Erasmus school of economics

What determines the mode of entry into self-employment?

Huibert van der Hart (382831)

30-6-2016Supervisor: Dr. P. van der Zwan

Bachelor Thesis

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Abstract

This paper compares family business owners to business owners who started their business from

scratch and business owners who took over an existing business, using data of 40 countries. Much of

the present literature compares individuals in self-employment and individuals in paid employment

on basis of individual characteristics. Within the group of self-employment comparisons have been

made between owners of family businesses and non-family businesses, and between those who took

over a business versus those who started from scratch. An international comparison of the three

modes of entry has not yet been provided in earlier research. The present research compares the

self-employed on basis of their educational level and type, type of income, preferences for a family

business or a public- or private business, fear of failure and risk taking behaviour. Results show that

compared to family business owners, founders are higher educated, a big share prefers to own a

family business, show more risky behaviour and have a lower fear of failure. Business owners who

took over an existing business compared to family business owners are higher educated, do not differ

in preferences for a family business, but do not show significantly more risky behaviour and do not

differ significantly in fear of failure. Furthermore, family business owners are not more likely to

report shares and savings as their main source of income. The minority of family business owners

prefers actually the family business over a public- or private firm, implicating that factors keep them

from making the choice to exit the family business for a non-family business. A comparison of these

three types of business owners on the mentioned characteristics is not conducted before and adds to

the present literature in that way.

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Table of Content

Abstract..............................................................................................................................................1

List of tables and figures.........................................................................................................................3

1. Introduction....................................................................................................................................4

1.1 Topic introduction and relevance..................................................................................................4

1.2 Thesis outline................................................................................................................................5

2. Literature review and Theory.........................................................................................................7

2.1 Level and type of education..........................................................................................................7

2.2 Type of income.............................................................................................................................9

2.3 Preferences of owners to work in a family business or not.........................................................10

2.4 The entrepreneurial mind-set of business owners......................................................................11

3. Data and Methodology.................................................................................................................14

3.1 Dataset.......................................................................................................................................14

3.2 Entrepreneurs.............................................................................................................................14

3.3 Variables used and methods of analysis.....................................................................................15

4. Results..........................................................................................................................................18

4.1 Level and type of education........................................................................................................18

4.2 Type of income...........................................................................................................................18

4.3 Preferences of owners to work in a family business or not.........................................................20

4.4 The entrepreneurial mind-set of business owners......................................................................20

Control variables..............................................................................................................................20

5. Discussion, Conclusion and Limitations........................................................................................22

Discussion and Conclusion................................................................................................................22

Limitations and future research suggestions....................................................................................23

Bibliography.........................................................................................................................................24

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List of tables and figures

Table 1 - The statistics of family businesses

Table 2 - Descriptive statistics of variables used

Table 3 - Variation of % family businesses per country

Table 4 - Correlation table

Table 5 - Multinomial logistic regression results hypothesis 1 and 2

Table 6 - Multinomial logistic regression results hypothesis 3 and 4

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1. Introduction

1.1 Topic introduction and relevance

Nowadays the majority of all businesses is a family business. Between 80% and 98% of businesses in

the world are managed, owned, or even both managed and owned by family members (Poza, 2010).

Family businesses operate in all industries: New York Times, Washington Post and Wall Street Journal

in the media industry, Levi Strauss and Zara in the fashion industry, LG Electronics and Casio in the

electronics industry, Ford and BMW in the automobile industry and Walmart in retail.

Myths and stereotypes about family businesses state that these businesses are more conservative,

prefer to use equity instead of debt and try to avoid losing control of the business (Donckels &

Fröhlich, 1991). Using equity instead of debt makes family businesses free to invest, without

concerns of risk-averse external investors or banks. On the other hand, being a family business is

used as a valuable trademark and reflects a tight service-focussed customer relationship (Koiranen,

2002). This is explained by the high commitment of family-members to the business (Beehr, Drexler,

& Faulkner, 1997). These high-effort inputs result in products of better quality compared to non-

family businesses (Ward, 1987). Family business owners focus on long-run instead of short run,

because they want to pass the business on to the next generation. Hence, family business owners

tend to act as team-players and focus on harmony in the business more than other owners do (Guzzo

& Abbott, 1990; Donneley, 1964; Salganicoff, 1990).

Because family businesses exist in all kinds of forms, sizes and shapes, a precise description and list of

features of these businesses will not make sense. Still a comparison of these businesses is very

relevant. Much of present literature on entrepreneurship compares individuals in self-employment

and individuals in paid employment, to arrive at the determinants of self-employment or

entrepreneurship (Beugelsdijk & Noorderhaven, 2005; Heinrichs & Walter, 2015). In general self-

employed people are more self-oriented, have higher effort and take more responsibility than the

paid employees (Beugelsdijk & Noorderhaven, 2005). Other determinants of self-employed are: high

need for independence, innovativeness, extraversion, openness to experience, conscientiousness

and pro-active behaviour (Heinrichs & Walter, 2015). In addition to the broad distinction between

self-employed and paid employed individuals in earlier literature, several subgroups of the self-

employed have been distinguished as well, a minor part of the literature compares family business

owners to non-family business owners (Beehr & Drexler, 1997; Gallo, Tàpies, & Cappuyns, 2004;

Miller, Le Breton-Miller, & Scholnick, 2008), and compares founders to non-founder-owners (He,

2008; Block, Thurik, Van der Zwan, & Walter, 2012).

