From Farming to International Business: The Social Auspices of Entrepreneurship in a Growing Economy

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From Farming to International Business The
Social Auspices of Entrepreneurship in a Growing
Economy

• Kaivan Munshi
• Brown University and NBER

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1. Introduction

• Business success depends on
• Credit
• Connections
• Credit and connections are determined by
• Family background
• Community networks
• Business communities cannot satisfy additional
  demand for entrepreneurs
• Entrepreneurs without business background will
  fill the gap
• Networks grow most vigorously in communities with
  poor outside options once they do crystallize
• Test this hypothesis with new data from the
  diamond industry

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The Survey

• List firms GJEPC database 2001-03
• Exit information 1995-2000

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Organization of the business

• Key step is accessing rough diamonds on credit
• Network provides referrals
• 10 rough suppliers/year vs. 40 polished buyers
• 70 of firms have a dominant supplier
• 70 of roughs sourced from Antwerp
• 75 of roughs received on supplier credit
• 6 of transactions have a written agreement

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Theoretical framework

• Production technology
• Network technology
• Selection into the industry
• Entry condition

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Growth of the network

• ?tj declines more steeply in L-community implies
  network strengthens more rapidly in that
  community
• Solving recursively, can show that this will be
  the case if
• Density is non-decreasing as we move down the
  ability distribution
• Network technology is not too concave
• Firm performance
• Controlling for ?ij with firm fixed effects,
  performance increases more steeply in the
  L-community

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Average entrants ability

• Assume linear network technology and uniform
  ability distribution
• Same result can be obtained for

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Alternative distributional assumptions

• Multiple cohorts
• Ability distribution F(?) constant across cohorts
• Individuals enter industry at a fixed age
• Receive referrals from preceding cohort
• Ability distribution varies across communities

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Selection into the network

• Payoff inside the industry
• Entry conditions
• Selection thresholds

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Additional results

• Investment in the network, measured by
  intra-industry marriage increases more rapidly in
  the L-community
• More non-network firms are drawn from the
  H-community and this gap widens over time
• Predictions for characteristics and performance
  unchanged

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Empirical analysis

• Changes in firm characteristics
• Allow for secular changes in outside options
• Control for age effects
• Changes in firm performance
• Allow outside options to change across
  communities and over time
• Control for changing returns inside the industry

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Conclusion

• No reason why such entry by outsiders could not
  be replicated elsewhere
• Infusion of bank credit can have
• unexpected negative consequences

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