From Farming to International Business:
The Social Auspices of Entrepreneurship
in a Growing Economy
Kaivan Munshi
Brown University and NBER
1. Introduction

Business success depends on:



Credit and connections are determined by:




Family background
Community networks
Business communities cannot satisfy additional
demand for entrepreneurs
Entrepreneurs without business background will
fill the gap


Credit
Connections
Networks grow most vigorously in communities with
poor outside options once they do crystallize
Test this hypothesis with new data from the
diamond industry
The Survey

List firms: GJEPC database 2001-03

Exit information 1995-2000
Organization of the business
 Key step is accessing rough diamonds on

credit
Network provides referrals
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10 rough suppliers/year vs. 40 polished buyers
70% of firms have a dominant supplier
70% of roughs sourced from Antwerp
75% of roughs received on supplier credit
6% of transactions have a written agreement
Theoretical framework
 Production technology
 Network technology
 Selection into the industry

Entry condition:
Growth of the network
 ωtj declines more steeply in L-community


implies network strengthens more rapidly
in that community
Solving recursively, can show that this will
be the case if:
i. Density is non-decreasing as we move down
the ability distribution
ii. Network technology is not too concave
Firm performance:

Controlling for ωij with firm fixed effects,
performance increases more steeply in the Lcommunity
Average entrant’s ability
Assume linear network technology and uniform ability distribution
Same result can be obtained for
Alternative distributional
assumptions
 Multiple cohorts

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Ability distribution F(ω) constant across cohorts
Individuals enter industry at a fixed age
Receive referrals from preceding cohort
 Ability distribution varies across
communities
Selection into the network
Payoff inside the industry:
Entry conditions:
Selection thresholds:
Additional results
 Investment in the network, measured by


intra-industry marriage increases more
rapidly in the L-community
More non-network firms are drawn from
the H-community and this gap widens
over time
Predictions for characteristics and
performance unchanged
Empirical analysis
 Changes in firm characteristics


Allow for secular changes in outside options
Control for age effects
 Changes in firm performance


Allow outside options to change across
communities and over time
Control for changing returns inside the
industry
Conclusion
 No reason why such entry by outsiders
could not be replicated elsewhere
 Infusion of bank credit can have
unexpected negative consequences