Entrepreneurship in the macro-economic context

1. Entrepreneurship in the macro-economic context Roy Thurik Erasmus School of Economics and Montpellier Business School IMES (Innovation, Management, EntrepreneurshipandSustainability) Conference, May 30, 2019, University of Economics, Prague

2. Economics of entrepreneurship • Persons • Firms • Industries • Economies • What is entrepreneurship? • Psychology v economics • Nascents v incumbents • Engagement levels • Orientation • Causes? • Empirics • Jack of all trades • Occupational choice • Consequences? • Effect measure • Remuneration

3. Economics of entrepreneurship • Persons • Firms • Industries • Economies • What is it? • Economics v psychology • Incumbents v nascents • Engagement levels • Entrepreneurial orientation • Causes? • Empirics • Occupational choice, jack of all trades • Biology • Consequences? • Effect measures: remuneration • New effect measures: health, happiness, satisfaction

4. Economics of entrepreneurship • Persons • Firms • Industries • Economies • What is it? • # firms • # nascents • Turbulence • Intrapreneurship • Causes? • Regulations - Micro reforms • Education • Culture • Consequences? • Growth • Recovery from recession

5. Economics of entrepreneurship • Persons • Firms • Industries • Economies • Interplay with level of economic development • Interplay with growth / unemployment • Interplay with the cycle

6. Total entrepreneurial activity and GDP/capita R2 = 0.57

7. Stylizedfact Business ownership per workforce per capita income

8. Stylizedfact Business ownership per workforce per capita income

9. Stylized fact Business ownership per workforce per capita income

10. Whatwill I do? • Entrepreneurship and the cycle • Ph.D. Köllinger and A.R. Thurik (2012), Review of Economics and Statistics, 94(4), 1143-1156. • Thurik, A.R. (2014), Entrepreneurship and the business cycle, IZA World of Labor, 90, (doi: 10.15185/izawol.90). • Erken, H., P. Donselaar and A.R. Thurik (2018), Total factor productivity and the role of entrepreneurship, Journal of Technology Transfer, 23(6), 1493-1521. • Thurik, A.R., M.A. Carree, A. van Stel and D.B. Audretsch (2008), Does self-employment reduce unemployment? Journal of Business Venturing, 23(6), 673-686. • Cima, J., J. Costa, C. Pinto and T. Pinto (2017), The dynamics of self-employment and unemployment during the great recession, International Review of Entrepreneurship, 15(3), 367-374. • Parker, S.C. (2018), The Economics of Entrepreneurship, 2nd edition, Cambridge University Press, Sections 3.3 and 6.5.

11. What do we want to know? • Is there a cyclical effect in entrepreneurship? • Is there co-variation between entrepreneurship and the business cycle? • Pro- or counter-cyclical? • Pre- or post-cyclical? • Can this co-variation be interpreted as causality? • What are the economic mechanisms? • What can policy do?

12. Would this make sense?

13. Practical background • Banking crisis (cleaning up) • Global aspect (international coordination) • Keynesian remedies • Country budget crisis (monetary and fiscal issues) • Budget austerity (politics) • Schumpeterian remedies? • Micro reforms • Freeing up labor and product markets

14. What does the literature say about entrepreneurial activity and the cycle? • Hypothesis 1: ‘Entrepreneurial activity is constant over the business cycle’ • Bernanke and Gertler (AER, 1989) • Carlstrom and Fuerst (AER, 1997) • Hypothesis 2: ‘Entrepreneurship is pro-cyclical’ • Rampini (JME, 2004) • Congregado, Golpe and Parker (IZA, 2009) • Golpe (Huelva, 2009) • No a priori • Frankish, Roberts, Storey (London, 2009) • Bonnet and Renou-Maissant (E&P, 2000)

15. What does the literature say about entrepreneurial activity and the cycle? • Entrepreneurs create new firms displacing old ones • Entrepreneurs absorb risks • Entrepreneurship is a way out of unemployment • Entrepreneurship is a financial vehicle • Entrepreneurship as a cyclical indicator

16. Data • 22 OECD countries, annual data for 1972-2007 • Sources: • Compendia 2007.1 (business ownership rate) • See van Stel (IEMJ, 2005) • OECD (GDP and unemployment rate) • Variables: • Business ownership rate • Self-employed and incorporate business owners • In % of labor force (employed + unemployed) • Harmonized across countries and over time • GDP in national currencies and constant prices (2000) • Standardized unemployment rates • GEM data 2001-2006: robustness check

17. Decomposition of trend and cycle • Business cycle is defined as GDP deviations from long term growth trend • Decomposition using the Hodrick-Prescott filter (JMCB, 1997) • with a smoothing parameter of 6.25 for annual data (Ravn and Uhlig, RES, 2002) • Business ownership cycle ……idem • Unemployment cycle …..idem

18. Average deviations from trend across 22 countries

19. Average deviations from trend across 22 countries

20. GDPt Et Two relationships ? ? GDPt Et

21. GDPt Et+1,2 Two relationships <0 >0 GDPt+1,2 Et

22. GDPt Et+1,2 Two relationships <0 >0 GDPt+1,2 Et Granger causality test business-ownership cycle  GDP cycle: significant >95% Granger causality test GDP cycle  business ownership cycle: significant >99% (based on VAR including cycles of business ownership, GDP and unemployment)  Entrepreneurship is an early indicator of the cycle in most countries and years

23. Et Et+n Playing with lags GDPt =0 GDPt+n

24. Et Et Et+n Et+n Playing with lags GDPt GDPt >0 <0 GDPt+n GDPt+n

25. Just playing with data but … • There is much evidence that entrepreneurship leads to economic growth • spillovers and innovation • competition • newness through turbulence • variation and learning • share of self-employed • Entrepreneurs during the boom • ‘what is high must come down’ • Opportunity costs of entrepreneurship • Entrepreneurs during the recession • Opportunity costs and prices of production factors are low • Low risk awareness • No new hardware; no sunk costs • Incumbents are busy downsizing

26. Conclusion 1 • Entrepreneurship leads the way out of recessions in most cases • Rejects earlier theoretical hypotheses • Using two indicators and large data sets • New empirical finding • Remaining heterogeneity across countries and time • Why Rampini (2004) doesn’t hold • Some agents are risk seeking during recessions • Entrepreneurship is a career choice that doesn’t pay • Overconfidence leads to an information structure where lenders may be better informed (≠ principle agent structure)

27. Conclusion 2 • Policies for encouraging entrepreneurship during the crisis • Do not raise unemployment benefits • Koellinger and Minniti (EL, 2009) • Bureaucracy and market entry regulations • Grilo and Thurik (ICC, 2008) • Van Stel et al. (SBE, 2007) • Financial support (e.g. tax based venture capital funds) • Jobbers, freelancers, etc • Patents and students • Governments are not alone

28. Conclusion 3 • Three links between entrepreneurship and the economy: • Explanations of economic growth • Keynesian, Romerian and Schumpeterian • Entrepreneurial economy • Audretsch and Thurik (ICC, 2001) • Entrepreneurship and the cycle • We need integrated models!

29. Conclusion 3 • Is the last ‘great recession’ different? • Country heterogeneity and world cycles • Entrepreneurship has many faces! • Data and analyses are inclusive policy effects • Which policy measures influence entrepreneurship? • Is there a cyclical effect of these measures?

30. Entrepreneurship in the macro-economic context Roy Thurik Erasmus School of Economics and Montpellier Business School IMES (Innovation, Management, EntrepreneurshipandSustainability) Conference, May 30, 2019, University of Economics, Prague