Demographics and entrepreneurship.

Liang, J., Wang, H., & Lazear, E. P. (2018). Journal of Political Economy, 126(S1), S140-S196.

Topics: Entrepreneurship, Entrepreneurial capability

Year: 2018

Country: Europe

 

Is there a relationship between age and entrepreneurial capability (idea for business, energy, and risk tolerance)? The present study shows that “some factors that contribute to entrepreneurship decline with age, but business skills increase with experience in high-level positions”.

Key takeaway: A decrease in a country’s median age is shown to increase new business formation.

Summary

To explain the relationship between entrepreneurship rates and age across different countries, the present study examines the impact of age structure on economic activity through entrepreneurship. The authors argue that “entrepreneurial capability depends on two types of abilities: one that grows with age (business acumen, experience) and one that declines with it (creativity)”. They also argue that entrepreneurship is slowed by having a large number of older workers occupying key positions and preventing younger employees from acquiring the necessary business skills. 

Data and Methodology

They test the theory using a cross-country entrepreneurship data by the Global Entrepreneurship Monitor and verify it using the Flash Eurobarometer Survey on Entrepreneurship. The data contains 1.3 million individuals between 15 and 60 years of age for 82 countries from 2001 to 2010. The population statistics are obtained from the US Census Bureau’s International Data Base, and the country-level attributes (GDP, education, start-up costs) come from the Penn World Table and the World Bank database. They run cross-country regressions with standard clustered errors and fixed effects at the country level, to test the impact of age (median age, population shrinkage) on entrepreneurship rate. 

Findings

The results show that “a one standard deviation decrease in a country’s median age increases new business formation by 2.5 percentage points, which is about 40% of the mean entrepreneurship rate across countries”. The impact is significant even when using different measures of entrepreneurship and is verified in both OECD and non-OECD countries. Furthermore, in older societies, the entrepreneurship rates are lower at every age group. The evidence supports the inverted U-shape relation between age and entrepreneurship predicted by the model. The necessary business skills and experience are missing at the young age and the old do not possess the creativity and energy to start a business. 

Possible extensions to the study would be to conduct the analysis on an industry-level, or to use individual-based data instead of country-level, to test the theory. 

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