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Entrepreneurship Dynamics, Market Size and Fiscal Policy

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  • Richard Kneller
  • Danny McGowan

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.

Suggested Citation

  • Richard Kneller & Danny McGowan, 2011. "Entrepreneurship Dynamics, Market Size and Fiscal Policy," Discussion Papers 11/07, University of Nottingham, School of Economics.
  • Handle: RePEc:not:notecp:11/07
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    Cited by:

    1. Qigang Yuan & Yanping Zhao & Hui Shang & Wei Zhang & Zaghum Umar, 2016. "Financing constraints on the size distribution of industrial firms: the Chinese experience," Applied Economics, Taylor & Francis Journals, vol. 48(41), pages 3899-3911, September.

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    More about this item

    Keywords

    Entry; Exit; Demand; Fiscal Policy;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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