Population Change and New Firm Formation in Urban and Rural Regions

Abstract

Several regions across the EU, including the Netherlands, face the challenges of population decline, which entails changing demographics and related social and economic implications. Social ties are disrupted by continuous out-migration, causing a decrease in support systems which may adversely affect the liveability of an area. This paper looks into the connection between population decline and composition, and the level of new firm formation, in order to describe and analyse the relation between these variables. Although it is clear that fewer people will eventually lead to fewer (new) firms, we assess whether this inherent negative relationship differs across different degrees of population change and across regional contexts. Population decline occurs in different types of regional contexts which could also lead to different consequences. In this study, we distinguish between urban and rural areas in order to assess whether different regional contexts lead to distinct outcomes. In order to establish the impact of population decline on entrepreneurship, the paper examines data on population density, size, growth and decline, together with firm dynamics in the years 2003 till 2009 retrieved from the LISA database. In general, the results show that population growth is indeed positively related to the occurrence of entrepreneurship. When we assess different levels of population decline, we find that the relationship between population change and entrepreneurship holds most strongly for declining regions. This suggests that it will become more difficult for regions in decline to maintain the same level of supply, affecting their autonomy and possibly the standard of living. Concerning the urban-rural dimension, urban regions will experience stronger impacts by population change. In conclusion, we find a clear distinction in the impact of the intensity of population change on new firm formation, particularly in the case of rural regions. Thus, the regional context and the severity of decline needs to be included in determining what kind of coping mechanism is needed when dealing with the consequences of decline. Key words: population decline, new firm formation, urban and rural regions