from farming to international business: the social auspices of entrepreneurship in a growing economy...
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The Survey List firms: GJEPC database Exit informationTRANSCRIPT
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