By M.G. Calza, P. Cella, F. Oropallo, S. Rossetti, C. Viviano ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Rome, December 6-7, 2006 Performance, Impact and Context Analysis Data Integration for Entrepreneurship Indicators in Italy

Outline ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Rome, December 7, Objectives 2.Background 3.Data Integration Issues 4.Framework of analysis 5.Entrepreneurship Performance Indicators 6.Entrepreneurship Impact Indicators 7.Entrepreneurship Determinants: Barriers to competition Profiles of new entrepreneurs and associated outcomes 8.An Entrepreneurship Scoreboard 9.Conclusions

Rome, December 7, 2006 The objective of this work is to contribute to research on entrepreneurship indicators by: 1.Building indicators on new/young firms 2.Developing indicators which focus on factors that hinder new entries and, more generally, competition 3.Using FOBS data to characterize the profiles of new entrepreneurs and associated outcomes Objectives ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators

Rome, December 7, 2006 Data on new/young firms are needed for various entrepreneurship indicators. Currently, there are two main sources of data : 1) The Business Demography database: It permits to identify real births and real deaths, and to calculate performance indicators, e.g. rate of new firms, business churn, survival rates 2) The Factor of Business Success Survey: It helps us to uncover the socio-demographic characteristics of new entrepreneurs and to understand their motivations and difficulties The main drawbacks with both sources are: (i) their “thin” coverage of economic variables (ii) the hitches allied to their linkage with SME (PMI) survey data, since new firms are inadequately represented in the latter For this reasons it is useful and indeed rewarding to integrate the information on new entrepreneurship with data from other sources Background (1) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators

Rome, December 7, 2006 The development of new entrepreneurship is deeply influenced by market entry barriers and the regulatory context Market barriers and competition are believed to be important factors in the study of the Italian economy Since these phenomena are multifaceted, their study requires different indicators and data sources To this effect Data integration is of paramount importance Background (2) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators

Rome, December 7, 2006 Data integration issues (1) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Advantages: - exploit existing statistical or administrative information - enhance the statistical information system on new firms - provide more and better information for policy making - open up new vistas for economic analysis Drawbacks: - confidentiality problems related to the access to micro data - administrative data are customarily collected for different purposes - they may refer to legal units not statistical units

Rome, December 7, 2006 Data integration issues (2) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Matching different data sources (statistical/administrative) means tackling a host of issue, e.g.: Identifying business units i.e. find an identifying variable which is a unique key that is a natural join between different sources. In almost all firm databases we choose the fiscal code Dealing with Matching Problems i.e. whenever a key variable is unavailable or is not sufficient to identify the statistical unit. In case of mis-matches or when sources do not contain the same unit Identifying changes in business units Changes involving a single unit (changes in kind of business classification, in legal form or localisation) Changes in the number of units (death, birth, breaks up and splits off, mergers and acquisitions) Addressing sampling problems When merging survey data with exhaustive data from a subset of the population Reconciling definitions and values among sources Whenever a variable has not the same definition or value across different sources Handling data editing and data reconstruction issues Measurement Errors, Missing data, Outliers etc.

Rome, December 7, 2006 Framework of analysis (1) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Following the OECD (Davis 2006) three types of entrepreneurship indicators can be distinguished: - Performance: which measure how a country performs in terms of entrepreneurship. Most of these indicators can be calculated using Business Register and Business Demography - Impact: which measure the outcome(s) of entrepreneurship. To focus our attention on these indicators we need to “expand” the information on new/young businesses and integrate it with information from other sources - Determinants/Context: which measure various aspects of the conditions and qualities that foster or hinder entrepreneurship. We focus our attention on two subgroups: barriers to competition and entrepreneurs profiles

