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Survival factors of newly founded firms

Theoretical frameworks and empirical evidence

Bachelor Thesis 2009 53 Pages

Business economics - Company formation, Business Plans

Excerpt

I TABLE OF CONTENTS

II LIST OF FIGURES

III LIST OF ABBREVIATIONS

IV ABSTRACT

V COPYRIGHT AND INTELLECTUAL RIGHT STATEMENT

1 Chapter – Introduction

2 Chapter – Central Terminology
2.1 Business Success
2.2 Business Failure
2.3 Classification of Newly Founded Firms

3 Chapter – Theoretical Frameworks and Empirical Evidence
3.1 Personal Factors
3.1.1 Human Capital Theory
3.1.2 Empirical Evidence
3.1.3 Social Capital Theory
3.1.4 Empirical Evidence
3.2 Firm-specific Factors
3.2.1 Transaction Cost Theory
3.2.2 Learning Theory
3.2.3 Empirical Evidence
3.3 Environmental Factors
3.3.1 Organizational Ecology Theory
3.3.2 Empirical Evidence

4 Chapter – Critical Review of the Success Factor Research

5 Chapter – Conclusion and Outlook

VI References

II LIST OF FIGURES

Figure 1: Foundation Types

III LIST OF ABBREVIATIONS

illustration not visible in this excerpt

IV ABSTRACT

New enterprises are a source of economic growth, innovation, structural change and employment. However, new firms face a serious problem of high mortality subsequent to their entry into the market. Thus the goal of this thesis paper was to identify survival factors of newly founded firms. This incorporated first to identify existing theoretical frameworks of SFR and second to provide insights into some empirical key findings for some important survival factors of newly founded businesses within the existing literature. In the core part of this paper, a crude systematization of success determinants into personal, firm-specific and environmental factors was used. The analysis of literature on firm survival and success factors revealed a mixed picture as different studies came up with contradicting results. Only few key findings were revealed to have consistent results, which are further presented and discussed in this paper. Furthermore, a critical review of the success factor literature revealed also that utilization of different success measures, biased and unrepresentative samples, inappropriate analytical methods and the lack of a theory-driven approach all contribute to inconsistent results. Finally, it was also identified that the research community faces a paucity of literature in the field of regional and pre-entry determinants and how they impact on business success and survival.

V COPYRIGHT AND INTELLECTUAL RIGHT STATEMENT

Copyright (2009) in text of this dissertation rests with the author, Wladimir Wiegel. Copies (by any process) either in full, or of extracts, may be made only in accordance with instructions given by the author. This page must form part of any such copies made. Further copies (by any process) of copies made in accordance with such instructions may not be made without the permission (in writing) of the author.

The ownership of any intellectual property rights, which may be described in this thesis paper, is vested with the author. It is subject to any prior agreement to the contrary, and may not be made available for use by third parties without the written permission of the author, who will prescribe the terms and conditions of any such agreement.

1 Chapter – Introduction

Research on entrepreneurship is an interdisciplinary science field that accentuates the complex and multidimensional concept of new business creation and development. The relevance of this research field is highlighted when observing the important role of new business creation for the welfare of an economy (Shane & Venkataraman 2000). New business creation is “at the heart of national advantage” (Porter 1990: p.125; Van Stel, Carree & Thurik 2005) as it fulfills several important functions in the economy. New enterprises “provide the engine of growth” (Audretsch & Fritsch 2003) for an economy and thus contribute to the increase of the per capita income (Audretsch & Thurik 2001a, b). Furthermore, young businesses represent mechanisms by which innovation is converted into new products and services (Shane & Venkataraman 2000). This innovation orientation contributes to efficiency and productivity and consequently enhances the rivalry in an economy (Nickell 1996; Nickell, Nicolitsas & Dryden 1997). Another important function of new firms is the generation of employment. An increase in the number of new businesses reduces the unemployment rate (Audretsch & Fritsch 2003). After all, the creation of new businesses has become increasingly important to modern OECD economies, as they are a source of economic growth, innovation, structural change and employment (Audretsch & Thurik 2001b).

As a matter of fact, large populations of newly founded firms face bankruptcies and liquidations within a short time after market entry (Aldrich & Auster 1986; Brüderl & Schüssler 1990). Kirchhoff (1994) proved that 60 percent of new ventures do not survive the initial five years. As a result, there are only few newly established businesses that remain in the market and contribute to the economic development (Shane 2007). Thus, the insights from the success factors research (SFR) of newly established firms play an important role in dealing with this problematic issue and provide support for the establishment and development of successful start-ups.

