Entrepreneurial Human Capital and Firm Dynamics

This article shows that entrepreneurial human capital is a key driver of firm dynamics using administrative panel data on the universe of firms and workers in Portugal. Firms started by more educated entrepreneurs are larger at entry and exhibit higher life cycle growth. Consistent with an effect on growth, the thickness of the right tail of the size distribution increases with entrepreneur schooling. The evidence points to several underlying mechanisms, with technology adoption playing the most important part. I develop and estimate a model of firm dynamics that can parsimoniously account for these findings and use it to draw aggregate implications. Accounting for the effect of entrepreneurial human capital on firm dynamics can substantially increase aggregate returns to schooling and the fraction of cross-country income differences explained by human and physical capital.

Automated summary

This article demonstrates that entrepreneurial human capital is a key factor in driving firm dynamics, with firms started by more educated entrepreneurs showing larger size and higher growth rates. The adoption of technology plays a crucial role in this process, leading to an increase in the size distribution of firms. A model of firm dynamics is developed and estimated to explain these findings, highlighting the significant impact of entrepreneurial human capital on aggregate returns to schooling and cross-country income differences.