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



Personal Experience: A Most Vicious and Limited Circle!?

Introduction

Firm formation is seen as a strong force behind economic growth (Kirchhoff
1994; Reynolds 1994, 1999; Wennekers and Thurik 1999). Early analyses for
Germany were unable to validate this view (Audretsch and Fritsch 1994; Fritsch
1996) but during the 1990’s it became more and more evident (Audretsch and
Fritsch 2003). Firm closures are the counterpart of firm formation and are no less
relevant. Production factors tied up in existing firms need to be released before
they can be reallocated. However, this is the macroeconomic view. In microeco-
nomics firm survival is often used as a measure of success and firm closure taken
to be synonymous with failure.

The survival of a firm is influenced by several factors. Some, like economic
conditions within a region or industry, affect all firms similarly (Audretsch 1991;
Brüderl et al. 1992; Stearns et al. 1995). Other factors are firm-specific, like the
firm’s age or its size at the time of foundation (Audretsch and Mahmood 1995;
Brüderl et al. 1992; Mata 1995). Some of the impacts are generally accepted and
are stylized as ‘
liability of smallness’, ‘liability of newness’, or ‘liability of ado-
Iescence’
(Brüderl and SchUβler 1990; Mahmood 2000; Stinchcombe 1965). But
even if such relationships are certain, a firm’s development actually depends on
the decisions of its managers and, thus, on their specific skills. Hence, the entre-
preneur’s human capital should be a highly relevant success factor.

Human capital is built up by learning. Possible ways of learning considered
here are schooling, vocational education, or professional experience (Becker
1985; Mincer 1974). Experience is a particularly important source of learning as
learning means to solve problems and so necessarily involves activity (Arrow
1962). Entrepreneurial knowledge and skills are thus best acquired by experienc-
ing entrepreneurship, i.e. from being an entrepreneur. A typical means of meas-
uring entrepreneurial experience is to track previous self-employment episodes
or previous firm ownership. However, this approach only captures a very general
kind of entrepreneurial experience as the reality of entrepreneurship is not that
simple. Such experience is heterogeneous: at the very least it can be divided di-
chotomously into ‘good’ experience and ‘bad’ experience. In this simple binary
classification, good experience is likely to be associated with success and bad
experience with failure. Nevertheless, a business failure might be useful: making
mistakes is supposed to be the predominant source of learning for small business
entrepreneurs (Gibb 1997). It is even suggested that bad experience initiates a
superior kind of learning (Chialvo and Bak 1999; Cope 2005). Such arguments
are often voiced in discussions about previously failed entrepreneurs. Yet they
are rarely, if ever, tested against empirical data.

The analysis herein addresses the question of whether personal entrepreneu-
rial experience promotes firm survival or, to be more precise, lowers a firm’s risk
of closure. The question can even be understood as: does entrepreneurial experi-



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