Impact of Financial Policies of Local Authorities on Entrepreneurship: Comprehensiveness of Policy Matters

Abstract

The article is dedicated to the issues of promoting entrepreneurship by local governments on municipal level in Poland. The authors conducted an analysis of the financial policy’s impact of local government units on the development of entrepreneurship. As explanatory variables in the article, the authors adopted instruments of entrepreneurship support that were based on the revenue side and the expenditure side of the budget. The list of these variables is as follows: total tax income on real estate, total tax income on transport, total income from property, total expenditure on property, product of variables describing tax income and property expenditure. As outcome variable, the authors adopted level of entrepreneurship in municipalities measured by the number of newly registered business entities per capita. While the control variable was the ratio called population density. The output dependent variable was divided by the number of working age population, while the output independent variables (revenue and expenditure instruments of financial policy of local authorities) were divided by the total population. Analysis was performed based on logarithmic averages for annual data that was collected at the commune level. Based on collected data, authors had constructed six models that were later estimated. The estimation of parameters of models was done using linear regression. Regression model for averages proved that local government units fiscal policy expressed in tax instruments strongly affect entrepreneurship, with assumption of simultaneous usage of several stimulants. Income instruments most strongly influence the development of entrepreneurship. Among these instruments the biggest impact on entrepreneurship have tax instruments, in particular the real estate tax. Expenditure instruments that most strongly influence entrepreneurship are capital expenditures. Finally, the effectiveness of financial forms of support is conditioned by stability and continuity of fiscal policies implemented by local governments. Analyzed model positively verifies opinions from literature that use by local authorities single instruments of entrepreneurship support (especially taxes) brings weaker results than the use of a set of a tax-including instruments.