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Survival of the small firm and the entrepreneur under demand and efficiency uncertainty

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Flores-Romero, Manuel G. (2004) Survival of the small firm and the entrepreneur under demand and efficiency uncertainty. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.700).

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Abstract

The objective of this paper is to offer an answer to the question: why do some entrepreneurs wish to own another firm in the future after having closed an unsuccessful
one? We first show this question is relevant because making use of a sample of entrepreneurs in the UK who have experienced a business closure, we show that 45% of them have the desire to own another firm in the future, despite having an unsuccessful experience in small firm ownership. To tackle our question we develop a model where the profits of the small firm depend on two firm-specific parameters: the efficiency parameter, which represents the skills of the entrepreneur to manage and cope efficiently with the everyday tasks of the small firm, and the demand parameter, which denotes the success of the firm’s product to attract demand or capture a market niche. It is found that our model answers our initial question by revealing the existence of a mechanism of entrepreneurial self-selection. Under such mechanism, skilful entrepreneurs are the only ones who wish to own another firm in the future, regardless of the degree of success in their previous venture, whereas unskilful entrepreneurs prefer to go to wage work. We show this mechanism accounts not only for the empirical evidence relevant to our initial question, but also for the rest of cases of entrepreneurs’ attitudes after experiencing a business closure.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HD Industries. Land use. Labor

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Small business -- Management, Small business -- Great Britain, Entrepreneurship -- Great Britain, Industrial management

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

30 January 2004

Dates:

Date	Event
30 January 2004	Published

Number:

No.700

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

Funder:

Consejo Nacional de Ciencia y Tecnología (Mexico) [Mexican Council for Science and Technology] (CONACYT)

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