Chapter 2

AN ECLECTIC THEORY OF
ENTREPRENEURSHIP: POLICIES,
INSTITUTIONS AND CULTURE

Ingrid Verheul ba, Sander Wennekers abc, David Audretsch cab and
Roy Thurik bac
a
EIM Business and Policy Research, P.O. Box 7001, 2701 AA Zoetermeer, The Netherlands,
Tel. +31-79-3413634
b
Centre for Advanced Small Business Economics, Faculty of Economics, Erasmus University
Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands, Tel. +31-10-4081398
c
Institute for Development Strategies, Indiana University, SPEA 201, 1325 E. Tenth Street,
Bloomington, Indiana 47405-1701, Tel. +1-812-855-6766

Correspondence:
Ingrid Verheul ([email protected]) and Sander Wennekers ([email protected])

2.1 INTRODUCTION

There is very little that generates consensus in the field of

entrepreneurship. When it comes to defining or measuring entrepreneurship,
scholars have proposed a broad array of definitions and measures (Hébert
and Link, 1989; Van Praag, 1999). Similarly, the origins and determinants of
entrepreneurship span a wide spectrum of theories and explanations (Brock
and Evans, 1989; Carree, 1997; Carree, Van Stel, Thurik and Wennekers,
2001; Gavron, Cowling, Holtham and Westall, 1998; OECD, 1998a).
Finally, the impact of entrepreneurship on economic development is
controversial (Baumol, 1990; Thurik, 1996; Audretsch and Thurik, 2000 and
2001; Carree, Van Stel, Thurik and Wennekers, 2001).
Despite the lack of consensus with respect to different aspects of
entrepreneurship scholars appear to agree that the level of entrepreneurial
activity varies systematically both across countries and over time (Rees and
Shah, 1986; Blanchflower, 2000; Blanchflower and Meyer, 1994; De Wit
12 Entrepreneurship: Determinants and Policy in a EU-US Comparison

and Van Winden, 1989). In terms of the impact of entrepreneurship, the

influential Employment Outlook of the OECD recently concluded that,
“Self-employment has become a significant source of job growth in many
OECD countries. In several it has recently grown considerably faster than
civilian employment as a whole – notably in Canada and Germany. The
recent picture contrasts with the 1970s, which saw the share of self-
employment in total employment fall in the majority of countries. Self-
employment is also an important source of entrepreneurship and small
business growth – bringing with it a potential for longer-term employment
growth” (OECD, 2000, p. 155).
Scholars also tend to agree that the 1970s served as a turning point, when
entrepreneurship rates reversed their long-term downward trend (Blau, 1987;
Acs and Audretsch, 1993; Acs, Carlsson and Karlsson, 1999; Carree and
Thurik, 2000a; Carree, Van Stel, Thurik and Wennekers, 2001). This sudden
and pervasive shift has perplexed the community of scholars as well as
policy makers. Since the beginning of the twentieth century large
corporations were seen as the sole and most powerful engine of economic
and technological progress. The large corporation was thought to have both
superior production efficiency as well as innovative efficacy. The continuous
decline in the number of small firms in the Western economies and the
alleged successes of the Eastern European centrally planned economies,
combined with the impressive domination of American corporate giants,
such as IBM, U.S. Steel and General Motors, reinforced these conclusions.
As Teece (1993) and Chandler (1990) emphasize, the exploitation of
economies of scale and scope were considered to be the driving force of
economic development. The post-war era was characterized by relatively
well-defined technological trajectories, stable demand, and seemingly clear
advantages of diversification. Audretsch and Thurik (2001) characterize this
period as one where stability, continuity and homogeneity were the
cornerstones they label as the ‘managed economy’. Small business was
considered to be a vanishing breed. Preserving small business had more to
do with democratic and political values than with economic efficiency.
In fact, as the fall of the Berlin Wall made clear, the centrally planned
eastern economies, built around economic concentration and the exploitation
of scale economies, failed and ultimately disappeared. But times have also
changed for the Western economies. Large firms have been subjected to
waves of downsizing and restructuring and entrepreneurship has been (re)-
discovered (Carree, 1997; Gavron, Cowling, Holtham and Westall, 1998;
Thurik, 1999; Wennekers and Thurik, 1999). In the 1980s, careful
systematic empirical evidence documented the shift in economic activity that
was taking place away from large firms to small, predominantly young
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 13

enterprises. While it is clear that such a shift has taken place, it is less clear
why and what the implications are. The goal of this chapter is to provide new
insights into the resurgence of entrepreneurship in the Western world. In
Section 2.2 we first discuss the complex and multi-dimensional phenomenon
of entrepreneurship and its consequences for measurement. In Section 2.3
we present a new analytical framework for conceptualizing the underlying
entrepreneurial forces. Section 2.4 outlines demand side issues, such as
technology, globalization, economic development and industrial structure.
Section 2.5 presents key supply-side factors, including population growth
and density, age structure, immigration, women participation, unemployment
and income levels and disparity. Section 2.6 covers the individual decision
making process whereby opportunities, resources, abilities, personality
characteristics and preferences are the input factors of a person’s risk-reward
profile. Section 2.7 discusses the role of a possible discrepancy between
actual and equilibrium rates of entrepreneurship. Section 2.8 addresses the
role of government intervention through linking policy to the other
determinants of entrepreneurship. Section 2.9 explains the pervasive
influence of culture and Section 2.10 provides a conclusion.

2.2 DEFINITIONS AND MEASUREMENT OF

ENTREPRENEURSHIP

Comparing the level of entrepreneurship across nations is difficult for

several reasons. First, there is no generally accepted definition of
entrepreneurship (OECD, 1998a; Van Praag, 1999; Lumpkin and Dess,
1996; Bull and Willard, 1993). Entrepreneurship is a multidimensional
concept, the definition of which depends largely on the focus of the research
undertaken. An entrepreneur can fulfil different functions (Fiet, 1996).
Hébert and Link (1989) distinguish between the supply of financial capital,
innovation, allocation of resources among alternative uses and decision-
making. They use the following definition of an entrepreneur which
encompasses the various functions: “the entrepreneur is someone who
specializes in taking responsibility for and making judgmental decisions that
affect the location, form, and the use of goods, resources or institutions”
(Hébert and Link, 1989, p. 213). Wennekers and Thurik (1999) give an
alternative (more ‘Schumpetarian’) definition in which they focus on the
perception of new economic opportunities and the subsequent introduction
of new ideas in the market. These definitions from the world of economics
differ from those in the management world. In their description of the
difference between entrepreneurs and managers, Sahlman and Stevenson
14 Entrepreneurship: Determinants and Policy in a EU-US Comparison

(1991, p. 1) use the following definition: “entrepreneurship is a way of

managing that involves pursuing opportunity without regard to the resources
currently controlled. Entrepreneurs identify opportunities, assemble required
resources, implement a practical action plan, and harvest the reward in a
timely, flexible way”.
Second, and related to the first argument, measurement and comparison
of the level of entrepreneurship for different time periods and countries is
complicated by the absence of a universally agreed upon set of indicators
(OECD, 1998a). One can have a ‘static’ or a ‘dynamic’ perspective
(Wennekers, 1997, p. 185). The so-called self-employment or business
ownership rate is an important static indicator of the level of
entrepreneurship (EIM/ENSR, 1995). In this study we will use the terms
business ownership and self-employment as equivalent to entrepreneurship.
The term self-employment refers to people who provide employment for
themselves as business owners rather then seeking a paid job. Alternatively,
the focus can be on the number of small- and medium-sized enterprises in a
country. On the other hand, the dynamic perspective focuses on the so-called
nascent and start-up activity, as well as on the net entry rate and the
turbulence rate (total of entry and exit).
In the static perspective of self-employment and business ownership two
definitions can be distinguished (EIM/ENSR, 1995). The first definition
refers to people leading an unincorporated business. These people usually
draw no salary but use the profits of the enterprise to cover personal
expenses. They have full personal liability for the conduct of the business.
The second definition concerns owner-managers who gain a share of the
profits as well as a salary from an incorporated business. These
entrepreneurs run a risk equal to his/her share of the invested capital in the
business.
In some countries, e.g., France, the Netherlands and the United Kingdom,
only the first category is considered self-employed, whilst in others, e.g.,
Germany, Denmark, Ireland, Portugal and Spain, the second category is also
included in self-employment statistics. For the present study use is made of a
harmonized database including entrepreneurship figures for 23 OECD
countries for the period 1972-1998 (Thurik, 1999; Audretsch, Carree, Van
Stel and Thurik, 2000). Within this data set entrepreneurship is defined
broadly, including the owners of both incorporated and unincorporated
businesses, but excluding the so-called unpaid family workers and wage-
and-salary workers operating a side-business as a secondary work activity as
well as business owners in the agricultural sector.
Table 2.1 shows that the countries with the lowest rate of
entrepreneurship are Luxembourg, Denmark, Norway, Austria, Sweden and
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 15

Finland. For these countries, several of which are Scandinavian, the rate of
business ownership is below 8.5 percent in 1998.1 By comparison, the
weighted sample average in 1998 is approximately 11 percent. By contrast,
in four countries, Greece, Italy, Portugal and Australia, the business
ownership rate exceeds 15 percent. Note that the majority of these countries
is Mediterranean.2 Taken as a whole the number of business owners in the 23
countries grew from about 29 million in 1972 to about 45 million in 1998.
The proportional growth of the labor force has been lower in this period so
that the rate of business ownership increased from 10 percent to 11 percent.
Clearly, the United States is the country with the highest number of
business owners: about 32 percent of the total 45 million business owners in
the 23 countries in 1998 are situated within the United States, about the same
percentage as in 1984. Countries that increased in business ownership rate
by more than 3 percentage points in the period of 1984 through 1998 include
Ireland, Canada, New Zealand, Portugal and Iceland. The former three
countries experienced a growth of the business ownership rate in the period
prior to 1984. There are four countries suffering a decline in the business
ownership rate in both periods: Denmark, France, Luxembourg and Norway.
Although Japan only had a decline in business ownership in the second
period (1984-1998), this decline is particularly noteworthy since its share in
total business owners dropped from more than 20 percent in 1972 to
15 percent in 1998.
Focusing on enterprises instead of business owners SMEs can be defined
as all private enterprises (excluding agriculture, hunting and fishing)
employing less than 250 employees.3 Harmonized data for the European
Union are available from 1988 onwards (KPMG/ENSR, 2000, p. 16), but for
individual countries longer time series based on national definitions may
exist. Several size-classes can be distinguished: micro enterprises (less than
10 employees, including self-employed without employees); small
enterprises (10-49 employees) and medium-sized enterprises (50-249
employees).
Data of dynamic indicators of entrepreneurship are scarce. Recently for
the Netherlands, the USA, the UK and Germany harmonized data for entry
and exit in the period from 1972 through 1997 have been collected. For
individual countries longer time series based on national definitions may
exist.
16 Entrepreneurship: Determinants and Policy in a EU-US Comparison

When measuring entrepreneurship it is possible to identify several

(additional) aspects of entrepreneurship, however these are beyond the scope
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 17

of the current study. They include gender, ethnicity, part-time

entrepreneurship as a primary occupation and having a side-business as a
secondary work activity, unpaid family workers and intrapreneurship.
Regarding the last dimension it can be said that entrepreneurial activity not
only takes place in small firms, but that it can also be present in large
organizations. Entrepreneurship not only occurs in the form of small firms,
but also in the form of corporate entrepreneurship, new ideas and
responsibilities implemented in existing organizations (Stopford and Baden-
Fuller, 1994; Wennekers and Thurik, 1999).

2.3 DETERMINANTS OF ENTREPRENEURSHIP:

A FRAMEWORK

The present study deals with the factors determining the level of
entrepreneurship. A broad range of determinants explains the level of
entrepreneurship, including economic and social factors. Moreover, it is
generally accepted that policy measures can influence the level of
entrepreneurship (Storey, 1994 and 1999; EZ, 1999). The government can
exert influence on entrepreneurship in different ways; directly through
specific measures and indirectly through generic measures. For example,
when stipulating a competition policy, the government can influence the
market structure and (indirectly) the number and type of entrepreneurial
opportunities. In this section a framework is presented for understanding the
various influences of policy measures on entrepreneurship. In the succeeding
sections this framework will be developed in more detail.
Several studies have been conducted to assess and explain the level of
entrepreneurship (Reynolds, Hay and Camp, 1999; EIM/ENSR, 1996;
Carree, Van Stel, Thurik and Wennekers, 2001; Acs, Audretsch and Evans,
1994). Capturing the concept of entrepreneurship is difficult due to the
diversity of statistical definitions and theoretical perspectives. The
determinants of entrepreneurship can be categorized according to the
disciplinary approach, the level of analysis, the discrimination between
demand and supply factors and a distinction between influences on the actual
and equilibrium rate of entrepreneurship.
Discussion of the determinants of entrepreneurship cannot be confined to
one discipline; psychology studies have focused on motives and character
traits of (potential) entrepreneurs, sociological studies have focused on the
(collective) background of entrepreneurs (margination theory), economic
studies have focused on the impact of the economic climate, including
scarcity and opportunity costs and yields, and technological developments
18 Entrepreneurship: Determinants and Policy in a EU-US Comparison

on entrepreneurial activity and the demographic perspective focuses largely

on the impact of the demographic composition on entrepreneurship. From a
regulatory perspective, the government can influence entrepreneurship both
directly through support policies or establishment legislation and indirectly
through policies not directly aimed at influencing the level of
entrepreneurship (De Koning and Snijders, 1992; Storey, 1994 and 1999;
KPMG/ENSR, 2000; Audretsch and Thurik, 2001).
The determinants of entrepreneurship can also be studied according to
level of analysis. A distinction can be made between the micro, meso and
macro level of entrepreneurship. The objects of study tied to these levels of
analysis, are the individual entrepreneur or business, sectors of industry and
the national economy, respectively. Studies at the micro level focus on the
decision-making process by individuals and the motives of people to become
self-employed. See Blanchflower (2000) for a review of studies. Research
into the decisions of individuals to become either wage- or self-employed
focuses primarily on personal factors, such as psychological traits, formal
education and other skills, financial assets, family background and previous
work experience (Van Praag, 1996; De Wit and Van Winden, 1991; Evans
and Leighton, 1989b). Studies at the meso level of entrepreneurship often
focus on market-specific determinants of entrepreneurship, such as profit
opportunities and opportunities for entry and exit (Bosma, Zwinkels and
Carree, 1999; Carree and Thurik, 1996). The macro perspective tries to
aggregate the arguments at the micro and meso level and focuses on a range
of environmental factors, such as technological, economic and cultural
variables (Noorderhaven, Wennekers, Hofstede, Thurik and Wildeman,
1999; Carree, Van Stel, Thurik and Wennekers, 2001) as well as government
regulation (OECD, 1998a). The present study focuses mainly on the country
level of analysis, but attempts to explicitly link the country level to the
individual level.
The level of entrepreneurship in a particular country can be explained
making a distinction between the supply side (labor market perspective) and
the demand side (product market perspective; carrying capacity of the
market) of entrepreneurship (Bosma, Zwinkels and Carree, 1999). Elsewhere
this distinction is sometimes referred to as that between push and pull factors
(Vivarelli, 1991). The demand side of entrepreneurship represents the
opportunities for entrepreneurship. It can be viewed from a consumers’ and a
firms’ perspective. Within the first perspective, diversity of consumer
demand is important. The greater this diversity, the more room is created for
(potential) entrepreneurs. Within the second perspective, focus is on the
industrial structure (sector structure, outsourcing, networking). The
opportunities are influenced strongly by technological developments and
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 19

government regulation. The supply side of entrepreneurship is dominated by

the characteristics of the population, i.e., demographic composition. Key
elements are the resources and abilities of individuals and their attitudes
towards entrepreneurship, i.e., preferences. The cultural and institutional
environment influences the supply side of entrepreneurship.
When studying the impact of different factors on entrepreneurship it is
important to distinguish between the actual rate of entrepreneurship resulting
from the short-term balance of supply and demand, and a long-term
equilibrium rate determined by the state of economic development, i.e.,
technology, market structure.
Since the determinants of entrepreneurship can be studied from different
perspectives, a framework to explain the role of the government is presented
that incorporates different disciplinary approaches, levels of analysis, a
distinction between the demand and supply side and a distinction between
the actual and ‘equilibrium’ level of entrepreneurship. These distinctions are
depicted in Figure 2.1. The framework refers to both the decisions of
individuals to start up a firm and the decisions of incumbent firm owners to
remain in business or to exit.
The process by which the actual rate of entrepreneurship (E) is
established involves both macro and micro components. At the demand side,
entrepreneurial opportunities are created by the market demand for goods
and services, whereas the supply side generates (potential) entrepreneurs that
can seize the opportunities provided they have the resources, abilities and
preferences to do so. Moreover, personality characteristics need to be in line
with the entrepreneurial opportunity. The entrepreneurial decision, i.e.,
occupational choice, is made at the individual level, taking into account
entrepreneurial opportunities and resources, ability, personality traits and
preferences of the individual.4 This distinction between environmental
(macro) and individual (micro) characteristics is made also in the OECD
Employment Outlook (2000) where it is argued that self-employment
depends upon conditions as well as skills and spirit of the (potential)
entrepreneur.5 In the present study on the one hand we identify external
resources, such as financial and technological resources and human contacts
within networks. On the other hand we distinguish between different internal
characteristics of the individual: ability, personality traits and preferences,
i.e., values and attitudes, influencing the occupational decision.
An individual’s risk-reward profile6 represents the process of weighing
alternative types of employment and is based on opportunities
(environmental characteristics), resources, ability, personality traits and
preferences (individual characteristics).7
20 Entrepreneurship: Determinants and Policy in a EU-US Comparison
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 21

