Linking entrepreneurship to growth

textabstractThis paper provides a link between the degree of entrepreneurial activity in a country and the growth performance. While a recent wave of empirical evidence suggests that the extent to which countries have shifted towards an increased role of entrepreneurship varies considerably across countries, virtually nothing is known about the consequences of lagging behind in this process. Do countries that have shifted towards a greater role for entrepreneurship enjoy greater growth? This question is crucial to policy makers, because if the opportunity cost, measured in terms of forgone growth, of a slow adjustment towards a greater role for entrepreneurship is relatively low, the consequences of not engaging in a rapid adjustment process are relatively trivial. However, if the opportunity cost is high, the consequences are more alarming. This paper offers two distinct approaches, based on two different measures of entrepreneurship – the relative share of economic activity accounted for by small firms, and the selfemployment rate. In addition, two different measures of performance of economic activity are also analysed – economic growth and reduction of unemployment – to link changes in entrepreneurship to changes in economic performance. Different samples including OECD countries over different time periods reach consistent results – increases in entrepreneurial activity tends to result in higher subsequent growth rates and a reduction of unemployment. We are grateful to the suggestions of Thomas Andersson and the anonymous referees of the OECD on earlier drafts of this paper, as well as the contributions of our colleagues on various research projects and papers, Martin Carree and Andre van Stel. Some of the statistical results and analyses are taken from joint work with these co-authors. Any errors or omissions remain our responsibility