An overview of literature

Chapter 2

2.0 Literature Review

This chapter gives an overview of literature that is related to the research problem presented in the previous chapter. This chapter will introduce the factors that affecting undergraduate's start-up and how this factor influence their decisions. Besides, it still covers some definition and expert's opinion about the variables in order to give a clear idea about the research area.

2.1 Job Opportunity

Tay (2009) point out that, thousands of normal Malysian Bumiputeras become millionaires through the helps from Hai-o, a traditional medicine corporation in Malaysia by its entrepreneurship development business model. In this economic crisis, Malaysian companies must imitate Hai-O's example to create employments and opportunities for the people. Entrepreneurial development campaign should be launch quickly by government for all races base on virtue, since this is one of the appraisals to counter economic crisis and create self employment.

Kauffman Foundation-funded U.S. Census Bureau new study reports illustrates that startup companies are a major contributor to job creation in the midst of record unemployment. The report Business Dynamics Statistics (2009) (BDS) also point out that while business startup drop slightly in most of the cyclical downturn, startups remain robust even in the most severe downturn over the early 1980s.

Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation, which funded the BDS said that, job growth is essential for the U.S. economy to rebound. The study further explained that new firms have historically been an important source of new jobs in the U.S. The research study the early years of business forming consistently shows how crucial new firms are to U.S. economy. This data will provide policymakers and new entrepreneurs a great hope for how they can solve the current crisis, which is create and grow jobs though entrepreneurship.

(Ewing Marion Kauffman Foundation, 2009 Jan)

From 1980- 2005, BDS (2009) data show that there is about 3 percent per year for the employment accounted by U.S. private-sector business startups Although this is still a small portion of overall employment, but this jobs from startup reflect new jobs, and is a huge percentage compared to a 1.8% average annual net employment growth of U.S. private sectors for the same period. This trend implies that if the job from new firm is excluded, there will be a negative on average U.S. net employment growth.

There is around 20 percent on average, new jobs in any given year is accounted by micro firm (firms with 1- 4 employees). But a 1.3 percent, a considerable smaller percentage of employment created in any given year by larger startup firms (those with 250 to 499 employees) are still substantial relative to net growth for the large number created. BDS data has revealed a declining trend in the micro-firm business startup rate although the overall business startup rate doest not exhibit much of a trend. The ample proof of substantial shifts away from small, single-establishment firms to large, national firms may reflect compositional changes in sectors such as retail trade.

Entrepreneurs are believed to be the foundation of U.S. nation's economic recovery because they create jobs through growth and start businesses but research shows that former employees often refuse to start a new business during a recession.

(Haltiwanger, Miranda, & Jarmin, 2009)

Audretsch, Carree, & Thurik (2001) had analysed the relationship between entrepreneurship and unemployment in an econometric model covering twenty three OECD countries from 1974 to 1998. There is complex relationship between the 2 variables. The relationship is either a positive effect on unemployment as firm start-ups (the "shopkeeper" or "refugee effect") or a negative effect (the "Schumpeter effect").

The GEM (2000) concludes that entrepreneurial activities, often defined as start-up activities have strong relationship with economic growth. In the study, the most important factor for economic growth is claimed to make up by the definition of entrepreneurship. In an econometric analysis of Sweden from year 1976-95, Flster (2000) finds vital support for his assumption that there is a positive effect on overall employment with the increase in self-employment.

Davidsson, Lindmark, & Olofsson (1994) find that from year 1985-80 seventy percent of net jobs are created in the small business sector in Sweden. A further highlight is that are founded on a hobby or subsistence motive but not growth oriented. Hence, small firms are crucial to the economy because of their big number but a vast majority of the upstarts will remain micro firms. Blanchflower (2000) doest not believe the hypothesis that the real growth rate is increase by the increases in the level of self-employment. He strengthens his opinion by making a contrast on the level of self-employment in 23 OCED countries in the year of 1966, 1976, 1986 and 1996. He found that most of the countries are having a decreased in the level of non-agricultural self-employment.

