Entrepreneurship and Economic Growth: The Proof Is in the Productivity wp50

CPR Working Paper Series No. 50

Entrepreneurship and Economic Growth: The Proof Is in the Productivity

Douglas Holtz-Eakin and Chihwa Kao

February 2003

Abstract: Popular and policy discussions have focused extensively “entrepreneurship.” While entrepreneurship is often viewed from the perspective the individuals’ benefits—an increase in standard of living, flexibility in hours, and so forth—much of the policy interest derives from the presumption that entrepreneurs provide economy-wide benefits in the form of new products, lower prices, innovations, and increased productivity. How large are these effects?

Using a rich panel of state-level data we quantify the relationship between productivity growth—by state and by industry—and entrepreneurship. Specifically, we use state-of-the-art econometric techniques for panel data to determine whether variations in the birth rate and death rate for firms are related to increases in productivity.

We find that shocks to productivity are quite persistent. Thus, to the extent that policies directly raise labor productivity, these effects will be long lasting. In addition, the data reveal that increases in the birth rate of firms leads, after some lag, to higher levels of productivity, a relationship reminiscent of Schumpeterian creative destruction. Given previous evidence that government policies raise the rate of entry of new entrepreneurs, our findings link these policies to enhanced productivity.

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