June 15, 2017

References for The take–up and variation of advice for new firm founders in different local contexts

Follow-up to The take–up and variation of advice for new firm founders in different local contexts from Kevin's blog


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The take–up and variation of advice for new firm founders in different local contexts

Writing about web page http://journals.sagepub.com/doi/full/10.1177/2399654417691514

In places with persistently high start-up rates more new entrepreneurs take business advice.

This blog reports research in England and Catalonia using an econometric model to show how start-up rates affect the receipt of advice by new entrepreneurs. It also tells us whether and when the state might interfere in business advice. The model enables us to demonstrate that the justification for state support (partial market failure in advice) is place specific but that the remedy of state support has less impact on demand for advice than starting in a place with a persistently high start-up rates. It’s a postcode lottery.

The local environment provides information and knowledge that impact the processes surrounding new firm foundation [1-4]. One of these elements is advice to potential entrepreneurs, which has been linked to greater rates of start-up activity [5] and improvements in entrepreneurial outcomes, such as firm survival [6] and growth [7-9].

Many owners and small firms managers state they find it difficult to navigate the market for advice [10]. Moreover, entrepreneurs may take advice from those with whom they have existing strong relationships, [11] even when those giving advice lack the most appropriate expertise [12]. These market failures reduce advice-taking and justify government interventions [13-16], yet it has been difficult to see the benefits of enterprise policy [17-19]. However, advice is a cost effective way to improve both firm outcomes and economic prosperity, especially in comparison with financial incentives for small firms [20, 21],

In the entrepreneurship literature, differences in the take-up of advice are explained through differences in the individual entrepreneur: either to suggest that potential entrepreneurs perceived themselves to have a knowledge deficit [6], or their characteristics, such as age and education played, encouraged some entrepreneurs to take advice [22, 23]. In addition the size of the firm and the length of time that it has been in existence, is also associated with advice [8, 9, 24, 25]. Whilst these individual and firm effects are important place is important too since we know that most advice is sought locally [5, 26]. More specifically, our research question asks whether demand for advice is proportionally higher in places with high rates of start-up thereby reducing the need for market intervention. It is our contention that the greater volumes of advice lead to greater proportions of advice as market participants leak ‘know-who’ or ‘know-how’ information which may be shared amongst groups of firms that face similar problems, like those that were recently founded, to reduce transaction costs for business advice and therefore market failure.

We suggest that specific local contexts can encourage the transfer of a rich flow of relevant information for entrepreneurs concerning from whom to take advice before starting a business, thus enabling the potential entrepreneur to navigate the market for business advice and, ultimately, enabling the market for advice to work effectively. We argue that not only the likelihood of taking advice will be higher in places with higher start-up rates but also that such high rates dampen the variation around advice, showing its impact on the demand for advice. Our empirical approach allows us to examine both the probability of taking advice and the variance in that probability. Following previous research, we argue that heteroskedasticity in a probit model reflects greater variation or uncertainty [27]. When entrepreneurs lack information about business advice, that uncertainty will be reflected in the variance function of the heteroskedastic probit model.

We investigate whether the variation in taking advice is influenced by the place where the new firm is founded by using data collected from two surveys of entrepreneurs in a number of purposely-selected contrasting areas in England (UK) and Catalonia (Spain). This research design enables us to analyse whether this relationship holds across diverse contexts in terms of start-up rates in two countries. Importantly, we also distinguish between public and private sector advice and show that the likelihood of taking private sector advice increases in places with high start-up rates while its variation tends to decrease in such places. In contrast, the taking and variation of public sector advice does not necessarily differ by locality, which suggests that the predominantly universal orientation of public business support does not reduce the uncertainty concerning advice.

The table below shows the output from a heteroskedastic probit model of the probability of new firm founders to take advice. In this table the co-efficients listed are either significant or reflect place. The first column shows those factors that affected whether the entrepreneur took advice from either the private or public sector starting with the founder’s age, entrepreneurial experience, whether the entrepreneur had a formal written business plan and/or finance from the bank, from family/friends or from public organizations. There was a construction sector effect and firm size mattered. Under the heading denominator are the three places that demonstrate the place effect: Buckinghamshire and Shropshire in England (compared to Tees Valley) and Anoia in Catalonia (compared to urban Barcelona). Finally, the number of observations is reported. .

