OBSTACLES TO ENTREPRENEURSHIP CAUSE UNEMPLOYMENT. A PANEL DATA ANALYSIS FOR WESTERN EUROPE, JAPAN AND THE UNITED STATES ( ).

Transcription

1 OBSTACLES TO ENTREPRENEURSHIP CAUSE UNEMPLOYMENT. A PANEL DATA ANALYSIS FOR WESTERN EUROPE, JAPAN AND THE UNITED STATES ( ). Miltiades N. Georgiou Ph.D. ABSTRACT In this paper it is shown that barriers to entrepreneurship increase unemployment rate. This will be feasible by using panel data econometric analysis. Data are annual and cover Western European countries, Japan and the United States for the period The elaboration of these data is made through the Eviews software package. Keywords: Entrepreneurship; Barriers to entrepreneurship; Unemployment; Models with Panel data. JEL classification: L6, J6, C3 Dr. M. N. Georgiou has an M.Sc. (Economics) from Stirling University, and a Ph.D. (Economics) from the University of Thessaly in Greece. He left in July 008 Emporiki Bank as a Department Head on Market Analysis. He has contributed papers to: Hellenic Bank Association, Economic Review of Commercial Bank of Greece, Applied Research Review, Applied Financial Economics Letters, Max Planck Institute of Economics (4) and Social Science Research Network (SSRN) (5). He is familiar with Eviews software package Author confirms that this article has never been published by any other journal. Further, this article expresses only author s personal ideas and of nobody else. Electronic copy available at:

2 PART 1. THEORY It is commonly held that entrepreneurship has a positive impact on employment. According to the work of Baptista et al. (005) entrepreneurship creates more jobs. A similar conclusion regarding Western Europe and United States is reached by Georgiou (006). Besides, Broadway et al., (005) claim that a business closure (failure) increases unemployment. In European Community many measures have been taken to foster entrepreneurship in order to reduce unemployment (Commission of the European Communities, 004). Finally, Gersbach (1999) supports the view that an increase in competition reduces unemployment However, entrepreneurship faces various types of obstacles. Negative impact on entrepreneurial activities have government legislation concerning taxation (Georgellis and Wall, 00), or bureaucracy (Berthold and Fehn, 003). Besides, according to Andersson (000) there are other types of obstacles like market segmentation, inadequate information in technological progress, labour market, as well as money market. Moreover, Bonini and Alka (006) assert that inflation is a barrier to entrepreneurship. Furthermore, obstacles on entrepreneurship differ among countries. According to the research of Thurik and Grilo (005) in the case of the opening of a new business European entrepreneurs face fewer obstacles compared with their counterparts in the United States. However, in the case of keeping running an existing business the opposite takes place. It is also worth mentioning that a business entry into the market faces various barriers depending on the plans of the existing most important companies within this market (Broadway and Tremblay, 005). Finally, the cost to start-up a company as well as the related regulations and legislation are off-putting (Djankov et al., 00). Electronic copy available at:

3 Therefore, barriers to entrepreneurship ultimately increase unemployment, for they hinder entrepreneurs to realise their plans. Hence, the present paper will be focused on the econometrical estimation of barriers impact on unemployment rate.

4 PART. THE MODEL Our model is expressed by equation (1), y it = c 0 + c 1 x it + error it (1) (ex-ante c 1 < 0). Variable y stands for the manufacturing total annual unemployment rate. Data source is IMF. Variable x represents Public sector taxation and market regulation, which is regarded as an obstacle to entrepreneurial activities. Data source is OECD. The subscript [i] refers to the country and the subscript [t] refers to the year. Data are annual and cover the following countries: Austria ( ), Belgium ( ), Denmark ( ), Finland ( ), France ( ), Germany ( ), Greece ( ), Ireland ( ), Italy ( ), Japan ( ), Netherlands ( ), Norway ( ), Portugal ( ), Spain ( ), Sweden ( ), UK ( ), and USA ( ). The sample has 94 observations in total. Panel data are elaborated by the software package Eviews. For Equation (1) there are basically two types of model, the fixed and random effects. The appropriate choice depends on whether one treats α i s as some fixed numbers or random drawings from a specific distribution. As the correlation structure of the error term is ignored, a more efficient estimation method would be the Generalized Least Squares (GLS) provided that there is no correlation between the x s and the α s. GLS requires weighting the observations of y and x by Σ (1/) : 1/ where 1 = σ I T σ θ = σ + T 1 ϑ ii T σ α

5 First one obtains an estimate θ by estimating the equation: y it y = β x x ) + ( u u ) () i. ( it i. it i. Once the component variances have been estimated, one forms an estimator of the composite residual covariance and GLS transforms the dependent and regressor data (Baltagi, 001; Davis, 00). The method of GLS will be used, for according to Yaffee (003) the methods of fixed effect as well as random effect are not efficient when there is heteroskedasticity (either between time periods or between cross sections). In large samples however the method of GLS can handle the abovementioned problem of heteroskedasticity. The results derived are presented in table 1 and the diagnostic tests, based on (Halkos 003), in table. Model (1) meets the criteria of heteroskedasticity, RESET and normality. Further, there is no serial correlation. Hence, model (1) is robust. The estimated coefficients are statistically significant and the coefficient of barriers is positive. Thus, it is pointed out that barriers to entrepreneurship create unemployment.