The occupational choices of individuals are made on the basis of their

risk-reward profile of entrepreneurship versus that of other types of
employment, i.e., wage employment or unemployment. At the aggregate
level these occupational choices materialize as entry and exit rates of
entrepreneurship. Weighing alternative types of employment people can
trade in their wage jobs (or unemployment) for self-employment, i.e., entry
into entrepreneurship, they can remain within the type of employment they
are currently in or they can decide, either voluntarily or involuntarily, to exit
from self-employment. Entry and exit can also impact the risk-reward profile
of entrepreneurship. This is often referred to as the ‘demonstration effect’,
where the mere gulfs or dynamics of entry and exit influence the (perceived)
attractiveness of self-employment, independent of existing opportunities and
individual characteristics. If many people enter self-employment other
people may be signaled and persuaded to start their own business without
taking into consideration the possibilities and the financial and/or intellectual
capital needed to successfully launch a business.
Together, both static and dynamic occupational decisions determine the
actual level of entrepreneurship (E).8 The actual rate of entrepreneurship
may deviate from the ‘equilibrium’ rate of entrepreneurship (E*) that can be
viewed as a long-term equilibrium rate resulting from demand-side forces,
such as technological developments and changes in the market structure
(Carree, Van Stel, Thurik and Wennekers, 2001). This ‘disequilibrium’
(E-E*) can be restored either through market forces or government
intervention. On the one hand the discrepancy between the actual and the
optimal rate of entrepreneurship is expressed through a surplus or lack of
entrepreneurial opportunities, leading to entry and exit of entrepreneurs,
respectively. On the other hand, the government can try and link the actual
and ‘equilibrium’ rate of entrepreneurship through intervention.9
Policy intervention in the economic process should take into account both
environmental conditions and individual characteristics (OECD, 2000) and
can work through the different components of Figure 2.1. Policy measures
and institutions may influence either the key determinants in the individual
decision making processes, and in that way indirectly co-determine business
ownership, or the mechanism itself, i.e., the manner in which these variables
determine the decisions with respect to business ownership. Government
policies dealing with the (de)regulation of entry and privatization or
collectivization of many services and utilities influence opportunities to start
a business (see arrow G1 in Figure 2.1). The supply of future entrepreneurs
and their characteristics can be influenced, albeit to a small extent, through
immigration policy (G2). Resources and abilities, i.e., skills and knowledge,
of individuals can be influenced through education, promoting the
22 Entrepreneurship: Determinants and Policy in a EU-US Comparison

availability of capital, i.e., development of the (venture) capital market or

financial support, and provision of information, through consulting or
counseling (G3). Preferences of individuals are more difficult to influence.
To a large extent, they are determined by cultural background and as a result
are difficult to modify (OECD, 2000). The government can try to influence
individual preferences by fostering an entrepreneurial culture. This can be
done using the educational system and the media (G4). Moreover, fiscal
incentives, subsidies, labor market regulation and bankruptcy legislation co-
determine the net rewards and the risks of the various occupational
opportunities (G5).
The subsequent six sections will focus on the basic six elements of the
above framework (demand side, supply side, individual decision making,
actual and equilibrium rates, government intervention and culture).

2.4 DEMAND SIDE

2.4.1 Introduction

Discrimination between demand and supply factors is customary when

explaining the level of entrepreneurship (Blanchflower, 2000; Storey, 1994,
Chapter 2). Whereas the entrepreneurial decision is made at the individual
level, supply and demand factors relate to a higher level of aggregation. The
supply and demand side create conditions for the entrepreneurial decision
made at the individual level. The demand side creates entrepreneurial
opportunities through the market demand for goods and services, whereas
the supply side provides potential entrepreneurs that can act upon the
opportunities. The demand for entrepreneurship is determined by a
combination of factors, including the stage of economic development,
globalization and the stage of technological development. These factors
influence the industrial structure and the (diversity in) market demand
leading to opportunities for entrepreneurship. See Figure 2.2. The demand
side factors are highly interrelated and can be considered, to a certain extent,
general factors that apply to all countries. The supply of entrepreneurship is
determined by the size and composition of the population, including age
structure, population density and the urbanization rate, the number of
immigrants and the proportion of women in the population or in the labor
market. The supply side is dealt with in Section 2.5.
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 23

2.4.2 Technological Development

A two-way relationship is assumed between technological advancement

and entrepreneurship; on the one hand technological developments are often
considered to be the driving force in the demand for entrepreneurship
(Wennekers and Thurik, 1999), whereas, on the other hand, small firms are
expected to play an important role in the development and spread of
innovation (OECD, 1996). Moreover, while influencing entrepreneurship,
technological development is assumed to interrelate with other demand side
factors.
Contemporary technological developments, such as the application of
information technology, seem to favor small-scale production through
cheaper capital goods, a decreasing minimum efficient scale and possibilities
for flexible specialization (Piore and Sabel, 1984; Carlsson, 1989; Loveman
and Sengenberger, 1991). Moreover, recent advances in information
technology have created better access to information and communication
devices that may facilitate small business ventures and enhances the
competitiveness of established small businesses. The (marginal) costs of
transforming information across geographic space have dramatically
decreased. Information can be transferred through email, fax machines, and
cyberspace (Audretsch and Thurik, 2000 and 2001). As a consequence,
market-based coordination is cheaper relative to internal coordination,
leading to a decline in firm size and diversification (Jovanovic, 1993).
Additionally, technological advancements have induced a reallocation of
resources towards new products, leading in turn to a more intense demand
24 Entrepreneurship: Determinants and Policy in a EU-US Comparison

for entrepreneurship (Casson, 1995). Hence, the number of products in an

early stage of their product life cycle may be expected to increase.
Moreover, it is known that the number of firms tends to rise strongly in the
early stages of the product life cycle (Klepper, 1996; Carree and Thurik,
2000b; Klepper and Simons, 1999). Many successful new businesses are
often found within high technology sectors, such as the computer industry
and biotechnology (Krugman, 1991; OECD, 1998a).
Technological developments lead to more dynamism in the economy, as
expressed by shorter product life cycles. As a consequence less advantage
can be obtained from economies of scale, thus favoring small businesses.
Moreover, economic dynamism entails risks that can be better absorbed by
small businesses that easily adapt to new situations than static large
businesses caught in their technological paradigm.
Next to these positive effects of technological developments on the level
of entrepreneurship a negative effect can be distinguished. Technological
developments can create barriers to entry for new firms entering specific
markets as a result of high R&D costs (EIM/ENSR, 1993 and 1996).
Technological developments can impact the level of entrepreneurship
indirectly through globalization and economic development. Technological
developments, such as information and communication technology and the
advent of cyberspace, have resulted in information exchange and
communication without boundaries. Moreover, technological developments
lead to higher levels of prosperity.

2.4.3 Globalization

The impact of globalization on the level of entrepreneurship is not

straightforward and can be both negative and positive. Globalization
involves the integration of world markets and offers opportunities for
exploiting scale. Moreover, globalization involves the disappearance of trade
barriers, creating new opportunities for all firms, either large or small. As a
consequence, increasing competition in international markets may have a
negative impact on the survival rates of (small) businesses.
On the other hand, the risk of variability in sales caused by the increased
international competition and the volatility in exchange rates, can be better
absorbed by small firms adopting production technologies that permit them
to adapt quickly to changes in market demand (Carree, 1997). The latter
argument reveals the interrelationship between globalization and information
technology. Globalization creates opportunities for small firms, provided
that entrepreneurs use other or new (production) technologies, whereas
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 25

information technology developments enable globalization (Audretsch and

Thurik, 2000).
Additionally, the increase in international competition and the increase in
cross-cultural influences, through which globalization expresses itself, has
made people aware of the existence of other cultures and their characteristics
through the nature and type of products and services offered. This exposure
of people to foreign products, making people aware of available consumer
goods from all over the world, has created new ‘global’ wants and needs and
accordingly more diverse consumer demands. Particularly in the last decades
there has been an increased diversification of consumer preferences and an
increased demand for tailor-made and individualized goods and services.
Next to the process of globalization, expressing itself through an increase in
international competition and cross-cultural influences (Acs, Audretsch and
Evans, 1994) this demand for variety can be attributed to an increasing
prosperity (Jackson, 1984). An increasing prosperity creates preferences for
goods and services fulfilling higher needs. Accordingly, a large number of
niches has been created, offering opportunities to new entrepreneurs
(Wennekers, 1997). Many specialty companies have entered the market
place. Moreover, flexible specialization enables small firms to respond
adequately to a change in consumer demands (Loveman and Sengenberger,
1991).

2.4.4 Economic Development

In the previous sections economic development was not explicitly

discussed as a determinant of entrepreneurship, although it probably has a
strong indirect influence through other determinants.10 The impact of
economic growth on the level of entrepreneurship is however ambiguous. It
appears that economic growth can either have a positive or a negative impact
on the level of entrepreneurship, depending on the stage of economic
development and on the intermediate factors through which economic
growth exerts influence on entrepreneurship.
Various studies argue that economic development is accompanied by a
decrease in the self-employment rate (Kuznetz, 1966; Schultz, 1990;
Bregger, 1996). This decrease has been persistent since the Middle Ages;
economic activity moved away from families towards factories (The
Economist, 1999). Several arguments have been brought forward supporting
a negative impact of economic growth on the level of self-employment
(Carree, Van Stel, Thurik and Wennekers, 2001). Economic development is
accompanied by an increase in wage levels and often by an improved system
of social security. Rising real wages raise the opportunity costs of self-
26 Entrepreneurship: Determinants and Policy in a EU-US Comparison

employment and thus make wage employment more attractive (EIM/ENSR,

1996). Fewer people are willing to leave ‘secure’ jobs as wages increase
with economic development (Iyigun and Owen, 1988). Marginal
entrepreneurs may be induced to become employees and this pushes up the
average size of firms (Lucas, 1978). Moreover, higher wages stimulate
enterprises to work more efficiently, leading to the use of economies of
scale.
On the other hand it is observed that, since the 1970s, per capita income
has a positive impact on the self-employment rate in most developed
countries (Storey, 1999, p.26; Carree, Van Stel, Thurik and Wennekers,
2001). There are arguments that support this positive impact of economic
growth on the level of entrepreneurship (Carree, Van Stel, Thurik and
Wennekers, 2001). Recent economic development often is accompanied by
the emergence of new industries. Small firms have a relative innovative
advantage in high innovative industries (Acs and Audretsch, 1987). New
technologies have reduced the importance of scale economies in many
sectors and small firms are no longer at a disadvantage. Moreover, small
firms are well equipped to implement technological advances (Carlsson,
1989). Increasing wealth leads to higher consumer needs. The demand for a
variety of products and services increases and small firms are well equipped
to supply these new and specialized goods. Moreover, a higher level of
prosperity may lead to higher personal needs, as argued by Maslow. The
higher need of self-realization is likely to be better fulfilled through self-
employment11 than working in routinized teams. The employment share of
the service sector increases with per capita income and the service sector is
characterized by small firm size, thus creating opportunities for
entrepreneurship (EIM/ENSR, 1997).12
Technological developments and the increase in prosperity jointly effect
entrepreneurship. Increasing prosperity leads both to a more differentiated
demand for goods and services (more luxurious products) and a demand for
new goods and services. Regarding the latter, technological developments
create a supply in new goods and services and the joint effect of the supply
and the demand for these new products leads to more entrepreneurship.
However, the causality between the demand and supply of new goods and
services is not clear. On the one hand, technological developments can lead
to the supply of new goods and services and the mere exposure of people to
these new products can lead to the creation of new wants, as existing goods
and services can no longer satisfy consumers. On the other hand, increasing
prosperity gives people the means to buy more and differentiated (new)
goods. The increasing wealth and the demand of people for new goods then
creates incentives for businesses to fill these market niches. Technological
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 27

developments enable small business owners to react to the newly created

consumer demands.

2.4.5 Industrial Structure

The Service Economy

The increase in prosperity, accompanying economic development, has

affected the industrial structure of the Western world. Generally, several
stages of economic development are distinguished that are each
characterized by different levels of self-employment (Acs, Audretsch and
Evans, 1994). In the first stage, the economy specializes in the production of
agricultural products and small-scale manufacturing. In this stage there are
high levels of self-employment. In the second stage, the economy shifts from
an agricultural towards a more manufacturing oriented economy. This stage
is characterized by increasing firm scale. In the third stage the economy
shifts from manufacturing towards services, offering new opportunities for
small-scale production.13 At present, countries in the Western world
experience an increase in the number of firms in the service sector. Most
services are characterized by a relatively small average firm size, creating
opportunities for self-employment (EIM/ENSR, 1997). The service sector is
characterized by low initial capital requirements, thereby minimizing
barriers to entry and making start-up easy.

Outsourcing and Spin-Offs

In the 1970s the credo was “big is beautiful”. Industrialization and

economic development were attributed to large businesses, exploiting
economies of scale through mass-production. As of the 1980s, partly as a
result of a structural crisis, large enterprises have started concentrating on
core competencies and outsourcing. Increasingly, companies are contracting
out non-core activities, such as cleaning, security and catering. The tendency
of large firms to externalize activities not belonging to their core business or
that are considered less profitable or more risky, creates opportunities for
entrepreneurship, stimulating start-ups of both subsidiaries and new
enterprises (Suarez-Villa, 1998). Closely related to outsourcing, the number
of corporate ventures, spin-offs and divestments have also increased
(Wennekers and Thurik, 1999). When uncertainty is high and information is
imperfect, market exchange tends to be more efficient than intra-firm
transactions. In a world dominated by a high degree of certainty and
predictability of information, transactions within firms tended to be more
28 Entrepreneurship: Determinants and Policy in a EU-US Comparison

efficient than market exchange. This is consistent with the well-documented

increase in both vertical integration and conglomeration during the post-war
period (Chandler, 1977). In the last twenty years, both of these trends have
been reversed (Carlsson, 1989). Carlsson and Taymaz (1994) show that the
decrease of vertical integration and conglomeration since the mid-1970s is
accompanied by a decrease in mean firm size.

