Commentary on Women Entrepreneurship—New Evidence and Insights on the Productivity Dimension of the Gender Gap in Business Performance

It is commendable that a growing number of women are choosing to work for themselves rather than for others. In a new Small Business Economics Journal publication (“Gender productivity gap: Does gender-equal ownership compensate for female entrepreneurs’ lack of prior industry experience? ”, a view-only version is available here : https://rdcu.be/cTZ0c ), my Statistics Canada colleagues (Douwere Grekou and Jenny Watt) and I contribute to an ongoing discourse on the relative performance of women-owned ventures.

What’s the issue?

Women entrepreneurs often come to their new ventures with less prior industry knowledge (i.e., first-hand knowledge gained from operating businesses in the same industry as the current venture) than their men counterparts. This is a major concern because it can result in a gender productivity gap: women-owned ventures can realize a substantially lower labour productivity (i.e., value-added per employee) than men-owned ventures. This could occur because a relatively large proportion of women entrepreneurs lack relevant tacit or experience-based knowledge—namely, know-how that is essential for generating and capturing value beyond the cost of the resources deployed in organizing business activities and serving customers.

Since women entrepreneurs can gain this experience over the course of developing businesses in various industries, the gender productivity gap is likely to gradually decline over time. But what can they strategically do to close this gap sooner? Does equally owning new ventures with men compensate for their lack of prior industry experience and reduce the gender productivity gap?

These unresolved questions go beyond the micro-level concern about women entrepreneurs and their ventures. They are also linked to major macro-level priorities in Canada. Specifically, the answers to these questions can harmonize and improve currently isolated national initiatives and policies aimed at these two priorities: (a) achieving gender equality in the economic sphere of life and (b) improving Canada’s potential for sustainable economic growth by closing the enduring labour productivity gap between Canadian and American firms.

What’s our theory?

We propose a gendered resource-based perspective that is grounded in insights from liberal feminist and economics (constraint-based) perspectives. A key tenet is that gender differences in new ventures’ labour productivity (i.e., value-added per employee) is a “function of gender differences in entrepreneurs’ capacity to meet the resource requirements of strategies that yield superior results.”

To clarify why such gender differences exist and matter, we appeal to gender-specific barriers or constraints that make it more difficult for women than men to initially gain first-hand business knowledge in the industry in which they want to operate. This kind of knowledge or experience matters a lot. When entrepreneurs have it, they could know how to appropriately combine and transform resources and operations in sustainably profitable ways under dynamic or uncertain business conditions.

Thus, we argue that a gender productivity gap in new ventures can arise because male entrepreneurs have these two enduring sources of advantage:

?a)?????Knowledge-based advantage—men have a higher propensity (or chance) than women to have essential industry knowledge because proportionally more men start and operate businesses across various industries. This could partially reflect pre-existing gender-specific impediments to business development in traditionally male-dominated industries (e.g., technology and science industries).

?b)????Network-based advantage—men have a higher propensity (or chance) to externally acquire essential knowledge from predominantly male-dominated, business networks when they initially lack it.

What does our theory predict?

Based on the theory that a gender productivity gap partially results from male entrepreneurs’ knowledge- and network-based advantages, we go on to develop some important hypotheses or predictions.?Specifically, for women-owned ventures (i.e., women own 51% or more of a new ventures’ shares), equally-owned ventures (i.e., if women and men own 50% of the shares as two separate groups of co-owners) and men-owned ventures (i.e., men own 51% or more of a new ventures’ shares), we expect to find the following pattern of labour productivity in the data:

First prediction: “…a smaller difference between the labour productivity of men-owned ventures and equally-owned ventures than between men-owned ventures and women-owned ventures.”

