The effects of uncertainty shocks on entrepreneurship are unknown. On the one hand, uncertainty shocks are associated with prominent levels of business mortality. The Federal Emergency Management Agency estimates that 40% of small businesses do not reopen after being hit by a natural disaster and 90% will fail within a year unless they can resume operations in less than a week and studies have shown that uncertainty shocks reduce output, employment, and productivity and suggest that business activity declines even in countries not directly hit by a disaster due to economic interdependencies. On the other hand, other studies suggest that uncertainty shocks may be beneficial to entrepreneurship. Building off the idea of ‘destructive creation,’ scholars have argued that uncertainty shocks may challenge established incumbents and open up opportunities for new business creation and radical innovation.
This project seeks to resolve this debate through novel evidence on the relationship between uncertainty shocks, risk preferences, and entrepreneurship. We intend to explore three related research questions: a) How do uncertainty shocks affect both firm failure and founding, and therefore the overall level of entrepreneurship?; b) how do these effects differ across sub-populations of entrepreneurial firms (e.g., venture-backed vs. other firms, low-tech vs. high-tech industries)?; and c) what role do changing risk preferences play in driving these effects?
Risk taking is at the essence of innovation and the literature traditionally assumes risk preferences to be stable across time. I evaluate the argument that exposure to exogenous high-consequence shocks alter risk preferences and thus risk taking. To identify this causal effect, I construct panel data on patents by U.S. county from 1990 and 2015 as proxy for innovation and then use large geophysical and meteorological disasters as natural experiments that generate substantial and sudden changes in uncertainty at the local level. I expect that counties exposed to natural disasters will observe comparatively large number of patents. Additionally, I test the moderating effects of the frequency and magnitude of exposure to disasters.
The literature that studies the country-specific determinants of market entry predominantly approaches the institutional environment as relatively stable (North 1990). However, uncertainty shocks are known to generate systemic disruptions that reshape norms, values, and rules which otherwise change incrementally (Bloom 2009). It is during these disruptions when local perceptions of geopolitical and economic conflict or cooperation are comparatively vulnerable to be deviated by the behavior of strategic foreign actors. Particularly, the actions undertaken by foreign national governments to help the shock-affected country may reduce the negative local perceptions of firms that are co-national to the responding government. The liability of foreignness that these firms may be mitigated, at least temporarily and thus increasing their opportunities for market entry.
This study connects the antecedents of corporate philanthropy and its consequences. We tackled the question of whether corporate philanthropy that is driven by altruism generates greater value for its beneficiary than corporate philanthropy than is driven by strategic considerations. The findings of a quasi-experimental design suggest that disaster-affected countries received greater average donations from firms whose behavior had, arguably, comparatively strong strategic implications (i.e., these firms have operations in the affected country, their headquarters-country is economically proximate and culturally distant to the affected country, and their donation was top-management driven) than from counterfactual firms whose behavior is, arguably, comparatively altruistic (i.e., these firms do not have operations in the affected country, their headquarters-country is economically distant and culturally proximate to the affected country, and their donation is employee-driven). This suggests that stressing altruism or, more broadly, the social preferences behind corporate pro-social behavior, as opposed to its strategic value, may result in an economic loss from the perspective of the beneficiary of firm action.