Clustering and Regional Development

Clusters, i.e., corporate relationships, involve various levels of

commitment between large enterprises and small businesses. Clusters are
geographically agglomerated industries, i.e., a high density of business
activity, resulting in ideas and both cooperation and competition between
businesses (Audretsch and Thurik, 2001). Moreover, clusters are
characterized by the focus on one particular industrial activity and the fact
that many small firms specialize in different phases of the production
process (OECD, 1996).
These regional industries can foster entrepreneurship in different ways.14
Within clusters R&D is often undertaken, leading to new ideas and
innovations. High technology developments are often better supported by a
group of cooperating businesses than by one or several large businesses
because of the opportunities to trade tacit knowledge within the cluster
(through cooperation). The coordination in a cluster is in between internal
and external coordination; it has the advantages of internal coordination, i.e.,
facilitating the trading of tacit knowledge, without the disadvantages of
external coordination, i.e., high transaction costs. Moreover, informational
advantages and accomplished technological developments in clusters create
opportunities for small businesses. Often clusters produce spin-off firms that
try to put innovative ideas into practice. Large businesses usually do not
want to take the risks associated with the investment and marketing of
innovative products, as these ventures tend to be costly and organizational
challenging. Moreover, not only clusters that deal with high technology
products and developments can stimulate new venture developments.
Informal networking and relationships in general can impact the level of
entrepreneurial activity (OECD, 1998a). This type of interaction between
businesses is possible through the proximity of similar or like-minded
industries or through fair trades and conferences, diffusing and sharing
knowledge and practicing innovative ideas (Audretsch and Thurik, 2001).
As Griliches (1992) has pointed out, knowledge spillovers come from
different people working on similar things. Empirical evidence supports
Griliches’ conjecture in identifying that knowledge spillovers are promoted
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 29

in clusters of economic activity (Audretsch and Feldman, 1996; Audretsch

and Stephan, 1996). Thus, cooperation between individuals as well as
between different firms generates the spillover of knowledge and new ideas.
There is a large incentive for individuals and firms to interact co-operatively
to create and explore new ideas that would otherwise remain undiscovered.
At first sight the mere proximity of small businesses in clusters does not
directly affect the level of entrepreneurship in a country. Clustering impacts
entrepreneurship through the creation of opportunities for new ventures
instead of through attracting established small businesses. However, when
looking more carefully, clusters enhance the competitiveness of established
small businesses and thereby influencing the survival rate of these
businesses. Clustering thus can have impact on the level of entrepreneurship
through both entry and exit.15 Informational advantages and the
accomplished technological developments in clusters create opportunities for
small businesses (entry) and increase the competitiveness of established
small businesses (exit). Clustering is an essential phenomenon of the ‘new
economy’.

2.5 SUPPLY SIDE

2.5.1 Introduction

The extent to which a certain population produces (potential)

entrepreneurs depends on its characteristics, such as growth and spatial
dispersion, demographic composition, and the level and disparity of income.
In the context of the present framework the dispersion of the population is
expressed through population density and urbanization rate and population
composition by the age structure, the proportion of immigrants and women.
These supply side factors have consequences for the likelihood of the
population to become self-employed and are dealt with in the following
sections.

2.5.2 Population Growth

The pace of population growth has important consequences for the level
of self-employment in a country (Bais, Van der Hoeven and Verhoeven,
1995). Countries that are characterized by a rapidly expanding population
and work force are found to have a growing share of self-employed people in
the work force, whereas countries experiencing low population growth are
30 Entrepreneurship: Determinants and Policy in a EU-US Comparison

found to have a diminishing share of entrepreneurs in the labor force (ILO,

1990). However, it may not be population growth itself that is a determining
factor of self-employment. Population growth can be due to natural growth,
i.e., the balance of births and deaths, or to immigration. Population growth
may thus involve a growing share of ethnic minorities. Ethnic origin is
known to influence the choice between self-employment and paid labor
(Storey, 1994). Population growth may also be accompanied by a downward
pressure on wages, lowering the opportunity costs of self-employment.
Moreover, population growth will create a future increasing demand for
goods and services. Expectations of potential entrepreneurs of future
entrepreneurial opportunities are likely to stimulate start-ups (Reynolds, Hay
and Camp, 1999).16

2.5.3 Population Density and Urbanization Rate

Evidence is mixed regarding the impact of population density, expressed

through the urbanization rate, on the level of entrepreneurship. On the one
hand, urban areas with high population density are able to support the
growth of entrepreneurial activity because of market proximity and a
business infrastructure (Brüderl and Preisendörfer, 1998). In addition,
research centers and universities, often situated within urban areas, can offer
an educated work force and access to innovational processes and/or
products. Moreover, the establishment of businesses in a certain area is
likely to attract other businesses because of the opportunities of cooperation,
spillover effects and the ‘signaling effect’17 (Audretsch and Fritsch, 2000;
OECD, 1998a, Chapter 6). High population density in urban regions may be
an important reason for the existence of small business in urban areas and
the startup of new businesses (Reynolds et al., 1994; Storey, 1994). On the
other hand, population density and urbanization can lead to the pursuit of
economies of scale, enabling firms to produce more (efficiently) for the
customers that are abound. Moreover, thinly populated areas with many
dispersed small villages often have many small retail stores, indicating that
population density can have a negative effect on the level of business
ownership (Bais, Van der Hoeven and Verhoeven, 1995).

2.5.4 Age Structure of the Population

The age structure of the population can have both a direct and indirect
impact on the level of entrepreneurship. The direct effect implies that people
of a certain age are often considered more likely to start a business. Peters,
Cressy and Storey (1999) found evidence that on average younger people are
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 31

less likely to be(come) self-employed. Several publications show that the

probability of a person to become self-employed increases with age (Brock
and Evans, 1986; Evans and Leighton, 1989a; De Wit, 1991; Acs, Audretsch
and Evans, 1994). Evans and Leighton (1989a) show that relatively many
entrepreneurs start a business in their mid-thirties and that the average age of
an entrepreneur is over 40 years. Storey (1994) reports that people typically
start a business when they are between 25 and 40 years old. However,
recently some contrary evidence was assembled by Van Gelderen (1999),
who reports that so-called nascent entrepreneurship in the Netherlands is
most frequent among the age group between 25 and 34 years of age. It is
unknown whether this indicates an age effect or a generation effect.
At the macro-level contradictory evidence exists on the relationship
between age structure and entrepreneurship as well. Evans and Leighton
(1989a) find that a declining age of the population has a negative effect on
the level of self-employment, whereas Reynolds et al. (1999) report that
countries with more individuals in the age class of 25-44 years old have
more start-ups and that the presence of so-called ‘early career’ individuals is
an important determinant of the level of business start-ups.
Indirectly, age structure influences the level of entrepreneurship through
different intermediary factors, such as psychological and social
characteristics of the entrepreneur, financial resources, behavior and
networks or contacts. These factors all depend on the age of the entrepreneur
and co-determine entrepreneurship (Peters et al., 1999).

2.5.5 Immigration

The number of immigrants in a country can either have a direct or an

indirect impact on the level of entrepreneurship in a country. Indirectly,
immigration is assumed to have consequences for both population growth
and the age structure of the resident population because immigrant families
usually have a younger age structure and more children. This may be due
partly to religious and cultural values.
Next to the indirect impact of immigration, through demographic factors,
immigration can also have a direct effect on the number of self-employed
(Borooah and Hart, 1999; Bates, 1997). The tendency and/or ability to
become self-employed differs between native people and immigrants.
Immigration involves taking risks and this is also the case for
entrepreneurship. Immigrants are therefore considered to have an appropriate
attitude or set of mind to start a business. Moreover, entrepreneurial
activities of immigrants can be stimulated or constrained by specific factors
that do not apply to native people (EIM/ENSR, 1993). Ethnic minorities
32 Entrepreneurship: Determinants and Policy in a EU-US Comparison

often have a backward position in society, because of difficulties with native

behavior, language and attitudes. The participation rate of ethnic minorities
in the labor market stays behind and, when they do participate, they are often
situated within the ‘secondary’ labor market occupations (SER, 1998). One
way for migrants to escape their backward position is to become an
entrepreneur.18
In a study by Clark and Drinkwater (2000) it is found however that
individuals who have difficulty with the language of the host country and
recent immigrants are less likely to be self-employed. This can be attributed
to the fact that these immigrants encounter more barriers in case of founding
a new venture or have more difficulty overcoming the barriers encountered
during the process of start up. Often they are not familiar with the necessary
start up procedures and there is a lack of trust on the part of other business
parties, such as investors and suppliers, who consider the lack of knowledge
of the home market, language and customs an important handicap for doing
business.
The argument that ethnic minorities are more likely to become
entrepreneurs than native people can be related to the margination theory,
stating the importance of an (negative) event, triggering the start-up of new
firms. According to this theory, the creation of an enterprise is not always
the result of a deliberate and intentional act or a result of rational decision
making. For most people, starting a business begins with the shattering of a
previous life pattern (Veciana, 1999). For individuals or people who are
unable to adapt to a social system, such as ethnic and migrant minority
groups, their marginal social position is a driving force to become self-
employed. Self-employment in this case is not only a means for earning a
living, it is also a way of obtaining recognition and social acceptance
(Veciana, 1999).
A high immigration rate can be reinforcing because a high number of
migrants in a certain area can stimulate migrants to create their own social
structure through setting up their own businesses, especially since native
entrepreneurs are less likely to sell foreign products and are often reluctant
to set-up a business in areas where immigrants abound (Van den Tillaart and
Poutsma, 1998). On the other hand, Clark and Drinkwater (2000) argue that
immigrants living in areas with a high percentage of their own ethnic group
are less likely to become self-employed as they are separated from native
values, norms and way of doing business complicating adjustment and
venture creation.
Next to the impact on the number of new ventures, immigration (ethnic
entrepreneurship) can exert influence on the exit rate of businesses. As
compared to native entrepreneurs ethnic business owners are more likely to
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 33

start businesses in the service and retail sector, i.e., a sector that is
characterized by low entry barriers and high competition and accordingly
high failure rates. Moreover, ethnic entrepreneurs often have the tendency to
serve their own community with products and/or services from the country
of origin which can lead to supersaturation of the sector and excess failure
rates (Van den Tillaart and Poutsma, 1998).

2.5.6 Participation of Women

In the last few decades the participation rate of women in the labor
market has increased substantially in most countries in the Western world
(OECD, 2000; OECD, 1998b). This can be attributed to changing values and
attitudes towards working women and the resulting changes in behavior of
women. An increase in the participation rate of women does not necessarily
imply an increase in the number of female entrepreneurs. It does however
increase the likelihood of women to become self-employed. Whether an
increasing participation rate of women in the labor market has a positive or
negative impact on the number of entrepreneurs depends on the variable
against which the participation rate of women is measured. When focusing
on the female participation rate relative to the labor force, it can be said that
an increase in the participation rate of women has a negative impact on the
level of entrepreneurship. This can be explained by the fact that, although
the number of women business owners (as a percentage of the population)
has been increasing in most Western countries, working women show
substantially lower self-employment rates than working men (Bais, Van der
Hoeven and Verhoeven, 1995). When focusing however on the participation
rate of women relative to the population, it can be said that an increasing
female participation rate leads to more (female) entrepreneurs.
Female self-employment rates in developed countries are generally lower
than self-employment rates of men (OECD, 1998b). There is however
variation between countries with respect to the number of female
entrepreneurs that to a large extent can be attributed to differences in
institutional and cultural environment. As a consequence it is difficult to
make general and unambiguous inferences here.
The lower self-employment rates of women are often attributed to
different factors. Evidence is mixed on the difficulties women have with the
acquisition of financial capital to start a business (Verheul and Thurik,
2001). It is argued that they either have less financial capital of their own to
invest in a business because of discontinuous labor market histories or have
difficulties in accessing funds provided by formal financial institutions
(OECD, 1998b; Hisrich and Brush, 1987; Riding and Swift, 1990). Other
34 Entrepreneurship: Determinants and Policy in a EU-US Comparison

studies, however, argue that female entrepreneurs have equal or even better
opportunities to raise financial capital than male entrepreneurs (Buttner and
Rosen, 1989; Rosa et al., 1994). An important factor complicating female
entrepreneurship is the combination of household and/or family
responsibilities, leading to time constraints for women business owners
(Loscocco, 1991). On the other hand, women are often attracted to self-
employment by the flexible time schedules it offers them (Buttner and
Moore, 1997; Brush, 1992).
In addition to their impact on the number of new ventures, women can
exert influence on the number of business failures. The impact of female
entrepreneurship on failure rates is ambiguous and difficult to assess. Several
studies argue that women-owned businesses are characterized by an inferior
performance and lower survival rates as compared to male-owned businesses
(Stigter, 1999; Du Rietz and Henrekson, 20001; Rosa et al., 1996).19 This
may be attributed to the business sector in which female entrepreneurs
engage and/or the time they spend running a business. Women are more
inclined to start a business in retailing and services, sectors with relatively
low capital investment, more possibilities for part-time entrepreneurship, and
a lower expected life span of firms (EIM/ENSR, 1996). Moreover, women
often have other activities next to their business, paid or unpaid, leading to
time constraints restricting their entrepreneurial activities (Stigter, 1999;
Bruce, 1999). Finally, women contribute to the diversity in the supply of
entrepreneurship because they have a different approach towards
entrepreneurship than men do (Verheul and Thurik, 2001). Female
entrepreneurs engage in different sectors and/or activities and have different
approaches towards managing the business. Diversity in supplied goods and
services leads, through selection by customers, to the survival of high quality
businesses. A higher number of female entrepreneurs may result in a
decreasing overall business failure rate, even when female-owned businesses
have a (slightly) lower survival rate.

2.5.7 Income Levels and Unemployment

There are conflicting hypotheses that explain the influence of the wage
rate on (changes in) the rate of self-employment. The first argues that if the
wage rate is high, the opportunity costs of self-employment are high. The
second refers to a high wage rate as an indicator of an affluent economy with
above average survival rates of small businesses, resulting in a high rate of
self-employment. Lastly, high-income levels, resulting from sustained high
wage levels, enable founders to raise start-up capital easily and at low cost.
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 35

The same contradictory impact on self-employment is true for

unemployment, a variable closely related to the wage rate. When explaining
spatial variations in rates of new firm formation, Storey (1994, p. 69) argues
that: “…if unemployment is high, then more individuals would be prepared
to offer themselves for self-employment, because of the shortage of
alternative job opportunities. On these grounds high rates of, or increases in,
unemployment would lead to higher rates of new firm formation. Yet, high
rates of unemployment also reflect a lack of buoyancy in the economy,
perhaps a lack of ‘enterprise’ in the population, and therefore a shortage of
demand”. Unemployment thus appears to have consequences for both the
valuation of different types of employment and the number of
entrepreneurial opportunities created at the demand side.
At the macro level a high rate of unemployment can negatively impact
the level of entrepreneurship through suppressing effects on new ventures,
i.e., a decrease in the availability of business opportunities induced by a
depressed economy. Moreover, the failure rate of established businesses
rises because of low revenues (EIM/ENSR, 1996). On the other hand, at the
individual level, (the risk) of unemployment is likely to have a positive
effect on the level of entrepreneurship through the reduction of the
opportunity costs of self-employment. When there is little chance of finding
paid employment, unemployed people have no other option then becoming
self-employed (EIM/ENSR, 1996). Unemployment can be considered a push
factor (according to the margination theory) as it turns self-employment into
a necessity. Moreover, the duration of unemployment can enhance the need
for business ownership. The probability of becoming self-employed
increases with the unemployment duration.20
There is evidence for a two-way causation of the relationship between
unemployment and self-employment. On the one hand a high rate of self-
employment can lead to a high growth level of the economy as a whole and
to subsequent low levels of unemployment (Audretsch and Thurik, 2000;
Carree, Van Stel, Thurik and Wennekers, 2001).21 A low level of
unemployment can stimulate entrepreneurship because it is an indicator of a
thriving economy with ample opportunities for entrepreneurship (Audretsch
and Thurik, 1998).

