Investigating entrepreneurial spirit with the rule approach: why self-employment is on the decline in Japan

This paper investigates the determinants of entrepreneurial spirit as measured by parental preference of self-employment for male heirs in Japan since 1992 through a statistical analysis. In addition to the relevance of our findings for entrepreneurship research, this empirical study serves as a showcase for the rule approach of Dopfer and Potts in applied research. It helps to understand how self-employment has become a less and less desirable occupational choice since the abandonment of Japan’s high growth path in the early 1990s. For entrepreneurial spirit in Japan, business sentiment, interest rates (perceived cost of capital), changing family structures (declining number of siblings), and fear of unemployment are all identified to exert significant negative influence. While the former three are strongly significant during all of the investigation period (1992-2007), fear of unemployment is found to strongly influence entrepreneurial spirit in the general population from 1998 onwards only. The rule approach helps to motivate how agents have come to understand unemployment as a factor relevant for their economic lives in the course of the years following the burst of the Japanese bubble economy. Negative signs on both business sentiment, and on fear of unemployment relate to different subgroups of agents, namely to self-employed individuals (business sentiment), and to individuals in dependent employment (fear of unemployment). Improving business sentiment means higher viability of preferred occupational choice for the self-employed, whereas a higher degree of fear of unemployment discourages dependently employed individuals from embarking on the route of self-employment. Further findings include significant evidence that the nominal interest rate – rather than its real counterpart – likely influences entrepreneurial spirit in Japan.