Academics and policymakers argue that ambitious entrepreneurship is a driver of regional growth. But what determines if entrepreneurship is ambitious or not? One strand of the literature posits that economically liberalised institutions are a catalyst of entrepreneurial activity. Other scholars argue that human capital is the main determinant of entrepreneurial ambitions. However, the evidence on the joint effects of institutions and human capital is yet to be consolidated. 

A recent study (Epure et al., 2024) analyses how economic liberalisation interacts with two key human capital types—education and experience—to shape ambitious entrepreneurship. Both types of human capital can lead to competitive advantage in productive activities, but the mechanisms through which an individual comes to possess them is fundamentally different. Human capital from higher education is essentially general knowledge and, while it could entail some degree of specificity—e.g., if related to jobs in dynamic industries—it is based on a stock of knowledge that can be taught and is not specific to time and place. By contrast, market-based human capital from having owned or managed a start-up or having served as a business angel (having provided funds to a new business started by someone else) contains hard-to-transmit knowledge that is specific to time and place and is necessarily acquired by the individual in the market.

The figure below illustrates the expected growth rates of educated entrepreneurs (with post-secondary education), of experienced ones (with start-up experience in the past year), and of those that acted as business angels in the past three years for a set of European countries that can be relevant comparison points for Spain. Over a 5-year period, educated entrepreneurs expected to grow their business in terms of employment by 63% in Spain; this was more than in Greece (57%) but substantially lower than Portugal or Germany, where expectations were to double the start-up size. While educated and experienced entrepreneurs did not exhibit strikingly different expectations in Spain, entrepreneurs with market experience displayed especially high growth ambitions in countries such as Germany and the United Kingdom.

The differences between countries may reflect institutional models. An interpretation based on labour markets may attribute differences of entry and outcomes in entrepreneurship to educated individuals having better options as employees rather than business founders. More recently, choice and outcomes of entrepreneurial activity have been linked to economic liberalisation. These business contexts are characterised by lower degrees of regulation. However, regulations do exist to provide efficient legal and governing frameworks, investment in infrastructure, and public goods essential for individuals and businesses to cope with market imperfections and grow their commercial activities. Overall, economically liberalised markets reduce transaction costs and favour free exchange by providing an adaptive business environment in which active players face lower entry barriers.

The main hypothesis of the article is that, while all human capital types are positively related to entrepreneurial growth aspirations, more liberalised markets (as compared to more regulated ones) magnify the ambitions of entrepreneurs who have specific human capital from start-up or business angel experience. This is because developing such market-based capital requires bearing the opportunity cost of managing uncertainty that usually characterises more liberalised markets. In contrast, general human capital acquired through higher education could lead to higher labour advantages as compared to entrepreneurial growth aspirations in dynamic markets. The reasoning is that general information transmitted via education is useful to navigate more predictable markets, conferring an advantage to interpret regulation rather than to manage uncertainty.

The study analyses 141,003 entrepreneurs from 93 countries between 2005 and 2020. It uses representative individual data from the Global Entrepreneurship Monitor and institutional data from the Heritage Foundation. All types of human capital and economically liberalised markets are positively related to entrepreneurial ambitions. In addition, demographics such as gender and household income (a three-level income scale) are also positively associated to growth aspirations, while age (included as the natural logarithm) is negatively related to growth ambitions. Networks matter, as shown by the positive effect of whether the respondent knows someone who started a business in the past two years. Last, the study used indicator variables on whether the entrepreneurs perceive a high fear of failure, having the required skills to start a business, and the existence of business opportunities show significant relationships to entrepreneurial growth aspirations. These results hold after controlling for current employment level, macroeconomic conditions, and specific industry and year effects.

To better understand the mechanics behind these results, one must take the institutional context as a baseline. As explained by the Nobel prize winner Oliver Williamson, institutions may change but very slowly; this implies that entrepreneurs need to adapt their human capital to the type of business context. To test this conjecture, the level of economic liberalisation was operationalised using the Heritage Foundation Index of Economic Freedom. Specifically, a composite measure was computed using equally weighted quantitative and qualitative factors of economic freedom based on property rights, government integrity, government spending, tax burden, business freedom, labour freedom, monetary freedom, trade freedom, investment freedom, and financial freedom. The resulting index takes values from 0 to 100. 

The results show that the positive relationship between economic liberalisation and entrepreneurial growth aspirations is lower for individuals with general, education-based human capital and larger for individuals with specific, market-based human capital (through start-up or business angel experience). The estimations show that increasing economic liberalisation ranging from 0 to 100 by about 9 points (one standard deviation) is related to 16.7% higher entrepreneurial growth aspirations with respect to the sample average. This represents the effect for individuals without any type of human capital. For entrepreneurs with higher education this effect is lower by 4.5 percentage points. In contrast, for entrepreneurs with start-up and business angel experience the effect is between 2.4 and 2.6 percentage points higher.

These graphs can also be interpreted in terms of potential institutional reform. For instance, moving from the 25th percentile of economic liberalisation (e.g., a score of about 57, countries like Greece) to the 75th percentile (e.g., a score of about 69, Belgium or Spain) is related to increased growth aspirations of 21.8%, which is lower by 5.8 percentage points for individuals with higher education, but higher by up to 3.4 percentage points for entrepreneurs with start-up and business angel experience. Moving from the 25th percentile to approximately the 90th percentile (e.g., a score of about 77 for the UK) is associated with increased growth aspirations of 36.4%, an effect lower by 9.8 percentage points for entrepreneurs with education-based human capital, but higher by up to 5.6 percentage points for those with market-based human capital.

Finally, the study shows that these results differ in good and bad economic times. During a crisis, market experience matters even more in an economically liberalised context, while higher education is equally valuable in all types of institutional contexts. Specifically, both start-up and business angel experience were especially valuable in liberalised markets during the global financial crisis, while start-up experience particularly mattered during the COVID-19 crisis. The study argues that while start-up experience always matters, during the global financial crisis, business angel experience for attracting resources was key (as bank funding was scarce). However, during the COVID-19 pandemic, which was disconnected from economic fundamentals, entrepreneurs could access relief packages for resources rather than using market investment, and thus relied mostly on start-up experience.

Governments dedicate generous funding to business and education policies (see, e.g., the recent “Entrepreneurship 2020 Action Plan” of the European Commission). This is congruent with flagship research highlighting that education may be the most important factor for regional growth and welfare. However, new policies should aim to generate complementarities between formal education and market experience. Recent research has found that “scientific” training of new entrepreneurs can lead to better venture outcomes. Such approaches may seek synergies between general education and specific entrepreneurship training, such as pitching business ideas to capital market participants. This is especially relevant when investors are constrained and are known to rely on early-stage signals of future start-up prospects. Overall, if education-based human capital serves as a precursor of growth, this study emphasises the need to align formal education with real business experiences for aspiring entrepreneurs.

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EPURE, M., MARTIN‐SANCHEZ, V., APARICIO, S., URBANO, D. 2023. Human capital, institutions, and ambitious entrepreneurship during good times and two crises. Strategic Entrepreneurship Journal [en prensa]. 

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