Drops in housing prices affect both consumers and young companies in need of credit.Young Businesses Are More Vulnerable to Housing Market Shocks
Who Starts Companies When Opportunity Suddenly Strikes?
- April 23, 2021
- CBR - Economics
Many entrepreneurs spend years planning and launching their startups, but others quickly put together a new company on the basis of changing circumstances.
Stanford’s Shai Bernstein, Chicago Booth’s Emanuele Colonnelli, the International Monetary Fund’s Davide Malacrino, and University of Colorado’s Tim McQuade examined the characteristics of Brazilian entrepreneurs who quickly launch companies in hopes of capturing sudden upswings in demand. These “responsive entrepreneurs” tend to be younger and more skilled than typical new business owners and may play an important role in sustaining dynamic economies and prolonging economic expansions, the researchers find.
“In an aging economy, understanding the impact of local demographic composition on economic responsiveness is very relevant,” says Colonnelli.
They paired economic data with background information on newly minted entrepreneurs. In Brazil, agribusiness accounts for nearly a quarter of GDP and a third of employment, which allowed the researchers to gauge the entrepreneurial response to defined spikes in crop demand.
For example, when coffee prices shoot up, more producers come online, as do new restaurants and retail shops aiming to serve a larger pool of customers. The researchers estimate that, in a given Brazilian municipality, a 10 percent change in the value of a local commodity tends to increase employment by about 2 percent.
Younger people drive this entrepreneurial surge: while about 40 percent of all new business owners came from the youngest quarter of the working-age population, the fraction who specifically responded to demand shocks jumped to greater than 60 percent, the researchers find. Younger entrepreneurs are more likely to leap when opportunity strikes for two reasons, the study suggests: they have a greater tolerance for risk and fewer personal constraints (such as a family) that could hamper their ability to act quickly.
Bernstein, Colonnelli, Malacrino, and McQuade studied the period between 1998 and 2014, using crop-production figures compiled by the Brazilian Institute of Geography and Statistics (responsible for the census and other national statistics) and commodity prices from the World Bank. To model the specific characteristics of responsive entrepreneurs, they mined background data on 80 million individuals—including their ages, education, and employment tenures—held in the RAIS database at the Brazilian Ministry of Labor and Employment.
Rising commodity prices tended to boost employment not just in the agricultural sector, but also in the manufacturing and services industries, the data indicate. More jobs generated more income, which translated into new opportunities for willing entrepreneurs. Startups accounted for a majority of the increase in the number of companies, rather than the higher survival rate of existing ones.
As for the health of these new ventures, companies formed in response to local demand shocks were slightly more likely to survive after two, three, and five years. This suggests that the newcomers “play an important role in driving the persistence and propagation of aggregate economic fluctuations,” the researchers write.
While youth is a trademark of responsive entrepreneurs, experience and business skill matter too. The researchers split young individuals within the same company into two groups—workers above the median years of experience, and workers below it. Members of the more experienced group were nearly four times more responsive than their peers in the other group, the researchers find. Likewise, nearly half of the responsive entrepreneurs worked in occupations such as product management or engineering that demanded nonroutine, cognitive skills, versus just 18 percent of all entrepreneurs.
Given the trend in many countries toward an older population and fewer children, the findings aren’t terribly encouraging. One concern, the researchers note, is that as the population ages in any given country, younger individuals may have a more difficult time moving into managerial positions and building skills, ultimately limiting the entrepreneurial responsiveness of the economy. To counteract this, Colonnelli says, “policy makers might want to attract young professionals or create programs aimed at helping the young acquire skills.”
But the findings are encouraging for areas with younger populations, as demographics reveal the potential for future economic growth.
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