New Firm Formation and Sustainable Regional Economic Development Relevance, Empirical Evidence, Policies

Abstract

The belief that new business formation is a source of economic growth is widespread. This belief has been a strong motivation for a great deal of research in entrepreneurship. It has also motivated politicians in many countries to devise strategies aimed at stimulating the formation of new firms. However, the theoretical as well as the empirical foundation for this belief are remarkably weak. Empirical research on the issue started late and only recently have researchers begun to assess the effects of new businesses on economic development in detail. The effect of new business formation on regional development is an important field of research. A proper understanding of these relationships may provide valuable inputs for policies aimed at stimulating growth. This short introduction provides an overview on the current state of knowledge about the effects that new businesses have on regional development. The focus is on regions for three reasons. First, geographical units of observation are much better suited for such an analysis than are industries.1 Second, empirical research has shown that the magnitude of the effects of new business formation on growth differs considerably across regions pointing to the importance of region-specific factors. Third, regions are an important arena for development policy (for an extensive review see Fritsch, 2013).