Does Inequality Foster or Hinder the Growth of Entrepreneurship in the Long-Run?

Abstract

This article assesses the extent to which historical levels of inequality affect the creation and survival of businesses over time. To this end, we use the Global Entrepreneurship Monitor (GEM) survey across 66 countries over 2005–2011. We complement this survey with data on income inequality dating back to early 1800s and current institutional environment, such as the number of procedures to start a new business, countries’ degree of financial inclusion, corruption and political stability. We find that although inequality increases the number of firms created out of need, inequality reduces entrepreneurial activity as in net terms businesses are less likely to be created and survive over time. These findings are robust to using different measures of inequality across different points in time and regions, even if excluding Latin America, the most unequal region in the world. Our evidence then supports theories that argue early conditions, crucially inequality, influence development path.