This research looks at growth intentions of nascent entrepreneurs and growth configurations of existing enterprises in Germany in terms of personal, business and environmental characteristics. Whilst more than 3/4 of the nascents intend to grow, only a slight majority of all existing enterprises have employees. Moreover, growth profiles of nascents and entrepreneurs differ with respect to personal and business characteristics. Gender, education and industry environment appear to be the most important factors which influence growth intentions and business growth in different ways. Even if we take into account data limitations, these results question the realization of growth intentions. Reasons could be external barriers such as limited access to resources but also an increasing personal awareness of obstacles to growth during the starting process which results in reconsidering initial business aims.

Politicians in Germany and elsewhere increasingly promote the idea of self-employment and business creation as one solution for growing unemployment. However, recent research points out an increasing number of micro enterprises such as firms without employees, low-income businesses, part-time activities etc., which questions the economic success of such businesses, especially with respect to their employment potential. On the other hand, data from a pilot study of nascent entrepreneurs indicates that the majority aims to grow. This raises key questions concerning business development in Germany which this paper will explore: Which factors appear to influence growth expectations, looking at nascent entrepreneurs, which factors influence the growth of existing entrepreneurs? Which factors hinder business growth and development in Germany? Is it possible to identify these ‘bottlenecks’ already in the nascent phase of a business, even taking into account that a number of these nascent business will never become fledgling firms? In this context the paper discusses growth intentions and potential growth paths of (nascent) entrepreneurs, analyzing them within the business formation process conceptually by drawing on theories about the factors influencing business growth (part 2) and empirically drawing on own research and statistical data (part 3). Part 4 presents limitations and conclusions, and discusses further research questions.

Enterprise growth has been a well researched topic for years. In evolutionary terms, business growth and development is to be understood as an open process with an unpredictable outcome. Growth therefore is also related to adaptation and learning which occurs during the process of dealing with the business environment (Birley, Westhead 1994). Besides this process perspective, previous research indicates several ‘static’ factors of influence. These include the entrepreneurs themselves, their professional background and their entrepreneurial capabilities and preferences, the branch and technological environment as well as the macro environment. In this context, Gibb and Davies (1990) identify four approaches to research business growth which either concentrate on the personality, on business management, on sectoral and broader markets, or on organizational development. Here, enabling or constraining factors are reviewed with respect to two main questions: (1) can firms grow and (2) do entrepreneurs want their firms to grow?

Can firms grow? This question suggests practical impediments to growth (Johannisson 1990) which could refer to either personal capabilities of the entrepreneurs and to internal or external resource constraints for the business. Demographic characteristics (gender, age) can influence growth paths in that female and younger entrepreneurs often have limited access to external resources to grow their businesses e.g., Brush 1992; Hinz 1998; Rosa et al 1996). For example, studies in Germany show that female entrepreneurs start with less capital and their enterprises stay smaller in terms of employment and turnover compared to businesses led by male entrepreneurs (Dickwach, Jungbauer-Gans 1995, Brüderl et al. 1996). On the other hand, Storey (1994) who provides an extensive review of studies researching growth factors could not confirm a gender-specific influence on business performance.

Another important factor influencing growth is the human capital of the entrepreneur such as schooling, professional, management and branch experience, previous entrepreneurship. Human capital plays an important role with respect to entrepreneurial know-how as well as with respect to access to external resources. In this context, research showed for example that in general, every second new entrepreneur in West Germany previously worked in the same branch (Pannenberg 1997, 1998). Brüderl et al. (1996) demonstrated for their sample of Bavarian new entrepreneurs that entrepreneurs are significantly more likely to set up larger enterprises in terms of initial capital and initial employment when they have long professional and previous sectoral experience as well as management experience and previous experiences in self-employment. Here, research indicates that habitual entrepreneurs succeed more often in starting another business, due to already existing networks or their ability to recognize business opportunities whilst the previous entrepreneurial experiences themselves do not play a significant role in explaining any differences (e.g., Alsos, Kolvereid 1998, Westhead, Wright 1998). Recent research also indicates that unemployment (and thus a lack of professional experience, and of self-confidence) plays a major role with respect to business success in terms of employment growth (Hinz, Jungbauer-Gans 1999). Employment growth is significantly lower in businesses of unemployed founders, and it is connected to the duration of unemployment.