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Hence very little research has been dedicated to differences between owners who took over a family

business, and two other groups of self-employed individuals: those who started their business from

scratch (founders) and those who took over an existing business. Making use of this distinction, this

paper targets to fill the present research gap where only two types of entrepreneurs are compared:

the self-employed versus the paid employed, the founders versus the non-founders, or the family

business owners versus the non-family business owners. By comparing owners who took over a

family business, to those who took over an existing business and to founders, this paper is an

addition to the present literature. It is also an addition to earlier literature that the analysis of this

paper is based on an international dataset, because earlier comparisons of business owners were

mostly based on national datasets.

Especially in family businesses the one or few owners determine the strategy of the firm. That person

is of great interest and central in this paper. Points of investigation will be which differences in

education, entrepreneurial attitudes, perceptions and type of financial resources exist between these

three groups of business owners. This results in the following central question:

To what extent do business founders and business owners who took over an existing business differ

from family business owners?

Hence, the characteristics of family business owners will be compared to owners who took over a

business and to founders. We do so, regarding the following factors: level and type of education,

type of income, preferences to work for a family business or not, the risk taking behaviour and fear

of failure of the owners.

From a practical point of view, competitors need to know what they can expect of their family

business owners, whether these owners will be more or less likely to invest heavily or expand fast or

not. So do employees need to know the important differences in business owners, because making

their choice to work for a family business owner can mean that their career prospects will be limited,

because in some cases top management positions will be filled up with family members only.

1.2 Thesis outline

The research question will be investigated making use of the dataset Flash Eurobarometer 354

“Entrepreneurship in the EU and beyond”. This survey was conducted for the European Commission

in 40 countries, resulting in a dataset consisting data of 42.080 respondents. Apart from the

countries of the EU, data were collected in Brazil, China, Croatia, Iceland, India, Israel, Japan, Norway,

Russia, South-Korea, Switzerland, Turkey, and the United States. In this thesis, results and

conclusions will be based on present research and the empirical part of this thesis. After this

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introduction, in chapter 2 the theoretical framework will elaborate further on the present research

available on this topic, presenting the hypotheses created to investigate the research question. Then

in chapter 3 the data will be introduced and analysed making use of multinomial logit models like it is

shown in the methodology. Followed by chapter 4, where the results will be presented. Finally, in

chapter 5, the discussion and conclusion will be presented, followed by limitations and future

research recommendations.

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2. Literature review and Theory

In general, family businesses are notable among the other businesses. As shown in Table 1 below,

the majority of businesses is a family business. There are three definitions of family businesses: the

most restricted definition in which multiple generations are direct involved in the management, a

less restrictive definition in which family members have some involvement in the business, for

example via voting rights, and the widest definition where family members only control the strategic

direction of the family business (Shanker & Astrachan, 1996). Poza used in his work a very wide

definition of the family business, hence he presents statistics showing that family businesses are the

majority amongst all businesses.

Family businesses constitute 80-98% Of all businesses in the worldFamily businesses generate 49% Of the gross domestic product (GDP)in the USFamily businesses generate more than

75% Of the GDP in most other countries

Family businesses employ 80% Of the US workforceFamily businesses employ more than

75% Of the working population around the world

Family businesses create 86% Of all new jobs in the USA total of 37% Of Fortune 500 companies are family-controlledA total of 60% Of all publicly held US firms are family-

controlledTable 1: The statistics of family businesses Source: (Poza, 2010)

2.1 Level and type of education

In general, monetary returns on education are shown to be very positive if the education level is low

in a country, and still positive but marginally declining when per capita income increases

(Psacharopoulos, 1994). Returns in the private sector tend to be higher than returns in the public

sector. Not only the educated person himself benefits from education, also the environment where

he/she is living benefits from it through externalities (Dee, 2004). Returns to education are higher

when the person is made aware of the beneficial effects for him personal and the society as a whole

(Jensen, 2010) Hence, through these externalities, educated people contribute to economic growth

(Blundell, Dearden, Meghir, & Sianesi, 1999). Education has a significant effect on voter participation

and increases peoples’ overall knowledge because educated people read more often newspapers

and other literature. Furthermore, education benefits society by screening the abilities of people and

their possibilities, hence providing employers with information to make a better match between job

and abilities (Layard & Psacharopoulos, 1974).

Educated people are more likely to start their own business (Bates, 1990). Because of that, education

will be a main point of investigation when comparing different types of owners. They tend to have

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higher sales and higher rewards (Robinson & Sexton, 1994). Each year of education extra is expected

to increase the annual reward for a self-employed male with $1212 (Robinson & Sexton, 1994). Their

empirical results show furthermore that on average owners have one year of formal education more

than employees. This can be explained by the fact that the expected returns for employees on

education are also lower than for the self-employed, namely $1023 instead of $1212 after a year of

education more for males. Comparing over a hundred empirical studies on the association of higher

education with entrepreneurial success, Van der Sluis et al. conclude that there is a positive and

significant effect of education on firm performance (Van der Sluis, Van Praag, & Vijverberg, 2008).

Profits increase with each marginal year of education. This effect of education on entrepreneurial

profitability was also shown to be positive for each year of primary education (Kolstad & Wiig, 2015).