Consequently, this thesis paper is positioned among the field of SFR in the context of newly founded firms. High mortality among new and young firms is immense and leads to important questions dealing with this problematic issue: What happens to the new firms subsequent to their entry into the market? Which firms do survive and which firms do exit the market? What firm characteristics and environmental characteristics do influence the survival probability of newly founded firms? Do the business owner’s endowments with resources matter for the survival chances of newly founded firms? Thus, the goal of this thesis paper is firstly to identify theoretical frameworks of SFR and secondly to provide some insights into empirical key findings, within the existing literature, on some important success factors influencing business survival and consequently try to answer these key questions.

The framework of this thesis paper is as follows. First, some important terminology is introduced, defined and specified to the context of new firm creation. The core of this paper focuses on three main perspectives – personal, firm-specific and environmental perspective – which is a crude categorization of critical determinants influencing firm survival. Within each perspective specific theories are introduced and, in the light of these theoretical frameworks, some empirical findings are presented on some important success determinants. Finally, a critical review on SFR will conclude this paper’s framework.

2 Chapter – Central Terminology

2.1 Business Success

In general, success can be defined as a “degree of goal achievement” of predefined goals or target systems (Dietz 1989: p.271; Jacobsen 2006: p.37).

The contemporary research on small firm foundation does not have a consistent and specific definition regarding the indicators of success of newly founded businesses. Many previously undertaken research studies used different measures for the organizational success (Klandt 1984: p.97-99; Fallgatter 2002; Woywode 2004). However, three success measures have still distilled from the variety of indicators used throughout the new firm creation literature.

First, many researchers used the economic survival of the young firms in a predefined time period – usually three to five years after entering the market – as a common measure of success (Brüderl, Preisendörfer & Ziegler 2007: p.91-93; Klandt 1984: p.97). Survival as a success measure can be seen as a minimalistic degree of success (Kroiß 2003: p.16). Notwithstanding, since market entry and survival, especially in the initial years after entry, are gruelling for most of the enterprises, survival is a fundamental prerequisite for future success and thus should be regarded as the success measure in the initial stage after business foundation (Landwehr 2005: p.43-45). Furthermore, in the broader applicable literature, the utilization of economic measures was also prevalent to measure success. Particularly two quantitative measures such as revenue growth and the amount of employees have emerged in many empirical studies of small business research (Dietz 1989: p.274; Brüderl et al. 2007: p. 91-93). First, they are easily measurable and second, they are to some extent positively correlated with more complicated business success measures which are more difficult to extract due to the lack of information available about small businesses (Brüderl et al. 2007: p.92, Jacobsen 2006: p. 37-38).

Further success measures, such as profits or return on investments (ROI), which were commonly used in the success measurement of mainly established firms are less relevant in the small business context. These measures have two main disadvantages. First, the modalities of profit measurement are dependent on the legal form of the organization, which induces difficulties adjusting profits in empirical research (Brüderl et al. 2007:p.91-93). Second, based on the fact that most newly established firms are facing losses in the initial years after establishment, profits or ROI are inappropriate success measures (Unterkofler 1989: p.38).

2.2 Business Failure

Defining success solely as the new firm’s ability to survive in a specific time period is problematic (Brüderl et al. 2007: p. 92). There can be some cases where firms cease to exist but their operations are still in progress and successful (Carroll 1987: p.44; Cochran 1981; Freeman, Carroll & Hannan 1983). Therefore, ‘non-survival’ of a firm cannot necessarily be seen as a business failure that leads to the final exit from the market as a result of unsuccessful business operations. Consequently, in order to specify survival it is necessary to define what is meant by ‘non-survival’.

In the entrepreneurship literature, different definitions for ‘non-survival’ or business failure are used. Cochran (1981) outlined several forms of failure that had been used in research. The first definition of business failure is the discontinuance of a business for any reason, which was used in several studies of business mortality (Cochran 1981). Discontinuance for any reason is an exceedingly broad category with many variations (Bates 2005). The variations may include extreme cases such as every change in ownership, for instance through acquisitions and mergers, successive disbandment or liquidations due to illness or retirement. Successive disbandment includes cases where entrepreneurs start firms with the goal of selling their interest to larger firms after some years of rapid growth or the pursuit of more attractive opportunities (Cochran 1981; Carroll 1987). Another extreme is using bankruptcy or the cease of operations with resulting losses to creditors as a business failure definition (Dun Bradstreet 1979: p.15). This is a very narrow way to define business failure because it excludes many businesses that are less dependent on creditors’ capital but would commonly be perceived as having failed (Cochran 1981; Bates 2005).

