Entrepreneurship, New Firms and Economic Growth: New Boys on the Block versus Golden Oldies

In contrast to the policy emphasis placed upon entrepreneurship, it is a
striking feature of the macro-economic literature on the determinants of
differences in economic growth that it very rarely mentions
entrepreneurship per se. It is also a pervasive problem of the literature on
the determinants of economic growth that there are so many potential
explanatory variables, and so many missing data problems, that systematic
analysis comparing alternative explanations is difficult to achieve. Thus
Freeman (2001) points out that in one influential review 87 different
explanatory variables are reported for testing on cross section samples of
long term growth rates for around 20 OECD countries.
In the case of adding entrepreneurship as yet another variable one key
problem is how to define and measure it. Another is dealing with problems
of causation. Are time series and cross section fluctuations in small business
formation and growth a cause, or a consequence, of variations in economic
growth over time, or across countries? Direct measures of entrepreneurial
attitudes and activity have recently been developed as part of the GEM
surveys. Development of better longitudinal datasets, of more direct
measures of different entrepreneurial activity of this kind, may assist in
econometric analysis of impacts on growth. Preliminary results along these
lines reported in GEM (2002), however, reveal few systematic connections
between entrepreneurial activity, entrepreneurial potential, or supporting
framework conditions and growth (see esp. GEM (2002) p. 23 ff.). The
GEM analyses are of necessity restricted to short periods and the authors
acknowledge that more work needs to be done. A number of other studies
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have sought to link proxies for entrepreneurship, such as small business
shares, or self employment, to cross national variations in growth or
unemployment rates and report positive links or links which imply adverse
growth consequences if these proxies depart from estimated equilibrium
levels (see e.g. Caree et al (2002), Audretsch and Thurik (2002))7. It is also
possible to draw some broad conclusions about the significance of
entrepreneurial entry for productivity growth using a recent programme of
comparative international research carried out by OECD (OECD (2003)).
This decomposes productivity growth over time for a country into effects
due to new entry, exit, and the performance of survivors, respectively. The
analysis covers the largest OECD economies for the periods 1987-92 and
1992-97.