Entrepreneurial activity in Portugal: Evidence from individual, firm, and regional level Joana Mendonça IN+ Center for Innovation, Technology and Policy Research November 2008

Introduction Entrepreneurial activity in Portugal2 The longitudinal and often all-inclusive nature of large surveys matching firms, owners, and employees makes these data sources particularly useful to answer research questions where interrelated heterogeneous factors concerning firms and individuals require large, unbiased samples with the possibility to investigate a variety of factors simultaneously In particular, longitudinal data allow us to study the pre-history and post-history of firms and entrepreneurial experiences There is considerable potential to use detailed longitudinal data to study new issues in entrepreneuship and industry dynamics. Linked data will allow to examine start-up survival and success; industry clusters, employee networks, labor market conditions, and interactions between all of these factors. There are also limitations!

The Quadros de Pessoal dataset The Quadros de Pessoal Database is a longitudinal matched employer- employee microdata set covering all business units with at least one wage- earner in the Portuguese economy, including extensive information on firms, establishments, business owners and employees from 1986 to 2002 Firms, establishments and individuals are fully cross-referenced through the use of a unique identification number, thus allowing for the recognition of entry and exit of firms and plants, as well as tracing the mobility of workers and business owners across firms and establishments over time Data on firms include size (employment), age, location, sector and number of plants; data on business owners and employees include gender, age, hierarchical level, tenure, and schooling Entrepreneurial activity in Portugal

The Quadros de Pessoal dataset IdentifiersPecuniary factors and working hours YearErnings – Regular,Irregular, Extra Identifier of the individualNr. of hours worked (per month) regular, extra Identifier of the firmRegular period of work (per week) Individuals’ demographicsDemography of firms GenderNumber of persons in the firm AgeNumber of establishments Date of birthEstablishing year NationalityNACE code (CAE) 1,2,3 and 6 digit Individuals’ occupational statusFirm Location Professional activity (1,2,3 and 6 digit)Parish, Municipality; District; Professional categoryRegions: NUTS I, II and III Professional Situation Date of admittance in the firmFinancial indicators and type of ownership Date of the last promotionSales volumes (Euros) Type of contractInicial capital (Euros) Partial /full time workLegal type of the business Share of National capital - Private (%) Individuals’ human capitalShare of National capital - Public (%) Level of qualificationShare of Foreign Capital (%) Education Overview of the main variables and dimensions of analysis Amaral, Entrepreneurial activity in Portugal

Firms Number of firms in the dataset YearNo FirmsNo Firms KBE Entrepreneurial activity in Portugal

Size Distribution of Firms KBE= OECD classification of knowledge based enterprise sectors: high and medium-high technology manufacturing; post and communications; finance, insurance and business services (OECD, 2002) Size ClassNº employessAll firmsKBE FrequencyPercentFrequencyPercent Micro1-10 employees2,355, , Small10-50 employees397, , Smedium , , Lmedium , , Large> 500 employees13, , Entrepreneurial activity in Portugal

Entry and Exit of Firms YearEntry FirmsEntry Rate Entry KBE Firms KBE entry Rate Entrepreneurial activity in Portugal

Entry and Exit of Firms Entrepreneurial activity in Portugal8 YearExit firmsExit rateExit KBE firmsKBE Exit Rate

Individuals’ professional occupation Business owner Paid- employee Member of cooperative Non-paid family member Total observations Frequency1,861,38527,318,50767,04213,92729,260,861 Percentage (average for ) 6.36%93.36%0.23%0.05%100.00% Entrepreneurial activity in Portugal Amaral, 2007

BO Age and Gender Entrepreneurial activity in Portugal Amaral, 2007

BO Education Levels Entrepreneurial activity in Portugal Amaral, 2007

Education levels in KBE Entrepreneurial activity in Portugal

Geographic Distribution of KBEs Entrepreneurial activity in Portugal

Limitations of the QP dataset It does not include public administration and the military sectors. Exit of firms is identified by exiting the dataset- does not allow controlling for mergers and acquisitions; There is no information on R&D and use of technology in the firms. The data excludes independent workers providing services to firms, or workers without contract. There is no information on family background, financial constrains or psychological traits of the employees and business owners Entrepreneurial activity in Portugal

