Sailors’ reaction to stormy waters: A cross-country
study on the impact of an economic recession on
entrepreneurial intention
☆Devin Tiemens
a, *, supervisor: dr. M. Wyrwich
a, co-assessor: dr. M.J.
Brand
aa University of Groningen, Faculty of economics and business economics, Nettelbosje 2, 9747 AE Groningen, The
Netherlands INFO Keywords Entrepreneurship; Entrepreneurial process; Entrepreneurial intention; Economic recession. Date: 20-06-2019 Wordcount: 11.997 ABSTRACT
Focusing on the early stage of the entrepreneurial process, a systematic understanding of the influence of an economic recession on individuals’ intention to become an entrepreneur was still lacking in entrepreneurship literature. In this study, a path model is created where individuals’ fear of entrepreneurial failure, self-efficacy and opportunity recognition mediates the relationship between economic recession and entrepreneurial intention. Drawing upon a GEM sample of >500.000 cases across Europe, statistical evidence reveal that an economic recession positively influences
entrepreneurial intention directly and indirectly via self-efficacy,
suggesting a counter-cyclical effect. However, a strong negative mediation effect via opportunity recognition and – to a limited extend – via fear of entrepreneurial failure seems to reduce individuals’ intention to become an entrepreneur. Together these results provide important insights into the effect of an economic recession on individuals’ attitudes, perceptions and intentions, which could serve as guidance for policymakers, by providing an appropriate method to survive an economic recession.
☆I would like to especially thank my supervisor Michael Wyrwich for providing me with feedback, suggestions and support during this research process. I am also grateful to the Global Entrepreneurship Monitor for providing the collected data. Finally, I am indebted to family and friend who have always supported me throughout my unique educational path.
Sailors’ reaction to stormy waters: A cross-country study on the impact of an economic recession on entrepreneurial intention
INTRODUCTION
In entrepreneurship literature, entrepreneurial intention historically emerged as an important field of literature. In fact, governments often focus on intentions of self-employment, since the creation of businesses facilitates innovation, jobs and competition that in the end increases economic growth and welfare of their citizens (Van Praag & Versloot, 2007; Van Stel, Storey & Thurik, 2007). Especially in times of economic hardship and increasing unemployment, stimulating entrepreneurship is essential to reduce unemployment rates (Thurik, Carree, Van Stel & Audretsch, 2008) and survive a recession.
In this economical vulnerable context, to date, only a limited number of studies investigated the impact of economic recessions on entrepreneurship (Nabi & Liñán, 2013; Shane, 2011).
Furthermore, the relationship between an economic recession and entrepreneurial intention remains inclusive since researchers proposed contradicting theories, arguments and findings. One strand of research argue that opportunity costs reduce in times of an economic recession and by means of this fuel individuals’ intention to become an entrepreneur (Audretsch, Thurik, Verheul & Wennekers, 2002; Shane, 2011). A second strand of research argue that an economic recession is a non-favorable context to startup a business, which negatively influences the intention to become self-employed (Fairlie, 2013; Konon, Fritsch & Kritikos, 2018). Other scholars agree on both arguments and state that therefore entrepreneurial intention remains equal in times of economic recessions (Stangler & Kedrosky, 2010).
A related and more developed stream of literature can be found in the field of entrepreneurial process theory, which tries to explain why some individuals have the intention to start up a venture, while others do not have this intention. From a cognitive perspective, researchers argue that
individuals’ perceptions such as self-efficacy and fear of entrepreneurial failure could contribute to distinguish potential entrepreneurs from non-entrepreneurs. Later, Liñán, Santos and Fernández (2011) proposed that within the entrepreneurial process, individuals “capture the influence of the external environment through their motivations and perceptions, generating attitudes and intentions which, in turn, determine behaviors.” (p. 374). This indicates that also the environment plays an important role in explaining individuals’ intention to become self-employed. However, research related to the influence of contingency factors affecting entrepreneurial intention is scarce (Krueger, 2017; Rauch & Frese, 2007).
The present study combines both aforementioned strands of research in order to investigate the contextual impact on individuals’ attitudes and perceptions related to entrepreneurship. More
about attitudes and perceptions in the early stage of the entrepreneurial process. In a pursuit to fill the contingency research gap mentioned by Rauch and Frese (2007), it is argued that an economic recession besides a direct effect, also indirectly through individuals’ perceptions and attitudes influences individuals’ intention to become an entrepreneur (Nabi & Liñán, 2013). In response to the contingency research gap, Schlaegel and Koenig (2014) advise researchers to use the Global
Entrepreneurship Monitor (GEM) to investigate this research gap. Therefore, the present study used the GEM database about individuals’ perceptions and attitudes of more than 500.000 individuals across Europe in combination with the OECD database, in order to investigate the research question:
“How does an economic recession influence individuals’ intention to become an entrepreneur?”
By answering the research question, this study contributes to a better understanding of the early stage of the entrepreneurial process, especially in times of a non-favorable economic
environment. By means of this, the present study aims to contribute in a practical and theoretical sense. On the one hand, this research could help in understanding the inclusive theories and results of previous studies investigating the association between an economic recession and entrepreneurial intention. Furthermore, unlike most other entrepreneurial intention studies (Liñán et al., 2011), this study accounts for differences between countries, contributing to entrepreneurial intention research by creating more accurate results. On the other hand, policymakers can use the information generated in this study as guidance for entrepreneurship policies under bad economic conditions, which is
especially relevant to survive an economic recession.
The overall structure of this research paper takes the form of five consecutive sections. The first section includes theoretical background about entrepreneurial intention and economic recessions. The second part provides a detailed overview of the methodology of this study followed by a
presentation of the results that were found in this study. This paper ends with a discussion and interpretation of the results, followed by the implications and limitations described in the conclusion section.
