Entrepreneurship after displacement
Entrepreneurship after displacement
Kristina Nyström 0 1
0 K. Nyström The Ratio Institute , P.O. Box 3203, SE-103 64 Stockholm , Sweden
1 K. Nyström (
2 Department of Industrial Economics and Management, KTH, The Royal Institute of Technology , Lindstedsv 30, SE-100 44 Stockholm , Sweden
According to Hoetker and Agarwal (Academy of Management Journal, 50(2), 446-469, 2007), research on knowledge transfers related to business closures is scarce. This paper intends to fill the knowledge gap on the transition to entrepreneurship after a business closure. This paper studies which employees are most likely to start an entrepreneurial venture after being affected by a displacement. Furthermore, following, e.g., Hyttinen and Maliranta (Scandinavian Journal of Economics, 110(1), 1-21, 2008) and Sørensen (Administrative Science Quarterly, 52, 387-412, 2007), this study investigates the link between former workplace characteristics, such as the size and age of the former workplace, and the transition into entrepreneurship. In the second part of the analysis, the performance of the entrepreneurial ventures started by employees after displacement is explored as it relates to survival, employment, and profitability. The empirical setting employs an employer-employee-matched dataset coving all displaced employees in Sweden during 2001-2010. The empirical findings suggest that employees displaced from smaller firms are more likely to transition to entrepreneurship. Employing a Cox proportional hazard model to study the survival of these companies shows that new firms generated by displaced employees from small establishments are more viable. Furthermore, individuals who took part in labor market polices have a higher probability of becoming entrepreneurs, although these firms tend to show lower survival rates, which indicates that these transitions are necessity-based. As for the performance of the business, the empirical findings suggest modest growth in terms of employment, turnover, and operating profit for the vast majority of entrepreneurial ventures started after displacement.
Displacements; Exit; Entrepreneurship; Labor mobility
Job displacement, defined as Ban involuntary loss of
job due to economic downturns or structural change
(OECD 2013, p. 192)
, affects millions of employees
every year. According to a cross-country comparison
, displacements affect 2–7% of
employees every year. There is a rather substantial
body of empirical literature on the people who are
most commonly affected by displacements and the
individual consequences of displacement in terms of
unemployment duration and earnings losses, for
(see OECD 2013 for an overview of this
. Consequently, the individual and societal
cost of displacement is substantial due to the long
unemployment periods and possibly deprecation of
skills that may follow displacement. Business
closures1 often receive considerable attention from the
media and policymakers whenever they occur as
large-scale closures. Among the largest bankruptcy
filings in the US were those of Enron (2001),
WorldCom (2002), Lehman Brothers (2008), and
Washington Mutual (2008).
What happens to employees after a business closure?
According to the OCED (2013) study mentioned above,
the re-employment rate of displaced workers varies
substantially across countries. In France and Portugal,
approximately 30% of displaced workers have a new
job within 1 year, while the corresponding figure for
Finland and Sweden is approximately 80%. However,
as noted by
Hoetker and Agarwal (2007)
knowledge of how knowledge and skills created at closed
firms and possessed by displaced employees can be
reutilized and capitalized remains limited. Exceptions
Knott and Posen (2005)
, who find that firms that
exit generate positive externalities, such as knowledge
spillovers, which benefit others in the industry;
and Agarwal (2007)
study the diffusion of knowledge in
terms of patent citation from exiting firms and find that
although firm exit is not fatal for knowledge diffusion, it
does reduce it significantly.
Nevertheless, there is a lack of systematic knowledge
regarding knowledge transfer and the skills carried by
employees following business closures. To the extent
that studies on the labor mobility of displaced workers
exist, they tend to be case-based.2 However, the
previously mentioned cross-country comparison by the
and recent papers by
Nyström and Viklund Ros (2014
, which explore the transition patterns of all
displaced workers in Sweden, are contributions that
systematically explore these transition patterns.
1 In this paper, the term Bbusiness closure^ is used. A business closure
may include bankruptcies or closures due to low profitability.
However, it should be emphasized that a business closure should not always be
regarded as a failure. There may be many reasons as to why owners
decide to discontinue their business. For instance, the reason for closure
may be that the entrepreneur wants to pursue other opportunities or end
their entrepreneurial careers before retirement (see, e.g.,
Gimeno et al.
DeTienne et al. 2008
Nyström and Viklund Ros (2014
) for a survey of the literature.
However, these papers tend to focus on transition
to employment, while studies on transitions to
entrepreneurship after displacement are scarce.
who finds that within
1 year after displacement, approximately 2% of
employees make the decision to become entrepreneurs
von Greiff (2009
) who finds that displacement
doubles the probability to become self-employed.
Røed and Skogstrøm (2014)
displacement to increase the probability to become an
entrepreneur substantially. However, none of these
papers explore the performance of the companies
started by displaced employees. The lack of
knowledge regarding transitions to entrepreneurship after
displacement is unfortunate since failed
entrepreneurial firms can generate value that can be used
by other entrepreneurs’, i.e., generate failure
(Acs et al. 2016)
This paper intends to fill the knowledge gap on the
transition to entrepreneurship after a business closure.
