Dinner table human capital and entrepreneurship

Hans Hvide, Paul Oyer 22 March 2018

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Little is known about what explains heterogeneity in entrepreneurship. The gap between self-employed and VC-backed entrepreneurs is so great that they are almost distinct entities (e.g. Levine and Rubinstein 2016). Using comprehensive registry data from Norway, we attempt to explain the things in the entrepreneurship black box that lead to the chasm between low- and high-potential entrepreneurship (Hvide and and Oyer 2018). To do this, we relate entrepreneurial choices to aptitude, as measured by IQ (see also Aghion et al. 2017), and to ‘dinner table human capital’, that is, knowledge about an industry obtained via interaction with parents (see also Bell et al. 2017).

Consider, for example, a person who opens a funeral home. The funeral home industry has historically been dominated by family businesses. An entrepreneur who learned the business as part of growing up will have an advantage over someone who opens a funeral home but who did not acquire the relevant knowledge from family members.

On the other hand, Google, Facebook, and technology-based startups in general have been successful because the founders had innovative ideas. The founders of these companies could not have learned the trade from their parents, because search engines and social networks did not exist when their parents were young. Their natural intelligence and education allowed them to create companies.

Figure 1 Propensity of male Norwegian entrepreneurs to enter family trade or technology sector, by IQ, 1999–2007

The prevalence of dinner table capital

Our funeral home versus high-tech anecdote has validity in the broad sample of Norwegian entrepreneurs we use in our paper (Figure 1). The blue bars show the propensity for new entrepreneurs to start businesses in the industry in which their fathers work (the vertical axis in the graph) by the Norwegian measure of IQ (the horizontal axis), as measured by the armed forces cognitive test at age 18. An entrepreneur with relatively low IQ (3 on the scale – we exclude 1 and 2, as they contain a small fraction of the sample) is about twice as likely to become an entrepreneur in his father's industry than an entrepreneur at the top of the IQ scale.

The red graph shows the propensity for new entrepreneurs to start businesses in a technology-intensive industry (the vertical axis) by the measure of IQ. An entrepreneur with a high IQ (9 on the scale) is more than four times as likely to become an entrepreneur in a technology industry as an entrepreneur at the bottom of the IQ scale.

We use several datasets from Norway. We employ a database that contains longitudinal accounting and employment information on the universe of incorporated firms established in Norway between 1999 and 2007. The data contain initial ownership shares; we define an entrepreneur as an individual with a substantial ownership share in the firm when it was established. We construct a dinner table human capital proxy based on parental occupation and use IQ as the main proxy for aptitude.

A male is much more likely to have started a business in his father's industry of employment than in other industries. For example, about 11% of entrepreneurs started firms in the same 2-digit industry as the father's employment, which is more than random allocation would suggest. This association is decreasing in entrepreneur IQ (Figure 1), though those who follow their fathers are overrepresented even in the highest-IQ entrepreneur groups.

The dinner table premium

Among the entrepreneurs that do not start up a firm in the exact same industry as their fathers' employment, 50% start a firm in a closely related industry. Dinner table human capital thus appears to play a role for a majority of entrepreneurs. However, while a large share of entrepreneurs open businesses in industries that are familiar to their families, there are only performance differences for children who follow their fathers in narrowly defined industries.

Transmission of industry knowledge from father to son might not be the reason sons follow fathers. It could be due to greater awareness of that industry, parental pressure or expectations to enter it, or because they have similar tastes. None of these alternative explanations would imply that entrepreneurs who follow their fathers create greater value.

We fins that a venture founded by an entrepreneur in an industry in which his father worked is noticeably different from other ventures, both at founding and after four years of operation, because:

  • they invest substantially more initial capital,
  • they are much more likely to survive four years,
  • they have more employees, and
  • they are much more likely to be positive outliers in the sense of having a large number of employees or high assets

We find a substantial premium in terms of performance for ventures started by sons whose father had worked in that 5-digit industry sector, compared to ventures started by individuals whose father did not.

Dinner table human capital helps explain why sons successfully follow their fathers. A complementary explanation is that parents actively help out, for example by providing cheap labour or by using their network. To address this, we analyse the subsample of entrepreneurs in which the father had died before the founding date. Our estimates on selection into the same industry, and on startup performance, are almost as strong on this subsample. This suggests that the effect of parents helping out, although possibly quite important, is smaller than the effect of dinner table human capital.

We conducted a survey of entrepreneurs to explore the mechanisms through which industry knowledge has been transferred from parents to children. About 3,800 entrepreneurs responded to the survey. With the usual caveat for surveys given limited response rates, 84% of same-industry entrepreneurs reported that they gained industry knowledge from their parents. Conversations at home and observing parents at work were the most frequent mechanisms for human capital transfer that were cited by survey respondents. Obtaining help from parents, through cheap labour or through access to networks, was less common.

Diner table capital in the labour market

Dinner table human capital may have broader importance. We analyse whether non-entrepreneurs (wage workers) also tend to follow their fathers. The patterns are similar; the fractions employed in the same 2-digit or 5-digit industries as their fathers were 12.5% and 5.5%. Previous work documents that young males often work at the same plant as their father. When we exclude these workers from the sample, the fraction of non-entrepreneurs that work in the same industry is about 10% (2-digit) or 3% (5-digit). Being employed in the same 5-digit industry as one's father, but not at the same plant, yields a premium of about 4% in wages, after controlling for industry fixed effects. So the value of dinner table human capital is substantial in the labour market, but does not appear to be as valuable as it is for entrepreneurs.

References

Aghion, P, U Akcigit, A Hyytinen and O Toivanen (2017), “The Social Origins of Inventors,” Harvard University Working Paper.

Bell, A M, R Chetty, X Jaravel, N Petkova and J V Reenen (2017), “Who Becomes an Inventor in America? The Importance of Exposure to Innovation,” NBER Working Paper Number 24062.

Hvide, H K and P Oyer (2018), "Dinner Table Human Capital and Entrepreneurship", NBER Working Paper 24198.

Levine, R and Y Rubinstein (2016), “Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?”, Quarterly Journal of Economics 132: 963–1018.

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Topics:  Labour markets

Tags:  human capital, labour market, entrepreneurs, Norway

Professor of Economics and Finance, University of Bergen and CEPR Research Affiliate

Fred H. Merrill Professor of Economics, Stanford Graduate School of Business

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