Abstract
This paper studies the relationship between entrepreneurship and economic growth using new panel data on the number of new firm registrations in 109 countries for the period 2002–2012. We find strong evidence of a pro-cyclical pattern in entrepreneurship. Furthermore we examine heterogeneous relationships between new firm registration and the business cycle and find that higher levels of financial development and a better business environment are associated with a stronger pro-cyclicality of entrepreneurship both across countries and within countries over time, i.e. a sharper contraction of new firm registrations at the outset of a recession, and a faster recovery of new firm registrations after the recession has ended. These findings suggest that fostering an efficient regulatory environment for the financial and private sector is important for encouraging a speedier recovery in the formation of new firms during economic expansions and aiding the efficient wind-down of insolvent firms during economic slowdowns.
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Notes
Evidence of a relationship between tighter credit during and economic downturns has been found in both high-income and developing countries. For example, Bernanke and Lown (1999) bring evidence of a decrease in bank lending, or a “credit crunch” in the banking sector, during the 1990 recession in the United States. Similarly, evidence has been found in Korea (Borensztein and Lee, 2002) and Eastern Europe (Guillermo and Coricelli, 1993).
The complete database on new firm registration is available at: www.doingbusiness.org/entrepreneurship.
Data collected from economies categorized by the International Monetary Fund and the Financial Stability Forum as offshore financial centers are excluded from the analysis. See http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm#table 1 and http://www.imf.org/external/np/pp/eng/2008/050808.pdf
See Table 1 for the definition and sources for all variables.
We lose several years of data since Doing Business data is not available for early part of our sample.
These results are also robust to using either starting values of our financial development and business environment measures (using 2003 for financial development and 2004 for business environment), or averages taken over the pre-crisis years, i.e. 2003–2007 or 2004–2007.
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Acknowledgment
We thank the Ewing Marion Kauffman Foundation and the World Bank Group for financial support. This paper's findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, their Executive Directors, or the countries they represent.
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Klapper, L., Love, I. & Randall, D. New firm registration and the business cycle. Int Entrep Manag J 11, 287–306 (2015). https://doi.org/10.1007/s11365-014-0345-0
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DOI: https://doi.org/10.1007/s11365-014-0345-0