Estimating Entrepreneurship: Concept for Drawing Distinctions Within Through Market Domination and of Early-Stage Firms, While Lacking the Business Activity

Magnus Henrekson & Tino Sanandaji Business & Economics︱ into empirical analysis. Indeed, very few thousands of smaller retail operations. to inform policy choices and capture datasets track which firms disrupt market This process illustrates how creative international differences. For example, equilibria. Nevertheless, Schumpeterian entrepreneurialism reduces the presence countries like Ecuador and Burkina entrepreneurialism remains a useful of small businesses and self-employment Faso have the highest concentration Estimating Entrepreneurship: concept for drawing distinctions within through market domination and of early-stage firms, while lacking the business activity. In particular, most firms the provision of better employment high-impact entrepreneurial companies in wealthy market economies exploit opportunities. The result is a more epitomised by Microsoft or Facebook. established practices and innovate only prosperous economy, as confirmed by Do Current Metrics Work? incrementally. For example, while many cross-country comparisons. THE TRICKY BUSINESS small businesses share the feature of OF TRACKING nascent Schumpeterian entrepreneurial Because of the tendency above, Entrepreneurship tends to be quantified Entrepreneurship makes a ventures of being newly founded measurements of entrepreneurialism with a single measure, lacking any vital contribution to economic and owner-managed, most are best that conflate the issue with small and distinction between innovative and prosperity. However, this activity described as permanently small and medium-sized enterprises (SMEs) replicative firms, or their level of is difficult to measure and replicative. Similarly, large businesses likely fail to pinpoint the pertinent impact. Such a conflation raises issues compare between countries. One have a greater impact yet often utilise phenomena. Indeed, government under the aforementioned research reason is that current metrics Korkusung/Shutterstock.com routine practices, such as in finance or fail to distinguish between real estate. Accordingly, depending on small-scale entrepreneurs the research aim, studies can encounter The Schumpeterian entrepreneur, without growth potential or problems when entrepreneurialism ambition, which are common to is treated as synonymous with self- therefore, is one who specifically developing nations – such as taxi employment and small business, or large transforms rather than replicates drivers or street vendors – and firms with high impact. entrepreneurial firms with high existing business methods. growth potential. Accordingly, CATEGORICAL CONFLATION Magnus Henrekson, Professor at The trouble with using imprecise efforts to expand the number of and policy aims. However, other Stockholm’s Research Institute of indicators for entrepreneurialism is disruptive entrepreneurs through SME- studies may adopt a single grouping Industrial Economics, and partly explained by the story of Walmart. friendly policies may have the reverse for entrepreneurialism to investigate Dr Tino Sanandaji, researcher Former JC Penney employee, Sam effect. Taxes and regulations tend to conditions shared by Schumpeterian and at the Stockholm School of Researchers disagree on the definition Walton, pursued an independent disproportionately fall on formally routine business owners, including self- Economics, have conducted of ‘entrepreneur’: do small business a study that combines owners fit into this category? venture when his boss rejected the registered corporations and discourage employment, reacting to opportunity, and adapts established idea to establish discount stores across growth-oriented innovative enterprises and dealing with risk and uncertainty. methodologies to more finely small towns in the U.S. Walmart would while giving an advantage to small Each approach to understanding the pinpoint entrepreneurial ntrepreneurs attract a lot of interest DEALING WITH DEFINITIONS grow to become the largest private informal operations. Greater precision entrepreneur therefore has its place, activity and better capture from governments and the public What constitutes an entrepreneur? employer in the world and replaced in measurement is therefore essential but how would the former variables be international differences. for their risk-taking and capacity Economists adopt various definitions. E th for innovation. After all, these attributes In the early 20 century, Joseph enable entrepreneurs to create new Schumpeter famously tied the concept jobs, technologies, and sources of value. to change. In other words, he saw Measuring entrepreneurship is therefore entrepreneurs as