Entrepreneurship is an increasingly important phenomenon in the world economy. The OECD reports that job creation and economic growth is driven primarily by the creation and growth of young, new firms (Criscuolo, C., P. N. Gal and C. Menon, 2014). However, such new firms are vulnerable. Each year in the US,  between 750,000 and 800,000 new firms enter the market, and half of these ventures will fail in their first five years (Small Business Administration, 2012). Europe has a similarly low survival rate (Mitusch & Schimke, 2011). Because of this issue, scholarly interest in the topic of new venture survival, or the ability of new ventures to successfully start and maintain their operations, has continued to grow (Cefis & Marsili, 2006; Geroski, Mata, & Portugal, 2010; Gimmon & Levie, 2010; Helfat & Lieberman, 2002; Klapper & Richmond, 2011; Mata & Portugal, 1994).

Although scholars have used many different ideas to study survival, the dominant paradigm among these researchers is the Resource Based View (RBV; Barney, 1991). According to the RBV, competitive advantage derives from a firm’s accumulation of forms of capital (e.g., physical, human, and organizational) that are valuable, rare, inimitable, and non-substitutable. New and entrepreneurial ventures must compete on slightly different terms: before a firm can acquire competitive advantage, it must first develop competitive parity, or the ability to meet market rents, and gain legitimacy, or external perceptions of firm’s capacity to meet its goals (Lounsbury & Glen, 2001). Past RBV research on new firm survival has developed a number of useful pieces of information about the value of physical capital such as financial resources (e.g., Geroski et al., 2010; Mata & Portugal, 1994), and the value of human capital such as founder knowledge and experience (e.g., Dencker et al., 2009; Hitt, Bierman, Shimizu, & Kochhar, 2001; Kotha & George, 2012). However, there are still many questions to answer.

While past RBV research has made contributions to understanding what resources influence survival, significant questions about how entrepreneurs can make the most of their resources remain unanswered. For example, little research has examined the processes, policies and decisions through which a firm channels its extant resources into competitive parity and future survival. One possible answer to this question is how these new firms use their resources to establish HR policies that impact firm outcomes.

Past studies have investigated the HR practices of successful, established firms use (e.g., Combs, Liu, Hall, & Ketchen, 2006). However, there is little academic knowledge regarding how HR practices relate to new venture outcomes. In addition, what HR practices are evaluated matters. Although many HR practices are required (e.g., selecting employees), others practices are optional, employee-focused policies that ventures can implement to motivate or attract high-quality employees. These practices include things such as flextime, bonuses, employee stock options, and group healthcare programs (Gavino, Wayne, & Edrogan, 2012). These literature defines such practices as motivation-enhancing HR (MHR) practices (Kehoe & Wright, 2013). MHR practices have demonstrated value for large and established firms (e.g., Combs et al., 2006). When and how new ventures use such HR practices is a question research has only begun to address. In terms of the RBV, MHR practices are an example of resource-management behavior that can maximize the value of a firm’s human capital and channel that potential toward the firm’s goals of competitive parity and survival (Hayton, 2003). Although, past literature has made clear the value of managerial experience and financial resources (Carter, Williams, & Reynolds, 1997), relatively little is known about how decisions about how the use of HR policies may link initial resources to survival.

A recent study by DeGeest, Follmer, Walter, and O’Boyle (in press) sought to address this question in hopes of better understanding how new ventures can effectively use HR policies to help them survive. This study used data from the Kauffman foundation on a panel of 1100 newly-started firms tracked over seven years to investigate how these MHR practices contribute to firm survival. The key findings of this study were as follows:

Access to vetted financial resources such as bank loans generally increased the use of MHR.

• Human capital factors such as the experience or education of the founding team has little effect on the use of MHR.
• MHR has a positive effect on firm survival.
• The effect of MHR on survival depending on the age of the firm. In general, MHR has a significantly stronger, positive effect on firm survival as firms as they aged.

The findings of this study suggest that one important way that new firms’ initial sources of capital influence firm survival is through the implementation of effective HR policies, and that the value of these policies grows over time as these firms age.

Literature:

Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99-120.

Cardon, M. S., & Stevens, C. E. 2004. Managing human resources in small organizations: What do we know? Human Resource Management Review, 14: 295-323.

Carter, N. M., Williams, M., & Reynolds, P. D. 1997. Dissurvival among new firms in retail:

The influence of initial resources, strategy, and gender. Journal of Business Venturing, 12: 125-145.

Cefis, E., & Marsili, O. 2006. Survivor: The role of innovation in firms’ survival. Research Policy, 35: 626-641

Combs, J., Liu, Y., Hall, A., & Ketchen, D. 2006. How much do high‐performance work practices matter? A meta‐analysis of their effects on organizational performance. Personnel Psychology, 59: 501-528.

Criscuolo, C., P. N. Gal & C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers, No. 14, OECD Publishing. DOI: 0.1787/5jz417hj6hg6-en

DeGeest, D.S., Follmer, L. Walter, S. & O’Boyle, E. (forthcoming). The Benefits of Benefits: A Dynamic Approach to Motivation-Enhancing HR Practices and Entrepreneurial Survival. Journal of Management. 

Dencker, J.C., Gruber, M., & Shah, K.S. 2009. Pre-entry knowledge, learning and survival of new firms. Organization Science, 20: 516-537.

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Geroski, P.A., Mata, J. & Portugal, P. 2010. Founding conditions and the survival of new firms. Strategic Management Journal, 31: 510-529.

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Kehoe, R. R., & Wright, P. M. 2013. The impact of high-performance human resource practices on employees’ attitudes and behaviors. Journal of Management, 39: 366-391.

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Klapper, L., & Richmond, C. 2011. Patterns of business creation, survival and growth: Evidence from Africa. Labour Economics, 18: S32-S44.

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Mitusch, K. & Schimke, A. (2011). Gazelles–High Growth Companies. Technical Report. Access via http://ec.europa.eu/enterprise/policies/innovation/files/proinno/gazelles-final-report_en.pdf

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