Spending allocation and entrepreneurship

Abstract

The continuous interest that researchers show toward entrepreneurship rests with the importance attached to it by both academia and lawmakers who link it to economic growth and job creation. Assuming that in certain circumstances entrepreneurship activity leads to economic growth, it is, then, important to see how the entrepreneurial activity is affected by different factors. One very important factor is the allocation of resources between the public and private sectors. Indeed, while some researchers maintain that large governments are detrimental for economic growth, others see government spending as a possible tool for spurring it. This study examines how the spending allocation amongst the private and public sector influences entrepreneurial activity. With the help of panel data for a large number of countries, this paper looks at the relationship between several measures of entrepreneurial activity and several measures of government spending. The main findings are that entrepreneurial activity is negatively related to both shares of general government final consumption expenditure and government expense out of GDP. Moreover, the results are robust across different model specifications and samples.