For the patterns of returns to prior industry knowledge or experience, we expect to find these outcomes:

Second set of predictions: “…(a) the returns to experience in men-owned ventures should be small or immaterial—because male entrepreneurs’ knowledge-based advantage (i.e., a higher chance to have prior industry knowledge) can be rendered redundant by their network-based advantage (i.e., a higher chance to have privileged access to essential knowledge embedded in social networks) due to overlapping elements between their prior industry knowledge and socially-embedded knowledge in male-dominated networks; (b) the returns to experience in equally-owned ventures should also be small or immaterial—because gender-equal ownership can facilitate the partial or full internalization of male entrepreneurs’ knowledge- and network-based advantages; and (c) the returns to experience in women-owned ventures should be significant and substantially higher than either equally-owned ventures or men-owned ventures—because we assume that female entrepreneurs are unable to generally compensate for male entrepreneurs’ knowledge- and network-based advantages under female-majority ownership.”

Our data and methods

???????????Our study employs a quantitative research design. For the statistically minded reader who is eager to learn about it, the details can be found in the published version (here ). But as a preview, I highlight these key aspects of our empirical approach:

●?????Sample: 183,358 unique ventures over the period 2006 to 2017.

●?????Data source(s): Statistics Canada’s Canadian Employer Employee Dynamics Database (CEEDD)

●?????Methods and core variables: A key estimation problem is that entrepreneurs have observable and unobservable characteristics that can both influence their likelihood to “choose,” “belong to,” or “self-select into” each business category (i.e., a women-owned, equally-owned or men-owned venture), and realize superior labour productivity. If so, how could we convincingly link observed productivity outcomes to business category choices independent of personal characteristics? More generally, a wide range of factors can conflate our estimation of the relationships in question. To achieve unbiased and precise estimates of the gender productivity gap and the returns to experience across the three business categories (i.e., women-owned, equally-owned and men-owned ventures), we applied an appropriate two-stage estimation procedure. The first stage estimation involves a propensity score estimation procedure that generates “probability weights” or “propensity scores” by quantifying the relationship between entrepreneurs’ characteristics and their chance of being the principal owner of a women-owned, equally-owned and men-owned venture. For the second-stage regression of labour productivity (including the returns to experience), we incorporate the propensity scores as bias-reducing weights, along with standard and new control variables to isolate conflating influences.

What did we find?

Our findings include labour productivity trends for men-owned, women-owned and equally-owned ventures based on two approaches. First, we analyze the average labour productivity of all ventures in a given year, which Figure 1 (below) conveys. For the second approach, we analyze the average labour productivity by cohort of entry (all the related Figures can be found in our study.)

Fig. 1 Average (log) labour productivity, by year and ownership type ?

Source: Grekou, Watt & Morgan (2022)

In sum, “men-owned ventures predominantly had higher levels of labour productivity than either women-owned or equally-owned ventures over the period 2001 to 2017.” Still, I highlight the gradual narrowing of the gap between the labour productivity of men-owned ventures and equally-owned ventures and between men-owned ventures and women-owned ventures.

Here are some notable findings from our more comprehensive regression analyses:

?●?????Estimated gender productivity gap: “…women-owned and equally-owned ventures are 16.5% and 5.9% less productive than men-owned ventures (in terms of value-added per employee), respectively.”

●?????Women entrepreneurs benefit more from having prior industry knowledge than their men peers: Women-owned ventures realize productivity gains when their principal owners have prior industry knowledge or experience. However, the returns to such experience in men-owned ventures is immaterial. Male principal owners’ prior industry knowledge could yield immaterial productivity gains because they already have greater access to a broader base of knowledge in male-dominated networks.

●?????Gender-equal co-ownership can compensate for women’s lack of prior industry knowledge and reduce the gender productivity gap: Equally-owned ventures generate relatively large productivity gains, which materialize only when experienced male entrepreneurs are matched with inexperienced female entrepreneurs–compared with equally-owned ventures involving experienced female entrepreneurs and either experienced or inexperienced male entrepreneurs. This is possible if only the former co-ownership arrangement (i.e., inexperienced female entrepreneurs/experienced male entrepreneurs) yields knowledge-driven, productivity gains that outweigh potential productivity losses from counterproductive conflicts.

●?????Prior industry knowledge is a key driver of new venture growth and particularly for women-owned ventures: The larger the number of employees, the higher the returns to prior industry knowledge in women-owned ventures. This is possible if prior industry experience can improve labour productivity by helping entrepreneurs manage their growing human resources more efficiently.

Do the findings support our predictions? Yes. These findings, among others, are consistent with the first and second sets of predictions that I described earlier.

