Entrepreneurship, Small and Medium-Sized Enter-
prises and the Macroeconomy
. Edited by Z. Acs,
B. Carlsson and C. Karlsson, C.U.P. 1999.
The microfoundations of macroeconomics have
moved a long way from the traditional represen-
tative firm and household. Heterogeneity, turbu-
lence, and growth dynamics of the firm population
have become central issues with ramifications
for many areas of economic analysis and policy.
The volume under review collects the Jönköping
conference papers from many of the leading con-
tributors to this emerging field, to provide an
authoritative survey of recent developments.
While many large and mature firms are house-
hold names internationally, there are also sub-
stantial flows of new start-up firms into most
industries, most of which fail within two years. A
few are successful and expand rapidly, but only
occasionally go on growing into large (young)
firms like Apple or Microsoft. The successful
small and medium sized enterprises (SMEs) often
seem to be more innovative than their larger com-
petitors. The high rate of new firm entry in the
U.S., particularly in information- and bio-tech-
nology, has undoubtedly contributed to American
domination of these areas.
However, expanding on these themes in their
introduction, the editors paint a too rosy picture
of superior U.S. economic performance in general,
compared to Europe. Job growth in the former
relates simply to population growth, and no
mention is made of decades of declining real
wages for unskilled workers in the U.S., growing
inequality and relative deprivation on a scale
unknown in western Europe, except in the U.K.,
which has also followed many U.S. policies.
In an interesting background chapter following
his 1995 book, Audretsch points out that not
only are most firms small, but most SMEs are
below the minimum efficient scale (MES) for their
industry. To compensate for this handicap, SMEs
pay lower wages and require longer hours than
larger firms, for similar skills, though job security
and promotion prospects are worse. The main
puzzle here, which is not addressed by Audretsch,
is why do large firms pay higher wages as well
as offering apparently better conditions? Rent
sharing seems the most likely answer, since there
is extensive evidence that wages are correlated
with profitability and capital intensity. Since most
SMEs fail before they attain MES, it is not sur-
prising that productivity is lower in small firms.
The entrepreneurial question of why people
start new firms is thoughtfully reviewed by
Casson. Entrepreneurs have expectations or infor-
mation about innovations or shocks that can only
be exploited by hiring other factors of production
in a new start-up. Selling new information is infea-
sible because a potential buyer cannot evaluate
the information or innovation without actually
knowing it. This basic point was made long ago
by Arrow, who is, curiously, not cited by Casson.
He does develop many insights into firm devel-
opment and structure on this basis and provides
pertinent critique of the more limited but better
known approaches by Williamson, and Grossman,
Hart and Moore.
Succeeding chapters provide empirical evi-
dence on a variety of more specialised topics.
Reynolds shows that economic growth causes
high rates of firm entry and exit, “volatility” or
“creative destruction”. Braunerhjelm and Carlsson
compare the recent macroeconomic development
of Ohio and Sweden, and argue that traditional
industry structure has impeded entrepreneuriship
and growth in both areas.
Part II focuses on finance for start-ups and
SMEs, beginning with Cressy’s study of the prob-
ability of failure as a function of human capital
and financial variables. Proxies for the former
reduce failure rates, but among the latter, “the
current overdraft limit is insignificant, perhaps
because of its correlation with firm sales” (p. 175).
In spite of this very appropriate caveat, Cressy
goes on to draw the unwarranted conclusion that
borrowing constraints are absent. He makes no
mention of extensive evidence for liquidity con-
straints found by other writers. The text claims
significance for variables such as turnover which
are statistically insignificant according to Table
6.3 of results. Several of the explanatory variables
in the estimates of failure probability are obvi-
ously endogenous, so the interpretation of these
results is called into question.
Reid next compares characteristics of surviving
and failed firms less than three years old and finds
little effect of most financial variables except
access to trade credit. Survivors were larger and
paid higher wages. Gompers examines venture
Small Business Economics
13: 341–342, 1999.