THEORY
Entrepreneurial intention could be defined as the intention of an individual to create a new business (Krueger, 2017) and become self-employed. It is a fundamental aspect in entrepreneurship literature, because it is the first stage in the entrepreneurial process of discovery, creation and exploitation of opportunities (Gartner, Shaver, Gatewood & Katz, 1994). Addressing the issue of entrepreneurial intention, previous research focused on the role of individual perceptions and
other hand, individuals’ perceptions, such as self-efficacy and fear of entrepreneurial failure could affect individuals’ intention to exploit the opportunity. Later on, classical economic theory proposed that the (economic) environment surrounding the individual could influence individuals’ attitudes, perceptions and intention to startup a business (Nabi & Liñán, 2013). Although researchers widely studied entrepreneurship in normal economic conditions – which could be expressed as calm waters – the effect of an economic recession – expressed as stormy waters – is relatively understudied. If this is expressed into nautical analogy, the question that arises is if sailors (individuals) perceive stormy waters as an opportunity that, if not exploited, lead to ‘missing-the-boat’ or as a non-favorable context expressed as ‘sinking-the-boat’ (Nabi & Liñán, 2013). Within this, it is expected that sailors’ believe in their sailing skills, their fear to ‘sink-the-boat’ and their ability to perceive stormy waters as an opportunity to sail faster, will be affected by the storm.
Regarding the forthcoming sections, first, theoretical background is provided about individuals’ entrepreneurial attitudes and their perceptions while not accounting for economical context. Hereafter, a brief introduction about the most recent and one of the heaviest economic recessions in history is provided – the economic recession of 2009 – followed by a theoretical explanation of the direct and indirect effects that an economic recession could have on individuals’ intention to become an entrepreneur.
Fear of entrepreneurial failure and entrepreneurial intention
One of the first determinants used in entrepreneurship studies to distinguish entrepreneurs from non-entrepreneurs is fear of entrepreneurial failure (Liñán et al., 2011), because entrepreneurship is unavoidably related to risk (Lin, Peña & Chen, 2017). Based on psychological research, fear of entrepreneurial failure is defined as the disposition to avoid failure in becoming an entrepreneur (Conroy, 2001). As Cacciotti, Hayton, Mitchell and Giazitzoglu (2016) theorize, it is the process of cognition, affect and action that describes the way fear of failure determines individuals’ response towards entrepreneurship. It appears that fear of entrepreneurial failure causes different individual behavioral responses such as fighting against the threat, avoiding the threat or freezing in place (Sylvers, Lilienfeld & LaPrairie, 2011). This perspective implies a negative relation between fear of entrepreneurial failure and entrepreneurial intention. However, recent inductive research found that it could be satisfying for people to do what they are afraid of, such as becoming an entrepreneur (Cacciotti, Hayton, Mitchell & Giazitzoglu, 2016), implying a positive effect towards individuals’ intention to start up a business. Whereas most studies found a negative relationship between
individuals’ fear of entrepreneurial failure and the intention to become an entrepreneur, there is also empirical proof for fear of entrepreneurial failure as a motivation for entrepreneurial intention
provided. For the direct effect of fear of entrepreneurial failure, this study follows the psychological perspective leading to the expectation that individuals with fear of entrepreneurial failure have the disposition to avoid entrepreneurship.
H1: Fear of entrepreneurial failure has a negative influence on the intention to become an entrepreneur.
Self-efficacy and entrepreneurial intention
Among others, psychologist Albert Bandura is a major contributor to the self-efficacy
literature. Psychological research defines self-efficacy as the believe of an individual in him- or herself being capable of successfully executing specific roles and tasks (Chen, Greene & Crick, 1998). As Bandura (1982) suggests, the process of self-efficacy evaluation starts with previous experiences of individuals, such as enactive mastery (personal attainments) and physiological arousal (e.g. anxiety). Subsequently, individuals analyze the task requirements and assess their personal and situational constraints to determine self-efficacy related to a certain task (Gist & Mitchell, 1992).
In the context of entrepreneurship research, self-efficacy is linked to individuals’ perception of having the right knowledge, skills and experiences required to start a business (Wennberg, Pathak & Autio, 2013). Because entrepreneurs must be confident in their capabilities to execute a variety of (unexpected) tasks in uncertain situations (Baum & Locke, 2004), self-efficacy forms an important perception in the entrepreneurial process. In conclusion, it is expected that those individuals believing in their own capabilities to start-up a business, are more likely to develop entrepreneurial intentions.
H2: Self-efficacy has a positive influence on the intention to become an entrepreneur.
Opportunity recognition and entrepreneurial intention
Ideas emerge before opportunities, but not all ideas are translated into opportunities (Nielsen, Klyver, Evald & Bager, 2017). Opportunity recognition is needed to translate ideas into opportunities and is defined as “the cognitive process (or processes) through which individuals conclude that they have identified an opportunity” (Baron, 2006, p.107). As Shane and Venkataraman (2000) argue, opportunity recognition depends on the available information and cognitive properties that are necessary to value the information. Whether an individual is able to seize an opportunity depends on their ability to understand, analyze and make sense out of the information and their ability to translate this information into an economic opportunity (Levie & Autio, 2008). When individuals have
recognized an economic opportunity, cognitive theories argue that this is a vital determinant triggering individuals’ intention to become self-employed (González-Pernía, Guerrero & Jung, 2018). Therefore, it is hypothesized that:
Economic recession
As addressed by Rauch and Frese (2007) it is likely that environmental aspects such as the economic situation influences individuals’ intention to become an entrepreneur. Especially in an extreme situation like an economic recession, it is reasonable that this situation disturbs individuals’ intention to start up an own venture. Before providing theoretical explanation for this phenomenon, a brief introduction about the most recent and one of the heaviest recessions in history is provided.
The most recent economic recession started around 2007 in the United States and intensified till 2009 towards the heaviest economic recession since the Great depression around 1930 regarding economic impact and geographical distance (Claessens, Dell’Ariccia, Igan & Laeven, 2010; Romer, 1990). It all started in the United States, where overextended mortgages affected the banking system and hit the heart of United States’ economy. Countries economically linked to the United States became affected as well, which led to a worldwide decrease of gross domestic product (GDP) in 2009 (Pape et al., 2016). As a reaction upon the economic recession, governments started introducing policies to recover their economy.