Davis, Haltiwanger, Schuh, (1996) and Bednarzik (2000) are disputing the importance of small firms in their studies. Davis et al draw their conclusion from a study of data from the U.S. Census Bureau during 1972-1988, whereas Bednarzik has studied the mid-1990s. According to them, although significance, entrepreneurship through start-ups is declare to make a minor contribution to job growth than expansion within the firms in the U.S., thus large firms supply more in terms of the net job creation compare to the smaller firms higher gross job creation rate.

Carree and Klomp (1996) contest the conclusion draw by Davis et al, arguing that small firms created more net jobs relative to their employment share in the 1972-1988 periods. Davidsson et al (1998) test the "regression fallacy" empirically, one of the reasons that overestimating the significance of small firms. The bias does not signify a qualitative change on the overall result, concluded by Davidsson et al in a test covers Sweden 1989-96. Baldwin and Picot (1995) use three different methods of estimation to avoid a regression-to-the-mean bias in a study cover the Canadian manufacturing sector 1970-90. A corresponding finding is that small firms have a higher net employment growth but also a higher gross volatility in job growth and destruction than a large firms. Whereas, an international comparison between the relative importance of small firms and a net job creation is found to be interesting, the results show differences between countries due to institutional reasons. For example, Davis and Henrekson (1999) indicate that the Swedish intensive-intensive, small, and/or managed-owned family businesses as well as entry of new firms was disfavoured by Swedish institutional environment prior to the economic crisis in the beginning of the 1990s compared to similar types of firms in the United States and other European countries.

Haltiwanger and Krizan (1999) draw a conclusion using data from the U.S. manufacturing sector 1972-93, that new firms show high average net employment growth rate but also high volatility compare to the existing firms. In addition, there is no proof of any systematic pattern by employer size of net employment growth among newly started firms. Although attributing a principal role to a single factor might be misleading, but somehow conclusion is draw, the age of firm is more important than size in the context of employment growth.

Schoen (2009) had conducted a survey reveal that 63 percent survey respondents prefer giving individuals the incentives they need to start their own business, and 23 percent allowing the government to create new jobs directly or though big companies. Besides, in the context of leading the country out of the recession, 63 percent of respondents think that the United States government needs to promote the founding of new businesses, which will create long-term, sustainable economic growth and employment opportunities, while only 22 percent prefer the government generating new jobs in the public and private sector. In a comparison between entrepreneurs, big business, scientists and government in job creation, 79 percent respondents feel that entrepreneurs are most crucial. Furthermore, despite the importance of entrepreneurship, 72 percent of respondents think the government does little to encourage entrepreneurship; they feel that government should do more to encourage individuals to start businesses. Approximately half of the respondents think America's law makes it harder for individual to start a business.

2.2 Innovation

Tay (2009) study indicates that extracts of venture capital funding do not necessarily nurture entrepreneurship. He says that new ideas are created from people but not through funding. Funding normally follow and flows to people with new ideas and willing to commercialise the venture. Cradle Sdn Bhd, a company set up by Malaysia government to encourages ideas and provides seed funding for commercially viable ideas.

Federal Reserve Bank (FRB) of Dallas's (n.d.) publication "Entrepreneurs and the Economics" says that the market system rewards those who further innovation and create jobs opportunities. New opportunities arise when new processes, new products and new services are introduced by entrepreneurs and when customers are attracted to purchase it. New services or products lines are develop to strengthen the recently introduced products. For example, the computer has stimulate the invention of internet, which in turn has effect on the development for search engines and software to explore World Wide Web, and finally it create a new way for people to shop and obtain information. Superior contributions and the entrepreneurial opportunities are required to create wealthy economy.

Everything that could be invented had already been invented, said by the director of the U.S. Patent Office in1889, and was proved to be wrong. In 100 years ago, most of the modern technology doest not exists. The advances sparked by entrepreneurs' ideas do not easy happen. A great deal of risk and a tremendous amount of work go into every new idea that finally makes its way into the marketplace. Entrepreneurs are not always appreciated for what they do in the economy even they create wealth and opportunity with their ideas. This is due to entrepreneurs can be very disruptive. Entrepreneurs leave behind a clutter of obsolete products and processes, when they take bold leaps and break contact with the familiar. This force is called creative destruction. Entrepreneurs spark the change of new technologies to replace old ones. Creative destruction needs to occur in a health economy, this is because overall more benefits than the loss. Products or processes becoming obsolete offsetting the losses from each act of creation brought about by entrepreneurs.

