Haven’t we all dreamed of being our own boss at some point or another? Entrepreneurs make this dream a reality, striking out on their own to found an independent business venture. This makes the factors impacting someone’s decision to leave paid employment and become a founder an interesting question, including institutional factors such as regulations and policies that could encourage or discourage entrepreneurship. When making such a decision, an individual will consider their circumstances, which includes comparing life as an entrepreneur to the conditions they have as an employee. This means that regulations impacting how inclusive and equitable the working environment is can have a significant impact on someone’s decision to become an entrepreneur, a possibility that has not been thoroughly researched. In recent research published in Strategic Management Journal, Raffaele Conti (ESSEC Business School), Olenka Kacperczyk (London Business School) and Giovanni Valentini (IESE Business School) were particularly interested in the effects of regulations enacted in order to combat discrimination at the workplace, on the basis of race, sex, sexual orientation, gender identity, disability, pregnancy, religion, age, and more on startups. The researchers focuses in particular on the effects of the Employment Non-Discrimination Acts (ENDA) in the United States. This legislation included employment protections for sexual orientation and gender identity, the focus of this study. It was also introduced progressively in 15 states between 1980-2006, so that the researchers could study its impact as it was implemented.
Regulation, discrimination, and innovation
Who becomes an entrepreneur? Much ink has been spilled examining individuals’ motivations to become founders, mostly studying individual and organizational factors. Lately, researchers have turned their attention to the study of the institutional environment (which can be the workplace) and especially changes in the institution, and how the characteristics of the institution impact people’s decision to become an entrepreneur. This research has largely focused on institutions that appeal to prospective founders, for instance by providing access to resources for launching a new business. However, resources are not the only factor impacting someone’s decision to strike out on their own: it’s a big decision to leave salaried employment for a risky new business. So it makes sense that past studies have found that people are more likely to become entrepreneurs when the alternative, salaried employment, is less appealing, and vice versa (e.g. Hellmann, 2007).
How do legislations that protect against discrimination come into this, then? These laws protect their employees from discrimination, with the aim of improving workplace conditions and providing an equitable environment. The researchers studied the effects of the Employment Non-Discrimination Act at the state level. To gather data on entrepreneurship, they studied the number of new firm filings in states following the enactment of the ENDA between 1980 and 2006. They found that indeed, when the ENDA was enacted, employees were less likely to strike out on their own and found a new venture: there were fewer new ventures following the implementation of the ENDA in a given state.
Quality over quantity: while there were fewer ventures, the new ones were of higher quality. They measured quality in three different ways, the first being by the number of patent applications by young firms in a given year. Firms that file for patents are likely to 1) have superior technology and 2) seek to capture the value of their technology, and having a patent portfolio has been linked to firm survival (e.g., Cockburn and Wagner, 2007; Helmers and Rogers, 2010). This makes patent filings a suitable proxy for quality. The researchers also used the amount of venture capital raised as a proxy for quality, since funding is also linked to growth potential and quality. The third proxy for quality was their survival chances, measured by the proportion of startups created in a given year that survived for at least five years. They found that indeed, following the implementation of the ENDA in a given state, startup quality was higher in that state, with more patent filings and venture capital raised for those startups. The ENDA also had a small but significant effect on firms’ survivability.
They also found that the effect of antidiscrimination laws was even stronger in states where LGBT populations are larger and where discrimination levels tend to be higher, as measured by the number of civil rights suits. In these cases, there were again significantly fewer new firms - but higher quality ones.
Does it matter who the founder is? The researchers looked at startups founded by all minorities (not only the LGBT population) and found that there were fewer new startups founded by members of minority groups. This can likely be traced back to improved work conditions at salaried employment, making members of minority populations less likely to transition to a founder role. Delving deeper into individual traits, they conducted an experiment with over four hundred US-based employees, finding that those who were put into a scenario where their employer enacted ENDA policies reported that they would be less likely to leave their job to be an entrepreneur and that they felt more satisfied with their employer. This suggests that antidiscrimination policies increase the appeal of the workplace.
The researchers also explored antidiscrimination policies at the firm level. They found that firms in states that enacted the ENDA were more likely to adopt antidiscrimination, pro-diversity practices, such as LGBT antidiscrimination programs or progressive LGBT policies - interestingly, these firms also displayed higher corporate social responsibility scores as well. The pattern was again replicated here: these policies were associated with fewer new ventures, but higher new venture quality. This indicates that the ENDA impacts firm policy, and that this firm policy also impacts entrepreneurship behavior.
Research and policy implications
We can agree that antidiscrimination policies are a positive step, but it is also useful to empirically examine the tangible effect of such policies. In this study, Dr. Conti and his colleagues explored the effect of ENDA policies in a new way by examining how such policies impact entrepreneurship. Their findings show that antidiscrimination policies increase the appeal of the workplace, making employees less likely to leave paid employment when they feel protected by their workplace and resulting in fewer new ventures, but that the new ventures that were founded were of superior quality. This suggests that antidiscrimination policies can not only improve the worklife of minority populations, but can also improve entrepreneurship quality, a novel finding and useful information for policymakers seeking to improve employment conditions and entrepreneurship quality alike. This also shows that keeping employee welfare in mind is beneficial for building a clearer understanding of how institutional policies impact new firms. Quality over quantity: antidiscrimination policies can keep current employees satisfied in their roles, and improve the results for those that do decide to step into a new business venture.
Conti, R., Kacperczyk, O., & Valentini, G. (2021). Institutional protection of minority employees and entrepreneurship: Evidence from the LGBT Employment Non‐Discrimination Acts. Strategic Management Journal. doi: 10.1002/smj.3340