What Affects Small Business Growth? Part III: Industry Experience and Education

It’s been a couple of weeks since I last wrote.  In my defense, a few things have happened in those two weeks:  I had a baby (the adorable and already charming Kai Yoo Whitmore), bought a new house, and had six family members come in for the holidays.  Oh, and I got pink eye somehow and couldn’t open my eye without massive amounts of pain and tears for several days.  Now that I am able to see again, I thought I would post another entry continuing on the topic of small business growth.

So far, we’ve seen research that showed that aspiration and intention are key in small business growth as are general management and leadership skills.  That is all well and good, but how about specific knowledge about your industry and product?  To what extent does that matter?  Relatedly, how about education?

Specific experience in same/closely related industry

Is industry experience important?

In their study comparing rapid- and slow-growth firms,  Barringer, Jones and Neubaum found that 76 percent of founders in the rapid-growth group (with an average compound annual growth rate of 167.29 over three years) and 1.55 percent over three years, respectively) had worked in the same or close related industry while only 24 percent of founders had similar experience in the slow-growth group (with an average compound annual growth rate of 1.55 percent over three years). In explaining how previous experience in the same industry affects growth, they suggested that in addition to knowledge, experience in the industry gives access to a network of contacts who can provide resources for the growth of the current firm.

Similarly highlighting the important of industry experience, Stam and Wennberg, in their a study of over 600 firms, found that the greater the industry experience of the founder, the greater the employment growth of the firm in the first six years of their lives.

Education

Will your years of education pay off in growing your business?

Barringer, Jones and Neubaum discovered that more founders of high-growth firms had a college education compared with founders of slow-growth firms.    Researchers Fairlie and Robb showed that compared with business owners who are high school drop-outs, college graduates have  25 percent higher sales. Owners who have completed graduate school have sales that are roughly 37 percent higher than college graduates.   Education can provide founders with technical skills relevant to their businesses while the process of getting educated in formal group settings can entrench the owners in networks that later prove to be useful in the growth of their ventures.

Education can have an indirect effect as well.  Wiklund & Shepherd show that education, like management experience, magnifies the positive effect of growth aspiration on actual growth. 

The moral of these studies:  Knowledge = growth.

-Mina

Coming up next: Financial and social capital and business growth

Sources:

Barringer, B. R., F. F. Jones, et al. (2005). "A quantitative content analysis of the characteristics of rapid-growth firms and their founders." Journal of business venturing. 20(5): 663.

Fairlie, R. W. and A. M. Robb (2007). "Why are Black-owned businesses less successful than white-owned buinesses?  The role of families, inheritances, and business human capital." Journal of Labor Economics 25(2): 289-323.

Stam, E. and K. Wennberg (2009). "The roles of R&D in new firm growth." SBU Small Business Economics 33(1): 77-89.

Wiklund, J. and D. Shepherd (2003). "Aspiring for, and Achieving Growth: The Moderating Role of Resources and Opportunities  *." Journal of Management Studies 40(8): 1919-1941.