"Fail better" is a popular mantra heard throughout Silicon Valley. In the U.S., lenient bankruptcy laws that don't jeopardize personal assets make it easier to fail, file for bankruptcy and move on to the next venture. However lenient bankruptcy laws are not a global norm and each country has its own laws, some more restrictive than others.
Charles Eesley, an assistant professor in the department of management science and engineering and at the Stanford Technology Ventures Program, has been been studying how changes in bankruptcy laws affect entrepreneurs. Specifically, Eesley and his collaborators, Kathleen Eisenhardt, and Robert Eberhart, an assistant professor at Santa Clara University, analyzed venture formation in Japan during a ten-year period from 1998-2007. This period also encompassed the comprehensive bankruptcy reforms enacted in 2003 in efforts to spur innovation and to change the perception of failure being a negative consequence.
Last month, a study was published in Organization Science that analyzed the results of their research. Following is a Q&A with Eesley about his research:
Q. Your research in Japan focuses on a subset of entrepreneur, the elite entrepreneur. What is an elite entrepreneur?
We define an elite entrepreneur as one who attended a top university. For our dataset, we defined these to include the seven former imperial universities (Tokyo, Kyoto, Hokkaido, Tohoku, Nagoya, Osaka, and Kyushu), and following literature, we add the Tokyo Institute of Technology (the top engineering university) and two leading private universities, Keio University and Waseda University. These ten institutions are consistent with the top universities named in well-known rankings, such as the London Times/QS rankings (Times Higher Education 2011). Personally, I have a particular interest in the careers and entrepreneurial activities of the alumni of elite universities.
Q. Why would an elite entrepreneur be more likely to form a company after lenient bankruptcy reforms are enacted?
After lenient bankruptcy reforms are enacted, elite entrepreneurs are more likely to form a company. Such individuals are influenced to a greater extent because they tend to have high opportunity costs in the form of good job opportunities and more personal wealth at risk in the event of a bankruptcy. The bankruptcy reform particularly influences these individuals because it protects their personal wealth in the event of a bankruptcy, speeds up the bankruptcy process so they can move on more quickly, and allows them greater freedom to pursue the kind of high risk, high reward ventures that are attractive to them.
Q. Not only do elite entrepreneurs create more firms, but they also create better performing ones. Why is that the case?
This is the case for two main reasons. First, these entrepreneurs are highly educated and tend to have a high level of skills owing to their elite level education and the training and experience it provides. Second, they also tend to have high levels of social capital. Their education and work experiences have provided them with strong social networks that they can leverage in creating their ventures. It's what AND who you know that makes the difference.
Q. Do you think the concept of the elite entrepreneur is specific to Japan or can it be generalized for other countries?
Definitely the concept can be generalized to other countries. What we are really interested in is the career choices of the best and the brightest in what fields they go into and apply their talents in. Nearly every country has at least one and often many more top tier, prestigious research universities that educate and train those who eventually reach the elite levels of government, business and academia. Outside of the U.S., Peking University and Tsinghua University in China, Universidad Catholica, a top engineering school, in Chile and Technion University in Israel would be included in this class of top tier institutions. In the U.S., I think most people would count Stanford alongside perhaps MIT, Caltech, Harvard, and the rest of the Ivy League as elite, top tier universities. Many of the most successful entrepreneurs trace the roots of their ventures to the education and training they received at these universities. I'm particularly interested in the alumni of elite universities, since it's personal for me as this is the group of bright, talented, hardworking students that I love teaching here at Stanford. Many of my other studies involve Stanford and MIT alumni.
Q. What are the implications for government policies?
An important implication is that bankruptcy laws are important policies for governments to structure carefully because they have a strong impact, not only on investors but also on entrepreneurs.
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