Research at IN+ Firm Level R. Baptista, F. Lima and M.T. Preto (2008). “The Role Played by Business Ownership Experience in the Internal Economics of the Firm”. R. Baptista, M. Karaoz and J.Mendonça (2007).“Pre-Entry Capabilities, Entrepreneurial Human Capital, and Start-up Success” R.Baptista, F. Lima and J. Mendonca (2008). “Differentiating the Role Played by Founders’ Human Capital on Firms’ Performance” Entrepreneurial activity in Portugal

Research at IN Entrepreneurial activity in Portugal16 Individual Level Amaral, A.M. & R. Baptista (2007). Transitions from Paid-Employment into Entrepreneurship: An Empirical Study for Portugal. Amaral, A.M, R. Baptista & M. Flores-Romero (2008). “Does Entrepreneurial Experience Really Matter for Business Performance?” R. Baptista, F. Lima and M.T. Preto (2007). “Switching from paid employment to entrepreneurship: the pecuniary impact of becoming a business-owner”. Amaral, A.M. & R. Baptista (2007). Serial Entrepreneurship: the impact of human capital on time to re-entry. Amaral, A.M., R. Baptista & Lima, F. (2008). Becoming an ex-entrepreneur: firm performance and the sell-or-liquidate decision. R. Baptista, F. Lima and M.T. Preto (2008). “Is there a labor market ‘penalty’ to Entrepreneurship?”.

Research at IN Entrepreneurial activity in Portugal17 Regional Level R. Baptista and M. T. Preto (2008). “Entrepreneurship and Industrial Re-Structuring: What Kinds of Start-Ups Matter Most for Job Creation?”. R. Baptista and M. T. Preto (2007). “New Firm Formation and Employment Growth: Differences between Regions”. R. Baptista and M. T. Preto (2006). “The Dynamics of Causality between Entrepreneurship and Unemployment: the Case of Portugal”. J. Mendonça and R. Baptista, “Proximity to Knowledge Sources and the Location of Knowledge Based Start-ups” J. Mendonça, R. Baptista and F. Lima, ““Creation of Higher Education Institutions and Entry of Knowledge Based firms”

The Role of Universities  Universities act as an important localized source of knowledge through: the development of research activities and the development of company-scientist links; the regular generation of new, qualified human capital able to use knowledge in productive activities, and absorb new developments, converting them into product, process and organizational innovations  A significant amount of these wealth-creating changes occur through the creation of new firms  Localized pools of specialized and highly trained human capital are also likely to absorb knowledge developments and convert them into innovations Entrepreneurial activity in Portugal

Scope and Objectives We study the impact of geographical proximity to knowledge sources and local absorptive capacity on the location of knowledge-based start-ups in regions. Explore differences in new firm formation in knowledge based sectors across Portuguese regions, examining the relationship between these differences and: Local presence of knowledge sources, i.e. universities, students and graduates Local availability of human capital capable of exploiting new knowledge to generate commercial innovations Entrepreneurial activity in Portugal

Methodology I  Dependent Variable: Count of start-ups in high and medium-high technology manufacturing, and knowledge intensive services in each municipality  Explanatory Variables: 1) No. of universities; No. of students; No. graduates/ year /municipality; 2) No. of Students and No. graduates in Basic sciences and Engineering and in Social Sciences  Control Variables: Stock of KBEs; Per capita sales volume; Av. years of education of the regional labour force (log); Pop. density (log); Distances (km) to major metropolitan centers (Lisbon and Oporto); Distance (km) to the district’s administrative centre  Econometric Estimation: Panel data (275 regions; 10 years); Zero inflated negative binomial regression; Estimations for pooled data Entrepreneurial activity in Portugal