2.5.8 Income Disparity

In addition to the level of income, income disparity can influence

entrepreneurship. Income disparity can impact the level of entrepreneurship
through both the supply and the demand side of entrepreneurship. At the
supply side high income disparity may push low wage earners and recipients
36 Entrepreneurship: Determinants and Policy in a EU-US Comparison

of social security benefits into self-employment, because their opportunity

costs of entrepreneurship are relatively low. For poor people starting a
business is a necessity (Stanworth and Curran, 1973). A high income
disparity may also provide people at the other end of the income distribution
with the financial means to cover the risks associated with self-employment
and to start a viable business. At the demand side high-income disparity is
likely to cause a more differentiated demand for goods and services. People
with higher incomes will pursue more expensive (luxury) products in
addition to the basic-need-products, whereas people with lower incomes tend
to pursue less expensive goods and services.22 Generally it is assumed that
income disparity positively influences self-employment. Indeed, empirical
research by Ilmakunnas, Kanniainen and Lammi (1999), based on a cross-
section of approximately 20 OECD-countries, suggests that income
inequality positively influences the rate of self-employment. A study of
Bosma, Wennekers, De Wit and Zwinkels (2000) also provides evidence in a
time series study for the Netherlands.
Moreover, there may be a two-way causation in the relationship between
entrepreneurship and the disparity of income. On the one hand, income
disparity may stimulate entrepreneurship through both the supply and the
demand side. On the other hand, an upsurge of entrepreneurship may be
expected to increase the disparity of incomes. The uncertainty of
entrepreneurial success is high (many who start a business fail), but there are
also considerable chances “to hit it big”. Inequality will thus be particularly
high among the entrepreneurs themselves. OECD (2000, p. 169) provides
extensive empirical evidence supporting the argument that the income
distribution of the self-employed tends to be less equal than that of wage and
salary earners.

2.6 INDIVIDUAL DECISION MAKING

2.6.1 Introduction

So far, we have concentrated on the determinants of entrepreneurship

from the perspective of the macro level. Demand and supply factors are also
inputs for individual occupational choice. In the present study it is argued
that demand side factors lead to entrepreneurial opportunities and that supply
side factors shape the individual characteristics of (potential) entrepreneurs.
Resources, ability, personality characteristics and preferences are the main
inputs for assessing and weighing the risks and rewards of entrepreneurial
opportunities versus those of alternative occupational opportunities. We will
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 37

not go into a detailed listing of opportunities, resources, abilities, personality

traits and preferences. For this information we refer to the extensive
literature on (micro-level) determinants of entrepreneurship (Blanchflower
and Oswald, 1998; Blanchflower and Meyer, 1994; Evans and Jovanovic,
1989; De Wit, 1993; Van Praag and Van Ophem, 1995; Storey, 1994; Birley
and Westhead, 1994; Reynolds, Miller and Maki, 1995). However, the
individual decision making process and its components will be briefly
discussed to illustrate how and when an entrepreneurial decision is made.

2.6.2 Opportunities and Individual Characteristics

Demand and supply side factors create conditions for the entrepreneurial
decision at the individual level. These conditions consist of opportunities,
‘external’ resources and ‘internal’ individual characteristics. The latter
include ability, personality characteristics and preferences, i.e., values and
attitudes. Whether a particular individual acts upon an opportunity depends
upon an individual’s external resources, ability, personality traits and
preferences.
Opportunities23 are created by the characteristics of the market. Different
types of opportunities can be distinguished. Opportunities for new products
arise when customers develop different wants and needs due to increasing
income levels or fast technological developments. Increasing or high-income
levels lead to a higher variety in the demand for goods and services. It also
leads to a higher level of uncertainty since demand becomes more
fragmented and whimsical. Both effects lead to more room and opportunities
for prospective entrepreneurs. Technological developments enable firms to
produce new goods and services and make people aware of the (future)
supply of new goods and services, thereby creating a demand for these new
products. Moreover, opportunities can arise from possibilities to produce
more efficiently, applying a process innovation, or experimenting with new
products applying product innovations.
Opportunities for new markets arise when the supply of existing goods
and services can be extended to new markets. These markets can either be
related to established markets, when the entrepreneur produces goods and
services that bear close resemblance (without or with little adjustments) to
the initial supplied products or when the market is opened up geographically
(to a different town, region or country). New markets also arise as a
consequence of a growing tendency towards outsourcing of non-core
activities (Carlsson, 1989; Jovanovic, 1993). Finally, opportunities for
entrepreneurial activity depend upon the development of the private service
sector vis-à-vis the public provision of services and the evolution of the self-
38 Entrepreneurship: Determinants and Policy in a EU-US Comparison

service (household) and the so-called informal or ‘grey’ sector. Since the late
1980s the balance has shifted towards the private (Wennekers, 1992). These
processes are partly driven by new regulation (privatization and
deregulation) and partly by a decreasing tax and social security wedge in
many countries.24 Finally, opportunities arise when the number of
entrepreneurs is not in line with the optimal or equilibrium number of
entrepreneurs. Actual and equilibrium rates of entrepreneurship will be
discussed in Section 2.7.
Whereas opportunities are created at the demand side, the supply side
generates (potential) entrepreneurs that can perceive and seize these
opportunities provided they have the (external) resources, ability, personality
characteristics and preferences to do so.
Resources are necessary means to start a viable business. They include
financial capital and other physical means as well as (potential) assistance
and information from human contacts (within networks). Financial means
either refer to start-up capital in the form of savings, gifts and inheritance, or
borrowing capacity based on real estate, reputation or former
accomplishments. The relevance of available financial means as a
determinant of entrepreneurial activity has been extensively documented
(Blanchflower and Oswald, 1998; Evans and Leighton, 1989; Van Praag,
1996). Resources here are considered external to the individual since we
distinguish them from ‘internal’ individual characteristics, such as abilities,
personality traits and preferences.
Following Robbins (1998, p. 46) we define ability as “an individual’s
capacity to perform the various tasks in a job”. Ability here includes both
acquired skills and knowledge and aptitude, i.e., an individual’s capability of
learning, the latter of which is inborn (Robbins, 1998).25 For an
entrepreneurial opportunity to materialize it is important that an individual
has the ability to perceive the opportunity and possesses the knowledge and
skills needed to act upon this perception. Adequate entrepreneurial skills and
knowledge, such as managerial skills and knowledge of marketing and
human resource management, can be developed through labor market
experience or the start-up or management of a previous business. In addition,
an individual needs to be able to adequately assess future rewards and risks
of the perceived opportunity. Because an entrepreneur is often exposed to
uncertainty when dealing with changing market conditions, the capacity to
learn from mistakes or new experiences is important for the survival of the
business.
The extent to which individuals are fit to become self-employed also
depends upon their personality characteristics. Personality traits often
associated with entrepreneurial success are creativity, initiative, opportunity
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 39

seeking, internal locus of control and persistence (Van der Kuip and
Verheul, 2001). Entrepreneurial personality characteristics are partly inborn
but can also be enhanced through previous self-employment and other
relevant experience (Evans and Leighton, 1989; Van Praag, 1996), and can
possibly be developed through education and training, albeit in an early
phase (Van der Kuip and Verheul, 1998).
Whereas resources, ability and, to a lesser extent, personality
characteristics pertain to the possibility of an individual to take up a certain
profession, preferences refer to the desire or willingness26 of an individual to
choose one profession over the other. In order for individuals to act upon an
entrepreneurial opportunity it is a necessary (but not a sufficient) condition
that they have a positive attitude towards, and place a value on,
entrepreneurship. Personal preferences relate to the degree of openness of an
individual to self-employment and include financial and immaterial goals,
such as the valuation of autonomy. It also embraces the attitude towards
risks.

2.6.3 Risk-Reward Profile

In modeling occupational choice and particularly the choice between

business ownership and wage employment it is often assumed that
individuals compare the expected financial and non-pecuniary rewards of
these alternatives.27 However, it can be argued that individuals not only
compare the rewards but also the risks of occupational alternatives: the net
rewards of occupational alternatives can be calculated.28
In the present study occupational choice is defined as the process of
weighing the risks and rewards of different types of employment taking into
account both environmental factors (opportunities) and individual
characteristics (resources, ability, personality and preferences).
The risk-reward profile of self-employment versus other types of
employment encompasses the valuation of expected relative rewards and
risks. The better the prospects of entrepreneurial income as compared to the
income out of wage-employment or unemployment benefits, the more
people will seriously consider the option of entrepreneurship. However,
average income is not the only factor involved in the decision. Even when
the average entrepreneurial income is high as compared to the average
income out of wage employment (or unemployment), its dispersion is high
and the success of a business is highly uncertain in the start-up phase
(Parker, 1996; Bosma, Zwinkels and Carree, 1999). Moreover, when
choosing to become self-employed, the possible consequences of failure may
include the loss of entitlements to social security, in addition to the stress
40 Entrepreneurship: Determinants and Policy in a EU-US Comparison

caused by the loss in income. When entrepreneurship entails the loss of

health care coverage, pensions and invalidity insurance, the opportunity
costs of self-employment increase, enhancing the preference for salaried
employment.29 The (relative) absence of these benefits for self-employed
people can be relevant particularly in the early phase of the business (OECD,
1998a) and is likely to discourage potential entrepreneurs from leaving
secure jobs.
An individual thus decides upon an entrepreneurial opportunity by
comparing the subjective returns of becoming an entrepreneur with the
subjective returns of performing an alternative income-producing activity
(Minniti and Bygrave, 1999). Expected returns can both be financial, i.e.,
wages and profits, and non-pecuniary, i.e., working hours,30 and are
weighted against the risks of failure or dismissal. These risks refer to both
financial liabilities and the stigma attached to failure. Total utility of each
occupational alternative depends upon personal assessments of all financial
and non-pecuniary risks and rewards. Weighing the alternatives according to
personal preferences results in an individual’s risk-reward profile of self-
employment versus wage-employment31 (or unemployment).
To create more insight into the relationship between demand and supply
side factors at the macro level and the individual risk-reward profile of self-
employment versus other types of employment, below we will discuss the
impact of dissatisfaction and the interest rate on the individual decision
making process, respectively. Clearly, the impact of dissatisfaction could be
discussed also in the section on unemployment or immigration, whereas that
of the interest rate could be discussed in the section on input-related policies.
Dissatisfaction with the current (un)employment situation positively
influences the risk-reward profile of entrepreneurship and company
formation (Shapero and Sokol, 1982; Brockhaus, 1980a, 1980b and 1982).
Brockhaus states that dissatisfaction with the previous work situation is
closely related to the entrepreneurial decision. He finds that self-employed
people are relatively dissatisfied with the previous work itself, supervision
and the opportunities for promotion.32 Not only can dissatisfaction with the
work situation influence the risk-reward profile, but also other negative
social events or shifts, such as forceful emigration or boredom and anger in a
more general sense, i.e., ‘negative displacements’, can stimulate people to
become an entrepreneur (Shapero and Sokol, 1982). Most studies concerning
the impact of dissatisfaction on self-employment use individual micro data.
Noorderhaven, Wennekers, Hofstede, Thurik and Wildeman (1999) however
found that dissatisfaction is also an important factor at the national level.
Across countries, dissatisfaction with life and society positively influence
the number of self-employed. The more people are dissatisfied with their life
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 41

and/or with the society they live in, the higher the proportion of self-
employed people in the labor force.
A high interest rate is expected to exert a negative influence on the risk-
reward profile of entrepreneurship in several ways. A high interest rate
implies high opportunity costs of self-employment because of foregone
alternative investment opportunities. Moreover, personal financial resources
often do not suffice for a business start-up, which forces potential
entrepreneurs to make use of other sources of capital, such as debt capital.
The interest rate on bank loans and other debt capital presents costs and risks
that will have to be taken into account when deciding whether to become
self-employed or not. Debt financing with high interest rates increases the
financial risk of the firm because of the risks of liability and redemption and
the fact that interest payments on debt are paid when due, irrespective of the
firm’s profitability and/or liquidity levels. Hence, a high interest rate is likely
to discourage potential entrepreneurs from starting up a business, because of
the (high) costs and risks involved. Next to the level of the interest rate,
interest fluctuations could also imply risks for the start-up of a new venture
with debt capital.

2.7 ACTUAL AND EQUILIBRIUM RATES

2.7.1 Actual and Equilibrium Rates

As presented in the previous section, changes in the rate of business

ownership are determined by the entry and exit of entrepreneurs making
occupational choices on the basis of their risk-reward profiles. People can
either be pushed into entrepreneurship in case of an unfavorable risk-reward
profile of wage employment or unemployment or pulled towards
entrepreneurship in case of a favorable risk-reward profile of self-
employment. Moreover, incumbent entrepreneurs can decide to voluntarily
close down their business because of high opportunity costs, i.e., better
alternatives. However, not all closures are voluntary and some entrepreneurs
are forced to close their business because it is no longer viable. At a more
aggregate level it can be said that the actual level of entrepreneurship is
determined by a combination of the many factors at the demand and supply
side of entrepreneurship: opportunities, resources, abilities and preferences
determine the landscape of risk-reward profiles of entrepreneurship versus
wage-employment at the individual level.
Next to the actual level of entrepreneurship in a certain country and a
certain period there is the concept of an equilibrium rate of entrepreneurship.
42 Entrepreneurship: Determinants and Policy in a EU-US Comparison

This equilibrium rate can be considered a long-term equilibrium depending

upon the stage of economic development in a country. The actual level of
entrepreneurship does not necessarily equal the equilibrium level. There are
different views on the factors determining the equilibrium rate of
entrepreneurship (Lucas, 1978; De Wit and Van Winden, 1991). Carree, Van
Stel, Thurik and Wennekers (2001) present theoretical and empirical
evidence of a long-term relationship between the stage of economic
development and the equilibrium level of business ownership. There is also
some evidence that this relationship is U-shaped. Carree et al. (2001)
mention a ‘Schumpetarian regime switch’ as the cause of the recent
reversal33 of the prolonged downward trend in the equilibrium rate of
entrepreneurship. Piore and Sabel (1984) use the term ‘Industrial Divide’
and Jensen (1993) uses the term ‘Third Industrial Revolution’. Audretsch
and Thurik (2001) make a distinction between the ‘managed economy’ and
the ‘entrepreneurial economy’. The study by Carree et al. (2001) also shows
that countries where the rate of business ownership does not equal the
equilibrium rate suffer from a lower rate of macro-economic growth. In this
respect the equilibrium level can also be interpreted as an ‘optimal’ level.
Finally, it is shown that both market forces and government intervention can
restore the equilibrium.

2.7.2 Restoring Equilibrium

Many forces may cause the actual number of entrepreneurs to differ from
the long-term equilibrium rate (Carree, Van Stel, Thurik and Wennekers,
2001). This ‘disequilibrium’ may stem from cultural forces and institutional
settings, such as the regulation of entry, incentive structures and the
functioning of the capital market (Davis and Henrekson, 1999; Henrekson
and Johansson, 1999). Market forces and policy measures play a role in
restoring the equilibrium. Different perspectives exist on the role of the
government in the economic process. There are theories, e.g., Austrian
School, Chicago School, that regard government intervention in the national
economy as harmful and disturbing, whereas ‘antitrust’ schools of thought
argue that the government has an important role in giving direction to the
economic process, i.e., addressing market failure. Implicit in the different
strands of thought is the argument that government intervention is
responsible for either corroding or restoring equilibrium.
In arguing that the actual and ‘optimal’ level of entrepreneurship do not
necessarily coincide and that the government can react to this unbalance, the
present study attributes a (potentially) positive role to government
intervention. In the framework of Figure 2.1 five avenues of policy measures
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 43

are distinguished. Depending on the nature of the (assumed) disequilibrium,

the government can try to restore equilibrium through policies fostering or
restricting entrepreneurship. In order to intervene properly in the national
economy, it is important that the government is able to perceive a deviation
from the equilibrium rate of entrepreneurship. When the government is
mistaken or has its own specific political ideas about the ‘optimal’ level of
entrepreneurship, government intervention is likely to have a ‘disturbing’
rather than a ‘restoring’ effect. In this sense the government can also be a
source of disequilibrium.
However, market forces can also play a role in restoring the equilibrium.
In particular, this restoring capacity of the market works through (the
valuation of) the number and type of entrepreneurial opportunities. In the
late 1970s and the early 1980s the structurally low number of enterprises is
likely to have contributed to a high level of unemployment (Carree, Van
Stel, Thurik and Wennekers, 2001). A high level of unemployment can push
people into self-employment due to the relatively low opportunity costs of
entrepreneurship (Storey, 1991; Evans and Leighton, 1989a; Audretsch and
Thurik, 1998).34 Moreover, when the number of business owners exceeds the
‘optimal’ rate this is assumed to diminishing profitability, due to higher
competition, resulting in high exit or failure rates and lower entry.

