ENTREPRENEURSHIP AND ECONOMIC DEVELOPMENT: THE ROLE OF SMALL FIRM FORMATION AND EXPANSION FOR REGIONAL ECONOMIC WELL-BEING

Abstract

Entrepreneurship, understood as the formation and growth of small, autonomous firms, is increasingly believed to be an important determinant of national and regional economic development. While several empirical studies in recent years have suggested that small firm formation is a major source of net new job creation, most studies that take on a regional perspective focus only on (gross) formation of new firms. The further development of these firms is thus neglected, and the positive relationship between small firm dynamics and economic well-being remains an assumption. In this study, a unique and comprehensive data set is used for examining how gross dynamics-births, turbulence, and growth-among establishments in small versus large firms relate to regional economic development. The results suggest the following: firstly, high gross birth rates lead to high net birth rates. This relationship is not self-evident, since high birth rates could be accompanied by high death rates. The results also show that the net effect of gross firm births is contingent on current small firm density and on the sectoral distribution of the start-ups. Secondly, out of the net dynamics measures tested (net formation and expansion surplus of small firm and large firm establishments) net small firm formation appears to be the most important predictor of growth in economic well-being. Thirdly, measures of gross business dynamics can explain more of the changes in regional economic well-being than can measures of net dynamics. In all, the results suggest that gross dynamics are important both for creating a net surplus of new firms and for reallocating resources for better use. They also suggest that for regional economic well-being, the vitality of the small firm sector is of great importance.