But education is not the only explanatory variable for behaviour of owners in business. Many

entrepreneurs doubt the impact of higher education, or even a business education, on their career

(Simpson, Tuck, & Bellamy, 2004). According to them experience is the main factor explaining success

in business. Qualitative research shows that internal training and prior experience in the sector is

very valuable for entrepreneurs (Simpson, Tuck, & Bellamy, 2004). This experience is a real possibility

for owners who take over a business, simply because the business already exists. However, these

internal education possibilities are limited for founders, who start their business from scratch. Family

businesses can create a learning environment for potential family business joiners to provide them in

this way with the experience needed in the market (Danes, Stafford, Haynes, & Amarapurkar, 2009).

So, those who start from scratch are more likely to invest in education – in terms of higher education

or taking part in an entrepreneurial course – than those who take over a business or family founders.

Even business experience in an existing business is very important if a person is planning to start a

business of his own. Especially in family businesses, family members are provided with the chance to

gain some business experience in the family business and later on use that experience in a different

sector, when they start their own business (Fairlie & Robb, 2007). This general management

experience significantly increases their chance to lead later on their own business. Because, as

stated, founders are less likely to make use of the experience factor than the owners in existing and

family businesses, the hypotheses are:

Hypothesis 1a: Founders and owners who took over an existing business are higher educated than

family business owners.

Hypothesis 1b: Founders and owners who took over an existing business are more likely to take part

in an entrepreneurial course than family business owners.

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2.2 Type of income

Managers are in general rewarded based on the performance of the firm either indirectly through

their own stake or directly in terms of a performance-based share of their wage (Michiels,

Voordeckers, Lybaert, & Steijvers, 2012). Current literature suggests that there is a difference in the

amount and type of reward between family business owners, non-family business owners and

founders. In this section, the types of owners are discussed in their role as leader of the business.

Hence they have the role of manager/owner. In the context of this section the owners are referred to

as managers because the top manager is likely to have his own stake, but an owner is not necessarily

involved in the management of the firm.

Pay-for-performance incentives are a small part of the reward of family business managers,

especially when the dispersion in equity is relatively low (Michiels, Voordeckers, Lybaert, & Steijvers,

2012). This can be explained by the fact that in many cases a family business manager will have his

stake in the firm so he has already an incentive to perform. And if the few other family stakeholders

believe in him, because they know more about him than an external investor, then the reward does

not necessarily need to be based on firm performance. This is also very related to the fact that the

ethics of the firm are taught by the older generation, which prove to be profitable for the firm in the

past, being perfectly in line with the ideas of the family shareholders (O'Boyle, Rutherford, & Pollack,

2010). Acting according to the firms’ traditional business ethics, which means the focus on what’s

good and bad in running the firm, taught by the older family managers, is shown to be significantly

profitable as well, which supports and clarifies the older generations’ trust.

Furthermore managers of family businesses are less compensated in total than external professional

managers in non-family businesses (Gomez-Mejia, Larraza-Kintana, & Makri, 2003). As stated above,

family business managers tend to bear less risk in terms of the performance-based part of their

reward, so this low risk translates in a lower fixed reward. Given that these family business managers

receive lower rewards, it is remarkable that performance of the family business is higher than others

(Poza, 2010; Vieira, 2013; Koiranen, 2002). Also, family businesses are more likely to survive because

the dividends paid to shareholders are usually lower (Vieira, 2013). The fact that family businesses

have a very strong preference to use equity over debt makes this effect even stronger (Mishra &

McConaughy, 1999). Lower rewards for the top-managers, lower dividend payouts and higher

performance add up to a strong formula which can only be encountered in family businesses.

Because if shareholders were external investors, they would simply claim their dividends to make

sure their targeted return on investment will be met.

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Comparing the rewards of family business managers and managers of a firm which was taken over,

concerning managers who have a stake in their firm, to founders who started from scratch, founders

have a small performance-based share of their reward (He, 2008). Their incentive is obviously to

increase the value of their own stake, so this is perfectly in line with the external investors. Results of

He show that those firms managed by a founder-manager are more likely to survive than firms

managed by a professional non-founder manager (He, 2008). Founders act in fact as a family

business owners, receiving a lower total reward including little performance-based incentives.

Further, managerial compensation tends to go up after a Venture Capital (VC) invests in the firm

(Bengtsson & Hand, 2011). The shares of the founder relatively dilute but become more valuable in

terms of money.

The stake value of the (previous) managers/owners will once be paid back to them. This makes older

family business owners likely to enjoy the returns on their investment in the firm as their present

main source of income. Because family businesses make significantly more use of equity than existing

and new businesses, the family business manager is expected to be more likely to live on that type of

income than the other types of entrepreneurs, which leads to the following hypothesis:

Hypothesis 2: Founders and owners who took over an existing business are less likely to report income

of investments as their main source of income than family business owners.

2.3 Preferences of owners to work in a family business or not

At some point, family members as potential successors will face the choice: try to work your way up

in the family business to be the future leader or go your own way and become an employee or

business founder elsewhere. Point of interest is, is the current situation of family business

entrepreneurs and the current situation of non-family business founders the situation they actually

prefer?

In general, three characteristics are identified by Chell characterizing entrepreneurs (Chell, 1985).

