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Opportunity versus Necessity Entrepreneurship: Two Components of Business Creation

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  • Robert W. Fairlie
  • Frank M. Fossen

Abstract

A common finding in the entrepreneurship literature is that business creation increases in recessions. This counter-cyclical pattern is examined by separating business creation into two components: “opportunity” and “necessity” entrepreneurship. Although there is general agreement in the previous literature on the conceptual distinction between these two factors driving entrepreneurship, there are many challenges to creating a definition that is both objective and empirically feasible. We propose an operational definition of opportunity versus necessity entrepreneurship using readily available nationally representative data. We create a distinction between the two types of entrepreneurship based on the entrepreneur’s prior work status that is consistent with the standard theoretical economic model of entrepreneurship. Using this definition we document that “opportunity” entrepreneurship is pro-cyclical and “necessity” entrepreneurship is counter-cyclical. We also find that “opportunity” vs. “necessity” entrepreneurship is associated with the creation of more growth-oriented businesses. The operational distinction proposed here may be useful for future research in entrepreneurship.

Suggested Citation

  • Robert W. Fairlie & Frank M. Fossen, 2018. "Opportunity versus Necessity Entrepreneurship: Two Components of Business Creation," SOEPpapers on Multidisciplinary Panel Data Research 959, DIW Berlin, The German Socio-Economic Panel (SOEP).
  • Handle: RePEc:diw:diwsop:diw_sp959
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    2. Wang, Chunbei & Lofstrom, Magnus, 2019. "September 11 and the Rise of Necessity Self-Employment among Mexican Immigrants," IZA Discussion Papers 12555, Institute of Labor Economics (IZA).
    3. Steiner, Viktor & Fossen, Frank & Rees, Ray & Rostam-Afschar, Davud, 2017. "How Do Entrepreneurial Portfolios Respond to Income Taxation?," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168302, Verein für Socialpolitik / German Economic Association.
    4. Nikolova, Milena, 2019. "Switching to self-employment can be good for your health," Journal of Business Venturing, Elsevier, vol. 34(4), pages 664-691.
    5. Frank Fossen & Ray Rees & Davud Rostam-Afschar & Viktor Steiner, 2017. "How Do Entrepreneurial Portfolios Respond to Taxation?," CESifo Working Paper Series 6558, CESifo.
    6. Alin Croitoru, 2020. "Great Expectations: A Regional Study of Entrepreneurship Among Romanian Return Migrants," SAGE Open, , vol. 10(2), pages 21582440209, May.
    7. Gries, Thomas, 2019. "Income polarization and stagnation in a stochastic model of growth: When the demand side matters," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203576, Verein für Socialpolitik / German Economic Association.
    8. Alin CROITORU & Flavius MIHALACHE, 2018. "Fostering Rural Transformation In Romania: Entrepreneurship, Land Reform And Institutional Changes," Journal of Community Positive Practices, Catalactica NGO, issue 1, pages 3-17.
    9. Fossen, Frank M., 2019. "Entrepreneurship over the Business Cycle in the United States: A Decomposition," IZA Discussion Papers 12499, Institute of Labor Economics (IZA).
    10. Aldén, Lina & Hammarstedt, Mats & Miao, Chizheng, 2020. "Financial Capital and Immigrant Self-Employment: Evidence from a Swedish Reform," Working Paper Series 1359, Research Institute of Industrial Economics.
    11. Chunbei Wang & Magnus Lofstrom, 2020. "September 11 and the Rise of Necessity Self-Employment Among Mexican Immigrants," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 46(1), pages 5-33, January.
    12. Nikolova, Milena, 2018. "Self-Employment Can Be Good for Your Health," GLO Discussion Paper Series 226, Global Labor Organization (GLO).
    13. Chizheng Miao, 2020. "Immigrant self‐employment and local unemployment in Sweden," Manchester School, University of Manchester, vol. 88(3), pages 464-488, June.
    14. Ida Ketut Kusumawijaya, 2019. "Predicting the Unseen: Entrepreneurial Opportunity on Entrepreneurial Intention," International Review of Management and Marketing, Econjournals, vol. 9(5), pages 141-149.
    15. Mohamad Buheji, 2018. "Understanding Necessity Entrepreneurship," Post-Print halshs-01820594, HAL.

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    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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