Extract

It is widely believed that new business formation leads to economic growth. However, the theoretical as well as the empirical foundation for this belief is remarkably weak. Empirical research on the issue started late and only recently have researchers begun to assess the effects of new businesses on economic development in detail. This chapter provides an overview of methods for empirically analyzing the relationship between new business formation and regional development. One of the chief reasons for focusing on regions is that geographical units of observation are much better suited for such an analysis than are industries. If industries follow a life cycle (Klepper, 1997), then the number of entries and the start-up rate will be relatively high in the early stages when the industry is growing, and comparatively low in later stages when the industry is in decline. In such a setting, the positive correlation between the start-up rate and industry development in subsequent periods can hardly be regarded as evidence of a positive effect of entry on growth, but may be more appropriately viewed as a symptom of industry development. Another reason for taking a regional perspective is that policy measures aimed at stimulating new business formation are most often directed at regions, not at industries.