It’s no secret that entrepreneurship is key for economic development. Entrepreneurship creates new jobs, accelerates economic growth with higher productivity firms, increases competition among existing businesses, and spurs innovation. But what factors have hindered entrepreneurs? Which economies have higher levels of entrepreneurship? What has changed over the past years?
The World Bank’s Entrepreneurship Database is a critical source of data that measures the level of entrepreneurial activity across countries over time. , helping understand the dynamics of private enterprises around the world.
The database looks at entrepreneurship in the formal sector and measures new business entry density—the number of newly registered limited liability firms per calendar year, per 1,000 working-age members of a country’s population. An analysis of data collected from 2006 to 2018 allows us to understand trends in new firm creation and the relationship between entrepreneurship and the business environment.
Here are a few insights:
The highest levels of entrepreneurship were observed in Hong Kong SAR, China; Estonia; and New Zealand.
Of the ten economies with the highest entry density, five are members of the Organisation for Economic Co-operation and Development (OECD) high-income group. Three of the top ten are from Europe and Central Asia.
Among the economies with the lowest entry density, ten had average entry rates of fewer than 0.2 new LLCs per 1,000 adults in 2018. Five of those 10 economies were in Sub-Saharan Africa and three were in South Asia.
In 2018, 151,739 new limited liability companies (LLCs) were registered in Hong Kong SAR, China – which resulted into an average number of 28.6 new LLCs per 1,000 adults (figure 1). This is the highest entry density rate in the world, followed by Estonia (23.6 new LLCs per 1,000 adults) and New Zealand (17.8 new LLCs per 1,000 adults).
Figure 1: The highest levels of entrepreneurship were in Hong Kong SAR, China; Estonia; and New Zealand in 2018.
A country’s entry density rate tends to be correlated with the level of economic development. In 2018, the average entry density was 7.2 in high-income economies, 2.5 in middle-income economies, and 0.7 in low-income economies. This means that ten times more new limited liability companies per 1,000 adults were registered every year in high-income economies than in low-income economies, and three times more than in middle-income economies.
Over time, the biggest increase in entry density rates was in high-income economies.
In absolute terms, high-income economies had the biggest increase in entry density over time—rising from 5.6 new LLCs per 1,000 adults in 2006 to 7.2 new LLCs per 1,000 adults in 2018 (figure 2). Among high-income economies, the 2018 entry rate was the highest in 13 years.
The data show the immediate effect of the 2008 financial crisis among high-income economies, with a drop of 1.4 percentage points in the average entry density between 2007 and 2009, while the impact on middle-income economies was approximately only a half percentage point decline during that period. Meanwhile, entry rates increased among low-income economies.
Figure 2: Entrepreneurial activity rose to record highs in all income groups in 2018
The data reveal significant disparities in growth in entry density among developing economies. In Sub-Saharan Africa, Lesotho and Rwanda saw the most important pickup in the pace of firm creation. The number of new limited liability companies registered per year jumped from 252 in 2006 to 10,635 in 2018 in Rwanda, and from 875 to 3,725 over the same period in Lesotho. At the other end of the spectrum, the number of new firms dropped by more than half in Zimbabwe in ten years—from 39,266 new firms in 2008 to 16,810 in 2018.
Malta saw the biggest absolute increase in entry density rate between 2006 and 2018, rising from 3.9 new LLCs per 1,000 adults to 17.5 new LLCs per 1,000 adults (figure 3). Although Malta joined the European Union in 2004, its entry density did not increase until 2010. Since then, Malta’s entry density rate has risen steadily every year except 2016, when the Maltese economy slowed slightly.
Figure 3: Malta experienced the biggest increase in entrepreneurship activity
Cumbersome procedures and corruption remain strong deterrents to entrepreneurship.
For a new firm to be created, several factors are key. Some relate to the entrepreneur, such as the business idea, skills and ambition, time, and vision and resources. Others are external and stem from the environment—market capacity and niche, rules and regulations, demand, and macro-stability, among others. For many, the idea of having to satisfy all of the bureaucratic steps required to start a business can be frustrating and discouraging.
Overly cumbersome incorporation procedures, for example, appear to be a deal-breaker for potential entrepreneurs who hesitate between going formal or staying informal. Another important factor affecting the level of entrepreneurial activity is corruption: the number of new businesses opened annually per 1,000 adults tends to be lower in economies where many existing firms receive at least one bribe payment request. A similar pattern is observed in places where making unofficial payments to public officials “to get things done” is a common practice (Figure 4). Further, where the practice of gift-giving to get an operating license or to meet with tax officials is more common, entrepreneurs tend to incorporate fewer businesses. High levels of corruption can be an impediment for entrepreneurs to start a formal business.
Figure 4. Expectations and incidences of corruption are associated with lower levels of entrepreneurial activity
The COVID-19 pandemic is taking a toll not only on existing firms but also on firm creation. The number of newly incorporated companies collapsed in many economies hit by COVID-19 related restrictions necessary to contain the spread of the virus.
These effects will be evident in the next round of data collection for the Entrepreneurship Database, to take place in 2021. The information will allow for a deeper understanding of the impact of the pandemic on entrepreneurial activity and hopefully be a helpful tool for policy makers.
Interesting and useful blog post and data. Congratulations!
The definition of entrepreneurship as the density of new formal firms per population is a good start. I wonder how it compares with other measures of entrepreneurship and how it relates to both firm destruction and future growth.