Personal Experience: A Most Vicious and Limited Circle!? On the Role of Entrepreneurial Experience for Firm Survival



Non-technical summary

In order to give an answer to the question of whether personal entrepreneurial
experience promotes firm survival, or is rather, to quote Oscar Wilde, “a most
vicious and limited circle”, this paper provides a close examination of how firm
survival depends on experience. It analyzes how successful firms are in which at
least one ex-entrepreneur who abandoned a business previously (so called ‘re-
starters’) participates, i.e. how they differ in their risk of failure compared to
other firms. In this regard, it is of particular interest whether entrepreneurs learn
their lesson from their previous business failure. There are several theoretical
arguments and mechanisms which come into the analysis of this issue. A posi-
tive impact of entrepreneurial experience on firm survival can be derived from
the human capital theory. This expected effect is therefore expressed in the first
hypothesis. The idea of learning mechanisms induced by negative experience
would lead us to expect failure experience to affect firm survival positively, too.
This expectation is set down in the second hypothesis.

For the survival analysis, this study makes use of the ZEW Foundation Panel.
The panel is the result of a co-operation between the
Centre for European Eco-
nomic Research (ZEW)
and Creditreform, which is the largest German credit
rating agency. The size of
Creditreform means that their data on enterprises in
Germany is the most comprehensive available.
Creditreform has provided the
data in semi-annual waves since 1989. The ZEW Foundation Panel contains in-
formation about three million start-ups which occurred between 1990 and 2005.
The unit of registration is the company itself rather than any subsidiaries, i.e. this
investigation is based on original foundation events and ignores affiliated foun-
dations.

The analysis herein addresses the question of whether personal entrepreneu-
rial experience promotes firm survival respectively lowers a firm’s risk of clo-
sure. The question can even be understood as: does entrepreneurial experience
affect the probability of business failure? Not every firm closure can be consid-
ered as a business failure. Thus, failures have been disentangled from the total
number of firm closures and analyzed separately. Two types of failure types can
be identified: bankruptcy and the voluntary closure of a firm in financial distress.
The results of the analyses suggest that experiences indicating success have no
great effects on the risk of failing with a restart. Contrarily, negative experience,
i.e. previous entrepreneurial failure, raises the risk of failing again. This means
that the hypotheses - that experience initiates learning and thus more success -
must be rejected. In particular, the assumption that experience of failure induces
higher-level learning is dismissed as the opposite is found to be true: failure ex-
perience increases the risk of further failure.



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