New Business Formation and Regional Development: A Survey and Assessment of the Evidence

Abstract

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Indirect employment effects of new business formation across regions: The role of local market conditions

“…New businesses introduce new capacities into the market. By challenging incumbent firms, newcomers subject themselves to a process of competition and market selection (for a detailed exposition, see Fritsch ). Due to this market selection, only a fraction of start‐ups survive for a longer period of time (Spletzer ; Bartelsman et al.…”

“…However, regional‐level analyses measure the indirect effects of new business formation on development only in the region or country in which the start‐ups occurred and, by disregarding the effects that occur in other regions, may considerably underestimate the overall indirect contribution . Taking employment as a performance measure, the indirect effects have been found statistically significant over a period of up to 10 years after entry (Fritsch ). In the vast majority of these cases (regions) the regional part of the indirect effect of new business formation on employment tends to be positive and, on average, considerably larger than their direct employment contribution (Fritsch et al.…”

“…Possible reasons for the considerable regional difference in the effects of new business formation on employment include attributes of the newcomers as well as characteristics of the respective regions. Quite a number of studies show that the positive effect of new business formation on regional development is considerably more pronounced in agglomerations than in rural areas (for an overview, see Fritsch ). Fritsch and Schroeter () conclude from their analysis of German regions that the degree of agglomeration or population density is key in determining the effect of new business formation on growth.…”

“…Since previous studies (for an overview, see Fritsch ) suggest that the effect of new businesses on employment evolves over a period of up to 10 years, we determine the employment that is directly created in the new businesses by summing the employment in the surviving start‐ups that occurred within the previous decade. Hence, the employment in new and young businesses is defined as the number employed by start‐ups in the current year and by the (surviving) entries of the previous 10 years.…”

“…The relationship between the measures of employment change and entrepreneurial activity is specified as where Δ lnEmp r,t is the respective employment change (overall/in incumbents/in new and young businesses) in region r , μ r is a region‐specific fixed effect, λ t represents a time fixed effect, and X r,t‐1 are the other exogenous variables. The lagged start‐up rate is calculated as a moving average over a period of 10 years to allow for the time lag identified in previous analyses (Fritsch ). Because our main interest is to identify the effects of new business formation, the start‐up rate is the key independent variable in our model.…”