Who Creates New Firms when Local Opportunities Arise?

Who Creates New Firms when Local Opportunities Arise?

By Shai Bernstein, Emanuele Colonnelli, Davide Malacrino, Timothy James McQuade
June 19,2018Working Paper No. 3650

New firm formation is a critical driver of job creation, and an important contributor to the responsiveness of the economy to aggregate shocks. In this paper we examine the characteristics of the individuals who become entrepreneurs when local opportunities arise due to an increase in local demand. We identify local demand shocks by linking fluctuations in global commodity prices to municipality level agricultural endowments in Brazil. We find that firm creation response is almost entirely driven by young individuals with generalist and managerial skills. In contrast, we find no such response within the same municipalities among skilled, yet older individuals. Those individuals who respond to local demand shocks are younger and more skilled than the average entrepreneur in the population. Entrepreneurial response of young individuals is larger in municipalities with better access to finance, more skilled human capital, and with overall younger demographics. These results highlight how the characteristics of the local population can have a significant impact on the entrepreneurial responsiveness of the economy.