j1 Int

Revealing Entrepreneurial Talent
Author(s): Francesco Ferrante

Source: Small Business Economics, Vol. 25, No. 2 (Sep., 2005), pp. 159-174
Published by: Springer
Stable URL: https://www.jstor.org/stable/40229389
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Small Business Economics (2005) 25: 159-174 © Springer 2005
DOI 10.1007/sl 1187-003-6448-6
Revealing Entrepreneurial Talent Francesco Ferrante*
ABSTRACT. A society's allocation of working time to entre-the main factors behind technical change and
preneurial, organizational and learning activities is the main
economic growth.
factor behind technical change and economic growth. Building
on Lucas (1978) and Kihlstrom and Laffont (1979), in this
Individual preferences dictate how much time
paper I offer evidence that the amount of working time spentwish to devote to leisure, to improving our
we
innate ability through education and training, to
by small business owners in entrepreneurial activities affects
working
the performance of the business and reveals their entrepre- as an employee or for oneself. The
neurial talent. The intuition is that it is reasonable to allocate
resulting allocation of time determines the demand
more of our time to those activities where we realize we are
and supply for different categories of commodi-
more productive. As actual consumption choices reveal
consumer preferences, the varying entrepreneurial content of ties and human capital, the returns to various
the activities performed is a signal of an individual's ability occupations and, among the latter, the reward to
as entrepreneur. The results obtained suggest that the alloca- entrepreneurial human capital, i.e. entrepreneurial
tion of working time by small business owners: (a) throws talent.
light on their behavioral patterns; (b) is related to the owner's
Analytical interest in the entrepreneur and the
human capital and to firm size; and (c) has a significant
correlation with business performance. The main finding of
nature of his reward dates back, at least,1 to
my analysis, confirming previous studies on this topic, is that Schumpeter (1936) and Knight (1965). Since then,
education is an important part of entrepreneurial human the debate on the social function of entrepreneurs
capital. Moreover, the latter is the main factor that can sustain in market economies and the nature of entrepre-
small firms' competitiveness in a globalizing economy.
neurial talent has attracted the interest of many
scholars in different fields.2 The emphasis has
The entrepreneur is at the same time one of the most varied across authors and over time, focusing
intriguing and one of the most elusive characters in the cast either on entrepreneurs' social role or on their
that constitutes the subject of economic analysis (Baumol,
individual characteristics. More recently, the
1965, p. 64).
theory of endogenous growth has stressed the
essential role of entrepreneurship in economic
1. Introduction development (Iyigun and Owen, 1999) and the
The use of time is the main determinant of possible distortions of inefficient allocation
income and welfare over an individual's entire of entrepreneurial talent (Murphy et al., 1991;
Baumol, 1990).
life. Analogously, a society's choices on how
Yet, this interest has not translated into an
to allocate time among leisure, education and
equivalent ability to consider, within the micro-
work and the distribution of working time in appli-
economic models, the specific role of entrepre-
cations characterized by different returns are
neurship. According to Baumol (1968), this is not
surprising in that within the cast of the neoclas-
Final version accepted on July 29, 2003 sical firm there is no room for the entrepreneur,
the stage being wholly occupied by mechanical
Universitd di Cassino
profit-maximizing managers: "The theoretical firm
Facoltd di Economia
is entrepreneurless - the Prince of Denmark has
via Mazzaroppi 03043
Cassino (FR) been expunged from the discussion of Hamlet"
Italia (Baumol, 1965, p. 66).
E-mail: f.ferrante@caspur.it A tangible sign of the problematic relationship
160 Francesco Ferrante
between neoclassical Buildingtheory

