Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 202: Market Potential and New Firm Formation

Jenny Grek (), Charlie Karlsson () and Johan Klaesson ()
Additional contact information
Jenny Grek: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Charlie Karlsson: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
Johan Klaesson: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden

Abstract: The purpose of the paper is to show how entrepreneurship conditions vary between regions of various sizes, and test the theoretical arguments on why large regions generally should generate more entrepreneurship. The paper empirically ana¬lyzes the role of regional size in explaining varia¬tions in total entrepreneurship. It also examines en¬trepreneurship in different sectors across functional regions, using data from Sweden for the period 1993 to 2004. Employing fixed effects vector decomposition (FEVD) regressions, we estimate how the conditions for entrepreneurship vary between re¬gions. The results show that the market potential as measured by local and external accessibility to gross regional product (GRP) has a strong significant impact on both entry of new firms and on firm exit. For the primary sector and the manufacturing sector this impact is negative and for the ordinary service sector and the advanced service sector its positive. A high employment rate implies that there is a strong negative impact on firm entry in all sectors. This is in line with what one could expect as there are weaker incentives for individuals starting own businesses in periods of low employment rate. Further, the presence of many small firms in different sectors has a strong positive significant impact on new firm formation.

Keywords: Entrepreneurship; Entry; Exit; Net entry; Regions; Sweden

JEL-codes: L10; R11; R12

21 pages, November 23, 2009

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