First, entrepreneurs often have a high need for achievement, which means the person is highly

motivated to achieve his goals, takes responsibility and welcomes feedback on his actions (Storey &

Green, 2010). Second, they tend to have an internal locus of control, meaning they believe their

success is due to their own actions and not due to external factors. Third, entrepreneurs tend to have

a higher risk-taking propensity, which means they are less risk-averse than the general population.

Founding a business is more risky than taking over an existing or family business, because in that case

everything needs to be built up from the ground. In an existing business, and even stronger in a

family business, employees or previous owners with a lot of experience in the market, can inform

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you about the current situation of the market. Entrepreneurs who report to be innovation-focussed

are more likely to be business-founders (Zellweger, Sieger, & Halter, 2011). So founders apparently

have different perceptions about risk and their own capability than non-founders (Simon, Houghton,

& Aquino, 1999). In most cases, people do not recognize the fact that they might be overconfident in

judging themselves and their capabilities (Armitage & Conner, 2001). This illusion of control causes

high failure rates among start-ups; the more overconfident the founder is, the likelier he is to fail

(Hayward, Shepherd, & Griffin, 2006). In short, founders are expected to behave more risky than

owners running an already existing firm.

Whether someone joins a family business or not, is not only determined by his self-perceptions.

Sharma and Irving argue besides the fact family members feel a certain obligation to keep the

business in the family, they can have an affective, imperative or calculative base to join the family

business (Sharma & Irving, 2005). Meaning that they join because they have a real desire, because

they are needed there or because this is the best option available for them personally.

Potential family business joiners are shown at home two sides of the coin of being in business

(Bronfenbrenner, 1986). They know from their parents that managing a business is intensive and

demands a lot of effort. They also experience the fact that whatever the owner does, not all risk can

be controlled for. This changes their perceptions regarding the illusion of control and self-efficacy

(Steier, 2007). This more realistic view of family business children on business ownership compared

to their peers makes them perform better when starting a business of their own. Though this higher

performance is partially caused by the financial resources they can use from family members, it still is

an advantage. Some will prefer starting their own business, without the more paternalistic hierarchy

in the family business (Carney, 2005).

So considering the fact that potential family business owners have the same, or even better, options

to start their own business or take over one as non-family business owner, they are expected to be

more satisfied with their current type of business if they can choose between a family business or a

non-family business. This leads to the following hypothesis:

Hypothesis 3: Founders and owners who took over a business are less likely to have a preference to

work for a family business instead of a non-family business than owners of a family business.

2.4 The entrepreneurial mind-set of business owners

The vision of the owner is crucial for the chances of the firm, as stated in section 2.2. His level of

education and experience are important factors explaining the performance of his business

(Simpson, Tuck, & Bellamy, 2004). Education shapes the vision of the owner and makes him behave

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more professionalized in the market, which increases the chance that the firm will survive, where the

absence of a professionalized management can be devastating for the firm (Ward, 1987).

The owner is also very important for the flexibility of the firm (Gubitta & Gianecchini, 2002).

Especially in the rapidly changing economic environment nowadays where businesses need to deal

with, flexibility is of huge importance for the survival chances of the firm (Porter, 1998). When

conditions change, the owner needs to adapt his firm to the new situation, and preferably even

benefit from the new situation. Because in many cases a lot of firms in the same market need to

make a similar change, making it beneficial to smooth that change. This happened for example in the

nineties when the information technology became more and more available to everyone (Zammuto,

Griffith, Majchrzak, Dougherty, & Faraj, 2007). Smaller businesses were able to increase their

economies of scale relatively more than the bigger firms, who already had the advantages of scale

economies. This process required a clear vision of the owners to change into a more productive firm,

the smoother the better.

Innovative companies are very flexible, they tend to customize their product and they make less use

of outsourcing and subcontracting than other businesses (Medina, Lavado, & Cabrera, 2005). These

innovative companies are likely to benefit from new situations in the market, by adapting smoother

and sooner than its competitors. This is in general easier for small firms, because a small firm bears

less fixed costs and employs fewer people than a big firm. Small firms therefore innovate more with a

focus on new products, where bigger firms tend to innovate more in terms of discovering new

markets or improving existing products (Storey & Green, 2010).

Obviously, these different focuses of firms will require different types of owners. An innovative

founder likes it to start a new small and flexible firm in a flexible market, like computer technology.

Where a more conservative owner takes over a wholesale-firm in food. Family business owners tend

to be more conservative in their strategy, hence the proportion of family businesses differs per

sector (Donckels & Fröhlich, 1991). Donckels and Fröhlich investigated three sectors: food, fashion

and electronics. As expected they found the highest proportion of family businesses in the more

conservative food industry, followed by the fashion industry and a very low proportion of family

businesses in the innovative electronics industry.

So family businesses choose the more conservative industries. But is this due to the vision of their

owners or other factors? The entrepreneurial traits as mentioned in section 2.3 are important

indicators for business angels whether or not to invest in a person’s business. Fear of control appears

to be negatively related to these traits (Duxbury, Haines, & Riding, 1996). This means that people

being afraid to fail in business are less capable of leading and owning a business. Maula et al. 2005

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noticed a higher fear of failure amongst family business owners compared to non-family business

owners, but this appeared not to be influencing their entrepreneurial activity (Maula, Autio, &

Arenius, 2005).

