A System Dynamic Approach to Modelling the Endogenous and Exogenous Determinants of the Entrepreneurship Process

Abstract

The importance of entrepreneurship for economic development and overall social well-being is widely recognised by researchers, experts, and policy makers. Researchers have identified a variety of endogenous and exogenous determinants, such as individual-level factors, external macro-level factors, and country-level cultural factors, which can moderate the raise in entrepreneurial activity. From the other side, there is a feedback loop between entrepreneurship affecting economic growth and being, in turn, affected by country wealth. The main objective of this study is to build a model to capture the relationship between entrepreneurship and external macro-level determinants, and to explore the possible effects of changes in entrepreneurship supply-and-demand factors. The research applies system dynamics simulation and proposes a dynamic macro-level model of entrepreneurship. The model equations are developed based on regression analysis. The results show that although entrepreneurship does have a positive impact on the economy, this effect can be mitigated by other factors. Furthermore, even though an improvement in the external determinants level results in increased entrepreneurship activity and consequent economic growth over a longer period, the effect may depend on factors such as overall country population development, and especially the proportion of adult populations, institutional factors, and individual intentions towards entrepreneurship.