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Determinants of the Prevalence of Start-ups and High-Growth Firms

By Per Davidsson and Magnus Henrekson

Abstract

The purpose of this study is to identify key institutional determinants of firm emergence and growth. We do this using various types of data from Sweden, a country, which until a recent turnaround, experienced a prolonged period of substandard economic performance. A characterization of a number of institutions and policy measures shows that they are likely to have contributed to an environment that discourages entrepreneurial activity and firm growth. Aspects dealt with include: missing arenas for entrepreneurship in the care and sectors and for household-related services, taxation of entrepreneurial income, incentives for wealth accumulation, wage-setting institutions and labor market regulations. Using original data, we provide evidence of a low prevalence of nascent entrepreneurs and a small net employment contribution by high-growth firms. These micro-level findings are consistent with the observed weak performance at the macro level. We admit that indisputable evidence for the effects of institutional arrangements is almost impossible to establish. However, the consistency of our theoretical arguments and empirical data makes a strong case for the notion that the Swedish case illustrates the costs of giving too little weight to economic renewal in policy making.Business taxation; Entrepreneurship; High-growth firms; Industrial policy; Nascent entrepreneurs; Swedish model

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