A family business can be less flexible if the owner needs to convince his stakeholders every time he

wants to invest, but not necessarily if the stakeholders trust him fully, then the family business can

be more flexible than a regular firm which needs to secure a loan from the bank first (Poza, 2010).

The time it takes to convince a bank in case of a non-family business and the time it takes to convince

the stakeholders to invest for a family business will be more or less equal. Maybe family businesses

are less able to make adaptations, because they are more represented in the sectors where

production-levels can be kept relatively constant.

Hypothesis 4a: Founders and owners who took over a business have more risky intentions than family

business owners.

Hypothesis 4b: Founders and owners who took over a business have a lower fear of failure than

family business owners.

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3. Data and Methodology

3.1 Dataset

This paper uses the dataset Flash Eurobarometer 354 “Entrepreneurship in the EU and beyond” . This

survey was requested by the European Commission and carried out by TNS Political & Social between

the 15th June and the 8th August 2012. All interviews were conducted from TNS e-Call centres. In

each country the sample was drawn multistage random; in each household the respondent was

drawn based on the last birthday rule. Meaning that the researcher was looking for the person in

each household who had the latest birthday of his own. This resulted in a sample of 42.080

respondents, around 1000 respondents for each of the 40 countries included in the survey. Because

of the big country size of the United States, 3001 instead of 1000 respondents are included for the

United States. Around 10% of persons in this sample reported to be self-employed. In total, data of

around 2350 self-employed respondents are used to analyse the hypotheses, because not all data of

self-employed people could be used due to missing answers on the questions of interest.

People are asked about their age, gender, education and country to provide the analyst with useful

information and possible control variables. Furthermore, the survey asks many questions about

points of view of the person, his job, his preferences, his current occupation and his preferences for a

possible future occupation. The majority of questions is focussed on job- and self-employment

related topics, providing insights in goals and perspectives both from self-employed and employees.

3.2 Entrepreneurs

Defining who is an entrepreneur and who is not is a debated topic in literature. Schumpeter

conceptualized entrepreneurship as the doing of new things or the doing of things in a different

way (Schumpeter, 1947). This definition focuses on the innovative side of entrepreneurship, where

others argue that entrepreneurs do not need to act innovatively in order to classify as an

entrepreneur (Martínez, Mora, & Vila, 2007). Self-employment is often used as a proxy for

entrepreneurship. Where the innovative entrepreneurs as Schumpeter defined them are hard to

distinguish between the other self-employed and hence almost impossible to collect data on, the

self-employed are relatively easy to measure in large-scale surveys. This is the reason that in

present literature on this topic, entrepreneurs are seen as the self-employed (Beugelsdijk &

Noorderhaven, 2005). This method of selecting the self-employed to be the entrepreneurs is used

in this paper as well. Entrepreneurs are defined as those who respond self-employed to the

following question: As far as your current occupation is concerned, would you say you are self-

employed, an employee, a manual worker or would you say that you are without a professional

activity?

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Three types of self-employed individuals are distinguished in this paper on basis of the following

question: ‘Have you started your business from scratch, have you taken it over from an existing

business, or is your business a family business?’ The answer to this question will classify the owners

as follows: ‘I have started my business from scratch’ classifies the owner as a founder, ‘I have taken

my business over from another business’ classifies the owner as an owner who took over a business,

‘my business is a family business’ classifies that person as an owner who took over a family business.

3.3 Variables used and methods of analysis

In order to answer the research questions, a selection of survey questions is made. In the table

below, all the used questions of the Eurobarometer Flash 354 dataset are presented, with descriptive

statistics in table 2 to show the properties of the variables. In order to compare three types of

owners, a multinomial logit model is used to estimate all coefficients and to check for significant

differences between the types of owners.

In every multinomial regression model age, gender and country are included as control variables. To

research hypothesis 1, the variables education and entrepreneurial course will be used. Education in

years represents the age when the respondent stopped full-time education. This is a continuous

variable. All values below 15 are changed into 15 and all values above 25 are changed into 25.

Further, whether a person took an entrepreneurial course or not is included in the binary variable

entrepreneurial course. If someone took an entrepreneurial course he classifies as a 1 (yes) for this

variable, if that person did not he classifies as a 0 (no). Other values are reported as missing.

To investigate hypothesis 2, the binary variable type of income is used. In the survey, respondents

reported 1 out of 6 options as their main source of income: 1) Your business 2) Part-time

employment 3)Full-time employment 4) Your shares/investments/rents/savings 5) Social

security/unemployment benefits 6) Your pension. To answer hypothesis 2, answer 4)

(shares/investments/rents/savings) is of interest. This means that this variable classifies as 1 (yes) if

respondents chose 4 and as 0 (no) if another option was chosen.

Variable Prefer a family business over a publicly- or privately listed company to work for is used to

investigate hypothesis 3. The preference of a family business or another business is expressed in a 1

if someone prefers a family business and a 0 if someone prefers another business.

Hypothesis 4 is investigated making use of the variables Risk taking behaviour and Fear of failure.

Fear of failure is measured by using the following question: One should not start a business if there is

a risk that it might fail respondents had 2 options to choose from: agree (value 1) disagree (value 0).

