Entrepreneurs Profit More at Home
A study has found that start-ups located in entrepreneurs’ home regions survive longer and earn greater annual profits.
The research by Professor Olav Sorenson of Yale School Management and Professor Michael Dahl of Aalborg University, looked at more than 10,000 start-up businesses in Denmark.
They found that the effect of locating a startup venture in a founder’s home town or region was equivalent to having years of industry experience.
Examing both the data on the businesses and the characteristics of the founders, Sorenson and Dahl noted that, compared to a newcomer to a region, the "local" entrepreneur has a 9% lower business failure rate and earns approximately $8,172 more in annual profit.
Furthermore, the longer an entreprenuer lived in a region, the rates improved further: For each year lived in the region the failure rate educes by almost 2% and profit is increased by $1,362 per annum.
The implications of the research are that entrepreneurship may be boosted by better regional social connections and a more intimate understanding of them.
This understanding echoes previous research from 2007 that shows businesses are at a disadvantage when they expand into foreign territories. Facing new cultural differences such as language, customs and laws, comapnies find their "foreigness" a liablity.
The Sorenson/Dahl study suggest that being an outsider extends from the bigger business down to the individual level.
Other studies have found similiar issues with the operating of franchises who open chains in areas where they have prior experience and the Sorenson/Dahl results suggest that franchises can benefit where owners and managers operate in familiar "home" regions, being better able to identify opportunities and having a greater affiliation with the local workforce.
The study, published in Management Science (June 2012) can be downloaded in PDF format from: Home sweet home: Entrepreneurs’ location choices and the performance of their ventures
If you’re running a regional businesses then you should also look at our business advice article on Entrepreneurs’ Relief