, CA, MA, or WA seem to do better with forming new businesses. Is that due to immigration? Despite high tax rates and onerous regulation, entrepreneurs continue to flock to "You didn't build that" states.

The sectors that are innovative in those states are not regulated. California 'at will' employment rules are a boon to innovation as ideas can spread quickly throughout a sector. A successful sector creates a culture that continues to innovate.

Note that almost none of the hardware that these innovations run on are manufactured in California. The innovation culture of making things has shrunk due to onerous regulation. The culture now is to design things in the US and make them elsewhere.

Derek,

All 50 states have at will employment. Most have exceptions for public policy, as does California.

"The term at-will employment is a legal term used in the United States. This term means that an employer can terminate an employee for any reason without warning. However, an employer can not fire an employee if the reason for doing so is illegal, such as firing someone because of their gender, race, or religion.

Contracts in at-will state between employers and employees prevent the employer from pursuing a claim against the employer as a result of being fired. In other words, an employee can not sue for lost wages due to dismissal from the job, provided the dismissal was legal, as discussed above.

This law doesn’t just apply to employers, though. In at-will employment states, employees can also quit their jobs or go on strike without having to provide an explanation.

All 50 states in the U.S. and Washington, D.C. are at-will employment states. However, some states have exceptions."

http://worldpopulationreview.com/states/at-will-employment-states/

The term at-will employment is a legal term used in the United States.

All 50 states have at will employment.

If you understand 'at will' as a term of art which encompasses (1) tenure for public employees and (2) a bevy of circumstances wherein a conventicle of lawyers can second-guess the employer's judgment and impose costs on him. You want something approximating 'at will' employment (among workers not under collective bargaining agreements), allow discretionary dismissals of public employees (so long as hiring and promotion is determined by examination results) and scrap employment discrimination law.

Give me a break. Your argument is ludicrous, as you grovel for distinctions between states by defining "at will" into something else.

All states have highways, and many have country roads. And, they each have their own state flower, too.

I don’t know what Caning is going on about, but I have read about (on this blog no less) is that Californian courts have almost categorically refused to enforce non-compete clauses in employment contracts, which makes it a lot easier for an employee with a good idea to leave and start their own company without being bogged down in lawsuits.

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The taxi industry is heavily regulated but that didn't stop Uber from starting up in California. The auto industry is heavily regulated but that didn't stop Tesla from being in California. Aerospace is also heavily red-taped but that didn't stop Bezos or Musk from starting up Blue Origin or Space X on the Left Coast. The financial industry is heavily regulated but that didn't keep Paypal or Stripe away from California.

You get the idea. There is more here than we can readily see. What are those reasons? Inquiring minds what to know!

Gates and Bezos were residents of Washington state. Jobs was from San Jose. Stanford and UC Berkeley both attract brilliant students who stay after graduation. The network effect. Also, when those people at Stanford and Berkeley started companies there was abundant farmland - The Valley of the Heart's Delight - into which they could expand.

After WWII many soldiers remained in California which subsequently experienced explosive growth. It was a constellation of factors that created the economic powerhouse of the left coast. Let's not forget Asia.

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https://www.youtube.com/watch?v=JFAp3aRJ2vA

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"Rather, the evidence shows that the strongest predictors of cross-national variation in entrepreneurial activity were normative, with social norms being the most strongly associated with entrepreneurialism and rates of organizational founding."

Are there other norms besides social norms? I'm not being facetious.

Cultural norms. Personal norms. Global norms. Legal norms. Family norms. All of which differ in spots from social norms.

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In other words, water is wet.

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Yesterday being college football day, my road cycling friend and I talked about college and how much has changed since the WWII generation. I grew up in a small Southern town, where the entrepreneurs (from the WWII generation) never went to college; indeed, college was mostly limited to doctors, lawyers, and teachers. These were highly successful entrepreneurs, with businesses ranging from agriculture to mining to car or tractor dealerships to real estate development and construction to restaurants to retail to beverage distribution to road construction. If they had gone to college, would they have been such successful entrepreneurs? I'm reminded that Peter Thiel thinks young people should skip college and get on with the task of innovation.

The people most likely to succeed in college are those either able to tolerate the imposed structure of scheduled classes, assignments, and testing or those with an IQ sufficiently high to be able to compensate for deficit in those areas. Some of those high IQ creative types are either so talented, intelligent, and determined enough that they can drop out and achieve massive success. I have never met such a person. Clearly, Steve Jobs, Zuck, and Gates are in that category.

As an aside, I noticed that the people that graduated with honors were not always the most intelligent or gifted people, but rather many of them were just the most organized, focused, dedicated, and strategic planners. One way to graduate with honors is to avoid tough classes and professors and maintaining a light but sufficient workload.

Actually, the point I was raising in my comment is whether college blunts entrepreneurship.

