Academic journal article Journal of Competitiveness Studies

Self-Employment Start-Ups and Value Creation: An Empirical Analysis of German Micro Data

Academic journal article Journal of Competitiveness Studies

Self-Employment Start-Ups and Value Creation: An Empirical Analysis of German Micro Data

Article excerpt

INTRODUCTION

Unemployed people starting a business receive public assistance in many industrialized countries. In Germany, the promotion of self-employment among the unemployed has become an increasingly important instrument of the active labor market policy. In 2004, the number of subsidized foundations from unemployment peaked at more than 350,000. Even though the support has been restricted and the number of assisted start-ups by unemployed individuals has declined since then, foundations from unemployment still have a significant share in all start-ups. Almost one third of all founders who started a new business on a full time basis in Germany in 2006 had been previously unemployed (KfW Bankengruppe, 2007).

The principal idea of promoting self-employment among the unemployed is to raise the employment level by helping the unemployed to create their own and preferably additional jobs. Whether this policy is an effective means to cut the unemployment rate, however, does not only depend on the number of start-ups induced by the promotion, their sustainability in the market and the number of jobs directly created by them, but also on the extent of displacement effects. In case the assisting of one start-up leads to an existing business closing, the promotion only shortens the length of individual unemployment spells without decreasing the overall unemployment level (Metcalf & Benson, 2000). Displacement effects are likely to occur in markets with a high level of competition, low market entry barriers and a low degree of product differentiation. Promoting start-ups which take place in these markets supposedly has little or no effect on economic growth, structural change and overall employment which are the principal objectives of common start-up programs.

This paper tries to assess the potential of start-ups from unemployment for jobs and growth by comparing foundations from unemployment with other foundations on the basis of the characteristics of the firms and of the founders themselves. Only a few studies have conducted such direct comparisons so far and none of them captured the recent boom of startups from unemployment in Germany. This is different for the present analysis which is based on data from the "Kreditanstalt fur Wiederaufbau (KfW)"1 covering the start-up years 2003 and 2004. The paper also analyzes differences in the transition from paid employment and unemployment into self-employment. In addition, it investigates the factors affecting the decision to start a business with or without additional employees. The analysis will give insights into what the typical characteristics of previously unemployed founders and their firms are and what the drivers of these start-ups are. This will lead to some conclusions regarding the economic effects and the adequate design of the promotion of start-ups from unemployment.

The paper is structured as follows. The next section gives a brief overview of the policy instruments to promote start-ups from unemployment and of the quantitative development of this kind of start-ups in Germany. Subsequently, the empirical literature concerning start-ups from unemployment is summarized. The following two sections describe the data set used and the results of the empirical analysis. Conclusions are drawn in the final section.

Promotion of Start-ups from Unemployment in Germany

In Germany, various programs have been initiated to stimulate start-ups by unemployed individuals in the last two decades. Support has always been given in form of a grant, but programs differ in the level of benefits, the duration of entitlement and the access requirements. Moreover, access requirements have changed within programs over time. The frequent changes in program availability and design have induced considerable changes in the level of foundations from unemployment, as well as in the total level of foundations in Germany in the last years.

The promotion of start-ups from unemployment started in 1986 with the bridging allowance ("Überbrückungsgeld"). …

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