Environment and the institutional infrastructure also influence growth paths. This refers to institutional factors such as labor markets and laws which could affect the ability of entrepreneurs to obtain additional employees. Another factor concerns credit markets where research often discusses credit rationing behavior of banks towards new and small entrepreneurs, but without reaching conclusive results (Cressy, Olofsson 1997). However, a recent study for Germany demonstrates that especially high growth oriented technology firms experienced difficulties in securing adequate external finance, thus pointing to the lack of venture capital in Germany (Audretsch, Elston 1997). This also refers to the general macroeconomic situation as new firms generally have a smaller resource base as well as less experience in dealing with, e.g., sharp drops in demand, which in turn will influence their long-term survival and success. And of course the social environment (networks and support from the family) plays a role in facilitating or constraining growth as has been demonstrated by several studies (e.g., Aldrich 2000, Brüderl et al. 1996).

Finally, regional and sectoral environments set enabling or constraining factors for business growth. Growth possibilities differ across regional environments reflecting the endogenous regional resource base in terms of, e.g., skilled labor, support programmes or university infrastructure as well as the region-specific potential such as regional income (Sternberg, Tamasy 1999). Moreover, research observed that regional concentration of sectors also played a role in fostering growth of young firms (Almus, Engel, Nerlinger 1999). In general, sectoral environments also influence enterprise growth paths, due to the life cycle of the sector. Growth potentials are more likely in young and emergent sectors, whilst mature and shrinking branches offer less possibilities. Furthermore, sectoral environments could result in different investment strategies for successful growth performance (Smallbone et al. 1995).

All that leads to the second question whether entrepreneurs want their firms to grow, which concerns the growth willingness of entrepreneurs. Whilst theoretically initial growth is desirable to overcome the ‘liability of smallness’ (Aldrich, Auster 1986) and to secure a sufficient resource base, personal growth ambitions play an important role in shaping any growth paths. This refers to self-imposed psychological barriers in those cases where entrepreneurs (wrongly) perceive that they may not have the possibilities and know-how to grow their companies. For example, research for German entrepreneurs confirm a general negative self-selection tendency for previously unemployed entrepreneurs and also for female entrepreneurs (e.g., Hinz, Jungbauer-Gans 1999, Welter 2000). Davidsson (1992) identified growth motivations which he sees as a function of perception, needs and opportunities, as the most important factor influencing growth paths.

Here, research demonstrated that motivation structures differ between employed and unemployed business founders: Push motives played a more important role for unemployed founders, pull motives for employed ones (Hinz, Jungbauer-Gans 1999). Not surprisingly, (expected) job loss was one of the priority motives for unemployed founders to start their enterprise while employed founders emphasized personal independence. Motivation also shows gender-specific differences where for example male craft entrepreneurs in West Germany were more likely to lay emphasis on a general interest in self-employment whereas female craft entrepreneurs ranked professional independence first, while generally securing a job played a more important role for women than for men (Welter 1996). Again, also age plays a role as younger entrepreneurs could be more growth oriented than older ones since they want to test their abilities whilst the older entrepreneurs have more realistic views of their possibilities (Kangasharju 2000).

To sum up, business growth is affected through a variety of personal and environmental factors, although the discussion above neglected the influence of subjective perceptions. Growth intentions are related to personal perceptions of the business environment as well of the entrepreneur’s abilities, i.e., they involve the individual sensemaking of the entrepreneur (Weick 1995). This however would need a process-oriented study, concentrating on modes of action and sense-making as well as interactions between the entrepreneurs and their environments. Our empirical results only allow us to discuss some of the ‘static’ growth factors which were presented in this chapter.

Method

Data presented below are based on own research and aggregated longitudinal statistical data. Our own sample consists of 1,945 individuals living in Germany and aged above 18 years who were interviewed in spring 1999. 2.3% of the sample are nascent entrepreneurs who were questioned with respect to their business aims in terms of employment size. The latter will be used as an equivalent for growth intentions. This data allow us to construct growth profiles of nascent entrepreneurs in terms of demographic characteristics, professional background, entrepreneurial experiences and industry environment.

