“If you were laid-off, how would you find a job?” [“by starting your own business” being one of the choices]

“Would you consider starting your own business if your were to lose your job?”

We can't understand our economy without better firm-level information systems.  That's my essential summary of a new report out today, "Assessing competitiveness: how firm-level data can help," from Brugel, a European think tank.  It's a well-crafted and important report as it makes the case for policymakers why the back-end systems are important investments.  As the report shows, when we worry about averages and don't look more specifically at elements of the distributions and how those are changing or could be impacted by certain policies, we hurt our chances of driving competitiveness and economic growth.

In the appendix to the report the authors reference some of the international experiences related to firm-level data sets.  I think their summary there was restrained in its criticisms.  Indeed, I recently sat through a meeting of leading experts on measuring firm-level innovation and growth at the OECD and was appalled at some of the compromises that were going to have to be made in order to fulfill a European Commission mandate for immediate data.  It was clear why the compromises had to be made - national statistical offices have not received the investments they need to develop their infrastructures but more importantly they are only just beginning to realize they need to find ways to encourage firm-level research with their data. However, even with the signs of change I've seen afoot in terms of determination from these offices, they have no legal, political, or practical systems in place to meet this challenge.  Indeed, at a time when most countries are undergoing significant public sector cuts, I am worried that the clear needs here will not be met with dollars.  I've seen many bodies, including the OECD which I had always thought of as the true champion of international analyses using government data moving towards more instances in which their reports rely more heavily on private data sources instead of government data.  While private sources should have their place, they cannot be a replacement for official data.  That said, if national statistical offices don't get behind some of the important issues Brugel outlined here, I fear that many nations may become more and more satisfied with substandard official statistics.  Indeed, some of the current crises in Europe have been driven by lacking regulatory mechanisms on national statistics (see articles on Greece).  

Formal is better; informal the scourge.  While I still remain largely in that camp, I have to say that an article in today's Financial Times gave me some pause on this question.  Growing up in a middle class household in the U.S. Midwest left me with a world view that is intrinsically oriented to the formal economy - or at least I thought.  My grandmother, may she rest in peace, was an amazing woman and indeed the main entrepreneur who I have had in my life and yet I doubt very much that she always reported all of her income.  A highly ethical woman in my estimation, she was widowed with three children (one under 1) at about  the age of 30 and went on to send all of them to college while living independently and only remarrying briefly.  At the age of 88 she was still running her own seasonal business for most of the year and beating me handedly at any game that we engaged before her death.  Just as she probably used a bit of creative accounting to get by at certain times, today's article points out some of the ways in which certain economies are likely surviving currently because of their informal economies.  

I have spent a lot of time in Spain in the recent year which has brought me head long into contact with the informal economy.  Indeed, when first here I have to say I nearly burst a blood vessel trying to deal with some of the things which could only be done in the informal economy which I was used to being formal.  I had some of my most heated arguments and grandstanding trying to deal with people who by all appearances were part of the formal economy but apparently were not.  As the article rightly points out, Spain's informal economy must be among the biggest in the developed world.  And yet, with all of the economic pain and tumult in the Spanish economy, by my reading of currently available data Spain is the hardest hit country anywhere in terms of pre-Crisis and post-Crisis impact on new business formation and the existing small business sector, the Spanish economy is still functioning.  Yes, there have been some significant protests, but as I think the article correctly identifies if Spain didn't have some of this informal economy there is no way that it would not be in a revolutionary state.  (I am not sure it won't reach that state but it's not there currently.)  If the government wants to bring some of this informal economy into the formal economy, which seems necessary for longer-term growth potential, then it needs to face facts about the repressive regimes which remain in place for many formal business and other activities.  That said, in my opinion, Spain has no choice but to live with its informal economy currently as the changes that it needs to make to much of its burdensome regulatory and other regimes will take time and seem deeply, deeply rooted in culture and society. 

