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Entrepreneurship and regional economic growth: towards a general theory of start-ups

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Start-ups of new firms are important for economic growth. However, start-up rates differ significantly between countries and within regions of the same country. A large empirical literature studies the reasons for this and endeavours to identify the regional determinants of start-ups. By contrast, there is a much smaller theoretical literature attempting the formal modelling of the start-up process within a region. In this article, we seek to contribute to this small literature by introducing a general theoretical model of the entrepreneurial start-up process. The model links start-ups to economic growth and can be applied to understand growth in a regional context. We derive a number of propositions which fit the stylised facts from the empirical literature: (i) growth in the regional economy is driven by an expansion in the number of start-up firms supplying intermediate goods and services; (ii) improvements in human capital will improve the rate of start-ups; (iii) improvements in the relative rates of return to entrepreneurs and business conditions will raise start-up rates; (iv) an increase in regional financial concentration will reduce the start-up rate in a region; and (v) increased agglomeration/urbanisation in a region has an a priori ambiguous effect on start-up rates.
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Keywords: economic growth; entrepreneurship; frictions; start-ups

Document Type: Research Article

Affiliations: 1: Universitat Paderborn, Paderborn, Germany 2: World Institute for Development Economics Research, United Nations University, Helsinki, Finland

Publication date: 2009-09-01

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