In Sobel (n.d.) view, a growing, vibrant economy depends on the efficiency of the process bu which new ideas are quickly discovered, implemented, and determined as successes or failures. The failures should quickly extinguished and free poorly used resources to go elsewhere, it is just as important as identifying successes. This is the benefits of business failure. Successful entrepreneurs broaden the size of the economic pie for everyone.

Sobel further explained that the founder of Wal-Mart, Sam Walton, was an entrepreneur who touched millions of lives in a positive way. In less than thirty years, His innovations in distribution warehouse centers and inventory control allowed Wal-Mart to grow from a single store in Arkansas to the nation's largest retail chain. Customers benefit from the convenient locations and low prices that Walton's Wal-Marts provide. Along with other entrepreneurs such as, Henry Ford (Ford automobiles), Ted Turner (CNN), Fred Smith (FedEx) and Ray Kroc (McDonald's franchising), Walton improved the everyday life of billions of people all over the world.

Schumpeter (1911) stressed the role of the entrepreneur who introducing new goods or new methods of production act as an innovator to implements change in an economy. In Schumpeter (1911) view, an entrepreneur is extremely disruptive in an economy. According to Schumpeter, the introduction of new products results in the obsolescence or failure of others, it is called creative destruction.

In contrast to Schumpeter's view, Kirzner (1997) feels that entrepreneurship is a process of discovery. Entrepreneurs are the ones who discover previously unnoticed profit opportunities. The entrepreneur's discovery lead a process in which these newly discovered opportunities are then implemented in the marketplace until market competition discards the profit opportunity. Kirzner feels that entrepreneur is an equilibrating force. For example, an entrepreneur is someone in a college town who amending houses and turning them into rental apartments when he found that a recent increase in college enrollment has generated a profit opportunity. Some empirical research has intention to examine the contribution of entrepreneurial activity to overall economic growth. Most of the widely cited studies use international data, normally the index of entrepreneurial activity for each country published annually in the Global Entrepreneurship Monitor. These studies conclude that differing rates of entrepreneurial activity are responsible for the differences between one-third and one-half economic growth rates across countries. Alike strong results have been found at the state and local levels.

Entrepreneurship and competition fuel creative destruction. Schumpeter(1939) summed it up as follows:

"The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates".

Alm & Cox,( n.d.) say that there is a profit motive for entrepreneurs to introduce new products and technologies to make themselves better off. New services and new goods, new industries, and new firms, compete with existing ones in the marketplace, taking customers by offering better performance, lower prices, new features, faster service, catchier styling, higher status, more convenient locations, more attractive packaging or more aggressive marketing. Pursuit of self-interest ignites the progress that makes others better off, is another seemingly contradictory aspect of creative destruction,

Sandefur (n.d) review an article by Romer, a leading scholar of Economic Growth, and concluded that innovation is a result from a combination of growth-fostering new ideas and social institutions. Ideas are unlike objects, it is not shareable, and greatly increase the speed of technology advancement. The ability and willingness to think and act creatively catalyse growth by combining capital, social institutions and new technology. Therefore, innovation has philosophical and psychological requirements.

Greater uncertainty, asymmetry, and reliance on knowledge as a factor of production, also characterized as Novus ordo seclorum, has increased the importance of small entrepreneurial firms. Acs and Audretsch (2001) conclude that regarding the innovative activity across sectors, there are notable differences in the importance of small firms. New entrepreneurial firms are an important part of the innovation process in computers and process control instruments industries. Baldwin and Johnson (1999), agreed the point by mentioned the importance of small firms regarding electronics, instruments, medical equipment, steel, and biotechnology.

