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The two-way relationship between entrepreneurship and economic performance

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  • André van Stel
  • Roy Thurik
  • Chantal Hartog
  • Simon Parker

Abstract

This paper examines the two-way relationship between entrepreneurship and economic performance, using a harmonized data set covering 21 OECD countries in the period 1981-2006. While the relation between entrepreneurship and economic performance has been investigated extensively, most papers in this research field suffer from one or more methodological flaws, so that the important question: "does entrepreneurship cause economic performance?" can still not be answered up till the present day. In this paper we investigate the relationship in a Vector Error Correction Model (VECM) framework. We find evidence for the existence of a long-run equilibrium relation between the level of business ownership and per capita income. We also find evidence that increases in business ownership actually cause economic growth. However, our impulse response analysis reveals that the effect depends on the number of business owners already present in the economy, i.e. we find decreasing marginal returns to entrepreneurship. We also find that the effect depends on the size of the shock (i.e. the increase in entrepreneurship), where too big shocks may lead to negative effects on GDP due to 'overshooting'. �

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Bibliographic Info

Paper provided by EIM Business and Policy Research in its series Scales Research Reports with number H200822.

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Length: 78 pages
Date of creation: 15 Jul 2010
Date of revision:
Handle: RePEc:eim:papers:h200822

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References

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  1. Audretsch, David B & Keilbach, Max, 2005. "Entrepreneurship Capital - Determinants and Impact," CEPR Discussion Papers 4905, C.E.P.R. Discussion Papers.
  2. Audretsch, David B & Carree, Martin A & Thurik, A R Roy & van Stel, A J, 2005. "Does Self-Employment Reduce Unemployment?," CEPR Discussion Papers 5057, C.E.P.R. Discussion Papers.
  3. van Stel, A.J. & Suddle, K., 2005. "The Impact of New Firm Formation on Regional Development in the Netherlands," ERIM Report Series Research in Management ERS-2005-075-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  4. David Audretsch & Roy Thurik, 0000. "Sources of Growth," Tinbergen Institute Discussion Papers 97-109/3, Tinbergen Institute.
  5. Johansen, S., 1999. "A Bartlett Correction Factor for Tests on the Cointegrating Relations," Economics Working Papers eco99/10, European University Institute.
  6. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  7. Mackinnon, J.G. & Haug, A.A. & Michelis, L., 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," G.R.E.Q.A.M. 96a09, Universite Aix-Marseille III.
  8. Andre van Stel, . "COMPENDIA: Harmonizing business ownership data across countries and over time," Papers on Entrepreneurship, Growth and Public Policy 2005-05, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
  9. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  11. Michael Fritsch & Pamela Mueller, 2004. "The Effects of New Business Formation on Regional Development over Time," Papers on Entrepreneurship, Growth and Public Policy 2004-36, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
  12. Hugo Erken & Piet Donselaar & Roy Thurik, 2008. "Total factor productivity and the role of entrepreneurship," Jena Economic Research Papers 2008-019, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  13. Franses, Ph.H.B.F., 1999. "How to deal with intercept and trend in pratical cointegration analysis?," Econometric Institute Research Papers EI 9904-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  14. Acs, Zoltán J & Audretsch, David B & Braunerhjelm, Pontus & Carlsson, Bo, 2006. "Growth and Entrepreneurship: An Empirical Assessment," CEPR Discussion Papers 5409, C.E.P.R. Discussion Papers.
  15. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  16. Roy Thurik & Andreas Freytag, 2006. "Entrepreneurship and its determinants in a cross-country setting," Scales Research Reports H200616, EIM Business and Policy Research.
  17. Michael Fritsch, 2008. "How does new business formation affect regional development? Introduction to the special issue," Small Business Economics, Springer, vol. 30(1), pages 1-14, January.
  18. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  19. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  20. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  21. Michael Fritsch & Pamela Mueller, 2004. "Effects of New Business Formation on Regional Development over Time," Regional Studies, Taylor & Francis Journals, vol. 38(8), pages 961-975.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Scottish entrepreneurial buzz, or needs must?
    by Brian Ashcroft in Scottish Economy Watch on 2012-11-18 00:26:14
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Michael Fritsch, 2011. "New Business Formation and Regional Development: A Survey and Assessment of the Evidence," Discussion Papers of DIW Berlin 1127, DIW Berlin, German Institute for Economic Research.
  2. Michael Fritsch & Florian Noseleit, 2013. "Indirect employment effects of new business formation across regions: The role of local market conditions," Papers in Regional Science, Wiley Blackwell, vol. 92(2), pages 361-382, 06.
  3. Michael Fritsch, 2012. "Methods of analyzing the relationship between new business formation and regional development," Jena Economic Research Papers 2012-064, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  4. Michael Fritsch, 2011. "The effect of new business formation on regional development - Empirical evidence, interpretation, and avenues for further research," Jena Economic Research Papers 2011-006, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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