Business owners, employees and firm performance

Business Owners, Employees and Firm Performance is a new working paper, by Mika Maliranta and Satu Nurmi, from the Research Institute of the Finnish Economy (ETLA).

The abstract reads:

The novel Finnish Longitudinal OWNer-Employer-Employee (FLOWN) database was used to analyze how the characteristics of owners and employees relate to firm performance as determined by labor productivity, survival and employment growth. Focusing on the role of the owner’s formal education and previous experience as an employee, the results show that previous experience in a high-productivity firm strongly predicts high productivity and probability of survival for the entrepreneur’s new firm. This can be interpreted as evidence of knowledge spillover through labor mobility. Strikingly, firms established in times of intensive excess job reallocation were found to exhibit superior productivity performance in the later phases of their life cycles.

The conclusion to the paper includes,

The diversified paths of primary owners and their employees are reflected in future company performance. Previous employer quality, measured in terms of relative productivity, is transferred through owners and employees as knowledge spillover related, for example, to technology or management. High-quality owners create firms capable of achieving and maintaining sustained high performance in terms of productivity, survival and employment growth.

Our results lend support to the view that employees’ entrepreneurial skills nurtured in high-productivity firms can be transferred to achieve higher productivity, especially in entrepreneur-owner firms. First, there is a strong positive relationship between the productivity level of the previous firm (where the owner worked as an employee) and the productivity level of the firm where the owner now works. Second, there is evidence of considerable employee mobility from high-productivity firms to ownership of a new firm (where the owner also works). These findings are consistent with the view that the transition of employees from high-productivity firms to entrepreneurship is an important business dynamic, driving knowledge spillover in the economy. Our results also indicate intensive employee mobility from low-productivity firms toward new and young firms, representing an important element of creative destruction. The reallocation of employees in creative destruction means that a greater share of the employees provide labor inputs to productively managed firms

and

Our results demonstrate the importance of considering owner and employee characteristics separately but in parallel in any analysis of firm performance, as owner and employee background and skills may play different roles in the development of employment and productivity. In addition, this analysis indicates a need to deal separately with entrepreneur-owner and pure owner firms. In entrepreneur-owner firms, an owner’s technically orientated education was found to impact positively on productivity performance and survival probability, but no such relationship was found in pure owner firms. One explanation for this difference is that closer owner links to production are needed to successfully exploit technical education and previous experience. In contrast, the potential contribution of pure owners pertains to factors that cannot be captured by measures of education and experience.

One interpretation of this is the perhaps not too surprising result that the human-capital of an entrepreneur-owner matters for the performance of a newly created firm. Knowledge gained from experience as an employee of a high productivity firm can be transferred to the firm of the entrepreneur-owner. Newer firms have relatively younger and more educated human capital but are more dependent on the older firms for an inflow of know-how.