Identity and Perception of Risk for Entrepreneurs: Lessons from an Industrially Less Developed State in India

Abstract

Identity matters for entrepreneurship in business environments marked by financial market imperfections. In the absence of formal finance, much of the economics literature on entrepreneurship focuses on the interplay of moral hazard and limited liability in explaining outcomes. However, this formulation of the problem bypasses a discussion of how entrepreneurial identity informs her perception of business prospects. While a recent branch of the literature has introduced the importance of social networks in enabling access to finance in developing countries, it does not address the issues an entrepreneur faces in developing an “identity” by belonging to a particular region or place. This paper addresses the aspect of location-based counterfactual thinking (CFT) in identity formation (which is created naturally by being a native member of a region) and its impact on the risk perception of entrepreneurs in the context of an industrially backward region. While the empirical results of the paper are drawn from a primary survey in the state of Bihar, India conducted in 2016 through snowball sampling for food processing industries, the results generalize to any context of entrepreneurial identity in the background of a low industrial base. Drawing insights from enterprise ecology, we find that (i) counterfactual thinking matters for risk perception and that (ii) both these variables change over the lifetime of entrepreneurship. We find that as the experience of the entrepreneur increases and she/he accesses more business networks/ associations, perception of risk is lowered. Alongside, the negative affect in counterfactual thinking (linked to a location-based identity) changes to positive affect with experience and exposure to business networks. The policy lesson from this exercise is that industrial policy initiatives must go beyond pecuniary incentives and pro-actively engaging in supporting entrepreneurial learning to strengthen investments and industrial outcomes in states like Bihar