Can diversity encourage entrepreneurship in transition economies?

Measuring entrepreneurship and religious diversity in the Life in Transition Survey

The first stage of entrepreneurship—“entrepreneurial attempt”—is captured by the survey question: “Have you ever tried to set up a business?”. A second survey question, “Did you manage to set it up?” provides information on the actual business start-up (second stage of entrepreneurship). This definition of entrepreneurship includes both formal and informal business owners and, due to the nature of the survey, mostly small businesses, with one or at most two employees are captured. It is important to note that self-employment is not the same as entrepreneurship, at least in the transition context. One can be self-employed without actually setting up a business: for instance, self-employment due to tax reasons captures professionals who have a job “on the side” (such as doctors or lawyers) but who are not actually entrepreneurs [1].

Additional analysis suggests that the LiTS sample is mainly composed of entrepreneurs seeking to take advantage of a business opportunity, rather than respondents who only started a business because of financial necessity or because of discrimination in the traditional workplace. This implies that post-socialist entrepreneurs captured by the LiTS are likely to drive growth (“opportunity” entrepreneurs), possibly by generating new ideas and knowledge transfers [1], [4].

The LiTS also includes useful information on the respondent’s gender and self-identified language and religion. Although information on ethnicity is also collected, the data are less reliable, as the question is open-ended, with no specific categories defined. The primary focus is on religious diversity, as a person can be multi-lingual or multi-ethnic, but rarely can have more than one religion. The level of religious diversity in each locality can be calculated by using a measure of diversity called Blau’s index, which calculates the probability that two randomly selected individuals in a given community belong to different religious groups. This statistic ranges from 0 (low diversity) to 1 (high diversity). As an illustration, a society with a single religious group is entirely homogeneous and the value of the diversity measure will be 0. In contrast, a society with three different religious groups of equal size will have relatively high diversity, at a value of 0.67.

Measuring religious diversity in this way is of course not perfect. Although the LiTS is representative at the country level, this is not the case at lower levels of aggregation (including the locality). However, comparable data on sub-national religious diversity across transition countries from other sources (such as country censuses) are not available. In addition, religious affiliation is not the same as religious “practice.” This is a limitation, as religious affiliation may capture ethnic identity, at least partially. Gender diversity is more straightforward to measure in the LiTS (using the share of men compared to women in a locality), although information beyond the traditional male/female division, such as options to identify as transgender or gender-fluid, is not available.

Religiously diverse localities in the post-socialist region have more respondents who have tried to start a business and a higher number of actual start-ups. This is a conditional correlation, and the authors of the paper present additional evidence suggesting that it is likely to be causal [1]. However, the relationship seems to be driven by the respondent’s access to borrowing (both from formal institutions, such as a bank, and from relatives and friends) and risk preferences. This is an important result, since it points to the role of financial constraints for businesses, restricting in particular entrepreneurs who are female or who belong to a religious minority (Figure 1).

The authors also consider how social capital in diverse localities affects entrepreneurial behavior [1]. Two different measures, or definitions, of social capital are used. The first one measures how frequently the respondent meets friends, while the second one looks at how much the respondent’s network extends beyond the family, close friends and colleagues. There is also a variable capturing whether the respondent believes that hard work, or intelligence and skills (as opposed to political connections or breaking the law) are the most important factors for success in one’s country. Entrepreneurs who are not embedded in dense networks (definition 1) are actually less likely to engage in entrepreneurship in diverse areas, both at the trial and business start-up stages. In contrast, religious diversity has strong benefits for would-be business starters who have social ties extending beyond immediate family, friends or colleagues, or who believe that working hard is important for success (definition 2 and additional variable). However, the latter two effects are only present when one tries to start a business and do not translate into a higher rate of actual business starters in a locality.

This impact of social capital could be due to the fact that adherents of different religions may have different attitudes, including on issues such as work ethic or the importance of the private sector in the economy. Such beliefs may affect business trial and start-up by nurturing different perceptions of how important entrepreneurship is in a particular society.

The state of gender diversity in a society and its implications for entrepreneurship

In developed countries, even today, women who are equally qualified continue to earn less than men at all levels of qualification. Motherhood seems to be penalized harshly in transition countries as well as in Germany, in contrast to countries in Scandinavia. Recent research estimates that the motherhood wage penalty (i.e. the difference in wages between mothers and women who have no children) is 33% in Germany, 19% in Ukraine, 10–15% in Russia and Hungary, but virtually 0% in Finland and Sweden [5]. Additionally, sex ratios remain skewed in favor of boys, not only in places such as China and India, but also in transition countries in Central Asia and the Caucasus, largely due to the availability of sex-selective abortion [6]. Finally, there is still a big gender gap in political participation: as of December 2015, only three transition countries (Slovenia, Serbia, and FYR Macedonia) had met the target (set by the UN Economics and Social Council in 1990) of having 30% or more women in national legislative seats. Figure 2 summarizes some of the main obstacles to increasing gender diversity in the workplace.

The uneven representation of women in the private and public sectors may explain why women are actually less inclined than men to try to start a business in the transition region. This could be due to demands of child rearing, lower propensity to take risks, or lower availability of financial and non-financial resources for starting a business. Encouragingly, those women who attempt founding a business are as likely to succeed in setting it up as men [1]. Moreover, women do not seem to become entrepreneurs out of necessity, but rather because they want to exploit existing economic opportunities [4]. This strongly suggests that female businesses are important for growth and transition [8]. For example, catering to previously unexplored markets dominated by women and children is one channel through which this process may occur. Of course, this effect will be dampened if the majority of women start businesses as a response to discrimination in the traditional workplace, though as explained above, this does not seem to be the case in the LiTS sample.

The benefits of gender diversity

There are several pieces of evidence that suggest that gender diversity may be beneficial to entrepreneurship and that gender diversity at the firm level can have a positive effect on productivity and overall economic growth. For example, diverse groups are more likely to have access to non-overlapping information, and exposure to different views can lead to creativity and innovation. There is evidence (from Scandinavia) of a positive impact of women’s presence on boards and in senior management on companies’ performance: companies with more than one woman on the board returned an excess return of 3.7% a year since 2005 compared to those with only men. Moreover, there is little evidence that women have an inherently risk-averse approach in company management [7]. In addition, companies that employ female managers may be better suited for serving consumer markets dominated by women and more gender-diverse boards could enhance corporate governance [9].

However, it may also be that women choose entrepreneurship not to exploit a business opportunity, but out of necessity or due to discrimination in the traditional workplace [4]. The impact of the latter type of entrepreneurship on growth and innovation is far less certain.

A well-functioning public sector is crucial for fostering business start-ups, and for encouraging more female entrepreneur. Research shows that women as policymakers make different decisions to men [10]. Women prefer policies that better reflect their own priorities, including child health and family nutrition, as well as policies that increase their bargaining position within the household, improve their rights in case of divorce, and raise their chances to access the labor market. Such policies can lead to long-term productivity, growth and development. This in turn can provide more opportunities for entrepreneurship in general. As an example, gender inequality in education has been found to reduce annual per capita growth rates by about 0.4–0.9 percentage points. Excluding women from education and the labor force may therefore stifle innovation (particularly if women’s and men’s skills in some areas, such as research, can be regarded as substitutes) [11]. Within the family, women’s empowerment can positively affect child welfare, child health, and family nutrition. These outcomes may be particularly relevant for sustained labor force participation, employment and entrepreneurship in the fast-aging societies of the transition region.