Recent data suggest a continuous decline in the business creation rates across business sectors and regions in the USA. While there are a few factors (such as a decline in population and an increase in business consolidation) that seem to collectively explain some of the trend for at least some areas, the overall phenomenon is still not understood. This study contributes to this line of research by assessing the relationship between economic development and business creation rates in an international setting. This study uses an 8-year and 130 countries (unbalanced) panel dataset to analyze this relationship. It finds the relationship between economic development and business creation rates to be linear and negative suggesting that the USA is not an outlier, and that business creation rates decrease in other developed economies as well. Since previous studies suggested that a decrease in business formation rates will impact the economy negatively, policymakers need to take corrective actions such as subsidies for new businesses and taxes for established ones.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
A recent study found a significant positive correlation between self-employment, business creation and innovation for urban areas (Faggio and Silva 2014).
The study reports that former communist countries have levels of entrepreneurship about 5.5% lower than the rest.
Acemoglu D, Akcigit U, Alp H, Bloom N, Kerr W (2018) Innovation, reallocation, and growth. Am Econ Rev 108(11):3450–3491
Acs ZJ, Audretsch D, Evans D (1994) Why does the self-employment rate vary across countries and over time? Centre for Economic Policy Research. London. Accessed from http://cepr.org/active/publications/discussion_papers/dp.php?dpno=871. Accessed 24 Oct 2016
Acs ZJ, Desai S, Hessels J (2008) Entrepreneurship, economic development and institutions. Small Bus Econ 31(3):219–234. https://doi.org/10.1007/s11187-008-9135-9
Ács ZJ, Autio E, Szerb L (2014) National systems of entrepreneurship: measurement issues and policy implications. Res Policy 43(3):476–494. https://doi.org/10.1016/j.respol.2013.08.016
Amoros JE (2009) Entrepreneurship and quality of institutions. World Institute for Development Economic Research (UNU-WIDER), Working Papers: UNU-WIDER Research Paper RP2009/07
Anscombe FJ (1973) Graphs in statistical analysis. Am Stat 27(1):17–21. https://doi.org/10.2307/2682899
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297. https://doi.org/10.2307/2297968
Arkolakis C, Papageorgiou T, Timoshenko O (2018) Firm learning and growth. Rev Econ Dyn 27:146–168. https://doi.org/10.1016/j.red.2017.06.001
Asturias J, Hur S, Kehoe TJ, Ruhl KJ (2019) Firm entry and exit and aggregate growth. Federal Reserve Bank of Minneapolis. Retrieved from https://www.minneapolisfed.org/research/sr/sr544.pdf. Accessed 29 Oct 2019
Aterido R, Hallward-Driemeier M, Pages C (2011) Big constraints to small firms’ growth? Business environment and employment growth across firms. Econ Dev Cult Change 59(3):609–647
Blau DM (1987) A time-series analysis of self-employment in the United States. J Polit Econ 95(3):445
Cabral R, Mollick AV (2011) Intra-industry trade effects on Mexican manufacturing productivity before and after NAFTA. J Int Trade Econ Dev 20(1):87–112
Carbonara E, Santarelli E, Tran HT (2016) De jure determinants of new firm formation: how the pillars of constitutions influence entrepreneurship. Small Bus Econ 47(1):139–162
Carree M, Van Stel A, Thurk R, Wennekers S (2002) Economic development and business ownership: an analysis using data of 23 OECD countries in the period of 1976–1996. Small Bus Econ 19(3):271
Carree M, Van Stel A, Thurik R, Wennekers S (2007) The relationship between economic development and business ownership revisited. Entrep Reg Dev 19(3):281–291. https://doi.org/10.1080/08985620701296318
