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Entrepreneurship Dynamics, Market Size and Fiscal Policy

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  • Richard Kneller

    (University of Nottingham)

  • Danny McGowan

    () (Bangor Business School)

Abstract

The current recession has highlighted the potentially severe impact of shrinkages in demand and fiscal austerity upon firm entry and survival. Using data covering broad manufacturing and service sectors in 17 countries this paper investigates how changes in fiscal policy and market size affect rates of firm entry and exit. We find that reductions in fiscal expenditure are associated with higher rates of entrepreneurship and that there are differences between more disaggregated policy factors such as government consumption, investment and taxation. Quantitatively more important is market size. In the immediate aftermath of a 5 percent reduction in market size the rate of entry falls by approximately 0.25 percentage points while the exit rate rises by a similar amount. Although small in comparison with average rates of entry and exit this corresponds to a loss of 17,500 firms in the United States. Changes in fiscal expenditure are estimated to have a slightly smaller effect.

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Bibliographic Info

Paper provided by Bangor Business School, Prifysgol Bangor University (Cymru / Wales) in its series Working Papers with number 11003.

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Date of creation: Oct 2011
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Handle: RePEc:bng:wpaper:11003

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Keywords: Entry; Exit; Demand; Fiscal Policy;

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  1. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 1998. "Entrepreneurs, Income Taxes, and Investment," NBER Working Papers 6374, National Bureau of Economic Research, Inc.
  2. John R. Baldwin & Paul K. Gorecki, 1991. "Firm Entry and Exit in the Canadian Manufacturing Sector, 1970-1982," Canadian Journal of Economics, Canadian Economics Association, vol. 24(2), pages 300-323, May.
  3. Disney, Richard F & Haskel, Jonathan & Heden, Ylva, 2000. "Restructuring And Productivity Growth In UK Manufacturing," CEPR Discussion Papers 2463, C.E.P.R. Discussion Papers.
  4. Griffith, Rachel & Redding, Stephen J & Van Reenen, John, 2000. "Mapping The Two Faces Of R&D: Productivity Growth In A Panel Of OECD Industries," CEPR Discussion Papers 2457, C.E.P.R. Discussion Papers.
  5. Baldwin, John R. Harchaoui, Tarek, 2002. "Productivity Growth in Canada," Productivity Growth in Canada, Statistics Canada, Economic Analysis Division, number stcb6e, December.
  6. Da Rin, M. & Di Giacomo, M. & Sembenelli, A., 2010. "Entrepreneurship, Firm Entry, and the Taxation of Corporate Income: Evidence from Europe," Discussion Paper 2010-026, Tilburg University, Tilburg Law and Economic Center.
  7. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2010. "The Effect of Corporate Taxes on Investment and Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 31-64, July.
  8. Greenaway, David & Gullstrand, Joakim & Kneller, Richard, 2008. "Surviving globalisation," Journal of International Economics, Elsevier, vol. 74(2), pages 264-277, March.
  9. Manjon, M.C., 2004. "Firm Size and Short-Term Dynamics in Aggregate Entry and Exit," Discussion Paper 2004-2, Tilburg University, Center for Economic Research.
  10. John R. Baldwin & Paul K. Gorecki, 1990. "Firm Entry and Exit in the Canadian Manufacturing Sector," Working Papers 767, Queen's University, Department of Economics.
  11. Mata, Jose & Portugal, Pedro & Guimaraes, Paulo, 1995. "The survival of new plants: Start-up conditions and post-entry evolution," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 459-481, December.
  12. André van Stel & Roy Thurik & Dennis Fok & Andrew Burke, 2009. "The Dynamics of Entry and Exit," Scales Research Reports H200907, EIM Business and Policy Research.
  13. Gibson,J.K. & Harris,R.I.D., 1996. "Trade Liberalisation and Plant Exit in New Zealand Manufacturing," Papers 66, Portsmouth University - Department of Economics.
  14. Gentry, William M. & Hubbard, R. Glenn, 2004. "The effects of progressive income taxation on job turnover," Journal of Public Economics, Elsevier, vol. 88(11), pages 2301-2322, September.
  15. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
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