Boom in Busts:Good or Bad?Sisi CHENUrusha HADAAnne NGUYEN
BANKRUPTCY “bankruptcy” – neither good nor inspiring Anti-failure bias widely shared among entrepreneurs and related parties in an effort to rescue failing firms from bankruptcy Anti-failure bias leads to wide-spread interest in entrepreneurial success a perspective: “bankruptcies are painful to individual entrepreneurs and employees, may be good for society overall”
Banca Rotta:-In medieval Italy-A harsh and cruel practice-If bankrupt entrepreneurs did not pay theirdebt, debtors would destroy the tradingbench of the bankrupt traders.-In 1542, World’s first bankruptcy law passedin England-Considered punishment from Incarcerationto death
Entrepreneur-Friendly Bankruptcy Law Recently, Governments have realized…- It lowers exit barriers- Entrepreneurship would be encouraged - if the pain associated with bankruptcy is reduced (US)- In Germany and Japan: - Liable for unpaid debt for up to 30 years (Germany) - A lot Japanese commit SUICIDE - Bankrupt firm can also be liable for criminal penalties
What if… Harsh bankruptcy laws still remain… - Fewer entrepreneurs will decide to risk launching their products. - Entrepreneurs abandon their ideas for fear of failure - As consequence, entrepreneurial sector will not thrive - Therefore, economy will not develop
For example: TheUS has EFB laws: 50% of entrepreneurs resume a new venture in four years Whereas,a society that severely punishes failed entrepreneurs: Will not learn to avoid their mistakes. Drop out of the game, because their wisdom and ambitions will be lost In the worst case, kill themselves
FREQUENTLY USED TERMS Entrepreneurship: identification and exploitation of previously unexplored opportunities Entrepreneurs: Founders and/or owners of new businesses or managers of existing firms who identify and exploit new opportunities
INSTITUTION-BASED VIEW Formal institutions that govern how entrepreneurs start up new firms either help or hinder the growth of new firms When formal institutional requirements are more entrepreneur - friendly, entrepreneurship flourishes, and in turn the economy develops and vice-versa In addition, informal institutions such as cultural values and norms also affect entrepreneurship.
RESOURCE-BASED VIEW An entrepreneurial firm must : create Value be Rare be Inimitable be Organizationally embedded • Resource-based view suggests that firm- specific resources largely determine entrepreneurial success and failure
Are they related to bankruptcy?? GROWTH Excitement about growing a new company attracts entrepreneurs An entrepreneurial firm can leverage its vision, drive, and leadership in order to grow, even though it may be short on resources such as financial capital • INNOVATION – Innovation is at the heart of entrepreneurship – It can bring an entrepreneurial firm back to shape
FINANCING 4F sources of funding : Founders, Family, Friends and Fools!! Given the well known failure risks of start-ups, why would anybody other than a fool be willing to invest in start-ups?? However, in reality, these investors are not fools as they always retain certain collateral against their investing Microfinance : emerged in response to the lack of financing for entrepreneurial opportunities in many developing countries 9started from developing countries, but now is a global movement)
QUESTION What are the pros and cons for entrepreneur-friendly bankruptcy laws?
ANSWER Advantages: - Lower exit barriers - Lower entry barrier for new entrepreneurs - Less suicide (e.g.Japan) - Economies will develop Disadvantages: - Banks - Investors - Unemployment level
QUESTION Why can bankruptcy laws become an exit barrier for an entrepreneurial firm?
ANSWER It can be an exit barrier by putting harsh consequences on the entrepreneur. An entrepreneur would more easily launch a start-up if he knows that “failure” is not for life.
QUESTION Why can bankruptcy laws become an entry barrier for an entrepreneurial firm?
ANSWER It can be a low entry barrier if the bankruptcies laws are entrepreneurs- friendly. Entrepreneurs would be more willing to create their business, if it can be done in a quick and cheap way.
QUESTION After the case, how would yourespond to the comment “Recent news about the boom in bankruptcies is so depressing”?
ANSWER It is in fact depressing for major firms Inthe case of SME’s, entrepreneurs have proven to be more successful at their second shot.
QUESTIONIn the end : Bankruptcy – is it good or bad??
ANSWER Bankruptcy is still bad as it loses capitals and the SME fails developping properly. Nonetheless, it is a sign that entrepreneurs have a chance to launch their start-up, even if it ends up bankrupted. On the long term it is favorable to the economy, as it creates approximately 50% of the value-added and generate 60% to 90% of employement.