Carree M, Congregado E, Golpe A, van Stel A (2015) Self-employment and job generation in metropolitan areas, 1969–2009. Entrep Reg Dev 27(3/4):181–201. https://doi.org/10.1080/08985626.2015.1025860
Colombelli A, Quatraro F (2018) New firm formation and regional knowledge production modes: Italian evidence. Res Policy 47(1):139–157
Commander S, Svejnar J (2010) Business environment, exports, ownership, and firm performance. Rev Econ Stat 93(1):309–337. https://doi.org/10.1162/REST_a_00135
Congregado E, Golpe A, Parker S (2012) The dynamics of entrepreneurship: hysteresis, business cycles and government policy. Empir Econ 43(3):1239–1261. https://doi.org/10.1007/s00181-011-0516-6
Cook RD, Weisberg S (1999) Graphs in statistical analysis: is the medium the message? Am Stat 53(1):29–37. https://doi.org/10.2307/2685649
Council of the European Union (2017) Council conclusions on the EU list of non-cooperative jurisdictions for tax purposes. Brussels. Accessed from http://www.consilium.europa.eu/media/31945/st15429en17.pdf. Accessed 8 Nov 2019
Davis SJ, Haltiwanger J, Jarmin R, Miranda J (2006) Volatility and dispersion in business growth rates: publicly traded versus privately held firms. Accessed from https://faculty.chicagobooth.edu/steven.davis/pdf/VolatilityDispersionBusinessGrowthRates.pdf. Accessed 12 Oct 2016
De Clercq D, Lim DSK, Oh CH (2013) Individual-level resources and new business activity: the contingent role of institutional context. Entrep Theory Pract 37(2):303–330. https://doi.org/10.1111/j.1540-6520.2011.00470.x
Decker R, Haltiwanger J, Jarmin R, Miranda J (2014) The role of entrepreneurship in US job creation and economic dynamism. J Econ Perspect 28(3):3–24. https://doi.org/10.1257/jep.28.3.3
Djankov S, La Porta R, Lopez-de-Silanes F, Shleifer A (2002) The regulation of entry. Q J Econ 117(1):1–37. https://doi.org/10.1162/003355302753399436
Dreher A, Gassebner M (2013) Greasing the wheels? The impact of regulations and corruption on firm entry. Public Choice 155(3–4):413–432
Dyck A, Ovaska T (2011) Business environment and new firm creation: an international comparison. J Small Bus Entrep 24(3):301–317
Estrin S, Mickiewicz T, Stephan U (2013) Entrepreneurship, social capital, and institutions: social and commercial entrepreneurship across nations. Entrep Theory Pract 37(3):479–504. https://doi.org/10.1111/etap.12019
Estrin S, Mickiewicz T, Stephan U (2016) Human capital in social and commercial entrepreneurship. J Bus Ventur 31(4):449–467. https://doi.org/10.1016/j.jbusvent.2016.05.003
Faggio G, Silva O (2014) Self-employment and entrepreneurship in urban and rural labour markets. J Urban Econ 84:67–85. https://doi.org/10.1016/j.jue.2014.09.001
Freytag A, Thurik R (2007) Entrepreneurship and its determinants in a cross-country setting. J Evol Econ 17(2):117–131
Haltiwanger J, Hathaway J, Miranda J (2014) Declining business dynamism in the U.S. high-technology sector. Accessed from https://www.brookings.edu/wp-content/uploads/2016/06/driving_decline_firm_formation_rate_hathaway_litan.pdf. Accessed 10 Nov 2019
Ireland RD, Tihanyi L, Webb JW (2008) A tale of two politico-economic systems: implications for entrepreneurship in Central and Eastern Europe. Entrep Theory Pract 32(1):107–130. https://doi.org/10.1111/j.1540-6520.2007.00218.x
Kaufmann D, Kraay A (2008) Governance indicators: where are we, where should we be going? World Bank Res Obs 23(1):1–30
Kheng V, Sun S, Anwar S (2017) Foreign direct investment and human capital in developing countries: a panel data approach. Econ Change Restruct 50(4):341–365. https://doi.org/10.1007/s10644-016-9191-0
