The effects of social spending on entrepreneurship in developed nations

Abstract

Understanding how national policy can spur entrepreneurial activity is central to entrepreneurship research. Over the past decade, there has been a limited set of research findings to suggest that social spending may increase entrepreneurship in addition to serving more direct social purposes. We examine the topic through the lens of market failure theory and Austrian economics. In accordance with the Austrian perspective, we theorize that social spending increases the opportunity cost of entrepreneurship, thereby decreasing the attractiveness of entrepreneurship in comparison to salaried employment. Drawing from a sample of 31 developed countries spanning 2004–2011, we investigate the effects of social spending on entrepreneurial attitudes and activity. Our results indicate that country level social spending negatively affects entrepreneurial activity, business ownership, and the public’s view of entrepreneurship as a career choice. The findings suggest that social spending may be better suited for addressing social issues compared to spurring entrepreneurial attitudes or activity. Our findings have implications for both the entrepreneurship and national policy literature.