those who create or necessary to track a crucial form of recreate firms to depart from usual economic activity for national prosperity. practices, through the use of new For example, authorities may wish to technology, product designs, business Sheila Fitzgerald /Shutterstock.com Fitzgerald Sheila calculate the rate of startup creation to arrangements, and other competitive CC BY-SA 3.0 , via Wikimedia Commons BY-SA CC assess the need for policy change to strides. Disruption to the status quo stimulate their growth. then brings about an altered market equilibrium in which other firms adapt Researching entrepreneurship, however, and compete with the innovator. Such is beset by methodological difficulties. an understanding breaks from traditional Experts disagree on definitions, indices, definitions of the entrepreneur, which and variables. Meanwhile, current place all heads of firms, managers, measures lack the specificity required to and self-employed persons under the

im Breisgau, Germany. Copyrighted free use., free Copyrighted Germany. Breisgau, im draw international comparisons. Against label. The Schumpeterian entrepreneur, this backdrop, Prof Magnus Henrekson, therefore, is one who specifically senior researcher and former CEO at transforms rather than replicates existing Image available for free publishing from the Volkswirtschaftliches Institut, Universität Freiburg, Freiburg Freiburg Freiburg, Universität Institut, Volkswirtschaftliches the from publishing free for available Image Stockholm’s Research Institute of Industrial business methods. Economics, and Dr Tino Sanandaji, researcher at the Stockholm School of Schumpeter’s definition of Walmart is the largest private employer in the world and replaced thousands of smaller Joseph Schumpeter coined the term Economics, set out to more accurately entrepreneurship is influential but retail operations in the US. ‘disruptive innovation’. examine these agents of enterprise. abstract, making it difficult to incorporate

www.researchoutreach.org www.researchoutreach.org of self-employment, business ownership, and early-stage startups with low expected growth. This demonstrates Behind the Research the tendency whereby innovative firms

Megapixie/Wikimedia.org displace smaller businesses within a sector and draw in the otherwise self- employed by offering more favourable Prof Magnus Dr Tino job prospects. The study’s findings also confirm that a well-educated labour Henrekson Sanandaji force and advanced infrastructure are E: [email protected] E : [email protected] valuable but insufficient to stimulate T: +46 70 222 97 00 T: +46 72 323 0694 creative entrepreneurship. Attracting W: www.ifn.se/mh W: https://tino.us/academic/ Schumpeterian firms also depends on having appropriate incentive structures and facilitating growth, such as through Research Objectives laxer business regulation. This is reflected Professor Henrekson and Dr Sanandaji compare the level of entrepreneurship across countries. in the concentration of high-impact Schumpeterian enterprises in countries such as Hong Kong, Singapore, and the United States, and some of the lowest Detail References rates appearing even in OECD nations Magnus Henrekson Henrekson, M. and Sanandaji, T. (2019). Measuring such as Greece and Italy. Professor Entrepreneurship: Do Established Metrics Capture Disruptive technology dramatically transforms industries. Research Institute of Industrial Economics (IFN) Schumpeterian Entrepreneurship? Entrepreneurship Theory The lowest occurrences of Schumpeterian P.O. Box 55665 and Practice, 44(4), 733–760. Available at: https://www.doi. empirically examined? Schumpeterian proxies in venture capital-funded firms, entrepreneurialism arise in developing SE-102 15 Stockholm, Sweden org/10.1177/1042258719844500 entrepreneurs may be indicated by a ‘unicorn’ businesses, and billionaire countries, such as India, Pakistan, and number of proxy variables, including and top young entrepreneurs, while Egypt. This might seem to imply the need Bio Henrekson, M. and Sanandaji, T. (2014). Small business activity whether a firm has filed for patents, excluding those whose wealth was for policy adjustments to encourage such Magnus Henrekson is Professor of Economics at the Research does not measure entrepreneurship. PNAS, 111(5), 1760–1765. acquired intellectual property protection amassed primarily through inheritance, innovators. However, Prof Henrekson Institute of Industrial Economics (IFN) in Stockholm, Sweden. He Available at: https://www.doi.org/10.1073/pnas.1307204111 or was from the start registered in states paid employment, financial investment, and Dr Sanandaji note the importance of was IFN’s CEO until October 2020. Until 2009, he held the Jacob such as Delaware with legal systems and asset