Paper to be presented at the Summer Conference 2009

on

CBS - Copenhagen Business School

Solbjerg Plads 3
DK2000 Frederiksberg
DENMARK, June 17 - 19, 2009

THE SELECTIVENESS OF THE ENTREPRENEURIAL PROCESS

Heiko Stueber
Leibniz University of Hanover and IAB
stueber@wigeo.uni-hannover.de
Udo Brixy
Institute for Employment Research (IAB)
Udo.Brixy@IAB.de
Rolf Sternberg
Leibniz University of Hanover
sternberg@wigeo.uni-hannover.de

Abstract:
This paper focuses on the phase before a firm is founded. Based upon cross-sectional data from the German section of the Global Entrepreneurship Monitor, the
specific aim of this paper is to shed some light on the selection that takes place during the entrepreneurial process and to explain empirically demographic and cognitive
characteristics of (potential) entrepreneurs. The results reveal significant differences between and common determinants of the different phases of the entrepreneurial
process.

JEL - codes: L29, -, -

 The Selectiveness of the Entrepreneurial Process

Abstract
This paper focuses on the phase before a firm is founded. Based upon cross-sectional data from
the German section of the Global Entrepreneurship Monitor, the specific aim of this paper is to
shed some light on the selection that takes place during the entrepreneurial process and to explain
empirically the demographic and cognitive characteristics of (potential) entrepreneurs. The results
reveal significant differences between and common determinants of the different phases of the
entrepreneurial process.

1. Executive Summary
A look into current entrepreneurship research, be it empirically motivated or with a theoretical
focus, shows a dominance of research on already existing entrepreneurs and the later phases of
the entrepreneurship process. Particularly poorly covered by empirical research are the very early
phases of the entrepreneurial process. This is somewhat surprising given the general acceptance
of entrepreneurship as a process and the fact that selection is in the nature of a process.
Especially the selection process is under-researched.

The aim of this paper is therefore to shed some light on the selection that takes place during the
entrepreneurial process. We distinguish between three phases: the period until an individual
decides to become self-employed, the period between the latter decision and the formal start of a
firm, and the period after the formal start of a firm. Our intention is to identify those determinants
that have an impact on the respective decisions of an individual during the entrepreneurial process.

From a theoretical perspective we roughly divide the determinants into those related to
characteristics of the individual itself and those related to the environment of the individual. The
former include demographic variables and cognitive characteristics. The latter contain a variety of
contextual variables related to the regional environment where the (potential) entrepreneur lives
and to its social network.

We use a multinomial probit analysis for explaining the propensity to be a latent nascent
entrepreneur, a nascent entrepreneur or a young entrepreneur or not to be involved in any kind of
entrepreneurship. By comparing the results of our estimates for the three entrepreneurial stages,
we try to find evidence of whether the influence of the independent variables varies at different
stages during the entrepreneurial process.

The data stem from the German part of the Global Entrepreneurship Monitor (GEM). We use
pooled data of the years 2002-2006 including nearly 17,000 individuals. 1,353 individuals of the
sample are latent nascent entrepreneurs, 810 are nascent entrepreneurs and 797 are young
 -2-

entrepreneurs. The remaining 13,978 individuals are non-entrepreneurs.

Our results clearly give empirical evidence of a strong impact of the self-selection process during
the three analysed entrepreneurship phases. We can show that most of this selection takes place
right at the beginning of the entrepreneurial process.

The findings support once more that the educational attainment is a crucial determinant for the
propensity to start a firm, but we are able to show that this is already the case in a very early stage
of the entrepreneurial process. The same applies for females. They too drop out right at the
beginning. All three variables of cognitive characteristics included in our analysis have a
substantial impact but differ in size according to the entrepreneurial stage. Since we only can use
pooled data we cannot tell whether changes in the influence of variables are the result of learning
or selection effects. For example those who are planning to become self-employed earn less than
comparable non-entrepreneurs. The relatively low income of latent entrepreneurs in particular is a
strong indication that a low income drives people to plan their own business. One possible reason
is that the market for dependent employment does not value their abilities. But panel data would be
needed to ascertain whether this is an expression of a selection that favours those with really
profitable concepts or whether it is really the effect of becoming self-employed.1 As for variables
covering the regional environment our analysis shows no significant differences for the two
planning stages, but the likelihood to really start a business is higher in regions with a growing
GDP per head and low unemployment.

The differences between the phases are more pronounced with males than with females as we are
able to show with two separate multinomial probit analyses. This may be interpreted as an effect of
the wage discrimination of dependently employed females.

2. Introduction
There are two main motivations why analysing the entrepreneurial process is important. First, if
possibly successful entrepreneurs are dropping out at certain thresholds during this process, the
achievable number of new firms is reduced. Second, as any other social processes, the
entrepreneurial process is selective. Even though selectivity as such is nothing to worry about as
long as its results are that - for instance - those whose ideas and concepts are not sound enough,
drop out. But it is well known that there is inefficient or even discriminating selection. For example
in every country males become more often entrepreneurs than females (e.g. Bosma et al. 2009).
Therefore the question occurs when this discrimination (or segregation) takes place: at some
threshold during the process – or right at the beginning of the process?

