The population of many western countries are aging rapidly, but whilst there have been numerous explorations of the impact this may have on the economy as a whole, few have explored how this might impact entrepreneurship. New research from Stanford Graduate School of Business aims to fill that gap.
The researchers suggest that an older society harms entrepreneurship because it prevents people from gaining valuable skills and experience in business at an earlier age, which in turn discourages them from starting a business.
“Workers in younger countries have more skills relevant for entrepreneurship at every age,” they explain. “In younger societies, managers obtain the skills necessary to start their own businesses earlier, which leads to more overall business formation.”
A startup culture
The researchers compiled data on both the average age of workers in a country and the level of entrepreneurship. This latter metric was pulled from the Global Entrepreneurship Monitor, which aims to rank levels of entrepreneurship across over 80 countries.
The analysis revealed that younger people were generally more likely to start a new business, and as a consequence, countries with a younger median age were more likely to have high levels of entrepreneurship.
The researchers believe this is down to something they refer to as the ‘rank effect’, which is when younger workers are unintentionally kept in lower-ranked positions due to the presence of more senior colleagues higher up the hierarchy. This in turn denies the younger people the kind of business experience they would find invaluable when starting out on their own.
“The whole hypothesis is that the old [people] block the young [people],” they explain. “In younger countries, where even the ‘old’ are young, there is more opportunity for entrepreneurship overall.”
Entrepreneurial skills
Central to their hypothesis is the belief that youth provides an inherent advantage for entrepreneurs, not least in the apparent boost to our creativity and energy levels at a young age. This, coupled with a greater willingness to take risks makes people more likely to start a business in their younger years.
This creativity and energy needs a degree of business acumen however in order for it to be turned into successful enterprises. This is something that can only really be gained through experience, especially in decision-making positions.
The researchers cite Brazil and Japan as examples where the rank effect is especially influential. In Brazil, their average age is just 26, and their rate of entrepreneurship is around five times that of Japan, whose average age is 44.
“If you live in Japan and you’re a 30-year-old, the chances of you getting high enough to learn what it takes to start your own business are pretty slim,” the authors say. “In Brazil, by 30, a larger fraction of workers have advanced to managerial positions—if they haven’t already left to start their own companies.”
The team then applied this rationale to the United States, where there is considerable diversity both in terms of entrepreneurialism and median age across the different states. As they predicted, the communities where young people are given more opportunities to sharpen their business skills had higher levels of entrepreneurialism.
“The younger you are when you acquire skills, the more likely you’ll go someplace else to apply them,” the authors explain. “That’s why Silicon Valley had so much business formation. It had all these young people who acquired these tremendous skills quickly, then they left wherever they were, went out, and started businesses of their own.”
Encouraging entrepreneurship
Most countries want to encourage entrepreneurship among citizens, so what can they realistically do? The motto seems very much be to encourage or enable young people to get solid business experience at a young age. Obviously employers can play a part in that by having a more meritocratic environment, whilst if you’re an individual with entrepreneurial leanings, you may wish to choose a company that gives you such prospects, even if this is likely to mean a much smaller employer.
Interestingly, the authors also believe that retirement age plays an inevitable role, as forcing/encouraging people to retire earlier has the inevitable effect of taking people out of the workforce. Whether that’s beneficial for the overall economy however is another matter, as rising life expectancies mean most countries are rising the retirement age rather than lowering it.
“At the end of the day, it’s all about what sort of experiences you’re going to get in a position,” the authors conclude. “Younger environments are quicker to provide the needed entrepreneurial skills to those who want to start their own businesses.”