What our findings don’t imply

The estimated gender productivity gap in our study does not call women entrepreneurs’ business acumen in question. In fact, there are cases where women-led ventures achieve similar or higher labour productivity compared to men-led ventures. Our study indicates that these cases could predominantly involve experienced female entrepreneurs. Admittedly, the proportion of top-performing women-led ventures is not large enough to put the average labour productivity of female-owned ventures on par with that of men-owned ventures. But based on what we know, gender differences in access to essential industry knowledge can partially account for the estimated gender productivity gap. However, there are alternative explanations, which I will discuss later.

I also emphasize that it is inappropriate to interpret our findings as evidence that women must partner with men as co-owners, or act like them, to operate successful businesses. We can quickly dismiss this claim based on the growing number of financially successful women-led ventures. I also reiterate that experienced female entrepreneurs generally operate relatively productive ventures as majority owners.?

?It is also notable that female entrepreneurs can add distinct value to co-ownership arrangements in ways that our business productivity measure inadequately captures, or in ways that complement labour productivity—for example, they could significantly contribute to intermediate processes or psychosocial conditions that are essential for organizational well-being and effectiveness over the long term.

Building on these caveats, I will explore other relevant theories or explanations in the next section.

Plausible alternative explanations for our results

What about gender differences in entrepreneurs’ risk preference?

? Although the reported findings are consistent with our theory and predictions, there are notable alternative explanations. According to our study, the productivity gains realized from switching from female-majority ownership to gender-equal ownership could result from an increase in risk preference, rather than an increase in the knowledge base. Social feminists and economists appeal to this preference-based mechanism when they make the case that women exhibit a lower risk preference than men. This could mean that male entrepreneurs can achieve relatively high value-added per employee because they are predisposed to commit proportionately more resources to product, service, production, or marketing innovations with unpredictable but high potential payoffs. So, while they can lose lots of money when things go wrong, they could profit from a few successful innovations in terms of highly priced premium offerings to customers.

Thus, the reduced gendered productivity gap that accompanies female entrepreneurs' shift from female-majority ownership to gender-equal ownership could partially come from increased risk preference under co-ownership. For example, women entrepreneurs with the highest tolerance for risk could be disproportionately drawn to co-ownership arrangements with presumably risk-loving male co-owners. Alternatively, women co-owners could progressively increase their risk preference over the course of jointly operating ventures with such male co-owners. We partially control for the “self-selection” possibility in the first case. But are unable to adequately address the “preference transformation” possibility in the latter case.

What about gender differences in entrepreneurs’ motivation for starting a business?

“Gender differences in risk preference could be manifested as gender differences in motivation.” It is possible that proportionally more men entrepreneurs have pure financial reasons for starting a business than women entrepreneurs. Thus, the gender productivity gap could partially reflect the presence of proportionally more women-majority owners with non-financial motivations. Let’s be clear, women define what they want and what counts as success. For some women, the increased sense of empowerment from greater independence or autonomy is sufficient. Other women share how satisfying it feels to fully identify with a business and do meaningful work. Being able to balance work and family responsibilities matters too. And of course, the increased ability to make money is a key consideration in some cases. If women entrepreneurs exhibit greater variation in their motivations than men entrepreneurs, they can also show greater variation in the kinds of social networks they associate with. In contrast to male entrepreneurs, female entrepreneurs could be less motivated to form and sustain relationships that exclusively revolve around work and business interests.

A focus on financial motivation and business-driven networks is more appropriate than non-financial motivations and related networks when analyzing the gender productivity gap. But our sample could contain proportionately more women entrepreneurs than men entrepreneurs with non-financial motivations, membership in multi-purpose networks, and concerns about non-financial measures of success. This could mean that our estimated gender productivity gap could be smaller if we were able to focus on only women entrepreneurs with a dominant financial motivation, business-driven networks, and pure financial measures of success.

