A Dynamic Perspective on Entrepreneurial Firm Diversity

Bram Timmermans
DRUID/Aalborg University

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Abstract
A Dynamic Perspective on Entrepreneurial Firm Diversity
Bram Timmermans
DRUID/ Aalborg University, Department of Business Studies
year of enrollment: January 2007, expected final date: January 2010
e-mail: bram@business.aau.dk

Researchers in the field of entrepreneurship have recognized that entrepreneurial activity is more a collective than an individual activity. (Schoonhoven and Romanelli, 2001). As a result, studies on entrepreneurial teams start to emerge, including those on diversity in entrepreneurial teams (Ensley et al, 2002; Ruef et al, 2003; Chowdhury, 2005). However, these studies look at team diversity cross-sectionally thereby neglecting the dynamic characteristic of teams, i.e. the potential change of team composition, which leads to a possible change in diversity. Whether or not this results in an increase or decrease of diversity will depend on the personal characteristics of the members that leave or enter the venture. This study will adopt a dynamic approach looking at the degree or diversity in the start of these ventures, identify if and how this diversity changes over time and say something about the consequence of this diversity on firm performance. This diversity will be measured not only based on the founding team but including another important source of human capital, i.e. the employees (Cardon and Stevens, 2004).
The literature is rather ambiguous on the effect of team diversity on team performance. New ventures face complex and non-routine problems, which are better solved by heterogeneous teams arguing for the positive effect of diversity. On the other hand, diverse teams increase the likelihood of conflict. The problem-solving dimension has a more cognitive nature while conflict occurs in demographic diverse groups. I argue in this paper that diversity in achieved characteristics increases the likelihood of firm survival while diversity in ascribed characteristics is negative for firm survival.
The empirical analysis of this paper will build on the Danish Dataset for Labor Market Research (IDA). IDA is suitable for this analysis as its longitudinal character shows firm dynamics and the employment history of all individuals residing in Denmark from 1980 and onwards. In addition, personal and firm characteristics can be identified. Given this structure it is possible to identify the composition of new ventures and the change in this composition in the following years
From this dataset I will identify all new start-ups in the private sector in the period 1995-2000, including the ascribed and achieved characteristics of the individuals connected to the new venture. An entropy measure will calculate the diversity based on these characteristics. These values will be used to (1) identify the composition of new ventures at founding and (2) test the effect of diversity on the likelihood on firm performance. The last analysis will identify the effect of a diverse composition in the first year. This analysis will then be extended to a more dynamic approach looking at the change in diversity due to the hiring of new and firing/resigning of existing members.
Some tentative analyses have indicated that the initial composition of new ventures in Denmark tends to be homogeneous. Results on the effect of diversity, both on the ascribed and achieved characteristics, on firm survival show the same ambiguity that can be observed in the existing diversity literature. Further fine-tuning of the diversity measure might solve this problem.

REFERENCES

Cardon, M. S. and Stevens, C. E. (2004). Managing Human Resources in Small Organizations: What Do we Know. Human Resource Management Review, 14:295–323.

Chowdhury, S. (2005). Demographic Diversity for Building an Effective Entrepreneurial Team: is it Important? Journal of Business Venturing, 20:727-746.

Ensley, M., Pearson, A. and Amason, A. (2002). Understanding the Dynamics of New Venture Top Management Teams: Cohesion, Conflict, and New Venture Performance. Journal of Business Venturing, 17: 365-386.

Ruef, M., Aldrich, H.E. and Carter, N.M.(2003). The Structure of Founding Teams: Homophily, Strong Ties and Isolation among U.S. Entrepreneurs. American Sociological Review, 68(2):195-222.

Schoonhoven, C. and Romanelli, E. (2001). Emergent Themes and the Next Wave of Entrepreneurship Research. In Schoonhoven, C. and Romanelli, E., editors, The Entrepreneurship Dynamic: Origins of Entrepreneurship and the Evolution of Industries: 383–408. Stanford Business books, Stanford, CA.