New firm registration and the business cycle

This paper studies the relationship between entrepreneurship and economic growth using new panel data on the number of new firm registrations in 109 countries for the period 2002–2012. We find strong evidence of a pro-cyclical pattern in entrepreneurship. Furthermore we examine heterogeneous relationships between new firm registration and the business cycle and find that higher levels of financial development and a better business environment are associated with a stronger pro-cyclicality of entrepreneurship both across countries and within countries over time, i.e. a sharper contraction of new firm registrations at the outset of a recession, and a faster recovery of new firm registrations after the recession has ended. These findings suggest that fostering an efficient regulatory environment for the financial and private sector is important for encouraging a speedier recovery in the formation of new firms during economic expansions and aiding the efficient wind-down of insolvent firms during economic slowdowns.