Necessity entrepreneurship and industry choice in new firm creation

Abstract

Research Summary Research on necessity entrepreneurship has generated important insights, yet it views necessity entrepreneurs in developed countries as one encompassing group of unemployed individuals—ignoring that the level of need is not uniform but instead increases with time spent in unemployment. We begin to unpack the role of unemployment duration in necessity entrepreneurship by asking how it affects one of the most fundamental decisions in start‐ups: “what business should I be in?” Analyzing primary data on 576 necessity entrepreneurs combined with three secondary data sets, we find that unemployment duration affects whether ventures are launched in “home” or in external industries, and moderates the extent to which founders' industry experience and the attractiveness of external opportunities relative to those in the “home” industry shape industry choice. Managerial Summary Necessity entrepreneurs—individuals who create new firms because they have no other options for work—represent a substantial proportion of world‐wide entrepreneurial activity, and, in developed countries, often come from the ranks of the unemployed. We analyze these entrepreneurs by answering the question “what business should I be in?,” a fundamental strategic decision that founders make. Our findings reveal that duration in unemployment is a key, hitherto unexamined factor that systematically affects the industry‐choice decision in startups. Moreover, we find that duration of unemployment moderates the founder's industry experience and the attractiveness of external opportunities relative to those in the “home” industry, with a markedly different picture for the long‐term unemployed—suggesting the need for customized government policies for formerly unemployed entrepreneurs.

Marketplace Literacy as a Pathway to a Better World: Evidence from Field Experiments in Low-Access Subsistence Marketplaces

“…Indeed, given the cognitive constraints they face, many subsistence entrepreneurs may be unable to draw a causal connection between being customer oriented and being successful, even though such an orientation can benefit them. A majority of subsistence microenterprises are formed by replicating the business models of successful entrepreneurs in the marketplace (Nikiforou, Dencker, and Gruber 2019). Many potential entrepreneurs, however, are excluded from institutions and experience social inequalities, which hinder their ability to participate in the marketplace, scan their environment for opportunities, and start their own enterprise (Nikiforou, Dencker, and Gruber 2019).…”

“…A majority of subsistence microenterprises are formed by replicating the business models of successful entrepreneurs in the marketplace (Nikiforou, Dencker, and Gruber 2019). Many potential entrepreneurs, however, are excluded from institutions and experience social inequalities, which hinder their ability to participate in the marketplace, scan their environment for opportunities, and start their own enterprise (Nikiforou, Dencker, and Gruber 2019). By gaining marketplace literacy, potential entrepreneurs can overcome such barriers to engage in entrepreneurship confidently and effectively (Venugopal, Viswanathan, and Jung 2015).…”

“…Because subsistence entrepreneurship is born out of necessity rather than opportunity, the creation of microenterprises is enabled with access to the market institutions and infrastructure to compensate for a lack of resources (Nikiforou, Dencker, and Gruber 2019) and skills to act on such external resources (Tobias, Mair, and Barbosa-Leiker 2013). For example, access to finance through market institutions is critical for the success of entrepreneurs in poverty contexts (Karlan and Valdivia 2011).…”

Entrepreneurs' gender, age and education shaping motives: push of necessity and pull of opportunity in MENA and Denmark

“…Another study could investigate how other factors -like environmental legislation, e.g., tax, intellectual property and labour laws, which might be tougher in MENA region -might affect entrepreneurs' motives. The unemployment rate as well as unemployment duration (Nikiforou et al, 2019) are other factors, which are different in MENA and Denmark that leads to opportunity, or necessity-based entrepreneurship. The unemployment rates for the non-oil-producing economies of the MENA-region are among the highest in the world.…”

The Value of Publicly Available, Textual and Non-textual Information For Startup Performance Prediction

“…In addition, investors and creditors aim at identifying promisinging startups early and therefore increasingly often use algorithmic scoring models (Corea 2018;Diffey 2019;Palmer 2017). More generally, uncertainties in the ex-ante evaluation of business opportunities are fundamental to the theory and the empirical testing of entrepreneurial strategy (Ahuja et al 2005;Amit et al 1990;Dencker and Gruber 2015;Nikiforou et al 2019;Oriani and Sobrero 2008).…”