1
Therefore the authors have started to develop a panel of German nascents and latent entrepreneurs that
may help to reduce some of the problems related to the data limitations.
 -3-

Up to now, there is relatively few research published that deals with more than one phase of the
entrepreneurial process. While later phases of the entrepreneurship process, especially from
nascent entrepreneurship onwards, have received increasing attention from empirical researchers
in the recent past (e.g., Gartner et al., 2004; Davidsson, 2006), especially the pre-nascent phase is
still under-researched. This is astonishing given the policy relevance of knowledge about
determinants indicating the transition from latent nascent entrepreneurship to actual
entrepreneurship. This paper aims to shed an empirical light on some of these determinants. A
specific topic of this paper is to describe and explain demographic and cognitive characteristics of
and differences between entrepreneurs during three different phases of the entrepreneurial
process: latent nascent entrepreneurship, nascent entrepreneurship and young entrepreneurship.
The data are based upon nearly 17,000 cases from the German data set of the Global
Entrepreneurship Monitor (GEM) for the years 2002-2006.

The remainder of the paper is structured as follows. In the next section we look at the different
stages during the entrepreneurial process and define latent nascent, nascent and young
entrepreneurship. In section 4 we give an overview of concepts and theoretical or empirical work
dealing with factors that have an impact on real or potential entrepreneurs in various phases of the
entrepreneurial process. The data is described in section 5. Section 6 explains the dependent and
the independent variables of the multinomial probit models as well as the models themselves and
the results of the models, while in the final section we conclude.

3. Stages of the entrepreneurial process

Becoming an entrepreneur is usually a rather long process from the first thoughts of the possibility
of becoming self-employed until eventually starting the business. The share of those who really
start a firm differs from country to country, between different methodological approaches and
between the times when the (potential) entrepreneurs are interviewed.

Shane & Venkataraman (2000) and Davidsson (2006) distinguish between the discovery phase
and the exploitation phase during the entrepreneurship process. While the first has to do with the
very early phases including the origins of the start-up idea, the latter refers to the tangible actions
associated with putting this idea into action (e.g. acquiring resources).

While we accept Davidsson’s (2006) argument that panel studies like the Panel Study of
Entrepreneurial Dynamics (PSED) are in general more appropriate to cover the dynamic process
of entrepreneurship, we think that, for lack of panel data for Germany so far, our concept is an
alternative. We make use of a retrospective approach by considering entrepreneurs in three
different phases of the entrepreneurial process (and despite not considering the same
entrepreneurs). Thus, we are able to obtain valuable empirical insights into the dynamic aspects of
the entrepreneurial process.
 -4-

Grilo and Irigoyen (2006) recently used a broad concept of latent entrepreneurship. It comprises
everyone who in principle, without really planning to become self-employed, would prefer to be it. It
is not surprising that this yields a share of more than 70% (the case of Portugal) who express a
preference for self-employment.

The measures used here follow the GEM concept (Reynolds et al., 2005) and demand a higher
degree of commitment with respect to the wish of becoming self-employed. With these measures it
is possible to obtain a fairly good insight into the transition from the start-up intention to the actual
start-up (from potential entrepreneurs to real entrepreneurs) empirically.

Latent nascent entrepreneurs are adults (up to 65 years) who are planning to start a business
within the next three years. This is more specific than the concept of latent entrepreneurship, but
nevertheless still an intention without any evidence of how concrete this intention really is. The
concept of nascent entrepreneurship is more distinct.2 An individual (between 18 and 64 years of
age) is considered a “nascent entrepreneur” on the basis of three conditions which all must be
satisfied: first, he or she has done something – taken some action – in the past year to create a
new business; second, he or she expects to own or to share ownership of the new firm; and, third,
the firm has not yet paid salaries and wages for more than three months. Young entrepreneurs,
on the other hand, were once nascent entrepreneurs and have put their start-up idea into action in
the recent past. They are defined as follows: in cases where the firm already exists and the
interviewee is the (shared) owner and he or she has paid salaries and wages for more than three
months but fewer than three and a half years, it is classified as a “new business” and the individual
is classified as a “young entrepreneur”.

Figure 1 shows the sequence of this process. The idea becomes more and more concrete from left
to right and is accompanied by a shrinking number of people who are involved. As is often the case
with social processes, it is difficult to give even a rough estimate of its duration. The axis shows the
concepts that have already been used in the literature to measure the number of people involved
in the particular state of the process.

Figure 1 about here

There are only few empirical studies available that distinguish between entrepreneurs in different
(early) phases of the venture’s history. While empirical work on nascent entrepreneurs alone (see
Davidsson, 2006; Gartner et al., 2004 for an overview) and young firms alone (Falck, 2007) has

2
This concept is already well established in the literature (e.g., Davidsson, 2006; Reynolds et al., 2004;
Lückgen et al., 2006).
 -5-

increased enormously in recent years, only two studies have so far considered latent nascent
entrepreneurs explicitly. Grilo and Irigoyen (2006) measure the extent of latent entrepreneurship by
using data from the Flash Eurobarometer survey on entrepreneurship from 2000 at the country
level of 15 European Union member states and the US. Latent entrepreneurship is detected by a
single hypothetical question about whether the interviewee would prefer to be an employee or to
be self-employed. Clearly this is a very hypothetical question for most people, as the authors
themselves state. Real entrepreneurship is measured by the percentage of self-employment as
given by official statistics. Second, Freytag and Thurik (2007) give a comprehensive overview of
approaches that try to investigate the relationship between latent and actual entrepreneurship.
Furthermore they contribute to recent research by estimating a model for 25 European countries
and the US in which they pay special attention to country-specific cultural and macroeconomic
aspects. Both studies find demographic effects and effects of the attitudes at individual level
together with highly significant country effects for the estimation of both latent and actual
entrepreneurship.

