Government investments and entrepreneurship

How can governments attract entrepreneurs and their businesses? The view that new business creation grows with the optimal level of government investment remains appealing to policymakers. In contrast with this active approach, we build a model where governments may adopt a passive approach to stimulating business creation. The insights from this model suggest new business creation depends positively on factors beyond government investments—attracting high-skilled migrants to the region and lower property prices, taxes, and fines on firms in the informal sector. These findings suggest whether entrepreneurs generate business creation in the region does not only depend on government investments. It also depends on location and skilled migration. Our model also provides methodological implications—the relationship between government investments and new business creation is endogenously determined, so unless adjustments are made, econometric estimates will be biased and inconsistent. We conclude with policy and managerial implications.

Plain English Summary

Governments can attract entrepreneurs and their businesses by offering incentives such as lower property prices, taxes, and fines on firms in the informal sector, as well as by encouraging skilled migration to the region. Thus, a policy implication is that the government can create a favorable environment for business creation as opposed to solely relying on government investments.

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Necessity or opportunity? Government size, tax policy, corruption, and implications for entrepreneurship

Economic Development Incentives: Fostering Productive or Unproductive Entrepreneurship?

Entrepreneurship policy and economic growth: Solution or delusion? Evidence from a state initiative

Data Availability

Data sharing is not applicable to this article as no new data were created or analyzed in this study.

Notes

Greenstone and Moretti, 2003 studied the location of million-dollar business investments announced in the 1982–1993 period and provided an economic analysis of the value the local region of attracting large firms by weighing the benefits of employment and property value gains against the costs of incentive packages.

There are many different conceptualizations of entrepreneurs. Parker (2018) provides an excellent summary. We follow the advice of Welter et al. (2017) and refrain from adopting a narrow conceptualization of entrepreneurship.

Although we discuss government infrastructure investments, government investments can be quite broad. For example, according to Lerner (2010), Singapore implemented specific government policies such as: “The provision of public funds for venture investors seeking to locate in the city-state; Subsidies for firms in targeted technologies; Encouragement of potential entrepreneurs and mentoring for fledgling ventures; Subsidies for leading biotechnology researchers to move their laboratories to Singapore; Awards for failed entrepreneurs (with a desire to encourage risk-taking).”.

Although Bennett (2019b) excludes projects in the power, communication, and railroad sectors from private infrastructure investments, there are historical examples of private companies investing in these sectors. For example, James J. Hill built the Great Northern Railway from St. Paul to Seattle with no US government aid (Folsom, 1991).

This is in line with Thurik and Wennekers (2004) and Acs et al. (2016), which support government policy that targets skills supply through education, knowledge transfer, worker mobility, and the ability to start new firms.

An example of the type of infrastructure investments that we have in mind is a government investment in rural high-speed broadband (Cumming and Johan 2010), which is quite different than some other types of investment, like neighborhood beautification, in terms of how it affects entrepreneurship. Because the focus here is on job creation and destruction, we ignore the effects of government policy on low growth entrepreneurship, which deserves to be studied in a framework where its contributions to society are accounted appropriately, as advocated by Welter et al. (2017).

The Q in the model is a parameter that represents the spatial restrictions in the regional economy due to distance, negative agglomeration externalities, and/or regulations. The Q is assumed exogenous, being determined by regional idiosyncrasies like topography and land use regulations, which are typically disconnected from the government levels or entities that provide business incentives.

We assume decreasing returns in the public-good investment technology, such that x > 1, as in Acemoglu (2005).

The reverse is also likely true—business creation tends to attract more workers and immigrants. However, in our model, M is exogenously given, so the only causality possible in our model is from immigration to business creation. We thank one anonymous reviewer for pointing this out.

Bandyopadhyay and Pinto (2017) and Ogura (2018) find similar results in regard to the effect of immigration and informality on production.

Even if infrastructure investments do not affect business creation directly, they might have an indirect effect through property prices, taxes, and immigration. As such, a possible extension of the model is to integrate G into these functions. However, this exercise would make exogenous variables like property prices, taxes, and immigration endogenous, so we miss their important impact in the model and in the policy prescriptions. Moreover, this extension changes the model entirely, yielding a different analysis and results. Thus, we leave this extension for future research.

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Author information

Authors and Affiliations

1. Department of Economics, Florida Atlantic University, Boca Raton, FL, USA João Ricardo Faria & Christopher J. Boudreaux
2. Department of Economics, Grand Valley State University, Allendale, MI, USA Laudo Ogura
3. Department of Economics, Copenhagen Business School, Frederiksberg, Denmark Mauricio Prado

1. João Ricardo Faria