51st Congress of the European Regional Science Association: "New Challenges for European Regions and Urban Areas in a Globalised World", 30 August - 3 September 2011, Barcelona, Spain
The ability to adjust to structural change is vital to economic development, and entries can be active participants in this process. This paper aims to shed some light on the relation between entrepreneurship and growth by arguing that entrepreneurial activity relates to growth via reallocation of factors across sectors. While the importance of entrepreneurship for the reallocation of factors is widely acknowledged, and economic growth may be accelerated by structural change, there is to date no empirical evidence as to the quantitative importance of this link. This study fills that gap. The historical framework is the accelerated economic transformation that occurred in industrialized countries during the mid 1970s, resulting in an increasing need to adjust. Based on German data from 1975 to 2002, evidence is presented that sectoral reallocations are an important means for transforming entrepreneurial activity into growth. To proxy changes in the local sectoral structure induced by entries, a set of similarity measures is introduced that quantifies the impact of new business formation on sectoral reallocations of local economic activity. These measures have in common that they measure the concordance of new entries' sector affiliations with that of existing businesses or those that exit. Next, these measures are used to analyze the relationship between structural change induced by entrepreneurial activity and economic development. The empirical findings suggest that structural change induced by newly founded businesses is positively related to local growth, revealing one element of the complex relation between entrepreneurship and growth.