Social Capital and Entrepreneurial Behavior in Transition Countries

Transcription

1 Social Capital and Entrepreneurial Behavior in Transition Countries 1. Introduction After a seminal study written by Coleman (1988), the concept of social capital has become a key input not only in social analyses, but also in political and economic studies. In addition to its direct effect on economic performance such as economic growth, investment, poverty reduction, various arguments have been put forward regarding the ways in which social capital can be associated with economic phenomena. One of these still-evolving indirect mechanisms is the role of social capital in entrepreneurship. Even though social capital keeps leaving profound impressions in economic studies, only limited number of studies has delved so far into social capital and entrepreneurship interact (for a review, see Gedajlovic et al., 2013). In general, these studies suffer at least from three limitations. First, the studies are mainly focus on individual countries and do not provide results that could be generalized in wider geographical context (e.g., Light and Dana, 2013; Puffer et al., 2009; Meek et al., 2009). Second, usually they do not distinguish between different stages of the entrepreneurial process, and mainly concentrate on the single ladder of entrepreneurial process (e.g., Davidson and Honig, 2003; Jack, 2005). Third, empirical results are not uncontroversial due to the definition of social capital and, therefore the indicators used to depict it are either very limited or incorrect (e.g., Thortnton and Flynn, 2003; Krueger et al., 2000; Scarbrough et al., 2013). As a consequence of concentration on individual countries, narrower depiction of entrepreneurial process and the absence of a commonly agreed definition of social capital, detailed evaluation of how social capital affects entrepreneurship across various stages and wider range of transitional countries still remains untapped area of empirical research. Our paper aims to cover this gap by linking social capital to individual s entrepreneurial behavior on the following three manners. First, we use high-quality nationally-representative micro data set over 32,000 individuals from 29 transitional countries of Europe and Central Asia. This allows broadening the perspective of previous studies dealing with social capital and entrepreneurship and shifting the focus to an area of the world displaying a large variety of differences. Second, we distinguish between three stages of individual s involvement in entrepreneurial process. This distinction enables accurate assessment of where and how in the entrepreneurial process social capital plays significant role. Third, we use a three-dimensional concept of social capital that was originally proposed by Coleman (1988). By doing so, we aim at overcoming the definitional controversy and vagueness which has haunted previous studies. 1

2 2. Literature Review 2.1. Multi-dimensional social capital The concept of social capital has generally been described as the interaction between people and social groups (Smelser and Swedberg, 1994). Social capital is considered as a collective good (Coleman, 1990; Gedajlovic et al., 2013). As opposed to other types of capitals (e.g. physical, human), social capital cannot build individually and can only persist through mutual cooperation and social association (Grootaert and Bastelaer, 2002). Although no single generally accepted definition has emerged so far, Coleman (1988) describes the scope of the concept in a broader context and includes to it three features of social organizations, which are widely agreed in the relevant literature. These features are: (i) trust and obligations, (ii) networking and information channels and (iii) civic norms and effective sanctions. Nahapiet and Ghoshal (1998) use this perspective in tandem with Coleman s perspective and treat the social capital as multidimensional concept covering relational (e.g., trust and obligations), structural (e.g., networks and relationship configurations, and cognitive (e.g., shared values). Putnam (2000) and Olson (1982) have enlarged Coleman s social capital concept by treating the externalities of social associations both negatively and positively. According to Putnam (2000), a strong network of associations, no matter which form (formal or informal), creates positive externalities fostering growth and governmental efficiency. However, Olson (1982) suggests that not all social associations are beneficial to societies. As a consequence of their rent-seeking character, members of certain networks or groups can benefit from the relationship at the expense of society as a whole Multi-stage entrepreneurial process Usually, empirical researches discriminate between entrepreneurship and no engagement when they analyze the determinants of entrepreneurship (Blanchflower et al., 2001; Vivarelli, 2004). However, the road as an entrepreneur is long, meaning that prior to becoming an actual entrepreneur, an individual goes through various stages of entrepreneurial process (Van der Zwan et al, 2012). Thus, setting up a business is the result of long series of complex choices and entrepreneurial engagement (Grilo and Thurik, 2008). As Gartner and Carter (2003) suggested, distinguishing between the stages continues even after a business established. Grilo and Thurik (2006) introduce the concept of engagement stages to discriminate between the various steps of opening a new business. Individual s preferences and intentions to become an entrepreneur usually regarded as the first stage of entrepreneurial process. Later on, the concept of 2