The following research questions are investigated in this
paper. Which employees are most likely to start an
entrepreneurial venture after being affected by a
displacement? Do the characteristics of their previous
workplace (in terms of size, age, and performance of
the business closed) influence the probability of
transition into entrepreneurship? To what extent do displaced
employees utilize their knowledge from previous
employment when starting a venture in the same industry?
Does experience measured by occupational status
matter for the decision to become an entrepreneur after
displacement? This study also analyzes the performance
of entrepreneurial ventures started after displacement in
terms of survival, turnover, employment, and
profitability. Is an entrepreneurial venture started in the aftermath
of displacement a temporary solution to joblessness, or
do these ventures grow and become a persistent part of
the economy, and, if so, to what extent? Which
individual characteristics and characteristics of the business
closure influence the survival of the venture?
The empirical section of the paper uses a unique
dataset of matched employer-employees that makes it
possible to study the transition and performance of
entrepreneurial ventures started by displaced employees
in Sweden during the period 2001–2010. For the period
2000–2008, the OECD reports an average displacement
rate of approximately 2% in Sweden. This implies that
in Sweden, approximately 100,000 Swedish employees
lose their jobs every year due to a business closure
(Tillväxtanalys 2009).3 In the first part of the paper, the
probability of becoming an entrepreneur after
displacement is studied. The individual characteristics that are
usually found to influence the choice to become an
entrepreneur are controlled for. This includes, for
instance, the experience of the entrepreneur measured by
the occupational position at the entrepreneur’s previous
place of employment and whether the displaced
employee has been involved in labor market policy
measures. One novelty of the paper is that the
firmindividual level dataset enables an analysis of the extent
to which the characteristics of the closing business
influence the decision to become an entrepreneur after
closure. This includes the age, size, and performance
of the previous business
(see, e.g., Hyttinen and
Maliranta 2008; Sorensen 2007; Elvung 2016 for
empirical studies on the size and age effect of previous
employee on the transition to entrepreneurship)
Furthermore, the performance of the entrepreneurial
ventures created after displacement will be explored.
This includes the survival, employment, turnover, and
profitability of the entrepreneurial ventures started by
displaced workers. In this part of the analysis, a Cox
proportional Hazard model is employed to study the
survival of the entrepreneurial ventures created by
displaced employees. Again, individual and firm
characteristics associated with the business closure are
assumed to influence the survival of the business. This
analysis helps us understand more about whether the
decision to become an entrepreneur is necessity- or
opportunity-driven. To formulate well-targeted labor
market policies and improve the institutional support
available in connection with displacements, further
understanding the nature of labor market transition after
3 Some large-scale closures that have received considerable policy
interest in Sweden include the closure of an Ericsson plant in
Norrköping in 1999 (telecom industry), SAAB in Trollhättan in 2011
(automobile industry) and AstraZeneca research facilities in Lund and
Södertälje in 2010 and 2012 (pharmaceutical industry). Regarding the
transition to entrepreneurship, it can be noted that when the
pharmaceutical company AstraZeneca decided to close R&D facilities in
Södertälje (located in the Stockholm region) in 2012, it affected more
than 1000 employees. After the closure, 32 companies were started in
(Life Science Sweden 2013)
. In the case of former
employees of AstraZeneca becoming entrepreneurs, we find
entrepreneurial ventures created with a clear connection to their employment in
their previous industry. This includes ventures in sectors such as
contract research, chemistry, and consultancy related to the industry.
Among the companies created after closure ventures with a more
remote connection to the pharmaceutical industry were also created.
This includes businesses in investment, stock trading, and dog
grooming, for example.
displacements, including transitions into
entrepreneurship, should be of great importance.
The paper is organized as follows; section 2 discusses
the theoretical arguments and previous empirical
research regarding the individual characteristics and the
characteristics of the closing business that may influence
the transition to entrepreneurship. Section 3 describes
the Swedish institutional context influencing the
decision to become an entrepreneur after a person is affected
by a business closure. Section 4 provides a description
of the data the empirical strategy. The empirical results
are discussed in section 5. Finally, conclusions and some
suggestions for future research are provided in section 6.
2 The transition of displaced employees to entrepreneurship
Labor mobility patterns after displacement may take
several paths. Figure 1 displays the possible transition
paths for employees affected by a firm closure. The
individual can decide to enter a new position of
employment in a new or incumbent firm, leave the labor market
(for studies, unemployment, or other reasons) or become
an entrepreneur. The empirical evidence regarding the
individual characteristics that determine the transition of
displaced workers into new employment or labor market
exit has been extensively researched in the literature.
This literature shows, for instance, that displaced
workers tend to suffer from longer periods of
unemployment and reduced earnings compared to non-displaced
(see the previously mentioned summary by the
OECD 2013 for an overview)
. Individuals who are
older, women, and workers with less education, as well
as workers with long previous tenure tend to suffer most
. Thus, previous
research on displacement has focused on the individual
characteristics in terms of age, gender, or education, for
example. However, in this paper, I also want to explore
Employment in new
or incumbent irms
Fig. 1 Labor market transition after displacement
whether characteristics of the closing establishment are
important for the future transition of displaced
employees into entrepreneurial activities.
