understanding the drivers of an ‘entrepreneurial’ economy: lessons from japan and the...

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Understanding the drivers of an ‘entrepreneurial’ economy: Lessons from Japan and the Netherlands

Hiroyuki Okamuro (Hitotsubashi University)André van Stel (EIM Business and Policy Research)Ingrid Verheul (Rotterdam School of Management)

Corvinus University Budapest, May 03, 2011


Motivation Many developed countries move from a ‘managed’ to an ‘entrepreneurial’ economy (Audretsch and Thurik, 2000, 2010). Speed of transition varies across countries. We investigate the differences between a more ‘managed’ economy (Japan) and a more ‘entrepreneurial’ economy (the Netherlands).Contrasting trends in the Netherlands and Japan (see next figure) In particular, we examine what factors contribute positively or negatively to various entrepreneurship indicators in Japan and the Netherlands, relative to a benchmark of OECD countries. By zooming in on specific countries, we can derive policy implications specifically focused on these countries (instead of deriving general conclusions based on a cross-country regression).


Business ownership rate (non-agriculture) in Japan, Netherlands & US, 1972-2008


Structure of paper- Comparison of various indicators of entrepreneurship and the entrepreneurial climate over time (US as a benchmark)- Theory about determinants of entrepreneurship at the macro level- Decomposition analysis, based on earlier study by Hartog, van Stel and Storey (2010), to better understand the differences in entrepreneurship levels between Japan and NL- Conclusions


Entrepreneurship in Japan and NL: general patterns 2002-2009 Nascent and young business entrepreneurship rates lower in Japan (compared to NL) Business ownership rate lower in Japan Start-up intentions (next three years) lower in Japan Share of fast-growing companies lower in Japan (but start-up size higher in Japan) Share of female entrepreneurs lower in Japan Share of ambitious entrepreneurs relatively low in both countries ‘Perceive business opportunities” and “skills to start a new business” rates lower in Japan Importantly, on most indicators both countries score lower than United States


Nascent entrepreneurial activity rate, 2002-2006 (GEM)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

JAP

SWE

POR

BEL

NL ITA

SPA

FIN

DK AUT

UK GER FRA

SWI

NOR

IRE

CAN

AUS

US NZ


Young business entrepreneurial activity rate, 2002-2006 (GEM)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0FR

A

JAP

BEL

FIN

POR

ITA NL

GER

SWE

AUT

DK UK SPA

CAN

SWI

IRE

NOR US AUS NZ


Non-agricultural business ownership rate,

2002-2006 (EIM COMPENDIA data base)

0.0

5.0

10.0

15.0

20.0

25.0

DK SWI

NOR

SWE

FIN

FRA

AUT

JAP

GER US NL UK BE

L

IRE

CAN

SPA NZ

POR

AUS

ITA


Future business start-up rate in Japan,

Netherlands & US, 2002-2009


Share of fast-growing enterprises (%)

in Japan, Netherlands & US, 1995-2008


Total Entrepreneurial Activity in Japan,

Netherlands & US, 2002-2009, by gender


Total Entrepreneurial Activity in Japan,

Netherlands & US, 2002-2008, by ambition level


“Perceive business opportunities” rate



“Skills to start a new business” rate



Theory: five groups of determinants of entrepreneurship (Verheul et al. 2002)

Macro-economic conditions (share of service sector, unemployment rate, per capita income) Technological factors (R&D expenditures/GDP) Socio-demographic factors (enrollment in sec. and tert. education, age composition, female labour share) Institutional environment (social security, taxes/GDP, employment protection, rule of law) Cultural factors (power distance, individualism, masculinity, uncertainty avoidance)


Decomposition analysis (1) We decompose fitted (predicted) values of the levels of the nascent, young business and business ownership rates of Japan and NL (and US), averaged over 2002-2006, into individual contributions of explanatory variables, based on Hartog et al. (2010) estimations, by multiplying the estimated coefficient with the observed (real) country value of the variable. By grouping similar explanatory variables, we can estimate the contribution of each group of factors. We then compute for each variable the relative deviation of Japan or NL from the overall average contribution of 20 sample countries, by deviding the difference of the estimated contributions between Japan (or NL) and the whole sample by the entrepreneurship ratio of overall average.


Decomposition analysis (2) In this way, the percentage deviation of Japan or NL from the overall country average level of entrepreneurship can be decomposed into deviations per (group of) variable(s). An example: social security (institutional factor) in Table 4- The overall average of the young business entrepreneurship (YBE) ratio (actual) is 2.97%. - The contribution of social security in overall average (estimated coefficient * overall average value of social security variable) is -1.34. - The computed contribution of this variable for Japan is -0.35. - Thus, the deviation of Japan from overall average of this variables is 0.99 (-0.35 – (-1.34)).- Finally, we calculate the deviation of contribution relative to YBE ratio as 33.2% (0.99/2.97). For this case we say “positive deviation”, meaning that the overall negative contribution of this variable is smaller in Japan.

