Abstract
Societies do not grow and prosper without entrepreneurs. Entrepreneurs are here defined as those individuals who exercise their ability and willingness to perceive new economic opportunities and to introduce their specific ways of seizing these opportunities into the market in the face of uncertainty (Knight 1921; Wennekers and Thurik 1999 pp. 46–47). They may do so by starting up firms or by instituting changes within established firms. As Baumol (1990) argues, entrepreneurial creativity need not necessarily be socially beneficial;1 still, new products, processes,ways of organizing, etc., all essential aspects of the growth process, are outcomes of entrepreneurship (Schumpeter 1911; Rosenberg 1992; Wennekers and Thurik 1999). Not surprisingly, the history of all rich societies is ripe with entrepreneurs:Julius Caesar’s friend Balbus went to Rome from a far–away province (Spain) and worked his way up through the ranks to become one of the richest people in the Empire, and on his way built both theatres and public baths; Thomas Edison’s inventions both made him one of the most famous people of his age and brought electric light and many other modern appliances to ordinary people; and in more recent years, Bill Gates founded one of the world’s largest personal fortunes by bringing the computer age into people’s homes. Common to these three individuals and countless other less known is entrepreneurial ability and will. Indeed, while culture may vary, it is arguable that the particular characteristics of entrepreneurship are anthropological constants (von Mises 1949; Kirzner 1997; Russell and Rath 2002).
Economic Freedom and Entrepreneurial Activity: some Cross-Country Evidence (first published in: Public Choice, Vol. 134, No. 3–4, 2008)
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Notes
- 1.
Entrepreneurship may well be unproductive and even destructive. For example, entrepreneurship may be exercised in criminal or rent-seeking activities.
- 2.
It should be stressed the distinction between “pure” economic policy and institutional design is not always easy to make. In the following, we think of economic policy as a set of factors that can be changed within a shorter time-span, and institutions as a set of factors that are stable in the medium run and only change over longer periods of time. What separates the two concepts is thus their degree of persistence over time.
- 3.
Although roughly speaking, interest in institutions and growth is still much larger than interest in entrepreneurship; cf. Bianchi and Henrekson 2005.
- 4.
However, see Audretsch et al. (2002) for some cross-country comparisons and Kreft and Sobel (2005) for cross-state comparisons in a US context.
- 5.
This includes, but is not limited to, the formation of new business ventures.
- 6.
Thus, even if by innovating the entrepreneur succeeds in establishing a monopoly that gives rise to indefinite returns, “… the flow of gains to the entrepreneur in her entrepreneurial role must be very temporary” (Baumol 1993: 7).
- 7.
However, much applied research in small business economics, economic geography, innovation studies, etc. has dealt with how institutions and economic policy influence small-firm formation and the rate of innovation.
- 8.
It may be argued, however, that welfare systems, by providing a safety system, may make people more prone to take entrepreneurial actions, because they know that if they fail, they need not starve. Thus, what may be called “opportunity entrepreneurship” could conceivable be positively influenced through this mechanism (see Sinn 1995, 1997). Thanks to Niclas Berggren for pointing this out.
- 9.
For readers who may want to use the GEM database themselves, we use the variables denoted “tea01”, “tea01opp” and “tea01nec” to form our aggregate data.
- 10.
The inclusion of exchange rate volatility and market capitalization is evidently important, as sound money may simply proxy for the effects of import and export price volatility, and may be a poor proxy for financial depth. However, in the present sample it is only significantly associated with the alternative measure of real exchange rate volatility from World Bank (2006), which only is available 23 observations here. Evidently, sound money picks up a somewhat different aspect of economic policy.
- 11.
Even though all regressions include the regional dummies, they are generally not individually significant, but only jointly. In other words, these dummies tend to pick up variation that is difficult to interpret. We therefore opt for not presenting them in the tables.
- 12.
It should be noted that if we instead use actual trade volumes, which can also be obtained from the Penn World Tables, we obtain the same non-result as with the trade index from the Fraser Institute.
- 13.
It should be noted that our results are robust to including a number of variables that may arguably proxy for similar underlying economic and institutional features mentioned in the literature. These variables include (but are not restricted to) measures of trade volume, discrepancies of domestic price levels from international levels, both absolute price levels and relative prices of capital goods, and alternative institutional measures such as the Freedom House democracy index and the World Bank index on the rigidity of employment rules. We do not report these additional results here but they are available on request from the authors.
- 14.
The indices on all five areas are composed of sub-indices, but we opt for including only the index that is significant. Moreover, the government size index has been criticized for being composed of particularly disparate elements, which warrants further specific testing (cf. de Haan and Sturm 2000; Sturm et al. 2002). We have also performed tests with, for example, the three constituent sub-indices – labour, credit and business regulations – forming the overall regulation variable. These results are not reported here as they show no association. Hence, the extent of regulations and controls in the labour market seem unassociated with entrepreneurship in this sample even though other studies have argued for a strong correlation (e.g. Kreft and Sobel 2005). In addition, all results in Table 4 also survive being estimated with the robust regression technique although we do not report them due to space constraints.
- 15.
It is worth mentioning that the regressions with public investment contain many missing observations. If we attempt to substitute the missing observations with data from other sources, we get a negative association between necessity entrepreneurship and public investment, but no relation with opportunity activity.
- 16.
It should be noted that we have performed a set of additional robustness tests although Table 6 only reports those for which the variables cover almost the entire sample. In particular, sound money also remains significant even if we include the volatility of the real exchange rate or actual inflation data in levels or variance from World Bank (2006). Hence, even if sound money may be the theoretically most worrisome of the five indices, as a referee correctly pointed out to us, the results are robust to including a set of other measures of financial development and related concepts.
- 17.
We chose not to report these results fully due to space constraints. As noted in the text, the findings are reasonably robust throughout and remain significant in the cases where the variance inflation factor remains below a level of approximately 20. We do, however, note that a full robustness test must await future research with more cross-country information.
- 18.
The study that is closest to the present work is Kreft and Sobel (2005) who show that across the US states, the level of entrepreneurial activity is significantly associated with economic freedom.
- 19.
Interested readers can, for example, compare the present results to Henrekson’s (2005) analysis of how the welfare state (in casu: the Swedish welfare state) stifles incentives for entrepreneurship.
- 20.
While this to some might seem a slightly farfetched possibility, it is worth stressing that Lindbeck et al. (1999) argue theoretically for the risk that welfare states can undermine citizens’ economic norms. Mokyr (2006) makes a similar argument that cultural beliefs played an important role in the Industrial Revolution, which was above anything else an entrepreneurial event.
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Bjørnskov, C., Foss, N. (2010). Economic Freedom and Entrepreneurial Activity: Some Cross-Country Evidence. In: Freytag, A., Thurik, R. (eds) Entrepreneurship and Culture. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-87910-7_10
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