3 nascent entrepreneur arises, when individual starts to take some concrete steps of starting up a new business. And finally, this process ends up with the establishing of a new business and becoming an entrepreneur. Grilo and Thurik (2006) call this ordering as entrepreneurial engagement levels, while Van der Zwan et al. (2010) refer to them as entrepreneurial ladder with the expectation that determinants of entrepreneurship are not necessarily the same across different stages of entrepreneurship process The interaction of social capital and entrepreneurship process: hypotheses The linkages between social capital and entrepreneurship have attracted less attention than the analysis of macroeconomic aspects. In addition, Audretsch et al. (2006) argue that most of the research on social capital and entrepreneurship interaction does not adequately address the subject too. Empirical studies are mainly focus on individual countries, use very limited (unidimensional), sometimes irrelevant indicators of social capital and finally, do not distinguish between different stages of entrepreneurial process. A broader definition of social capital allows several possible links to be identified social capital and entrepreneurial process, keeping in mind that form of social capital which is crucial in one stage may be more or less valuable at other stages Trust and entrepreneurship process Attitudes of high trust make it easier for individuals to reach collective decisions and implement collective action. It reduces the transaction cost and mitigates the risk or uncertainties associated with the decision making by substituting for as well as complementing the contracts or regulations (Luhmann, 2000). Trust-based personal relationships enable individuals to gain greater feedback on their business idea and succeed in entrepreneurship (Greve, 1995). High mutual trust, especially in the generalized form, can play a significant role in establishing large-size companies and having export-oriented businesses (Fukuyama, 1995). Aldrich (2000) argues that trust-building activities during a business creation are particularly important for innovative entrepreneurs. Meanwhile, particularized trust in narrower context (e.g. trust in friends, trust in family) can be more crucial in establishing and operating a small business in order to retain confidentiality and personal control (Bennet and Robson, Nacsent). In contrast to social as well as particularized trusts, which are apparent mainly in non-commercial relations according to Wiliamson (1993) and early-stage entrepreneurship as per Welter (2012), 3

4 institutional trust can make the individuals to deal more confidently with them and become a successful entrepreneur. According to Raiser (1999), trust in various institutions and organizations is essential for the efficient operation of a market economy. Institutional trust appears to play more important role during periods of venture creation and business growth (Höhmann and Welter, 2005). Contrary, low trust in certain institutions such as financial institutions may lead to individuals certain irrational or passive relationships with those institutions, which can end up with moral hazard problems associated with financing. Nevertheless, institutional trust and social trust are not mutually exclusive and former in its turn requires a latter to be developed and sustained (Welter and Smallbone, 2006). Based on these arguments, we propose the following hypotheses: Hypothesis 1a. Institutional trust will be more significant predictor of entrepreneurship than social trust. Hypothesis 1b. Not all type of institutions, but mainly confidence towards pro-business organizations will be positively related to entrepreneurship, particularly in the later stage of entrepreneurship process Networks and entrepreneurship process So far, most related research on the interaction between social capital and entrepreneurship has focused on the importance of social networks for business creation and growth. It has been unanimously agreed that the participation by individuals in social networks and associations increases the availability and accessibility of information and reduces its cost. The information that relates to good or evolving business opportunities, sources of financing, or successfully registering new business venture can play a critical role in venture gestation. Burt (1992) argues that information benefits stemming from social networks and relations occur in three forms: access, timing, and referrals. The phenomenon of credit rationing proposed by Stiglitz (1981) tends to be a consequence of limited or imperfect information about potential borrowers credit risk, loan use, and truthfulness in reporting repayment ability. Having broader ties and participating actively in social associations help to address these information asymmetries. To have an access to more accurate information can also result in better business performance and profit margin of already existing entrepreneurs (Fafchamps and Minten, 1999). Social networks and relationships obtained through both official (Olson-type) and unofficial (Putnam-type) routes may play different role in entrepreneurship process. During the early-stage 4