on Lucas (1978) and Kihlstrom
of and the fir
entrepreneur Laffont (1979)
is that, inandthe Gifford (1992),
vast in this paper
majority
economics text-books, the
I argue that the allocation of workingoccupatio
time by
between self-employment and
self-employed persons in activities wage la
characterized
out, as if it were by a differing
residual returns may reveal that
their entrepre- does n
inquiry. neurial talent. Just as actual consumption choices
As a result, the formal analysis of the funda- should reveal people's preferences, the amount of
mental factors determining occupational choice working time spent by self-employed persons in
and the resulting supply of entrepreneurs3 is activities characterized by different entrepreneurial
quite recent, rooted in the work of Lucas (1978) content and productivity should signal their ability
and Kihlstrom and Laffont (1979). Building on as entrepreneurs.
previous analyses, these authors explain why The aim of this paper is threefold: (a) to spec-
individuals become employees or self-employed ulate on the opportunities to use data on the allo-
by stressing either their function of coordinator/ cation of time in the specific context of small
supervisor (Lucas) or of risk-bearer (Kihlstrom business economics; (b) to offer preliminary
and Laffont). In the context of the latter interpre- empirical evidence on behalf of this methodologi-
tations, entrepreneurial talent is measured either cal strategy; (c) to discuss the main implications
in terms of productivity of individuals in coordi- of this preliminary evidence for the design of
nating and supervising employees within a firm or, training policies.
alternatively, in terms of risk aversion. Along the The conceptual and statistical frameworks
same lines as Lucas, interesting insights on the adopted here are very simple; indeed, I am aware
links between the productivity of managerial time that this choice will undoubtedly attract reason-
and the supply of entrepreneurship are found in Oi able criticism from advocates of a more formal
(1983) and Otani (1996). modeling structure.6 Although the final aim of
From a different perspective, Jovanovic (1989) economics is to reveal structural properties, at the
and Evans and Jovanovic (1989) develop a model present stage I do not intend to interpret the
of entrepreneurial choice with liquidity constraint statistical correlation in terms of causal links
based on the idea that the choice of becoming an among the variables. Nevertheless, the results are
employee or an entrepreneur depends on wealth. provocative, since they suggest that (a) it is
Here the incentive to become an entrepreneur has possible to discern different behavioral strategies
more to do with objective conditions, i.e. the from data on the allocation of working time by
ability to finance a business venture, than with small business owners; (b) the allocation of small
subjective qualities of individuals. In such a con- business owners' time bears some relationship to
text, the interest in and the practicability of mea- their complement of human capital and to the size
sures of entrepreneurial talent are questionable. (number of employees) of the business; and (c) the
Due to the lack of a common conceptual frame- allocation of working time has a significant impact
work, the available empirical evidence is scattered on a business's performance (or the other way
and, in general, not particularly strong. The main around, perhaps).
issues investigated have been the demographic The reason for addressing this issue is twofold.
characteristics and socio-economic background First, although entrepreneurship is considered
of the self-employed vis a vis the employees, and a main engine of economic growth, systematic
the factors affecting the probability of survival efforts to measure it are still lacking.7 The step to
of businesses run by the former4 (Evans and be made in this direction requires the development
Leighton, 1989; Schiller and Crewson, 1997). of consistent analytical frameworks8 according
Other empirical studies5 directly investigate the to which researchers can select, collect and
contribution of entrepreneurial characteristics process statistical data. The conceptual framework
(education, experience, family background) to a developed here provides some insights in the
set of performance indicators such as firms' latter direction and suggests that, in order to
growth and innovation (Roper, 1998; Storey, 1994; derive meaningful indicators of the supply of
Barkham et al., 1996). entrepreneurship in the economy, the quantitative9
Revealing Entrepreneurial Talent 161
that
measures ordinarily used should be determines
adjusted the behavior
for of the firm and
the quality of the entrepreneurial thereby
stock.bears
Secondly,
a heavy responsibility for the vitality
a poor entrepreneurial culture isofconsidered
the free enterprise
to be society. In the writings of
classical economists
the main factor behind the weak position of smallhis appearance was frequent,
though he
European firms in low-tech industries inremained
the facea shadowy entity without
of new competition stemming from
clearly globalization
defined form and function" (Baumol, 1968,
p. 64).
and the ICT revolution.10 Unfortunately, entrepre-
neurial culture is an empty box that One main feature of
needs to thebedebate on entrepre-
filled if one aims to implementneurship13
cost-effective
is the unclear distinction between man-
agerial
industrial policies to sustain these and entrepreneurial
firms. In this functions. Indeed,
paper, I stress that entrepreneurs'amongand the various attempts to clarify this essen-
workers'
human capital should be seen astial point, the view that entrepreneurs pursue
complementary
and I discuss the main implicationsallocativeof efficiency
this whereas
con-managers, given
clusion for the design of training resources and allocative targets, are responsible
policies.
for technical
The choice of a sample11 considering small efficiency
sub- seems the most appro-
priate, although
contracting Italian firms in textiles it lacks a clear operative content:
and clothing
"Given an arrangement
is not casual in that (a) in small firms the identi- in which calculations,
fication of the person in charge ofexperience
taking or judgment
decisions indicate to constitute a
(the entrepreneur) as opposed toreasonable
those approximation
executing to the current optimum,
them (the managers) is simpler; (b)it is a manager's on
studies task to see that this arrangement
sub-
is in fact
contracting12 (see e.g. Lyons, 1996) instituted to
suggest a reasonable degree of
that
the comparative analysis of the approximation.
actual strategies The entrepreneur (whether or not
chosen by the subcontractors may he in fact doubles asuseful
reveal a manager) has a different
function. It is hiscapabili-
information about their entrepreneurial job to locate new ideas and to
put them
ties; (c) in the recent past and still into effect.
now, in He must lead, perhaps even
Italy
inspire; he cannot
and in Europe, the textile and clothing allow things to get in a rut and
industries
have been under strong competitive for him today's practice
pressure, is never good enough for
thus
tomorrow.
requiring the activation of those In short, he is the Schumpeterian inno-
entrepreneurial
capabilities required to implement vator and some more. He is the individual who
non-price-com-
petition strategies. exercises what in the business literature is called
'leadership'.
The paper is organized as follows. And it is he2who is virtually absent
Section
draws heavily on Baumol (1968) from
and thedeals
receivedwith
theory of the firm" (Baumol,14
1968, p. 65). Unfortunately,
the economic analysis of entrepreneurship. Section if one is interested in
conducting
3 presents the empirical evidence on the empirical studies, these indications are
alloca-
tion of working time by Italiannotsmall
very helpful in that they do not provide ready-
business
owners in textiles and clothingto-use
and methodological
its use to indications on how to
reveal entrepreneurial talent. measure
Sectionand classify
4 draws different behaviors as man-
some implications on the role ofagerial or entrepreneurial.
education and
Until thetalent
training as sources of entrepreneurial '60s, the abundance
in a of ideas flowering
out of the debate
globalizing economy. Section 5 sums up the main was contrasted with the sub-
conclusions. stantial poverty of formal models on occupational
choice and entrepreneurial behavior. In the '70s
and '80s, the first attempts to close this analytical
2. The economic analysis of entrepreneurial
gap generated a few models providing a bench-
talent
mark on the analysis of the supply of entrepre-
The analysis of entrepreneurial talent and of theneurship. The main issues addressed by these
contribution of entrepreneurship to economic contributions are: (a) factors affecting occupa-
growth is at the root of the study of the physiology tional choice, the supply and demand of entrepre-
of market economies. "He [the entrepreneur] hasneurship and the link between the distribution of
long been recognized as the apex of the hierarchyentrepreneurial talent and the size distribution of
firms (Lucas, 1978; Kihlstrom