Acs (1996) introduces an innovation measure, defined as the amount of innovations per 1000 employees in different industry sectors. Applying this measure on data on the U.S. market 1982 point out that small firms (<500 employees) produce more innovations in the fields of process control instruments, electronic computing equipment, engineering and scientific instruments, electronic components, and plastics products. Suggested explanations for the relative importance of small firms might be knowledge spillovers and diseconomies of scale in the production of innovations. Knowledge spillovers are considered explicitly by Acs et al (1994) in a study of the pattern of innovations in the U.S. in 1982. In an econometric analysis they conclude that the innovative output of small firms increase in the vicinity of universities. A similar study by Audretsch and Vivarelli (1996), covering 15 Italian regions over nine years, comes to the same conclusion.

Almeida and Kogut (1997) and Almeida (1999) come thorugh a conclusion whereby small firms tend to innovate in relatively unexplored fields of technology after specific studies of the semiconductor industry through patent data between 1977-89. But, large companies seem to differ by concentrating their research measured as patents, in more established fields. From a study of 380 innovations made in U.S., UK, B.R.D., Japan, and France between 1953 and 1973, Rothwell and Zegveld (1982) found that small firms contributed 31 % and large firms 54 % of all innovations. They also concluded that the entire output of small firms in UK consisted of radical breakthroughs when computing how radical the innovations were.

The U.S. small firms produced 30 % of the "major technological shifts" and 27 % of the "radical breakthroughs" made in the country as well as 37 % of the "improvement-type innovations." Geroski (1994) finds a strong negative relationship between market concentration and innovation. Acs and Audretsch (1990) come though a same conclusion in a study of industry innovations in 1982. Moreover, the latter support the notion of two technological regimes, a routinized one, and an entrepreneurial one. They note that the entrepreneurial regime, in which small firm innovation is of importance, is characterized by a relative reliance on skilled labor and that large firms control a significant share of the market. By contrast, the routinized regime is recognized as being, concentrated, capital-intensive, unionized and producing differentiated products.

Baldwin (1995) had study growing small and medium sized enterprises (GSMEs) in Canada 1984-88 and found that the more successful firms are on average focusing to a greater extent on innovative strategies and activities than the less successful firms. In conclusion, the most important determinant of small firm success is found to be innovation.

2.3 Productivity

New firms play a crucial role in the process that links churning to productivity gains. According to a research "Turmoil and Growth: Young Businesses, Economic Churning and Productivity Gains", by Haltiwanger, Jarmin, & Davis (2009), exiting and declining businesses destroy millions of jobs meanwhile new and growing businesses create millions of jobs each year. The study, conducted by researchers from the University of Chicago, University of Maryland and the U.S. Census Bureau, points out that the contribution of new businesses extends beyond initial entry, with surviving businesses having very rapid employment growth in their early years. The report's analysis of productivity data shows that in the early years, young businesses have higher productivity levels and faster productivity gains compare more mature businesses. In effect, new, more productive business replaces lower productivity one so call churning process, thereby raising living standards and increasing productivity.

The Economic growth from Encyclopedia Britannica (n.d.) stressed the influence of entrepreneurship. The leadership of an entrepreneurial class will cause the allocation of resources changes during the course of growth and development. Many economists believe that the quality of entrepreneurship is an important explanation of differences in the rate of technical progress between countries. Decisions must be made as to whether a new product or process will be introduced. It has been argued that the rate of technical progress will not be the same even two countries undertaking similar amounts of investment leading to more or less identical rates of growth in the capital stock. In one country, a rapid growth of labour productivity will lead by entrepreneurs that undertaking enterprise investment and with the introduction of the most advanced types of production techniques. In the other, the investment program may lead only to marginal changes in productive processes because of hesitation or ignorance; the resulting growth in labour productivity and GNP will be small. For example, much has been said since World War II about the more aggressive nature of German businessmen as compared to their English counterparts. Economist Joseph A. Schumpeter emphasis on the theoretical work of role of the entrepreneur in economic growth stems, but many others have echoed it. Joseph A. Schumpeter started the modern growth theory.