The next two columns (1) shows where the significant effects are for the public sector in England where experience reduces the likelihood of taking advice but advice is more likely when accompanied by finance from public organizations. The effect of place in the denominator was not significant. In the next two column (2)s, for the private sector the age was negative, formal plan positive and so was finance from family and friends. Here crucially the effect of place was significant in the red outlined box, showing the variation was lower in Buckinghamshire and Shropshire

The next four columns (3) and (4) show the effects in Catalonia. The significant effects are for the public sector in Catalonia where founder’s age and being in construction reduces the likelihood of taking advice from public organizations. Again advice is taken with finance from public organizations. The effect of place in the denominator was not significant for taking the public sector. For the private sector in Catalonia, column (4), bank finance and firm size were significant and again the effect of place was significant in the red outlined box, showing the variation was lower in Anoia.

Heteroskedastic probit model results on the variation in the take-up of public sector or private sector business advice

  (1) (2) (3) (4)
  England   Catalonia  
  Public Private Public Private
Founder's age   -.0065* -.0231*  
Entrepreneurial experience -.3475*      
Formal written business plan   .4334*  
Bank finance       .3992**
Finance from family and friends   .6079**    
Finance from public organizations 1.002**   1.1315**  
Construction sector     -.8575  
Firm size       .1244*
Place: Buckinghamshire -.0752 -1.7260**    
Place: Shropshire 3.1122 -1.7223**    
Place: Anoia     .1361 -.8020**
Observations 594 596 381 381

** P<.01, *P<.05

In both England and Catalonia the variation in the take-up of private sector advice was strongly influenced by locality. This was not the case for the public sector advice. The effect of place was reflected in the variation in advice. In places with greater start-up rates meant that the variation win advice was lower. This lower variation we suggested is which we linked to uncertainty suggesting lower uncertainty surrounding advice in places with higher start-up rates. In addition because this finding concerned variation and uncertainty we can link this to the demand for advice. Consequently places with higher start-up rates have a and because this was a variation it was not because of more resources it indicates higher demand for advice.

The findings have important implications for policy. The place specific context of market failure showed the public sector role of increasing supply of advisory services to disadvantaged localities was insufficient to reduce the uncertainty or ambivalence concerning advice; moreover, its effect was similar in the high start up areas, illustrating the tension between targeting and the more universalist views of public business support that continues in England in the form of the LEPs. One implication is that the resources devoted to business support initiatives are not targeted sharply enough at reducing specific transaction costs. A second point is the importance for public providers to deal with institutional trust or legitimacy. One solution to this problem is a division of labour between public sector design of the programme but delivery through reputable private sector partners.

Linking place and the provision of advice shows lower variation around taking advice in high start-up areas. Individuals are embedded in geographic settings with locally available support, which is unequally known (uncertain). Greater local start-up rates generate an information spillover effect that reduces uncertainty and ameliorates market failure.

The longer version on which this is based is

Mole, K and CapallerasCapelleras, J-L (2017) Take-up and variation of advice for new firm founders in different local contexts

Environment and Planning C early online http://journals.sagepub.com/doi/full/10.1177/2399654417691514

June 09, 2016

We need SME advisers on the ground to boost SME productivity

Writing about web page http://dx.doi.org/10.1080/01442872.2013.875145

We need SME advisers on the ground to boost SME productivity. Being referred boosts the likelihood of taking advice that builds SME capacity by 29 per cent so Moving Information Online can Diminish Change: Advisory Services to SMEs

How to support SMEs effectively has occupied policymakers for decades. Previous work suggests weak competition as a cause of ‘the problem’. Therefore, the means of delivering support matters little. Accordingly, the government moved support online rather than be delivered in face-to-face exchanges between advisers and clients. However, we suggest that firms considering to adopt internal management practices to build capabilities does require face-to-face contact, so practices diffuse in a pattern like an ‘epidemic’. In support a multinomial logit model of 1334 cases of advice found those SMEs that took advice to enhance internal management practices were more likely to be referred by other firms.