Well, that is all a bit of an aside probably for most of my readers.  I offer it only in the way of saying, this topic of informal economy measurement is extremely important.  Many of the data projects we have funded only focus on the formal economy because high-growth companies need to be operating formally (OECD and World Bank), but I am sure that this set of measurement issues is important and indeed will likely be incorporated by many scholars as a measure of institutions in different countries.  The Financial Times article is data driven, offering estimates from Friedrich Schneider that appear to be the going standard in this area, but it also has a nice discussion of the dangers of measuring the informal economy over time.  I would expect that we will see a lot more measurements of the informal economy as the markers of business and household activity (all the data we are leaving in our daily activities) explode in the coming years; it is these data or things like electrical consumption that seem most common bases for estimating the actual business activity in a country.  Those interested in this area should check out the article or the longer journal article which I have been told by experts at the World Bank is where they currently draw from:

Schneider, F. and D. Enste, 2009. Shadow economies: Size, causes and consequences. Journal of Economic Literature, 38(1): 77-114.

Here is a sneak peak at some of the data the Financial Times presents:

Researchers who follow data on internet and phone connectivity know how spotty comparable international data is.  For households, this is a fact, and when we move into the connectivity of businesses across countries, the data just doesn't exist.  So, I was curious today when a new publication from European Commission came out covering "E-communications" across the EU at the end of 2009.  While I was disappointed to not see anything in their survey about how the households were using electronic communications to facilitate business (think of all the reports of people running small Internet businesses on the side), I was struck by one measure I found in the report - "calling over the Internet."  

So when measuring if anyone in the household used their computer to make a phone call, the authors found surprisingly little change since 2008 but a lot of heterogeneity across countries. Lithuania and Latvia came in at the top, with more than 60 percent of households reporting these activities while Portugal and Spain came in at the bottom around 10 percent.  

As someone who has relied on a digital phone to work for the last six years and because I have had many interactions with companies attempting to globalize which were relying on boundary-less communications like Skype, I think there is something in these statistics worth more of a look.  At the least, these statistics seem to point to another indicator of the extent to which a particular country is internationalized.  

The National Science Foundation (NSF) has an exciting new survey in the works on microbusiness innovation (which was featured at our recent Kauffman Interagency Forum on Entrepreneurship and Innovation Data).  They are seeking interested contributors to the development of this work. 

One of my favorite surveys done on entrepreneurship is the Eurobarometer out of the European Union (EU) through Gallup.  It is the result of the European Union’s increased focus on entrepreneurship development following their 2000 meeting in Lisbon.  The EU Commission is kind enough to include several non-European Union countries in the survey (this year had the U.S. and China, in particular).  So, their roughly triennial survey brings important cross-country comparisons.  The 2009 version of this survey was recently published. 

The current year survey instrument (which is at the back of the report) is a big improvement over past instruments and tries to get into topics like how entrepreneurs are viewed in society, the experience of the population with entrepreneurial endeavors, and perceptions of risks, barriers, and opportunities. 

The overview report is about 200 pages so there is too much to cover here but a couple of things that stood out to me in my first pass of the report:

• “Looking at those who were not self-employed, in most countries, the proportion of respondents who considered it feasible to become self-employed in the next five years was lower than the proportion of those who would like to be self-employed. In the Nordic countries, however, an opposite trend was seen – i.e. the preference to be self-employed was lower than the perceived feasibility of gaining such a status; for example, 49% of non-self-employed Swedish respondents said it would be feasible to become self-employed in the next five years, whereas just 28% had an actual preference for changing their status.” This is an interesting measure – plans vs. perceptions – and I’d imagine our colleagues in the Nordic countries in charge of entrepreneurship should be very pleased with this result.
• The rate of entrepreneurial activity for the U.S. that they measure has gone up from 15 percent in 2004 to 18 percent in 2007 and 21 percent in 2009.  My colleague Mike Horrell pulled together some of the historical data from their reports to show that this change is driven by an increase in reported embryonic activity as well as those reporting work in established businesses (see table of all countries measured in Eurobarometer).
• This is one of the few surveys that can tell us anything about how efforts to promote entrepreneurship through education are going.  What they find is “a comparison, between 2007 and 2009 results, concerning the extent to which respondents agreed that their school education prepared them to become entrepreneurs showed that, in 2007, a number of European countries scored better than the US in stimulating entrepreneurship (e.g. Norway 74%, Portugal 71% vs. US 63%); in 2009, however, the US outscored all European countries (US 73%, Cyprus 64%, Portugal 63%).”

