A number of studies argue that in the last 25 years or so the innovative advantage has moved from large, established enterprises to small and new firms, because new technologies have reduced the importance of scale economies in many sectors. Also, an increasing degree of uncertainty in the world economy from the 1970s onwards has created more room for newfirm startups, trying to exploit new ideas.

This bigger role in technological development for new-firm startups at the cost of large incumbent firms is sometimes indicated as the 'Schumpeterian regime switch'. An implication of this switch is that the contribution of new and small firms to economic growth increases. This hypothesis motivates the present report where we investigate whether the regime switch can be established empirically. We estimate a model in which employment growth is explained by startup activity and some controls, using a data set for 60 British regions in the period 1980-1998. Within this period, we analyze different subperiods to investigate whether the impact of new-firm startups on growth has changed during the last two decades of the 20th century.

In our empirical work, we pay attention to the question which variable should be used to normalize regional startup rates, i.e., stock of businesses or regional workforce. We correct for different sector structures in different regions that may influence the perceived impact of startups on economic growth. Furthermore, we correct for reversed causality, i.e., the possibility that high correlations between start-up activity and economic growth may reflect that regions performing well attract new businesses instead of new-firm startups contributing to regional growth.

We find evidence for a positive short-term effect of startup activity in the late 1980s and early 1990s on subsequent employment change, irrespective of macro-economic conditions, i.e., recession or boom periods. We do not find convincing evidence for a short-term effect of new businesses started in the early 1980s. But we do find a positive effect of these latter startups on employment change between 1991 and 1998, suggesting the existence of a long-term effect.

Our results for Great Britain show similarities to those found by Audretsch and Fritsch (2002) for German regions. They also find no effect of new-firm formation on employment growth in the 1980s but a significant positive effect in the 1990s. Furthermore, they also find evidence for a long-term effect of startup activity in the 1980s on growth in the 1990s. The bigger impact of new-firm startups on growth in the 1990s compared to the 1980s suggests that Great Britain and Germany might have moved from (more) 'managed' to (more) 'entrepreneurial' types of economies between the last two decades of the 20th century. This regime switch involving the increased positive employment impact of new-firm start-ups in Great Britain and Germany in the 1990s might induce policy makers in other countries as well to reconsider the role of new-firm startups in employment creation.

Orders

The report 'Startup activity and employment growth in regions' (price EUR 16,-) can be ordered through info@eim.nl, by fax (+ 31 79 341 50 24) or by phone (+ 31 79 341 36 34), stating the order number H200108. On receipt of your order an invoice will be enclosed.