The growth of China and India and their financial sectors are hard to ignore. In a recent working paper, Tatiana Didier and I study the extent to which firms in these countries use capital markets to obtain financing and grow.
A financial crisis is a difficult time to start a business. Credit is tight, demand is low, and the future is uncertain. Even in recovery periods, entrepreneurs may be skittish about making the enormous sacrifices necessary to launch a new enterprise and lenders may be unwilling to lend to new borrowers. New data from the Entrepreneurship Database – a collaborative effort between the Bank's Development Economics Group (DEC) and Doing Business - provide an interesting look at the relationship between new firm creation and the recent financial crisis and ongoing recovery. The main indicator is new firm entry density, defined as the ratio of new registrations of limited liability companies to the working age population. The data show that new firm entry density (“entry density”, for short) dropped sharply in response to the 2008-09 financial crisis but by 2011 had recovered to pre-crisis levels in many economies.
New firm entry density over time: Percent change in entry density as compared to 2004 levels (Source: Entrepreneurship Database, 2012)
A lot of work has been done on understanding the impact of human capital or the level of education on economic development (see for example, Barro 1991 and Benhabib and Spiegel 1994). That human capital is important for economic development, at least potentially so, seems fairly non-controversial and obvious. But is it really so?