6 PART 3. CONCLUSIONS From the above analysis it becomes evident that barriers to entrepreneurship create unemployment. It is therefore recommended to Governments to alleviate strict regulations and to encourage entrepreneurial plans to come to fruition. Some countries have more severe regulation than others and this is off-putting for entrepreneurs to start a business. Regulations should be from the entrepreneurial point of view simple to handle and not time consuming. Government legislation must exist to protect county s interests and at the same time to be able to attract entrepreneurs.

7 REFERENCES 1. Andersson, T., 000, Seizing the Opportunities of a New Economy: Challenges for the European Union, Directorate for Science, Technology and Industry, OECD September, (available at: as id45168.pdf).. Baltagi, B. H., 001, Econometric Analysis of Panel Data, nd edn, John Wiley and Sons, Chichester. 3. Baptista, R., Escária, V., and Madruga, P., 005, Entrepreneurship, Regional Development and Job Creation: The Case of Portugal, Max Planck Institute of Economics, Discussion paper #0605, Jena, Germany. 4. Berthold, N., and Fehn, R., 003, Unemployment in Germany: Reasons and Remedies, CesIfo Working Paper No. 871, Category 871, Category 4: Labour Markets, February 003, table 7, (available at: as id38516.pdf). 5. Bonini, S., and Alkan, S., 006, The Macro and Political Determinants of Venture Capital Investments around the World, Università Commerciale Luigi Bocconi, Milan, Italy. (available at: as id94531.pdf). 6. Broadway, R., and Tremblay, J. F., 003, Public Economics and Start-up Entrepreneurs. Available in: 7. Commission of the European Communities, 004, Employment and Productivity and their Contribution to Economic Growth, Commission Staff Working Paper, sec (004) 690, Brussels Davis, P., 00, Estimating multi-way error components models with unbalanced data structures, Journal of Econometrics, 106,

8 9. Djankov, S., La Porta R., Lopez-de-Silane, F., and Shleifer A., 00, The Regulation of Entry, The Quarterly Journal of Economics, 117, Georgellis, Y., and Wall, H. J., 00, Entrepreneurship and the Policy Environment, The Federal Bank of St. Louis, working paper A, September. (Available at: Georgiou, M. N., 006, Does Entrepreneurship Create Enough Jobs in Europe? A Note, Max Planck Institute of Economics, Discussion paper #0806, Jena, Germany. 1. Gersbach, H., 1999, Product market competition, Unemployment and Income disparities, Review of World Economics, Volume 135, Number, June, Halkos G. E., 003, Environmental Kuznets Curve for sulfur: evidence using GMM estimation and random coefficient panel data models, Environment and Development Economics 8: , Cambridge University Press. 14. OECD (data source). Available at: Thurik, R., and Grilo, I., 005, Determinants of Entrepreneurial Engagement Levels in Europe and the US, Discussion Paper #505, Max Planck Institute of Economics, Jena, Germany. 16. Yaffee, R. A., 003, A primer for panel data analysis, September, p. 10. (Available at:

9 APPENDIX Table 1. Results Method GLS cross section SUR c 0 0,000 (0,03) c 1 0,044 (6,35) Adjusted R 0,97 Durbin Watson 1,948 Note: For n = 94 (at 95%) d U = 1,68567

10 Table. Diagnostic Tests 1 TESTS GLS (Cross section SUR ) Critical values (at 95%) Heteroskedasticity 0,03 3,948 Heteroskedasticity 0,654 3,948 Heteroskedasticity 0,033 3,841 Heteroskedasticity 0,77 5,991 Heteroskedasticity 0,714 7,815 RESET 1 0,464 3,841 RESET 0,655 5,991 RESET 3 0,941 7,815 Normality 1,718 5,991 Test 1: Regression of the squared residuals on X. That is, u t = x tγ1 + vt,1 Test : Regression of absolute residuals on X. That is, u t = x tγ + vt, (a Glejser test) Test 3: Regression of the squared residuals on Ŷ Test 4: Regression of the squared residuals on Ŷ and Ŷ Test 5: Regression of the log of squared residuals on X (a Harvey test) Test 6: Regression of residuals on Yˆ 3 Test 7: Regression of residuals on Y ˆ Test 8: Regression of residuals on Yˆ 4 Test 9: Normality test (Jarque Bera) 1 The diagnostic tests are based on Halkos (003)