Shadow economy and entrepreneurial entry

We analyze theoretically and empirically the impact of the shadow economy on entrepreneurial entry, utilising 1998-2005 individual-level Global Entrepreneurship Monitor data merged with macro level variables. A simple correlation coefficient suggests a positive linear link between the size of the shadow economy and entrepreneurial entry. However, this masks more complex relationships. With appropriate controls and instrumenting for potential endogeneity where required, the impact of the shadow economy on entry is found to be negative, based on a linear specification. Moreover, there is also evidence of nonlinearity: entrepreneurial entry is least likely when the shadow economy is of medium size. We attribute the negative effects of shadow economy on entry to perceived strong competition faced by new entrants when the shadow economy is widespread. At the individual level, an extensive shadow economy has a more negative impact on respondents who are risk averse. In addition, in the economies where property rights are strong, the negative impact of the shadow economy is weaker.

Entrepreneurial entry:which institutions matter?

In this paper we explore the relationship between the individual decision to become an entrepreneur and the institutional context. We pinpoint the critical roles of property rights and the size of the state sector for entrepreneurial activity and test the relationships empirically by combining country-level institutional indicators for 44 countries with working age population survey data taken from the Global Enterprise Monitor. A methodological contribution is the use of factor analysis to reduce the statistical problems with the array of highly collinear institutional indicators. We find that the key institutional features that enhance entrepreneurial activity are indeed the rule of law and limits to the state sector. However, these results are sensitive to the level of development.

Institutional environment, innovative entrepreneurial entry and venture capital financing

We analyse the determinants of high growth expectations entrepreneurial entry (HGE) using individual data drawn on working age population, based on the Global Entrepreneurship Monitor (GEM) surveys for the 1998-2004 period. Individual level explanatory variables are combined with country-level factors. Our results suggest that availability of venture capital and intellectual proper rights protection are strong predictors of HGE. In addition, we also find that innovative start-ups are associated with highest growth expectations in countries with extensive supply of venture capital and strongest intellectual property rights. Once we introduce venture capital, we detect no significant effects of other elements of financial systems on high-powered entry.

Finance and entrepreneurial entry

This paper investigates the determinants of both the volume of finance and the sources of finance of business start-ups in 42 countries. Using the Global Entrepreneurship Monitor (GEM) surveys for 1998-2003, we jointly examine how the institutional business environment and individual characteristics of entrepreneurs affect the financing of entrepreneurs. We find that the property rights system is the most significant determinant of both the total volume of finance and of the use of external finance for the individual start-up project. In addition, our findings suggest that that the supply of informal finance is associated with the higher share of external sources in start-up finance, whereas the size of the formal financial sector appears to play a more important role for the volume of entrepreneurial self-finance. Our results suggest that the use of external finance by start-ups correlates with the extent of financial restrictions in a country in a non-monotonic way. We find that some financial restrictions may enhance the use of external funds by entrepreneurs, yet the sign of this effect reverses and the coefficient becomes stronger for the high level of financial repression by the government. Finally, our findings imply that the characteristics of the start-up finance are also affected by various individual characteristics of entrepreneurs, their growth intentions and ownership structure.