Schumpeter laid primary stress on the role of the entrepreneur, or businessman, unlike most Keynesian or pre-Keynesian theorists. It was the quality of entrepreneurs performance that determined the speed of capital growth and whether this growth would involve change and innovationi.e., the development of new productive techniques and new products. The quality of entrepreneurship is responsible to the differences in growth rates between countries and between different periods in any one country. The latter in turn reflected certain cultural and historical values carried by the business class. Schumpeter also attributed much of the growth of technical progress and of the supply of labour to the entrepreneur. Thus, in more modern terminology, the reason why demand and supply have grown more or less at the same rate Schumpeter's explanation would be that supply adjusted to demand while demand in turn reflected the activities and investments of the entrepreneur.

(Economic Growth, 2009)

An article by Sobel (n.d.) in Concise of Encyclopedia of Economics says that Bill Gates, who as an undergraduate at Harvard developed BASIC for the first microcomputer, went on to help found Microsoft in 1975. During the 1980s, IBM contracted with Gates to provide the operating system, now known as MS-DOS for its computers, the software was procured by Gates from another firm, essentially turning the catchpenny into a multibillion-dollar product. 90 percent of the world's computers is running with Microsoft's Office and Windows operating software. Gates expanded people ability to generate output (and income), by making software that increases human productivity, resulting in a higher standard of living for all.

Sugars (2009) have mentioned several reasons to start-up during recession. According to him, recession normally followed by an average of 50-months growth cycle. During recession, more and better- qualified people are available at affordable rates, everything is cheaper, suppliers are giving better credits because the credit markets have virtually shut down, and the B2B credit flows are keeping money circulating out of sheer necessity. People must aware of good opportunities others have buggered up, and finding deals where people could get an entire business simply by taking over a lease. Some other reasons including tax incentives, better public relation and to get out from unemployed.

Recession was significantly and permanently transforming the UK economy, with 60 per cent of businesses claiming their organisation has been transformed for good due to the impact of recession, while less than a quarter of companies have continued to operate unchanged, strong evidence reveal by Barclays Commercial in examining recessionary behaviour amongst established UK companies. Paul Harvey, Head of Gloucestershire Barclays Commercial Bank, said that the results shows many companies are using this period to make a renewed push for growth and market share, far from being focused solely on survival,. He said that people are also seeing a grass roots economic transformation in the UK as businesses change what they produce and how they produce it en mass. Other survey findings include: Thirty seven percent owners/managers said they are diversifying product and service offerings in order to protect against the recession and sixty two percent of business said they were currently streamlining their business processes to combat recession.. (Southwest business, 2009)

Aghion and Saint-Paul (1991) formalize the idea that economic fluctuations can stimulate productivity growth with a simple model. Firms' investment in such growth in the reorganization of their production or in technical progress is greater during recessions that are expected to be followed by an expansionary phase. Productivity growth increases because the opportunity cost (in terms of forgone profits) of labour resources or investing capital in managerial reorganizations or technological improvements is low during depression phases the more so when the discrepancy between booms and slumps is large.

Aghion and Saint-Paul first study a one-firm (or one-sector) model, in which the sole producer decides at each instant how to distribute labour between reorganization (or R&D) and production activities. They find that the average growth rate is an increasing function of the amplitude of the economic fluctuations which are assumed to occur randomly and increases with the frequency of recessions, provided that the latter are initially less frequent than expansionary phases. For a multi-firm (or multi-sector) version of this model, in which firms are subject to uncorrelated idiosyncratic shocks of the same type, they find that the average growth rate again depends on the amplitude and frequency of fluctuations. The growth process introduces an additional discounting effect, however, which works through relative prices over time to an extent that increases with the intersectoral substitutability of products.

Aghion and Saint-Paul then analyse the combined effects of idiosyncratic fluctuations and aggregate recessions, which they find reinforce one another the more so when firms incur (large) fixed production costs. More generally, large fixed production costs tend to increase the impact of economic fluctuations on growth. Finally, they show that under a natural interpretation of the model where firms continually hire or fire workers for both `reorganization' and `production' activities their main results are consistent with those found in recent empirical evidence on the cyclical behaviour of job reallocation.

As reported by the U.S. Bureau of Labor and Statistics (2009), productivity increased 9.5 percent in the nonfarm business sector during the third quarter of 2009 as unit labor costs fell 5.2 percent (seasonally adjusted annual rates). In manufacturing, productivity increased 13.6 percent while unit labor costs fell 7.1 percent. An article by Vercillo (2009) says that employees tend to be more loyalty to the company as unemployment rate is high during recessions. This sense of loyalty is a major contributing factor as to why the recession is actually increasing employee productivity.