To sum up: a great deal of empirical research has been conducted on the explanation of the status
of a nascent entrepreneur (yes-no) but less on the distinction between latent nascent
entrepreneurs, nascent entrepreneurs and young entrepreneurs or – in other words – on the
distinction between the early discovery phase and the later exploitation phase during the
entrepreneurship process.

4. Factors affecting the entrepreneurial process

Both empirical and theoretical literature on differences in the demographic and non-demographic
characteristics of entrepreneurs in different phases of the entrepreneurial process is scarce; the
majority of the empirical studies only refer to the status of the entrepreneur (yes or no). Most of the
empirical evidence is based upon nascent entrepreneurs (e.g., Gartner et al., 2004) although they
are not defined in the same way in all studies.

Traditionally, entrepreneurship literature was dominated by approaches based upon the

entrepreneur him/herself. In recent years this literature has experienced a fundamental shift away
from person-oriented empirical work to context-related work.3 Even within the person-oriented
entrepreneurship research a trend away from pure demographic characteristics like gender and
age to cognitive, affective and attitude-related aspects cannot be overlooked. In our
methodological approach we consider several kinds of variables including demographic variables,
cognitive characteristics and characteristics of the entrepreneur’s environment.

3
Considering for example the founder’s networks or the regional environment in which he/she lives, see
e.g. the comments on the relevance of social proximity for entrepreneurial activities by Boschma (2005)
and Sternberg (2007).
 -6-

Age and sex are two of the most popular variables in empirical studies on the determinants of the
individual decision as to whether or not to become an entrepreneur (e.g., Carter and Brush, 2004;
Reynolds et al., 2004). It is widely acknowledged that females are less likely to be entrepreneurs
than males. According to a recent study by Wagner (2007), this difference is mainly caused by
their attitudes towards the willingness to take risks. Females tend to be older than males when
becoming self-employed and are over-represented in the service industries, a fact that cannot be
attributed to the secular growth of this industry, since this pre-dates the growth in female self-
employment. For females the family background has a significant influence on the decision
between self-employment or dependent employment, unlike for males. Whereas having children or
being married usually has no effects for males, females are more likely to be self-employed if they
are married and / or have children of school age. The burden of caring for the family and in
particular for children still traditionally lies with women, so they try to make use of the greater
independence and flexibility of self-employed work. Arenius and Minniti (2005) using GEM data on
28 countries emphasize that whereas perceptual variables are important to distinguish between
entrepreneurs and non-entrepreneurs, there are only negligible differences between entrepreneurs
of both sexes. In Germany the differences between entrepreneurs and non-entrepreneurs are
striking as well, but nevertheless there remains a remarkable variation between males and
females, too (see table A1 in the annex).

Davidsson (2006) points out that whereas the under representation of females among nascent
entrepreneurs is very well documented there is no consistent evidence for further discrimination
once they are in the process of becoming an entrepreneur. The above mentioned reasons why
woman are less likely to try to found a firm are in favour of a very early discrimination. To get a
deeper insight into the differences also separate estimations were conducted for males and
females.

Hypotheses:

– Already latent nascent are less likely to be female.

– The likelihood of being female does not vary between nascent and young entrepreneurs.

As for the age effect, empirical studies show a clear result: there is a negative or curvilinear effect
of age on the probability of becoming a nascent entrepreneur, with a clear peak in the group aged
between 25 and 34 (Reynolds, 1997; Delmar and Davidsson, 2000). This is also a robust result for
the countries involved in the GEM project for all survey years since 1999 (e.g., Bosma et al., 2009,
for the most recent GEM Global Report). Concerning the age of nascent entrepreneurs it is a
stylised fact that the 35 to 44 year-olds are most likely to set up their own firm (Lévesque and
Minniti, 2006). Age is often used as a proxy for experience, which is arguably not synonymous but
a common practice since real measures of experience are scarce. Besides the advantage of
 -7-

experience, older people (or in the case of the 35 to 44 year-olds: less young) often have more
money at their disposal and therefore fewer difficulties in raising capital. On the other hand, older
people tend to be more risk-averse than younger people, a fact that offsets the influence of age
and experience (Parker, 2004: 70).

Hypothese:

– Nascent entrepreneurs are younger than the average population.

Key factors leading to successful exploitation include human capital (specific or general) and
cognitive characteristics, both from a theoretical perspective and from empirical evidence.
Davidsson and Honig (2003) are able to show that both previous experience as a founder – as an
example of specific human capital – and social capital indicators are helpful for successful
exploitation. While this result is similar to that obtained by the majority of related studies there are
also contradictory results showing that there is no clear relationship for the relevance of human
capital and/or social capital for the likelihood to become an entrepreneur (e.g., Wagner, 2003 vs.
2005). On the other hand the results are quite clear for industry experience (positive impact) (e.g.,
Baltrusaityte et al., 2005; Cooper et al., 1994). According to Blanchflower (2000) and Blanchflower
and Oswald (2007) self-employment in the USA and Canada is highest at both tails of the
education distribution, whereas in the UK low skilled are less likely to be self employed. The results
from the “Regional Entrepreneurship Monitor” (REM) project on entrepreneurship in ten German
regions show a pattern as in the UK. Nascent entrepreneurs are better educated on average than
the adult population as a whole (see Wagner and Sternberg, 2004; Lückgen et al., 2006). Parker
(2004) points out that the outcome of variables concerning the formal qualification level (measured
in years of education or as a set of dummies registering whether survey respondents hold
particular qualifications) tends to be positive in cross-section analysis. However, he criticises the
fact that the skills which make a successful entrepreneur are not necessarily associated with
formal qualifications.4 This is in line with Davidsson (2006) who states that in many studies a
positive influence of education can be found for the prevalence to be a nascent entrepreneur but
with regards to making progress in the entrepreneurial process indicators of specific rather than
general human capital are important. Nevertheless, although this is certainly true, highly qualified
people often have other opportunities on the labour market and are less likely to be “necessity
entrepreneurs”, a group that is especially large in Germany (Sternberg et al., 2007; Brixy et al.
2009). Wagner (2008) reports a - relative to medium educational levels – lower propensity of the
highly qualified to be a nascent entrepreneur.

