The entrepreneurship fountain of youth: Younger management ranks generate more entrepreneurs

Abstract

The present paper argues and tests the proposition that firms with older top and middle managers produce fewer entrepreneurs, because these firms offer less chances to their employees to enter managerial positions that provide valuable experience for entrepreneurship (rank effect theory). Empirical work using linked employer-employee microdata for Portugal support this. The rank effect is stronger in firms with older top managers. Employees who progress slower into managerial ranks are not pushed into entrepreneurship but are more likely to take on jobs as employees in other firms. Overall, our results suggest that firms with younger management ranks offer more chances for workers to enter managerial positions and, therefore, spawn more entrepreneurs.

Executive summary

A common career pathway leading towards entrepreneurship materializes through gaining experience working as a wage employee. In particular, work in top and middle management roles involving leadership and responsibility for strategic decisions should provide experience, knowledge and networks that are valuable for entrepreneurship. Founders of prominent unicorns and start-up ventures throughout the world have acquired significant managerial experience.

Top and middle management roles often involve tasks that demand a broad range of skills associated with obtaining and deploying resources, as well as organizing and managing people. Furthermore, top and middle managerial positions expose individuals to ample opportunities for obtaining new knowledge and learning, including knowledge about new business opportunities.

A recent theory named the rank effect suggests that in societies with older workforces, younger workers are less likely to become entrepreneurs because they are unable to acquire the experience and skills required for entrepreneurship. In aging societies, top and middle managers are more likely to be older and hold on to their positions for longer, thereby blocking younger subordinates from reaching managerial ranks. Since younger people are more likely to possess the energy, creativity, risk-taking and innovative abilities that enable and motivate entrepreneurs, if fewer young employees hold top and middle managerial ranks (so they can acquire essential experience), entrepreneurship rates will likely decline.

Arguably, the rank effect argument overlooks that, if workers are indeed blocked from progressing to managerial positions in firms with older workforces and managers, frustration caused by lack of career advancement may also lead them to leave, either by seeking employment in another firm, or possibly by becoming entrepreneurs themselves. If non-managerial workers frustrated with lack of career progress are more likely to become entrepreneurs, the basic argument of rank theory – that managerial experience is a vital determinant of entrepreneurial ability and motivation – is significantly weakened.

In this article we look at how corporate careers unfold over time towards entrepreneurship, focusing on whether reaching top and middle managerial ranks is indeed a steppingstone towards entrepreneurship. In particular, we seek to find out whether firms with older top and middle managers offer lower chances for workers to reach key managerial ranks and, as a byproduct of those lower chances, are less likely to spawn entrepreneurs. We also examine whether slower than average career progress towards managerial ranks is likely to lead employees to entrepreneurship, or to move jobs to a different firm. Lastly, we test if obtaining top managerial experience may be more strongly linked with likelihood of entrepreneurial transition than obtaining middle managerial experience.

To test our ideas, we use detailed matched employer-employee data for Portugal and focus on wage workers who start a new job spell between 2005 and 2015. We use discrete-time hazard models to investigate whether the age structures of firms' managerial workforces are related with a reduced likelihood for the firm's employees to become entrepreneurs, by lowering their chances to progress in their careers by reaching top and middle managerial roles.

Our main results indicate that top and middle management experience increases the likelihood of workers becoming entrepreneurs, with top management experience leading to the highest likelihood of entrepreneurial transitions. In firms with older managers, workers are less likely to reach key managerial positions and, therefore, less likely to become entrepreneurs. We also find that slower than average advancement towards managerial ranks is likely to lead workers to move to jobs in other firms, but not to entrepreneurship.

Our results suggest that holding top and middle management ranks is an important steppingstone for those individuals whose career path progresses from wage employment to entrepreneurship. A firm's propensity to produce entrepreneurs likely depends not just on its ability to generate new ideas and products but is also related with the age structure of its managerial workforce. Moreover, firms' organizational forms and structures, as they relate to the numbers and functions of top and middle managers, are also likely to influence the spawning of entrepreneurs.