2.4 Competition

Kedrosky (2008) report mentioned that cross-section of successful public companies was founded during recessions, including such recent examples as Microsoft, Genentech, Genzyme, Southwest Airlines, and many others. And outstanding companies being founded during a recession are not just a recent phenomenon, with Allstate, Morgan Stanley, Knoll, and Krispy Kreme, among others, all able to trace their founding dates to the Great Depression. According to Kedrosky the relationship between company success and economic conditions at the time of a company's founding is ill-understood. He further rises up several critical questions such as:

Do weak economic conditions at the start lead to fewer companies founded?

Do weak conditions lead to fewer successful companies?

Do companies founded in better economic times fare better than those founded during recessions?

The answers to these questions are crucial because of the central role that entrepreneurial ventures play in U.S. economy, from innovation, to job creation, to improvements in our overall standard of living and GDP. In his research he found out that it is slightly more likely a post-1975 IPO (initial public offering) came from a non-recessionary period. That group's productivity was eighty-three companies per year, while the recession subset's productivity was seventy companies per year that went public. If, however, remove the Great Depression and WWII, both of which introduce some unrepresentativeness, result end up with 138 companies/year from expansion periods, and 140 from recession periods. In other words, these data suggest that the likelihood of a company being part of the public IPO set post-1975 is unrelated to whether it came from a recessionary or non-recessionary period. Finally he conclude that at least as evidenced by having gone publicdoes not give us any information about whether that company was founded during a recessionary or non-recessionary period. At least in a general sense, that is suggestive in that, given smaller numbers of companies founded during recessionary periods, the implication is that companies founded in such times have a higher likelihood of turning out to be economically important.

In Sobel (n.d.) opinion to an entrepreneur, they take the resources required to produce a pair of shoes that can be sold for twenty dollars and instead turns those into branded sport attire that sells for forty dollars will earn a profit by increasing the value those resources create. He makes such a comparison because in competitive resource markets, an entrepreneur's costs of production are determined by the prices required to bid the necessary resources away from alternative uses. Those prices will be equal to the value that the resources could create in their next-best alternate uses. Because the price of purchasing resources measures this opportunity cost the value of the forgone alternativesthe profit entrepreneurs make reflects the amount by which they have increased the value generated by the resources under their control.

Acs (1996) suggests that one explanation for employment growth in the U.S. is increased competition. Manifestations of increased competition include rising import competition, antitrust, deregulation, new structures of vertical integration and reductions in economies of scale.

An econometric study by Geroski (1994) leads to the conclusion that competition plays a crucial role in enhancing productivity, with both new ideas and new firms provoking movements to, and outwards movements of, the production frontier which, the data suggest, would not have occurred in their absence. Moreover, Geroski finds that markets are deconcentrated by innovative activities and concludes that:

"It is almost certainly the case that small-firm and entrant activity drives the negative association between changes in concentration and innovative activity which appears in the data."

Gort and Sung (1999) published an econometric study of the US telephone industry and yields the conclusion that greater efficiency is led by increased competition within the industry. Gort and Sung assume that competition can affect efficiency in four ways; higher quality of capital inputs, lower monitoring costs, greater efficiency of firm-specific organizational capital, and greater incentive to stimulate demand, as well as rivalry stimulating innovation. Regarding the fourth effect, the authors mention that due to better opportunities for capturing the returns from innovation, it is possible that the incentive to innovate might be greater under monopolistic conditions. Moreover, monopolistic enterprises might have more resources to invest in innovation.

