Frontiers of Entrepreneurship Research
1996 Edition
SUMMARIES

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EXISTING BUSINESSES AS SOURCES OF NEW FIRMS: A MISSING TOPIC IN BUSINESS FORMATION RESEARCH?


Michael G. Scott
Peter J. Rosa

Department of Management and Organization
University of Stirling
Stirling FK9 4LA
Scotland, UK.

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++44 1786 467335

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++ 44 1786 467329

Principal Topics

From our recent work on entrepreneurial life cycles and growth it has become clear that using the "firm" as the unit of analysis in entrepreneurial research is flawed. A "firm" is merely a legal unit which can be manipulated by discerning entrepreneurs to maximize their advantage, and it is empirically open in what ways small firm entrepreneurs draw boundaries around different business activities and seek advantage from manipulating the "firm" as a legal organization. The matter of multiple or sequential ownerships is not extensively researched: studies of "portfolio" or "habitual" entrepreneurs relegate these categories to the ,margins, leaving a largely untested assumption that most new firms are created by new founders. (The image of the lone hero is still a powerful cultural icon).

Our research aims to explore more systematically the rate and nature of multiple ownership amongst small business owners, and to analyze and assess its implications to current debates on the determinants of new firm formation.

Method

Our ongoing research attempts to assess the scale of multiple ownerships through a range of methods. These include analysis of company records for Director’s cross holdings in Scotland; by the analysis of the parentage of companies; and at the micro level by tracing entrepreneurial genealogies. Macro data will be drawn largely from Scotland as a test case, but will include European and US data were possible. The micro data will be based on interviews with Scottish portfolio entrepreneurs.

Major Findings

Present indications are that for the UK, possibly as many as 1 in 4 or 5 businesses are part of ownership clusters. The paper will report on the up-to date situation. Secondly, in exploring the reasons for multiple ownerships, we have indicative data that entrepreneurs make special use of the legal framework to enable experimentation in diversification, i.e. they generate new businesses for the purpose of testing out a new product or service, in the knowledge that if it fails, its loss can be insulated from other firms in the cluster.

Implications

A high incidence of multiple ownership (past and present) would imply that it is the entrepreneurs of existing firms that are one of the most important direct instigators of new firms, a point often ignored in research on and policy towards business start-up. Analysis of small firms foundation tend to show that firm density is an important determinant of firm formation. Where small firms are at a high density, the higher rates of formation are often explained in terms of the availability of more and better "role" models, and better support environments. The more obvious explanation, that it is the owners of the small firms themselves who are creating new businesses, has been overlooked. Demonstrating a high rate of multiple ownership would support the importance of existing firms as primary sources of new firms.

The work has important implications for both policy and research. Our understanding of the new firm formation process has been over-simplified by removing the entrepreneur from center stage. Baumol warned us that "the theoretical firm is entrepreneurless- the role of existing businesses in the new firm formation process is an attempt to redress that balance.

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