Financial inclusion—entrepreneurship nexus: evidence from a threshold analysis

While it is widely believed that enhancements in financial inclusion foster entrepreneurship growth, extant empirical studies have generated conflicting findings on financial inclusion’s relationship with entrepreneurship. On the back of this state of the literature and on the suspicion of some non-monotonicity in the relationship, we investigate the existence of threshold effects in the financial inclusion-entrepreneurship nexus. Using a dynamic panel threshold regression model on data from 68 developing and 28 developed countries over the period 2006 to 2020, the findings reveal significant financial inclusion thresholds in both contexts. In developing countries, financial inclusion has no significant impact on entrepreneurship below the identified threshold, but once this threshold is surpassed, it significantly enhances entrepreneurial activity. In developed countries, financial inclusion positively influences entrepreneurship both below and above the threshold, though its impact diminishes above the threshold. These results underscore the non-monotonic nature of the financial inclusion-entrepreneurship relationship and suggest that policymakers in developing countries should prioritize efforts to raise the level of financial inclusion beyond identified threshold levels to drive financial inclusion-induced entrepreneurship growth. Meanwhile, in developed economies, further gains in financial inclusion may yield diminishing returns, requiring policymakers to prioritize other drivers of entrepreneurship beyond financial inclusion.