4
The variety of knowledge is also of importance. As Lazear (2005: 676) points out, entrepreneurs are more
often the “jack of all trades” type. This means that they need not “necessarily [be] superb at anything,
entrepreneurs have to be sufficiently skilled in a variety of areas”.
 -8-

However, these results should not be misinterpreted. While a high educational level may indeed be
(statistically) unimportant for a successful exploitation of venture ideas, this might be due to other
more attractive employment opportunities – and it does not necessarily mean that a good
education is not of advantage for the entrepreneurial process per se (Davidsson, 2006; Gimeno et
al., 1997).

An alternative measure for human capital is the income usually from dependent employment. This
measure has the advantage of showing the level of opportunity-cost independent from any formal
educational level. It can be interpreted as a minimum net profit-level for self-employment (not
including a premium for greater risk). On the other hand income of young persons who just finished
their education usually is lower than average. In this case the actual income cannot be seen as a
minimum net profit-level at least in the long run.

Hypotheses:

– Medium and high education raises the propensity to be a latent entrepreneur.

– Once an individual is a latent entrepreneur education has no further impact on the likelihood to
eventually set up a firm.
– Because of high opportunity-costs highly educated individuals are less frequently
entrepreneurs.

Examining motivations and perceptions is a popular method for distinguishing nascent

entrepreneurs from other individuals by means of their cognitive characteristics (e.g., Shaver,
2004). According to Reynolds et al. (2004), there are five categories of reasons or motivations that
individuals give for starting a business: innovation (doing something new, also learning),
independence, financial success, external validation (recognition and need for approval, searching
for status) and roles (e.g. following family traditions). Surprisingly, results from the US “Panel Study
of Entrepreneurial Dynamics” (PSED I) did not reveal any statistically significant differences
between the first three of the five variable groups (Reynolds et al., 2004). However, nascent
entrepreneurs rate recognition and roles lower than non-entrepreneurs. Arenius and Minniti’s
(2005) work based upon GEM cross-sectional data shows that perceptual variables such as
alertness to opportunities, fear of failure, and confidence in one’s own skills are important for
distinguishing nascent entrepreneurs from non-entrepreneurs.

Furthermore Arenius and Minniti (2005) show that both nascent entrepreneurs and young
entrepreneurs as well as more established entrepreneurs (with businesses older than three and a
half years) are much more likely to respond affirmatively to questions about perceptual variables
than respondents who are not active in starting or managing a business. They also show
significant differences between young entrepreneurs and nascent entrepreneurs in terms of
opportunity perception (more positive for nascent entrepreneurs), but no differences for confidence
 -9-

in one’s skills or fear of failure and knowing other entrepreneurs. Using 2001 GEM data for 18
countries, Koellinger et al. (2007) confirm this result and show that the confidence associated with
one’s own skills and ability declines as more experienced entrepreneurs are considered – thus
differences occur between the phases of the entrepreneurial process.

Hypotheses:

– Entrepreneurs on all stages are more ready to trust their skills and take risks compared to
non-entrepreneurs.
– This confidence is declining during the entrepreneurial process.

Factors of the regional environment gained in importance more recently when scholars tried to
explain an individual’s propensity to start a firm or to explain a firm’s growth.5 Most of these
research activities, however, do not explicitly cover the process character of entrepreneurship but
are based upon cross-sectional entrepreneurship data and meso- or even macro-level data for the
independent regional variables (see Falck, 2007; Fritsch et al., 2006, for rare exceptions). The
empirical evidence is clear for most of the regions and countries studied: irrespective of differences
embodied in the individual him/herself there are strong regional impacts on an individual’s
propensity to start a firm. Feldman (2001) goes even further and argues that entrepreneurship is
primarily a “regional event”. This regional impact may among other things be due to (perceptions
of) the entrepreneurial climate (Reynolds et al., 2004), entrepreneurial perceptions of the
population in the given region, the regional labour pool and unemployment rate or the availability of
venture capital, relevant infrastructure or entrepreneurship support policies. Also more general
economic indicators like growth of value added are often used as a regional predictor of individual
start-up activities (e.g., Bosma et al., 2008). The majority of these studies, however, do not
explicitly consider entrepreneurs during different phases of the entrepreneurship process. While
most of the studies focus either on nascent entrepreneurs or on young entrepreneurs, they only
cover the effect of regional variables on the status of being an entrepreneur but they say little
about the distinction between the early discovery process and the later exploitation process.

There is a general problem of relating regional (macro) evidence to personal decisions.

Unemployment, for example, is especially in Germany a stimulus to become self-employed
(Sternberg et al., 2007; Bergmann and Sternberg, 2007). But the regional unemployment rate
conveys not only the proportion of unemployment but is also an indicator for regional economic
performance. Rising unemployment is accompanied by declining demand, what decreases the

5
See Brixy and Grotz, 2007; Falck, 2007; Sternberg and Rocha, 2007; Fritsch and Schmude, 2006;
Fritsch and Mueller, 2004; Audretsch and Fritsch, 2002; Bade and Nerlinger, 1999, on German regions;
or Acs and Armington, 2004; Braunerhjelm and Borgmann, 2004, and Bosma 2009, for regions in other
countries.
 - 10 -

prospects for newly founded firms.

