Government investments and entrepreneurship

Abstract

How can governments attract entrepreneurs and their businesses? The view that new business creation grows with the optimal level of government investments remains appealing to policymakers. In contrast with this active approach, we build a model where governments may adopt a passive approach to stimulating business creation. The insights from this model suggest new business creation depends positively on factors beyond government investments-attracting high-skilled migrants to the region and lower property prices, taxes, and fines on firms in the informal sector. These findings suggest whether entrepreneurs generate business creation in the region does not only depend on government investments. It also depends on location and skilled migration. Our model also provides methodological implications-the relationship between government investments and new business creation is endogenously determined, so unless adjustments are made, econometric estimates will be biased and inconsistent. We conclude with policy and managerial implications.Plain English Summary. Governments can attract entrepreneurs and their businesses by offering incentives such as lower property prices, taxes, and fines on firms in the informal sector, as well as by encouraging skilled migration to the region. Thus, a policy implication is that the government can create a favorable environment for business creation, as opposed to solely relying on government investments.

Business environment reforms effect on entrepreneurial activities of high-income economies: panel data evidence

“…Completely, governments can encourage entrepreneurs by offering other types of incentives (e.g. lower property prices, fines on firms in the informal sector, encouraging skilled migration to the region) (Faria et al ., 2023).…”

“…Additionally, governments can attract entrepreneurs and their businesses by providing taxes incentives (Faria et al ., 2023). Economies with high levels of corporate taxation provide lower incentives for entrepreneurs and correspondingly reduced rates of economic growth (Aidis et al ., 2012; Audretsch et al ., 2022; Dharmapala and Hines, 2009; Lee and Gordon, 2005), substantially cutting the profits generated by corporate projects (Becker et al ., 2012).…”

“…In turn, governments play a role in shaping the entrepreneurial environment through nurturing entrepreneurship and company growth through the intermediation of their institutions (Faria et al ., 2023; Gnyawali and Fogel, 1994; Urbano et al ., 2019; Urbano and Alvarez, 2014). This implies prioritising entrepreneurship through undertaking the production of various typologies of reforms capable of rendering their countries more attractive for investors and entrepreneurs (Alvarez et al ., 2011; Contractor et al ., 2020; Román et al ., 2013).…”

“…In 2019, Doing Business captured a record number of 314 regulatory reforms with 128 economies having introduced substantial improvements to their business environment (World, Bank, 2019). After various years of research, the field remains focused in identifying favourable conditions for entrepreneurship and in capturing institutional differences between economies that lead to satisfactory levels of entrepreneurship (Audrestch et al ., 2022; Bosma and Schutjens, 2011; Faria et al ., 2023; Stenholm et al ., 2013; Wennekers et al ., 2005). In this regard, several studies have associated economic freedom with rising levels of TEA through longitudinal analysis of various economies (Angulo-Guerrero et al ., 2017; Aparicio et al ., 2016; Bjørnskov and Foss, 2008, 2013; Sobel et al ., 2007).…”