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Financial development and entrepreneurship

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  • Dutta, Nabamita
  • Meierrieks, Daniel

Abstract

We empirically investigate the effect of financial development on entrepreneurship for a panel of 136 countries between 2004 and 2017. We add to existing research on the nexus between financial development and entrepreneurship by (1) constructing a novel index of financial development to account for the various dimensions of financial development, (2) using an instrumental-variable approach that exploits the presence of heteroskedasticity in regression residuals to provide causal estimates of the effect of financial development on entrepreneurship and (3) examining the role of the quality of economic and political institutions in mediating this latter effect. As our main result, we show that higher levels of financial development cause higher levels of entrepreneurial activity, especially when economic and political institutions are sound. Our empirical results suggest that financial development beneficially contributes to entrepreneurial activity by satisfying the demand for accessible, cheap and extensive credit on the part of entrepreneurs as well as the demand for the efficient and cost-effective management of risk and information on the part of investors. At the same time, our results speak to the notion that national financial systems need to be imbedded into a sound institutional framework for the economic benefits of financial development to be fully realizable.

Suggested Citation

  • Dutta, Nabamita & Meierrieks, Daniel, 2021. "Financial development and entrepreneurship," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 114-126.
    • Handle: RePEc:eee:reveco:v:73:y:2021:i:c:p:114-126
    DOI: 10.1016/j.iref.2021.01.002
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    2. Bahati Sanga & Meshach Aziakpono, 2022. "The impact of technological innovations on financial deepening: Implications for SME financing in Africa," African Development Review, African Development Bank, vol. 34(4), pages 429-442, December.
    3. Galina Gospodarchuk & Elena Zeleneva, 2022. "Assessment of Financial Development of Countries Based on the Matrix of Financial Assets," Economies, MDPI, vol. 10(5), pages 1-18, May.
    4. Gnangnon, Sèna Kimm, 2023. "Duration of membership in the world trade organization and investment-oriented remittances inflows," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 258-277.
    5. Hunjra, Ahmed Imran & Islam, Faridul & Verhoeven, Peter & Hassan, M. Kabir, 2022. "The impact of a dual banking system on macroeconomic efficiency," Research in International Business and Finance, Elsevier, vol. 61(C).
    6. Gnangnon, Sèna Kimm, 2022. "Duration of WTO Membership and Investment-Oriented Remittances Flows," EconStor Preprints 251274, ZBW - Leibniz Information Centre for Economics.
    7. Haojun Wang & Ying Wang & Bei Lyu & Yanchao Yang & Honghong Huang, 2023. "Military Experience and Individual Entrepreneurship—Imprinting Theory Perspective: Empirical Evidence From China," SAGE Open, , vol. 13(1), pages 21582440231, March.

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    More about this item

    Keywords

    Financial development; Financial depth; Entrepreneurship; Innovation; Institutions; Principal component analysis; Identification through heteroscedasticity;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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