In Europe, the European Union (EU) deployed two ways to recover the economy. First, national banks were supported and second, Keynesian economics were appointed by the EU to reactivate the economy (Pape et al., 2016). On short term, this approach helped most countries in Europe to increase the GDP again between 2010 and 2011. But, in the long run, this approach caused public account deficits whereby several EU member countries were not able to refinance their government debts and therefore became even more impacted by the economic recession (Pape et al., 2016).
Although, the GDP of the United States already became positive in 2009 – indicating the end of the economic recession – other countries, such as most countries in Europe, had a negative GDP until 2013. Altogether, the economic recession impacted countries all over the world by reducing countries’ economic activity and increasing unemployment rates (Claessens et al., 2010; Pape et al., 2016).
Economic recession and entrepreneurial intention
Samuelson (2001) once said: “what we know about the economic recession is that we don't know very much” (para. 3). Also, after the most recent economic recession (2009), it remained relatively silent among researchers investigating the effect of an economic recession on
entrepreneurship (Shane, 2011). However, those researchers that focused on the effect of an economic recession, used contradicting arguments. A first stream of literature argue that an economic recession is positively related to entrepreneurship (counter-cyclical effect), because increased unemployment induces lower opportunity costs and therefore more people are inclined to become an entrepreneur (Audretsch et al., 2002; Shane, 2011). Within this, the opportunity costs represent the income that can be generated by starting an own venture in comparison to the income that can gained by employment (Cassar, 2006). In times of economic hardship, the utility of self-employment could be greater than the utility of employment, for example when unemployed people can hardly find paid employment (Audretsch et al., 2002) or when employed people are not sure about their future at the company they are working for (Hsu, Roberts & Eesley, 2007). In the past, several studies have found proof for this counter-cyclical effect (Fairlie, 2013; Konon et al., 2018). Nevertheless, another stream of literature argue that an economic recession does not affect entrepreneurship, because reduced demands are compensated by more intention to become entrepreneurial as a protection against unemployment (Stangler & Kedrosky, 2010). Finally, a third literature stream argues from the pro-cyclical point of view. From this point of view, it is argued that an economic recession is a non-favorable context for starting up a business (Shane, 2011) because, access to external finance and the supply of products and services are reduced in times of economic recessions (Cowling, Liu & Ledger, 2012; González-Pernía et al., 2018). Since these essential resources are vital determinants for individuals’ intention to start an own venture (Levie & Autio, 2008), it can be argued that an economic recession is a non-favorable context for individuals’ intention to become an entrepreneur, and therefore it is expected that:
H4: An economic recession has a negative direct impact on the intention to become an entrepreneur.
So far, empirical research has widely focused on the effects of individuals’ attitudes and perceptions (fear of entrepreneurial failure, self-efficacy and opportunity recognition) on their
Figure I (simple) conceptual model
Economic recession and fear of entrepreneurial failure
As Cacciotti et al. (2016) propose, fear of entrepreneurial failure does not only depend on internal cognitive evaluations, but also the external environment has an influence on fear of
entrepreneurial failure. Taken together, both concepts determine whether an individual has a positive or negative association with entrepreneurship. Situations that rise external threats could be a source of fear of failure. Since in times of an economic recession, economic hardship is often the major reason for the failure of many (small) businesses (Ropega, 2011), it is likely that individuals see this economically bad environment as an external threat, which fuels their fear of entrepreneurial failure. Especially since an inductive research by Chua and Bedford (2016) found that fear of going bankrupt is one of the major concerns of individuals thinking about entrepreneurship. Moreover, as Nabi and Liñán (2013) argue, during an economic recession dooming media headlines about lower expected customer demand and returns can give an extra boost on individuals’ fear of entrepreneurial failure.
Concluding on above, individuals considering an economic recession as a threat are expected to have less intention to become self-employed (Nabi & Liñán, 2013) because they create “concerns over loss or potential loss of their livelihood and stored wealth” as a trigger of fear of entrepreneurial failure (Cacciotti et al., 2016, p.311). Hence, it is predicted that the negative effect of an economic recession on individuals’ intention to become self-employed is partly mediated by increasing fear of entrepreneurial failure, leading into the following hypotheses:
Economic recession and self-efficacy
Bandura (1990) explains self-efficacy as a process in which individuals gauge multiple sources of information to determine their self-efficacy for a certain task, and within this process, information assessment could vary due to situational circumstances. Researchers have found different environmental aspects influencing individuals’ self-efficacy evaluation (Gist & Mitchell, 1992). In the context of this paper, Gist and Mitchell (1992) explain that psychological risk and danger could negatively influence individuals believe in their own capabilities. In times of an economic recession, individuals could experience more psychological risk or danger due to decreasing security and stability (e.g. their financial status), causing fear and uncertainty (Marjanovic, Greenglass, Fiksenbaum & Bell, 2013) and by means of that negatively impacting individuals’ self-efficacy.
In addition, the complexity of the task is another determinant in the formation of individuals’ self-efficacy and increases when there is more dynamism or probabilistic linkages (Gist & Mitchell, 1992). Because in times of economic recession the task of starting up a business is more complex due to an overall decrease of access to finance, sales and income (Papaoikonomou, Segarra & Li, 2012), it is expected that the negative effect of an economic recession on individuals’ intention to become an entrepreneur is (partly) mediated by reducing individuals’ self-efficacy.
H6: (a) An economic recession has a negative effect on self-efficacy. (b) Self-efficacy (at least in parts) mediates the relationship between economic recession and entrepreneurial intention.
