Successful Entrepreneurship
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Successful Entrepreneurship

Confronting Economic Theory with Empirical Practice

C. Mirjam van Praag

Mirjam van Praag compares and contrasts the economic theory of entrepreneurship with determinants of successful entrepreneurship derived from empirical evidence, in an attempt to discover what makes for an accomplished entrepreneur. The author’s state-of-the-art historical, theoretical and empirical research on successful entrepreneurship – all from an explicit economic perspective – comprehensively addresses questions such as: ‘What are the factors that influence individuals’ decisions to start a business venture as opposed to working as an employee?’ and ‘What are the individual characteristics that make one successful as an entrepreneur?’ thereby supporting or dispelling various existing myths. Individual factors contributing to the success of entrepreneurs that are considered include, amongst others, human capital, financial capital and psychological traits. The importance of such factors for the various phases of entrepreneurship, including start-up, delivery and performance is also measured.
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Chapter 7: Human Capital

C. Mirjam van Praag


Introduction To stimulate the further development of entrepreneurs, policy makers have, for instance, implemented entrepreneurship stimulation programmes in schools, and have made several subsidies and support services available for start-ups and small firms. However, the question remains in which way optimal stimulation of entrepreneurial performance can be achieved. There is one factor that both academic scholars and policy makers see as an important determinant of entrepreneurial performance, namely human capital. It is the topic of this chapter. The correct measurement of the magnitude of the returns to human capital is therefore of the utmost importance to devise and implement effective policies. However, a recent meta-analysis (van der Sluis et al., 2003) reveals that the effect of formal schooling, one of the most prominent manifestations of human capital, on entrepreneurial performance has not yet been measured consistently. This is due to shortcomings in the empirical strategies applied so far. Previous studies measuring the relationship between education and entrepreneurial performance merely measure (conditional) correlations rather than causal effects. No attempt has yet been made to apply identification strategies such as instrumental variables (IV), twins studies and the like in order to estimate causal effects that are not biased due to the neglect of unobserved heterogeneity and the endogenous nature of the decision to invest in schooling. My aim is to measure the returns to education (RTE) for entrepreneurs and relate its magnitude to the RTE for employees. To this end, I shall estimate the RTE for both...

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