In a study of firms based in the UK, Nickell (1996) finds that there is only weak empirical evidence in favor of the hypothesis that competition improves corporate performance. On the other hand, when measuring competition, as either lower levels of surplus profits, or increased numbers of competitors, it appears that there is a positive correlation between total factor productivity growth Financing Activities and the level of competition and Barclays Commercial examining recessionary behaviour amongst established UK companies says that a majority of UK businesses view the ability to leapfrog struggling competitors as their key opportunity in the current recession. In a survey name "The Turning the Corner", carried out at Barclays Commercial events around the UK, found company attitudes remained focused on competition over integration, as 54% of the 305 business owners and managers viewed the challenges faced by competitors as their key recessionary opportunity, followed by a third (31 per cent) who viewed retention, staff loyalty, and productivity as their greatest opportunity during the downturn. (Southwest business, 2009)

Kauffman Foundation research paper prepared by Robb, & Robinson (2008) reported that external debt financing such as bank loans are the more common sources of funding for many companies during their first year of operation which contrary to widely held beliefs that startup companies rely heavily on funding from family and friends. According to the study, approximately 75 percent of most firms' startup capital is made up by credit card debt, bank loan or in equal parts of owner equity, underscoring the importance of liquid credit markets to the formation and success of new firms.

Almost 5,000 businesses founded in 2004 were surveyed by the KFS (Kauffman Foundation Study) and tracks them annually over their early years of operation. The survey focuses on the characteristics of the firms and owners over time and the nature of new business formation activity. This dataset provides a first-time glimpse, and a rich picture, of the early capital structure decisions of new firms.

Interestingly, compare to any other type of company the KFS also found that high-tech firms are more likely to get outside equity investments in their first year of operations. According to the data, high-tech firms received an average of $31,216 in this type of financing, compared with firms overall, which received only $7,000 on average.

2.5 Government Policy

Viard (2009) said that during recessions, the government consistently pursues policies to stimulate aggregate demand, that is, to increase spending by firms, households, and government. (In this context, spending refers to housing investment, consumer purchases, government purchases of goods and services, business and, and exports net of imports.) Monetary policy can stimulate aggregate demand by lowering interest rates through expanding the money supply, which increases firms' and households' desired spending. Fiscal policy is another available tool. A lot of tax and spending measures can stimulate aggregate demand by increasing the amount of spending that households and firms wish to do at any given interest rate. An increase in government purchases of goods and services directly increases spending. Under some circumstances, simply giving firms or households more money through government transfer payments or pr tax cut may increase investment or consumer spending to some extent. Moreover, tax measures can reduce disincentives or provide incentives, for firms and households to engage in investment and consumer spending. Both fiscal policy and monetary policy have been used to stimulate aggregate demand before and during the current recession.

"Fiscal stimulus does not create output and jobs from thin air, but simply "borrows" them from the future".

Viard notices that fiscal stimulus to aggregate demand must be properly planned because stimulus "borrows" jobs and output from the future rather than creating them from thin air. He also concludes that provides more tax cuts and advocates more generous tax deductions for business losses have better effect than increases in government purchases in providing larger (correctly measured) stimulative effect during recessions.

A new paper from the Center for Economic and Policy Research shows that, Costa Rica's economy continues on a downward path, partly because fiscal policy is being offset by a tightening of monetary policy, regardless of a reasonably sized fiscal stimulus package. The International Monetary Fund (IMF) is urging this monetary tightening.

The paper, "Costa Rica During the Global Recession: Fiscal Stimulus with Tight Monetary Policy," by Cordero (2009), determines how Costa Rica's monetary policy has destroyed its fiscal policy as the government has sought to respond to the global recession.

Cordero said that Costa Rica would do better if the government didn't take the inflation as a major concern during such a deep recession. Instead, the Costa Rican government seems to follow IMF and tightens their monetary policy, and this has hurt the economy.

In February 2009, the Costa Rican government launched the "Plan Escudo," a rescue package supposedly designed to help Costa Rica defense against the global crisis, and providing a stimulus of about 2.8 percent of GDP. But recent data shows that the recession appears to be deepening instead of the stimulus. The paper found that the IMF has insisted that Costa Rica's monetary policy remain tight due to a perceived risk of a balance of payments crisis and worries over inflation targets. However, the author notes that the IMF could help prevent a balance of payments crisis as it has done, for example, in Mexico -- a vastly larger economy through the provision of a credit line of foreign currency.

The paper also examines the government's macroeconomic policies in recent years, prior to the world recession, to see what other policies might have done better.

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