firms. In and
particular, Oi's model is based on the Laf
Oi, 1983; Otani, 1996); (b) the occupational idea that individuals are endowed with different
choice and the supply of entrepreneurship in the managerial abilities in coordinating workers and
presence of liquidity constraints (Evans and suggests that, given the amount of time required
Jovanovic, 1989). Following this, in the '90s to monitor the work of others, abler individuals
advances in the analysis of the factors generating become entrepreneurs while those below a cut-off
economic growth led to a stress on the link ability level become employees. More talented
between occupational choice and economic growth individuals, whose shadow price for managerial
and on the contribution of entrepreneurship to time is higher, are also able to supervise larger
economic development (Murphy et al., 1991; groups of workers and hence to coordinate larger
Banerjee and Newman, 1993; Iyigun and Owen, firms. So, given the distribution of ability among
1999). individuals and the available technologies, the
The models of Kihlstrom and Laffont (1979) model determines both the supply of entrepreneurs
and Lucas (1978) share, in Lucas' words, common and the size distribution of firms.
features: "Richard Kihlstrom and Jean- Jacques More recently, in line with Nelson and Phelps
Laffont developed an equilibrium theory in which (1966), Otani (1996) has stressed the link between
agents differ in their attitude toward risk with the technical change and the supply of entrepreneur-
relatively least risk averse becoming entrepre- ship and developed a model where entrepreneurial
neurs. I am here adopting exactly their formula- talent is partly endogenous and is treated as a
tion, with 'attitudes toward risk' replaced by specific form of human capital acquired through
'talent for managing'" (Lucas, 1978, p. 510). This experience. The object of the learning process,
warrants a restriction of our discussion to the which bears an apprenticeship cost, is assumed to
former model. Kihlstrom and Laffont assume that be knowledge of the firm's constituent elements:
the distribution of labor force between self- "The cost of learning about the components of a
employment and employment depends on the dis-explains why firms do not expand infinitely,
firm
tribution of risk aversion within the population. while the scale economy in learning explains
Notably, given the production technology and whythe
firms exist, in other words, why firms do not
usual behavioral assumptions, all individuals break with down into even smaller parts" (Otani, 1996,
risk aversion below a certain threshold become
p. 274).
entrepreneurs and hire the rest as employees. In contrast with the Schumpeterian view and
in line with Knight's approach, Evans and
Under reasonable assumptions on the nature of
uncertainty, the authors suggest that the sizeJovanovic
of (1989) developed a static model rooted
firms decreases with the degree of risk aversion in
ofthe literature on information failures, where,
the entrepreneur and that the distribution of risk
given innate talent and initial wealth, entrepre-
aversion within the population also determines neurial choice is determined by the cogency of
the size distribution of firms. The model can be the liquidity constraint. Their estimated model
interpreted in two ways: either by saying that provides evidence in favor of the thesis that
individuals have different utility functions, hence liquidity constraints affect the choice to start a
preferences, or that individuals have the samebusiness, not only the amount of capital to invest.
preferences over risky prospects but different Moreover, a reasonable dynamic interpretation of
initial wealth. Indeed, in the latter case the impli- the econometric results suggests that size of a firm
cations of the model for development and growthis not a good proxy for entrepreneurial talent,
can be very different (Banerjee and Newman,15 since liquidity-constrained individuals must start
1993). their business venture with a sub-optimal level of
Following Lucas (1978), Oi (1983) focuses on capital and need more time to grow.16 Indeed, this
an individual's productivity in performing the may well imply that, in the survival race, uncon-
entrepreneurial function as an explanatory variable strained less-talented entrepreneurs may prevail
in the choice between self-employment and wage over talented but liquidity-constrained ones.
work, in entrepreneurs' allocation of time between On the whole, these contributions offer a rich
coordination and supervision, and in the size of interpretative tapestry that will be used, with
Revealing Entrepreneurial Talent 1 63
to activities
eclecticism, to develop a simple conceptual characterized by deferred returns.
frame-
work based on the idea that the allocation of entre- Hence, talent would be measured by the time
preneurial working time is a crucial theoretical and profiles of the returns associated with different
empirical issue. allocations of working time.
In fact, these different interpretations lead to the
same conclusion, namely that the allocation of
3. The allocation of working time by small
working time among activities characterized by
business owners as a proxy for
different entrepreneurial content should reveal the
entrepreneurial talent
entrepreneurial talent (in terms of entrepreneurial
Time is an essential input in economic activity productivity, risk aversion and myopia) of the
and, as the day is 24 hours long, it is also the most agent who decided the allocation.
evenly distributed resource. Its allocation among Whereas data on the allocation of non- working
alternative uses determines the relative price of time are systematically collected and processed
goods and services in the short term and the wealth (Juster and Stafford, 1991), empirical evidence on
of nations in the long term. Indeed, the produc- the use of working time, in particular by the self-
tivity of working time is an essential indicator of employed, is scanty at best. To my knowledge
economic development. Whereas a high level of there are no empirical papers on the allocation
economic development is associated with a high of working time by entrepreneurs. The lack of
productivity of the time dedicated to learning and models of entrepreneurial behavior based on time
investment activities, underdevelopment can be allocation presumably reflects the lack of reliable
depicted as a condition where, due to technolog- data and the absence of empirical research expe-
ical backwardness and institutional failures, the rience in this field. Indeed, in this respect, one
productivity of working time is so low that not should agree with the more general contention that
enough time remains17 for learning and developing "While the importance of time allocation as an
better technologies. analytic construct is close to being self-evident,
In the context of small business economics, the the use of data on time allocation either to model
reason for relying on data on the allocation of economic behavior or to understand the dynamics
working time to analyze entrepreneurs' behavior of economic change over time has only recently
and to reveal their talent is twofold. First, fol- began to attract the interest and attention of eco-
lowing Lucas (1978) and Oi (1983), one should nomics" (Juster and Stafford, 1991, p. 471).
expect that individuals prefer to allocate more time Small firms appear to be natural candidates for
to more rewarding managerial activities and that an empirical analysis on the use of entrepreneurial
the reward is increasing in the productivity of the time - which is deeply rooted in the household
time spent in those activities. So, on the grounds production approach: notably, in small firms, the
that the firm is the organization where entrepre- usual problems stemming from the separation of
neurial talent is best rewarded, one should expect ownership and control do not arise, and con-
that more talented (productive) individuals will sumption and production activities are almost
allocate relatively larger shares of their time indistinguishable.18
to those managerial activities characterized by In line with that approach, in the analysis that
relatively higher entrepreneurial content. Second, follows I make the substantially harmless assump-
following Kihlstrom and Laffont (1979), one tions that (a) the total amount of work is fixed
should expect that less risk-averse individuals exogenously and the decision concerns only its
will allocate relatively larger shares of their time allocation and (b) the shadow price of diverting
to activities characterized by relatively more working time from direct production to entrepre-
uncertain returns, namely, those activities that neurial activities is well approximated by the cost
have greater entrepreneurial content. Moreover, of labor, i.e. the equilibrium wage or, equivalently,
by adopting an equivalent perspective and the marginal value produced by non-entrepre-
substituting the expression 'risk aversion' with neurial labor. As a consequence, in equilibrium,
'myopia', more talented individuals should be the shadow value of working time would be the
expected to allocate more of their working time same across different applications. It is worth
TABLE I
according to their entrepreneurial content: (a)
The size distribution of firms in the sample
entrepreneurial and managerial activities strictu
sensu, which are assumed to absorb entrepre-
No. of employees Share of firms (%)
neurial time and (b) direct participation in pro-
0-9 37.5 duction (PT). PT can be considered the typical
10-19 30 use of time with a known return. In a competitive
20-49 30
equilibrium, the return is given by the marginal
50-99 2.5
product of labor in value; indeed, this is the entre-
preneurial activity characterized by the least entre-
remarkingpreneurial
here content. Conversely,
thatentrepreneurial al
managed time has uncertain and deferred returns,
directly by which th
of these entrepreneu
depend on the productivity of entrepreneurial and
portion managerial
their time in those specific
of
workin applications.
The data In our sample, on average 35% of working timebel
presented
40 Italian was devoted to production and 63% to entrepre-
family-run s
clothing and
neurial and managerialtextile
activities. However, cross-
province offirm differences in the allocation of working time
Frosinone.
the firms were
in significant
theand need explanation.
sampl The distri-
feature of bution
the of firms withItalian
respect to the percentage in
the large shares of time allocated to
share ofentrepreneurial
outpactivi-
accounted ties (ET) is shown
for by in Figure 1.small f
The advantage One eighth of our entrepreneurs
of devoted stud no
firms is time at all to entrepreneurial
they provide activities, and two- a
ment fifths allocated less than 50%. As a result of the
organizational form
ranging first step, building
from on the previous assumptions, I
Schumpet
pursuing was able to distinguish firms onauton
highly the basis of the
gies22 to entrepreneurial talent of their owners,
business measured
units
on their by the share ofcontractor
main working time devoted to truly
cate the typical
entrepreneurial activities. empl
main disadvantage of th
empirical findings can
other sectors and firms. 3.1. Small business owners' allocation of
working time and firms' strategies and
In the survey, conducted through interviews -
performance
to avoid misinterpretation - owners where asked
to assess the distribution of their working time The first empirical question here is whether firms'
among different activities. A distinction was strategies and performance are related to the
drawn between two main groups of activities amount of time spent by their owners on entre-
151 d^T
10
0 0<ET<30 3<XET<50 5CKET<80 80<ET<90 90<ET<100
Figure 1. The distribution of firms with respect to time devoted to entrep
TABLE II
preneurial activities proper. The expectation is that
Type of investment and ET
more talented entrepreneurs will devote more time
to marketing, production investment
Typeand
of pricing
investment Average ET
strategies revealing low discount rates and
Non-innovative investment 27
autonomy from the main contractors, and that as
Innovative investment 68
a result of this, more talented entrepreneurs
achieve better overall performance.
In order to assess the existence of systematic
TABLE III
relationships, I run the mean-difference testof