Hypotheses:

– Growing regional unemployment should drive people into self-employment.

– A growing economy gives good prospects and occasions for new firms.

5. Data and method

Ideally, the entrepreneurial process is analysed using panel data. In this case it would be possible
to analyse the reasons for attrition between the different stages. This is of special importance for
time-variant variables that can change during the process on the individual level, like for example
education. Because there is no panel data available for Germany we make use of cross-sectional
data that is based on different people for each state. We therefore cannot disentangle learning and
selection effects and have to assume that there are no or at least only minor cohort or calendar-
time effects.

The cross-sectional data of the Global Entrepreneurship Monitor (GEM), which have been
gathered annually since 1999, allow such analyses for Germany. Since important variables were
defined differently in the early years, we can only make use of the data collected from 2002 until
2006. Every year a random household telephone sample is drawn and using the “last birthday”
method, anyone between 18 and 65 is interviewed. The computer-aided telephone interviews are
conducted by a professional survey vendor. Although the data have been assembled to facilitate
cross-national comparisons of the level of national entrepreneurial activity, with the pooling of the
data for five successive years, we are able to generate a large micro-dataset on German
entrepreneurship.

Table 1 about here

As table 1 shows, it was possible to use nearly 17,000 interviews. The three different types of
entrepreneurial activity that are surveyed were already defined in section 3. Obviously these states
are non-exclusive, which means that a person can be in more than one stage. This is by definition
the case with latent nascent and nascent entrepreneurs. Someone who wants to found a firm
within the next six months also belongs in principle to the group of latent nascent entrepreneurs.
The same applies for young entrepreneurs who are already planning their next business. Because
the estimated model cannot deal with one person being in different states, we decided that young
entrepreneurship should be considered over nascent entrepreneurship and nascent
entrepreneurship over latent nascent entrepreneurship. This ranking follows the idea of the
growing certainty of the three states.
 - 11 -

Besides the questions that are necessary to classify the interviewees into the four groups, many
relevant variables are surveyed for each person who is identified as being any kind of
entrepreneur. But the nearly 14,000 individuals who are not involved in any kind of
entrepreneurship6 are asked only a few questions7. Besides basic demography the questions
include one about the household income, one about whether the interviewees know someone who
has started a business in the last two years, one about how they perceive the economic situation
for setting up a business and one about the willingness to take risks8.

More methodological details on the GEM attempt are described in Reynolds et al. (2005).
Davidsson (2006) provides a valuable assessment of GEM data for the purpose of research into
nascent entrepreneurship.

6. Modelling latent nascent, nascent and young entrepreneurship

6.1. The independent variables

In section 4 we presented an overview of the theoretical and empirical literature on the factors
determining the status of an entrepreneur (latent nascent vs. nascent vs. young entrepreneur)
and/or the discovery process and/or the exploitation process. We assign available empirical
information to three groups of indicators: demographic characteristics of the (potential)
entrepreneur, cognitive characteristics of the (potential) entrepreneur, and characteristics of the
region where the (potential) entrepreneur lives. The precise information about the independent
variables is comprised in table 2.

Table 2 about here

6.2. The statistical model

GEM data are used to estimate a multinomial probit model for explaining the propensity to be a

6
Not involved in any kind of business means that they have never planned or owned a business and
never provided funds for a new business started by someone else. Therefore we avoid the “holiday
makers” trap, mentioned in Davidsson (2006).
7
In fact there are others that are asked in more detail as well, mainly self-employed. Besides the three
groups of entrepreneurs analysed we dropped all those who are involved in any kind of
entrepreneurship or self-employment in order to distinguish clearly between non-entrepreneurs and
those who plan to become an entrepreneur.
8
The distribution of age, gender and household income can be found in the annex (tables A2 and A3).
Note that these data are not weighted.
 - 12 -

latent nascent entrepreneur, a nascent entrepreneur or a young entrepreneur or not to be involved

in any kind of entrepreneurship. We estimated robust standard errors9 and included dummies for
regions and years (for better clarity not reported in the tables). All interviewees are assigned to a
single state: latent nascent entrepreneurship, nascent entrepreneurship, young entrepreneurship
or – the large majority – no entrepreneurship at all.

By comparing the results of our estimates for the three entrepreneurial stages, we try to find
evidence of whether the influence of the independent variables varies at different stages during the
entrepreneurial process. For example, education might have no influence on the probability of
being interested in starting a firm – but could be important for those who really set up their own
firm.

Tables 3 to 5 about here

6.3. Results

The results (see tables 3 to 5) show that entrepreneurs’ at all three stages have a great deal in
common and overall there are great differences compared with non-entrepreneurs. These
differences occur already right at the beginning of the entrepreneurial process. So, entrepreneurs
differ from non-entrepreneurs right from the start. Nevertheless, the magnitude of the influence of
some variables varies considerably across the three entrepreneurial stages.

The age of latent entrepreneurs differs remarkably from that of individuals engaged in later phases
of entrepreneurship. Latent entrepreneurs are particularly young - from 35 onwards the likelihood
to be a latent nascent entrepreneur is significantly lower than for the very young aged between 18
and 24. The likelihood of being involved in nascent or young entrepreneurship on the other hand is
highest for individuals aged between 25 and 44 But for all kinds of entrepreneurship it is lowest for
those aged 55 and above. This shows that at the beginning of their career many think about
becoming self-employed and they are most likely to really start a business between 24 and 45.

