boom in busts
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Boom in Busts: Good or Bad?
Sisi CHENUrusha HADAAnne NGUYEN
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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”
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Banca Rotta:
-In medieval Italy -A harsh and cruel practice-If bankrupt entrepreneurs did not pay their debt, debtors would destroy the trading bench of the bankrupt traders.
-In 1542, World’s first bankruptcy law passed in England-Considered punishment from Incarceration to death
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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
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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
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For example: The US 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
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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
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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.
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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
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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
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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)
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What are the pros and cons for entrepreneur-
friendly bankruptcy laws?
QUESTION
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Advantages: - Lower exit barriers- Lower entry barrier for new entrepreneurs- Less suicide (e.g.Japan)- Economies will develop
Disadvantages:- Banks- Investors- Unemployment level
ANSWER
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QUESTION
Why can bankruptcy laws become an exit barrier for an entrepreneurial firm?
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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.
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QUESTION
Why can bankruptcy laws become an entry
barrier for an entrepreneurial firm?
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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.
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QUESTION
After the case, how would you respond to the comment
“Recent news about the boom in bankruptcies is so
depressing”?
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ANSWER
It is in fact depressing for major firms
In the case of SME’s, entrepreneurs have proven to be more successful at their second shot.
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QUESTION
In the end : Bankruptcy – is it good or bad??
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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.