The micro census which is based on a yearly 1%-representative sample of the German population, collects data for self-employment, distinguishing between the self-employed entrepreneurs working on their own and self-employed with employees. This aggregated data will be used to discuss the longitudinal development of micro enterprises as well as demographic characteristics (gender, age) of existing entrepreneurs and their business characteristics (branch). This allows us to discuss growth versus non-growth configurations of existing enterprises, based on actual employment data.

Results

Longitudinal data from the micro census shows a rising non-agricultural self-employment quota over the past 20 years with micro enterprises gaining importance and the self-employed with employees decreasing in share (Table 1). Here we use the self-employment quota excluding agriculture because micro enterprises play a dominant, albeit decreasing role in agriculture. The share of micro enterprises in agriculture amounted to 75.4% in 1975 and to 69.3% in 1998. Looking at growth rates, the total number of micro enterprises increased by 80% over two decades, while the number of enterprises with employees increased by 37%. Thus, the rising absolute entrepreneurship (self-employment) results mainly from the growth in the total number of micro enterprises which amounts to 1.3 million in 1999 compared to 742,000 in 1975. In contrast: in 1975 enterprises with employees constituted 58% of all self-employment (1.0 million), in 1999 their share decreased to 51.5% with the total number of 1.4 million being only slightly larger than for micro enterprises. Services are the sector where micro enterprises gained most importance, even when taking into account that new sectoral definitions shifting single branches were introduced in 1993. Their share rose from 45% in 1975 to 58% in 1999.

A comparison of growth configurations for nascents and entrepreneurs allows some interesting, although preliminary observations. A first look at growth intentions of nascent entrepreneurs, considering above/below average growth intentions, indicates significant differences with respect to gender, age, professional experiences as well as the business and regional environment (Table 2). The growth profiles of entrepreneurs differ mainly with respect to age, professional background and business characteristics. That means that younger nascents, but older entrepreneurs, nascents without any professional degree, but entrepreneurs with higher degrees and nascents preparing a start-up in trade and services, but entrepreneurs with enterprises in industry display an above average growth orientation. In terms of gender and regions, growth profiles of entrepreneurs show similar trends, compared to growth intentions of nascents.

Who is going to realize his/her growth intentions? Data from our own sample and the micro census show that in comparison to 3/4 of all nascents who intend to grow, only slightly more than half of all existing enterprises did grow in the sense that they have employees (Table 2). Of course, the differences between nascents with growth intentions and entrepreneurs who did grow in terms of employment could be a result of the fact, that mainly nascents with growth intentions give up throughout the process of business formation. The prevalence rate for nascent entrepreneurs in Germany amounts to 2.3% or approximately 800,000–1.2 million whilst statistical data for start-ups show 300,000–500,000 new enterprises per year. Between 30% and 20% of all nascents might realize their venture. Data on nascents for other countries confirm that between 30% in the Netherlands, 33% in Sweden and 14% in Norway manage to set up a business (van Gelderen, & Bosma 2000; Alsos, Ljunggren, & Rotefoss 2000).

With respect to the realization of growth intentions, our data thus only allow for very basic reasoning because (1) we do not know how many nascents will make it through the formation process, (2) the two samples represent different years and (3) a direct match between both samples is not possible. Nevertheless, in order to get an approximate idea of potential growth barriers we calculated the realization quota, as the quotient “enterprises with employees/nascents with growth intentions” (last column in Table 2). This indicates, that around 2/3 of nascent entrepreneurs would manage to realize their growth intentions. We, however, did not correct this rate to take into account that not every nascent realizes his/her venture, because this would need more detailed information on who exactly makes it through the business formation process than our sample provides. Looking at personal and business growth characteristics in more detail there are even so some interesting results, themselves indicating several further opportunities for more detailed research.