In line with our expectations highly educated individuals are more likely to found a business.
Interestingly the influence of education is higher for men than for women. Education has the
highest effect for latent nascent entrepreneurs thus right at the beginning of the entrepreneurial
process. With other words, highly educated individuals are more likely to found a business, but
even more likely to (just) ponder about being self-employed. The shrinking involvement of highly

9
Because we included two regional variables (development of GDP and unemployment) it is necessary
to relax the assumption of independence within groups. We used stata 10 command: “mprobit …,
robust”. To calculate the marginal effects we used the command “mfx compute, predict(…)”.
 - 13 -

educated in the process is a sign for a selection, since they especially have attractive alternatives
as employees.

The probability of woman to be an entrepreneur is lower at every stage, but is especially low for
latent nascent entrepreneurs. Still more often than men, women don’t even think about becoming
an entrepreneur. But in the later stages the coefficient is lower than at the beginning of the
process. This could be a sign that women once in the process, tend to proceed to eventually start a
firm.

We included three variables to provide information about cognitive characteristics and attitudes:
“fear of failure”, “opportunity recognition” and “social networks”. Each of them has a substantial
impact but different in size on every entrepreneurial stage. The fear that a business might not be
successful is much lower for all stages than it is for non-entrepreneurs. As expected, confidence
grows from latent nascent entrepreneurship to later phases of the entrepreneurial process. It can
be assumed that this is partly a selection process thus those with less confidence might more often
give up. On the other hand, individuals might also become more confident as their plan becomes
more concrete. Furthermore it is a remarkable outcome that women are clearly more optimistic at
every stage. The recognition of opportunities is higher among the latent nascent and nascent
entrepreneurs and is considerably lower with young entrepreneurs. This can be interpreted as a
kind of disillusionment since not all of the new firms can be expected to fulfil the expectations of the
entrepreneurs. The impact of knowing someone personally who has recently started his/her own
business (social networks) is declining from stage to stage. Again, this is a sign that role models
are important for the likelihood to think of becoming self-employed oneself. At later stages of the
process more experienced entrepreneurs or consultants may replace the role-models.

With regard to income it is remarkable that, under control of education, those who are planning to
become self-employed earn less than comparable non-entrepreneurs. This is significant with the
latent nascent and to a lesser degree - for nascent entrepreneurs too, whereas those who are
already (young) entrepreneurs have at least € 3,000 at their disposal per month significantly more
often. To what extent this is an expression of a selection that favours those with really profitable
concepts or whether it is really the effect of becoming self-employed cannot be ascertained without
panel data.

The relatively low income of latent entrepreneurs in particular is an indication that a low income
drives people to plan their own business. Higher opportunity-costs have indeed a negative
influence on the likelihood to become self-employed. But the question as to the reasons for their
relatively lower income remains unanswered. Obviously the market for dependent employment
does not value their abilities and qualifications sufficiently. According to Lazear (2005) and Wagner
(2003) employees benefit from being highly specialised whereas entrepreneurs have a balanced
profile pattern and do especially well if their qualifications are broader, following a “jack of all
 - 14 -

trades” pattern. A further explanation could be that young people who are planning to set up a
business are more often still in some form of education, for example writing a thesis or studying for
other qualifications that are not covered by the qualification variable. This prevents them from
earning much at the moment, but anticipation would pay off in the future. In regions with growing
GDP per head, people more often plan to set up a firm, but this does not apply for young
entrepreneurs. This, too, could be an indication of special selection such that entrepreneurs more
often give up if they find attractive alternative employment in their vicinity. The differences are more
pronounced with males than with females. This is presumably a base-effect because of the well
known wage discrimination of dependently employed females.

The two regional variables (development of regional GDP and unemployment rate) only show an
influence on the probability of young entrepreneurs, the GDP with a positive sign and the
unemployment with a negative sign. Evidently the likelihood to really start a firm is higher in
economically prospering regions.

7. Conclusions
Even though entrepreneurs differ remarkably form non-entrepreneurs in general, our results give
evidence of self-selection processes as well as learning processes during the three analysed
entrepreneurial phases. Most of these selections were identified just at the beginning of the
entrepreneurial process.

Especially the gender-gap is something where politics is required. Women often do not even think
of becoming self-employed but ones they decided to start a firm, they do it with greater confidence
than men. Although there already are special schemes for supporting start-ups of women, we have
the idea that these are scheduled to late and that self-employment as an alternative to depended
employment must reach women – but also men – earlier in live. This is supported by the very
young age of latent nascent entrepreneurs. Therefore we support the idea to make a basic
entrepreneurial education a topic already at school (Schröder and Schmitt-Rodermund 2006). As
our results show, role models are an important stimulant to think about becoming an entrepreneur.

Furthermore the attitude – the mind-set of a person – shows a very substantial influence on the
decision to become self-employed. Here too, education might help to reduce the “fear of failure”, as
long as this fear is exaggerated, since well informed individuals are better able to judge about the
risks. On the other hand, for some groups of entrepreneurial “small-holders” it might be worth
thinking about offering some basic social security

A further point is that even though high qualified are more likely to start a business, there is
evidence that they often drop out at an early stage. The reasons for this are unclear, but it is not far
fetched that the opportunity-costs play a role. Eventually the regional variables show that
entrepreneurship-policy is – like more often than not – a growth orientated policy because
 - 15 -

entrepreneurs more often succeed in prospering regions.