2.1 Individual characteristics influencing the transition
Empirical research regarding the individual
characteristics that influence the decision to become an entrepreneur
is now extensive.
summarizes the empirical
evidence and concludes that the probability of becoming
an entrepreneur increases with age because the potential
entrepreneur, for example, acquires more experience and
develops his or her social network. Furthermore, the
empirical evidence shows that entrepreneurial activities
tend to decrease when a person approaches retirement
age. This possible non-linear relationship implies that an
inverted U-shaped relationship between age and
entrepreneurship is expected. To empirically test this
relationship, a squared age variable can be introduced in
the empirical analysis. Regarding the performance of the
most empirical studies find the age of the entrepreneur
to be positively related to survival.
Related to the discussion on the relationship between
entrepreneurship and age is the issue of experience and
the propensity for an employee to become an
entrepreneur and for his or her subsequent performance
as an entrepreneur.
general business experience, industry experience,
functional experience (e.g., marketing, management),
startup experience, and vicarious experience (observing
others being entrepreneurs). On this matter, previous
empirical evidence shows that individuals with
entrepreneurial experience and individuals with entrepreneurial
aspirations are more likely to become entrepreneurs in
(Hyytinen and Ilmakunnas 2007)
Dunkelberg et al. (1987)
entrepreneurs and entrepreneurs who show higher than
average growth rates commonly identify their business
idea while still at their previous place of employment.
also concludes that the empirical evidence
suggests that entrepreneurial experience and industry
experience are positively related to the survival of the
venture. However, most other variables measuring
experience (including managerial experience) are not
found to enhance survival chances.
In this paper’s empirical analysis, there is also
information on whether an individual has participated in any
labor market policy measures, which indicates whether
they have a history of unemployment. Regarding the
transition from unemployment to entrepreneurship,
found that unemployed individuals
have a higher probability of becoming self-employed
compared to employees. It is also interesting to note that
longer durations of unemployment are associated with a
higher probability of transition into entrepreneurship
(see, e.g., More and Mueller 2002)
. However, the
performance of ventures started by the unemployed is less
successful compared to employees who become
(Andersson and Wadensjö 2007)
. According to
a literature review by
experience of unemployment does not promote survival and
instead has a negative relationship with firm survival.
Furthermore, the empirical evidence shows that
women are less likely than men to become entrepreneurs
. According to the Global Entrepreneurship
Monitor, the entrepreneurial activity among the Swedish
male population is approximately 9%, while the
corresponding figure for women is approximately 4%
et al. 2015)
. The differences in goals and types of
entrepreneurial ventures started by women and men
also result in performance differences.
concludes that there is a gender entrepreneurship earnings
gap and that female entrepreneurs underperform relative
to men with regard to turnover, employment creation, and
venture survival. For instance,
Lohmann and Luber
find that approximately 40% of women who are
self-employed remain in business after 5 years, while the
corresponding figure for men is approximately 60%.
Education and income can be expected to be
positively related to entrepreneurial activity. It can be argued
that a certain amount of human capital is required to be
involved in innovative and entrepreneurial activities.
Furthermore, well-educated employees generally have
jobs with more independence, which may imply that
they have access to social networks required for
entrepreneurial activities. Income is also an indicator of the
individual ability of a potential entrepreneur. On the
other hand, education and income are usually correlated,
and thus the opportunity cost of entrepreneurship may
be high. Even if the evidence is far from conclusive,
, most empirical studies find
a positive relationship between education level and
transition to entrepreneurship. Regarding the performance
of the entrepreneurial venture, survival rates are found to
be positively related to an entrepreneur’s education
Furthermore, it is suggested that immigrants have a
higher propensity to become entrepreneurs. Numerous
potential reasons for such an overrepresentation have
(see Parker 2009)
. Some suggested
reasons are that immigrants have access to ethnic capital
that may be utilized in an entrepreneurial setting, that
their mobility to paid employment is blocked due to
language barriers, non-validated foreign qualifications,
or even discrimination, or that immigrants are
selfselected risk takers. Summarizing the empirical
concludes that there is a positive
relationship between immigration as a determinant of
entrepreneurship. Regarding the relationship between
immigrant status and survival rates of entrepreneurial
concludes that there is either no
relationship or a negative relationship, although the
conclusion is derived based on a small number of
studies. Finally, opportunities for entrepreneurial activities
vary substantial across regions with entry rates being the
highest in metropolitan regions
(see Barreneche García
2014; Nyström 2007, 2009)
. Hence, the probability of
transition into entrepreneurship can be expected to be
higher in metropolitan regions.