Economic recession and opportunity recognition
Besides fear of entrepreneurial failure and self-efficacy, opportunity recognition could also play a role in times of an economic recession. In fact, “a poor economic context can limit
opportunities and hamper the entrepreneur's ability to exploit these opportunities” (Devece, Peris-Ortiz & Rueda-Armengot, 2016, p.5467). During an economic recession, demand decreases and therefore less opportunities can be explored in the environment. Moreover, if an individual explores an opportunity during an economic recession, it is less likely that he or she will exploit the opportunity, due to lower expected demand and less access to important resources in comparison to times of economic prosperity (González-Pernía et al., 2018). Therefore, it is hypothesized that the negative effect of an economic recession on the intention to become an entrepreneur is partly mediated by reducing opportunity recognition, leading into the following hypotheses:
H7: (a) An economic recession has a negative effect on opportunity recognition. (b) opportunity recognition (at least in parts) mediates the relationship between economic recession and entrepreneurial intention.
Figure II Path model
METHOD
Several researchers have argued that the economic situation and individuals’ entrepreneurial perceptions and attitudes play a role in the process of entrepreneurial intention. However, it is relatively unknown if and how an economic recession influences the entrepreneurial process due to lack of empirical research. Therefore, this study aims to verify the thoughts of previous researchers by executing a quantitative empirical study.
Regarding the methodology of this empirical study, the remaining part of this chapter will provide detailed information about the sample and measures that were used and the analyses that were executed in order to investigate the research question.
Sample
The sample that was used for this study is focused on the most recent economic recession of 2009. More specifically, secondary data of two sources over the period of 2004 until 2015 were merged, which allowed to compare situations of economic recessions with situation of economic prosperity. The first database is the national yearly database of Global Entrepreneurship Monitor (GEM) which consists of data about entrepreneurial behaviors and attitudes of individuals across the world. The present study focused on those countries that were already members of the EU before 2005. Hence, Bulgaria, Romania and Croatia were not included since these countries joined the EU in 2007 and 2013. Moreover, twelve EU state member countries were deleted, since these countries were missing more than once in the yearly database of GEM. This resulted in a sample including thirteen countries: Greece, The Netherlands, Belgium, France, Spain, Hungary, Italy, United Kingdom, Sweden, Germany, Ireland, Finland and Slovenia. Every country was administered to at least 2000 adults each year and data was collected by validated interviews. These interviews were held by experts who are under control of multiple research institutions, increasing the validity of this research.
included with data about GDP and unemployment for each country and year in this study. Finally, the database that was created for this study was filtered for useful cases, which resulted in a final sample of 511.105 cases. Altogether, the scale of the sample, the reliable databases that were used in
combination with the timeframe and the focus on different countries, aimed to increase the validity of this study.
Measures
In this research, an economic recession is defined as a period of time wherein nation’s GDP declines for two or more consecutive quarters in a quarter-to-quarter comparison (Mazurek & Mielcová, 2013). Previously, studies have used several methods to measure economic recession, like GDP declines, unemployment rates, stock market downturns or a combination of those (Pape et al., 2016). However, the main analyses in this study are based on GDP declines for several reasons. First, GDP decline is included in the definition of economic recession itself. Second, GDP is the most popular indicator for economic recession. Third, a combination of measures does not significantly perform better than solely GDP measures (Mazurek & Mielcová, 2013). Nonetheless, robustness checks with unemployment and a combination of yearly unemployment and GDP as measure for economic recession are executed to verify the conclusions. For the main analysis, this study focused on the first two quarters GDP of each year (expressed in percentage real GDP change related to previous quarter), because fairly most (81%) of the data was gathered and/ or administered in June or July. The data was dummy coded a (1) if the first and second quarter were both negative, and (0) if not.
All other variables used in this study are part of the GEM database. During the surveys, held by GEM consortium, respondents could have answered each question with (1) yes, (0) no, (-1) don’t know (-2) refused. To measure the independent variable fear of entrepreneurial failure, the following question was asked: “Would fear of failure would prevent you from starting a business?”.
Furthermore, respondents were asked to respond on the following question, concerning self-efficacy:
“Do you have the knowledge, skill and experience required to start a new business?”. Next,
respondents were asked to react upon the following statement: “In the next six months, will there be
good opportunities for starting a business in the area where you live?” in order to determine
opportunities explored by individuals in the area they live. The dependent variable is measured by asking respondents: “Are you, alone or with others, expecting to start a new business, including any
type of self-employment, within the next three years?”
wherein the method of GEM was followed to divide the working-age population (18-65 years) in five groups: 18-25, 26-35, 36-45, 46-55 and 56-64 years old. Regardless of inconsistent findings in previous studies, the general expectation is an inverted U-shaped effect (Storey & Green, 2010), meaning that one would expect the third group to have the most intention to become self-employed. Third, household income was included as a three-point categorial variable. The household incomes were divided into groups of the 33% lowest, medium and highest household incomes. Previous research has found significant positive effects related to entrepreneurial intention (e.g. Kibler, 2013). Fourth, individuals’ education level was included ranging from 0 (none) to 4 (graduate experience). With respect to this, previous research found mixed results for the level of education and intention to start an own venture (Storey, 1994). Fifth, to control for differences of the macro factors county and year, these variables were included as well. Eventually, all above mentioned variables were dummy coded and within each analysis the first group functioned as reference group.
Analyses
After preparing the dataset, a check for multicollinearity of the variables (correlation > ,500) was performed. If the correlation exceeded the threshold level, VIF values have been check and should not have exceeded the critical level of 5,000 (Bowerman & O’Connell, 1990). Subsequently, a pre-analysis in the form of figure I was performed by means of a binary logistic regression for several reasons. First, this method allows to determine if the data provides similar evidence than previous studies, since this (simple) model has been widely studied in the field of entrepreneurship. Second, to check whether indeed individuals’ perceptions and attitudes are important predictors for
entrepreneurial intention when controlling for economic recession. Third, this method allows to analyze the goodness-of-fit of this (simple) model and to predict the odds (EXP b) of an individual
having the intention to become an entrepreneur based on each independent variable. With respect to the interpretation of the goodness-of-fit, this study used the Nagelkerke R2 in contrast to the standard Hosmer Lemeshow test, because the Hosmer Lemeshow test is problematic with large sample sizes (Paul, Pennell & Lemeshow, 2013).
