Expert Answer:Entrepreneurial Abstract Case Analysis


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Innovation  The European Journal of Social Science Research
Vol. 22, No. 3, September 2009, 329340
Measuring and building high-quality entrepreneurship: a research
Shaoming Chenga*, Roger R. Stoughb, and Randall W. Jacksonc
Department of Public Administration, Florida International University, Miami, Florida, United
States; bSchool of Public Policy, George Mason University, Fairfax, Virginia, United States;
Regional Research Institute, West Virginia University, Morgantown, West Virginia, United
(Received 10 January 2009; final version received 9 August 2009)
This article discusses a detailed research design to measure entrepreneurship
quality, as opposed to entrepreneurship quantity, and to develop a standard
entrepreneurship quality measure focusing on high-growth small and often new
businesses, based on critiques of previous entrepreneurship measures. Available
longitudinal establishment-level data sources for building up the entrepreneurship
quality index are introduced and evaluated and the Longitudinal Business
Database of the US Census Bureau emerges as the best candidate because of its
coverage and timely update. The creation and development of the entrepreneurship quality measure will enable researchers to empirically identify a wide range of
economic, social, policy, and firm factors that may affect the development of
high-quality entrepreneurship. The creation and development of the entrepreneurship quality measure will also enable researchers to uncover the critical role of
high-quality entrepreneurship in economic growth in general and in rural
development in particular.
Keywords: entrepreneurship quality; entrepreneurship quantity; small businesses;
Entrepreneurs innovate. They create and employ. They are vital to the success of
economic growth (Acs and Audretsch 1993, Acs and Armington 2006, Baumol 2002,
Schumpeter 1934, van Stel et al. 2005, Wennekers and Thurik 1999, Yu et al. 2006).
In particular, entrepreneurs are critical to reduce poverty and promote economic
development in rural America, because traditional production assets in rural regions,
such as inexpensive labor and abundant resources, are not likely to result in their
economic success in a changing global economy (Acs and Malecki 2003, Appalachian Regional Commission 2001, Low et al. 2005, Markley 2006, Vaughan et al.
1984). As a result, traditional ‘‘smokestack-chasing’’ business recruitment, retention,
and expansion strategies have been gradually replaced by one with greater emphasis
on homegrown new and small business development. Instead of focusing on
attracting a ‘‘blockbuster’’ firm, state and local governments are now increasingly
*Corresponding author. Email:
ISSN 1351-1610 print/ISSN 1469-8412 online
# 2009 Interdisciplinary Centre for Comparative Research in the Social Sciences and ICCR Foundation
DOI: 10.1080/13511610903399088
S. Cheng et al.
turning to helping indigenous start-ups in order to tap their potential to improve the
health of rural economies and create a sustainable economic future for rural areas.
Nevertheless, previous literature focuses primarily on the sheer quantity (breadth)
of entrepreneurship but overlooks the quality (depth) of entrepreneurship. Entrepreneurship quality stresses the portion of successful new ventures that have
expanded rapidly over years, in sharp contrast to entrepreneurship quantity that is
based entirely on gross firm formation and the total number of new businesses.
Overemphasizing entrepreneurship quantity, while at the same time neglecting
entrepreneurship quality, may dampen efforts to foster rural entrepreneurship and
hinder rural America from achieving sustainable economic prosperity, since highgrowth small firms are the primary drivers of job and wealth creation (Birch 1979,
Gallagher and Miller 1991, Hart and Hanvey 1995, Kirchhoff 1994, Storey 1997).
Such lack of understanding, to a great extent, results from the fact that a standard
measurement for high-quality entrepreneurship does not exist. There is an urgent
need, therefore, to develop a standard entrepreneurship quality measure to reflect the
magnitude of high-quality entrepreneurship across geographic space and over time.
This measure will, in turn, enable researchers to empirically uncover the relation
between entrepreneurship quality and economic development, and to identify
factors that can nurture high-quality entrepreneurship, particularly in the rural
areas. Findings can then be used to craft tailored economic development strategies
and entrepreneurship assistance programs, based on each individual rural area’s
distinctive entrepreneurship endowments and unique competitive capacities.
