The Relevance of Business Exit for Future Entrepreneurial Activity

• Date: 01 March 2016
• DOI: http://doi.org/10.1002/jsc.2053
• Author: Judit Albiol‐Sánchez
• Published date: 01 March 2016

RESEARCH ARTICLE

Strat. Change 25: 151–169 (2016)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2053

Copyright © 2016 John Wiley & Sons, Ltd.

Strategic Change: Briengs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2053

The Relevance of Business Exit for Future

Entrepreneurial Activity1

Judit Albiol‐Sánchez

Department of Economics, Universitat Rovira i Virgili, Reus, Spain

Territories can capitalize on knowledge resulting from business exit by designing

policies that distinguish rst‐time entrepreneurs who need specic support and

information from individuals with an entrepreneurial background whose experience

might help enhance the quality of future entrepreneurial activity.

e analysis of the impact of entrepreneurial exit on macroeconomic gures is an

interesting information‐based input to promote entrepreneurship. In most coun-

tries, policymakers employ entrepreneurship as a tool for overcoming stagnating

or declining economic activity (Henry and Treanor, 2013). As a result, entrepre-

neurship has rmly entered into the agendas of policymakers, educators, practi-

tioners, and business people.

e current economic and nancial crisis faced by economies since 2008 has

triggered signicant debate among policymakers. Many researchers have noted

that the labor market experienced its deepest downturn since the post‐World War

II era (Elsby et al., 2010). In particular, this downturn has had an important

implication for entrepreneurship rates. us, in most developed and developing

countries the analysis of entrepreneurial exit has become crucial since it may

impact the conguration and level of competitiveness of local industries. Yet little

attention has been paid to the impact of entrepreneurial exits on entrepreneurial

entry decisions (DeTienne, 2010).

Fritsch and Mueller (2004) argue that market exit should be understood as a

necessary element of market selection, and this would likely result in improved

competitiveness and employment growth. Also, it is suggested that policymakers

should stop subsidizing rms to minimize the costly exit of newly created rms.

Previous research using data from the Global Entrepreneurship Monitor (GEM)

shows substantial dierences in the dynamics of entrepreneurship across economies

(Acs and Varga, 2005; Reynolds et al., 2005; Wennekers et al., 2005). Audretsch

and urik (2000, 2001, 2004) emphasize the observed correlation between entre-

preneurship rates and the level of economic development. Hence, scholars seem

1 JEL classication codes: L26, O11.

The relationship between business

exit rates and new entrepreneurial

activity evidences changes in the

conguration of the local

industrial fabric.

In developed economies,

policymakers make an excessive

use of entrepreneurship as an

instrument to channel

unemployed individuals to the

labor market.

Policies seeking to increase the

impact of necessity‐driven

entrepreneurship should target

the specic needs of these

entrepreneurs and increase their

level of human capital.

152 Judit Albiol-Sánchez

Copyright © 2016 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

to agree that the level of entrepreneurial activity varies

systematically across countries (see, for example, Wit and

Winden, 1989; Blanchower and Meyer, 1994; Rees and

Shah, 2006; Grilo and urik,2008).

erefore, it is crucial to assess whether entrepreneur-

ial exit rates contribute to explain future entrepreneurial

activity across economies. is study uses GEM data to

explain whether business exits lead (or not) to a fall in

future levels of entrepreneurial activity at the country

level. To enhance estimation accuracy, the total entrepre-

neurial activity (TEA) rate and its two components –

nascent and new business activity rates – have been

analyzed. Given that entrepreneurs are heterogeneous in

their entry motivations (Reynolds et al., 2005; Ardagna

and Lusardi, 2009), the analysis distinguishes between

opportunity‐driven and necessity‐driven entrepreneurial

activity.

e data used in this study cover the period 2002–

2007 for a sample of 41 economies. e longitudinal

nature of the data allows us to accurately study the busi-

ness exit–entrepreneurial activity relationship. To the best

of our knowledge, this is the rst longitudinal study

linking exit rates to future entrepreneurial activity at the

country level.

e remainder of the study is organized as follows.

e rst section provides a brief overview of the entrepre-

neurship literature. e second section then describes the

data and the econometric methodology. e third section

presents the results, while the nal section provides con-

cluding remarks.

Literature review

Business exit

Following DeTienne (2010), business exit, understood as

the process by which entrepreneurs leave the rm they

created – either by removing themselves from the owner-

ship and decision‐making structure of the rm, shutting

down the business, or discontinuing business activity – is

a critical stage of the entrepreneurial process. Entrepre-

neurial exit not only represents the end of the rm’s

lifecycle, but also has a signicant eect on the industry

and the local economy. From an industry perspective,

entrepreneurial exit rates might represent a change in both

the competitive balance of the industry and the congura-

tion of the local industrial fabric, thus providing value to

competing rivals (Akhigbe et al., 2003).

Business exit is more than a mere liquidity‐related

event. At the territorial level, exit rates might be the ulti-

mate consequence of the recycling process of the stock of

entrepreneurial rms (DeTienne, 2010). Territories might

show high (or low) business exit rates, and these exit rates

are path dependent and inuence future decisions of

entrepreneurs. is way, the regeneration of the popula-

tion of businesses represents a mechanism to transfer

novelty to established rms, with potentially positive and

negative eects on the territory’s economy (Audretsch,

1995). New rms represent a vital space for introducing

innovations to the market (Decker and Mellewigt, 2007) –

however, market selection forces often take many of these

short‐lived rms out of the economy, thus limiting their

potential contribution. On the contrary, and against the

background of the current economic downturn, new rms

are vulnerable to market conditions, thus increasing their

likelihood of being selected out from the industry. is

way, economic turbulence might contribute to the

consolidation of high‐potential new rms, thus facilitat-

ing the regeneration of the stock of rms by displacing

established businesses (Audretsch, 1995; DeTienne,

2010).

Entry decision: opportunity and necessity motivations

e decision to become an entrepreneur is heterogeneous

among individuals, mainly because of existing dierences

in their motivation to start a business. Research in the

economics of entrepreneurship distinguishes between

opportunity and necessity entrepreneurs (e.g., Reynolds

et al., 2005; Sternberg and Wennekers, 2005; Ardagna

and Lusardi, 2009; Block and Wagner, 2010). ese