After performing the pre-analysis, the path model as presented in figure II was investigated. In this analysis the indirect (mediation) effects of economic recession affecting individuals’ intention to become self-employed through fear of entrepreneurial failure, self-efficacy and opportunity
recognition were analyzed, based on the equations of Jose (2013). First, the coefficient value (b) and standard error (E.R.) of the relation between economic recession (X) and entrepreneurial intention (Y) were standardized (correcting for standard deviation). Second, b and E.R. concerning the relationship between (X) and the mediating variables (M), were standardized and checked for significance to rather confirm or reject hypothesis 5a, 6a and 7a. Third, both effects, economic recession (X) on
coefficient, standard error and the P-value of each indirect effect has been calculated, to confirm or reject hypothesis 5b, 6b and 7b.
Eventually, additional tests in the form of robustness checks were performed by means of covariance-based structural equation modelling (CB-SEM). This specific SEM approach was selected for three reasons. First, CB-SEM was chosen, because the primary goal of this study was to confirm or reject the theories discussed in the theory section, rather than exploratory research calling for PLS-SEM (Hair, Hult, Ringle & Sarstedt, 2016). Second, the analysis is covariance-based rather than correlation-based, since Boomsma (1983) found that SEM based on correlations lead to imprecise results. Third, since this study is based on binary data, standard SEM was not possible, therefore this study followed the method of previous researchers with binary data and created a variance-covariance matrix in order to execute the CB-SEM (Bodoff & Ho, 2016).
When performing CB-SEM, the goodness-of-fit of the proposed path model was analyzed. While analyzing the fit of the model, control variables where not included to account for the
wastebasket effect, influencing the model fit (Kelloway, 1998). Following the method of Afthanorhan (2013), first the absolute fit was analyzed by means of the goodness-of-fit index (GFI), which should be > ,900 based on Jöreskog and Sörbom (1982). Secondly, the incremental fit was analyzed by the adjusted GFI and should have an acceptable value of > ,900 (Tanaka & Huba, 1989). Eventually, the control variables were included again to analyze the CB-SEM coefficient values and corresponding P-values.
After performing CB-SEM based on the full sample, an invariance test was performed in order to investigate the difference of path coefficients of the path model between the sample before the economic recession (2004-2008) and the sample after the economic recession (2010-2015). This invariance test is performed, because it could be the case that an economic recession has an ongoing effect on entrepreneurial intention after the first shock of an economic recession (in this case 2009). Each relevant path was constrained to subsequently perform a chi square difference test (invariance test) to analyze for difference – between prior and post economic recession – of each path in the model (Chin, Mills, Steel & Schwarz, 2014).
Finally, measurement robustness checks were performed, since there is no univocal measure for economic recession (Pape et al., 2016). First, CB-SEM was performed based on the yearly percentage change of the unemployment rate in relation to the previous year (dummy coded 1 for positive, 0 for negative). Secondly, CB-SEM was executed based on a combination of yearly
RESULTS
In this section, the findings of this study are presented. First, preliminary test results are presented by means of descriptive statistics, correlations and the test results of the binary logistic regression. Subsequently, the findings of the path analysis are presented to confirm or reject the hypotheses as explained in the theory section. In the third section, robustness test results are explained, confirming (or not) the findings of previous tests.
Descriptive statistics and correlations
Descriptive statistics (table I) indicate that 10% of the respondents has intention to become an entrepreneur and 29% has recognized an opportunity. Furthermore, results show that 47% of the respondents has confidence in their knowledge, skills and experiences required for starting up a business. In contrast, 43% has fear of entrepreneurial failure. In the time period of this study, 21% of the cases were during the economic recession.
Table I Descriptive statistics
Variable N Mean StDev
(1) Entrepreneurial intention 511.105 ,100 ,298
(2) Fear of entrepreneurial failure 511.105 ,430 ,496
(3) Self-efficacy 511.105 ,470 ,499
(4) Opportunity recognition 511.105 ,290 ,456
(5) Economic recession 511.105 ,210 ,410
* Remainder of the table available in appendix I
Regarding the correlations between the main variables (table II), it can be concluded that there is no multicollinearity (value above ,500). Concerning the control variables, there is one variable exceeding the threshold of ,500, namely the correlation between economic recession and 2009. Anyhow, this is reasonable since 2009 was the major shock of the recent economic recession. On top of that, since the VIF score of 2,122 is not above the critical level of 5,000 it was decided to keep the variable in the model. All other correlations were below the threshold value of ,500.
Table II Correlation matrix
Variable 1 2 3 4 5
(1) Entrepreneurial intention 1,00
(2) Fear of entrepreneurial failure -,071*** 1,00
(3) Self-efficacy ,190*** -,140*** 1,00
(4) Opportunity recognition ,142*** -,092*** ,131*** 1,00
(5) Economic recession -,008*** ,064*** ,016*** -,134*** 1,00
Pre-analysis
While controlling for, among others (appendix II), economic recession, previous widely studied effects of individuals’ attitudes and perceptions on entrepreneurial intention are tested and presented in table III. Strong suggestive evidence was found for the relationship between (H1) fear of entrepreneurial failure and entrepreneurial intention (b= -,261, P<,001), between (H2) self-efficacy
and entrepreneurial intention (b= 1,292, P<,001) and between opportunity recognition and
entrepreneurial intention (b= ,745, P< ,001). Respectively, as shown in Table III, self-efficacy seems
to have the strongest effect (EXP b= 3,641) on the likelihood of an individual having the intention to
become an entrepreneur, followed by opportunity recognition (EXP b= 2,106) and fear of
entrepreneurial failure, creating ,330 times less likelihood to have the intention to start an own venture.
Besides individuals’ attitudes and perceptions, the direct effect of an economic recession was tested (H4). Remarkably, this test shows a strong suggestive contradicting result for the effect of an economic recession on individuals’ intention to become an entrepreneur. Instead of a negative effect of economic recession on entrepreneurial intention, results show that an economic recession has a significant positive effect (b= ,325, P<,001) on individuals’ intention to become self-employed. More
specifically, in times of an economic recession the likelihood of individuals having the intention to become self-employed is 1,384 times higher than in times of no economic recession. Finally, Nagelkerke R2 reveals that 15,1% of the variation is explained by this (simple) model, which falls within the norm for a logistic regression (Dana, Ratten & Honyenuga, 2018).