2.8 GOVERNMENT INTERVENTION

2.8.1 Introduction

In the previous sections it has been made clear that market forces on both
the demand and supply side impact the level of entrepreneurial activity.
Moreover, the government will be inclined to influence the actual level in
the case of perceived deviations from the equilibrium (‘optimal’) rate of
entrepreneurship. The government can fulfil different roles in the economic
environment. First, it creates a legal framework in which the property rights
of all market parties are guaranteed and protected. This general role of the
government is supplemented with a ‘correcting’ role of the government in
case of market failure. Market failure can take different forms, such as
market concentration undermining competition; information discrepancy
between market parties; absent or dysfunctional markets; externalities and
collective goods. The ‘correcting’ role of the government is aimed at free
competition, leading to efficient allocation of scarce resources. Also, the
government sees to it that market parties act in accordance with what is
considered ‘fair’. An example is government intervention in the distribution
44 Entrepreneurship: Determinants and Policy in a EU-US Comparison

of income. Finally, the government also acts as a market party through

government expenditures.
These general roles of the government can also be applied to
entrepreneurship. Government intervention within the field of
entrepreneurship is inspired by the importance of the small business sector
for economic growth and job creation. In their first life phase small
businesses are often weak and in need of some support and protection to be
able to properly compete in the market place (at a later stage). An additional
task of the government may be to warrant the quality of entrepreneurship;
too many small businesses may erode the quality of supplied goods and
services. The government may try to promote quality through the
implementation of different laws and regulations, such as the establishment
legislation, measures enhancing competition, i.e., preventing market
concentration, and environmental laws. Next to sustaining quality,
government regulation enables entrepreneurs to run or start a business
providing minimal and transparent procedures and arbitration.35 Also, the
government can reduce market failure in the field of entrepreneurship by
removing barriers to entry. Barriers to entry not only result from
concentration in the market, but may also result from incomplete information
or shortage of finance.
In the present study it is argued that the government is able to influence
the rate of entrepreneurship through the five different groups of determinants
of entrepreneurship as represented in Figure 2.1. For this purpose a
distinction is made between five types of policy measures:

Gl. Government intervention on the demand side of entrepreneurship;

influencing the number and type of entrepreneurial opportunities.
G2. Government intervention on the supply side of entrepreneurship;
influencing the number and type of potential entrepreneurs.
G3. Government policies aimed at influencing the availability of resources,
skills and knowledge of individuals. These policies generally deal with
the input factors of entrepreneurship, i.e., labor, finance and information.
G4. Government policies aimed at influencing the preferences, i.e., values
and attitudes, of individuals.
G5. Government policies (directly) aimed at the decision-making process of
individuals. Given certain opportunities and individual characteristics,
this type of government intervention directly influences the risk-reward
profile of entrepreneurship.

Before going more deeply into the above classification of government

intervention, Section 2.8.2 presents an overview of the field of government
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 45

policy and entrepreneurship according to some more traditional perspectives.

This is done to create insight into the relationship between government
intervention and entrepreneurship from a traditional point of view.
Subsequently, in Section 2.8.3 the five different types of government policy
distinguished in this study will be related to the traditional perspectives to
investigate whether there are differences or whether there is overlap.

2.8.2 Government Policy and Small Business: Some

Traditional Perspectives

Government policies with respect to small business and/or

entrepreneurship can be categorized according to different perspectives and
views. In a study on SME government policies in the United Kingdom
Storey (1994) distinguishes between macro policies, such as interest rates
and taxation; deregulation and simplification; sectoral and problem-specific
policies; financial assistance and indirect assistance, i.e., informational
services; and the relationship between small firms and the government.
Another type of classification is according to input and output or enabling
and constraining measures (Audretsch and Thurik, 2000 and 2001).
Government policies can be directed either at the input side of
entrepreneurship, i.e., labor, finance and information, or the output side of
entrepreneurship, i.e., opportunities for sales. Next to these input- and
output-related policies the government can create conditions of
entrepreneurial activity or combat its detrimental effects. Moreover, policies
can either be generic, i.e., aimed at the whole economy, or specific, targeted
at entrepreneurship. In KPMG/ENSR (2000, Chapter 8) eight fields of
planned and implemented actions are distinguished when dealing with recent
policy developments in SME-specific fields (administrative burdens; late
payment; finance; internationalization; information; labor training; R&D and
innovation; fostering entrepreneurship).36 Next to solely consisting of policy
measures and government regulation, intervention can be interpreted in a
broader way, including education and culture.
In the remainder of Section 2.8.2 the impact of government policy on
entrepreneurship is dealt with according to a classification based on the
above-mentioned perspectives.

Macro-Economic Policies

Introduction
Macro-economic policies are generic; they concern the economy as a
whole and are not directly aimed at influencing the level of business
46 Entrepreneurship: Determinants and Policy in a EU-US Comparison

ownership. These policies often have an important impact on the trading

position of small firms (Storey, 1994). Macro-economic policies provide a
framework within which businesses of all sizes practice their activities.
Examples of macro-economic policies that have impact on entrepreneurial
activity are taxation, labor market regulation, social security and income
policy. The impact of these policies on entrepreneurship will be dealt with in
the subsequent sections.

Taxation
Governments exert influence on the relative net earnings of different
types of employment through the tax system. The impact of taxes on the
level of entrepreneurship is complex and even paradoxical. In OECD
(1998a) it is argued that high tax rates reduce the returns on entrepreneurship
and can impede the start-up of new firms and expansion of established firms.
Tax payments are at the expense of retained earnings and negatively affect
the liquidity position of businesses. Moreover, high growth businesses, i.e.,
‘gazelles’, are penalized by high marginal income- and corporate tax rates.
As a consequence, high tax rates induce tax avoidance and evasion, for
example through moonlighting, thereby reducing the opportunities for
legitimate entrepreneurship. On the other hand, it has been hypothesized that
self-employment offers better opportunities to evade or avoid tax liabilities
than wage-employment (Parker, 1996, p. 466). In the latter case higher
(marginal) tax rates could promote self-employment.37
In addition to the general impact of taxes, the impact of different types of
taxation on entrepreneurship needs to be addressed. For example, the
taxation of dividends may result in the reliance on retained earnings when
financing expansion. This inhibits a flow of capital in the most promising
projects. Moreover, capital tax on new equity can discourage equity
financing and high payroll taxes make it difficult for entrepreneurs to hire
labor at a price that corresponds with the value of the employee to the
entrepreneur.
Additionally, Davis and Henrekson (1999) contend that the tax system
can introduce distortions. For example: tax exemption rules in Sweden,
favoring capital-intensive manufacturing industries, have tilted the size
distribution away from high potential enterprises towards large firms. They
also conclude that in Sweden effective tax rates for family businesses are
much higher than for other firms.

Labor Market Regulation

Generic legislation can also be directed towards the risks involved in
different kinds of employment. An important risk (potential) small business
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 47

owners have to face is insufficient or inadequate availability of personnel.

Often small businesses have relatively more difficulty hiring adequately
skilled personnel than large businesses. Large businesses often offer better
(vertical) promotion opportunities and higher salaries for the same activities
(Brown, Hamilton and Medoff, 1990). Against this background employment
flexibility is important for small businesses. Heavy unionization in a
country, resulting in a strong regulation of ‘hire and fire’ increases the risks
of business-ownership because of the difficulty for business owners to adjust
their workforce in correspondence with market fluctuations. At the same
time the risks for employees are relatively low in such an environment.
Labor market regulation thus can constrain new entrepreneurial activities
(OECD, 1998a). In recent years the deregulation of labor markets has made
wage-employment more insecure and stimulated entrepreneurial activity in
many countries (OECD, 2000).

Social Security
The possible loss of entitlements to social security when becoming self-
employed can constrain entrepreneurial activity.38 When entrepreneurship
means giving up benefits, such as health care coverage, retirement pensions,
disability or unemployment insurance, the opportunity costs of self-
employment increase, thereby enhancing the preference for salaried
employment. Moreover, a high level of social benefits is likely to discourage
unemployed people to start a business to escape from unemployment (Bosch
and Westhof, 1997). In addition to the absolute level of social security the
difference in safety nets between wage earners/unemployed people and
business owners influences the level of entrepreneurship.39 The absence or
inadequacy of safety nets for the entrepreneur can be particularly relevant in
the early phase of the business (OECD, 1998a).
Social security systems can be divided in three types of schemes (Baenen
and Visser, 1996): universal schemes, general schemes and categorical
schemes. Under a universal scheme (basic) social protection is organized in
the same scheme for all professional groups. This means that self-employed
and wage-employed people are equally insured and by the same laws. In this
case there is no (dis)incentive within the social security system for people to
become self-employed. The general scheme refers to equal treatment of all
self-employed people; self-employed are insured within the same scheme,
whereas employees are insured within a different scheme. When the
insurance provided to employees and employers differs to a great extent,
there are (dis)incentives to become an entrepreneur. Within the categorical
schemes a distinction is made between professional groups of self-employed.
In this case starting or running a business could be more attractive with
48 Entrepreneurship: Determinants and Policy in a EU-US Comparison

respect to insurance in one sector than in another. The type of social security
schemes implemented differs considerably between countries.

Income Policy and Income Disparity

Governments can directly impact the risk-reward profile of
entrepreneurship versus other types of employment through exerting
influence on wages and the relative gross returns of business ownership. For
example, a policy of wage moderation can stimulate entrepreneurship
through lowering the costs of hiring labor. Indeed, research by Carree, Van
Stel, Thurik and Wennekers (2001) suggests that the labor income share in
the national income has a negative influence on the business ownership rate
in 23 OECD countries. This finding is supported by a study of Bosma,
Wennekers and Zwinkels (2000) showing that sustained wage moderation in
the Netherlands has contributed to the revival of self-employment.
Income policy, in particular when affecting the income distribution, may
also create some (indirect) incentives for self-employment, since income
disparity can influence the level of entrepreneurship both through the
demand and the supply side.

Regulation of Dynamism

Introduction
The level of entrepreneurship is determined by the balance of entry and
exit of firms. The sum of entry and exit, i.e., business turbulence, may be an
important driving force for productivity growth and innovation (Bosma and
Nieuwenhuijsen, 2000). To guard the number and quality of entrepreneurial
ventures, governments sometimes try to regulate entry and exit flows of
entrepreneurship through special legislation. Two examples of this type of
legislation, namely business licensing (establishment legislation) and
bankruptcy legislation, are dealt with in the following sections.

Establishment Legislation
In most countries several legal demands have to be met when starting a
business. Often, as is the case in the Netherlands, a potential entrepreneur is
required to have certain skills or know-how, depending upon the sector.40
Establishment requirements can be general, applying to all small businesses,
or more specific, applying to a certain industry or occupation. General skill
requirements may relate to different aspects of self-employment, such as
management, finance and marketing, while specific skill requirements relate
to industry- or occupation specific aspects of e.g., health-related professions,
technical professions or the hotel and catering industry. In addition to skill
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 49

requirements business owners need to comply with environmental and safety

legislation and have to take into account registration procedures, including
those concerning social security and taxes.
The impact of establishment legislation on the level of entrepreneurship
is ambiguous. On the one hand, establishment legislation can be a serious
barrier for (potential) entrepreneurs as it raises the costs of starting or
running a business. These costs can take different forms. A distinction can
be made between the amount of money necessary to comply with the
establishment legislation, the length of time necessary to complete the
legislation procedures and the complexity of the procedures in the
establishment process. These costs might lead potential entrepreneurs to shy
away from risk-taking (OECD, 1998a). On the other hand, it is conceivable
that establishment requirements contribute to a higher quality of
entrepreneurship and a higher survival rate, thus having a positive impact on
the level of entrepreneurship in the long run. However, the evidence in this
direction is scarce.41

Bankruptcy Policy
Firm closure is part of the entrepreneurial process and allows resources to
move to their most productive uses. Policies that restrict the scope for firms
to restructure or close diminish the ability of an economy to adjust and
discourage entrepreneurs from starting up (OECD, 1998a). At the individual
level potential entrepreneurs can be discouraged by severe bankruptcy
regulation if, in their assessment, the possible penalties for going bankrupt
offset the potential rewards of starting a business.
The government has several means to relieve the costs in case of
(personal) bankruptcy. Discharge clauses free the debtor of his debt within a
certain time span. The extent to which discharge clauses are in use varies
between countries. In the Netherlands entrepreneurs that go bankrupt are
required to settle their debts, if possible from future earnings. This places a
constraint on prospective entrepreneurial activity (OECD, 1998a). In
contrast, in the United States owners of failed businesses are not required to
pay off their debts, with the exception of their pay roll taxes, i.e. contribution
for social security and unemployment benefits. Next to discharge clauses
other rescue possibilities, such as the postponement of debts and
restructuring, are available to businesses in distress. A postponement of debt,
i.e., temporary debt moratorium, is frequently used, whereas reorganization
is more infrequent (EIM/ENSR, 1997). During the time of reorganization
debts are frozen or need not fully be repaid.
Furthermore, bankruptcy policies vary according to the balance between
competing stakeholders groups and the degree of government intervention.
50 Entrepreneurship: Determinants and Policy in a EU-US Comparison

Bankruptcy policy needs to strike a balance between creditors’ and the

enterprise’s needs. A legal framework enabling (temporary) postponement of
commercial debts protects enterprises in distress, and at the same time (albeit
indirectly) encourages late payments, thereby damaging the position of the
creditors (EIM/ENSR, 1997).
Bankruptcy can also have a non-financial consequence, namely stigma.
Social attitudes towards bankruptcy differ between countries. In the United
States failure is often seen as an unfortunate outcome of a ‘good try’,
whereas in most European countries bankruptcy is considered a personal
failure (OECD, 1998a). For stimulating start-ups it is important that
governments take action to positively influence the public attitude towards
business failure.42

Deregulation and Simplification

Introduction
According to Storey (1994) deregulation consists of two elements. The
first is related to stimulating free markets and increasing the opportunities
for competition. The second refers to lifting administrative and legislative
burdens that take time, energy and resources away from fundamental
entrepreneurial activity.