Literature review
Entrepreneurship, small businesses and new ventures
Entrepreneurship is necessary to the creation of new organization, but entrepreneurship is not synonymous with new ventures. These two concepts are so closely linked
that to some they are interchangeable. Gartner (1989) suggested that the creation
of new organizations alone constitutes entrepreneurship. Entrepreneurs, through
their entrepreneurial activities, accumulate and assemble external resources to
construct new businesses (Morgan 1996, Vesper 1990). Through their new businesses,
entrepreneurial individuals also channel and transform their entrepreneurial ambitions and qualities into actions. In these cases, small firms are a behavioral
manifestation of entrepreneurship (Hebert and Link 1989, Wennekers and Thurik
1999) or an organizational extension of individual entrepreneurial actions (Lumpkin
and Dess 1996). New and often small firms also greatly contribute to the flourishing
of entrepreneurship as important catalysts or actors in technological innovations
(Acs and Audretsch 1993, Schumpeter 1934, Nelson 1984, Winter 1984); as agents of
change in market structure and competition environment (Beesley and Hamilton
1984, Brock and Evans 1989); and as critical forces in industrial restructuring and
national competitive advantage upgrading (Hart 2003, Porter 1990).
It is true and widely agreed that new ventures, according to the Schumpeterian
framework, are far more important in bringing ‘‘new combinations’’ into economic
process than are established firms (Acs and Armington 2006, Scherer 1992,
Utterback 1994). But not all of new businesses are entrepreneurial, because of the
existence of lifestyle and necessity-driven new ventures. The lifestyle small businesses
emerge from individuals’ pursuit of certain lifestyles, while necessity-driven small
Innovation  The European Journal of Social Science Research
businesses emerge from individuals’ lack of or limited employment opportunities.
The key criterion to distinguish (at least conceptually) entrepreneurial new ventures
from the others is whether these new entrants ‘‘continue to expand’’ (Hart 2003, p. 6).
Only those new ventures that continue to expand, driven by their novelty and
dynamism, represent the spirit of entrepreneurship. Entrepreneurship quality (i.e.
fast-growing entrepreneurial start-ups) is empirically linked to job creation and
economic growth. It is known that the major share of jobs is created by a relatively
small number of ‘‘gazelle’’ small firms rather than by small firms in general (Birch
1979, Gallagher and Miller 1991, Hart and Hanvey 1995, Kirchhoff 1994, Storey
1997). It is also known that high-growth and high-potential small firms have positive
impacts on economic growth (Mason 1985, Wong, Ho, and Autio 2005). Nurturing
high-growth firms, or ‘‘gazelles’’, has then become a primary target and ultimate goal
of entrepreneurship policy (Pages et al. 2003), and has become one of the top
priorities of regional, national and international economic development policy
makers (Fischer and Reuber 2003, Smallbone et al. 2002). Despite the conceptual
ease of distinguishing entrepreneurship quality from entrepreneurship quantity, it is
very difficult to develop empirical measures to reflect such concepts, as we further
elaborate on below.
Entrepreneurship, economic growth and rural development
Economic growth has traditionally been accounted for by factors such as capital
formation, labor inputs, scale economies and knowledge creation and spillover.
However, recently entrepreneurship has been considered a crucial mechanism of
economic development (Acs and Armington 2006, Acs et al. 2004, 2005, Baumol
2002, Groot et al. 2004, van Stel et al. 2005, Wennekers and Thurik 1999). This
mechanism is so central and critical that scholars are now viewing our economy
and society as evolving into an ‘‘entrepreneurial economy’’ (Audretsch and Thurik
2000) and an ‘‘entrepreneurial society’’ (von Bargen et al. 2003). The centrality of
entrepreneurship, at the macroeconomic level, is manifest as entrepreneurship is the
conduit of knowledge spillovers, the catalyst for innovation and a primary element of
economic structural change as well as job and wealth creation. It is estimated by
Global entrepreneurial monitor that one-third of the economic growth across nations
can be accounted for by entrepreneurship differences (Reynolds et al. 1999). At the
microeconomic level, its central role is demonstrated as the engine behind the
formation and growth of new firms and, consequently, the creation of jobs and
wealth. As a result, nurturing high-growth firms has become a primary target and
ultimate goal of entrepreneurship policy (Pages et al. 2003), and entrepreneurship
policy has become one of the top policy priorities of regional, national, and
international agendas (Fischer and Reuber 2003, Smallbone et al. 2002).
