National and Regional Perspectives
Edited by Michael Fritsch
Chapter 4: The Effect of New Business Formation on Regional Employment: Empirical Evidence, Interpretation, and Avenues for Further Research
4 The effect of new business formation on regional development: empirical evidence, interpretation, and avenues for further research1 Michael Fritsch THE LINK BETWEEN NEW BUSINESS FORMATION AND GROWTH There seems to be a widespread belief that new business formation leads to economic growth (Wennekers and Thurik, 1999). This belief has motivated politicians in many countries to promote entrepreneurship in order to stimulate growth (see, for example, the contributions in Audretsch et al., 2007; and Leitao and Baptista, 2009). Remarkably, however, the theoretical as well as the empirical foundation for this belief is rather weak. Empirical research on the issue started late and only quite recently have researchers tried to assess the effects of new businesses on economic development in more detail. This chapter provides an overview of the current state of knowledge about the effect of new business formation on regional development. It begins with a brief sketch of the extant research on this topic. I then report main results of studies that have analyzed the development of small and young firms, and discuss their merits and shortcomings. One objection to this type of analysis is that it does not account for possible indirect effects of new business formation, which may be important and require a macro-level analysis of the relationships. Based on an exposition of such indirect effects of new business formation on development, I turn to the findings of analyses that investigate the relationship between new business formation and regional development. After describing the overall pattern that has...
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