The more business owners, the merrier? The role of tertiary education

Small Bus Econ (2013) 41:335357 DOI 10.1007/s11187-012-9436-x

The more business owners, the merrier? The role of tertiary education

Mirjam van Praag Andr van Stel

Accepted: 16 May 2012 / Published online: 14 June 2012 The Author(s) 2012. This article is published with open access at Springerlink.com

Abstract Policy in developed countries is often based on the assumption that higher business ownership rates induce economic value. Recent microeconomic empirical evidence may lead to a more nuanced view: Especially the top-performing business owners are responsible for the value creation of business owners. Other labor market participants would contribute more to economic value creation as an employee than as a business owner. The implied existence of an optimal business ownership rate would thus replace the dictum of the more business owners, the merrier. We attempt to establish whether there is such an optimal level, i.e., a quadratic relation between the business ownership rate and economic output rather than a linear or higher-order relationship, while investigating the role of tertiary education. Two ndings stand out. First, by estimating extended versions of traditional CobbDouglas production functions on a sample of 19 OECD countries over the period 19812006, we indeed nd robust evidence of an optimal business ownership rate. Second, the relation between business ownership and

macroeconomic productivity is steeper for countries with higher participation rates in tertiary education. Thus, the optimal business ownership rate tends to decrease with tertiary education levels. This is consistent with microeconomic theory and evidence showing that business owners with higher levels of human capital run larger rms.

Keywords Business ownership Human capital

(Returns to) education Cross-country comparison

Production function

JEL Classications E23 J24 L26 O40 O57

1 Introduction

Policy makers believe a dangerous myth. They think that start-up companies are a magic bullet that will transform depressed economic regions, generate innovation, create jobs, and conduct all sorts of other economic wizardry.

(Shane 2009, p. 141)

Developed countries have installed many policy measures over the past decades based on the assumption that higher business ownership rates induce economic value creation (European Commission 2009, Chap. 3). Indeed, evidence has been collected of a positive relationship between business ownership

M. van Praag (&)

Amsterdam Center for Entrepreneurship (ACE), University of Amsterdam, Amsterdam, The Netherlands e-mail: [email protected]

A. van...