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The Global Financial Crisis Led to a Drop in Business Creation

October, 2010, Leora Klapper, DRGFP

New business registrations of limited-liability firms dropped sharply in richer countries amid the global financial crisis, and less so, if at all, in many lower-income countries, according to the newly released 2010 World Bank Group Entrepreneurship Snapshots.

The fall in new business registrations largely paralleled the spread of the crisis in timing and intensity: countries which were hit harder by the crisis suffered more severe declines in formal registration. In New Zealand, for example, 47,897 new firms were registered in 2009, a 35 percent drop from 74,247 in 2007. Bulgaria and Lithuania also saw drastic declines.

By contrast, registrations in many low-income countries held up. That’s mainly because economic shocks there tend to bring smaller changes and many of these countries also recently introduced new measures to modernize business registration. For example, new firm registrations increased to 610 in 2009 from 581 in 2007 in Burkina Faso, a land-locked developing country in West Africa that introduced one-stop-shop registration. Colombia and Morocco avoided sharp drops in registration as well.

The report, along with a companion searchable database, is based on data from 112 countries, mainly statistics collected directly from government registries. The survey, which has been conducted every two years since 2004, is funded by the Ewing Marion Kauffman Foundation.

While the data show that countries with higher GDP per capita saw sharper declines in new registration, an even more significant indicator is the development of financial markets: countries where financial markets make up a bigger part of the domestic economy suffered larger drops in registrations during the crisis.

That’s probably because withdrawals of finances tend to have a large impact on start-ups when finance plays a larger role in the economy. But those countries have more business creation to begin with, mainly because access to financing makes it easier for entrepreneurs to start new businesses. In the long run, the authors argue, financial development offers more benefits than risks to business creation.

What spurs business creation? The report cites good governance, a strong legal and regulatory environment and low corporate taxes. For example, new registrations were highest where the cost of starting a business was the lowest, even when controlling for income-level.


Access the entrepreneurship database 

Read the working paper that explains the survey.

  




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