Ivory Tower and Entrepreneurship

Skrevet af - Foto: Bjarke MacCarthy - 26. april 2016 - 11:380 kommentarer
Toke Reichstein og Jing Chen.

Two CBS researchers seek answer to the complex question 'Are universities, often perceived as ivory towers, a right place for prospective entrepreneurs to learn and grow?'

The idea that university education may have no effect on entrepreneurial success or even hamper one’s entrepreneurial prospect has often been embraced by public media and even prominent practitioners.

A recent article in Financial Times ("School of hard knocks no barrier for billionaires", April 3, 2016 if you are a subscriber to Financial Times online, you can find it here www.ft.com/cms/s/0/9aee9450-f7e9-11e5-96db-fc683b5e52db.html#axzz46ph7OgYv) seems to lend further support for this notion by showing that entrepreneurial billionaires are disproportionally likely to be the ones who dropped out of university education.

In the meantime, more and more entrepreneurship programs have been initiated at universities and business schools worldwide, under the belief that university education could and should play an essential role in nurturing young entrepreneurial talent and facilitating them to take such a career path at an early stage.

Are universities, often perceived as ivory towers, a right place for prospective entrepreneurs to learn and grow? To answer this rather complex question, this article takes the very first step to look into the comparative statistics of entrepreneurial activities that were initiated by students across all universities in Denmark before or immediately after graduation (BA or MA).

Our observation period spans 2002 to 2009. Based on education data provided by Statistics Denmark, we identify individuals who completed a degree equivalent to a BA or a MA across years and were active on the Danish labor market.

During the eight-year period, 99.906 individuals were registered to have completed a degree at one of the eight university institutions in Denmark, with a general increasing tendency of graduation (10.228 in 2002 and 14.215 in 2009).Figure 1 shows a distribution of those graduates over the eight institutions.

Copenhagen University (KU), Arhus University (AU) and Copenhagen Business School (CBS) altogether produced about 65% of the total graduates. The IT University (ITU) is by far the smallest in terms of graduates, but has the highest growth rate. In 2002, there were only 25 people graduated from ITU. This number increased to 167 graduated in 2009 (71% annual growth rate on average).

Figure 1: Number of BA and MA Graduates: 2002 - 2009

 

For each university, Figure 2 plots the share of those students who registered a new business either in their graduation year, or in the year before or after graduation. These numbers suggest that the rate of new entrepreneurs among university graduates has been fairly low over the years. On average, 1,18% of the graduates became entrepreneurs.

ITU displays the highest percentage of graduates who entered entrepreneurship (3.6%). KU has produced the largest number of entrepreneur graduates during the observation period (309), but this is merely a size effect since they only account for 1,1% of the graduates at KU. Furthermore, a Chi-square test suggests there is no significant difference between the shares across all universities.

Figure 2: Percentages of Entrepreneurs among New Graduates across Higher education institutions

Next, we consider two different types of businesses: sole proprietorship and corporation. A large portion of new businesses identified in our sample are sole-proprietors, which means they were owned and managed by the entrepreneur and there is not legal distinction between the entrepreneur and the business.

A sole proprietorship is hence the default and the simplest type of business entity. A corporation, on the other hand, is a legal and tax entity that often comes in a more sophisticated form. An incorporated business is generally considered a more committed and serious entrepreneurial attempt than a sole proprietor. Figure 3 presents a cross-sectional comparison between universities with respect to the relative shares of incorporated businesses versus sole proprietors.

Figure 3: Corporation VS. Sole Proprietorships

Figure 3 shows that although CBS generates a similar rate of new entrepreneurs as other universities, those new businesses are much more likely to be incorporated. Thirty-nine percent of entrepreneur graduate from CBS established incorporated firms, while the corresponding number for KU and AU is 14% and 21%, respectively.

Thirty percent of university graduates from DTU and 25% from ITU formed incorporated businesses. Figure 4 shows that CBS accounts for 29% (82 out of 284) of the total incorporated businesses in our sample, while KU accounts for 30% of businesses that were sole proprietorships.

Figure 4: The Distribution of Corporations and Sole Proprietors across Universities

What factors could possibly cause this difference? The statistics presented in Table 1 suggest some plausible explanation. In this table, we list the top three programs that generate the highest number of businesses created by graduates at each university. Here, we see a clearly distinct pattern between comprehensive universities (KU and AU) and those oriented towards business (CBS) or technology (DTU and ITU).

At KU, for example, 30% of the businesses were created by graduates from psychology programs, and only 6% of those businesses were incorporated. At the two technical universities (DTU and ITU), engineering and IT-related programs tend to spawn the most entrepreneurs, and the incorporation rate ranges from 14% to 50%, which is obviously higher than the rate at KU. Business and economics major students at CBS contribute to 36% of newly created businesses, and nearly half of those businesses were incorporated.

Collectively, these descriptive statistics suggest that the relationship between university education and entrepreneurship varies according to the types of programs in which students are enrolled. In some programs, such as IT or engineering, university education plays an essential role in equipping students with the technological knowledge needed for identifying and generating promising business ideas.

In programs such as economics and business administration, university education helps students become acquainted with business reality and the first economic principles. To some extent, it lowers the entry barriers to entrepreneurship from both the mental and knowledge perspectives. The statistics may also indicate that for some programs such as psychology, law and accounting, entrepreneurship becomes a natural career choice, given the supply and demand situation on the labor market. (Note that table 1 is attached below to make it more readable).

Table 1: Top Programs that Produce Entrepreneur Graduates

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