Analysis the markets
between the average ET of groups of firms
Behavior Average ET
showing different strategies and performance
measures (Table XXI). I consideredMarket
the following
analysis 94
qualitative measures of firms' strategies and per-
No market analysis 51
formance: (i) whether the investments of the firm
in the previous two years were innovative; (ii) the
TABLE IV
propensity to acquire information through sys-
Quality segment of the market and ET
tematic use of market analysis; (iii) the quality-
segment of the market; (iv) the competitive
Quality segment of the market Average ET
advantages of the firm. Moreover, as all firms
High
in the sample are subcontractors, the nature of bar- 70
Medium 57
gaining with the main contractors and its outcome
are important dimensions of entrepreneurial
behavior. So I checked whether bargaining power TABLE V
Competitive
and ability to obtain satisfactory terms of trade advantages and ET
were related to talent as revealed by the allocation
Type of competitive advantage Average ET
of working time. In order to test this conjecture,
I considered, (v) the concentration Product
of sales, which
quality 58
should provide a measure of outside options;
Workers' (vi)
human capital 70
Lowi.e.
the nature of the bargaining process, price
the 49
greater or lesser passivity of the subcontractor;23
(vii) the sign of the output price change experi-
folio; the
enced in the previous three years (considering (Table VI); (vi)
substantial homogeneity of the firms'bargaining
technologies process (
enced
and output); and finally (viii) the number a positive or zer
of days
last
of delay in receiving the amounts three
due, on the years (Ta
enced
assumption that weaker firms are obliged shorter delays
to accept
late payments. As a further indi
strength,
On the whole, although the t-ratio is not sig- entrepren
kind
nificant for all the tests, the data show of services the
that owners
allocating more time to ET have more indicate
entrepre- that less talen
neurial strategies and perform better to have in the a weaker org
market; moreover, when they bargain need services that bu
with their
house
main contractor, they get better results (such as real an
in that (i)
they are likely to be more innovative talented
(Table II), entrepreneu
(ii) they are more active in acquiringnormally
information are provid
infrastructure)
(Table III); (iii) they are more likely to be in the (Tabl
high-quality segments of the market Finally,
(Table IV); in order t
(iv) they rely more on product qualityexpectations
or human about f
whether
capital than on low price as their competitive edge they inten
the near
(Table V); (v) they have a more diversified port- future. The
TABLE VI TABLE XI
Portfolio diversification Future prospects and ET
Share of revenues from largest customer Average ET Hiring prospects Average ET
R < 40 78 Will not hire workers 53