This research compared how firms seek advice that builds capability such as IS and best practice interventions (BPI), and how they seek capability-using advice such as marketing advice. The paper argues that advice to small businesses that builds internal capability is risky for the adopting firm, placing greater requirements on the reliability of information surrounding these practices. To ensure that their information is reliable, we found firms to seek word-of-mouth referrals before taking internal, capability-enhancing advice. While governments shifted advice onto the web, this was linked with less intensive advice that failed to build capabilities. In this case, communicating via the web reduced the changes envisaged by the firm.

The models are reported in the table (Table 3 in the full paper). There are two columns for each model representing the estimate for those taking advice that builds capability only (field=1) and those taking advice that both builds capabilities and advice that uses extant capabilities (field=2). Models 1 and 2 use the sample of 1,337 firms, -more models are available where the ongoing advice is taken in the full paper (Mole, Hart and Roper 2014). All the models are significant.

Being referred boosted the likelihood of taking both sets of advice by 29 per cent.
As expected the role of referrals was significant to explain the taking of internal advice that built capability; however, it was actually more significant and influential when linked to both sorts of advice (field=2). There are three significant variables in the baseline equation (field=1): firm size, legal status, and business plans. These are consistently significant throughout the four models. The first is firm size, with smaller firms more likely to take advice. Next was the absence of limited liability which was linked to taking advice. Finally, the absence of a business plan was connected to the advice. This suggests that less capable firms are taking capabilities building advice. For those taking both types of advice (field=2) being in manufacturing had a positive effect. There are significant age effects with a u-shaped relationship, and a similar but weaker relationship with limited liability status. These patterns are repeated across the sub-sample and are robust to including the independent variables.

Multinomial Logit Estimation
Builds capacity Builds and Uses capacities
BLreferred 0.533** 0.877***
(0.249) (0.174)
BLmailshot -0.193 0.139
(0.326) (0.261)
BLwebsite -0.432** -0.0369
(0.193) (0.143)
Firm size -0.299*** -0.0309
(0.115) (0.0759)
Plan -0.607*** 0.0814
(0.182) (0.134)
Limited liability -0.829** -0.300*
(0.193) (0.146)
Three-four yrs old 0.0798 0.663***
(0.328) (0.226)
Ten-twenty yrs old -0.298 0.380**
(0.291) (0.187)
Twenty yrs plus old 0.293 0.516***
(0.231) (0.166)
Manunfacturing -0.0180 0.465***
(0.263) (0.169)
Constant 0.417 -0.846**
(0.404) (0.337)
Observations 1,337 1,337
Log likelihood -1219
Chi-squared 140.4
Degrees of freedom 32
Pseudo r2 0.0544
Standard errors in parentheses * p<0.01, ** p<0.05, * p<0.1

Some of the other control variables were intriguing. The relationship between internal advice, firm size, planning and limited liability status suggested that Business Link was building capacity in less well-organised firms that had fewer management practices: the ‘long tail’ of underperforming small companies (Bloom and Van Reenen 2010). This long-tail of underperforming companies is not new; indeed, it was part of the Commission on Public Policy and British Business in 1997 (Voss et al. 1995, Commission et al. 1997). The commission recommended that SME networks be strengthened; thus, they pinned their hopes on peer-to-peer learning as opposed to what they saw as standardised practices (Commission et al. 1997). However, most networks, and founding teams, are characterised by homophily (McPherson, Smith-Lovin and Cook 2001). Thus, poorly performing firms identified by researchers (Bloom and Van Reenen 2010, Voss et al. 1995, Commission et al. 1997) network with other poorly performing firms; so, networks reinforce differences rather than ameliorate them (McPherson et al. 2001). In other words, poorly performing businesses may be overembedded (Uzzi 1997). To break out of overembeddedness requires an intervention, either from the market through increased competition or through an agency such as the Business Link studied here.