Table III Logistic regression entrepreneurial intention
Variable b S.E. (EXP) b
Constant -2,661 ,052 ,070
(2) Fear of entrepreneurial failure -,261*** ,011 ,770
(3) Self-efficacy 1,292*** ,011 3,641
(4) Opportunity recognition ,745*** ,010 2,106
(5) Economic recession ,325*** ,019 1,384
Nagelkerke R2 ,151
* † P ≤ .10, *P ≤ .05, **P ≤ .01, ***P ≤ .001 ** Remainder of the table available in appendix II
Path analysis
To perform the path analysis, the coefficients and standard errors were standardized, while controlling for the control variables, by means of the equations proposed by Jose (2013). Table IV shows the results of these tests. The tests confirm the previous finding regarding hypothesis 4,
recession has a positive effect on fear of entrepreneurial failure (b= ,019, P<,010) and (H5b) fear of
entrepreneurial failure mediates the relationship between economic recession and entrepreneurial intention (b= -,003, P<,010). Based on this, it can be concluded that there is enough statistical
evidence for hypothesis 5, meaning that in the presence of an economic recession, individuals are more likely to be afraid of entrepreneurial failure, which in turn negatively affects the chance that individuals have the intention to become self-employed. Hypothesis 6 predicts that the negative effect of an economic recession on entrepreneurial intention is (partly) mediated by reducing self-efficacy. However, results indicate contradicting findings, since (H6a) an economic recession has a positive and significant effect on self-efficacy (b= ,098, P<,001) and (H6b) the mediation effect is positive (b= ,066,) and significant (P<,001) as well. Hence, there is statistical proof for a positive mediation effect,
instead of a negative mediation effect. Based on this, it is indicated that in the presence of an economic recession, self-efficacy increases, which in turn increases the chance that individuals have the
intention to become an entrepreneur. Further statistical tests reveal that, (H7a) an economic recession significantly reduce opportunity recognition (b= -,344, P<,001), and (H7b) opportunity recognition
significantly mediates the relationship between economic recession and entrepreneurial intention (b= -,139, P<,001). More specifically, in times of an economic recession, individuals are less likely to
recognize an opportunity which in turn attenuates the chance of having the intention to become self-employed. With respect to effect sizes, these standardized results show that opportunity recognition has the largest indirect effect, followed by self-efficacy and fear of entrepreneurial failure.
Table IV Standardized mediation effects
Fear of entrepreneurial failure (M)
Self-efficacy (M) Opportunity recognition
(M)
b S.E. b S.E. b S.E.
M ¬ X ,019** ,007 ,098*** ,007 -,344*** ,008
Y ¬ M -,143*** ,006 ,669*** ,006 ,403*** ,005
Y ¬ X ,178*** ,010 ,168*** ,010 ,176*** ,010
Indirect effect -,003** ,001 ,066*** ,005 -,139*** ,004
* † P ≤ .10, *P ≤ .05, **P ≤ .01, ***P ≤ .001
** X= independent variable (economic recession), Y= dependent variable (entrepreneurial intention),
M= mediator
Robustness and invariance tests
overview see appendix III). Results confirm previous evidence for the direct relationships of economic recession on: (H4) entrepreneurial intention (b= ,029, P<,001), (H5a) fear of entrepreneurial failure (b= ,077, P<,001), (H6a) self-efficacy (b= ,018, P<,001) and (H7a) opportunity recognition (b= -,149, P<,001). Moreover, results indicate significant proof for the indirect relationships of economic
recession towards entrepreneurial intention via: (H5b) fear of entrepreneurial failure (b= -,001, P<,050), (H6b) self-efficacy (b= ,002, P<,010) and (H7b) opportunity recognition (b= -,010, P<,050). In conclusion, all above mentioned findings are confirmed by the covariance-based SEM.
Although the effect and significance of all coefficients are identical compared to the previous tests, there could be observed some difference in the coefficient values. One reason for this is the fact that the CB-SEM is based on summary data in contrast to raw data that was used for the pre- and path-analyses (main analysis). More specifically, the test coefficients of the pre- and path-analysis were based on log odds, but the CB-SEM path coefficients were based on the covariance-variance matrix. Furthermore, within the path-analysis based on Jose (2013) each (indirect) path was calculated separately, in contrast to the CB-SEM including all path analyses together, leading into different coefficients.
* † P ≤ .10, *P ≤ .05, **P ≤ .01, ***P ≤ .001
** Between parentheses= indirect effect, without parentheses= direct effect
Figure III Results covariance based structural equation modelling
Additionally, indirect effect sizes can be calculated by multiplying the coefficients of each path. Resulting in the indirect effect of economic recession on entrepreneurial intention via fear of entrepreneurial failure being -,001, via self-efficacy being ,002 and via opportunity recognition being -,010. As shown in table V, the total effect of economic recession on entrepreneurial intention is ,019. Interestingly, the findings suggest that 47% of the total effect of economic recession on
Table V Direct, indirect and total effects
Relation b S.E.
Direct effects
(2) fear of entrepreneurial
failure ¬ (5) Economic recession ,077*** ,002
(3) Self-efficacy ¬ (5) Economic recession ,018*** ,002
(4) Opportunity recognition ¬ (5) Economic recession -,149*** ,002 (1) Entrepreneurial intention ¬ (5) Economic recession ,029*** ,001 Indirect effects
(1) Entrepreneurial intention ¬ (5) Economic recession
(via fear of entrepreneurial failure) -,001* ,001 (1) Entrepreneurial intention ¬ (5) Economic recession
(via self-efficacy) ,002** ,001
(1) Entrepreneurial intention ¬ (5) Economic recession
(via opportunity recognition) -,010* ,001 Total (direct + indirect effects)
(1) Entrepreneurial intention ¬ (5) Economic recession ,019** ,002
* † P ≤ .10, *P ≤ .05, **P ≤ .01, ***P ≤ .001
When testing for invariance, the chi square difference test results (table VI) in c2=-7179,158
and a P-value of 1,000 indicating no difference at the model level when comparing the model between prior and post economic recession. At the path level, likewise, results indicate that there is no
statistical evidence at the confidence level of 95%, to confirm that there is non-invariance between the prior and post economic recession sample. Hence, the paths are assumed to be equal before and after the shock of an economic recession.