5 of entrepreneurship which mainly refer to individual s preference on occupational choice and identification of business opportunities, he or she relies mainly on strong personal network ties and contracts (Welter, 2012). However, most likely, individual with more official networks and memberships will be in central position to access necessary sources and utilize valuable information for the later-stage of entrepreneurship process (Liao and Welsch, 2005). The higher the degree of associational membership, and business-oriented networks the more communication channels are available for use, and more likely a person to enterprise. Gedajlovic et al. (2013) argue that not always social networks lead to positive outcomes with regard to entrepreneurship. Coleman (1988) is explicit about this: A given form of social capital that is valuable in facilitating certain actions may be useless or even harmful for others (p. 598). For example, the costs of developing and managing certain network relationships may result in some narrow-shared values and restrictive obligations, which limit the range of opportunities. Furthermore, certain configurations of social networks may also lead to negative outcomes due to the costs associated with the acquisition and management of relationships. Social relationships may also result in the prevalence of monopolies and corruption (Riordion, 2004). Based on these logics, we hypothesize: Hypothesis 2a. Olson-type (formal) social associations will play more significant role in entrepreneurship process than Putnam-type (informal) networking. Hypothesis 2b. Olson-type networks can be both positively as well as negatively associated with entrepreneurship, depending on the nature of professional association Social norms and entrepreneurship process Although social norms have rarely been empirically tested in the entrepreneurship literature, scholars tend to agree that that without a business supportive habits, commensurate cultural capital and commonly-accepted social norms, an abundance of social capital may fail to yield entrepreneurial consequences (e.g., Gedajlovic et al., 2013; Davidsson and Wiklund, 1997). High civic norms and social values can reduce the merits of various opportunistic behaviors by community members. Social pressures and fear of exclusion can induce the individuals to provide the expected behavior which is well accepted and desired by the community they belong. Social norms can cover a wide range of virtues and values, which can be positive as well as negative. In this regard, to be bounded by social norms and values that exist in society might not 5

6 necessarily encourage people to be an opportunistic and to succeed in creating a new business venture too. For example, Krueger et al. (2000) found no evidence of relationship between social norms and entrepreneurship intention. Coleman (1990) suggests that social capital may yield environments where individual freedom of action is limited because of the rigid enforcement of social norms. According to Fukuyama (1995), the sharing values and norms do not necessarily produce social capital. Therefore, one needs to be careful in defining the social norms, since some of them may be wrong (right) ones, although they may influence the entrepreneurship positively (negatively). For example, not telling a truth, or breaking the rules may exist as a common behavior in a certain community which can affect the early-stage entrepreneurship positively, but later-stage entrepreneurship negatively. Together, these lead to following hypotheses: Hypothesis 3a. Social norms, in the form of obeying the rules, will not be correlated or even negatively associated with the early-stage of entrepreneurship. Hypothesis 3b. Social norms, in the form of obeying the rules, will be positively related to latestage entrepreneurship, particularly with the success of becoming an entrepreneur. 3. Data and empirical method 3.1. Data Our main source of data is the individual-level data file of the second round of Life-in-Transition (henceforth, the LITS) survey which was implemented by the European Bank of Reconstruction and Development (EBRD). The data collection took place in late 2010 (EBRD, 2011). Since a complete description of the LITS s methodology, including a report on observations and a discussion of the experiences with data collection can be found elsewhere (EBRD, 2011), we limit ourselves to the following succinct discussion of the data set. The main goal of conducting the LITS surveys was to collect directly comparable information about overtime changes in individuals and households experiences, behaviors, and attitudes across the 29 European and Central Asian transitional countries. The survey is made up of a cross-sectional survey which collected information on a broad range of topics, such as the socio-demographic characteristics of respondents (e.g. age, gender, and educational attainments) and households (e.g. dwelling ownership and rural/urban place of residency). Importantly, the LITS also collected data about personality traits, entrepreneurial process and social capital. The data was collected through face-to-face interviews with trained interviewers. 6

7 A consistent sampling methodology was used across all 29 countries. At least 1,000 households were interviewed in each country. The sample is nationally representative. The LITS questionnaire consists of two sections. The first section of the questionnaire is administered to household head who is defined as the most knowledgeable person in the household and is designed to collect information on household composition, housing, expenditures and wealth. The second section of the questionnaire is administered to adult household member in order to gather the individual s personal information, information about her or his economic activities, values and attitudes, as well as life history. The individual member of household was selected for the interview based on the last birthday sampling rule Measures Entrepreneurship variables We use 3 outcome variables (Preference, Trial and Success) of entrepreneurship, which all were taken from the LITS data. The survey asks a question to respondents whether they prefer selfemployment to any other type of formal employment (Preference). If they do, they are asked if they had ever tried to start a business (Trial). If they had, they are also asked whether they succeeded in establishing a new business (Success). The first variable refers to latent entrepreneurship, while the last two questions consider the nascent entrepreneurship activities of respondents. To empirically investigate the relationship between three distinct dimensions of social capital and entrepreneurship process, we complement our analysis by a set of individual-level and countryspecific explanatory variables Social Capital variables We use a wide range of indictors to capture all three dimensions of social capital: trust, network and social norms. For trust, we distinguish between social trust and institutional trust in accordance with previous literature (e.g., Coleman, 1988; Paxton, 1999). For the measurement of the second social capital dimension, social networks are divided into two groups: Putnam-type and Olsontype. The third dimensions of social capital, social norms, are captured by the two types of variables following the existing social capital literature that consider Coleman s (1988) theory of encouraging active citizenship and civic norms Control variables 7

