1 Aims and scope
2 Possible effects of new firm formation on economic development
2.1 Review of the effects
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Securing efficiency and stimulating productivity increase by contesting established market positions. Not only the actual entry but also the very possibility of an entry forces the incumbents to perform more efficiently (Baumol et al. 1988).
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Acceleration of structural change. It can frequently be observed that structural change is mainly accomplished by a turnover of the respective economic units, i.e., by entries of new firms joined by exits of old-established incumbents. In this case, the incumbents do not undergo necessary internal changes, but rather are substituted by newcomers.4 This type of process has been emphasized by J.A. Schumpeter’s (1911/1934, 1942) concept of „creative destruction” and by Alfred Marshall’s (1920) analogy of a forest in which the old trees must fall in order to make way to the new ones.
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Amplified innovation, particularly the creation of new markets. There are many examples of radical innovations that have been introduced by new firms (Acs and Audretsch 1990; Audretsch 1995; Baumol 2004). One major reason for this pronounced role of new firms in introducing radical innovation could be that incumbent suppliers are more interested in exploiting the profit possibilities of their given product program versus searching for new opportunities, particularly if the new products may contest their established ones (Geroski 1995, 431; Klepper and Sleeper 2005). Due to such reluctance that this sort of incumbent firms have towards new ideas, to set up one’s own business may appear to be the only or the most promising possibility for inventors to commercialize their knowledge (Audretsch 1995; Klepper and Sleeper 2005).
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Greater variety of products and problem solutions. If the product program of a newcomer differs from those of the incumbents, or if an entrant introduces significant process innovation, this leads to a greater availability of goods and problem solving methods. Such an increased variety implies a higher probability of finding a supply with a better match for customer preferences. Increased variety due to new supplies may stimulate an intensified division of labor as well as follow-up innovation and can, therefore, generate significant impulses for economic development.
2.2 Regional effects
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First, start-ups in different regions can be of dissimilar quality and, therefore, more or less successful with regard to survival and employment growth; thus, the direct employment effects can vary considerably.
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Second, the crowding-out effect of a successful entry may not occur in the same region in which a start-up takes place but in other regions.
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Third, the supply-side effects can also occur in other regions, resulting from the competitors located in these regions which introduce improvements in their supply.
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Regions with a large share of high quality start-ups may experience stronger direct employment effects than regions in which only very few of the new businesses are of such a high quality.
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Success of start-ups and direct employment effects should also be higher in regions where relevant resources are abundant and competition for these resources is not very intense. Because the incumbents also benefit from such a favorable environment, displacement effects should be relatively low and supply-side effects may be relatively pronounced.
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Regions in which most of the businesses are characterized by a relatively low productivity level can be expected to experience a much more pronounced decline in employment due to displacement effects, in comparison to regions where a high share of the suppliers is in the high productivity range. Also, the supply-side effects in low productivity regions should be smaller if those challenged incumbents, which are located in other regions, operate in the high-productivity range.
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The magnitude of the supply-side effects in a region may depend on the innovativeness of the regional suppliers as well as on the quality of the regional innovation system in which they are embedded. Among the factors that can be expected to shape the efficiency of the regional innovation system are the qualification of the regional workforce, the presence of academic research institutions, the innovativeness of other firms in the region as well as the availability of innovation related business services (Fritsch and Slavtchev 2007).
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The magnitude of the effects may, particularly, depend on the size of the respective industry in the region. If, for example, a successful start-up is the only supplier of the industry located in the region, output-induced crowding-out effects will not occur and supply-side effects may be relatively small.
3 Review of the empirical evidence
3.1 Different approaches to analyze the effect of new business formation on economic development empirically
3.2 Empirical evidence on the effects of new business formation on economic development
3.3 The ‘wave’ pattern
4 Overview of contributions in this issue
Author(s) | Country | Time period | Definition of start-ups | Sector(s) of start-ups | Sector-adjustment of start-up rate | Dependent Variable (s) | Length of time-lag (years) | Pattern of time-lags found |
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Acs & Mueller (2007) | USA | 1989–2003 | New establishmentsa
| All private sectorsc
| No | Employment change in all private sectorsc
| 6 | ‘s’-shaped, ‘u’-shaped or monotonously declining depending on type of entry and type of region |
Arauzo-Carod, Liviano-Solis & Marin-Bofarull (2007) | Spain | 1978–1996 | New establishments | Manufacturing | Yes | Employment change in manufacturing | 7 | ‘s’-shaped |
Baptista, Escária & Madrugo (2007) | Portugal | 1982–2002 | New establishmentsa
| All private sectorsc
| Yes | Employment change in all private sectors | 10 | ‘u’-shaped |
Carree & Thurik (2006) | 21 OECD countries | 1972–2002 | Change of number of business ownersb
| All private sectorsc
| No | Change of employment, GDP, labor productivity | 14 | ‘s’-shaped |
Fritsch & Mueller (2007) | West Germany | 1983–2002 | New establishmentsa
| All private sectors | Yes | Employment change in all private sectors | 10 | ‘s’-shaped |
Mueller, van Stel & Storey (2007) | Great Britain | 1980–2003 | New establishmentsd
| All private sectorsc
| Yes | Employment change in all private sectorsc
| 8 / 10 | ‘s’-shaped |
Van Stel & Suddle (2007) | Nether-lands | 1988–2002 | New firms (headquarters) | Most private sectorse
| Yes | Employment changee
| 8 | ‘s’-shaped or inversely ‘u’-shaped |