June 16, 2010 update

The European Commission has released a new survey on internationalization of European small businesses which provides new insights into what types of international activities businesses are undertaking. 

August 17, 2009 original post

Entrepreneurs have complex and not well understood ties to the global community.  In Europe this issue has received more attention than here in the U.S., largely because the importance of cross-border interactions to growth, even within Europe.  Indeed, this week I reviewed and provided comments on a survey and draft study from EIM for the European Commission on internationalization.  I'll post on that when it is finalized and information public, but in the meantime, it got me looking for data which is available to look at international aspects of entrepreneurship.  I can't say that I found a lot but I am grateful to Brian Headd of the Small Business Administration, Office of Advocacy, for several of these resources.  Know of something else?  Shoot me an email. 

NFIB 2004 Survey on International Trade

Survey of Business Owners

• The 2007 Survey of Business Owners by the Census Bureau has questions but data isn't available yet.  Note that I think this data will be much more interesting now that this survey also added a question on immigrant status of the entrepreneur.  Read the questionnaire.  Information is available on the percent of firms that have exports (goods and services) as at least 10 percent of their sales.
• Some information from the 2002 survey has been published.  Read more detailed report.

International Trade Association, Department of Commerce

• Here we have small business exporters.  Read overview flier.  Access the data. 
• Note: Exports only cover the exporting of goods.

Kauffman Firm Survey

• Beginning in year four, we asked the following question. What percent of [NAME BUSINESS]’s total sales were to individuals, businesses, or governments outside of the United States? Get overview statistics from this question.

Panel Study on Entrepreneurial Dynamics

• I've never seen this data used but in theory they include the following question in at least the first wave: Within the first two to three years of operation, what percent of your customers do you expect to be...) international – that is, they normally reside outside the US?

And lastly, in international commerce, Brad Jenson seems to be a leading U.S. figure.  Brian referenced him and I've heard others in Census and government reference Brad although I have never talked with him.  For actual studies and better insight on international trade, you can try Brad Jenson. 

Understanding entrepreneurial exit at smaller businesses is a really complex and important topic given the aging entrepreneurial population of most developed economies.  While the term "exit" in entrepreneurship is most often reserved for high-growth companies with large outside equity investors that want to cash out an investment, the majority of "exits" happen in small firms in manners which we know very little about.  The topic is most important in family-owned firms but in reality it should be relevant in all businesses, particularly with the aging of new entrepreneurs in the U.S. over the last decade. 

One of the first pieces of research that I remember reading in my current position at the Foundation that caused a bit of an ah-ha moment for me was a piece by Brian Headd at the Small Business Administration about the need to redefine success (and really failure) in entrepreneurship research.  Brian’s main point was that when we look at firms that go out of existence the common perception is that the only outcome which can be deemed positive from a business demography perspective is one in which the firm continues to survive, not one in which the firm ceases to exist.  But in reality, close to 30 percent of U.S. business owners whose business had ceased to operate still reported the business as being a success at closure.  For me, this study was one of the first that really helped to challenge my own assumptions in building surveys because it made me realize that I was implicitly assuming all business exits were failures and I would have at the time used the terms interchangeably. 

In hindsight, probably our biggest failing in the design of the Kauffman Firm Survey was of the questions asked businesses who reported having exited the marketplace.  Only through dialogue with researchers like Fabrice Cavaretta has it become apparent to me how much more effort we should have put in determining what type of exit a firm had.  But anyone that has tried to talk with a respondent about something which has failed, like a business, will know that it’s often not an easy conversation.  Indeed, most of the times we have attempted to collect more information from exited businesses, our survey vendor on the project, Mathematica, has not had much success. 

I haven’t come across many surveys specifically targeting recently exited businesses in the course of this job, but I did come across one recent effort from Belgium which looks only at recently exited microbusiness owners.  In general, I’ve seen a lot more interest in Europe in understanding how today’s business owners plan to transition their ownership stakes as many near retirement.  I suspect that this research emerges (or at least was funded) to support policy efforts in this regard. 