Results  No. students in each year increase the probability of a new firm entry (1% per additional student)  No. graduates increase the probability of 1 more firm entering the market (0.5% per additional graduate)  No. of universities has a very significant impact (31%) High and Medium-high Tech Manufacturing  No. students in engineering and basic science have a positive effect on new firm entry  No. students in social sciences display a negative coefficient  No. graduates in engineering and basic science gave a negative coefficient Entrepreneurial activity in Portugal

Results  No. students in each year increase the probability of a new firm entry (3% per additional student)  No. graduates increase the probability of 1 more firm entering the market (1.7% per additional graduate)  Nº of universities in the region has a positive effect on entry in services Knowledge Intensive Services:  different types of students and graduates gave similar results Entrepreneurial activity in Portugal

Scope and Objectives What is the real impact of new universities on entrepreneurial activity in regions? Assess the effect of the establishment of a new higher education institution in a region on the subsequent levels of new firm entry in that region Universities have a role in fostering entrepreneurial activity, then the creation of universities in regions will have an impact in the no of start- ups in the same region The creation of a new higher education institution in a region has a positive effect on subsequent levels of new firm entry in knowledge based sectors in that region Entrepreneurial activity in Portugal

Methodology II  Econometric Estimation: Estimation with first difference estimator; propensity score matching estimator Control groups: A)regions where no. institutions is 0 and remains 0 during the entire time No. municipalities= 204 B) regions where the no. institutions is ≠ 0 and remains constant. No. municipalities= 17 Treatment: creation of a new institution in 1993 and 1994 Treatment variable has the value 1 if there was an increase in the no. higher education institutions in the region; 0 otherwise No. treated municipalities= 17 Matching: made with pre-treatment characteristics (t-2) Entrepreneurial activity in Portugal

ATT - Average Treatment effect on the Treated Group A = Regions with no. institutions equal to zero Group B = Regions with no. institutions constant and different from zero * significant at 10%; ** significant at 5%; *** significant at 1% No. TreatedNo. ControlATTStd. Err. Difference in the share of new firms between t = 3 and t = –2 Control group A+B Control group A Control group B Difference in the share of new firms between t = 5 and t = –2 Control group A+B Control group A Control group B *2.036 Difference in the share of new firms between t = 7 and t = –2 Control group A+B Control group A Control group B Effect of a new higher education institution on firm entry in regions – ATT Estimation with the stratification matching method Results Entrepreneurial activity in Portugal

Results Note: ATT - Average Treatment effect on the Treated * significant at 10%; ** significant at 5%; *** significant at 1% No. TreatedNo. ControlATTStd. Err. Difference in the share of new firms between t = 3 and t = –2 Control group A+B * Control group A * Control group B Difference in the share of new firms between t = 5 and t = –2 Control group A+B ** Control group A ** Control group B Difference in the share of new firms between t = 7 and t = –2 Control group A+B * Control group A Control group B Effect of a new higher education institution on the entry of KBE in regions – ATT Estimation with the stratification matching method Entrepreneurial activity in Portugal

Concluding Remarks There are significant differences in new firm formation in knowledge based sectors among Portuguese regions, persistent over time Geographical proximity to knowledge sources and pools of human capital plays a significant role in generating differences in entry by knowledge based firms across regions Increase of the No. Universities/higher education institutions has a positive effect on new firm entry in a region in KBE Effect is stronger in regions where there was no institutions and when compared with regions where there is no institution

Policy Implication Regional development: focus potential action aimed at fighting depopulation in certain areas. Universities enhance regional development - less favored regions would benefit from establishment of a new institution. They can benefit not only from knowledge spillovers from the institutions, but also from the setting of more educated people. Local educational facilities have to develop effort in technology transfer and entrepreneurship programs, in order to take advantage of the concentration of human capital existent in the region. Understanding the location patterns of knowledge based firms should be a good base for the design of policy actions regarding incentives for new firm creation.

Entrepreneurial activity in Portugal: Evidence from individual, firm, and regional level Joana Mendonça IN+ Center for Innovation, Technology and Policy Research November 2008