40 < R < 60 61 Will hire workers 64
60 < R < 80 61
80 < R < 100 58
strategies and perform

TABLE VII
should be considered a
Bargaining process and ET
preneurial talent.
Mechanisms of price determination Average ET
3.2. Entrepreneurial ta
Fixed by the subcontractors on the
the size of the firm
basis of the terms of payment 100
Bargained by the parties on the basis
Entrepreneurial talen
of the terms of payment 78
Fixed by the main contractor 47 acquired abilities to de
benefit from disequilib
abilities are such qualit
TABLE VIII
self-confidence (absenc
Sign of output price changes in the last three years and ET
rate of time preferenc
Sign of the price change Average ET ties, individuals can imp
dealing with uncertain
62 capital. In particular, t
+ 80
provides evidence th
53
acquired through ed
traits of personality in
TABLE IX aptitude to cope with
activities (Bowles et al
Average days of delay in receiving payments and ET
Hence, the second ste
Days of delay Average ET
existence of a significa
<30 59 allocation of working
<60 52 talent, and, respectively
Total 57 of entrepreneurial hum
expectation is that size
TABLE X talent and, since huma
Type of services most needed and ET neurial ability, with ent
as well. As far as the lin
Type of services most needed Average ET talent (as measured by
is concerned, Table XI
Real services 50
Financial services 64
the ET share is lowes
Training 71 firms (1 to 5 employee
Infrastructure 85 size.
This evidence can be i

The first interpretation
talented entrepreneurs had better
preneurs prospect
are able to co
relatively more willing to hire
and run (Table
larger XI).
firms. Th
All in all, this preliminary
- which analysis
does not consti
rely
fair prima facie evidence that the
monitoring amount
functions -
spent on entrepreneurial activities
make more affects
profits, rein
TABLE XII
should be delegated to managers and should thus
The size distribution of firms according to ET
be considered as an inferior use of entrepreneurial
time.
Size (employees) Share of firms (%) Average ET
The link, albeit weak, between size and entre-
1-5 17.5 28
preneurial talent is confirmed by the computation
6-9 20 50
10-19 30 68
of the simple correlation coefficients between size
20-50 32.5 71 and ET in that, the latter yielded a positive but not
significant coefficient (Table XIV).
A reasonable explanation of these results rests
A closer look at the data on the size distribu- on the presence of scale effects. Namely, as the
tion of firms whose owners allocate at least 75% size of the firm increases, the time devoted to
of their working time to ET does not result in so coordinating and monitoring should not rise pro-
neat a picture (Table XIII). Although micro firms portionally, because the entrepreneur can and must
(1-9 employees) are under-represented, 50% of delegate part of these functions.
the remaining larger firms are excluded from the A second set of results that is neater and more
sub-sample. Hence, I tested whether the difference interesting concerns the link between entrepre-
in the average ET for firms with ET, respectively, neurial talent and entrepreneurial human capital.
lower and higher than 75%, was significantly dif- In this context (Schultz, 1990), human capital is
ferent from zero, and the t-test led us accept this assumed to depend on the level of education
hypothesis at 95% (see Table XXI). (EHC) (Table XV) and experience (L), for which
On the other hand, if one follows the interpre- a good proxy is the number of years spent by
tative route suggested by Evans and Jovanovic the entrepreneur in running the same business
(1989), this result could be explained in terms or working in the same field (Table XVII). This
of liquidity constraints that limit the initial size preliminary evidence on the role of education
and the rate of growth of talented entrepreneurs. confirms the intuitions of Schultz (1990) and
I tested the latter hypothesis but did not find Otani (1996) and the results in Evans and
evidence that, in this specific context, credit Leighton (1989), Bates (1993) and Schiller and
rationing had any explanatory power. Crewson (1993), Storey (1994), Berkham et al.
Alternatively, one may hypothesize that this (1996) on the role of human capital in entrepre-
result is due to the inability of ET to capture entre- neurship.
preneurial functions strictu sensu. In fact, ET Simple correlation coefficients between the
includes activities that at least in part can and level of education, measured as the number of
TABLE XIII
The size distribution of firms with ET > 75%
Size class Number of firms Share of firms with ET > 75% Share of firms with ET > 75%
with ET > 75% over the total over the class total
1-9 4 23.5% 26.7% (15)

10-19 6 35.3% 50.0% (12)
20-50 7 41.2% 53.8% (13)
Total 17 100.0% 42.5% (40)
TABLE XIV
Simple correlation coefficient r(ET, S) (S = number of employees)
Mean Std. dv. r(X, Y) R2 t p n
ET 58.325 36.51722
S 13.7 12.06648 0.253184 0.064102 1.613295 0.114956 40
TABLE XV
hence increases the productivity of time devoted
Education and ET
to direct production.
Education level Average Cases
As for experience (Table XVII) the results
ET obtained show no positive and statistically signif-
icant correlation with ET.30
B.A. (17-19 years) 90 3 The idea that work experience might not matter
High school (13 years) 73 6 is consistent, for instance, with the empirical
Technical school diploma (10-12 years) 49 8
evidence provided by Evans and Leighton (1989)
Lower secondary (8 years) 63 14
Elementary school (5 years) 35 8 and Roper (1998), suggesting that learning by
doing is more relevant to employees than the self-
employed. According to this thesis, one should
years of school attendance necessary
think to
that attain a that is commonly attrib-
the central role
uted to practical experience in business manage-
given degree, and our measure of entrepreneurial
talent is positive and significantment
at is5%
more a(Table
piece of conventional wisdom than
XVI). a conclusion based on hard evidence. Of course,
I would notcapital
This outcome is consistent with human suggest here that experience is not
theory (Becker, 1965) and in particular
importantwith the
but rather that its function may be less
relevant than factors
thesis that education increases the productivity of such as innate talent and
education.31
entrepreneurial time by enhancing innate abilities.
Indeed, this relationship may hide a more funda-
The final step is to consider the joint impact of
mental mechanism that deserves further investi- size and entrepreneurial human capital on ET.
gation. Given the cost of education, and leavingAssuming that education and entrepreneurial time
aside the psychological cost of its acquisition,27are positively related and that in larger firms the
one should expect that educational choice dependsentrepreneur allocates more time to entrepre-
on (i) the degree of risk aversion28 and (ii) the rate neurial activities, I estimated a simple statistical
of time preference, i.e. the two main factors thatmodel for ET, which includes education (HC), size
should be correlated with entrepreneurial talent.(S) and size squared:
The reason is that investment in education, like the
entrepreneurial use of working time, is character- ET = a + PHC + yS + 8S2
ized by uncertain and deferred returns. Hence, if
one consistently follows human capital theory, the Multiple regression produced the results shown
true underlying correlation is between the "struc- in Table XVIII.
tural" factors - which, I suggest, should directly By excluding the intercept and then the squared
reveal entrepreneurial talent - and entrepreneurialterms the final results shown in Table XIX were
time.29 obtained.
As we see in Table XVII, entrepreneurs with a The data confirm that firm size and the level
technical school diploma (vocational training cor- of education are correlated with entrepreneurial
responding to 10-12 years of education) allocated, talent, as revealed by the allocation of working
on average, less time to entrepreneurial activities time. They suggest that at least as a first approx-
than those with 8 years of schooling. A reasonable imation education and size should be included in
explanation of this somewhat surprising result is a micro-econometric model of entrepreneurial
that technical education improves practical skills, behavior and firm performance. However, whereas
TABLE XVI
The simple correlation coefficient r(ET,EHC)
Mean Std. Dv. r(ET,EHC) R2 T p n