Rome, December 7, 2006 Framework of analysis (2) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Units of analysis New firms: real births from the Business Demography Young firms: four-year surviving from Business Demography Incumbent firms: taken as “benchmark firms”, i.e. standing on markets for at least 5 years Analyzed indicators - Rate of new firm start-ups - Business churn - Survival rate for new businesses - Turnover of new firms - Number of SMEs in total economy - Importance of SMEs in total economy - Share of employment in SMEs - Growth rate of employment of young firms - Growth rate of turnover of young firms - Contribution of new firms to productivity growth - Share of new/young firms that export - Exports per employee of new/young firms - Return on sales (Ros) for new/young firms - Share of labour cost for new/young firms - Financial burden on sales - Barriers to competition - Profiles of new entrepreneurs and associated outcomes Sources Business Register, Business Demography, SBS data, Foreign Trade Statistics, Fiscal Data, Balance Sheets Performance Impact Determinants

Rome, December 7, 2006 Entrepreneurship Performance Indicators ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators NF : real births from Business Demography NF(t,t+n): young firms (t-year surviving from Business Demography) DF : real deaths from Business Demography TF : All firms from Business Register SME: Small-medium firms T_ : Turnover… E_ : Employment… Breakdown by sector Nace, legal form, geographical area, size class …

Rome, December 7, 2006 Entrepreneurship Impact indicators ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators NF : real births from Business Demography NF(t,t+n): young firms (t-year surviving from Business Demography) T_ : Turnover… E_ : Employment Exp_: Exports OS_: Operating Surplus LC_: Labour Costs TC_: Total Costs IP_: Interest Payments P : Labour Productivity measured by Turnover on Employment  : Share of employment Breakdown by sector Nace, legal form, geographical area, size class …

Rome, December 7, 2006 Entrepreneurship Impact indicators ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators When Business Register, Business Demography, Foreign Trade, Balance Sheets and SBS are integrated a great deal of new opportunities open up - Growth rate of employment of young firms - Growth rate of turnover of young firms - Contribution of new firms to productivity growth - Share of new/young firms that export - Exports per employee of new/young firms Population: B.R. & B.D. Linked with Foreign TradeExporting/Imp. firms Balance Sheetscorporate firms SBS (sample)domain level analysis

Entrepreneurship Impact indicators Rome, December 7, 2006 Growth rate of turnover and employment of young firms ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators

Rome, December 7, 2006 Contribution of entries and exits to productivity growth of micro firms ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Impact indicators

Rome, December 7, 2006 Share of new, young and incumbent firms that export (%) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Impact indicators

Rome, December 7, 2006 Exports per employee in firms at birth, after four years (young firms) and in incumbent firms (thousand €) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Impact indicators

Rome, December 7, 2006 Entrepreneurship Impact indicators ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Opportunities that open up when Fiscal data are integrated Fiscal survey purpose To support Tax Admin. control action on small and medium firms (Turnover less than 5 million €) (Coverage: all business sectors except Energy (E), Financial (J), Social (O) Available information: sectors from D to I and M: 48 balance-sheets-comparable variables sectors K and N: excluded from the analysis since available variables are not comparable Ros=Return on sales LCI=Share of labour cost IPS=Financial burden on sales Population% Linked New firms69 Young firms73 Incumbents81

Rome, December 7, 2006 ROS (%) - Profitability ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Impact indicators

Rome, December 7, 2006 Share of labour cost (%) on total costs ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Impact indicators

Rome, December 7, 2006 IPS=Financial burden on sales (%) ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Impact indicators:

Rome, December 7, 2006 Entrepreneurship Determinants ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators For the analysis of entrepreneurship determinants more complex methodologies have to be applied

Rome, December 7, 2006 Entrepreneurship Determinants: Barriers to competition ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Barriers to competition: Barriers to entry are an essential condition to the existence of non-competitive behaviour Several indices relating to the existence of entry barriers have been computed (at 3-digit level of aggregation) : - Herfindahl index (H) (Sum of squared market sale shares) - Concentration Ratio (CR5) (Cumulative market sale share of the largest 5 firms) - Share of advertising expenses (AE) (Advertising costs on sales) - Share of Fixed assets (FA) (Fixed assets on total Assets) - Dominant firm size (Size class that represents at least 50% of workers) Sources: Business Register, Structural Business Statistics, Balance Sheets Coverage: D-K (Nace rev. 1.1) Anything that prevents new firms from actually entering a market As a proxy for monopolistic competition due to product differentiation