Entrepreneurship-oriented economic development strategy is particularly important to the rural areas in America. This is primarily because traditional
production assets in rural America, such as inexpensive labor and abundant
resources, play a diminishing role in the contemporary knowledge-based economy
and a globally competitive economic and business context and, therefore, do not
always lead to a region’s economic success (Appalachian Regional Commission 2001,
Low et al. 2005, Acs and Malecki 2003). As a result, traditional ‘‘smokestackchasing’’ business recruitment, retention and expansion strategies have been
gradually replaced by one with greater emphasis on homegrown new and small
S. Cheng et al.
business development (Dabson et al. 2003, Doctors and Wokutch 1983, Mokry
1988). Instead of focusing on attracting a ‘‘blockbuster’’ firm, state and local
governments are now increasingly turning to helping indigenous start-ups in order to
tap their potential to improve the health of rural economies and create a sustainable
economic future for rural areas (Acs and Malecki 2003, Markley 2006, Vaughan
et al. 1984). Compared with its urban counterpart, however, rural America faces
many challenges in its efforts to foster local small businesses, such as thin labor
markets and poor transportation accessibility (Acs and Malecki 2003), inadequate
venture capital information as well as more limited face-to-face contact (Acs and
Armington 2003), and lack of local innovation network and technology clusters
(Acs et al. 1996, Cooke and Morgan 1998, Malecki and Tootle 1996).
Entrepreneurship measurement: quantity vs. quality
Previous entrepreneurship measures were either based on the ‘‘rates’’ or ‘‘stock’’ of
self-employment or new firms, and were intended to gauge the overall scale of
entrepreneurship (i.e. the total number of start-ups created). Each of these measures
has its own advantages and limitations, and the use of a particular indicator depends
on the trade-offs between such measures and the specific requirements of given
research projects. Most earlier studies using a self-employment indicator (e.g. Evans
and Leighton 1989, Low et al. 2005, Parker 2005, Steinmetz and Wright 1989)
measured only single self-employed individuals but excluded business founders with
employees even when they were still working for themselves. This kind of indicator
is at odds with the essence of ‘‘growth’’ in the determination of entrepreneurial
firms and is most likely to underestimate organization formation because entrepreneurs will lose their self-employed status when they hire employees as their business
expands (Gartner and Shane 1995). Self-employment is thus a poor indicator of firm
creation and growth (Reynolds and White 1997). Earlier ‘‘new firm formation’’
measures, relying primarily on Dun & Bradstreet files, had difficulty in recognizing
new firms due to a firm’s organizational restructuring or legal status change, and in
distinguishing seasonal ‘‘new’’ businesses (Aldrich et al. 1989, Birley 1984). This, to a
great extent, has incurred concerns and disputes toward Birch’s (1979) analysis and
conclusions on the contribution of small firms to job creation (e.g. Armington and
Odle 1982, Davis et al. 1996).
In addition to the difficulty in operationalizing the concepts of ‘‘self-employment’’ and ‘‘new firm formation’’ in earlier entrepreneurship measures, neither the
‘‘rate’’ nor the ‘‘stock’’ approach is free of serious issues. Rate indicators, whether in
terms of self-employment or new firm formation, fluctuate more than their stock
counterparts (Meager 1992, Reynolds 1992). Such year-to-year rate fluctuations may
lead to paradoxical conclusions in time-series analyses. Even in cross-sectional
analyses, which many of the previous studies used (e.g. Acs and Armington 2006,
Audretsch and Keilbach 2005, Armington and Acs 2002, Reynolds et al. 1994, Wong
et al. 2005), the comparison between rates could also be problematic because those
rates may be highly sensitive to the given year or years selected for investigation.
Additionally, a rate indicator does not tell the whole story from a new venture to
either a successful company or to another failed business. On the other hand, the
stock measures, which consider both the entry and exit of firms or self-employment,
may be very stable in value (i.e. change very slowly) and therefore lead to statistically
insignificant results.