ET 58.325 36.51722
EHC 9.55 3.456321 0.344111 0.118412 2.259216 0.029688 40
TABLE XVII
is the ability to discover, select, process, interpret
Experience and ET and use the data necessary to take decisions in
Years of activity of the firm
an uncertain world and, then, to exploit market
opportunities. The main factors affecting this
< 15 >15 ability are certain innate traits (i.e. creativity,
imagination, degree of risk aversion, myopia,
Average ET 62 46 alertness), and competence acquired through
formal education (codified knowledge) and by
TABLE XVIII means of on-the-job experience. A secondary but
Estimates and tests for ET(HC, S) important element is tacit knowledge embedded in
the environment and available to individuals, e.g.
Estimate r(33) p-level knowledge generated within an industrial district.32
a 13.82061 0.829159 0.412971914
One should expect that, in large populations,
the distribution of innate characteristics is the
p 3.618924 2.396555 0.022373931
y 1.852317 1.519737 0.138101384 same, and that they depend on factors that are
8 -0.03383 -1.23327 0.226188049 not in the domain of economic analysis and
that change only over a very long time span.
R = 0.47746712, R2 = 0.22797485, Adjusted R2 = 0.15779074,
Hence, leaving aside the role of tacit knowledge
F(3,33) = 3,2482,p < 0.03412, Std. error of estimate: 30.961.
embedded in the environment, geographical and
temporal variations in the stock of entrepreneurial
TABLE XIX
talent that might be relevant to economics are
Estimates and tests for ET(HC, S, S2)
mostly due to abilities acquired through formal
Estimate r(33) p-level education, training and experience.
The importance of these sources of knowledge
P 4.311963 5.110547 0.00001 reflects the complexity of the data to be processed
y 1.48392 2.55631 0.015367 and of the technological and social environment
in which firms are embedded. With economic
F(2,33) = 57,077, p < 0.00000, Std. error of estimate: 33,103.
globalization and the ICT revolution, in recent
decades the technological and social environment
the role of education appears has
to grown more complex and
be clear-cut, the amount of skill
size
and knowledge
may not be such a good explanatory variable. required to take strategic decisions
has increased both quantitatively and qualita-
tively.33
4. Entrepreneurial culture, education and
On the other hand, it is evident that the faster
training policy
technology and the competitive environment
This paper provides insights change,
on three the faster the value of specific knowledge
different
issues. One is the likely impact of experience
acquired through technical decays while that of
change and globalization on the codified knowledge,of
nature acquired through formal edu-
entre-
preneurial talent in small firmscation
and andontraining,34
the increases:
demand "The comparative
advantage of
for entrepreneurial human capital. schooling rises
Second isrelative
the to that of
much-debated empirical question of how
learning from experience to becomes
as technology
measure entrepreneurial culture more complex
and the and as astock
consequenceof of increases
entrepreneurship. In the light of the recent In short,
in specialization" (Schultz, 1990, p. 98).
the change
tendency to take the contribution in the demand for entrepreneurial
of entrepreneur-
human
ship to economic growth into account capital can be described
thisas (a) isan increase
indeed a key issue (Audretschin andthe minimum
Thurik,amount of2001;
codified knowledge
Thurik, 1999). The third issuenecessary is methodological,
to generate a unit of information and (b)
being on the design of training policies a reduction in the for
degree small
of substitutability
firms. between codified and non-codified knowledge.
What we call entrepreneurial talent, basically, These conclusions shed light on how entrepre-
neurial culture may betraining

