The Relationship Between Entrepreneurship and Economic Development: Is It U-Shaped?

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The relationship between entrepreneurship and economic development: is it U-shaped?

Sander Wennekers André van Stel Martin Carree Roy Thurik

Zoetermeer, July 2009

This report is published under the SCALES-initiative (SCientific AnaLysis of Entrepreneurship and SMEs), as part of the 'SMEs and Entrepreneurship programme' financed by the Netherlands Ministry of Economic Affairs.

EIM Research Reports

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H200824 july 2009 awe@eim.nl

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The relationship between entrepreneurship and economic development: is it U-shaped? Sander Wennekersa, André van Stela, d, Martin Carreeb, and Roy Thurikc, a, e EIM Business and Policy Research b Maastricht University c Erasmus University Rotterdam d University of Amsterdam e Max Planck Institute of Economics, Jena a

Abstract: Following a centuries-long decline in the rate of self-employment, a remarkable discontinuity in this downward trend seems beyond doubt for many advanced economies starting in the 1970s and 80s. In some countries there is an ongoing revival of self-employment. At the same time, crosssectional analysis shows a U-shaped relationship between start-up rates of enterprise and levels of economic development. We provide an overview of the empirical evidence concerning the relationship between independent entrepreneurship, also known as self-employment or business ownership, and economic development. We also argue that the reemergence of independent entrepreneurship is based on at least two ‘revolutions’. If we distinguish between solo selfemployed at the lower end of the entrepreneurship spectrum, and ambitious and/or innovative entrepreneurs at the upper end, many advanced economies show a revival at both extremes. Policymakers in advanced economies should be aware of both revolutions and tailor their policies accordingly. Keywords: entrepreneurship, self-employment, business ownership, economic development, Ushape, L-shape Contact: Sander Wennekers, EIM Business and Policy Research, PO Box 7001, 2701 AA Zoetermeer, the Netherlands, awe@eim.nl. First version: December 2008 Version: July 2009. This paper is considered for publication in Foundations and Trends in Entrepreneurship. Document: Survey U-Shape Ent_FnT_v11.doc, 7/3/2009 11:21 AM Acknowledgement: This paper has been written in the framework of the research program SCALES carried out by EIM and financed by the Dutch Ministry of Economic Affairs. An earlier version has been read at research seminars at Erasmus University Rotterdam and Utrecht University. We thank Oedzge Atzema, Isabel Grilo, Philipp Koellinger, Adam Lederer, Erik Stam, Erik Swets and Jacques Thisse for their comments and/or assistance.

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Summary
Following a centuries-long decline in the rate of self-employment, a remarkable discontinuity occurred in this downward trend for many advanced economies starting in the 1970s and 80s. In some countries there is an ongoing revival of self-employment. Weighing the evidence, it is too early to conclude that the historical, decreasing relationship between economic development and the level of business ownership has become U-shaped. Nonetheless, a trend break is beyond doubt, and this discontinuity is all the more remarkable as there is no...
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