Hoetker and Agarwal (2007)
argue that for a
successful knowledge diffusion to take place, it is important for
an entrepreneur to use an existing firm as a template to
observe and perhaps interact with their rules and
routines to fully benefit from knowledge spillovers. Hence,
it can be argued that previous employment experience in
the same industry should have a positive effect on the
performance of the entrepreneurial venture created after
displacement even if, in the case of business closure, the
entrepreneur do not have possibilities to interact with the
2.2 Characteristics of the closing f irm
Regarding the characteristics of the former workplace,
the extent to which size and age of the establishment
influence the transition to entrepreneurship has been
researched. It has empirically been shown that
employees in small firms are more prone to become
(e.g., Hyytinen and Maliranta, 2008)
explains this small firm effect on entrepreneurial
spawning? According to
Elfenbein et al. (2010)
selection effect may be prevalent because employment in
small firms is similar to entrepreneurship. Hence,
individuals who prefer independence and less bureaucracy
and individuals who are less risk averse choose to work
in small firms. Furthermore, the lower wages paid by
(see, e.g., Wagner 1997 and Waddoups
imply that the employees are more likely to transit
to entrepreneurship in order to increase their income.
However, even if an alternative to staying in the firm
does not exist in cases of business closure, it can be
argued that the wage received at the closed business
influences the income-related benefits received through
unemployment insurance (see section 3.2). Hence, the
wage at the closed business can still be argued to
influence the opportunity cost of entrepreneurship. A final
argument is that employment in small firms develops
entrepreneurial learning and skills that could be valuable
in pursuing an entrepreneurial career.
As for the size of the establishment, it can also be
hypothesized that a number of institutional factors may
be of importance in the transition process following a
business closure. These arguments are mainly valid when
transitions to entrepreneurship are not primarily driven by
the identification of opportunities that an employee
would like to explore. For several reasons, it can be
argued that employees at larger firms may have better
chances of finding new employment. First, larger firms
may be able to provide more support in the transition
process in connection with a closure. Second, there may
also be a positive signaling effect associated with
previous employment at a large company. Small and new
companies face a competitive disadvantage when
recruiting relative to large and established firms because
they are unable to rely on their reputation and name to
. Attracting more
applicants for a position implies that a company can select
higher quality employees from the larger applicant pool
(Turban and Cable 2003)
. Having this background in
mind when recruiting displaced employees from a larger
company implies the possibility that the employee
selected for a large firm came from a larger pool of applicants,
which should therefore signal high quality. Finally,
employees in large firms are more likely to be covered by a
collective agreement that ensures additional support in
the transition process (see the discussion below on
institutional support in case of firm closure).
Even though new firms are often small, small firms
are not always young. Nevertheless, some of the reasons
discussed can be argued to be valid for young firms as
well. There may be selection mechanisms at work,
implying that less risk-averse individuals select into
employment in new firms, as well as entrepreneurial
learning and lower wages in new firms
affecting the opportunity cost of
entrepreneurship. It can also be argued that available
institutional support increases with the age of the firm. However,
labor mobility after working with a new firm is
relatively less researched in the empirical literature (
). The empirical evidence on the new firm effect on
entrepreneurial spawning is less extensive than on the
small firm effect on entrepreneurial spawning.
find a firm age effect on entrepreneurial
Regarding profitability, it can be argued that there
is a higher probability of identifying profitable ideas
worth exploring as an entrepreneur after a closure if
the closed establishment was profitable. Many
entrepreneurs discover the idea behind their
entrepreneurial venture at their previous employer
In particular, the empirical evidence suggests that
entrepreneurs who got their business ideas at their
previous place of employment tend to perform better
in terms of higher growth rates
(Dunkelberg et al.
. In the case of business closure, it should be
stressed that entrepreneurs who close a business still
describe it as successful
; hence, there
are possibilities to identify viable business
opportunities, especially in businesses showing positive
returns. In summary, firm size and age are
hypothesized to be negatively related to transition to
entrepreneurship while performance in terms of
profitability is argued to be positively related to the probability
of becoming an entrepreneur and to the performance
of created ventures.
3 The institutions of support after a business closure and incentives for transition to entrepreneurship
The decision to become an entrepreneur naturally
depends on the alternative options for income that are
available after displacement. In this context, institutional
conditions are of great importance. The two most
relevant policies are the unemployment insurance system
and the support offered by job security councils, which
is a unique institution available in the Swedish context.
3.1 The Swedish unemployment insurance system
Swedish unemployment insurance has two parts; a basic
amount and an income-related benefit that can be
received for a maximum of 300 days.4 The basic amount
applies to individuals who are 20 years or older and fulfill
a working requirement.5 This basic amount is currently
set at approximately €326 per day.7 To qualify for
income-related benefits, the working requirement
mentioned above must be fulfilled. In addition, the individual
must have been a member of an unemployment insurance
fund for at least 12 months. The income-related benefit
compensates 80% of the previous income up to a
maximum of €68 per day8
(Swedish Public Employment
. This corresponds to a monthly salary of
€1870, which corresponds to a salary lower than what
90% of what Swedish employees earn. Hence, most
Swedish employees would in fact not receive 80% of
their salary in case of unemployment, and this has
resulted in the development of a complementary insurance
market where, for example, labor unions offer insurance
plans that cover income losses due to unemployment
above the mentioned compensation limit for
incomerelated benefits. At the same time, it should be mentioned
that approximately 90% of employees are members of an
unemployment fund. However, it is not known how large
the share of these employees is who would qualify for
income-related unemployment benefits.9 In the
beginning of the unemployment period, there are no explicit
requests from the Swedish public employment service to
apply for jobs outside one’s current field or in other
regions. However, as the unemployment period increases,
there is greater pressure to apply for jobs in different
sectors, fields and regions.10
4 For individuals with children under the age of 18, the benefits can be
received for 450 days. It should also be noted that the conditions for
unemployment insurance differ across the years studied in this paper.