management. These empirical precision, not only in guiding Wallenberg Research Chair in the Department of Economics favourable to public companies. quality-based indicators are examined research but in policy aims as well. at the Stockholm School of Economics. After receiving his PhD Personal Response alongside broader quantitative Countries may have a greater need to in 1990 from Gothenburg University with his dissertation ‘An What inspired you to conduct this research? Quality-based measures of Economic Analysis of Swedish Government Expenditure’, he Schumpeterian businesses look for conducted several projects that aimed to explain cross-country Our inspiration was Big Data! In recent years more signs of innovation and high growth The study’s findings also confirm that a growth differences. Since the turn of the new millennium, his data sources have become available, and we put a lot of but may not discern current impact. primary research focus is entrepreneurship economics and the effort into compiling several new datasets that measured Prof Henrekson and Dr Sanandaji well-educated labour force and advanced institutional determinants of the business climate. In addition to business activity across countries, and that used different rectify this by incorporating indicators his academic qualifications, he has extensive experience as methods. As the datasets gradually grew more complete, for the level of firm impact, including infrastructure are valuable but insufficient an advisor, board member and lecturer in many different interesting patterns emerged that gave us clues to new expected employment growth, sales, contexts. research findings, with results which interestingly confirmed and the wealth of founders. By taking to stimulate creative entrepreneurship. Joseph Schumpeter’s intuition from almost a century ago. the market context into account, Tino Sanandaji is a Research Fellow at the Institute for Economic We both have a background in economics and like to apply smaller firms can be assessed as measures of national business activity, promote small and medium-sized firms and Business History Research (EHFF) at the Stockholm School of modern statistical methods used in economics to further innovative and market-disrupting from business ownership to expected when they have an underdeveloped Economics, Sweden. He received his PhD from the University of entrepreneurship research. relative to their sector, even while growth in early-stage startups to the service sector or experience a decline Chicago in 2011. Sanandaji has authored numerous articles and accumulating relatively little wealth number of self-employed. These in employment in large firms or the books, as well as several government-commissioned reports. With high-impact entrepreneurial businesses like and a smaller workforce. Low and qualitative and quantitative factors public sector. A multi-dimensional Amazon and Facebook notoriously evading and high impact thus form additional are inspected across 64 countries and understanding of the entrepreneur is Funding avoiding tax by significant amounts, is it particularly categories that intersect with routine against features of the economic and therefore crucial for directing business • The Jan Wallander and Tom Hedelius Foundation the medium stage of innovative firm growth that is and Schumpeterian entrepreneurship, institutional environment, including brilliance towards national prosperity. • The Marianne and Marcus Wallenberg Foundation most inhibited by burdensome tax and regulation? to form a rigorous conceptual model GDP, education and human capital, Indeed, the researchers conclude by of entrepreneurialism. Prof Henrekson research and development spending, warning other specialists and policy- Yes, to the extent that large firms use advanced and Dr Sanandaji use these insights and the regulatory burden on business. makers to avoid the pitfalls in conflating planning and loopholes to avoid taxes, the burden to investigate variations in the rate very different types of firms as identically disproportionately falls on the rest of the economy in the form of workers and smaller firms. There is also interesting of high-impact Schumpeterian THE BOTTOM LINE entrepreneurial, and highlight the entrepreneurship between countries. A core finding of the study was that need for further research to dig deeper evidence suggesting that family-owned businesses pay qualitative measures capture high-impact than the very top layer of high-impact more taxes and tend to be less aggressive in tax To detect high-impact Schumpeterian Schumpeterian activity while negatively Schumpeterian businesses, to better planning and tax avoidance. enterprises, the two researchers use correlating with the quantitative factors estimate entrepreneurship.