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Annex

Table A1 about here

Table A2 about here

Table A3 about here

 - 20 -

Figure 1: Phases of the entrepreneurial process

Discovery process Exploitation Entrepreneurial phase

process

Being committed Start of business

to found a firm

Latent entrepreneurship Latent nascent Nascent Young

(e.g. Grilo & Irigoyen 2006) entrepreneurship entrepreneurship entrepreneurship
(GEM) (GEM) (GEM)

Table 1: Overview of the number of interviews

of the German GEM (2002-2006) used in the estimations

Total Non-
Latent
interviews Nascent Young entre-
nascent
used preneurs
2002 8,092 441 257 239 7,155
2003 2,566 303 173 164 1,926
2004 2,020 192 121 141 1,566
2005 2,672 274 175 175 2,048
2006 1,588 143 84 78 1,283
Total 16,938 1,353 810 797 13,978
Data source: Adult Population Survey (APS) of the Global Entrepreneurship Monitor (GEM), Germany
 - 21 -

Table 2: List of the independent variables

Variables Description and calculation Expected relationship

Demographic characteristics

Age Dummy with 5 categories: Increase in entrepreneurial

1: 18-24 (reference group) activities until the mid-thirties
2: 25-34 followed by a steady
3: 35-44 decrease from the mid-forties
4: 45-54 onwards
5: 55-64
Sex Dummy (female = 1) Negative

Human Capital

Education Dummy with 4 categories: Positive: increasing likelihood

1: lower secondary school (reference) for being an entrepreneur in
2: intermediate secondary school any stage with increasing
3: Upper secondary school educational level.
4: University degree

Income Monthly household income in € Negative: increasing

Dummy with 4 classes: opportunity-costs lower the
1: < 1,000 (reference) likelihood for being an entre-
2: 1,000 – 2,000 preneur at any stage
3: 2,000 – 3,000
4: > 3,000

Cognitive characteristics

Fear of failure Dummy (high/low) high = 1 Negative

Opportunity recognition Dummy (yes/no) yes = 1 Positive

Social networks Dummy (yes/no) yes = 1 Positive

Regional characteristics

Development GDP GDP per capita (ln) 2002-2004 Positive

Development of unemployment rate
Development of unemployment Positive/ negative
2002-2006

Control variables

Location in eastern or western

Dummy
Germany
Year of Observation Dummy for each year
 - 22 -

Table 3: Estimates of the propensity to be a latent nascent, a nascent

or a young entrepreneur – (Multinomiale probit-results)

Latent nascent Nascent Young

entrepreneurs entrepreneurs entrepreneurs
dy/dx P>|z| dy/dx P>|z| dy/dx P>|z|
Age: (reference: age 18-24)
(*)
25-34 -0.006 0.288 0.008 0.124 0.026 0.000
(*)
35-44 -0.018 0.001 0.011 0.026 0.024 0.000
(*)
45-54 -0.030 0.000 0.006 0.247 0.017 0.003
(*)
55-64 -0.057 0.000 -0.019 0.000 -0.012 0.003
Education:
(reference: lower secondary school)
(*)
Intermediate secondary school 0.002 0.634 0.005 0.161 -0.003 0.397
(*)
Upper secondary school 0.014 0.019 0.012 0.007 0.007 0.062
(*)
University degree 0.018 0.005 0.013 0.006 0.012 0.006
Monthly income in €:
(reference: < 1,000)
(*)
1,000 - 2,000 -0.027 0.000 -0.007 0.110 0.003 0.607
(*)
2,000 - 3,000 -0.030 0.000 -0.007 0.108 0.006 0.264
(*)
> 3,000 -0.024 0.000 -0.005 0.297 0.020 0.001
(*)
Sex (reference: male) -0.020 0.000 -0.011 0.000 -0.013 0.000
Development GDP/pc (ln) 2002-2004 0.006 0.145 0.002 0.380 0.005 0.097
Development unemployment 2002-2006 0.000 0.983 0.001 0.171 -0.002 0.040
(*)
Fear of failure (high=1) -0.054 0.000 -0.036 0.000 -0.039 0.000
(*)
Opportunity recognition (yes=1) 0.039 0.000 0.036 0.000 0.020 0.000
(*)
Social networks (yes=1) 0.063 0.000 0.045 0.000 0.035 0.000

Notes: The estimation method is multinominal-probit; reference group: individuals not engaged in any other kind of
entrepreneurial activity, standard errors are robust; (*) dy/dx is for discrete change of dummy variable from 0 to 1,
dummies for years and regions included but not shown for better readability
chi2 2824.59
e(chi2) 0.000
Number of individuals 16,938
 - 23 -

Table 4: Females: Estimates of the propensity to be a latent nascent, a nascent

or a young entrepreneur – (Multinomial probit-results)