This concerns, for instance, what happens after the 300 days of
unemployment insurance ends. Before 2000, for example, one could qualify
for an additional period of unemployment insurance. In 2000, a labor
market policy aimed at stimulating unemployed workers to intensify
their job seeking activities was introduced, thereby removing the
possibility of qualifying for additional periods of unemployment
insurance and reducing compensation levels.
5 This working requirement requires that the individual to have worked
at least 80 h per month for at least 6 months during the last 12 months
6 As of 2015
7 Five days a week
8 Also 5 days a week
9 Combining statistics from SCB on employment and the number of
members in unemployment funds from
for 2006 indicate
that 87% of employed individuals are members.
10 An additional institutional aspect relevant for this discussion is the
government wage guarantee which implies that if a firm files for
bankruptcy, the employee is guaranteed a maximum of 3 three monthly
3.2 Job security councils
Job security councils have developed as a part of the
Swedish model, which implies that the parties on the
labor market take responsibility for the readjustment
process with respect to displacement. The support
provided by job security councils is considered unique in an
. Job security
councils are a complement to the unemployment insurance,
and the support they offer is available for employees
where firms have signed a collective agreement with a
union. The funds were established in the period 1972–
2012, and the number of employees covered by the
funds has accordingly been increasing. Today, more than
3 million employees, i.e., most Swedish employees, are
covered by this potential additional support in the case of
displacement. There are currently ten organizations
connected to the job security councils, and the goal,
organization, and extent of the support offered differ
. Some of the job security councils offer additional
economic compensation, but for the most part, they
provide, for instance, information and coaching on
how to find a new job. Annually, approximately
40,000 employees receive some type of support from
job security councils
. The largest job
security council in the private sector reports that
approximately 2% of the employees involved in their support
activities end up as self-employed. This is similar to the
figure reported by
they also find that almost 80% of them perceive that
their new job is either more or equally qualifying
compared to the job they lost
. However, it
should be mentioned that the access to the support
offered by the job security councils are connected to
the employer having a collective bargaining agreement.
, 60% of the Swedish
firms do not have such an agreement and small firms and
firms in new and fast-growing industries are
overrepresented among firms without collective agreement.
What are the implications of the prevalence of the
abovementioned benefits and institutions with regard to
the incentives to become an entrepreneur? A reasonable
conclusion is to assume that before the 300 days covered
by the income-related unemployment benefits, the
incentives to embark on an insecure path such as
entrepreneurship would be relatively low (given that one
qualifies for the income-related unemployment benefit).
Hence, necessity-based entrepreneurial activities can be
assumed to be rather low during this period. However,
as the end of the unemployment insurance period
approaches, the opportunity cost decreases and it is
reasonable to assume that necessity-based entrepreneurial
activities increase. However, it should be noted that
before 2000, it was possible to qualify for an additional
period of unemployment insurance. In 2000, a labor
market policy aimed at stimulating unemployed workers
to intensify their job-seeking activities was introduced,
thereby removing the possibility of qualifying for such
additional periods of unemployment insurance and
reducing compensation levels.
4 Data and empirical strategy
4.1 The dataset and the definition of displacement
To identify displaced employees, the same methodology
to define displacement as applied in
Viklund Ros (2014
) is used. The methodology implies
i m p o s i ng a f l exi bl e t i m e w i n d o w t o i d e nt i f y
displacement and has been developed by
and used by
von Greiff (2009
. The argument for imposing a flexible
time window is that the closure process may start several
years before an establishment disappears in the statistics.
This is particularly true for closures of large
establishments. Using this flexible time window methodology to
identify firm closures implies that the closure process is
defined to be 1, 2, or 3 years long, depending upon the
size of the establishment and the pace of job
The individuals affected by a displacement and the
rest of the variables used in the empirical analysis are
identified through a matched employee-employer
database covering all employees and establishments in
Sweden and are provided by Statistics Sweden. The
coverage of the database enables us to identify displacements
11 The process is defined as 3 years long if the number of employees at
the firm 3 years prior to the closure was 50 employees or more and if
the workforce was reduced by at least 20% each year during the closure
process. The closure process is 2 years if it does not fulfill the
requirements of a 3-year closure process and if the number of employees,
2 years prior to the closure, was at least 25, and if there was a reduction
of the workforce by at least ten employees, corresponding to at least a
reduction of 20%, the year before the closure. The closure process is
defined to be 1 year, which simply corresponds to all of the
establishments that are not defined to have 2- or 3-year processes. This
definition applies to approximately 80% of closures.
