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Spending allocation and entrepreneurship

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Abstract

The continuous interest that researchers show toward entrepreneurship rests with the importance attached to it by both academia and lawmakers who link it to economic growth and job creation. Assuming that in certain circumstances entrepreneurship activity leads to economic growth, it is, then, important to see how the entrepreneurial activity is affected by different factors. One very important factor is the allocation of resources between the public and private sectors. Indeed, while some researchers maintain that large governments are detrimental for economic growth, others see government spending as a possible tool for spurring it. This study examines how the spending allocation amongst the private and public sector influences entrepreneurial activity. With the help of panel data for a large number of countries, this paper looks at the relationship between several measures of entrepreneurial activity and several measures of government spending. The main findings are that entrepreneurial activity is negatively related to both shares of general government final consumption expenditure and government expense out of GDP. Moreover, the results are robust across different model specifications and samples.

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Notes

  1. Similarly, a recent paper classified these factors into entrepreneur-associated and contextual (Tamasy 2006).

  2. The expenditure equation used by the two institutions is GEi = 100 − α(Expendituresi)2 where “GEi represents the government expenditure score in country i; Expendituresi represents the total amount of government spending at all levels as a portion of GDP (between 0 and 100); and α is a coefficient to control for variation among scores (set at 0.03)”.

  3. In their paper, the size of government index ranges from 1 to 10 where higher values of the index indicate lower government sizes (as measured by general government consumption expenditures as a percent of GDP plus transfers, subsidies, and social security).

  4. Unfortunately, no generally accepted definition of “developing economies” exists yet (Hayami and Godo 2005).

  5. Several countries that follow the British Common Law (but also other countries such as Japan) recognize sole proprietorships and partnerships as business entities. Depending on the intended use, the number of firms reported by the World Bank database is severely biased down in their case.

  6. This specification is widely used in similar studies (Nystrom 2008).

  7. Other variables considered were GDP per capita, GDP per capita squared, household final consumption expenditure, savings, foreign direct investment, and the tax rate. All led to multicollinearity and were avoided in the final estimation.

  8. I have to thank an anonymous reviewer for suggesting this specification, which significantly helped with variable selection and robustness tests.

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Acknowledgments

I am thankful to the two anonymous referees for their comments and advice. I also have to thank the Editor for helping and above all, patience.

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  1. University of Central Oklahoma, 100 North University Drive, Edmond, OK, 73034, USA

    Mihai Nica

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Nica, M. Spending allocation and entrepreneurship. J Int Entrep 11, 351–369 (2013). https://doi.org/10.1007/s10843-013-0114-0

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