One further definition of business mortality is in the middle-range of the two extremes stated above and was provided by Ulmer and Nielson. The authors only defined those firms as business failures that were sold or liquidated with losses to prevent further losses (Ulmer and Nielsen 1947: p.11). This definition appears more relevant in case of small businesses than using a measure that relates either to discontinuance or bankruptcy. However, this definition has a disadvantage when it comes to the measurement of the firm survival. One would need to rely on subjective opinions of someone associated with the business, which could result in biases (Cochran 1981; Bates 2005). In addition, Woywode (1998) defined ‘non-survival’ in two ways. He distinguishes between forced liquidations which are given in case of insolvencies and voluntary liquidations that comprise all firm closures, whether successive or non-successive disbandment, and which do not fall under the insolvency procedure.

All in all, in this paper, business failure is defined as the “final manifestation of unsuccessful organizational performance” (Carroll 1987: p.44), which results in the final cessation of business activity.

2.3 Classification of Newly Founded Firms

The entrepreneurship literature distinguishes different criteria for classifying different types of business foundations (Unterkofler 1989: p.45-65). For instance new business establishments can be classified according to the legal form, the business size, the founder or the form of financing (Dietz 1989; p.27; Fallgatter 2002). Consequently, the classification of a newly founded firm can be multilateral and requires a selection of a model that suits the context of small enterprise foundation.

The model of Szyperski and Nathusius (1977: p.26-30) is suitable in this context as foundation types are classified in two dimensions: (1) the founder’s attribute of independence and (2) the existence of organizational structures. Regarding the founder’s attribute of independence, the authors differentiate between an independent individual and an organizational member. Independent individuals are mainly self-employed persons or entrepreneurs who establish a new business in order to exploit an entrepreneurial opportunity (Shane 2007: p.224-225) or to secure their self-employed existence (Szyperski & Nathusius 1977: p.26). Founders who are organizational members are establishing new businesses within the scope of their employment activity (Szyperski & Nathusius 1977: p.26; Shane 2007: p.224-225). In respect to the dimension of the existence of organizational structures, the authors differentiate derivative and original foundations (Szyperski & Nathusius 1977: p.26-27). Derivative foundations are also described as system-changing foundations. These kinds of foundation include the takeovers, acquisitions, mergers, buy-outs, franchising, reorganizations or restructuring of already existing corporate entities (Fallgatter 2007: p.25-26). Original foundations include the foundation of totally new businesses such as independent start-ups or new corporate ventures without any relation to previously existing corporate structures. Original foundations are flexible in the creation of systems and structures. They are also seen as system-creating establishments.

Within the framework of this paper, the focus is laid on the original foundations, especially on the independent-original foundation because this foundation type suits the initial situation of small enterprise creations best. Derivative foundations are excluded because of the different initial problems that arise with this type (Szyperski & Nathusius 1977: p.27-28). Corporate ventures as a part of the original foundations are also excluded, as they are able to rely on the knowledge and experiences of their parent company. Independent-original founded firms are de novo start-ups and are mainly characterized in the extreme relevance of the founder person, who is exposed to a broad field of decision-making and who has to rely on his or her potential of knowledge and previous experiences. Furthermore, independent-original founded firms are lacking initial structures and embody a high failure risk (Szyperski & Nathusius 1977: p.27-29).

Figure 1 : Foundation Types according to Szyperski and Nathusius (1977: p. 26-30)

illustration not visible in this excerpt

Source: Szyperski and Nathusius (1977: p. 26-30)[1]

3 Chapter – Theoretical Frameworks and Empirical Evidence

The previous chapters revealed the importance of newly created firms in an economy and the central terminology was specified in order to reach a more focused approach in the following core part of this thesis paper. The goal of this chapter is to find appropriate theoretical frameworks used in the SFR in the context of small business creation. The theories are supplemented with empirical evidence of some empirical studies on critical success determinants influencing new firm survival.