and transitions to entrepreneurship during the period
2001–2010.12 This paper uses only the establishments
that have closed due to exits and hence establishments
closed due to mergers or splits are excluded. One of the
disadvantages with the dataset is that we are able to
follow the employees only on a year-to-year basis and
that we have limited information on what they do if they
exit the labor market. There is information available on
whether they have received some income from
receiving unemployment benefits or either education related to
the unemployment insurance system. However, there is
no information on whether, for instance, they enter other
educational activities or decide to retire. Thus, following
von Greiff (2009
), employees older than 55 and younger
than 25 are excluded the year prior to displacement
because individuals in these age groups have a higher
probability of exiting the labor market for education or
retirement. For further details about the definition of
Nyström and Viklund Ros (2014
Table 1 provides a description of the variables included
in the empirical analysis. For further details of the
variable, see also
. Table 2 presents the
descriptive statistics for the data included in the empirical
analysis.13 It should be noted that the number of firm
closures is substantially larger than the number of files
for bankruptcies. According to
about 15% of all Swedish firm closures are associated
with a bankruptcy procedure.14
4.2 Econometric methodology
The empirical analysis consists of two parts. In the
first part, the determinants of the choice to become an
entrepreneur after displacement are investigated.
Because the dependent variable in this analysis has a
binary outcome (becoming an entrepreneur or not), a
logit-model is estimated. The estimation is corrected
for heteroscedasticity by using robust standard errors.
12 Because the data end in 2010 and a flexible window for defining
closures with a maximum of 3 years is used, the implication is that the
number of displacements is truncated in the end of the period.
However, it is argued that the truncation will have less influence on the
reemployment rates because these rates are calculated as a share of the
number of displaced workers. An alternative would be to exclude these
last years, but this would imply lost observations.
13 A correlation table is available in Appendix 1.
14 According to Tillväxtaanlys (2009), about 50,000 firms closed
during the period 2001–2006, while the number of bankruptcies is
approximately 7000–8000 for the same period.
Odd-ratios are calculated to enable the interpretation
of the size of the effects.15 An odds ratio exceeding
one should be interpreted as the variable having a
positive effect on the probability of becoming an
entrepreneur, while an odds ratio below one indicates
a negative relationship. For the analysis of
performance of the entrepreneurial ventures, the
development of turnover, employment, and the survival is
analyzed. In line with previous research on firm
(see, e.g., Mata and Portugal 1994; Esteve-Pérez
and Mañez-Castillejo 2008; and Box 2008)
, the Cox
proportional hazards model is applied. The
proportional hazards model is a
semiparametric estimation method where the covariates
are multiplicatively related to the hazard, in this case,
the closure of the firm. An estimated hazard ratio
below one should be interpreted as the covariates
having a negative effect on the probability of hazard
(closure of the firm), while a hazard ratio above one
implies a positive relationship.
5 Empirical findings
Figure 2 shows the development of the entrepreneurial
activities by employees who are affected by a business
closure. It is interesting to note that the prevalence of
these entrepreneurial activities has increased over the
period. During the period 2001–2007, the share of
displaced employees who transition into entrepreneurial
activities increased from approximately 2.5 to 4%. This
can be compared to the prevalence of entrepreneurial
activity measured by the Global Entrepreneurship
Monitor, where total entrepreneurial activity (TEA) was
quite stable at approximately 4% during the same
period. After 2007, TEA rates increased to approximately
8% in 2013
(Braunerhjelm et al. 2015)
and at the same
time, the entrepreneurial activities by displaced workers
increased. It is possible that the previously mentioned
stricter regulation regarding the policy on what happens
15 In STATA, the logistic regression option reporting odds ratios are
used. In this model, xj is defined as the vector of independent variables,
augmented by 1, and b the corresponding estimated parameter vector.
The logistic regression model is fit by a logit estimation and the odds
ratio corresponding to the ith coefficient is ψi= exp(bi). This estimation
supports the Huber/White/sandwich estimator of variance for the
robust standard error option. For further details, see, e.g., STATA [R]
base reference guide on logistic regression.
a As noted by, for instance, Minniti et al. (2008), although entrepreneurship and self-employment are not necessarily synonymous,
selfemployment is often used as proxy for entrepreneurship.
b According to the Swedish Standard Classification Occupations 1996 (SSYK-code). The reference group is BOther occupations^ with SSYK
codes 5–9 and 0. Examples of occupations occupations are: engineers, technicians and nurses. Examples of specialized occupations are (with
demand theoretical specialist competence): architects, business administrators, and lawyers Examples of managerial occupations are:
management positions in large, middle sized and small companies. Examples of office occupations are: office work and customer service.
after the 300 days covered by unemployment insurance,
which was introduced in 2000, can explain part of the
somewhat upward trend during 2001–2007. If these
stricter policies influence the incentives for transition
to entrepreneurship, it can be argued that they most
likely would generate necessity-based entrepreneurship.
