Principal Topic

The business ownership rate (i.e. the number of business owners per labor force) declined since the Industrial Revolution. From about the mid-80s, an increase of the business ownership rate has been observed in many western countries. This is also the case for the Netherlands. There are several explanations for this U-shaped trend. This enables us to make predictions for the future. We present a time series model for explaining and forecasting the business ownership rate, as well as gross entry and exit rates. The model has been estimated for the 1965–1997 period using a new dataset for The Netherlands.

Method

An equation explaining the business ownership rate investigates long run determinants of business ownership, whereas an equation explaining the annual changes of this rate investigates short run determinants. Using a cointegration technique, the long run and the short run are linked through an error correction mechanism gearing the actual business ownership rate towards a long run equilibrium rate. An equation explaining entry rates is estimated simultaneously. This reveals not only the determinants of entry, but also those of exits, as the exit rate is by definition the difference between the gross and net entry rate.

Results and Implications

Regression analysis of our model indicates that income per capita, income inequality, the industry structure, business profitability and the business licensing policy measures are among the determinants of Dutch business ownership development. Forecasts using the model show that the Dutch business ownership rate is expected to continue its growth in the next decade, though at a lower pace. The analysis has some important implications for policy makers. High business ownership rates are, especially when observed in combination with high entry and exit rates, often linked to economic growth. However, recent empirical research suggests that a business ownership rate that is above its (country specific) optimum level may lead to a penalty for economic growth.

CONTACT: Niels Bosma, EIM Business & Policy Research, Italiëlaan 33, P.O. Box 7001, 2701 AA Zoetermeer, The Netherlands; (T) +31 79 3413634; nbo@eim.nl