This paper analyzes the effect of business creation and entrepreneurship on economic growth, while considering the institutional determinants of business creation. To explore this relationship, this study relies on data from the Entrepreneurship Database, Doing Business Database, World Development Indicators Database and World Governance Indicators Database for 126 countries from 2004 to 2020. This paper aims to empirically link two literature strands, the one of the main determinants of business creation and the other of the effect of business creation and entrepreneurship on economic growth.
Instrumental variable two-stage least squares (IV-2SLS) estimation is used to account for the endogeneity problem that may arise when studying the effect of business creation and economic growth, by using as instruments the ease of doing business indicators. We model economic growth as a function of the traditional factors of capital, consumption, exports and imports, along with entrepreneurship that may be also important to foster economic growth. We include these factors into a Cobb–Douglas production function.
The results of this paper show a positive effect of business creation on economic growth. However, when we assess this effect across different income levels, we find that this effect is mainly driven by the group of high- and middle-income countries. We also find that corruption does not necessarily impede economic growth for all income levels. The results are used to derive policy implications in terms of the importance of entrepreneurship and business creation for economic performance across different income levels.
One of the main limitations of our model is the lack of a larger time span to assess the effect of the pandemic on economic growth.
Governments should use several policies to remove market and institutional barriers to entrepreneurship; as administrative costs associated with registering a business, taxes and financial barriers in the market. Hence, many reforms can be implemented for different components of ease of doing business indicator, as cost of starting a business, taxes and capital requirement specifically for low-income countries, to make the effect of entrepreneurship more sound on economic growth. Moreover, governments have to mitigate the negative effects of exports on business creation by providing financial assistance to new businesses and by enforcing trade agreements that reduce barriers to trade in low-income countries.
This study contributes to the literature by providing a bridge between two strands of literature: one of which is on the main determinants of business creation and the other is on the effect of business creation on economic growth. Creating a large dataset on 126 countries from 2004 to 2020, including 82 developing countries and 44 developed countries, the author aims to understand the dynamics of business start-ups around the world and to find empirical evidence for the effect of business creation on economic growth, while accounting for the endogeneity of business creation. Thus, we will study how entrepreneurship is promoted and how entrepreneurship influences economic growth. According to our knowledge, this study is the first study studying the two strands of literature with the largest set of developing countries while explaining the business creation indicator through different institutional mechanisms.