Young enterprises are only able to develop and grow successfully if they have identified their relevant critical success factors (Woywode, Struck & Bindewald 2003: p.410). Rockart (1979) stated that „critical success factors … are, for any business, the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization … They are the few key areas where ‘things must go wright’ for the business to flourish” (a.c.i. Leidecker & Bruno 1984: p.23).

The research on entrepreneurial business creation is labeled with a vast amount of studies that have identified a broad range of these critical factors contributing to the new firms’ success (Brüderl et al. 2007: p.20). In spite of this vast amount of identified success factors, this research field has been lacking an own conceptual framework for the systematic and theory-driven identification of significant survival factors (Brüderl et al. 1992, 2007: p.20; Cooper 1993). Nevertheless, previous theoretical and empirical research reveals that there is a common pattern used to systemize the research on success factors. As a crude systematization of factors that affect the survival chances of new enterprises, three groups can be extracted (Brüderl et al. 1992, 2007: p.33, Preisendörfer 2002). The first factor group represents the characteristics of the individual founder, the second pertains to the characteristics of the new firm itself and the third group includes the environmental characteristics, which may all influence the start-up survival (Brüderl et al. 1992, 2007: p.33; Möckel 2005: p. 45). This segmentation of success factors can be seen as an initial approach to a theoretical framework in this research field (Brüderl et al. 2007: p.18).[2] These initial theoretical frameworks can be supplemented with specific theories, which are adopted from other research fields and modified to the context of the small business formation research field (Brüderl et al. 2007: p.18; Cooper 1993).

However, a crude systematization into the three segments of success determinants is not used by all researchers (Brüderl et al. 2007: p.18; Kroiß 2003: p.19-23). Some researchers approach the initial systematization by arranging the factors in endogenous and exogenous or internal and external factors (Dietz 1989: p.278; Unterkofler 1989: p. 27; Szyperski & Nathusius 1977: p.35). However, since small businesses are simple and usually small organizations, the characteristics of the founder do matter for the new firm survival. Thus, it is appropriate to observe the personal characteristics explicitly in a separated personal-related factor group (Brüderl et al. 1992, 2007: p.33).

In the following sections, the approach of the three factors framework is adopted. Each factor group will be described and expanded by specific theories, which are commonly used in the small business research field. After the theoretical overview, some empirical evidence on survival factors is provided.

3.1 Personal Factors

Personal determinants are critical success factors that are based on the characteristics and behaviors of the founder of the enterprise (Brüderl et al. 2007: p.33; Möckel 2005: p.45).

The analysis of personality characteristics is also known as the ‚traits-approach‘ to entrepreneurship (Brüderl et al. 2007: p.35). This approach is one of the classical approaches to entrepreneurship that aims at finding trait patterns of extremely successful entrepreneurs (Preisendörfer 2002). At the same time, it was criticized by many researches that many studies did not come up with consistent results, the list of personal traits is becoming too diversified and did not relate on the far too varied behaviors needed in the entrepreneurship activities (Baum, Frese, Baron & Katz 2007; Preisendörfer 2002). However, this personal-based perspective accentuates the role of the founder as one of the key survival factors of a newly established firm. The strengths and weaknesses of the founder have a direct influence on the survival or failure of the young business (Klandt 1984: p.7; Szyperski & Nathusius 1977: p.38-39). As newly founded firms are usually small and operate in simple structures, the founder plays an important role in the young and simple organization. Thus it is important to observe and analyze the personal determinants explicitly in an own theoretical framework (Brüderl et al. 2007: p.35-36).

[...]


[1] English translation of German terminology follows Shane (2007: p.224-225) and dict.cc dictionary

[2] Preisendörfer (2002) labeled this crude systematization as a model: “Drei-Faktoren-Modell”; Brüderl et al. (2007: p.18) termed them as “Leitlinien-Ansätze”

Details

Pages
53
Year
2009
ISBN (eBook)
9783640839308
ISBN (Book)
9783640839001
File size
585 KB
Language
English
Catalog Number
v167384
Institution / College
University of Mannheim
Grade
1,7
Tags
Entrepreneurship Survival Factors SMEs Small Businesses Business Failure Business Success Entrepreneur New Enterprises Erfolgsfaktoren Unternehmer Junge Unternehmen Unternehmensgründung

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Title: Survival factors of newly founded firms