Table VI Chi square difference test between prior and post economic recession
Relation DF c2 Sig.
Structural weights 41 -7179,158 1,000
(2) Fear of entrepreneurial failure
¬ (5) Economic recession 1 -14190,949 1,000
(3) Self-efficacy ¬ (5) Economic recession 1 -13713,540 1,000
(4) Opportunity recognition ¬ (5) Economic recession 1 -15314,190 1,000 (1) Entrepreneurial intention ¬ (2) Fear of entrepreneurial failure 1 -17263,507 1,000 (1) Entrepreneurial intention ¬ (3) Self-efficacy 1 -12964,665 1,000 (1) Entrepreneurial intention ¬ (4) Opportunity recognition 1 -10643,092 1,000
* † P ≤ .10, *P ≤ .05, **P ≤ .01, ***P ≤ .001
except H6. For H6 there is no statistical evidence for (H6a) economic recession affecting self-efficacy
(b= ,001, P=1,000) and (H6b) the mediation effect (b= ,001, P=,964). Nevertheless, if CB-SEM is
performed with economic recession based on a combination of yearly GDP and unemployment rate (appendix V), both H6a (b= ,023, P<,001) and H6b (b= ,002, P<,050) are confirmed, as well as the
remaining hypotheses. In conclusion, hypothesis 6 needs to be interpreted with some caution, but overall the path model and corresponding hypotheses are robust.
DISCUSSION
This study provides evidence for most theories discussed before, as well as providing new insights into the field of entrepreneurial intention literature. With respect to the direct effects of individuals’ entrepreneurial attitudes and perceptions (while controlling for economic context), results indicate a significant negative effect of (H1) fear of entrepreneurial failure on individuals’ intention to become self-employed and positive effects of (H2) self-efficacy and (H3) opportunity recognition on individuals’ intention to become self-employed. These results support evidence from previous observations (e.g. Boudreaux, Nikolaev & Klein, 2019; Cacciotti & Hayton, 2015; Zhao, Seibert & Hills, 2005).
individuals having the intention to become self-employed (Audretsch et al., 2004). In conclusion, one could argue that an economic recession decreases the opportunity costs via interest rates,
unemployment and switching costs, which might force individuals to become self-employed even in a non-favorable environment. This argument is already partially confirmed by the studies of Fairlie (2013) and Konon et al. (2018). Besides opportunity cost arguments, it is also questionable if an economic recession is a non-favorable context to startup a business. In this study, it was argued that individuals perceive reduced access to external finance and the supply of products and services in times of an economic recession as a non-favorable context to startup a venture. But, on the other hand, economic recessions in general cause lower production and entry costs (Konon et al., 2018).
Furthermore, in times of high unemployment there is more and lower-cost labor available (Fairlie, 2013; Konon et al., 2018), which from an entrepreneurs’ point of view makes it more attractive to startup a business.
Regarding the indirect effects, H5 was confirmed, indicating that fear of entrepreneurial failure increases in times of an economic recession which in turn reduces the chance that individuals have the intention to become an entrepreneur. Although the relatively small impact, it is expected that a higher chance of going bankrupt during an economic recession is the reason for this indirect effect.
One unanticipated finding (that should be treated with some caution) was the positive indirect effect of self-efficacy. This finding contradicts to H6, meaning that in times of an economic recession, individuals’ self-efficacy enhances, which in turn increases the likelihood of having the intention to become self-employed. Based on the argument of Bandura (1990), it was expected that in times of an economic recession individuals have less self-efficacy due to higher complexity in tasks and perceived risk and danger. However, the opposite seems to be true. This discrepancy might be attributed to overconfidence, a bias often observed at (potential) entrepreneurs. Since, Hayward, Shepherd and Griffin (2006) found that individuals become increasingly overconfident when they are involved in complex tasks and future outcomes are more uncertain, it is likely that in times of an economic recession this could positively bias the perception of self-efficacy. Based on this, another path model than was tested in this study is proposed, wherein economic recession positively influences
overconfidence due to higher complexity and uncertainty, which in turn increases self-efficacy and by means of that improves entrepreneurial intention.
that economic recession has the largest direct impact on opportunity recognition which in turn increases the effect of opportunity recognition on entrepreneurial intention.
The above-mentioned findings are found to be robust when applying different measures for economic recession. Hence, this study found proof for the argument of Mazurek and Mielcová (2013), meaning that measuring economic recession with quarterly GDP rate, at least, performs equal to other economic recession measures, or a combination of those. Furthermore, it was found that the mediation mechanisms are robust and apply to the whole timeframe of this study. In other words, the indirect effects are not different after an economic recession in comparison to before an economic recession.
CONCLUSION
The central goal of this study was to investigate how an economic recession influences individuals’ intention to become an entrepreneur. Contrary to the expectations, an economic recession has both a positive and negative (indirect) impact on individuals’ intention to start an own venture. More specifically, results suggest that an economic recession has an upward effect on entrepreneurial intention directly and indirectly via self-efficacy. While at the same time, economic recession
negatively influences individuals’ intention to become self-employed indirectly via fear of entrepreneurial failure and opportunity recognition.
White, 2003). However, in order to guide policymakers more properly, more research is needed. Future research could therefore focus on the effects of federal R&D investments, increasing
bankruptcy exemption levels, education, providing knowledge and connecting non-entrepreneurs to entrepreneurs on entrepreneurial intention in times of an economic recession.