Older entrepreneurs appear to be more successful in realizing growth intentions compared to younger entrepreneurs and those without a degree. Therefore, the age trend seems to indicate that younger entrepreneurs are more likely to own micro enterprises despite their high growth intentions while older persons have larger enterprises despite their low growth intentions as nascents. However, this result is not surprising given that 70% of new entrepreneurs do not create jobs initially (Lageman et al. 1999) and the average age of a new entrepreneur is 36 years (Brüderl et al. 1996, Pannenberg 1998). Moreover, growth resources such as skills, know-how, competence and self-confidence increase with age which positively influences survival and success of businesses. Additionally, younger nascents (up to 34 years) obviously tend to be overly optimistic, regarding their possibility and capability to set up not only a business, but a growing one. In this context, previous research demonstrated for Germany, that the younger the potential entrepreneurs, the higher, but also the more vague their entrepreneurial intentions were (Welter, Rosenbladt 1998). However, this picture is a static one and neglects the process perspective. The micro census does not allow for finer distinctions between the age of the entrepreneur and new, young and mature enterprises. A number of those micro enterprises might eventually grow while naturally their owners will grow older so that the age is not a distinctive factor explaining business growth.

The picture differs with respect to the education which could be described as distinctive in distinguishing growth paths (Leicht, Philipp 1999). A lower degree of entrepreneurs goes hand in hand with a smaller enterprise size. Entrepreneurs in micro enterprises are far more likely to have been apprenticed to a trade or to have no formal degree. In this context, nascents without professional degree appear to demonstrate mainly “wishful thinking” with respect to business aims. Whilst their above average growth intention also might reflect the need to contribute to household incomes (our data show that this group of nascents has a very low household income), the differences between growth intention (above average) and growth status (below average) as well as the realization quota, which is far below average, indicate a growing awareness of difficulties connected with setting up a business such as a lack of know-how, lack of as well as limited access to external resources. Moreover, branch contexts play an important role in explaining the high share of micro entrepreneurs with a low educational level, as the possibility for these micro entrepreneurs to be found in agriculture and services, i.e., in sectors with low requirements in terms of skills, is significantly higher than for micro enterprises in industry where entry thresholds are higher (Dietrich 1999). Finally, the fact is interesting that entrepreneurs with a higher technical education display the highest realization quota.

The data for entrepreneurial experiences of nascent entrepreneurs support the assumption that nascents become more realistic during the business formation process, i.e., as they gather entrepreneurial experience in a trial-and-error process. Those nascents with previous or current entrepreneurial experience demonstrate an above average growth intention, thus implying a higher self-confidence of these entrepreneurs. However, in this context there is no detailed data available for realized entrepreneurship to check whether they are also more successful in realizing their ventures, although previous research appears to confirm this for Germany (Brüderl et al. 1996).

The gender data at a first glance appears to confirm a well known story. On the whole, the majority of female entrepreneurs have micro enterprises without employees. The picture is reversed, when looking at growth intentions of female nascents. Still, male nascents are significantly more inclined to grow their enterprises. Surprisingly, also a majority of female nascents indicates growth orientations. These results question the assumption that females differ with respect to their business aims, i.e., that they are less inclined to grow their enterprises. They again point to gender-specific access to external resources (especially capital). Moreover, they might also indicate self-perceived barriers during the business formation process. For example, case studies show that female entrepreneurs frequently tend to perceive themselves as non-bankable before even trying to access external finance (Welter 2000).

Household income, region and enterprise sector illustrate the business environment. They influence the resource base the enterprise can fall back on when growing. With respect to income, the data clearly show a positive relation between higher income and realized growth intentions. However, here we would need further information in order to decide whether high incomes are a result of realized growth or a resource contributing to growth. A preliminary look at growth profiles in different regions (West versus East Germany) at a first glance indicates a more favorable environment in East Germany. East German nascents display a significantly above average growth orientation, they are also slightly more likely to realize growth intentions. Here, the reasons might not be due to environmental factors but to a different mentality. Business registration statistics also confirm that East German entrepreneurs are less inclined than their West German colleagues to start micro enterprises. Again, this calls for a more detailed analysis than is possible here.

