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Entrepreneurship and Economic Growth: The Proof Is in the Productivity

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Abstract

Popular and policy discussions have focused extensively on "entrepreneurship." While entrepreneurship is often viewed from the perspective of the individual's benefits--an increase in standard of living, flexibility in hours, and so forth--much of the policy interest derives from the presumption that entrepeneurs provide economy-wide benefits in the form of new products, lower prices, innovations, and increased productivity. How large are these effects? Using a rich panel of state-level data, we quantify the relationship between productivity growth--by state and by industry--and entrepreneurship. Specifically, we use state-of-the-art econometric techniques for panel data to determine whether variations in the birth rate and death rate for firms are related to increases in productivity. We find that shocks to productivity are quite persistent. Thus, to the extent that policies directly raise labor productivity, these effects will be long lasting. In addition, the data reveal that increases in the birth rate of firms lead, after some lag, to higher levels of productivity, a relationship reminiscent of Schumpeterian creative destruction. Given previous evidence that government policies raise the rate of entry of new entrepreneurs, our findings link these policies to enhanced productivity.

Suggested Citation

  • Douglas Holtz-Eakin & Chihwa Kao, 2003. "Entrepreneurship and Economic Growth: The Proof Is in the Productivity," Center for Policy Research Working Papers 50, Center for Policy Research, Maxwell School, Syracuse University.
  • Handle: RePEc:max:cprwps:50
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    References listed on IDEAS

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    1. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 36-49, January.
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    3. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
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    5. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    6. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, pages 115-143.
    7. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1994. "Entrepreneurial Decisions and Liquidity Constraints," RAND Journal of Economics, The RAND Corporation, pages 334-347.
    8. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
    9. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Slow Death of American Entrepreneurship
      by Ben Casselman in FiveThirtyEight Economics on 2014-05-15 16:39:30

    Citations

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    Cited by:

    1. Zoltan Acs & Lawrence Plummer & Ryan Sutter, 2009. "Penetrating the knowledge filter in “rust belt” economies," The Annals of Regional Science, Springer;Western Regional Science Association, pages 989-1012.
    2. Zoltán Ács & Attila Varga, 2005. "Entrepreneurship, Agglomeration and Technological Change," Small Business Economics, Springer, vol. 24(3), pages 323-334, February.
    3. Jean Bonnet, 2016. "From Knowledge to Innovation Economy: Developing Education and Creating Entrepreneurial Ecosystems," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2016-02, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    4. Hugo Erken & Piet Donselaar & Roy Thurik, 0000. "Total Factor Productivity and the Role of Entrepreneurship," Tinbergen Institute Discussion Papers 09-034/3, Tinbergen Institute.
    5. David B. Audretsch & Werner Boente & Jagannadha Pawan Tamvada, 2007. "Religion and Entrepreneurship," Jena Economic Research Papers 2007-075, Friedrich-Schiller-University Jena.
    6. Mark Drabenstott, 2005. "A review of the federal role in regional economic development," Monograph, Federal Reserve Bank of Kansas City, number 2005arotfrire.
    7. Zoltán J. Ács & Lawrence A. Plummer & Ryan Sutter, 2015. "Penetrating the knowledge filter in “rust belt” economies," Chapters,in: Global Entrepreneurship, Institutions and Incentives, chapter 17, pages 320-343 Edward Elgar Publishing.
    8. Zoltan Acs & Lawrence A. Plummer & Ryan Sutter, 2007. "Penetrating the Knowledge Filter in the Rust Belt," Jena Economic Research Papers 2007-058, Friedrich-Schiller-University Jena.
    9. Asai, M. & McAleer, M.J., 2016. "Asymptotic Theory for Extended Asymmetric Multivariate GARCH Processes," Econometric Institute Research Papers EI2016-35, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    10. Charlie Karlsson, 2012. "Entrepreneurship, social capital, governance and regional economic development: an introduction," Chapters,in: Entrepreneurship, Social Capital and Governance, chapter 1, pages 1-26 Edward Elgar Publishing.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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