Human Capital in New Firms

Abstract

This dissertation is a collection of three stand-alone research papers on the composition of human capital in newly founded firms. The papers are all empirical but they are closely related to two theoretical approaches. The first approach is the jack-ofall-trades model by Lazear (2005) and the second the O-ring theory introduced by Kremer (1993) and applied to new firms by Fabel (2004a,b) and Fabel and Weber (2005). Besides contributing to the search of stylised facts about the effects of the composition of human capital in new firms, this dissertations aims at discovering to what extent the predictions of these theoretical approaches can be confirmed by the data. In the introduction (Chapter 1), it is motivated why there is interest in new firms. The three papers are included in Chapters 2 to 4.In Chapter 2, it is analysed whether heterogeneity in the educational backgrounds of the founders matters for the success of academic spinoffs. Furthermore, it is examined whether team foundations are more successful than single entrepreneurs. These questions are analysed using a data set on academic spinoffs in Germany. Firm success is measured by employment growth. The results show that team foundations are more successful than single entrepreneurs. Team foundations of engineers perform better when they have a business scientist in the team. However, different subjects per se and homogeneity with respect to the academic origins of the founders do not play a significant role for the success of academic spinoffs.In Chapter 3, it is investigated to what extent the predictions of the O-ring theory are supported by the data. The O-ring theory predicts that individuals sort between firms according to their level of ability and that a higher average ability level within firms is positively related to both the number of individuals in the firm and capital per head. For the analysis, a rich register data set is used, covering the whole population of firms founded in Denmark in 1998 as well as all individuals involved in these new firms in the start-up year and in the following three years. In order to analyse the extent of sorting of individuals between firms, statistical tests are constructed, which compare the actual distribution of individuals among firms with the distribution resulting from random assignment of individuals to firms. The results show that, contrary to the prediction of the theory, individuals with differentlevels of ability tend to team up in new firms. Also contrary to the prediction of the theory, firm size and average level of ability of the involved individuals turn out to be negatively related. The only hypothesis that is confirmed by the data is the positive relationship between capital per head and the average level of ability in a firm.In Chapter 4, the implications of the O-ring theory for the survival of new firms are considered. The theory assumes that (given team size) average ability in a team is positively and (given ability) team size is negatively related to firm survival. Moreover, it can be inferred that a higher level of homogeneity with respect to ability and a higher level of heterogeneity with respect to the field of education leads to higher survival chances of new firms. Using the same data as in Chapter 3, it turns out that both the average level of ability in a team and team size have positive effects on a firms' probability to survive. Most important is the fact that a firm is founded by a team at all. In contrast, homogeneity with respect to ability and heterogeneity with respect to educations do not affect the probability of firm survival. It can beconcluded that the main reason why most of the hypotheses tested in Chapter 3 fail is that an additional person does not increase firm failure.