Policy Implications

Several policy implications flow from this study. First, agencies need to focus on word-of-mouth marketing (Reichheld 2003). How customers react to business support services is critical in the business of capability enhancing and transforming businesses but perhaps less so in capability using advice (Branzei and Vertinsky 2006). Since policymakers value building capacity then the reputation of sources of advice is paramount; consequently, it might be wise to take steps that protect the repute of advice and advisers (Mole and Bramley 2006).

The policy implications from the study also relate to the different groups of firms that are receiving different types of advice – market segmentation. Direct mail campaigns are likely to be more effective for advice that uses extant capabilities, such as marketing or sales. In addition, firm characteristics are linked to different sort of advice within this category. Although a model of advice over time it is perhaps going too far, firms receiving training advice, for example, are much older than those who receive marketing advice.

The original paper (Mole et al. 2014) can be found here

Mole, K. F., M. Hart & S. Roper (2014) When moving information online diminishes change: advisory services to SMEs. Policy Studies, 35, 172-191.


Bloom, N. & J. Van Reenen (2010) Why Do Management Practices Differ across Firms and Countries? Journal of Economic Perspectives, 24, 203-224.
Branzei, O. & I. Vertinsky (2006) Strategic Pathways to Product Innovation Capabilities in SMEs. Journal of Business Venturing, 21, 75-105.
Commission, on, Public, Policy, and, British & Business. 1997. Promoting Prosperity: A Business Agenda for Britain. London: Vintage.
McPherson, M., L. Smith-Lovin & J. M. Cook (2001) Birds of a Feather: Homophily in Social Networks. Annual Review of Sociology, 27, 415-444.
Mole, K. F. & G. Bramley (2006) Making Policy Choices in Nonfinancial Business Support: An International Comparison. Environment and Planning C-Government and Policy, 24, 885-908.
Mole, K. F., M. Hart & S. Roper (2014) When moving information online diminishes change: advisory services to SMEs. Policy Studies, 35, 172-191.
Reichheld, F. F. (2003) The One Number You Need to Grow. Harvard Business Review, 81, 46-54.
Uzzi, B. (1997) Social Structure and Competition in Interfirm Networks: The Paradox of Embeddedness. Administrative Science Quarterly, 42, 35-67.
Voss, C., K. Blackmon, P. Hanson & B. Oak (1995) The Competitiveness of European Manufacturing – A Four Country Study Business Strategy Review, 6, 1-25.

March 09, 2016

Brexit: any effect on business support?

Recently, I have been conducting research interviews concerning the value of business support. One interview was with a group in the West Midlands who provided business support to a large number of clients with advice and financial support available to growing small firms in their region. They were re-bidding to develop the project further. The money was coming from the EU programmes.

I've been asked to comment on the implications of 'Brexit' for business support. In truth i don't believe that the implications for business support is the most central to the decision to stay or leave the EU. Nonetheless I think there are three points that might be made:

  1. The EU policies are strongly in support of supporting small businesses. The The Competitiveness of SMEs (COSME) is the EU programme specifically dedicated to improving competitiveness and SMEs, with a total budget of € 2.3 billion over 2014-2020 - a lot of resources albeit over a wider area (source: Directorate- General for Enterprise and Industry Annual Activity Report 2014).
  2. There is a drive towards better evaluation of these programmes too, although programme deliverers always argue that the cost of the evaluation takes away from the ‘good work’ that they are accomplishing
  3. On the other hand, some talk that the US SBIR programme that top-slices money from the federal innovation budget for SMEs could be difficult to implement in the UK it because of its anti-competitiveness. But if we still want to access the EU market after brevet - and everyone agrees with that then we will still have to abide by the rules.

In summary the reasons why brexit might be harmful to business support is that the EU finances a great deal of business support; and the reasons why it might be beneficial is the familiar argument surrounding what would and would not be possible.

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