Social Disparities and Entrepreneurship

YASUDA Takehiko
Faculty Fellow, RIETI

Evaluating a successful entrepreneurship amid widening social disparities

The question of whether income inequality is on the rise and income disparities are widening is currently the weightiest economic issue in Japan. Many solid empirical studies show that the widening of the income distribution gap as witnessed in the rise in the Gini coefficient since the 1990s is a phenomenon by appearance only, brought about by changes in the age distribution of the population. However, the debate over widening disparities is, if anything, heating up, underscored by the popularization of such catchphrases as karyu shakai (lower class society) and kibo kakusa shakai (expectation-gap society). Even in the ongoing Diet session, political parties are engaged in debate over the argument that the current situation is a dark side of the results brought about by Prime Minister Junichiro Koizumi's structural reforms.

Opinions on these debates vary on the degree of disparity, whether it is widening and how to assess the situation, yet all agree that it is not desirable for such disparities to become permanent. If a one-time "loser" can become a "winner" by trying again, the existence of such disparity can be condoned to a certain extent and to varying degrees. To this end, the notion of a "society where people get a second chance" has become a hot topic. The government is fully aware of this, and has set up a council to achieve a society with many opportunities (the second-chance promotion council) to promote efforts to support those who take second chances in launching a business or entering or reentering the workforce.

Conflict arises in the definition of second chance. One definition might be putting NEETs (a term used for those not in employment, education, or training) and freeters (15-34 year-olds who lack full-time employment or are unemployed) into fulltime jobs. Another may be to help middle-aged or older white-collar workers who have been fired by poorly performing companies get new jobs at growing firms. The second-chance concept also extends to another model - having those who have lost jobs or failed in businesses gain a measure of success by starting or restarting a business. In other words, entrepreneurship is being seen as an important factor in preventing social disparities from becoming permanent.

What leads to success in making a fresh start through entrepreneurship?

If this is the case, the issue is: what creates successful entrepreneurship? If success totally depends upon such factors as an entrepreneur's wealth prior to startup, then it would be meaningless to urge one-time failures and those without sufficient assets to make a fresh start by starting a new business.

In these regards, assessing disparities in society enters the realm of economic research. Various questions can be posed, but the following should be considered: Does entrepreneurial success depend on one's previous financial situation? This question can be divided into two parts. First, does previous financial situation affect the ability to start a business, and second, does it affect the success of the new business?

As to the former, studies have recently been conducted in the United States and Europe examining the correlation between an individual's personal assets and the probability of that person later starting a business. To sum up those reports, generally speaking, the more assets an employed person has, the more likely that person will become self-employed (start a new business). In other words, the richer a person is, the easier it is for that person to become an entrepreneur. However, this outcome was only clearly observed among a limited rich class (according to one U.S. study, those within the top 10% in terms of total assets). This indicates that while this small group has an advantage in making a fresh start as an entrepreneur, the difference in entrepreneurship probability dependant upon assets is minor among those not in that class. Put another way, just in terms of starting a new business, it is also possible for "losers" to do so. However, there has been no analysis on whether an entrepreneur's other attributes prior to starting a business - such as unemployment or previous business failure - serve as obstacles.

We should also consider the question: Is entrepreneurial success affected by a person's situation immediately prior to that time?

Studies both in Japan and abroad have confirmed that (1) there is a positive correlation between the amount of funds pumped into a startup and an entrepreneur's assets and educational level and (2) the more startup funds a person has, the higher growth the new business achieves. If we link these two, it could be said that; (3) a business started by a person rich in assets is more likely to succeed than one launched by one who is not. In other words, this may indeed make it appear that the success of a new business depends on an entrepreneur's wealth and level of education. Yet things are not that simple. Even if (1) and (2) are correct, this does not necessarily mean that (3), the product of the other two, is right.

In the RIETI Discussion Paper "Which Entrepreneurs Are Strongly Placed under Liquidity Constraints - A study based on Japanese entrepreneurship data," I confirmed both (1) and (2), and in the process analyzed the hypothesis (3). The result was that even if the significance level was set loosely at 10%, no proof could be found that (3) is valid. Moreover, while there was a weak positive correlation with educational background, the notion of making a new start through entrepreneurship is not meaningless when it comes to the assets an entrepreneur possesses immediately prior to startup.

What to be careful of when trying to make a fresh start through entrepreneurship

This does not mean that all those who feel they have previously failed should try to start anew through entrepreneurship. In the course of preparing the aforementioned discussion paper, some examples of poor performance of a new business were observed. In one case a new business was launched because the entrepreneur "could not find another employment opportunity." Additionally, studies both in Japan and abroad show that businesses begun when a person was advanced in age had a high rate of failure and low growth. It can be inferred from these findings that there are indeed those who are not suited to becoming entrepreneurs.

Plainly thinking, when comparing being hired to working independently, the latter is more difficult, and it is only natural that there will be people only capable of the former. Therefore, suggesting this type of person try to make a new start through entrepreneurship could bring failure that further exacerbates an already difficult life.

The view that a society that does not allow for new starts effectively sets disparities in stone is already problematic. However, making a fresh start in the form of entrepreneurship can widen disparities depending on who is attempting it. In this sense, it is hoped that the discussions at the second-chance promotion council will proceed with reason, without placing excessively high expectations on entrepreneurship.

April 25, 2006

April 25, 2006