In sum, some data limitations precluded us from comprehensively isolating and comparing ventures led by female and male owner teams with comparable collective risk preferences, financial motivations, and business-driven networks. Thus, these plausible alternative explanations provide opportunities for researchers to build on and extend our work. Specifically, they may qualify our theory and how we interpret the key findings. For instance, it is reasonable to interpret our estimate of the gender productivity gap as an upper bound for a potential range of estimates. In addition, our proposed resource-based mechanism could be further contextualized in terms of relevant contingent factors, including the previously stated ones.

What do we now understand better?

Based on everything I have shared, what difference does this study make? This study contributes by proposing a nuanced gendered resource perspective. It is helpful for understanding and predicting the variation in the observed patterns of labour productivity across women-owned, equally-owned and men-owned ventures. It can systematically explain why and how gender-equal ownership can serve as a strategic instrument for internalizing male entrepreneurs’ advantages.?Even better, the core insights and predictions are consistent with the reported findings. At the same time, the study pinpoints relevant alternative theories, limitations, among other issues (e.g., accounting for the combined influences of gender and racial or ethnic minority status), that provide opportunities for future research. In doing so, it advances the theory of women entrepreneurship.??

The articulated evidence-based insights also contribute to the practice of women entrepreneurship. These insights are helpful for important questions, such as:

●?????When are female-led ventures less financially successful than male-led ventures?

●?????Which barriers or disadvantages should we prioritize when developing programs to support women businesses?

●?????What pragmatic strategies that women entrepreneurs deploy to circumvent such barriers and achieve better financial results?”

A key insight is that the lack of prior industry knowledge can considerably account for the gap in labour productivity between women-owned ventures and men-owned ventures. At the same time, co-ownership arrangements can help. Specifically, if the goal is to rapidly close a gender productivity gap through such arrangements, male entrepreneurs stand out as potential co-owners because of their knowledge- and network-based advantages. But there are other factors to consider when selecting co-owners, including the presence of complementary skills, compatible values, and shared vision. After assessing such factors, women entrepreneurs might very well favour female-majority ownership over gender-equal ownership. In this case, it is worthwhile to explore the most effective ways to compensate for their knowledge- and network-based disadvantages.

These insights are also relevant for Canadian policy makers tasked with promoting economic growth initiatives. There is general agreement that Canada’s future growth prospects will improve as the labour productivity gap between Canadian and American firms closes. But our findings suggest that how quickly this occurs could depend on whether and how policy makers develop harmonized initiatives that can close the reported gender productivity gap. These initiatives could be harmonized around the goal of making it easier for women entrepreneurs to gain experience-based knowledge of targeted industries directly or indirectly.

Some key takeaway messages

It is encouraging that the gender productivity gap has been narrowing. But it is still wide enough to deny women entrepreneurs the same average level of returns from entrepreneurship as their men counterparts. This could be an important issue for financially motivated women looking to earn and accumulate wealth as entrepreneurs. They don’t need male entrepreneurs as co-owners to thrive. However, since male co-owners are more likely to have knowledge- and network-based advantages, they can derive productivity-enhancing benefits from gender-equal ownership arrangements. Consequently, gender-equal ownership in an ownership option worth considering when strategizing how to rapidly close the gender productivity gap.

__________

Acknowledgments

The authors of the reported study thank the editor, László Szerb, and two anonymous reviewers for their constructive feedback over the course of the Small Business Economics Journal’s review process. They also acknowledge Women and Gender Equality Canada for funding the foundational research behind this study, and Statistics Canada for providing access to various administrative databases. For this online commentary, they thank the research support team at HM Morgan & Associates Inc . for providing editorial assistance.

Disclaimer: The views conveyed in the reported study and this online commentary are solely those of the authors; and hence, should not be construed as those held by Women and Gender Equality Canada or Statistics Canada.

How to cite the relevant work

Grekou, D., Watt, J., & Morgan, H. M. (2022). Gender productivity gap: Does gender-equal ownership compensate for female entrepreneurs’ lack of prior industry experience? Small Business Economics. DOI: https://doi.org/10.1007/s11187-022-00659-w.

__________

?#GenderProductivityGap #Entrepreneurship #WomenEntrepreneurship #FemaleEntrepreneurs #LabourProductivity #LabourProductivityGap #IndustryKnowledge #SmallBusinessEconomics #NewVentures #UWaterloo #StatCan