Abstract
Latvia’s dramatic macroeconomic development from double-digit economic growth to a double-digit fall in GDP, followed by a gradual recovery between 2005 and 2015, provides a fertile ground for examining how entrepreneurship is affected by the business cycle. Data from the Global Entrepreneurship Monitor shows that the changing macroeconomic conditions brought substantial variation in the prevalence rate of early-stage entrepreneurship. It was around 4–5% at the beginning of the period and more than doubled after the economic crisis hit Latvia, hence exhibiting a clear counter-cyclical pattern. Data also shows that this increase in total early-stage entrepreneurial activity was propelled mostly by necessity-driven entrepreneurship, i.e. supporting what in the literature is labelled the refugee or push effect. Furthermore, most of this entrepreneurial activity was of low quality in terms of ambitions and ceased once the labour market recovered. To get a deeper understanding of opportunity recognition, we construct a measure of opportunity confidence that helps us understand the cyclical behaviour of opportunity-driven entrepreneurship and the role played by the opportunity cost of entrepreneurship and the perceived fear of failure.
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- 1.
The early-stage entrepreneurship phase covers entrepreneurial activity from the first active step taken to start up a business until the moment when the enterprise has paid salaries to its owners for 42 months (3.5 years). An early-stage entrepreneur is an adult individual who is either a nascent entrepreneur or a new firm owner.
- 2.
Percentage of those involved in TEA who are involved in entrepreneurship because they had no other option for work.
- 3.
As discussed in Dombrovsky et al. (2011), using data from the Latvian Panel Study of Entrepreneurial Dynamics (PSED), the main sectors in which Latvian nascent entrepreneurs were active in 2006–2007 were construction and business and private services. Each of these two sectors attracted around 20% of the nascent entrepreneurs surveyed. Compared with the Latvian economy as a whole, these two sectors were highly overrepresented among nascent entrepreneurs.
- 4.
Starting from 2011, the counter-cyclical nature is broken. As discussed later in this chapter, this might be related to the impact of the Micro-Enterprise Tax regime.
- 5.
The Micro-Enterprise Tax regime: Companies that qualify for the micro-enterprise tax scheme pay a flat 9% (a gradual increase to 15% is planned as of 2017) of their total turnover in tax. Accordingly, the tax replaces personal income tax and corporate income tax for the owner. It also replaces personal income tax and social security contributions for the employees.
- 6.
Putnins (2013) investigates exporting Latvian companies and finds that in comparison to their non-exporting counterparts, they tend to be larger, younger and faster growing. In other words, the level of ambition among exporting companies is higher.
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This research has been generously supported by the National Research Programme SUSTINNO.
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Krūmiņa, M., Paalzow, A. (2017). The Business Cycle and Early-Stage Entrepreneurship in Latvia. In: Sauka, A., Chepurenko, A. (eds) Entrepreneurship in Transition Economies. Societies and Political Orders in Transition. Springer, Cham. https://doi.org/10.1007/978-3-319-57342-7_8
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