Personal Experience: A Most Vicious and Limited Circle!?
11
which helps to build up lasting business relations. The second measure is finan-
cial standing. A bad financial standing curtails a firm’s capability for growth and
thus also for survival, because it impedes the acquisition of financial means. Be-
sides these economic indicators there are also other covariates, for example, the
age structure of the entrepreneurs involved in the firms that is important because
the entrepreneur’s current position in life can affect his closure behavior. In rec-
ognition of resource-based approaches, a team indicator is also introduced. A
team of managing proprietors should be able to supply above-average resources
like financial means or human capital. The start-up size also matters: on the one
hand, a small workforce might be a bottleneck, restricting the capacity to take
orders; but on the other each employee is a relevant cost factor - even one too
many might overstretch a new firm’s financial means. One main characteristic of
a firm is its legal form, which can be put into the binary categories of limited and
unlimited liability legal forms. The choice of a limited liability legal form is as-
sociated with demands like minimum margins on the capital stock or particular
disclosure requirements. It is thus a kind of quality measure for uninformed
business partners. Yet it affects the risk taking behavior of a firm’s management
and thus the development of the venture. If there is a liability limitation, manag-
ing proprietors might be encouraged to approve projects that involve excessive
risks. The effects of trading under a limited liability legal form on firm success
are indisputable but ambiguous. Thus, a measure is introduced in order to ac-
count for the effects of limited liability legal forms.
Finally, control measures for industry affiliation, for site selection in terms of
distinguishing between East- and West-Germany and for the year of establish-
ment are introduced. This is relevant due to specific conditions arising from
these characteristics, such as the level of necessary capital commitments, the
strength and structure of competition, different federal state politics, or other
particular conditions. These latter control measures are not reported in the esti-
mation results table.
The indicators concerning the education and age of the involved entrepre-
neurs are not completely available for all of the firms in the sample. In order to
preserve a maximum number of observations a missing-value-indicator approach
is therefore applied (Cohen and Cohen 1983). The approach is to generate two
dummy variables, which indicates missing values of education and age. At the
same time, the missing values are filled up with numeric values.
Estimation method
In survival analysis, one is mostly interested in evaluating the risk or hazard
of failure that an object is faced with at a specific time. This type of analysis is
widely used in medicine or in engineering, for example with humans and ma-
chines as the ‘objects’ and death and breakdown as the ‘failures’. In economics
survival analysis has become firmly established in evaluating firm survival, as is