I am not sure that I have a lot more to say on the subject at this time but I am hoping others out there can point me to similar efforts internationally or more work here in the U.S.  NFIB has some interesting factoids from a couple of their small business polls that I’d like to end with. 

Families in Business, Volume 2, Issue 6, 2002, ISSN - 1534-8326

• Forty-eight (48) percent of family business owners would like to have a family member eventually take over operation of their venture. The number rises to five in eight among those whose firm employs 20 or more people. However, just 13 percent believe it is “very likely” that a family member actually will take over, though another 23 percent believe it is “likely.” Yet, only 7 percent of all operating businesses were inherited.
• About 9 percent intend to transfer business ownership to one or more family members within the next five years. Those planning the transfer average a little less than 60 years of age.
• Thirty-nine (39) percent say that they originally went into the business with one or more family members. Almost three-quarters of inherited businesses were transferred to more than a single family member.

Owners and Managers, Volume 8, Issue 8, 2008, ISSN - 1534-8326

• The principal owner still works for professionally-managed businesses in 55 percent of cases. He/she is semi-retired or retired in 19 percent of them; 17 percent work in another business that he/she owns; and 6 percent work for an organization that they do not own.
• Sixty-one (61) percent of professional managers think that it is “highly likely” that they will own and operate their current business at some point and another 11 percent think it is “possible.” However, just 35 percent of owners who are not managers in professionally-managed firms think that the professional managers in their enterprises are “highly likely” to own and operate the firm some day and another 8 percent think it is possible. It appears a considerable number of professional managers will not realize their quest.
• Twenty-eight (28) percent of professional/paid managers are family members of one or more current owners. Family members are much less likely to think they will eventually take-over (own) the business than non-family managers.

Last year I posted on an effort at Eurostat to do a large-scale survey on Access to Finance.  Since that time, more than a year has passed and it looks like Eurostat is much further down the line in developing this survey.  I haven't been tied very closely to their efforts since then because over time what they are attempting to do and what we have done with the Kauffman Firm Survey (KFS) have diverged.  I am actually really pleased that this has happened, in a way, because Eurostat made some very important decisions early on in conceptualizing their study that limited its ability to gather comparable data to the KFS and the new version of their survey seems much more realistic in the content it collects and likely to get comparable data across European countries.

The minutes from the most recent expert meeting on the survey and the draft survey instrument show a survey effort that has gelled on trying to determine how the relationship has changed between 2007 and 2010 between small firms and debt/equity markets.  This survey is notable because it is one of the few which asks businesses about attempts to access equity markets (and debt), not just actual equity or debt received.  Now, while this is a solid instrument and they face a lot of limits in the length of the survey, I would have concerns about the complexity of concepts used here with no definitions (like factoring) and the reliability of the data as a result.  The saving grace may be that the survey skirts most respondent fears by not actually asking for specific dollars received or other sensitive topics only overall use.  The other downside is there is no way to gather data on the experience of the companies that didn't survive 2007 to 2010, an obviously tumultuous set of years where access to finance may have been a critical factor in their sustainability.  Additionally, these national statistical offices, which already have a significant amount of rich microdata, are gathering data through this survey that is least helpful to them in matched microdata analysis.  While they get a lot of directional feedback from businesses, they don't get specifics - like amounts - which for research purposes would have been so much more valuable when matched with other business data already on record.  But I have to keep reminding myself that the national statistical offices are not actually charged with performing the research which could really inform policy in this area; they need to be good stewards of the data and try to achieve high response rates so that tabular information can be published and sent to Eurostat. 

Eurostat has a tough task in organizing a survey like this since they never actually have the microdata and don't carryout the country-level collections.  I admire them for taking on this important and tough subject but do so wish that the European regulations were different and that this enormous effort could be used to create a rich research data set which would go so much further in advancing research and understanding in this area than the aggregate tables and limited reports which this effort will produce.  Don't even get me started on the fact that no non-European countries will be fielding replications of this effort (to my knowledge) when it happens even though this has been in the planning stages for more than three years.