However, the development of necessity-based
entrepreneurship reported by the Global Entrepreneurship
Monitor for this period does not provide any clear pattern that
would support this argument
(Braunerhjelm et al. 2015)
Entrepreneurial activity by displaced employees
Fig. 2 Prevalence of entrepreneurial activities started by displaced workers 2001–2009
5.1 The probability of transition into entrepreneurship
Table 3 presents the results from the logit-model estimating
the probability of a displaced employee becoming an
entrepreneur. In the analysis, the probability of entering
entrepreneurship 1, 2, or 3 years after displacement is
reported. The purpose of this distinction is to explore whether the
transition patterns differ over time assuming that the
prevalence of necessity-driven entrepreneurship increases the
longer the time passes since the business closure.
As expected and consistent with previous empirical
(e.g., Hyytinen and Maliranta 2008)
for a large establishment decreases the probability of
transition into entrepreneurship. In line with our previous
expectations, the performance of the prior establishment
turns out to be statistically significant, with odds ratios
being slightly above one during the first year. However,
the odds ratio is below one during the second and third year
after closure. Hence, if the transition to entrepreneurship is
immediate, it is more likely that the transition is based on
identifying a profitable opportunity at the closing business.
Regarding the age of the closure, the probability of
transition to entrepreneurship has an odds ratio that exceeds one
during the first year. Hence, the idea that employees in
younger firms closing down are more likely to become
entrepreneurs is not supported. For the second and third
year, the odds ratio is below one, but the size of the firm
age-effect is very small during all 3 years.
Regarding individual characteristics, similar to the
general evidence on the decisions to become
entrepreneurs, males have a higher probability of becoming
entrepreneurs. This finding is valid for all 3 years after
displacement. Also in line with previous empirical
research, the transition into entrepreneurship increases
with age but with a decreasing rate (squared age).
Individuals who have entrepreneurial experience have a
higher probability of transition into entrepreneurship.
However, it should be noted that for the first year of
1 year after
Robust Std. error
Robust Std. error
2 years after
3 years after
Robust Std. error
observation, the size of the effect is overestimated due to
a methodological problem related to the fact that it is
only possible to observe the transition into
entrepreneurship on a yearly basis.16Furthermore, as expected,
employees in metropolitan regions are more likely to
become entrepreneurs after displacement. Individuals with
qualified, specialist and in particular, managerial
occupations have a higher probability of becoming
entrepreneurs. Finally, an interesting finding is that individuals
who have participated in labor market policy measures
(either education or income-related unemployment
benefits) also have a higher probability of transition into
entrepreneurship after displacement.
5.2 Performance of entrepreneurial ventures started
by displaced workers
Figures 3, 4, 5 and show the average development of
employees, turnover, and operating profit for the firms
started the year after displacement and that survive at least
5 years. The employment development of these firms
seems rather moderate in that they start by employing
approximately 2.5 employees on average, which
16 If, for instance, the firm was closed during the beginning of the year,
the individual affected by the closure may have already started his/her
company the same year. When we observe the transition to
entrepreneurship in the year after the business closure, the entrepreneurial
experience may refer to the new venture induced by the business
increases to approximately 3.2 employees after 5 years.
The average turnover at the beginning of the period is
12,800 SEK, increasing to 15,800 SEK after 5 years. For
operating profit, the average profit is 800 SEK in the
beginning of the period and increases to 1100 SEK after
5 years. These are all quite moderate performance figures.
However, looking at the distribution of performance
(provided in Appendix 2) some of these entrepreneurial
ventures turn out to be successful in terms of
performance. The maximum values for these firms are 7.5
million SEK in turnover, 725,000 SEK in terms of
operating profit and 313 employees.
Table 4 provides the results of the Cox proportional
hazard model studying the survival of the firms generated
by displaced employees. Regarding the characteristics of
the closing establishment, the results show that coming
from a large closure increases hazard rates, i.e.,
entrepreneurial ventures started by displaced workers in small
firms have higher chances of survival. Thus, this result
supports the idea that firms generated by displaced
employees in small firms are more viable because the
employees of these firms may have acquired valuable
entrepreneurial knowledge during their time as employees in
small and new firms. Entrepreneurship spurred from older
firms has lower hazard ratios, but the size of the effect is
rather small. Furthermore, entrepreneurial activity spurred
from profitable firms reduces hazard ratios, which
supports the hypothesis that these displaced employees may
have identified a profitable business idea at their previous
Average turnover (SEK)
place of employment. As expected, entrepreneurial
ventures started in the same industry as the entrepreneur was
working before reduces the hazard rate indicating that
starting a business in the same industry generates business
ideas with higher chances of survival.
Regarding the individual characteristics, the empirical
findings are in line with previous empirical research
and suggest that the hazard rate is lower
for male and older entrepreneurs. A higher wage at the
closed establishment also decreases hazard rates. Thus, it is
Operating pro it (SEK)
argued that a higher wage at the prior place of employment
implies that the potential benefits from entrepreneurship
are estimated to be rather high (more likely
opportunitybased entrepreneurship), which should enhance the
probability of survival. Furthermore, consistent with previous
empirical findings on venture survival, entrepreneurs with
foreign backgrounds have a higher hazard ratio. However,
firms started by individuals with higher education
surprisingly show lower survival. Being involved in labor market
policies in immediate relation to the firm closure increases
hazard rates of the entrepreneurial venture started. This is
consistent with the findings by
Andersson and Wadensjö
who find that unemployed individuals perform
worse than employees starting an entrepreneurial venture.
