Peers and Entrepreneurship

Workplace Peers and Entrepreneurship

Introduction

What role do social influences play in the decision to become an entrepreneur? A growing literature in entrepreneurship has examined this question, with an aim to better-understand the mechanisms that drive the entrepreneurial process. One line of argument suggests that variation in rates of entrepreneurship is due to differential access to both information and resources that might arise from one’s social networks (Gompers, Lerner, and Scharfstein, 2005; Lerner and Malmendier, 2008; Saxenian, 1994; Sorenson and Audia, 2000). Other work has examined the role of social networks in shaping individual career aspira- tions and attitudes toward entrepreneurship independent of the knowledge required to run a business (Giannetti and Simonov, 2009).

We examine whether the likelihood of entrepreneurial activity is related to the prior career experiences of an individual’s co-workers, using a unique matched employer-employee panel dataset. We argue that co- workers can increase the likelihood that an individual will perceive entrepreneurial opportunities as well as increase his or her motivation to pursue those opportunities. We find that an individual is more likely to be- come an entrepreneur if his or her co-workers have been entrepreneurs before. Peer influences also appear to be substitutes for other sources of entrepreneurial influence: we find that peer influences are strongest for those who have less exposure to entrepreneurship in other aspects of their lives.

What role do social influences play in the decision to become an entrepreneur? A growing literature in entrepreneurship has examined this question, with an aim to better-understand the mechanisms that drive the entrepreneurial process. One line of argument suggests that variation in rates of entrepreneurship is due to differential access to both information and resources that might arise from one’s social networks (Gompers, Lerner, and Scharfstein, 2005; Lerner and Malmendier, 2008; Saxenian, 1994; Sorenson and Audia, 2000). Other work has examined the role of social networks in shaping individual career aspira- tions and attitudes toward entrepreneurship independent of the knowledge required to run a business (Giannetti and Simonov, 2009).

In this paper, we focus on a particularly important form of social influence that has not received much attention in the entrepreneurship literature– the role of workplace interactions in influencing the decision to become an entrepreneur. Given the fact that an increasingly large share of productive time is spent at the workplace, co-workers are likely to be an important source of social influence for potential entrepre- neurs. Moreover, the vast majority of entrepreneurs launch their new ventures following a period of em- ployment in established organizations (Bhide 2000; Burton, Sørensen and Beckman 2002). This fact has sparked a growing interest in the role that the workplace plays in shaping entrepreneurial activity (Gom- pers, Lerner, and Scharfstein 2005; Dobrev and Barnett, 2005; Sørensen 2007a; Elfenbein, Hamilton and Zenger, 2009). However, most of the work in this tradition has focused on how formal, structural charac- teristics of the employing organization shape the rate of entrepreneurial entry. Much less attention has been paid to the characteristics of the people who work in these settings and, in particular, to how the ca- reer experiences an individual’s co-workers may relate to the decision to become an entrepreneur. The role of these social influences in the workplace is the focus of our study.

One particularly salient aspect of what co-workers bring to the workplace lies in the nature of their career experiences, since these experiences influence their knowledge and attitudes. Prior research has shown that an individual’s career experiences affect his or her own entrepreneurial behavior and outcomes through their impact on access to information and ideas (Shane 2000; Sorenson and Audia 2000; Klepper 2001) and access to resources (Burton, Sørensen and Beckman 2002). We argue that these career expe- riences not only exert a direct effect on the individual, but could “spill over” to co-workers by influencing the informational and normative environment in which individuals make entrepreneurial entry decisions. In this sense, the career experiences of one’s colleagues may indirectly influence individual rates of en- trepreneurial activity.

Testing claims about the influence of co-workers poses important challenges. First, a convincing test of these claims demands unusually comprehensive data characterizing the work histories of an individual’s workplace peers. This data challenge is especially daunting given the fact that entrepreneurship is such a rare event, so that sufficient statistical power demands large samples of potential entrepreneurs, and hence correspondingly larger amounts of information on each of these individuals’ co-workers. We use a unique matched employer-employee panel dataset from Denmark to examine the relationship between the characteristics of an individual’s workplace peers and the propensity to become an entrepreneur. Our dataset has annual observations on the entire labor market, allowing us to track individuals as they move between spells of employment and self-employment over time. In addition, since we are able to match individuals to firms, we also know who each individual’s colleagues are in every year, and can measure their prior career experiences. The richness of the data allows us to directly assess the posited relation- ship between career histories of co-workers and entrepreneurship, in order to move beyond prior studies looking at such a relationship but measuring them only at a regional or firm-level (e.g. Saxenian 1994, Gompers Lerner and Scharfstein 2005; Giannetti and Simonov, 2009).

The second challenge is inferential. With data in hand, it may be straightforward to establish a correlation between certain peer characteristics and rates of entrepreneurship. But this simple correlation is potential- ly spurious: the observed peer effects may reflect unobserved differences in firm characteristics that in- fluence the kinds of people who work for a firm or may reflect unobserved differences in individual dis- positions that drive both the choice of employer and eventual entry into entrepreneurship. While we do not have the benefit of random-assignment of co-workers or a natural experiment in our study, we under- take several additional tests to outline the sources of such endogeneity and to control for such spurious correlations.

The remainder of this paper is organized as follows. In the next section we develop our theoretical arguments linking the career experiences of workplace peers to entrepreneurship. We then discuss our data sources and the construction of the sample for our analysis, as well as the construction of measures. Following a discussion of the findings (where we outline our steps to control for unobserved heterogeneity), we briefly consider the implications of the results for our understanding of entrepreneurship.

Peers&Eship      ✓Open download here.

PDF of white paper by Nanda (Harvard Business School) and Sorensen (Stanford Business School), courtesy of ELI, Entrepreneurship Learning Initiative Mentor OH

 

 

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