Risk taking behaviour is originally a question asking what respondents would do if they would inherit

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120.000 euro. Respondents had 4 options to choose from: 1) Start a business 2) Buy a house or

repay my mortgage 3) Save the money 4) Spend it on things I always wanted to buy. The

entrepreneurial intent is of interest, so this variable will classify as 1 (yes) if the option chosen is Start

a business and as 0 (no) if another answer was chosen.

As mentioned already: age, gender and country are included as control variables. Age is a continuous

variable. Gender is reported as 1 if the respondent is male, 0 if female. To indicate the country of

each respondent, each country is changed into a dummy variable stating whether a person lives in

that country or not.

All respondents Three types of owners specificFounders Takeover

ownersFamily business

ownersRange

Av. Std. dev.

Av. Std. dev.

Av. Std. dev.

Av. Std. dev.

Pref. fam. bus(yes/no)

1/0 .39 .49 .37 .48 .40 .49 .43 .50

Entrepreneurial course (yes/no)

1/0 .24 .00 .29 .45 .28 .45 .24 .43

Risk taking behaviour(yes/no)

1/0 .19 .39 .28 .45 .22 .42 .25 .43

Fear of failure (yes/no)

1/0 .52 .50 .38 .49 .48 .50 .52 .50

Type of income(yes/no)

1/0 .09 .28 .08 .28 .09 .29 .10 .30

Gender 1/0 .43 .50 .63 .48 .62 .449 .59 .49Age when stopped education(years)

15-25 19.59 .02 20.74 3.45 20.29 3.46 19.61 3.22

Age 1-98 47.93 17.68 46.97 12.87

46.66 12.61

45.35 14.04

Country 1-28Table 2: Descriptive statistics of variables used Source: Flash Eurobarometer survey on entrepreneurship, No. 354

As can be seen in table 2, family business owners are on average younger, less educated, more likely

to be female and have a higher fear of failure than founders and owners who took over a business.

Remarkable is the fact that the preference for a family business does not differ much between the

different types of owners.

17

In order to investigate each of the hypotheses, the family business owners, founders, and owners

who took over a business are compared making use of multinomial regression models. These models

show how likely a person is to classify for one of the variables compared to the reference category.

This reference category is always family business owners.

Country Number of founders

Number of takeover owners

Number of family business owners

Total number of owners

% family business-owners

Lowest % of family business owners

Slovakia 112 6 9 127 7%Sweden 42 6 4 52 8%Spain 78 8 9 95 9%

Highest % of family business owners

Slovenia 27 9 11 47 23%Portugal 61 10 22 93 24%Luxembourg 20 3 17 40 43%

Table 3: Variation of % family businesses per country Source: Flash Eurobarometer survey on entrepreneurship, No. 354

Important for the analysis is the variation of the % of family business owners per country, because

countries will be added as control variables. Table 3 shows that the % of family businesses differs per

country, but also that the majority of countries has between 10 and 20 % family business owners,

with Luxembourg being an outlier, possibly because of the small total number of business owners. 12

Countries are excluded from the control variables because their data on which people were from

that country were not usable, with less than five observations per country, compared to more than

ten for the other countries. The remaining 28 countries are included as control variables. To answer

hypothesis 3 Bulgaria, Denmark, Romania and Sweden are left out as control variables because

including these countries biases the results because of their very low sample size for this question.

They were left out as control variables because for these countries there were less than five

observations for this question, where for the other countries there were more than ten observations

per country.

18

4. ResultsTable 4 presents a correlation matrix of the variables used in the multinomial regression models. Computations of the variance inflation factor (VIF) show that the results are not biased by multicollinearity (VIF<1.096).

1. 2. 3. 4. 5. 6. 7. 8. 9.1. Pref. fam. bus 12. Entrepreneurial course .01 1

3. Risk taking behaviour .03 .04 14. Fear of failure -.06 -.05 .02 16. Type of income -.00 .05 .01 .01 17. Type of entrepreneur .05 -.04 .03 .11 .02 18. Gender -.04 .01 .07 -.03 .01 -.03 19. Age when stopped

education -.06 .10 -.03 -.13 -.04 -.13 .03 1

10.

Age .00 -.09 -.20 .03 .07 -.05 .02 .08 1

Table 4: Correlation table

Table 5 shows the multinomial regression results for hypothesis 1 in model 1 and hypothesis 2 in

model 2. First the control variables are shown, and below the control variables the variables of

interest.

4.1 Level and type of education

Focussing on the level of education, Table 5 shows that compared to family business owners,

founders (Coeff.=0.11; p<0.01) and owners who took over a business (Coeff.=0.07; p<0.01) are

significantly more likely to have studied longer. This result is in line with the expectations in

hypothesis 1a, hence hypothesis 1a is supported. Founders (Coeff.=-0.06; p>0.10) and owners who

took over a business (Coeff.=-0.11; p>0.10) are compared to family business owners also more likely

to have followed an entrepreneurial course, but this effect is not significant, which was not in line

with expectations. Hence hypothesis 1b is rejected.

4.2 Type of income

The results of the second model in Table 5 show that founders (Coeff.=0.20; p>0.10) and owners who

took over a business (Coeff.=0.39; p>0.10) are both less likely to report

shares/investments/rents/savings as their main source of income compared to family business

owners, but this effect is not significant. So hypothesis 2 is not supported.