Somewhat surprisingly the effect of entrepreneurial
experience does not turn out statistically significant in the
empirical analysis. Among the occupational categories, having an
office occupation, managerial experience and qualified
occupation increase hazard ratios. This is also somewhat
surprising because previous research according to
indicates that most types of experience are weakly
related to firm survival. Hence, it is possible that these
Table 4 Results from the Cox proportional hazards model
Robust std. error
Characteristics of closure
Characteristics of individuals
Labour market policy
findings imply that experience plays a different role for
survival of the ventures when the venture is created by
displaced workers. For instance, when individuals with a
more qualified occupational background engage in
entrepreneurial activities in the aftermath of the displacement, it
is potentially a temporary solution to joblessness waiting for
a more attractive opportunity to appear. Finally,
entrepreneurial activities initiated by entrepreneurs in metropolitan
regions have hazard ratios exceeding one reflecting the
higher turbulence in terms of entry and exit rates in these
, 2009). Appendix 3 provides the
Kaplan-Meier survival estimates which indicate that
approximately 80% of the ventures survive their first year
while approximately 40% survive 4 years.
6 Conclusions and suggestions for future research
This paper contributes to the literature on the future
utilization and capitalization of knowledge and skills
of employees when their former employees decide to
close a business. In particular, the decision to become an
entrepreneur and the performance of the entrepreneurial
ventures started by displaced workers is explored.
Table 5 summarizes the theoretical expectations and
empirical findings in this paper.
Among the individual characteristics associated with
transition into entrepreneurship after displacement,
individuals with qualified, specialist and, in particular,
managerial occupations have a higher probability of
becoming entrepreneurs. However, the analysis of the
performance of these ventures in terms of survival
shows that these ventures have a shorter survival period.
This may indicate that the transition to entrepreneurship
for these employees is a temporary solution to
joblessness. Furthermore, individuals who have participated in
labor market policy measures (either education or
income-related unemployment benefits) also have
higher probability of transition into entrepreneurship
after displacement. The fact that these entrepreneurial
ventures have lower survival may indicate that
entrepreneurship is a temporary solution but also consistent with
previous research that these ventures tend to perform
(see, e.g., Andersson and Wadensjö, 2007)
Regarding the link between the characteristics of the
closing establishment theoretical arguments, suggested
Elfenbein et al. (2010)
, for why selection effects,
opportunity cost effects, and learning effects are
arguments that should imply a higher propensity of
Expected sign (−) refers to an odds ratio or hazard rate below 1, and expected sign (+) refers to an odds ratio or hazard rate above 1
+/− may imply that the expected sign is theoretically ambiguous or lack of previous empirical research
# Not statistically significant in all estimations
employees in small and new firms to transition into
entrepreneurship. In addition, signaling effects and the
institutional setting regarding the support provided by the
former employee and the employment security fund,
which are specific to the Swedish setting, can be argued
to enhance the transition of employees in large firms to a
new employment, leaving employees in small and new
firms more exposed to necessity-based entrepreneurship
after displacement. The empirical result supports the
hypothesis that small business closures spur entrepreneurial
activity after displacement. However, there is no
empirical support for an age-effect on the probability of
transition into entrepreneurship. Furthermore, firms generated
by displaced employees in small firms turn out to have
better prospects of survival, indicating that there may be a
learning effect associated with working for a small firm.
This paper uses register data where there is no
available information about the motivation to start
entrepreneurial ventures. Hence, it would be interesting to collect
data on whether these entrepreneurial ventures created by
displaced employees are perceived as necessity- or
opportunity-driven. Furthermore, in the research setting
of this paper, it is not possible to specifically distinguish
between the role of selection, opportunity cost, and
learning effects and the role of the institutional setting for the
transition and patterns of displaced workers. In fact, to the
best of my knowledge, there is little systematic research
on the effect of the institutional support available in the
case of business closure, at small and young firms and the
transition to new employment or entrepreneurship after
displacement. Furthermore, it would be interesting to
explore the business idea generation process in relation
to the information about the closure of the business. Does
the entrepreneurial venture rely on a business idea that
existed for quite some time while a person is an employee
and is its realization spurred by information about an
impending closure? What knowledge and skills
developed at their former employment do displaced employees
find valuable in their role as entrepreneurs?
Acknowledgements The author would like to thank Ingrid
Viklund Ros and Vardan Hovsepyan for their valuable assistance
with working with the dataset. The author would also like to thank
the participants at the workshop on BBankruptcy institutions,
corporate insolvency and entrepreneurship^ in Turin 2015 and
Paris 2016 for valuable comments and suggestions on previous
versions of this paper.
Fig. 9 Kaplan-Meier survival
Open Access This article is distributed under the terms of the
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