June 15, 2017

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

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