19

Model 1 Model 2Founders Takeover owners Founders Takeover owners

Covariates Coeff. SE Coeff. SE Coeff. SE Coeff. SEIntercept 5.44 21.00 -6.43 33.11 13.65 20.97 -.07 33.08Control variablesAge .01* .01 .00 .01 .01 .01 .00 .01Gender .01 .12 .12 .18 -.01 .12 .12 .18CountryAustria .32 .85 -.32 1.32 .08 .84 -.50 1.32Belgium .10 .85 -.32 1.33 -.18 .85 -.59 1.32Bulgaria .08 .87 2.25 1.65 -.30 .86 1.95 1.65Czech Rep -.84 .87 .54 1.41 -1.09 .87 .33 1.41Denmark -.12 .90 -.83 1.35 -.56 .89 -1.15 1.35Estonia -1.53 .95 -.18 1.45 -1.88 .95 -.44 1.48Finland .01 .86 .08 1.35 -.23 .86 -.16 1.34France -.36 .87 -.41 1.35 -.64 .87 -.65 1.35Germany .09 .85 -.03 1.33 -.18 .85 -.25 1.33Greece .48 .83 1.10 1.33 .24 .82 .90 1.33Hungary -.47 .89 -.05 1.39 -.72 .89 -.26 1.39Ireland -.05 .84 .33 1.34 -.21 .84 .17 1.34Italy .05 .85 .08 1.33 -.08 .85 -.04 1.33Latvia -.74 .89 .04 1.40 -.95 .89 -.15 1.34Lithuania -.36 .89 -.43 1.37 -.63 .89 -.68 1.37Luxembourg 1.20 .85 1.23 1.37 .96 .85 .99 1.37Malta -.39 .89 -.20 1.40 -.30 .90 -.19 1.41Netherlands -.45 .83 -.38 1.30 -.73 .83 -.63 1.30Poland .18 .84 .85 1.35 -.18 .84 .58 1.34Portugal .18 .85 .18 1.34 .05 .85 .05 1.34Cyprus -.45 .84 .85 1.37 -.64 .83 .68 1.37Romania -.54 .89 1.01 1.50 -.76 .88 .80 1.50Slovakia -1.34 .89 -.25 1.39 -1.48 .88 -.35 1.39Slovenia .35 .89 -.39 1.36 .19 .89 -.54 1.36Spain -.94 .89 -.88 1.42 -1.1 .89 -1.18 1.37Sweden -.44 .85 .92 1.40 -.54 .84 -.80 1.39UK ref. cat. - - - - - - - -Included variablesAge when stopped Education

.11*** .02 .07*** .03

Entrepreneurial course

-.06 .13 -.11 .20

Type of income .20 .20 .39 .34Nagelkerke R2 .11 .09Reference category: Family business owners p< 1%: ***; p< 5%: **; p< 10%: * (two-tailed test) N=2378

Table 5: Multinomial logistic regression results hypothesis 1 and 2

20

4.3 Preferences of owners to work in a family business or not

Analysing the preferences for family- or non-family businesses, no significant differences in

preferences were found for founders (Coeff.=0.24; p>0.10) and owners who took over a business

(Coeff.=-0.01; p>0.10) compared to family business owners, as is shown in table 6. This result does

not support hypothesis 3. The insignificant differences in preferences for family businesses of family

business owners compared to founders and owners who took over a business result in rejection of

hypothesis 3. The fact that this variable shows no significant difference for founders and owners who

took over a business compared to family business owners is remarkable. Family business owners are

the only owners who can choose for the option of taking over a family business, the other owners

can not. Aside of that, family business owners have the option to start a business of their own, or

take over an existing business. This means that family business owners are not expected to own a

family business against their preference, because they have the option to leave the family business.

4.4 The entrepreneurial mind-set of business owners

Focussing on risky intentions, Table 6 shows that founders are significantly (Coeff.=-0.38; p<0.05)

more likely to have risky intentions when they inherit a large amount of money, than family business

owners, as expected in hypothesis 4a. Owners who took over a business (Coeff.=0.02; p>0.10) do not

significantly differ in risk taking behaviour compared to family business owners, which is not in line

with hypothesis 4a. Hence hypothesis 4a is rejected.

Founders have significantly less fear of failure compared to family business owners (Coeff.=0.56;

p<0.01), proving hypothesis 4b. Owners who took over a business (Coeff.=0.09; p>0.10) do not

significantly differ in fear of failure compared to family business owners, so hypothesis 4b is rejected.

Control variablesFurthermore, in general we see that founders (Coeff.=0.01; p<0.10) tend to be significantly older

than family business owners. No significant differences in gender are found between founders and

owners who took over a business compared to family business owners.