Shame on me, I used your post to play my favorite tune.

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Tyler, have you read about the Prof Galloway's commentary on the disaster shaping up at WeWork? It is hilarious and dead-on! People have a glassy-eyed view of entrepreneurship so it's nice to hear from a former entrepreneur and investor who isn't afraid to tell it like it is. A few quotes:

"I speak from experience: if you tell a thirty-something dude he’s Jesus Christ, he’s inclined to believe you."

"We've witnessed a halving of journalists since 2008, while the number of corporate communications execs has tripled. In sum, the ratio of bullshit/spin to watchdogs has increased sixfold."

https://www.profgalloway.com/wewtf
https://www.profgalloway.com/wewtf-part-deux

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So do we have evidence that migrants assimilate to the cultural norms of the host country or evidence that the host country assimilates to the cultural norms of the migrants?

This would appear to be a multi-trillion dollar difference in the impact of immigration on both long run economic output but also global well being.

I am also interested in what sorts of things impact on these "social norms", after all the vast bulk of medical innovation comes out of the US. Such innovation saves more lives than anything else once you have vaccines and sanitation down so it would seem to be highly risky to change things in the US that might undermine the social norms that drive medical innovation.

The poison is in the dose.

If we consider a dynamical system with a forcing the transient response is, well, transient but the long term steady state is dominated by the forcing.

Consider British North America in the 17th and 18th century. The early "European" immigrants were British Protestants - English, Scots, and Irish. There were also some Dutch and Germans. The natives dominated the early settlers until a massive influx of Puritans, escaping conflict in GB leading up to the Glorious Revolution, settled around Boston. That triggered King Phillip's War, which was a turning point for the natives. From then on the forcing - relentless immigration from GB and the fertility of British North Americans caused the Northeast to become British but not Iroquois - using them as a proxy for all natives. Note that the natives were not unified in their approach to the British invasion but rather used the Brits in their intertribal conflicts, weakening all of the tribes. One final spasm during and following the Seven Years War and the native peoples cease to be a significant contributor to the culture of northeastern America at the time of the signing of the Constitution. I have deliberately left out any discussion of the south.

Our border with Mexico is really a border with Mexico and Central America. Right now it is a defacto open border and the forcings are migration from Mexico and Central America and the fertility of the migrants. The steady state will look like the forcing.

Press one for English.

As an aside, a significant portion of the current migrants from Mexico are not even literate in Spanish nor are they native speakers of Spanish - they speak indigenous languages, of which there are many.

Ironic.

It's going to be interesting.

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Texas and Utah leading the way!
https://www.mnn.com/family/family-activities/blogs/your-kids-lemonade-stand-legal

LOL. Texas legalized lemonade after making it illegal in the first place.

California and Nevada lead in this survey:

https://www.romper.com/p/are-lemonade-stands-illegal-in-these-states-mini-entrepreneurs-are-protected-18017233

Good for them too. So 14 states now.

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Deirdre McCloskey, of Bourgeois Dignity, must be smiling!
For those who have not indulged, her hypothesis (in one sentence) is that it was the idea that, for lack of better word, being involved in capitalism was an honorable way of life that made it possible for the industrial revolution.

Until the 19th century it was generally considered declassé for aristocrats/patricians to be "in trade" , but that applied to a very tiny fraction of the population.

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“more gender-egalitarian societies and societies that value and reward performance and endorse status privileges “

Isn’t egalitarianism by definition incompatible with status privileges? What am I missing here?

On page 7 under Hypothesis 2:

"The rate of new organizational founding in society will increase with social norms supportive of entrepreneurship, with social perceptions of entrepreneurship as a desirable career choice, and with the status and media attention given to successful entrepreneurs."

Thanks for the explanation, that makes sense. Did they run some kind of statistical analysis to see if those things are independent variables? Because rewarding high performance and entrepreneurship seems like something that would correlate pretty strongly with large gaps in income and wealth between men and women.

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The major limitation of this paper, like many others on entrepreneurship, is the way the dependent variable is defined and measured, i.e., as the starting of a new business. There's no difference in the underlying data between starting another nail salon or restaurant and starting a company that incorporates innovative technology or organization, irrespective of whether it was created by the founders or imported from abroad. So it's no surprise that the U.S. ranks 46th in the resulting measure of new business formation while 5 of the top 10 countries are in sub-Saharan Africa. If the question we really want answered is what makes a country -- in a particular time period -- technologically, intellectually, or culturally innovative (in the Schumpeterian sense) we can't get it with this data. Other research has tried to differentiate among startups on the basis of their likelihood of scaling up (like the GAFA companies did) and the resulting country rankings make a lot more sense. On the historical question of "innovativeness," it's hard to beat McCloskey's Trilogy, Mokyr's "Culture of Growth," and Phelps's "Mass Flourishing."

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