Oct 22, 2012

Entrepreneurship in Mexico

From a the new working paper titled "Intergenerational Mobility and Income Effects for Entrepreneurial Activity in Mexico" (Vélez-Grajales & Vélez-Grajales, July 2012):
According to the definition used in this work [". . . entrepreneurs as those who report being owners or partners" p. 7], 8.3 percent of the male individuals in the sample are entrepreneurs. In comparison with the whole sample, entrepreneurs’ monthly household income is 35 percent higher. Once social classes are defined, 7.6 percent of middle-class individuals report being entrepreneurs, 5.7 percent for the lower classes and 16.9 percent for the upper classes. 
In order to analyze whether entrepreneurial activity is a good vehicle for mobility, a wealth asset index is estimated for two birth cohorts—1942-1964 and 1965-1981—of respondents and their parents. Numbers from the intergenerational transition matrices for respondents and their parents’ asset indices suggest that there are more options for entrepreneurs’ upward mobility, but also that for entrepreneurs with lower-class parents it is more difficult to move to the top quintile. Results of the econometric analysis suggest that, as opposed to self-employed and employed individuals, the wealth of entrepreneurs is determined to a higher degree by their parents’ wealth, at least for the younger generation, i.e., those born between 1965 and 1981. 
In the second part of the study, probit models are estimated to identify the determinants of the decision whether to become an entrepreneur. The independent variables include predetermined respondents’ socio-demographic characteristics. Results show that the probability increases when the respondents’ father was an entrepreneur. This positive effect is also obtained within economic sectors. Having an entrepreneur father is an important predictor of entrepreneurial activity in the service sector. Also, the probability of becoming an entrepreneur is higher for those whose father worked in a large firm, as opposed to a SME or microenterprise. It can be concluded that in Mexico, the decision to become an entrepreneur is strongly determined by the father’s occupation, and not necessarily by the individual’s initial wealth or educational attainment. 
Finally, using the propensity score matching method, the mean effect of entrepreneurial activity on income is estimated. Applying the “caliper” method, for the group of all entrepreneurs, entrepreneurship is found to increase income by 17 percent. When the exercise is made by socioeconomic classes, the effects observed for entrepreneurs with parents who belonged to the extreme quintiles, i.e., the first and fifth, are significantly higher than that observed for entrepreneurs with middle-class parents. 
Previous results suggest that entrepreneurs are exceptional individuals, or outliers. Also, barriers to entrepreneurial activities increase the relative effect on income. 
The analysis has some limitations. The most important one is that it is not possible to identify all entrepreneurs who were engaged in entrepreneurial activities before the survey was conducted. Therefore, the results might be biased towards successful entrepreneurs. Further analysis should be done to arrive at some policy implications. For example, it is important to analyze whether credit restrictions limit options to increase the number of successful entrepreneurs. In any case, not all individuals have the potential to become entrepreneurs, just as not all individuals have the potential to become pianists or professional baseball players.

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