Deregulation and Competition Policy

The impact of deregulation and competition policy on the number of
entrepreneurs can be divided into effects at the entry- and the exit-side of
entrepreneurship. Relaxation of entry regulations stimulates the number of
start-ups, as was shown in the previous section. Next to new business
formation, industry deregulation and increased competition can have other
benefits, such as lower prices, higher productivity growth, new products and
new jobs.43 Increased competition can also impact the failure rate, i.e., exit,
of new and established businesses. Policies to promote competition not only
include the removal of rules that restrict competition. It also involves the
introduction of (new) rules and institutional arrangements in dysfunctional
markets, i.e., markets where the absence of rules and regulations harm the
functioning of the market (Dutz, Ordover and Willig, 2000).
Deregulation is closely related, and often accompanies, privatization. The
aim of privatization is to improve efficiency through restructuring firms and
reallocating control rights over employment from politicians and civil
servants to commercial managers. It leads to the disintegration of the public
enterprise into separate entities. In many cases privatization goes hand in
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 51

hand with the rapid introduction of a competitive market to prevent

monopoly situations (Carree, 1997).
The aim of deregulation is to remove regulative barriers, such as business
licensing, while competition policy focuses on the elimination of market
barriers to entrepreneurship, such as cartel agreements. Established firms can
collude in many ways to prevent new firms from entering the market, for
example by denying them access to raw materials and distribution
channels.44 It can be said that entrepreneurship and competition are
interrelated since competitive entry often involves entrepreneurial activity
and (potential) competition often requires opportunities for entrepreneurship
(Dutz, Ordover and Willig, 2000).45

Administrative Burdens and Compliance Costs of Legislation

Too much and unclear legislation can discourage entrepreneurial activity
(OECD, 1998a). Small businesses are relatively sensitive to the
administrative costs of the compliance with government regulation, as
compared to larger businesses. The time and energy entrepreneurs spend on
administrative commitments distract them from their basic (entrepreneurial)
activities (EZ, 1999). Not only are administrative burdens a barrier to entry,
they are also a barrier to firm growth (Nijsen, 2000). Entrepreneurs can be
discouraged from hiring employees because of the administrative procedures
involved (Niehof, 1999). Administrative costs also occur when
administrative procedures are opaque. Often government institutions use
different concepts to discuss similar subjects obscuring government
regulation and assistance. The tax system is a good example. It often
confuses entrepreneurs due to ambiguously written rules, frequent changes,
expiration clauses and different layers of taxation (regional and national).
Moreover, the ‘language of tax’ is usually difficult to comprehend.46

Input-Related Policies

Introduction
Government policies that are input-related stimulate resources available
to small firms: labor, financial capital and information/knowledge.47 A
distinction can be made between assistance policies aimed at improving the
financial conditions of businesses and those that are designed to improve the
efficiency of the firm (Storey, 1994). Financial assistance aims at reducing
market imperfections; i.e., ‘the finance gap’,48 and can take the form of
development of alternative capital markets, such as the venture capital
market, or the direct payment of grants, loans or subsidies to the firm. By
contrast, efficiency-enhancing policies stem from the need to overcome
52 Entrepreneurship: Determinants and Policy in a EU-US Comparison

information imperfections and often include business training and the

provision of information, through consultancy and counseling.

Functioning of the Venture Capital Market

New and established businesses often have difficulties with the
acquisition of capital (Gaston, 1989; Gompers, 1999). Most starting
entrepreneurs obtain financial resources from family and friends. However
often additional financial resources are required to finance the start-up or
expansion of the business (Gaston, 1989; Gompers, 1999). These additional
financial resources can be acquired through formal and informal financial
institutions. However, because of the high risks involved and often the lack
of a track record, most financial institutions are reluctant to lend money to
early-stage and seed businesses. Moreover, the majority of these businesses
often are too small to raise equity on public exchanges to finance start-ups
and/or (early) growth. Thus venture capital can be used as an alternative to
‘regular’ financial resources (Borger et al., 2000).
As defined by Sofrova venture capital is capital provided by firms, full-
time professionals or private persons who invest alongside management in
young, rapidly growing or changing privately-owned companies which have
the potential to develop into significant businesses (Sofrova, 1996). Venture
capital is particularly important for financing high-risk, high-return projects
and is often issued to young firms, typically those developing innovative
technologies (OECD, 1998a). A distinction can be made between formal and
informal venture investors. Formal venture capital refers to investments
made by corporate investors, government bodies, banks, pension funds
and/or insurance companies (financial institutions), while informal venture
capital consists of investments by private individuals Moreover, investors
can either have an active or passive involvement in management of the
business (Sofrova, 1996).
A well-developed venture capital market is assumed to stimulate high
risk, high profit start-ups. Moreover, bankruptcy due to ‘undercapitalization’
can be prevented by providing the necessary financial resources to small
firms. A well-developed venture capital market is thus likely to have a
positive impact on entrepreneurship. Nonetheless, the degree to which the
venture capital market is developed varies between countries. Three types of
venture capital markets can be distinguished to characterize the (venture)
capital market of a country: the bank-oriented system; the Latin system and
the market-oriented system.49
Possible explanations of underdevelopment of the venture capital market
are restrictions on the institutional investors’ holding of unlisted equity and
the difficulty of exit for venture capital. Moreover, according to Borger et al.
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 53

(2002) a distinction can be made between different cultural characteristics

that are assumed to impact the attitudes of investors and entrepreneurs, such
as attitude towards risk and loss of control. These cultural characteristics can
indirectly influence the development of the venture capital market. Risk
adversity is likely to negatively influence the development of the venture
capital market, because the supply of venture capital often involves high
risk. Moreover, making use of venture capital is often accompanied by a loss
of control. As compared to the venture capital market in the United States
the European venture capital markets are characterized by the reluctance of
European entrepreneurs to accept the loss of control that constitutes venture
funding and the variation in rules applying to public listing in different
European countries (OECD, 1998a).
The government can support the development of the venture capital
market by intervening in both the supply and the demand of the venture
capital market. These measures can be divided in direct and indirect
measures (Borger et al., 2000). Indirect measures include stimulation of the
secondary market and encouragement of financial institutions to offer a wide
range of products. Direct measures include a direct supply of capital to the
small business sector and financial incentives to invest in (new) ventures.

Specific Entrepreneurship Support Policies

Governments in developed economies have devised many different
policies to support small businesses (KPMG/ENSR, 2000, Chapter 8) This
assistance usually takes the form of direct financial payments and free or
subsidized advisory services. A number of these support schemes are
specifically directed at supporting the start-up of new enterprises.
First, there are credit facilities for starting enterprises within the
framework of an SME guarantee scheme. It is assumed that credit is rationed
because lenders have incomplete information about the projects proposed by
borrowers (Cressy, 1996). This credit rationing may hit small entrepreneurial
firms particularly hard, since they are perceived to be a riskier investment
and often do not have collateral to cover loans. The government can
introduce loan guarantee schemes to solve this problem. Evidence for the
impact of these schemes on the development of small businesses is mixed
(OECD, 1998a). An important problem facing guarantee schemes is the
inefficient allocation of resources. Most loans are distributed to firms that
already have access to sources of ‘regular’ financial institutions (OECD,
1998a).
Other types of support for (new) small businesses are fiscal facilities,
such as tax exemptions, that are sometimes available for start-ups and young
enterprises, and subsidized facilities, such as courses, information and
54 Entrepreneurship: Determinants and Policy in a EU-US Comparison

advice. Finally, networks of entrepreneurs can stimulate the exchange of

information between entrepreneurs and (subsidized) mentors, i.e.,
senior/successful entrepreneurs, can support new entrepreneurs.
However, as Storey (1999) has pointed out, adequate evaluations of these
different support schemes are rare and it is often unknown to what extent
these policies meet their objectives. Storey (1999) argues that the
effectiveness of support schemes should be both monitored and evaluated.
Monitoring includes specification of the characteristics of individuals taking
up the scheme, probing recipients’ opinions and their views on the extent to
which the scheme made a difference. Evaluation ideally involves the
comparison of assisted businesses with non-assisted businesses with the
same characteristics, such as age and sector, and taking account the
‘selection bias’, i.e., businesses that seek assistance are likely to differ from
businesses that do not. According to Storey (1999) the government needs to
pay attention to all components before bringing about ‘heaven’, i.e.,
government support that is efficient and effective.

Sectoral and Problem-Specific Policies

Introduction
Next to general policies, focusing on the (small) business sector at large,
policies can be distinguished that focus on specific sectors, regions or
groups. In many countries specific policies exist for stimulating
entrepreneurial activity among different groups of people, such as women,
young people, immigrants and unemployed people, and within specific
sectors of industry, such as the IT-sector. Moreover, specific policies focus
on stimulating entrepreneurial activity in specific rural or urban areas, and in
businesses with certain characteristics, such as high-tech and fast-growing
businesses.

Stimulating Entrepreneurial Activity among Groups of People

Although young people often indicate a preference for self-employment
(OECD, 2000), the likelihood of self-employment increases with age (Evans
and Leighton, 1989a; Brock and Evans, 1986; Acs, Audretsch and Evans,
1994). One reason for this paradox might be the low amount of capital
possessed by young people, inhibiting the start-up of new ventures (OECD,
2000). To stimulate self-employment among young people government
policies can support the start-ups of firms by young people financially.
Additionally, the government can provide informational support, both
through counseling and setting up so-called ‘help desks’ and building
awareness of self-employment as a career option. Moreover, the government
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 55

can tackle the lack of work experience of young people through the
promotion of apprenticeships (during education).
Women are generally less inclined to become entrepreneurs than men
and, if they pursue self-employment, they often engage in different activities
and start smaller businesses than men (OECD, 2000; Verheul and Thurik,
2001). The fact that female entrepreneurs often start smaller businesses than
men can be attributed to either different ambitions or activities (Verheul and
Thurik, 2001). Women often engage in the service sector, where businesses
tend to be smaller. Moreover, it is often argued that women have less
financial resources to invest in the business (OECD, 1998b; Hisrich and
Brush, 1987; Riding and Swift, 1990). To stimulate entrepreneurship among
women and extend their entrepreneurial activities to different sectors of
industry the government can support women by giving advice or financial
support.
In addition to stimulating entrepreneurial activity of young people and
women, the government can also stimulate self-employment among the
unemployed through targeted advisory and financial support. In a study by
Evans and Leighton (1990) it is found that although unemployed people are
about twice as likely as employed people to start a business, these businesses
are more likely to fail. Government policies that merely focus on stimulating
unemployed people to engage in entrepreneurial activity, thus seem
insufficient. Government support in the business phase(s) following the
start-up phase, as well as education and training, may raise the chances of
small businesses started by unemployed people to survive in the market
place.

Stimulating Entrepreneurial Activity within Geographical Areas

Generally, there are large differences in the economic development,
living standards and the employment situation between regions within a
country (EIM/ENSR, 1997). Government policies can tackle these
imbalances by stimulating the establishment of businesses in so-called
‘underdeveloped’ areas. Urban areas usually attract (small) businesses
because the existing infrastructure, consisting of other businesses, financial,
advisory and educational institutions. To promote entrepreneurial activity in
‘underdeveloped’, often rural, areas government policies can focus on
developing and sustaining an appropriate infrastructure. In addition,
businesses can be granted financial assistance, i.e., subsidies or loans, when
moving to less developed areas. Curran and Storey (1993) point out that
inducing small business development in accessible rural areas is likely to be
rewarded since (manufacturing) firms in these areas tend to outperform the
businesses located in urban areas. Policies that are aimed at stimulating
56 Entrepreneurship: Determinants and Policy in a EU-US Comparison

entrepreneurship in rural areas however might need to proceed with caution,

since they are bound to have consequences. Storey (1994) argues that one of
the main concerns of public policy in facilitating the development of small
businesses in accessible rural areas is the impact of industrialization on the
countryside. Expansion of established businesses and settlement of new
businesses in rural areas is often restricted by planning controls that warrant
the preservation of these areas.

Stimulating R&D and High-Tech Firms

Technological developments are important for the creation of
entrepreneurial opportunities. Government intervention within the area of
high-technology firms and R&D in general is often considered justifiable
since market imperfections corrode the extent to which benefits that accrue
from technological innovations can be appropriated. Individual inventors can
not assure that they (themselves) appropriate the rewards of an invention and
this discourages both individual inventors to undertake innovative activities
and investors to finance these innovative activities (Storey, 1994). Apart
from the risk of ‘inappropriability’ investments in R&D are often considered
unattractive because of the high risks that accompany these innovative
ventures. These risks involve the uncertainty that R&D investments result in
a product that can be sold in the market and the difficulty of assessing the
characteristics of the (potential) market (Storey, 1994). On the other hand,
the returns on R&D investments can be very high when these ventures prove
to be successful.
Despite the difficulties and risks of innovation for small businesses, a
large proportion of R&D and innovations takes place within small
businesses (Menkveld and Thurik, 1999). The government can further
stimulate innovative activity in small firms through overcoming market
imperfections by supplying finance50 in an early stage, i.e., before the
product is available for sale, and promoting R&D through stimulating
networks in which knowledge is easily exchanged between businesses and
institutions. The problem of ‘inappropriability’ can be reduced through the
implementation of well-designed patent systems that protect the ownership
rights of technological innovations.

Education

The government can influence the rate of entrepreneurship not solely

through legislation, but also through the educational system (EZ, 1999). The
government can influence the quality and type of education, through
government spending and exposure to quality assessments.
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 57

When investigating the impact of education on the level of

entrepreneurship in a country a distinction needs to be made between
different levels of education: primary (pre-high school), secondary (high
school) and tertiary education. Reynolds, Hay and Camp (1999) conclude
that the larger a country’s investment in education at the tertiary level, the
higher is the rate of new firm formation.
Education (in the broadest sense) is important for stimulating
entrepreneurship because of several reasons (Reynolds, Hay and Camp,
1999). First, education provides individuals with a sense of autonomy,
independence and self-confidence. These qualities are important when
starting a business. Second, education makes people aware of alternative
career choices. Third, education broadens the horizons of individuals,
thereby making people better equipped to perceive opportunities and finally,
education provides knowledge that can be used by individuals to develop
new entrepreneurial opportunities.
A distinction can be made between this general education and more
specific education focusing on the promotion of entrepreneurship and
stimulating entrepreneurial skills and knowledge. The educational system
can be used for the encouragement of commercial awareness, raising the
social standing of the entrepreneur and the development of necessary
entrepreneurial skills (Gavron et al., 1998). Kourilsky and Carlson (1997)
make a similar distinction. In their view entrepreneurship education has
multiple goals: creating awareness of entrepreneurship as a career option and
of the role of the entrepreneur in the economy, promoting readiness through
basic knowledge and (entrepreneurial) qualities and stimulating application
of knowledge and qualities in an entrepreneurial context. Implicit in the
argument of Kourilsky and Carlson is the ‘teachability’ of entrepreneurial
qualities. Whether and to what degree entrepreneurial qualities can be taught
is however a subject of debate in entrepreneurial literature (Gibb, 1993). Van
der Kuip and Verheul (1998) argue that entrepreneurial qualities,
perseverance, creativity and risk taking can be developed by introducing
projects involving these aspects in both early and later educational phases,
ranging from kindergarten to college. These projects may combine teaching
elements with practical experience. This approach is in concurrence with
Hofstede who argues that “one of the most effective ways of changing
mental programs of individuals is changing behavior first” (Hofstede, 1980,
p. 23). In addition, universities (tertiary education) can provide courses on
entrepreneurship, enabling the development of practical business skills.
Moreover, universities could incorporate business modules into their regular
curriculum (OECD, 1998a).
58 Entrepreneurship: Determinants and Policy in a EU-US Comparison

Beyond training of entrepreneurial skills, education can transmit

entrepreneurial values and can influence the attitude of people towards
entrepreneurship (OECD, 1998a). At the same time, a more positive societal
attitude towards entrepreneurship may stimulate entrepreneurial education,
because education is also an expression of the prevailing cultural values. In
this sense culture and education are intertwined. On this mutual
reinforcement between education and culture also see Hofstede (1980, p. 22
and p. 233). This topic will be further discussed in Section 2.9.

