Why does the effect of new business formation differ across regions?

Abstract

We investigate regional differences in the effect of new business formation on employment growth in West Germany. We find an inverse Ushaped relationship between the level of start-up activity and employment change. The main variables that shape the employment effects of new businesses in a region are population density, the share of medium-skilled workers, the amount of innovation activities as measured by the proportion of research and development (R&D) employees, and an entrepreneurial character of the regional technological regime. In contrast, a high share of small-business employment has a negative influence on the employment effect of start-ups. Other indicators for education, innovation activity, and labor productivity do not prove to be statistically significant.1 Aims and scope 1 Recent empirical research strongly indicates that the effect of new business formation on economic development is of a long-term nature.2 It is found that start-up rates may have a statistically significant impact on growth for a period of up to 10 years (for an overview, see Fritsch 2008). Over this time span, the effect of start-ups on growth shows considerable variation that is in most cases (countries or regions) characterized by a wave-like pattern (see Sect. 2 for details). This wave-like pattern reveals that new businesses have a positive impact on economic development in the first 1 or 2 years after formation, but that the effect then declines and, in many cases, becomes negative. In many regions, the effect becomes positive again after about 5 years, and then A. Schroeter e-mail: alexandra.schroeter@uni-jena.de 1 We are indebted to Oliver Falck (CES-ifo, Munich), Stephan Heblich (MPI, Jena), Antonio Garcia-Tabuenca (University of Alcala, Madrid), and two anonymous referees for their helpful comments on an earlier version of this manuscript. Oliver Falck also provided very valuable advice on econometric issues.

Methods of analyzing the relationship between new business formation and regional development

“…Given that economic growth creates entrepreneurial opportunities, entrepreneurship, which confirms results of Fritsch and Schroeter (2011) for German regions. A main limitation of Hartog et al's (2010) study is that it contains no information on gross entry and thus nothing can be learned about how the number of entries affects turbulence in the stock of businesses and the consequent effects on economic development.…”

“…A key result of Fritsch and Schroeter's (2011) analysis is that population density has a strong positive influence on the effects of new business formation on regional employment, an influence that appears to be more important than that of other variables.…”

The more business owners, the merrier? The role of tertiary education

“…By estimating macroeconomic production functions, we follow the tradition of a second strand of literature which models output as a function of the traditional input factors physical capital, labor, and knowledge capital, and, in addition, of an input factor labeled entrepreneurship capital (see, for instance, Audretsch and Keilbach 2004a, b;Audretsch et al 2006;Mueller 2007;Bosma et al 2011;Fritsch and Schroeter 2011). We contribute to this strand of literature in two ways.…”

Barriers and Opportunities for Entrepreneurship in Older Industrial Regions

“…There is a vast amount of academic literature on entrepreneurship and its ability to revitalize regions (Acs and Armington 2004;Audretsch and Keilbach 2004;Baptista and Preto 2011;Caree and Thurik 2010;Dejardin 2011;Fritsch and Schroeter 2011;Mueller 2007). The economic fundamentals of entrepreneurship stem from the building blocks that economists have put forward over the last 200 years.…”