Human Capital

Human capital research delves even deeper into entrepreneurs’ specific characteristics and demographic traits. The questions of who chooses a particular path in the first place and who gets ahead and why lead this discussion of human capital and entrepreneurship.

Introduction

The body of research on the relationship between founder background and entrepreneurial success is in many ways similar to the bodies of research look at the relationship between individual backgrounds and career outcomes among any other subgroup – students, corporate executives, political leaders, sports figures, entertainers, scientific and engineering stars, and even career criminals. The broad research question is always "who gets ahead and why?"

Scholarly inquiry into the question of success can organized into two broad approaches – one emphasizes individual characteristics, the other emphasizes situational characteristics. Among scholars focused on individual characteristics, it is possible to further distinguish between those who emphasize innate (or ascribed) characteristics – race, gender, religion, ethnicity, nationality, family background, personality, genetics – and those who emphasize achieved characteristics – those that are the products of choices and investments such as education and experience. The situational factors of interest to scholars tend to be shaped by the disciplinary training of the researcher and include everything from cultural values, political climate, and the regulatory environment to industry and organizational competitiveness and population demography.

But there is an important prior question – who chooses a particular path in the first place? While there is a growing recognition that different processes may impact selection into a particular occupation and performance within the occupation once the choice has been made, there has been relatively little progress in linking questions of entry and of success.

Discussion

Introduction

Interestingly, the research literature on human capital and entrepreneurship is already broadly organized into these two different questions – 1) Who becomes an entrepreneur?  and 2) Who succeeds as an entrepreneur? More than 25 years of research examines both questions. We outline some of the key findings and provide selected citations below.

Education and Native Ability
Gender and Family Circumstances
Career Experiences
Causal Ambiguity

From all of the accumulated evidence on these two questions, there is broad consensus that human capital matters for entrepreneurship; however, it is important to recognize that while the correlational evidence linking human capital and entrepreneurship is quite strong, the causal relationship is poorly understood.

There is little agreement on how much human capital matters for entrepreneurial entry or success. There are debates as to whether the most important components of a founder's background that are related to entrepreneurship are ascribed (family of origin, race, gender, ethnicity, etc.) or achieved (work experience, social capital, personal wealth). There are persistent debates over whether the correlates of entrepreneurial entry and entrepreneurial success are driven by situational factors (things about the time period, region, culture, or environment) or by individual factors (including human capital). Finally, and perhaps more importantly, even after 25 years of effort we still have little understanding of the mechanisms that drive the observed relationships between human capital and entrepreneurial performance.

Much of the causal ambiguity arises from the fact that there are selection and sorting processes that shape both entrepreneurial entry and entrepreneurial success, and these selection and sorting processes are likely to be strongly correlated with human capital and are probably situated in particular places and times.

One interesting debate along these lines is whether a "Matthew Effect" (the rich get richer and the poor get poorer) explains the relationship between human capital and entrepreneurial performance. (Azoulay, Stuart and Wang 2014). The core idea is that the observed relationships are not the result of real differences in underlying ability, but instead the product of a flawed system that relies on status and prestige as signals (Roberts and Sterling 2012).

Obviously, disentangling the causal relationships between human capital, entrepreneurial entry, and entrepreneurial success is extraordinarily difficult, but a crucial first step is to link the two canonical questions about entrepreneurial entry and entrepreneurial performance and investigate them together.

For example, do we observe fewer successful female and minority entrepreneurs because women and minorities lack the ability or motivation or because they face stronger barriers and constraints? Consider also that ascribed human capital characteristics (the things you get from your birth lottery) are well-known to be associated with achieved ones. Do the observed patterns of well-educated and experienced white men being more likely to succeed convincingly demonstrate the importance of human capital for entrepreneurial success, or would these effects disappear if we adequately handled selection effects?

Future Research

  • Treat entrepreneurship in the broader context of careers and consider how spells of entrepreneurship are the product of prior spells. Examine both the antecedents and consequences of entrepreneurship spells for individuals and for organizations.
      
  • Look more closely at the employees of entrepreneurial firms. We know that entrepreneurial firms are creating jobs (Haltiwanger, Jarmin, and Miranda 2013), but are they good jobs?
      
  • Examine the effects of the career histories of founders in great detail. Founders stemming from different "knowledge contexts," for example, university or non-profit research labs, users, or established firms ­bring different knowledge and social resources to the firm. These differences in knowledge may be a key predictor and shaper of firm-level outcomes.
      
  • To date, much of the literature on human capital and entrepreneurship looks at firm survival as an outcome, largely for reasons having to do with data availability. Survival is operationalized as a binary variable, where acquisition, mergers, and exit are all bundled together. However, for the field to progress, (1) the survival variable should be unpacked, and competing risks models that examine successful (profitable) and failed ("fire sale") acquisitions considered, (2) additional outcome measures should be considered. These might include technological impact and job creation. An implicit assumption in the literature is that the goal of a firm is to survive and be profitable; however, entrepreneurs each have different goals and different skills­—and outcomes other than survival can benefit society—hence, broadening our study of outcomes would improve the field's ability to make policy prescriptions.

Data Sources

The best data for studying entrepreneurial entry is undoubtedly longitudinal matched employer-employee data.

One of the challenges of conducting research in this field is the lack of databases compiling information on individual career history, entrepreneurial undertakings, and firm-level entrepreneurial outcomes. To date, much work in the field relies on painstakingly, hand-collected datasets.

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