Regional Institutional Environment and New Firm Formation

Abstract

Kristina Nystrom This chapter uses an institutional approach to investigate the relationship between the regional institutional environment and regional new firm formation. The importance of perceived attitudes regarding private enterprises, local taxes, political majority, the size of the government sector and perceived rules and bureaucracy on new firm formation in 286 Swedish municipalities is investigated. The empirical findings show that perceived positive attitudes toward private enterprises and political governance by a right-bloc majority tend to have positive effects on regional new firm formation. A large local government sector, on the other hand, tends to have negative effects on regional new firm formation. The chapter also explores if the effect of different aspects of regional institutional environment on new firm formation are similar across industries. The pattern in the private service sector industries is most similar to the overall pattern in the economy, while the only variable reflecting the regional institutional environment that influences new firm formation in manufacturing industries is perceived rules and bureaucracy. 8.1 INTRODUCTION Political and economic institutions underlie and determine the incentive structure in a society. Hence they importantly affect economic performance in a society (North, 1991, 1994). It is undoubtedly the case that the quality of institutions plays an important role for creating economic growth (see e.g. Acemoglu et al., 2001; Rodrik et al., 2004). Stimulating entrepreneurship is by many policy makers regarded as an important way to achieve economic growth. However, as recognized by Wennekers and Thurik (1999), the link between individual micro-level foundations...