Rome, December 7, 2006 Entrepreneurship Determinants: Barriers to competition ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators To measure the intensity of entry barriers for each market, a composite index (summing up indicators re-scaled by their own mean values) is computed To avoid redundancy, indicators have been selected on the basis of the correlation matrix below: Market Barriers Intensity = CR5/m(CR5)+AE/m(AE)+FA/m(FA) Thanks to the above index, markets can be ranked and distinguished for example according to their dominant size (micro, small, medium and large)

Context: Barriers to competition Rome, December 7, 2006 ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Market Barriers Intensity Index in 1999 (violet) and 2003 (beige) in all micro (dominant size) business sectors

Rome, December 7, 2006 ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators The Italian FOBS survey (a sample of 6 th. records) allows to sketch the following identity of the “average” entrepreneur Entrepreneurship Determinants: Profiles of new entrepreneurs and associated outcomes Male 39 years old secondary education with previous working experience- -in the same sector of activity Given the vast array of information on entrepreneurs and their characteristic gathered with the survey, different profiles, not just one, are likely to coexist Multidimensional techniques (e.g. cluster analysis) can be used to group entrepreneurs into homogeneous clusters subject to the following conditions: - the within clusters distance should be as small as possible - the between clusters distance should be as large as possible Each cluster will define an entrepreneur’s profile

Rome, December 7, 2006 ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Steps of the clustering procedure 1. Choice of variables Only a set of demo-social variables has been considered (such as geog. area, Nace, occupation prior to starting-up enterprise, age, gender, educational background, branch experience, a synthetic measures of the motivations at start-up and a synthetic measure of the difficulties at enterprise start-up) 2. Distance measure between units: Gower’s dissimilarity formula 3. Cluster algorithm: Ward’s minimum variance method (it minimizes the within group variance and maximizes the between groups variance) 4. Choice of the number of clusters: 6 clusters have been chosen according to the results of pseudo t-test and pseudo f-test 5. Ex-post characterization of the cluster with economic information from B.R. and Fiscal data: per capita turnover, employment variation and ROS, LCI and IPS Entrepreneurship Determinants: Profiles of new entrepreneurs and associated outcomes

Rome, December 7, 2006 ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Determinants: Profiles of new entrepreneurs and associated outcomes The empirical analysis leads to portrait the following profiles:

Rome, December 7, 2006 How does each profile perform? ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Determinants : Profiles of new entrepreneurs and associated outcomes

Rome, December 7, 2006 How does each profile perform? ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Entrepreneurship Determinants : Profiles of new entrepreneurs and associated outcomes

Rome, December 7, 2006 ISTAT-Eurostat-OECD Workshop on Entrepreneurship Indicators Towards an entrepreneurship scoreboard Performance Impact Determinants

Data Integration for Entrepreneurship Indicators in Italy: Performance, Impact and Context Analysis CONCLUDING REMARKS AND PUZZLES: We have tried to contribute to the “entrepreneurship debate” focusing on selected “key concepts” and measuring them for Italy We have shown the potential of data integration. A wide range of indicators can be developed, but further work is needed in other areas (e.g. credit access) Looking ahead, further analysis is needed on the assessment and selection of indicators on grounds of their relevance and other quality criteria (e. g., robustness, coherence, accurateness …) to better support policies with “evidence” From our analysis new/young firms appear to perform well. How does this impact on the overall economy? What policy implications can be drawn? AND ABOVE ALL How an effective tool the Entrepreneurship Scoreboard can be expected to be? Rome, December 7, 2006