Table 4: Contribution of individual determinants to explanation of young business entrepreneurial activity rate, average values 2002-2006 Japan Netherlands United States

All-country average

contribution Contribution % Deviation

(relative to YB rate)

Contribution % Deviation (relative to YB rate)

Contribution % Deviation (relative to YB rate)

Share service sector -1.09 -1.17 -2.71 -1.30 -7.09 -1.52 -14.47

Unemployment rate -1.31 -0.96 11.88 -0.82 16.52 -1.11 6.69

Per capita income -4.03 -3.96 2.35 -3.96 2.53 -5.35 -44.38

Macro-economic conditions -6.43 -6.09 11.52 -6.07 11.96 -7.98 -52.17

R&D expenditures (% of GDP) -1.00 -1.54 -18.28 -0.82 5.98 -1.24 -7.99

Technological factors -1.00 -1.54 -18.28 -0.82 5.98 -1.24 -7.99

Enrollment secondary education 0.58 0.52 -2.03 0.61 1.05 0.48 -3.28

Enrollment tertiary education 2.68 2.16 -17.55 2.37 -10.49 3.30 20.83

Age composition 9.83 9.35 -16.27 9.72 -3.74 9.94 3.66

Female labor share 2.29 2.11 -6.30 2.26 -1.21 2.36 2.23

Socio-demographics 15.39 14.13 -42.15 14.96 -14.38 16.08 23.45

Social security -1.34 -0.35 33.22 -1.96 -20.84 -0.61 24.35

Taxes (% of GDP) -2.64 -1.87 25.68 -2.66 -0.77 -1.87 25.82

Corporate tax rate -0.46 -0.58 -4.01 -0.47 -0.64 -0.57 -3.74

Employment protection -1.40 -1.76 -12.19 -2.20 -27.02 -0.12 42.99

‘Rule of Law’ 1.49 1.24 -8.31 1.60 3.71 1.42 -2.30

Institutional environment -4.34 -3.32 34.39 -5.70 -45.55 -1.75 87.12

Power distance -1.84 -2.50 -22.19 -1.76 2.76 -1.85 -0.35

Individualism 2.86 1.82 -35.10 3.16 10.11 3.60 24.74

Masculinity -0.80 -1.59 -26.57 -0.23 18.93 -1.04 -8.04

Uncertainty avoidance 1.87 2.98 37.31 1.72 -5.24 1.49 -12.88

Cultural factors 2.10 0.71 -46.56 2.89 26.56 2.20 3.46

Constant term plus year dummies -2.74 -2.64 3.42 -2.75 -0.29 -2.75 -0.29

Fitted value 2.97 1.26 -57.66 2.50 -15.73 4.56 53.58

Residual 0.00 -0.11 -3.86 -0.51 -17.00 -0.01 -0.34

Young business entr. activity rate 2.97 1.14 -61.53 2.00 -32.73 4.55 53.24

Example 1: Contribution of macro economic conditions to young business rates in 20 countries, 2002-2006 (contribution relative to overall average)

Example 2: Contribution of technological factors to young business rates in 20 countries, 2002-2006 (contribution relative to overall average)

Example 3: Contribution of socio-demographic factors to young business rates in 20 countries, 2002-2006 (contribution relative to overall average)

Example 4: Contribution of institutional environment to young business rates in 20 countries, 2002-2006 (contribution relative to overall average)

POR

FRA NL IT

A BEL

SPA DK

SWE

FIN

NOR

AUT GER

NZ

IRE JA

P AUS

SWI

UK CAN

US

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Example 5: Contribution of cultural factors to young business rates in 20 countries, 2002-2006 (contribution relative to overall average)


Main findings (relative to overall average) Both countries show little deviation in the contribution of macro economic conditions. Low female labour share in Japan has a positive but smaller contribution to nascent entrepreneurship. Tertial education and age composition have positive but smaller contribution to YB entrepreneurship in Japan. Institutional environment in NL has a negative and larger contribution to YB entrepreneurship and business ownership rates (high levels of social security and employment protection). Negative contribution of institutional factors in Japan is smaller (low taxes and social security). Cultural factors have positve but smaller contribution to YB entrepreneurship and business ownership ratio in Japan (high power distance, low individualism, high masculinity). Netherlands the opposite: larger positive contribution of culture


Conclusions and policy implications We investigate the factors of differences in entrepreneurship levels between Japan and NL using decomposition analysis. This type of analysis allows us to zoom in on the specific causes for the two countries explaining their entrepreneurship levels. The comparison with the OECD benchmark makes it easier to evaluate where improvements can be made (i.e. influencing determinants so that entrepreneurship rates increase). NL: Institutional environment can be improved. Japan: Cultural values (e.g. rewarding individual achievement) and female labour participation can be improved.


Major references Audretsch, D.B. and A.R. Thurik, 2000, Capitalism and democracy in the 21st century: from the managed to the entrepreneurial economy, Journal of Evolutionary Economics 10 (1-2), 17-34. Hartog, C., Van Stel, A.J. and D.J. Storey, 2010, Institutions and entrepreneurship: The role of the rule of law, EIM Scales paper H201003, Zoetermeer: EIM Business and Policy Research. Hofstede, G., 2001, Culture's Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations, 1st edition in 1980, Thousand Oaks CA: Sage Publications, USA. Verheul, I., Wennekers, S., Audretsch, D. and R. Thurik, 2002, An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture, in: Audretsch, D.B., Thurik, A.R., Verheul, I. and A.R.M. Wennekers (eds.), Entrepreneurship: Determinants and Policy in a European-US Comparison, Boston/Dordrecht: Kluwer Academic Publishers, 11-81.

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