8 In addition to social capital indicators, we control for a set of individual-level variables. Our control variables reflect those of existing literature and range from respondent s social-demographic characteristics, economic endowments, social attitudes and personality traits (Nikolova and Simroth, 2013; Van der Zwan et al., 2012, Estrin and Mickiewicz, 2011). We include a respondent s age, gender, education, wealth, access to bank services, risk tolerance, optimism, and subjective health Empirical method The main objective of our paper is to investigate the role of three-dimensional social capital in entrepreneurial behavior of individuals in transition countries. Given that our entrepreneurship variables (Preference, Trial and Success) are binary dependent variables we employ a probit maximum likelihood estimation in the study. Econometrically, our empirical strategy is based on the following equation: PPPPPPPPPPPP ii,kk = αα 0 + XX αα 1 + KK αα 2 + SS αα 3 + εε (1) TTTTTT PPPPPPPPPPPP ii,kk = ββ 0 + XX ββ 1 + KK ββ 2 + SS ββ 3 + ηη (2) SSSSSSSSSSSSSS PPPPPPPPPPPP ii,kk = γγ 0 + XX γγ 1 + KK γγ 2 + SS γγ 3 + δδ (3) where PPPPPPPPPPPP ii,kk denotes preference of self-employment by respondent ii in country k, TTTTTT PPPPPPPPPPPP ii,kk is a dummy variable equal to 1 if this individual i from country k has tried to set up a business and SSSSSSSSSSSSSS PPPPPPPPPPPP ii,kk is a dummy variable equal to 1 if individual i from country k has succeeded to set up a business, provided that he or she prefers to be self-employed. XX αα 1, XX ββ 1 and XX γγ 1 are vectors of individual and households-level independent variables. KK αα 2, KK ββ 2 and KK γγ 2 refer to vectors of country level dummy variables, in order to control country-level heterogeneity. SS αα 3, SS ββ 3 and SS γγ 3 are to the vectors including the different social capital variable sets categorized under trust, network and social norms dimensions. Finally, εε, δδ and ηη are disturbance parameters, which are assumed to be normally distributed. As elaborated above, our dependent variables have a nested nature, which means our Trial and Success variables are subsets of our first category (Preference). This character of the dependent variables enables us to estimate the determinants of each stage of entrepreneurial process separately, without concern for cross-equation correlation (Wooldridge, 2002). 8

9 Given it s a broader definition, different dimensions of the social capital are mutually reinforcing and sometimes they substitute for each other and sometimes complement (Grootaert and Basterlaer, 2002; Welter, 2012). As Gedajlovic et al. (2013) suggested, some social resources may proceed other social resources and lead to the development of new forms of social capital. For example, networking and social associations usually persist in many relations of mutual trust; high civic norms make it more likely to observe greater confidence among people or social norms and values in society may underlie people s networks. Taking into account the potential interrelationships between various forms of social capital, in Equations 1, 2 and 3 we separately estimate the effect of each dimension of social capital on entrepreneurship process. 4. References Aldrich, H., Entrepreneurial Strategies in New Organizational Populations. In Swedberg, R. (Eds.), Entrepreneurship: The Social Science View, Oxford University Press, Oxford, UK. Audretsch, D.B., Keilbach, M.C., Lehman, E.E., Entrepreneurship and Economic Growth. Oxford University Press, Oxford, UK. Bennet, R., Robson, P., The use of external business advice by SME s in Britain. Entrepreneurship and Regional Development 11 (2), Blanchflower, D.G., Oswald, A., Stutzer, A., Latent entrepreneurship across nations. European Economic Review 45 (4-6), Burt, R.S., Structural Holes: The Social Structure of Competition. Harvard University Press, Cambridge, MA. Coleman, J., Social capital in creation of human capital. American Journal of Sociology 94, S95-S120. Coleman, J., Equality and Achievement in Education. Westview Press, Boulder, CO. Davidson, P., Honig, B., The role of social capital and human capital among nascent entrepreneurs. Journal of Business Venturing 18 (3), Davidson, P., Wiklund, J., Conceptual and Empirical Challenges in Study of Firm Growth. In Davidson, P., Entrepreneurship and the Growth of Firms, Edward Elgar Publishing, Cheltenham. 9

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