from farming to international business: the social auspices of entrepreneurship in a growing economy...

From Farming to International Business: The Social Auspices of Entrepreneurship

in a Growing Economy

Kaivan MunshiBrown University and NBER

1. Introduction Business success depends on:

Credit Connections

Credit and connections are determined by: Family background Community networks

Business communities cannot satisfy additional demand for entrepreneurs

Entrepreneurs without business background will fill the gap Networks grow most vigorously in communities with poor outside

options once they do crystallize Test this hypothesis with new data from the diamond

industry

The Survey List firms: GJEPC database 2001-03

Exit information 1995-2000

Organization of the business Key step is accessing rough diamonds on

credit Network provides referrals

10 rough suppliers/year vs. 40 polished buyers 70% of firms have a dominant supplier 70% of roughs sourced from Antwerp 75% of roughs received on supplier credit 6% of transactions have a written agreement

Theoretical framework Production technology Network technology Selection into the industry

Entry condition:

Growth of the network ωt

j declines more steeply in L-community implies network strengthens more rapidly in that community

Solving recursively, can show that this will be the case if:i. Density is non-decreasing as we move down the

ability distributionii. Network technology is not too concave

Firm performance: Controlling for ωi

j with firm fixed effects, performance increases more steeply in the L-community

Average entrant’s abilityAssume linear network technology and uniform ability distribution

Same result can be obtained for

Alternative distributional assumptions Multiple cohorts

Ability distribution F(ω) constant across cohorts Individuals enter industry at a fixed age Receive referrals from preceding cohort

Ability distribution varies across communities

Selection into the networkPayoff inside the industry:

Entry conditions:

Selection thresholds:

Additional results Investment in the network, measured by

intra-industry marriage increases more rapidly in the L-community

More non-network firms are drawn from the H-community and this gap widens over time

Predictions for characteristics and performance unchanged

Empirical analysis Changes in firm characteristics

Allow for secular changes in outside options Control for age effects

Changes in firm performance Allow outside options to change across

communities and over time Control for changing returns inside the industry

Conclusion No reason why such entry by outsiders

could not be replicated elsewhere Infusion of bank credit can have unexpected negative consequences