Latent nascent Nascent Young

entrepreneurs entrepreneurs entrepreneurs
dy/dx P>|z| dy/dx P>|z| dy/dx P>|z|
Age: (reference: age 18-24)
(*)
25-34 0.001 0.882 0.001 0.887 0.036 0.001
(*)
35-44 -0.004 0.536 0.009 0.094 0.028 0.001
(*)
45-54 -0.018 0.002 0.004 0.496 0.022 0.008
(*)
55-64 -0.043 0.000 -0.015 0.000 -0.004 0.425
Education:
(reference: lower secondary school)
(*)
Intermediate secondary school 0.003 0.557 0.005 0.217 -0.002 0.428
(*)
Upper secondary school 0.012 0.094 0.009 0.044 0.006 0.140
(*)
University degree 0.013 0.091 0.009 0.065 0.008 0.068
Monthly income in €:
(reference: < 1,000)
(*)
1,000 - 2,000 -0.012 0.059 -0.019 0.674 -0.001 0.808
(*)
2,000 - 3,000 -0.016 0.011 -0.000 0.922 0.004 0.423
(*)
> 3,000 -0.007 0.311 -0.002 0.591 0.010 0.075
Development GDP/pc (ln) 2002-2004 0.008 0.065 0.003 0.236 0.005 0.198
Development unemployment 2002-2006 -0.000 0.815 0.000 0.605 -0.003 0.021
(*)
Fear of failure (high=1) -0.045 0.000 -0.027 0.000 -0.024 0.000
(*)
Opportunity recognition (yes=1) 0.042 0.000 0.041 0.000 0.015 0.000
(*)
Social networks (yes=1) 0.051 0.000 0.031 0.000 0.024 0.000

Notes: The estimation method is multinominal-probit; reference group: individuals not engaged in any other kind of
entrepreneurial activity, standard errors are robust; (*) dy/dx is for discrete change of dummy variable from 0 to 1
dummies for years and regions included but not shown for better readability
chi2 1337.49
e(chi2) 0.000
Number of individuals 8,980
 - 24 -

Table 5: Males: Estimates of the propensity to be a latent nascent, a nascent

or a young entrepreneur – (Multinomial probit-results)

Latent nascent Nascent Young

entrepreneurs entrepreneurs entrepreneurs
dy/dx P>|z| dy/dx P>|z| dy/dx P>|z|
Age: (reference: age 18-24)
(*)
25-34 -0.016 0.114 0.017 0.090 0.022 0.031
(*)
35-44 -0.036 0.000 0.011 0.214 0.023 0.014
(*)
45-54 -0.045 0.000 0.009 0.335 0.015 0.117
(*)
55-64 -0.073 0.000 -0.024 0.000 -0.020 0.005
Education:
(reference: lower secondary school)
(*)
Intermediate secondary school 0.000 0.997 0.006 0.390 -0.004 0.536
(*)
Upper secondary school 0.015 0.132 0.015 0.053 0.007 0.351
(*)
University degree 0.022 0.037 0.017 0.040 0.015 0.052
Monthly income in €:
(reference: < 1,000)
(*)
1,000 - 2,000 -0.047 0.000 -0.015 0.045 0.008 0.401
(*)
2,000 - 3,000 -0.050 0.000 -0.017 0.024 0.007 0.406
(*)
> 3,000 -0.049 0.000 -0.010 0.232 0.031 0.006
Development GDP/pc (ln) 2002-2004 0.001 0.908 0.001 0.901 0.006 0.220
Development unemployment 2002-2006 -0.001 0.796 0.002 0.207 -0.001 0.492
(*)
Fear of failure (high=1) -0.061 0.000 -0.045 0.000 -0.056 0.000
(*)
Opportunity recognition (yes=1) 0.037 0.000 0.031 0.000 0.026 0.000
(*)
Social networks (yes=1) 0.076 0.000 0.058 0.000 0.047 0.000

Notes: The estimation method is multinominal-probit; reference group: individuals not engaged in any other kind of
entrepreneurial activity, standard errors are robust; (*) dy/dx is for discrete change of dummy variable from 0 to 1
dummies for years and regions included but not shown for better readability
chi2 1471.49
e(chi2) 0.000
Number of individuals 7,958
 - 25 -

Table A1: Attitudes, Percentage in favour

1 Opportunity 2
Fear of failure 2 Social networks
recognition
Male Female Male Female Male Female
Latent nascent 28.1 29.8 31.6 30.8 68.1 57.8
Nascent 19.9 26.6 36.5 37.8 76.5 65.4
Young 14.8 21.6 36.2 27.9 75.7 64.1
Non-entrepreneurs 50.0 59.1 17.7 11.0 38.2 27.0
1
Percentage yes: The fear of a failure would prevent you from starting a business.
2
Percentage yes: In the next six months there will be good opportunities for starting a business in the area where you live.
3
Percentage yes: You know someone personally who started a business in the past two years.

Data source: Adult Population Survey (APS) of the Global Entrepreneurship Monitor (GEM), pooled data for Germany
2002-2006

Table A2: Distribution of sex and age according to

the four phases of the entrepreneurial process in percentages (unweighted)
Sex Age
Male Female < 24 25-34 35-44 45-54 55-64
Latent nascent 59.8 40.3 20.0 24.3 29.3 17.5 9.0
Nascent 62.4 37.6 11.4 22.5 34.2 22.3 9.7
Young 64.8 35.2 8.9 24.0 35.6 22.9 8.6
Non-entrepreneurs 42.4 57.6 12.1 15.7 26.8 23.0 22.4
Data source: Adult Population Survey (APS) of the Global Entrepreneurship Monitor (GEM), pooled data for Germany
2002-2006

Table A3: Distribution of household income according to

the four phases of the entrepreneurial process in percentages (unweighted)
Monthly income in €
< 1,000 1,000 < 2,000 2,000-3,000 > 3,000
Latent nascent 13.0 26.1 26.8 34.1
Nascent 9.4 24.9 28.2 37.6
Young 5.9 20.5 26.0 47.6
Non-entrepreneurs 10.3 31.8 31.0 26.9
Data source: Adult Population Survey (APS) of the Global Entrepreneurship Monitor (GEM), pooled data for Germany
2002-2006