21

Model 3 Model 4Founders Takeover owners Founders Takeover owners

22

Covariates Coeff. SE Coeff. SE Coeff. SE Coeff. SEIntercept -6.78 10.85 27.60 24.40 7.32 20.77 -2.58 33.30Control variablesAge .01 .01 -.01 .02 .01** .01 -.00 .01Gender .18 .26 .47 .37 .04 .12 .15 .18CountryAustria .75 .73 -.19 1.55 .30 .84 -.45 1.33Belgium .30 .74 -1.71 1.30 -.03 .85 -.53 1.34Bulgaria - - - - .05 .86 2.06 1.66Czech Rep -1.35 1.13 -2.48 1.64 -.69 .86 .46 1.42Denmark - - - - -.23 .89 -1.04 1.35Estonia -.44 1.17 -1.67 1.79 -1.62 .95 -.36 1.48Finland -.22 .91 -1.07 1.64 0.10 .85 -.00 1.35France -.00 .92 -1.83 1.48 -.35 .87 -.53 1.37Germany 1.42 .86 -1.43 1.35 .17 .85 -.14 1.33Greece .22 .66 -1.47 1.25 .55 .82 1.01 1.34Hungary -.79 1.15 -1.78 1.78 -.53 .88 .04 1.41Ireland .57 .67 -1.41 1.27 .23 .84 .30 1.35Italy .95 .65 -1.20 1.23 .08 .84 .21 1.35Latvia .16 .80 -.52 1.60 -.75 .89 -.17 1.41Lithuania 2.22 1.32 -2.04 1.43 -.39 .89 -.56 1.38Luxembourg 2.43 1.25 -0.78 1.60 1.08 .84 1.44 1.44Malta .79 .77 -1.09 1.39 -.13 .89 -.12 1.41Netherlands -.05 1.20 -2.47 1.65 -.51 .83 -.58 1.30Poland -0.13 0.73 -0.19 1.57 -.03 .83 .61 1.35Portugal 1.13 .66 -1.08 1.25 .19 .84 .12 1.35Cyprus -.13 .60 .28 1.52 -.43 .83 .77 1.37Romania - - - - -.44 .88 .91 1.52Slovakia -1.04 .87 -1.14 1.64 -1.29 .89 -.36 1.40Slovenia .48 .96 -2.15 1.42 .41 .88 -.46 1.37Spain .83 .78 -1.39 1.34 -.92 .89 -.64 1.39Sweden - - - - -.91 .95 -.89 1.44UK (reference category)

- - - - - - - -

Included variablesPref. fam. Bus(yes/no)

.24 .27 -0.01 0.39

Risk taking behaviour(yes/no)

-.38** .15 .02 .25

Fear of failure (yes/no)

.56*** .12 .09 .19

Nagelkerke R2 .17 .11Reference category: Family business owners p< 1%: ***; p< 5%: **; p< 10%: * (two-tailed test) N=447 (model 3), 2334(model 4)

Table 6: Multinomial logistic regression results hypothesis 3 and 4

23

5. Discussion, Conclusion and Limitations

Discussion and Conclusion

This study investigated the differences between founders, owners who took over a business and

owners who took over a family business. Expectations were that family business owners were lower

educated and less likely to have followed an entrepreneurial course. Family business owners were

indeed lower educated but not less likely to have followed an entrepreneurial course, proving the

association found in earlier literature, of higher levels of education with an increased chance of

founding a business (Parker & van Praag, 2012). The lower level of education of family business

owners was also suggested by earlier literature (Fairlie & Robb, 2007).

Family business owners were expected to report more often returns from shares and investments to

be their main source of income, because family businesses make more use of equity than non-family

businesses and the return on this previous equity investments will be paid back to the family

business stakeholders. This difference turned out not to be not significant. The fact that there were

no significant differences found for this variable between founders and business owners who took

over an existing business compared to family business owners did not surprise, because this effect

was not found in earlier literature as well.

The most remarkable result of this study is that family business owners have the same preference

regarding owning a family business or a non-family business compared to founders and business

owners who took over a business. This is an interesting result, because family business owners are

the only owners who have the option of taking over a family business and the option to take over a

non-family business. This implicates that certain factors keep family business owners from making

the choice according to their actual preferences, to start working for a non-family business. With

founders significantly being older than family business owners, chances are that after gaining

experience in the family business, the owner leaves the family business to start a new firm,

considering the gained experience as an important factor in entrepreneurship (Simpson, Tuck, &

Bellamy, 2004; Fairlie & Robb, 2007).

Furthermore, founders show significantly more risky intentions and a lower fear of failure than family

business owners. This was according to the earlier literature and as expected, where family business

owners are more represented in the conservative industries (Donckels & Fröhlich, 1991). This turns

out not to be only due to their risky intentions, but as stated, also to the fear of failure of the

owners.

24

Limitations and future research suggestionsThe reasons why the majority of family business owners do not choose to leave the family business

might be subject for future research, already existing literature on this topic shows that there are in

fact several hurdles to take when leaving the family business (Sharma & Irving, 2005). A limitation

regarding the empirical analysis is that twelve countries have been left out as control variables,

including these variables would be beneficial for the reliability of the results of further research.

Furthermore, model 3 uses unfortunately a lower number of observations than the other three

models. This was due to the fact that there were few observations for this variable. It would be

valuable to create a new model, based on a higher number of observations.

In the Flash Eurobarometer dataset no monetary data was available on income, other than self-

reported household income on a four option categorical scale. Data on the monetary rewards of

respondents would add value to future research by showing to what extent monetary rewards are

related to characteristics of the three types of owners. Monetary data would create the possibility to

explain better why people remain in family businesses instead of non-family businesses. The dataset

provides data on the non-monetary features of businesses which are valued by the respondents, like

safety and working conditions, and monetary data could make to overview of reasons to work for

different types of businesses more complete.

25

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