Policies Fostering New Firm Formation and Self-Employment in Italy

Abstract

In this study, we test for the effect of public policies supporting entry in Italian regions on actual rates of new firm formation. To assess the effectiveness of entrepreneurship policy, we investigate the dynamics in six different sectors at the local level: Manufacturing, Construction, Commerce, Hotels and Restaurants, Transportation, and Financial Services . In addition, we investigate whether structural unemployment has an independent effect on new firm formation. In our analysis, we take into account other local factors, including economic growth, per capita value added, presence of an industrial district or a large metropolitan area in the province, and wage level. Note that regional economic characteristics may not only explain firm entry but also firm exit, and therefore net entry. In case of adverse economic conditions, self-employed workers may decide to prolong their entrepreneurial experience and do not close their business, particularly if they have no other way of earning a living. Hence, unemployment may not only exert a positive effect on gross entry but also have a negative effect on the exit rate. Findings indicate that entrepreneurship policy does not have an important impact on industrial dynamics, and that the positive effect of unemployment on net entry is mainly driven by a negative effect on firm exit. The latter result suggests a lack of dynamics in the Italian regional labor markets, where individuals are not able or willing to adjust their occupational preferences and switch between professions. The remainder of this study is structured as follows. We start with a review of policies favoring new firm formation in the Italian regions in Sect. 2.2, and a presentation and discussion of differences in unemployment rates across provinces in Sects. 2.3 and 2.4. Subsequently, we present a model to determine the impact of entrepreneurship policies and unemployment, as well as other relevant regional factors, on gross entry, net entry, and net exit for the 103 Italian provinces. Finally, in Sect. 2.6, we discuss the empirical results for the period 1997–2003, and Sect. 2.7 is the conclusion.