Sectoral contexts play an additional important role in that start-ups in branches such as transport or trade are more likely to fail than in the manufacturing industry or in knowledge-intensive services. The data show that the share of realized growth intentions is below the overall average rate in tertiary sectors. These sectors also display the highest growth rates for micro enterprises (1975: 44.7%, 1999: 58.0%), which is a result of the overall structural shift from manufacturing to services. The large share of micro enterprises in services and trade results from low entry thresholds in terms of knowledge and capital. In knowledge-intensive service branches these low barriers of entry are partly due to modern communication techniques and information technologies allowing for a smaller enterprise size. However, the increase in micro enterprises in the tertiary sector also indicates a growing labor flexibility in large enterprises which increasingly buy services formerly produced in-house. This results in employees pushed into self-employment as well as in new opportunities for the self-employed in these market segments. Here, the low realization quota with respect to growth indicates a combination of low entry thresholds and consequently high turbulence in tertiary sectors whilst the high growth intentions for nascents reveal their perception of business potentials in these sectors, although in the long run business growth seems more likely in industry.

There are obvious limitations to the empirical results. The pilot study of nascent entrepreneurs does not tell us anything about the outcome of their venture creation process whilst both samples do not analyze growth processes. This however, would be necessary in order to learn more about transitions and constraints. Our data also do not allow us to draw statistically sound conclusions about which barriers are the most important for nascent entrepreneurs and young enterprises. Here, one would expect growth barriers to change their importance (or perceived importance) throughout the formation and growth process, again depending on various personal and business characteristics as well as their interactions.

Moreover, there is a need to recognize that today’s entrepreneurial reality is diverse which questions a simple “economic” approach to business growth, measured in terms of employment growth. As Bridge et al. (1998: 122) describe it: “A static stage in small business development may not sound very exciting, but it characterizes the state of most small businesses. Once they have started their own business, electricians, plumbers, chimney sweeps and consultants, for instance, rarely grow, and many other one-person businesses are the same: static is the normal state for them.” This picture indicates a variety of criteria that are important to grasp the reality of growth paths. ‘Soft’ criteria such as the personality of the entrepreneurs, and their motivation for setting up a business or going into self-employment and remaining there play an important role in determining business growth and success as well as survival (Storey 1994).

Thus, the growth criteria takes a subjective and individual meaning depending on personal success indicators such as the personal satisfaction of the entrepreneur with his or her professional and economic situation. The increasing labor flexibility adds another dimension, in that, self-employment and entrepreneurship are more likely to become restricted periods in a professional lifetime (Sennett 1998) where entrepreneurship is not necessarily connected with long-term growth objectives. Despite economic growth, entrepreneurship then stand for a supplementary income, for example, in the case of part-time or low-income entrepreneurship. It also represents the simple fact of becoming “employed“ again which is often the case for the unemployed. Or entrepreneurship could mean the realization of a personal dream without necessarily being connected to the economic development of the business. In other words, different types of entrepreneurial activities and self-employment emphasize different aims, reflecting the variety of micro enterprises as there are: traditional craft businesses, potential gazelles in emerging branches such as computer services side by side with part-time and/or low-income activities or life-style companies. In this context, Gibb and Scott (1985) discussed the usefulness of employment growth as an indicator for business growth and business dynamics, but there remains the fact that this is also the easiest variable to ask for in empirical surveys.

Even if we take into account these limitations, the results obviously leave the possibilities and abilities of German nascent entrepreneurs to realize growth intentions an open question. Gender, education and industry environment appear to be the most important factors which influence both growth intentions and business growth in different ways. Reasons could be external barriers such as limited access to resources but also an increasing personal awareness of obstacles to growth during the starting process which results in reconsidering initial business aims. New venture creation could be considered a learning process where experiences made during the first steps into entrepreneurship reinforce or change initial intentions. In this context, case studies with German entrepreneurs confirm that business aims could change considerably during the formation process. Initial entrepreneurial success acted as a trigger to redefine business aims (Welter 2000). However, the results also suggest a need for deeper analysis of nascents as well as young firms and their growth transitions in order to fully understand business growth and the increasing phenomenon of micro enterprises in Germany. A better understanding of these factors and processes will benefit both academicians and those involved in supporting starting and growing enterprises.

CONTACT: Friederike Welter, Rhine-Westphalia Institute for Economic Research (RWI), Research Group “Crafts, Small and Medium-sized Enterprises,” Hohenzollernstr. 1-3, D-45128 Essen; (T) +49 201 8149-268; (F) +49 201 8149-200; welter@rwi-essen.de

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