activities, improved should consist ofto hel
on-the-job
more dynamic economy.
tutorships ratherThere
than through is
outside
nowactivitiesb
sensus that human such as seminars, conferences
capital, andand other traditional
specifica
teaching tools. is an important
preneurial human capital,
economic growth (Lucas, 1988; Barro
Martin, 1995; Mankiw et al, 1992; Benh
5. Conclusions
Spiegels, 1994).
Crucial questions in
theory are whetherBuilding on Lucas (1978) and
market Kihlstrom and
failures af
Laffont (1979), this papers provide
accumulation of entrepreneurial human empirical ca
the selection of entrepreneurs
evidence that the allocation of working(Redd
time by
Acemoglu, 1996). self-employed
While it
persons may
between activitiesnot
charac- b
to specify exactlyterized
how by differing
to returns
increase may reveal their
the
actual entrepreneurs35
entrepreneurial and talent. Justtheir avera
as actual consumption
choices should
there is every reason to reveal people's preferences,
suppose that I ap
education and training
suggest that the policies
self-employed usecan of working inc
quality of potential
time entrepreneurs.
in activities characterized by a different entre-
Let us now turn topreneurial
the content should signal individual
second question ability
how to measure the supply of entrepr
as entrepreneur.
in the economy. For The resultsif entrepreneur
are provocative. They suggest that
(a) it is possible
matters, quantitative measuresto discern different suchbehavioralas
of self-employed persons
patterns do not
from data on the allocation of working pr
accurate picture.time Any such
by small business owners;gauge
(b) the allocationne
properly adjusted bears
for the quality
some relationship to the owner's comple-of th
ment of human
Drawing on the results of capital
thisand to the size of the o
paper,
do so is to measurebusiness (number of employees); and (c) the
entrepreneurial hum
primarily in terms of ofeducational
allocation entrepreneur's working time attain
has a
then as the significant
training and impact on the performance
experience of of athe
women in charge business
of entrepreneurial
(or perhaps, the other way round). Of f
within the firms. course, this study is intended as an example in the
Finally,
addition
use of to in
data onthese
the allocation general
of working time toins
education training and
as sources
reveal behavioral patterns. of
I hope that more will
come in the future.
neurial human capital, the analysis deve
provides more specific methodological
The most robust empirical finding of this paper i
for the design of training
is the positive policies
link between entrepreneurial ability
business owners. First of
and the level of all,
formal inadequate
education, whereas expe-
skill and training
rience, among employees
in contrast with the conventional wisdom,
just a sign of poordoesentrepreneurial
not seem to play any role. The fact is that cult
the owners. Thatentrepreneurial
is to ability say, entrepren
is only partly innate and
workers' human capital appear
also depends on education, to
which gives peoplebe
the co
tary inputs.36 tools to take informed decisions and to face an
This conclusion implies that, more than in the
uncertain future with greater confidence: in a
past, training programs for small businesses
word, to perform the allocative function conven-
should be addressed to both workers and tionally assigned to entrepreneurs. It is legitimate
employers. Secondly, the postulate that thetoallo-
conclude that, taking the amount of innate
cation of working time reveals the owner's entrepreneurial
cost of talent as given, investment in edu-
diverting time from non-entrepreneurial activities
cation should be used to increase the supply of
carries important implications for managerial
entrepreneurship in the economy and to improve
training to less talented business owners. Given
entrepreneurial culture.
the high revealed opportunity cost of taking time
away from production and related managerial
Appendix
TABLE XX
Descriptive statistics
Valid N Mean -95% 95% Sum Min Max Range Variance Std.Dev. Error
HC 40 9.550 8.445 10.655 382 5 17 12 11.946 3.456 0.546

S 40 13.700 9.841 17.559 548 0 48 48 145.600 12.066 1.908
ET 40 58.325 46.646 70.004 2333 0 100 100 1333.507 36.517 5.774
WT 40 41.675 29.996 53.354 1667 0 100 100 1333.507 36.517 5.774
TABLE XXI
Results of the test of the difference between the means
Test p-level
5%
Average ET and market analysis 0.002

Average ET and price bargaining 0.002
Average ET and innovative investments 0.014
Average ET and size 0.022
Average ET and education 0.038
Average ET and number of buyers 0.10
Average ET and the price change in the last three years 0.14
Average ET and the decision to hire new workers 0.18
Average ET and product quality 0.20
Average ET and price vs. quality competition 0.22
Average ET and age 0.24
Average ET and the type of most needed services 0.27
Average ET and investments in the last three years 0.29
Notes neurs from non-entrepreneurs within the group of small busi-