Besides, future research could improve the path model, by involving opportunity cost theory to investigate the propositions mentioned above. Within this, it might be wise to distinguish necessity driven entrepreneurs from opportunity driven entrepreneurs, since their opportunity costs differ (Block & Wagner, 2010). Furthermore, this study opens a new question regarding the effect of
overconfidence in times of an economic recession. Empirical research could test the proposed path model concerning the indirect effect of overconfidence towards self-efficacy and in turn on
individuals’ intention to become an entrepreneur. In spite of these limitations, in general the model performed well and therefore future research could investigate the path model throughout the different stages of entrepreneurial process theory. Since this study only focused on the early stage of
entrepreneurship, future research could focus on at startup, post startup, maturity and closure stages of entrepreneurship.
Although several measurement robustness checks concerning economic recession were performed, this study is limited by lacking information about individuals’ perception of an economic recession. Therefore, this study analyzed economic recession on a macro level while individuals’ perceptions and attitudes were measured on an individual level. Future research could follow the method of Nabi and Liñán (2013) analyzing economic recession on an individual level to check for robustness of the findings of this study.
One could also have some concerns about the generalizability of this study for two reasons. First, due to lacking available GEM data of the twentieth century, this study only investigated the economic recession of 2009. Hence, it remains unclear if the findings can be generalized to previous economic recessions. Secondly, this study only focused on (some) European countries, not accounting for other regions across the world. However, research found that the financial, legal and social
consequences of entrepreneurial failure differ across nations. For example, entrepreneurial failure in the United states is seen as a learning process, but entrepreneurial failure in most countries of Europe is seen as something shameful and is often related to negative financial and legal consequences (Vaillant & Lafuente, 2007). Therefore, one could expect that different consequences of
entrepreneurial failure could cause different results of the path model across the world. Concluding on above, future research could investigate whether the path model holds in different economic recessions and regions across the world.
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APPENDIX Appendix I – Remainder Table I Descriptive statistics
Appendix III – Covariance Based Structural Equation Model
Relation b S.E.
(2) Fear of entrepreneurial failure ¬ (5) Economic recession ,077*** ,002
(3) Self-efficacy ¬ (5) Economic recession ,018*** ,002
(4) Opportunity recognition ¬ (5) Economic recession -,149*** ,002 (1) Entrepreneurial intention ¬ (2) Fear of entrepreneurial failure -,019*** ,001
(1) Entrepreneurial intention ¬ (3) Self-efficacy ,099*** ,001
(1) Entrepreneurial intention ¬ (4) Opportunity recognition ,070*** ,001 (1) Entrepreneurial intention ¬ (5) Economic recession ,029*** ,001
(1) Entrepreneurial intention ¬ (6) Male ,023*** ,001
(1) Entrepreneurial intention ¬ (8) 25-34 -,037*** ,001
(1) Entrepreneurial intention ¬ (9) 35-44 -,069*** ,001
(1) Entrepreneurial intention ¬ (10) 45-54 -,094*** ,001
(1) Entrepreneurial intention ¬ (11) 55-64 -,119*** ,001
(1) Entrepreneurial intention ¬ (13) Some secondary ,046*** ,001
(1) Entrepreneurial intention ¬ (14) Secondary degree ,057*** ,001
(1) Entrepreneurial intention ¬ (15) Post-secondary ,057*** ,001
(1) Entrepreneurial intention ¬ (16) Graduate ,080*** ,001
(1) Entrepreneurial intention ¬ (18) Medium income -,004*** ,001
(1) Entrepreneurial intention ¬ (19) High income -,006*** ,001
(1) Entrepreneurial intention ¬ (21) The Netherlands -,044*** ,002
(1) Entrepreneurial intention ¬ (22) Belgium ,000 ,002
(1) Entrepreneurial intention ¬ (23) France ,013*** ,002
(1) Entrepreneurial intention ¬ (24) Spain -,057*** ,001
(1) Entrepreneurial intention ¬ (25) Hungary ,011*** ,002
(1) Entrepreneurial intention ¬ (26) Italy -,022*** ,002
(1) Entrepreneurial intention ¬ (27) UK -,041*** ,001
(1) Entrepreneurial intention ¬ (28) Sweden -,039*** ,002
(1) Entrepreneurial intention ¬ (29) Germany -,016*** ,002
(1) Entrepreneurial intention ¬ (30) Ireland -,011*** ,002
(1) Entrepreneurial intention ¬ (31) Finland -,057*** ,003
(1) Entrepreneurial intention ¬ (32) Slovenia ,024*** ,002
Appendix IV – CB-SEM measurement robustness check with unemployment
* † P ≤ .10, *P ≤ .05, **P ≤ .01, ***P ≤ .001
** Between parentheses= indirect effect, without parentheses= direct effect
Relation b S.E.
Indirect effects
(1) Entrepreneurial intention ¬ (5) Economic recession
(via fear of entrepreneurial failure)
-,001* ,001
(1) Entrepreneurial intention ¬ (5) Economic recession
(via self-efficacy) ,001 ,001
(1) Entrepreneurial intention ¬ (5) Economic recession (via opportunity recognition)
-,006* ,001
Total (direct + indirect effects)
(1) Entrepreneurial intention ¬ (5) Economic recession ,006** ,001
Appendix V – CB-SEM measurement robustness check with combination measure of yearly GDP and unemployment
* † P ≤ .10, *P ≤ .05, **P ≤ .01, ***P ≤ .001
** Between parentheses= indirect effect, without parentheses= direct effect
Relation b S.E.
Indirect effects
(1) Entrepreneurial intention ¬ (5) Economic recession
(via fear of entrepreneurial failure) -,002* ,001 (1) Entrepreneurial intention ¬ (5) Economic recession
(via self-efficacy)
,002* ,001
(1) Entrepreneurial intention ¬ (5) Economic recession
(via opportunity recognition) -,011* ,001 Total (direct + indirect effects)
(1) Entrepreneurial intention ¬ (5) Economic recession ,018** ,002