Klapper L, Delgado JMQ (2009) The impact of the business environment on the business creation process. The World Bank, Policy Research working paper series: 4937. Accessed from http://vortex3.uco.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=ecn&AN=1046299&site=ehost-live. http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2009/05/19/000158349_20090519094645/Rendered/PDF/WPS4937.pdf. Accessed 10 Nov 2019
Koster S, Karlsson C (2009) New firm formation and economic development in a globalizing economy. Accessed from https://ideas.repec.org/p/hhs/cesisp/0167.html. Accessed 10 Nov 2019
Litan RE, Hathaway I (2014) What’s driving the decline in the firm formation rate? A partial explanation. Accessed from https://www.brookings.edu/wp-content/uploads/2016/06/driving_decline_firm_formation_rate_hathaway_litan.pdf. Accessed 10 Nov 2019
Munemo J (2017) Foreign direct investment and business start-up in developing countries: the role of financial market development. Q Rev Econ Finance 65:97–106
Noorderhaven N, Thurik R, Wennekers S, Van Stel A (2004) The role of dissatisfaction and per capita income in explaining self-employment across 15 European Countries. Entrep Theory Pract 28(5):447–466. https://doi.org/10.1111/j.1540-6520.2004.00057.x
Quesada JM, Guillen MF, Amit R, Klapper L (2007) Entrepreneurship and firm formation across countries (English). Policy Research working paper; no. WPS 4313. World Bank, Washington, DC. http://documents.worldbank.org/curated/en/904131468315535965/Entrepreneurship-and-firm-formation-across-countries. Accessed 12 Nov 2019
Rivera-Batiz FL (2002) Democracy, governance, and economic growth: theory and evidence. Rev Dev Econ 6(2):225–247. https://doi.org/10.1111/1467-9361.00151
Sciascia S, Mazzola P, Chirico F (2013) Generational involvement in the top management team of family firms: exploring nonlinear effects on entrepreneurial orientation. Entrep Theory Pract 37(1):69–85. https://doi.org/10.1111/j.1540-6520.2012.00528.x
Sun L, Lee IH, Hong E (2017) Does foreign direct investment stimulate new firm creation? In search of spillovers through industrial and geographical linkages. Small Bus Econ 48(3):613–631
Tadesse B, Fayissa B (2008) The impact of African growth and opportunity act (Agoa) on U.S. imports from Sub-Saharan Africa (SSA). J Int Dev 20(7):920–941
Thai MTT, Turkina E (2014) Macro-level determinants of formal entrepreneurship versus informal entrepreneurship. J Bus Ventur 29(4):490–510. https://doi.org/10.1016/j.jbusvent.2013.07.005
van Stel A, Thurik R, Wennekers S, Reynolds PD (2004) Explaining variation in nascent entrepreneurship. Accessed from http://ideas.repec.org/p/eim/papers/h200401.html. Accessed 21 Sept 2016
Verheul I, Van Stel A, Thurik R (2006) Explaining female and male entrepreneurship at the country level. Entrep Reg Dev 18(2):151–183. https://doi.org/10.1080/08985620500532053
Wennekers S, Thurik R (1999) Linking entrepreneurship and economic growth. Small Bus Econ 13(1):27
Wennekers S, Van Wennekers A, Thurik R, Reynolds P (2005) Nascent entrepreneurship and the level of economic development. Small Bus Econ 24(3):293–309. https://doi.org/10.1007/s11187-005-1994-8
World Bank (2017) Entrepreneurship. Accessed from http://www.doingbusiness.org/data/exploretopics/entrepreneurship. Accessed 13 June 2017
Zhou Y (2018) Human capital, institutional quality and industrial upgrading: global insights from industrial data. Econ Change Restruct 51(1):1–27. https://doi.org/10.1007/s10644-016-9194-x
This paper has greatly benefitted from very useful comments and suggestions received from two anonymous reviewers. However, the author is solely responsible for all remaining errors and omissions.
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
About this article
Cite this article
Nica, M. Economic development and business creation. Econ Change Restruct 54, 219–239 (2021). https://doi.org/10.1007/s10644-020-09274-9
- Business creation
- Economic development
- Panel data