nesses owners.
* 1 would like to acknowledge valuable comments from T. 8 The main drawback of the empirical studies in t
Cameron, G. Gagliani and two anonymous referees. The usual that, as a rule, they are not based on consistent b
disclaimer applies. models that can distinguish between endogenous
1 Contributions include Cantillon (1979), Say (1971), nous variables. From a statistical point of view, t
Marshall (1930). For a historical perspective, see Herbert and ally leads to lengthening the list of exogenous var
Link (1988). increasing the risk of multicollinearity.
2 See Baumol (1968, 1990) and Schultz (1990). 9 For example, a quantitative measure of entrepr
3 Of course, there is non-coincidence between the two, entre- often used is the share of self-employed as a perc
preneurs being a subset of the self-employed. labor force.
4 On the other hand, in order to test the predictions of their 10 The main features of this change are related to t
model, Evans and Jovanovic (1989) looked at the effects of in the degree of uncertainty and the growth in mar
liquidity constraint on the choice of becoming self-employed. mentation (Acs and Audretsch, 1993; Wennekers a
5 The number of explanatory variables that are included in 1999).
the statistical models is, in general, very large. As a result, 11 These indicators are computed for a sample of small sub-
most of the available empirical studies fail to provide clear contracting firms that are representative of a large number of
insights or reveal the fundamental forces. Indeed, overview of Italian and European firms facing the challenges of global-
these contributions suggests that the level of education is a ization. The original motivation of this research was to
fundamental factor explaining the performance of individuals evaluate the ability of entrepreneurs to deal with this new com-
as entrepreneurs and an element deserving further investiga- petitive pressure. I do not present all the results of the research
tion. here. On the whole, they suggest that a large share of firms
6 Even though, in addition to Lucas (1978) and Laffont and do not have adequate entrepreneurial resources to compete,
Kihlstrom (1979), I draw on a large body of theoretical through technical change and product quality, on a global
literature on human capital. scale. On the other hand, in contrast with conventional
7 A related empirical issue is how to distinguish entrepre- wisdom, within this group of small firms, size did not appear
1 72 Francesco Ferrante
to be the most
significantone business (subcontract
discriminating factor betw
preneurial (competitive) product of another busine
and non-entrepreneurial
petitive) firms. with plans and technical sp
12 About two-thirds ofcontractor.
final business sales in Euro
of the value of purchased22 Production,
intermediate organizational, investment,
inputs marketing
(mate and
ponents, machinery etc.) pricingthat
strategies. involve inter-firm
requiring transaction-specific
23 In informal talks investments.
with some entrepreneurs we learned These that
some firms of
are effected under a variety used to let the buyer set the price
contractual after delivery
agreeme
generally as "outsourcing" or "subcontracting".
of the product!
13 Schumpeter (1936) was 24 Absence the first
of fatalism corresponds to envisage
to self-confidence in the t
role of the entrepreneur ability to as achieve
an one's goals. A way of
engine of measuring
econom is the
Rotter's scale, assessing
According to him, the process of creative the extent to which one perceives
destructio
success or failure
by new innovative ventures is as the being dependent
main on factor
one's actions or inon
external factors. On the importance
sion of consumption opportunities, and ultimately,of self-confidence as a t
in the economy's wealth depends
trait affecting labour marketon how
success fast
and the returns ent
to edu-
cation, see Bowles et al.
are in introducing innovations. By(2001).generating dis
entrepreneurs create the 25 Strong empirical evidence is available
opportunities on thearbitr
for joint role
played by education
induce further entrepreneurial and these personal traits
activities. For in determining
Schum
financing of innovation the success
is of immigrants
not (Bowles et al., 2001).
a typically entre
26 Going a step further,
function and the entrepreneur is one not
should expect that given talent,
necessarily t
or the owner of the firm.size and Moreover,
ET are jointly determined by efficiency conditions
profits are no
motivation for becomingin thean
allocation of entrepreneurial time.
entrepreneur and there
27 Which depends
psychological reasons behind themainly on innate learningof
choice abilities and
acting
socio-economic background.
vator in a society. Building on these ideas, entre
talent is then viewed as28 something
Shaw (1996) provides empiricalrelatedsupport for this conclu-
on the o
sion.
individual characteristics, notably to creativity an
tion in discovering new 29ways
Indeed, such anof doing
interpretation things,
is appropriate as long as the and t
ingness and ability to carry
decision to invest out
in educationinnovative
is taken by the individuals con- projec
other. Knight (1965) focuses on
cerned, or at least the with
in agreement uncertain
them, not by their parentsnature
preneurial activity and innovation
who may bear the financial burden and stresses the r
30 One may question
entrepreneur as a risk-bearer. Inwhether
this this context,
result depends on the basica
preneurial talent is related to the
measure of experience ability
used and whether it might notto proces
be useful
tion necessary to deal towith
collect other uncertainty.
data that allow accounting for the The actual ne
approach is close to Schumpeter
amount of time spent by thein that
entrepreneur itanyunde
running
economic disequilibriumbusiness.
is a natural condition of
and that the role of entrepreneurs
31 On the other hand, the empirical as evidence
arbitratorsprovided by c
ceived only within a disequilibrium
Roper (1998) supports the opposite viewframework
that experience may an
of uncertainty (Kirzner,
generate1997), where
behavioral inertia and barriers tothe concep
organizational and
tive efficiency is deprived
technical change. of any normativ
Entrepreneurial talent 32
isThis viewed
type of knowledge as the
is considered ability
an important factor to
discover business opportunities, and
explaining the international success alertness
of small Italian businesses is
persona] attitude required of
in low and entrepreneurs.
medium-tech sectors.
14 On this view, see also Schultz,
33 The new 1990,requires
competition due to globalization p. new
94.
15 They show that, with liquidity
entrepreneurial strategies basedconstraint,
on internationalization and the
tribution of wealth affects
continuous product the evolution
and process of the
innovation. One can no longer
survive by just replicating
finally suggesting that history established behavioral routines.
matters.
16 This also implies that
34 Theliquidity -constrained
difference between experience and formal education ent
will show a greater tendency
is the fact that the to
formerreinvest earnings
generates specific, non-transferable
Jovanovic, 1989, p. 821).
individual knowledge, the latter codified knowledge generated
17 Given the amount of time
through required
a long-term process of systematic to produce
observation and
tence level of output. elaboration of transferable information collected by many indi-
18 Of course, the sameviduals.
analysis can be carried out
organizations by considering and
35 According to Baumol averaging
( 1 965, the al
p. 64) "theory can say a great
time of the individuals in charge
deal that is highly relevantofto thethe
subject ofmanagerial
entrepreneurship
19 The total number of
even if textile
it fails to provide a and clothing
rigorous analysis of the behavior fi
province was 483 (1998).
of the entrepreneur or of the supply of entrepreneurship".
20 In particular, in 1996 about
36 Inadequate 66% human
levels of entrepreneurial ofcapital
total can t
clothing employment inlead
Italy was in
to two observationally firms
equivalent with
outcomes: (a) ineffi- few
employees; 25% in firms
cient with fewer
selection of personnel than on-the-job
and (b) insufficient 10.
21 Subcontracting can be
training.defined as an arrangemen
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Revealing Entrepreneurial Talent

Author(s): Francesco Ferrante

Revealing Entrepreneurial Talent Francesco Ferrante*

between neoclassical Buildingtheory

firms (Lucas, 1978; Kihlstrom

0 0<ET<30 3<XET<50 5CKET<80 80<ET<90 90<ET<100

Figure 1. The distribution of firms with respect to time devoted to entrep

relationships, I run the mean-difference testof

Share of revenues from largest customer Average ET Hiring prospects Average ET

R < 40 78 Will not hire workers 53

strategies and perform

This evidence can be i

1-9 4 23.5% 26.7% (15)

Mean Std. dv. r(X, Y) R2 t p n

Mean Std. Dv. r(ET,EHC) R2 T p n

neurial culture may betraining

HC 40 9.550 8.445 10.655 382 5 17 12 11.946 3.456 0.546

Average ET and market analysis 0.002

Notes neurs from non-entrepreneurs within the group of small busi-

References Journal of Economic Behavior and Organization 3(19),

Say, J. B., 1971, A Treatise

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