2.8.3 Five Types of Government Intervention Framing

Entrepreneurial Activity

In previous sections the impact of government policy on entrepreneurship

has been dealt with using a typology based on traditional perspectives in the
literature. Earlier in this chapter a distinction has been made between five
types of government intervention. These types of government intervention
correspond with the dotted arrows in Figure 2.1 and represent the influence
of government policy on entrepreneurial activity through the different
determinants of entrepreneurship. The aim of this section is to discuss these
five types of government intervention and thereby create better insight into
the processes by which the government can have impact on the rate of
entrepreneurial activity.
‘Type 1’ government intervention, as represented by arrow ‘G1’ in
Figure 2.1, involves government intervention on the demand side of
entrepreneurship – government intervention that (in)directly impacts the
type, number and accessibility of entrepreneurial opportunities. Some of
these policies help to create demand for entrepreneurship whereas others
enable small firms to make use of the room that is created by market
demand. Policies stimulating technological developments and income policy
belong to the first category of policies, whereas competition policy and
establishment legislation pertain to the latter category of policies.
Technological advancements create opportunities for entrepreneurial
ventures through new ideas or new application processes. These
advancements can be stimulated by the government through (subsidizing)
expenditures on R&D. Income policy can create opportunities for
entrepreneurship through higher wealth or income disparity, inducing
demand for tailor-made products and services and thereby stimulating
demand for entrepreneurship. Competition policy improves the accessibility
of markets through reducing market power of large firms and lowering
barriers to entry for small businesses. Moreover, establishment legislation
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 59

tends to negatively influence the access to markets, through the

implementation of business licensing requirements.
When comparing the elements of ‘type 1’ intervention with traditional
perspectives on government intervention as distinguished in the previous
section, there is little similarity. Income policy is generic, focusing on all
households within the economy, whereas other policies, in particular R&D
subsidies, are more specific. However, competition policy and establishment
legislation can both be related to deregulation and simplification, influencing
the access to the market.
‘Type 2’ government intervention, as represented by arrow ‘G2’ in
Figure 2.1, involves government intervention to affect the pool or supply of
potential entrepreneurs at the aggregate level. These policies can take the
form of influencing the characteristics or the number of people within the
population. Policies that pertain to ‘type 2’ intervention include immigration
policy and regional development policy (dealing with (sub)urbanization
processes), influencing the composition and the dispersion of the population,
respectively. Moreover, the fiscal treatment of families with children,
including family allowances or child benefits, may influence the age
composition of the population.
‘Type 3’ government intervention, as represented by arrow ‘G3’ in
Figure 2.1, impacts the availability of resources, skills and knowledge of
potential entrepreneurs. Resources, skills and knowledge are all internal
individual characteristics that can be acquired or further developed through
training or education. Inborn characteristics, such as learning capacity and
personality traits, are far less likely, if not impossible, to be developed
through education and training. Government policy will have to focus on, for
instance, overcoming the finance and knowledge gap through increasing the
availability of financial and informational resources, respectively. For
example, policies aimed at the (development of the) venture capital market
can help improving the access of (small) business owners to financial capital
needed to start or expand a business. Direct financial support, i.e., subsidies,
grants and loan guarantees, can also increase the availability of resources of
(potential) entrepreneurs. The knowledge base, consisting of both skills and
knowledge, of the (potential) entrepreneur can be influenced through the
direct provision of relevant ‘business’ information, i.e., advice and
counseling, or through the educational system. ‘Type 3’ policies can be
typified as input-related policies, since they refer to both material, i.e.,
financial capital, and immaterial, i.e., knowledge, inputs in the
entrepreneurial process.
‘Type 4’ government intervention, as represented by arrow ‘G4’ in
Figure 2.1, works through the preferences of individuals to become an
60 Entrepreneurship: Determinants and Policy in a EU-US Comparison

entrepreneur. Preferences of people, as expressed through values and

attitudes, are developed during upbringing. Although preferences are
culturally determined, the government can play a role, albeit small, in
shaping entrepreneurial values and attitudes by introducing entrepreneurial
elements in the educational system and by paying attention to
entrepreneurship in the media. ‘Type 4’ policies are characterized by the
assumed broadness of the concept of government policy, including the
educational system and overlapping, to some extent, with culture. The
relationships between culture, institutions and entrepreneurship are the
subject of the next section.
‘Type 5’ government intervention, as represented by arrow ‘G5’ in
Figure 2.1, is directed at the decision-making process of individuals, i.e.,
potential entrepreneurs. Given opportunities, resources, ability, personality
traits and preferences, the risk-reward profile of entrepreneurship can be
influenced by this type of government intervention. Policies that are relevant
in this respect, are taxation, influencing business earnings, social security
arrangements, influencing the willingness of people to give up their present
state of (un)employment to become an entrepreneur, and labor market
legislation regarding hiring and firing, thereby determining the flexibility of
the business and the attractiveness to start or continue a business.
Bankruptcy policy can also influence the risk-reward profile. For example,
when legal consequences of bankruptcy are severe, this may lead people to
shy away from self-employment. Note that ‘type 5’ policies are generic
macro-economic policies, as they apply to all economic actors.

2.9 CULTURE

2.9.1 Defining Culture

A variety of definitions of culture exists (Kluckhohn, 1951; Schneider

and Barsoux, 1997, p. 19). In the present study we use the definition as
proposed by Hofstede (1991, p. 5) who defines culture as “the collective
programming of the mind which distinguishes the members of one group or
category of people from another”. This definition may be applied to different
levels of analysis, including the level of the family, ethnic group, firm or
other organization and society or nation.
Culture is intangible and largely unobservable as it can only be studied
through various verbal and nonverbal manifestations from which constructs
are inferred (Hofstede, 1980, p. 14). Culture is a highly complex
phenomenon, including both deeply embedded values and manifestations
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 61

that are more at the surface and consequently more observable (Hofstede,
1991). Values are the most deeply embedded manifestations. Hofstede
(1980, p. 18) defines values as “a broad tendency to prefer certain states of
affairs over others”.51 Rituals, heroes and symbols are more outward-
directed manifestations.
For a better understanding of the concept of culture it is necessary to
make a distinction between culture and personality. The latter refers to the
individual and encompasses personal traits52, originating from genetic
inheritance and individual experiences, as well as values that are for a large
part shaped by cultural influences. In contrast, culture is restricted to
collective, often normative, ‘mental programs’. There is an ongoing debate
among psychologists to what extent culture and personality can be
considered independent and distinct variables, and to what extent they are
‘mutually constitutive’, i.e., integral parts (Church, 2000). In his study
Church propagates an integrated cultural trait psychology perspective
(Church, 2000, p. 681). This means that he argues that mental programming
is partly unique for individuals and partly shared with those who belong to
the same culture.
For research on the determinants of entrepreneurship it is useful to make
a distinction between culture and institutions (Mitchell, 1979, p. 107;
Wennekers and Thurik, 1999, p. 41). We consider culture mainly as
unobservable and institutions as observable. Here we differ from North
(1994, p. 360) who subsumes culture under institutions.53 A related
distinction is the one between background institutions, that are
predominantly cultural, such as trust, commitment and authority
relationships, and social institutions, that are related to business
organizations, such as property rights, capital markets and the education
system (Whitley, 1992, p. 19-25 and p. 269). In the present study a
distinction has been made between culture, general institutions and specific
policies that support new and/or small firms.

2.9.2 Measuring Culture

We claim that culture can only be indirectly inferred from its

manifestations: rituals, symbols, heroes and values. Rituals, symbols and
heroes can be studied through content analysis of documents, speeches,
television programs and other recorded material. Values are often studied
through surveys in which individual people are interviewed about their
preferences and opinions. Inferences about differences in values between
groups can be made by comparison of the mean scores of the interviewed
62 Entrepreneurship: Determinants and Policy in a EU-US Comparison

individuals from these groups.54 Alternatively, the extremes of the frequency

distributions can be compared.
The most famous systematic attempt to measure cultural differences
between nations is made by Hofstede (1980) who analyzed the empirical
data of an exceptionally large survey of IBM subsidiaries in 40 countries in
1968 and 1972. A factor analysis of the mean scores per country regarding
work-related values produced four dimensions of national culture:
individualism, power distance, masculinity and uncertainty avoidance. In a
later study (Hofstede, 1991) long term orientation was added as a fifth
dimension.
Other cross-national empirical studies have been conducted by Inglehart
(1997) who studied the rise of ‘post-materialist’ values, Hoppe (1990) who
carried out a study similar to the one by Hofstede, and Lynn (1991) who
studied different national attitudes to competitiveness and money.

2.9.3 Cultural Change

Values

Values change slowly. Hofstede (1980, p. 16) stresses that mental

programs passed on from one generation to another are resistant to change.
He emphasizes that the stability of cultural patterns can be ascribed to
“reinforcement by the institutions which themselves are products of the
dominant value systems” (Hofstede, 1980, p. 233). These institutions
“include the family, education systems, politics and legislation” (Hofstede,
1980, p. 22). The role of historical processes in shaping cultural value
orientations is also shown in an in-depth three country study by d’Iribarne,
focusing on management and culture in France, the United States and the
Netherlands (1989, Chapters 2, 5 and 8). It highlights the role of path
dependence.
Hofstede (1980) makes a distinction between three processes of cultural
change: zeitgeist effects (values shift due to external shocks, such as a
technological revolution, war or recession); generation effects (generations
differing in fixed values replace each other) and maturation or seniority
effects (respondents’ values change as they grow older or assume greater
responsibilities).
The process of cultural change in society can be demonstrated by
focusing on the changing value systems. According to Hofstede (1980) the
period between 1968 and 1972 showed a sharp increase in individualism, a
slight increase in masculinity and stress at work, and a decreasing preference
for an autocratic boss. These cultural trends are worldwide but there is little
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 63

evidence of cultural convergence across countries, with the possible

exception of individualism (Hofstede, 1991, p. 238). From a long-term
perspective, the strong statistical impact of rising wealth on individualism
(Hofstede, 1991, p. 75) makes a continued trend towards individualism
highly likely, with emerging high-growth economies converging towards the
level of individualism attained in the rich countries.

Positive Feedback from Increasing Self-Employment

Although culture is slow to change entrepreneurial activity may create its

own feedback cycle, slowly moving society to a more entrepreneurial
culture. In regions or countries with a high density of entrepreneurial activity
examples of successful new venture creation offer role models people can
conform to: “If he/she can do it, I can” (Veciana, 1999). A ‘demontration’
principle is at work here: the more entrepreneurs, the higher the exposure of
people to entrepreneurship, the higher the acceptance of entrepreneurship as
an alternative to wage-employment and the higher the likelihood of other
people becoming self-employed.
In the past twenty years positive feedback effects from re-emerging
entrepreneurial role models, reinforced by changes in incentive structures
and other institutional changes, may have contributed to the rise of
entrepreneurial preferences and abilities. Given the early stage of
institutional change and the slow pace of cultural change through generation
replacement55 it is reasonable to expect a further increase in entrepreneurship
in the next years.56

2.9.4 Culture’s Consequences

Culture Matters

There is an extensive literature on the importance of culture and

institutions for economic structure and performance. The role of culture has
been analyzed at the macro level (Landes, 1998; Lynn, 1991; North, 1990
and 1994; Olson, 1982 and 1996) and the firm level (Casson, 1991;
Hofstede, 1991; Whitley, 1992). In this section we will focus on culture’s
implications for the level of entrepreneurship, i.e., business ownership, in a
country.
64 Entrepreneurship: Determinants and Policy in a EU-US Comparison

Culture and Entrepreneurship

From the framework proposed in Section 2.3 (Figure 2.1) it can be

inferred that national culture may influence the level of entrepreneurship
through both the supply and the demand side of entrepreneurship. At the
supply side individual preferences for self-employment are likely to be
within the cultural domain, since they are often shaped by the nation’s
prevailing attitude towards entrepreneurship. In a study of Reynolds et al.
(1999) several indicators of an entrepreneurial culture are mentioned. At the
level of symbols, rituals and heroes both the stories in the media about
successful entrepreneurs and the respect for those who start a new business
may be indicators of an entrepreneurial culture. In a sample of ten countries
a positive correlation was found between respect for entrepreneurs and the
rate of firm start-ups (Reynolds et al., 1999, p. 30).57 At the level of more
deeply rooted values the following values are found to be important for
entrepreneurship: the value placed on independence and autonomy in the
workplace, tolerance for inequality of income and wealth and the (absence
of) stigma attached to those whose entrepreneurial initiatives fail. Reynolds
et al. (1999) find a positive empirical relationship between the social value
of independence and the level of entrepreneurial activity. However, at the
level of values relationships between culture and entrepreneurship do not
always follow intuition. This is demonstrated in a cross-sectional study by
Wildeman et al. (1999) reporting an unexpected positive relationship
between Hofstede’s power distance and uncertainty avoidance indices and
the share of business ownership in the labor force in 23 industrial nations.
Additionally they find a negative correlation with Hoppe’s individualism
index. They explain these results as proof that dissatisfaction can be a source
of entrepreneurship: in countries with a high power distance, a high
uncertainty avoidance and low individualism, there may be relatively more
business owners since enterprising individuals cannot satisfy their needs
within existing organizations. Support for this hypothesis can be found in
Baum et al. (1993) where it is argued that there is a negative impact of
individualism on the level of entrepreneurship. On the other hand,
uncertainty avoidance has also been shown to have a negative indirect
influence on the development of the level of entrepreneurship over time. In a
study by Noorderhaven et al. (1999) Hofstede’s uncertainty avoidance index
is used to make a distinction between high and low uncertainty avoidance
countries. In the former group a strong negative relationship between GDP
per capita and the level of business ownership is found, indicating that push
factors to entrepreneurship prevail in this environment. For the low
uncertainty avoidance countries no significant influence of per capita income
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 65

on business ownership is found. However, the expected profits of self-

employment appear to be a significant pull factor for entrepreneurship.
Almost all of the low uncertainty avoidance countries show a resurgence of
business-ownership in recent years.58
The influence of culture, through the supply side dimension of
entrepreneurial abilities, is difficult to establish and remains rather
speculative. However, prevailing attitudes with respect to entrepreneurship
in the educational system will probably influence the degree of relevant
training that is offered in schools. The evaluation report59 of the Australian
program on entrepreneurship and education gives strong indications that the
presence of a principal or teacher who is highly committed to the concept of
enterprise education is a key factor for schools in becoming involved in
enterprise education projects.
Culture may also influence entrepreneurship through the demand side as
it (indirectly) influences entrepreneurial opportunities. The prevalence of
entrepreneurial values within the realm of government and politics may
influence the scope of the private versus the social sector, particularly with
respect to utilities and personal services; the degree of entry regulation of
new business start-ups and the extent to which innovative regional clusters
are fostered through private-public partnerships.
In sum little is still known about the complex role of culture in the rise
and fall of business-ownership. More extensive and international comparable
data regarding cultural dimensions at the country level are needed to create a
better understanding of the influence of culture on entrepreneurship and the
relevant social and economic processes involved.

