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The entrepreneur’s mode of entry: the effect of social and financial capital

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Abstract

This article uses a French database of firms set up in 1998 to investigate the determinants of takeovers versus startups as a mode of entry. It focuses on two determinants that previous research has not fully analyzed: social capital and financial capital. Our findings suggest social capital affects the mode of entry. They show that entrepreneurs with social capital are more likely to create new firms from scratch than to take over existing firms. We confirm the effect of financial capital on the mode of entry. Bank loans are more often associated with takeovers than with startups and low initial wealth is more often associated with startups than with takeovers. These results show that finance affects the mode of entry.

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Notes

  1. Entrepreneurship can occur within an existing organization (Casson 1982; Shane and Venkataraman 2000) and takeovers of existing firms can be a way for individuals to become entrepreneurs. The entrepreneurial process consists indeed of distinct activities, for example opportunity identification, resource mobilization, and the creation of an organization (Shane and Venkataraman 2000) which does not exclusively correspond to a startup.

  2. In the mid-nineties, transfers of this kind only accounted for 14% of takeovers in France compared with 27% in the Netherlands, 42% in Germany, and 68% in Italy (European Commission 2003).

  3. Coleman (1988) considered the relationships among family members to be the ideal environment for the creation of social capital.

  4. All these articles are formally based on the key idea that entrepreneurs face liquidity constraints and that one of the strongest impediments to entrepreneurship is the lack of financial capital. However, Cressy (1996, 2000), Hurst and Lisardi (2004), Moore (2004) and Kim et al. (2006) have questioned the interpretation of the relationship between wealth and self-employment as evidence of liquidity constraints. Cressy (2000) argued that reducing absolute risk aversion can explain the positive relationship between wealth and entrepreneurship. Hurst and Lisardi (2004) showed that the propensity to start a business is non-linear in wealth. Moore (2004) provided evidence that the relationship between wealth and entering entrepreneurship is only significant for high-wealth households and that liquidity constraints do not seem binding for most new entrepreneurs.

  5. In their model, the individual characteristics of entrepreneurs are private information and very imperfectly shared with outside investors. The latter are only aware of the distribution of entrepreneurs’ characteristics. Consequently, the risk of projects cannot be easily or accurately accessed. They study a continuum of borrower types with projects with identical expected internal rates of return and with non-observable riskiness.

  6. This is why specific financial transactions, called leveraged buyouts, based on a high proportion of unsecured debts, have been developed since the eighties first in US and later in Europe. The financial structure of buyouts typically consists of 60–80% of debt, as opposed to debt ratios of 20–30% in public firms (Rajan and Zingales 1995).

  7. Note that their sample includes family business transfers.

  8. This result is obtained by adding the percentage of each “loans i ” variable.

  9. 61.10% of takeovers in private personal services are accounted for by restaurants and 17.64% bars against 38.13% and 7.40% respectively for new ventures.

  10. The odds ratio shows the strength of association between a predictor and the response of interest. It is the factor by which the odds (equal to the probability of takeover divided by the probability of new venture) change for a unit increase in the corresponding independent variable. The odds ratio is a convenient concept for dummy variables, because a unit change means having the characteristic versus not having. If the odds ratio is unity, there is no association. Odds ratios greater (smaller) than unity indicate that for the predictor concerned takeover (pure creation) is more likely.

  11. In other regressions, we consider only two modalities of entrepreneurial networks: family networks versus other networks.

  12. The small difference between the results regarding the effect of debt on modes of entry is also surprising. Williamson (1988) showed that the financial structure of innovative firms tends to be very different from that of non-innovative ones and, consequently, we might have expected different results in terms of relationships between modes of entry and debt for innovative firms in comparison with the global sample.

  13. If we compare the data gathered by Parker and Van Praag (2010) and those used by Block et al. (2011) for the Netherlands, the same spread can be observed.

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Authors and Affiliations

  1. University of Caen Basse-Normandie, CREM UMR 6211, 19 rue Claude Bloch, 14032, Caen Cedex, France

    Françoise Bastié, Sylvie Cieply & Pascal Cussy

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  1. Françoise Bastié
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  2. Sylvie Cieply
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  3. Pascal Cussy
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Correspondence to Sylvie Cieply.

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Bastié, F., Cieply, S. & Cussy, P. The entrepreneur’s mode of entry: the effect of social and financial capital. Small Bus Econ 40, 865–877 (2013). https://doi.org/10.1007/s11187-011-9391-y

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