Industrial Economics
Starting up

The widespread consensus that new-firm start-ups underpin the economy's continual rejuvenation highlights the need to identify conditions and regional environments that are conducive to their formation and the local economic policies that may sustain this process. In Discussion Paper No. 864, Research Fellow David Audretsch and Marco Vivarelli investigate the determinants of new-firm start-ups empirically for two sets of panel data from 78 Italian provinces during 1985-8. Applying the `income choice theory', that potential entrepreneurs choose between wages from employment in incumbent enterprises and profits to be accrued from new firms, they derive econometric results confirming that start-up activity is higher in provinces where profits are greater and wages lower. Policies to raise a region's overall profitability may therefore facilitate higher start-up activity over and above their direct effects.

Audretsch and Vivarelli also report empirical support for the role of current employment conditions: redundancy or a high likelihood of becoming unemployed can `push' individuals to start new firms, and greater employment dislocation is associated with more start-up activity. While they find no empirical support for the `Schumpeterian view', which associates the birth of a new firm with an innovative business idea, they caution that this result from aggregate data cannot reject the possible positive influence of R&D spillovers on new-firm formation within specific (innovative) industries.

Finally, they consider recent theories concerning environmental and institutional factors, which stress the positive effects on start-up activity of the `network externalities' associated with good infrastructure, networks of potential buyers and suppliers and `incubator' firms in which potential entrepreneurs can learn how to start and organize new firms. Start-ups are indeed positively related to existence of entrepreneurial networks in the form of a greater density of small firms. Audretsch and Vivarelli infer that policies to rejuvenate an area's industrial structure through new-firm formation will need to be more intensive in regions in which the number of existing small firms is relatively low.

New-Firm Start-ups in Italy
David B Audretsch and Marco Vivarelli

Discussion Paper No. 864, November 1993 (AM)