2.10 CONCLUSIONS

The level of entrepreneurship differs considerably across countries and

periods. Entrepreneurship is a multidimensional concept, the definition of
which depends largely on the focus of the research undertaken. The present
study deals with the factors determining the level of entrepreneurship. A
broad range of determinants explains the level of entrepreneurship, including
economic and social factors. Moreover, it is generally accepted that policy
measures can influence the level of entrepreneurship. The government can
exert influence on entrepreneurship in different ways; directly through
specific measures and indirectly through generic measures. For example,
when stipulating a competition policy, the government can influence the
market structure and (indirectly) the number and type of entrepreneurial
opportunities.
66 Entrepreneurship: Determinants and Policy in a EU-US Comparison

The goal of the model is threefold. First, it attempts to integrate different

perspectives of the determinants of entrepreneurship. Second, an extensive
description of the role of government is provided in an endeavor to answer
the question of how policy measures may influence entrepreneurship. Third,
our model may serve as means for explaining temporal en cross-sectional
differences in the rate of entrepreneurship. The study is motivated by the
recent increase in the rate of entrepreneurship in many modern economies,
by the considerable variation of this rate across countries and the importance
of entrepreneurship for growth.
The level of entrepreneurship in a particular country can be explained
making a distinction between the supply side (labor market perspective) and
the demand side (product market perspective; carrying capacity of the
market) of entrepreneurship. This distinction is sometimes referred to as that
between push and pull factors. The determinants of entrepreneurship can
also be studied according to level of analysis. A distinction can be made
between the micro, meso and macro level of entrepreneurship. The objects of
study tied to these levels of analysis, are the individual entrepreneur or
business, sectors of industry and the national economy, respectively. Studies
at the micro level focus on the decision-making process by individuals and
the motives of people to become self-employed. Research into the decisions
of individuals to become either wage- or self-employed focuses primarily on
personal factors, such as psychological traits, formal education and other
skills, financial assets, family background and previous work experience.
Studies at the meso level of entrepreneurship often focus on market-specific
determinants of entrepreneurship, such as profit opportunities and
opportunities for entry and exit. The macro perspective focuses on a range of
environmental factors, such as technological, economic and cultural
variables as well as government regulation.
The present study focuses on the country level of analysis, but attempts
to explicitly link the country level to the micro level where an individual’s
risk-reward profile represents the process of weighing alternative types of
employment. This profile is based on opportunities (environmental
characteristics), resources, ability, personality traits and preferences
(individual characteristics). The occupational choices of individuals are
made on the basis of their risk-reward profile of entrepreneurship versus that
of other types of employment, such as wage employment or unemployment.
At the aggregate level these occupational choices emerge as entry and exit
rates of entrepreneurship. Weighing alternative types of employment people
can trade in their wage jobs (or unemployment) for self-employment, i.e.,
entry into entrepreneurship, they can remain within the type of employment
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 67

they are currently in or they can decide, either voluntarily or involuntarily, to

exit from self-employment.
The process of occupational choice is also embedded in an institutional
and cultural environment. First, opportunities for entrepreneurial activity
depend upon the development of the private service sector versus the public
provision of services and the evolution of the household and the so-called
informal sector. Since the late 1980s the balance has shifted towards
commercial provision of many services due to privatization, deregulation
and a decreasing tax and social security wedge in many countries.
Additionally, entrepreneurial opportunities also depend upon competition
and establishment legislation. Second, the government can influence
resources and abilities of individuals through subsidized information and
advice services, loan guarantees and other direct support schemes. Third,
personal attitudes towards entrepreneurship are a ‘product’ of the current
cultural environment. These cultural patterns are however stable and path
dependent, and are reinforced by education and legislation that again are
products of the cultural system. Nonetheless, once policies promoting
entrepreneurial opportunities, the availability of resources and
entrepreneurial ability bear some success, emerging entrepreneurial activity
will provide new role models triggering cultural change.
This study has documented that entrepreneurship is a multi-faceted
phenomenon. This may explain why research on entrepreneurship spans so
many academic fields under many disparate guises. At its best, the subject
has generated a diversity of approaches and perspectives. At its worse, it has
a ‘Tower of Babel’ nature, where each academic discipline speaks its own
distinct language with its own methodology, impenetrable by outsiders.
This study has tried to build on the positive challenges of
entrepreneurship research by drawing on the rich traditions and findings
spanning a broad spectrum of academic disciplines to develop an integrated
Eclectic Theory of entrepreneurship. This Eclectic Theory incorporates
multi-level units of analysis – micro (individuals) as well as macro
(countries). In addition, it draws on the perspectives and traditions of a
number of disciplines, including sociology, management, psychology,
regional science, and economics. The resulting Eclectic Theory ought to
provide a conceptual framework for analyzing both the determinants of
entrepreneurship as well as the consequences or impact of entrepreneurship
across a broad array of industry, national, spatial and temporal settings.
Hopefully, this Eclectic Theory of entrepreneurship will serve as a bridge to
provide a common link across the broad array of academic disciplines,
reflecting the rich diversity of settings in which entrepreneurship takes place.
68 Entrepreneurship: Determinants and Policy in a EU-US Comparison

ACKNOWLEDGEMENT
The present chapter is the outcome of a research partnership between the School for
Public and Environmental Affairs (SPEA) at Indiana University, the Faculty of Economics at
Erasmus University Rotterdam and EIM Business and Policy Research in Zoetermeer. An
early version of the present chapter has been read at the RENT XIV Conference in Prague,
November 2000. Ingrid Verheul acknowledges financial support of the VSB Fund Schiedam
and the Trust Fund Rotterdam. The authors would like to thank Martin Carree, Candice
Henriquez and Lorraine Uhlaner for comments on an earlier version of the present chapter.

NOTES
1
The Scandinavian countries all have at least several of the following characteristics that
often go along with low business ownership rates: a high per capita income, high female
labor participation rates, low income disparity, a large scope of the public sector and a
relatively low degree of dissatisfaction with life. See Wildeman et al. (1999) and
Henrekson (2000).
2
Greece, Portugal and also Spain have a relatively low per capita income, implying a
traditional industrial structure, and their populations show a relatively high degree of
dissatisfaction. Italy is characterized by a low per capita income in Southern Italy and a
specific industrial structure in Northern Italy (industrial districts with an emphasis on
small family businesses).
3
In some countries, most notably the Netherlands, SMEs are defined to be enterprises
employing less than 100 employees.
4
Our model of occupational choice bears some resemblance to the entrepreneurship
development framework used by Stevenson (1996), in the sense that in her model
motivation, skills and opportunity factors are the key aspects of business start-ups.
5
In the OECD Employment Outlook (2000) ‘conditions’ include access to finance,
administrative burdens, taxation and social security. ‘Skills’ include human capital and
managerial skills and ‘spirit’ refers to personal choice (OECD, 2000). Within our
framework individual characteristics are defined broader, including the (individual) access
to capital.
6
The concept of ‘willingness’ proposed by Van Praag en Van Ophem (1995) bares
resemblance to the concept of the risk-reward profile we use in this study. Van Praag and
Van Ophem define willingness to start a business as “the valuation of self-employment
versus wage- or unemployment, for otherwise identical situations”. They consider
willingness as “dependent upon both individual preferences for the special features of self-
employment as well as on the available outside options and their perceived attractiveness”.
7
Individual characteristics also involve demographic characteristics, such as age, gender,
marital status and ethnic background. These demographic characteristics to a certain extent
determine the availability resources to an individual and their abilities and preferences.
8
Note that different levels of analysis are linked here; the risk-reward profile shaped at the
individual level determines the actual rate of self-employment at the country-level.
9
In order to intervene at the national economy, it is important that the government is able or
willing to perceive a deviation from the optimal rate of entrepreneurship. Moreover,
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 69

independent of the magnitude of the optimal rate, the government will have its own
(political) ideas about the desirable level of entrepreneurship.
10
In the present study economic development is used synonymous to prosperity and wealth.
11
Blanchflower and Oswald (1998) provide some evidence that on average entrepreneurs
have a higher job and life satisfaction than employees.
12
There also seems to be a reverse causality; high or increasing levels of small business
presence lead to higher economic growth (Carree and Thurik, 1998 and 1999; Carree, van
Stel, Thurik and Wennekers, 2001) or lower levels of unemployment (Audretsch and
Thurik, 2000).
13
It should be born in mind that economic development has cyclical aspects because periods
of economies of scale and flexible specialization alternate. Initially, a new product is
produced by specialized small firms and gradually, more experience in production can lead
to more product-specific knowledge and, as a consequence, to exploiting economies of
scale (Carree and Thurik, 2000b).
14
Storper and Salais (1997) argue that learning processes are of central importance to the
understanding of the functioning of regional economies. The diffusion of knowledge,
through a collective learning process, proceeds most efficiently in an innovative milieu
characterized by a high degree of openness based on personal networks that are embedded
in local communities and the proximity of work, social and cultural relationships.
15
When studying the impact of groups of cooperating firms, i.e. clusters, on entrepreneurship
a distinction should be made between vertical and horizontal relationships between firms.
In case of vertical relationships, the division between one firm internalizing part of the
production chain, and two firms each specializing in different parts of the production
chain, is vague. Only when different functions within the production chain are
externalized, opportunities for entrepreneurship are created.
16
According to Reynolds, Hay and Camp (1999) no or negative population growth should be
anticipated by the national government and a shortage in a country of people who are most
likely to pursue self-employment can be compensated by stimulating other groups, women
or younger/older people, to become self-employed.
17
The ‘signaling’ effect refers to the fact that the (mere) establishment of businesses in a
certain area is perceived as an indication of the attractiveness of this area by other
businesses.
18
This holds especially for countries where immigrants have long had a place in society, like
the United Kingdom (Storey, 1994) and the Netherlands (Bais, Van der Hoeven and
Verhoeven, 1995).
19
In a study by Kalleberg and Leicht (1991) it is argued that female-owned businesses are not
more likely to go out off business.
20
In an empirical investigation for 23 OECD countries, Audretsch and Thurik (1998) find a
positive effect of the (lagged) change of unemployment on the change of the self-
employment rate. They correct for the reversed causality of self-employment influencing
unemployment. See also Storey (1991), Evans and Leighton (1990) and Audretsch and
Thurik (2000).
21
Taking into account the two-way causation of the relationship between unemployment and
the rate of self-employment there is a clear possibility of a non-linear relationship between
unemployment and the number of people starting a business. A positive relationship
changes into a negative one, beyond a certain point where potential entrepreneurs are
discouraged by the lack of entrepreneurial options and the likelihood of business failure
(Meager, 1992). In this sense the positive and the negative effects of unemployment are
70 Entrepreneurship: Determinants and Policy in a EU-US Comparison

confined to certain phases of the business cycle. Different countries can have differently
shaped relationships between unemployment and the number of (starting) entrepreneurs
(Meager, 1992).
22
The impact of income disparity on the demand for entrepreneurship should not be
overestimated. The main factor causing differentiation of consumer wants is not income
disparity but average per capita income or wealth.
23
Van Praag and Van Ophem (1995) use a broader definition of opportunity, referring to
opportunity as “the possibility to become self-employed if one desires this”. In their view
opportunity is determined by both individual characteristics and the (macro-) economic
environment.
24
Henrekson (2000) presents a model for analysing the impact of taxes and social security
contributions on the choice between do-it-yourself and purchase on the market.
25
Other research in this area does not subsume aptitude under ability but refers to aptitudes as
potential abilities and abilities as the knowledge and skills an individual currently
possesses (Schermerhorn, Hunt and Osborn, 2000; Wagner and Hollenbeck, 1995). For the
purposes of the present study we choose however to include aptitude with ability.
26
Van Praag (1996).
27
See Acemoglu (1995) and Murphy et al. (1991). An earlier model distinguishing between
entrepreneurship and wage-employment, couched in terms of opportunity costs of
entrepreneurship, is presented by Lucas (1978).
28
The net rewards of occupational alternatives are calculated correcting the rewards for
inputs, like working hours, and other costs. Unemployment and unpaid (family) work are
included with the occupational alternatives.
29
Whether an individual considers these risks important factors in the decision to become
self-employed depends on the risk propensity of an individual (Brockhaus, 1980b).
Individuals with a high propensity to take risks may be more likely to become an
entrepreneur as rewards of entrepreneurship are considered more important than the risks
involved.
30
OECD (2000, p. 170) summarizes considerable evidence that on average self-employed
people work longer hours than employees. At the same time there is evidence that, in spite
of longer hours and poorer working conditions, the self-employed have a higher work
satisfaction than employees (OECD, 2000, p. 171).
31
An alternative formulation would be to consider the expected rewards of wage-employment
as the opportunity costs of self-employment.
32
With respect to their actual financial compensation the self-employed were less dissatisfied.
33
The proportion of the labor force that is self-employed has decreased in most Western
countries until between the mid-1970s and the mid-1980s. Since then the self-employment
rate has started to rise again in several of these economies. See also Table 2.1.
34
It has to be born in mind that at the aggregate level (high) unemployment may also correlate
with recession and declining entrepreneurial opportunities.
35
Next to the range of laws and regulations, the quality of legislation is important; the energy,
time and money spent on the compliance with government regulation need to be
minimized in order for the entrepreneur to have maximum resources available to spend on
the basic activities.
36
In KPMG/ENSR (2000) an account is also given of the national policies of 19 European
countries as well as what is considered best practice.
An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture 71
37
An investigation by Parker (1996), using data from the United Kingdom, supports this
hypothesis. More, and partly contradictory, evidence concerning the effects of average and
marginal tax rates on self-employment is presented in OECD (2000, p. 173).
38
Social security here is defined in a broad manner, including other benefits, in addition to
retirement pensions.
39
In the United States self-employed individuals are required to pay into social security via
self-employment taxes. This rate is two times higher, since it includes both the shares of
employers and employees.
40
In the Netherlands a relaxation of skill requirements has recently been implemented. The
general skill requirements will be abolished by the of January 2001, whereas the
complete establishment act, including industry-specific and occupation-specific
requirements, is to be withdrawn by 2006. In this way, the Dutch government tries to
improve the entrepreneurial climate (EZ, 1999).
41
The relaxation of establishment requirements in the Netherlands was shown to have a
positive impact on the number of start-ups (Bosma, Zwinkels and Carree, 1999), without
negatively influencing the ‘quality’ of entrepreneurship. See also Carree and Nijkamp
(2001) for the influence of deregulation in the retail sector on the speed of entry and exit.
42
The degree of intervention of the government in the bankruptcy procedure varies across
countries (EIM/ENSR, 1997; De Koning, 1998).
43
For some empirical evidence see Lever (1997) and Lever and Nieuwenhuijsen (1999).
44
Most countries have adopted competition laws, prohibiting this kind of anti-competitive
behavior. Sanctions vary from fines to imprisonment (OECD, 1998a).
45
There is however a strand of literature suggesting that competitive forces are harmful for
entrepreneurship (Dutz, Ordover and Willig, 2000). Schumpetarian arguments favoring a
negative impact of competition on entrepreneurship, include competition erodes profits
that are necessary for internal funding of entrepreneurial activity and the small size of
businesses is a bottleneck to innovative entrepreneurship, since economies of scale (and
scope) are necessary to extract the benefits accruing from successful entrepreneurial
activity.
46
Information technology (electronic filling) could be used to reduce the administrative or
compliance burden of the tax system. In several countries governments have taken action
to streamline administrative requirements and improve the coordination between public
agencies (OECD, 1998a).
47
Labor market policies have been dealt with in the section on macro-economic policies.
48
The ‘finance gap’ is attributed to the risk adversity of banks, choosing to ration credit,
because of imperfect information. Small and new (innovative) firms are particularly
vulnerable to this credit rationing, since they are more likely to fail and are thus considered
more risky (OECD, 1998a).
49
The bank-oriented system is characterized by underdevelopment of the stock exchange
market and the important role of banks as providers of (venture) capital. There is a
concentration of shares with a limited group of shareholders. The Latin system is also
characterized by underdevelopment of the stock exchange market. Relatively many
businesses and financial holdings are family-owned or state-owned. The market-oriented
system is characterized by the separation of property and management. There are many
shareholders and banks have a limited role in the provision of (venture) capital. The stock
exchange market is well developed and there are many different suppliers of risk capital.
50
For an overview see Donselaar et al. (2000).
72 Entrepreneurship: Determinants and Policy in a EU-US Comparison

51
Some well-known values are individualism versus collectivism, power distance, social
implications of gender, trust, ways of dealing with uncertainty and the valuation of wealth.
52
The most important personality traits that are distinguished in the literature are
extraversion, agreeableness, conscientiousness, emotional stability and openness towards
(new) experiences. These traits are often referred to as the ‘big five’ (Church, 2000, p.
655).
53
“Institutions are the humanly devised constraints that structure human interaction. They are
made up of formal constraints (e.g., rules, laws, constitutions), informal constraints (e.g.,
norms of behavior, conventions, self-imposed codes of conduct), and their enforcement
characteristics. Together they define the incentive structure of societies and specifically
economies”.
54
It must be noted that groups may show a large degree of variation as cultural typologies
only describe central tendencies or dominant values.
55
Reynolds (2000, p. 48) also expects that “Fundamental changes in the life course,
occupational, and career aspirations of ordinary citizens, required to create an enterprise
society, may take several human generations”.
56
However, these reinforcement feedbacks may not continue indefinitely. When the
percentage of entrepreneurs in the labor force is very high, the opportunities for potential
entrepreneurs may decrease. Moreover, competition between the increasing number of
incumbent entrepreneurs may in time lead to a high exit rate. These effects will be
strengthened if the carrying capacity of the market diminishes as more products of the
present technological wave mature and scale economies arise
57
This may be an example of a positive feedback effect as mentioned in the previous section.
58
Given these mixed results of cross-sectional and (indirect) time-series analysis of the
impact of uncertainty avoidance on the level of entrepreneurship, one might hypothesize
that the worldwide trend towards individualism has also had a positive (indirect) effect on
the revival of business-ownership.
59
Keys Young, Evaluation of the enterprise education in schools (EES) element of the school
to work programme; final report, 24 June 1999, Department of Education, Training and
Youth Affairs, Canberra.

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