Why does the effect of new business formation differ across regions?
Michael Fritsch
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Alexandra Schroeter
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JEL Classifications
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M. Fritsch (&) A. Schroeter School of Economics and Business Administration, Friedrich Schiller University Jena
, Carl-Zeiss-Str. 3,
07743 Jena, Germany
We investigate regional differences in the effect of new business formation on employment growth in West Germany. We find an inverse Ushaped relationship between the level of start-up activity and employment change. The main variables that shape the employment effects of new businesses in a region are population density, the share of medium-skilled workers, the amount of innovation activities as measured by the proportion of research and development (R&D) employees, and an entrepreneurial character of the regional technological regime. In contrast, a high share of small-business employment has a negative influence on the employment effect of start-ups. Other indicators for education, innovation activity, and labor productivity do not prove to be statistically significant.
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Recent empirical research strongly indicates that the
effect of new business formation on economic
development is of a long-term nature.2 It is found
that start-up rates may have a statistically significant
impact on growth for a period of up to 10 years (for
an overview, see Fritsch 2008). Over this time span,
the effect of start-ups on growth shows considerable
variation that is in most cases (countries or regions)
characterized by a wave-like pattern (see Sect. 2 for
details). This wave-like pattern reveals that new
businesses have a positive impact on economic
development in the first 1 or 2 years after formation,
but that the effect then declines and, in many cases,
becomes negative. In many regions, the effect
becomes positive again after about 5 years, and then
1 We are indebted to Oliver Falck (CES-ifo, Munich), Stephan
Heblich (MPI, Jena), Antonio Garcia-Tabuenca (University of
Alcala, Madrid), and two anonymous referees for their helpful
comments on an earlier version of this manuscript. Oliver
Falck also provided very valuable advice on econometric
issues.
2 Acs and Mueller (2008); Andersson and Noseleit (this issue);
Arauzo-Carod et al. (2008); Audretsch and Fritsch (2002);
Baptista et al. (2008); Baptista and Preto (this issue); Bosma
et al. (this issue); Carree and Thurik (2008); Dejardin (this
issue); Fritsch and Mueller (2004, 2006, 2008); Koster (this
issue); van Stel and Storey (2004); Mueller et al. (2008); van
Stel and Suddle (2008).
becomes insignificant after about another 5 years.
Previous analyses also find that the magnitude of the
wave, as well as the total effect of new business
formation on growth, is shaped to a considerable
degree by regional conditions. Some regions are able
to achieve substantial employment growth from new
business formation; however, the effect can even be
negative in other regions (Fritsch 2008).
In this paper, we analyze differences in the total
effect of new business formation on regional
development in West Germany. Unlike other work on this
subject (Fritsch and Mueller 2004, 2008), we are not
interested in the 10-year wave pattern as it occurs,
but in the overall result after this process has ended.
To what extent and why do the long-term effects of
new business formation vary between regions? What
characterizes those regions where new business
formation leads to pronounced employment growth
as compared with those regions where this effect is
negligible, if it even occurs at all? What is behind
these interregional differences? To answer these
questions, we employ a panel approach in which we
relate regional start-up rates and other regional
characteristics to regional employment change over
10-year periods. This analysis allows us to identify
the main factors that shape interregional differences
in the effects of new business formation on
economic development. Previous analyses of regional
differences only compare the effects in different
types of regions, such as agglomerations and rural
areas or regions with high and low levels of
productivity; however, our approach allows us to
account simultaneously for several factors that may
shape these effects, e.g., population density and
productivity.3
3 E.g., Fritsch and Mueller (2008) find that the effect of new
business formation on regional employment is relatively large
in agglomerations and in regions with high levels of labor
productivity. Since, in West Germany, most of the regions with
high labor productivity are agglomerations and many of the
low-productivity regions are rural areas (Fritsch and Mueller
2008, p. 22), a larger growth effect of new business formation
in regions with high productivity levels could well be
explained by their higher population density. In this paper
(Sect. 5), we indeed find that the regional productivity level
does not contribute to explaining the effect of new business
formation on regional development when population density is
included in the analysis.
The following sectio (...truncated)