Government Investments and Entrepreneurship

TL;DR

This paper presents a model showing that new business creation depends on factors beyond government investments, such as skilled migration and local economic conditions, challenging the traditional view that government spending alone drives entrepreneurship.

Contribution

The paper introduces a passive approach model for entrepreneurship, highlighting the roles of migration and local economic factors, and discusses implications for econometric analysis and policy.

Findings

Business creation depends on migration and local economic factors.

Econometric estimates of government investment effects may be biased.

Passive approaches can complement active government policies.

Abstract

How can governments attract entrepreneurs and their businesses? The view that new business creation grows with the optimal level of government investments remains appealing to policymakers. In contrast with this active approach, we build a model where governments may adopt a passive approach to stimulating business creation. The insights from this model suggest new business creation depends positively on factors beyond government investments--attracting high-skilled migrants to the region and lower property prices, taxes, and fines on firms in the informal sector. These findings suggest whether entrepreneurs generate business creation in the region does not only depend on government investments. It also depends on location and skilled migration. Our model also provides methodological implications--the relationship between government investments and new business creation is endogenously determined, so unless adjustments are made, econometric estimates will be biased and inconsistent. We conclude with policy and managerial implications.