Innovation  The European Journal of Social Science Research
Most previous entrepreneurship measures did not capture the heterogeneous
nature of entrepreneurship either, since they focused primarily on the overall or gross
aspect of entrepreneurship (e.g. new firm birth rates) and overlooked its qualitative
differences across regions and over time. Henrekson (2005) argued that entrepreneurship is not about general new firm formation (or rates) or self-employment (or ratio),
but about the concentration of fast-growing new firms. It is also indicated that the
relatively small number of high-growth new firms, instead of the number of new firms
that is roughly equivalent to the number of self-employed persons, accounts for the
majority of jobs created (Buss 2002, Kirchhoff 1994, Storey 1997). These fastgrowing entrepreneurial firms are willing and able to grow through successfully
commercializing and diffusing new ideas on a large scale, and therefore, they play a
particularly important role in economic development (Audretsch 1995). The notion
of high-growth and high-potential firms begs for corresponding entrepreneurship
quality measures that are able to single out such firms from the general batch of
newly-formed firms that also include non-entrepreneurship-related lifestyle and
necessity-driven small ventures. There is no commonly accepted definition of a highgrowth entrepreneurial firm. High-growth firms have been previously defined as the
5 or 10% of the fastest-growing firms (Almus 2002, Birch 1987), those which expand
their number of employees by more than 20% in a three- or four-year period (Birch
1995), or those which double their employment within five years (Brüderl and
Preisendörfer 2000).
The development of the Longitudinal Business Database (LBD) of the US
Census Bureau provides an unparalleled opportunity to track organization growth
and empirically distinguish high-growth firms. Reynolds (1992) suggested that
a longitudinal dataset should be able to track individual new start-ups across
years. Earlier efforts, though sparse, have been tried with publicly available data
sources. Low et al. (2005) separated the breadth (quantity) and depth (quality) of
entrepreneurship. They gauged entrepreneurship breadth though a county’s selfemployment rate, and entrepreneurship depth though either a county’s ratio of
proprietor income to proprietor employment (an income measure) or a county’s nonfarm proprietor income over the total sales of products and services (a revenue
measure). As Low et al. themselves admitted, however, both the income and revenue
measures for entrepreneurship quality are rather crude because they are incapable of
excluding lifestyle, necessity-driven and natural-resource-based self-employment
from their high-income and high-revenue-oriented entrepreneurship quality measures. One of the best ways to eliminate such unwanted inclusion is to isolate truly
high-growth entrepreneurial firms by tracking their performance. Autio (2005), in
one of a series of the Global entrepreneurship monitor reports, attempted to isolate
high-growth-expectation entrepreneurship and compare its concentrations in
44 countries, primarily through international interviews of adult population on their
five-year growth expectations of their existing or intended start-ups. Although
valuable as one of the first internationally coordinated efforts, this research may
reach suspicious conclusions because positive expectations or potentials may not
necessarily lead to reality and because people in some cultures may be more
optimistic about the future than those in other cultures and hence have higher, if not
unfounded, growth expectations.
The National Commission on Entrepreneurship (2001) was arguably one
of the first to track the growth of new ventures by using LBD and developed a
‘‘Growth Company Index’’ (GCI) to rank 394 Labor Market Areas (LMAs) in the
S. Cheng et al.
United States. GCI measures the percentage of existing firms that experienced annual
employment growth of at least 15% (or 100% in the same time period) in 19921997.
GCI has limitations, although it is one of the earliest entrepreneurship quality
indicators, and such limitations may distort the scale and distribution of high-growth
firms. First, GCI is based on 19921997 data and may not be able to reflect current
distribution of high-growth firms, particularly after recent various state/local small
firm growth initiatives. Second, GCI does not distinguish employment growth by
industry sectors in its final single aggregated indicator, and thus may have an inherent
bias to the manufacturing sector and may favor the service sector in which
employment expansion is relatively easier. Third and finally, GCI fails to distinguish
new firms by their initial employment and, therefore, it may favor very small
establishments. GCI implies that a new venture with employment growth from one
to five employees in five years is classified as a high-growth company while another
firm with employment expansion from 100 to 150 employees is not. Camp (2005)
developed a similar regional entrepreneurship index that includes the share of young
firms that are growing by at least five employees in the course of 19911996, in
addition to the number of new firm formation and its annual change. Henderson
(2006) refined GCI by adding a minimum employment growth hurdle of at least
10 employees, which partially addresses GCI’s inherent bias against large establishments. The new entrepreneurship quality measure will refine GCI to address the
three limitations above. Similar to GCI, the new measure will …
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