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Research Article

The impact of policy uncertainty on entrepreneurial activity: a cross-country analysis

ORCID Icon, ORCID Icon, ORCID Icon & ORCID Icon
Pages 593-616 | Received 20 Apr 2022, Accepted 30 Apr 2023, Published online: 16 May 2023
 

ABSTRACT

This study examines the impact of Economic Policy Uncertainty (EPU), capturing the extent to which a national economy is characterized by uncertainty about future tax codes, monetary policy, and government spending on the rate of entrepreneurial activity, including necessity entrepreneurship and opportunity entrepreneurship. Applying the system Generalized Method of Moments methodology on panel data covering 26 countries over 19 years, we show that higher EPU is associated with increased rates of necessity entrepreneurship. The results are significant even after controlling for other macro-level indicators and alternate EPU specifications. The results also suggest a lower rate of necessity entrepreneurship in developed economies, which reflects the role of safety nets as a shield against sudden loss of livelihood. We find no significant relationship between EPU and opportunity entrepreneurship, suggesting that opportunity entrepreneurship is governed by a more complex combination of factors. Our study contributes to the literature on determinants of entrepreneurship and offers important recommendations for entrepreneurs and policymakers.

Acknowledgments

The authors would like to express their sincere gratitude to Dr. Paul D. Reynolds and Dr. Niels Bosma for generously providing access to the GEM data. The authors would like to extend special appreciation to Dr. Niels Bosma for his insightful feedback on queries about the GEM data. The authors would also like to acknowledge the anonymous reviewers and the handling editor, Dilani Jayawarna, for their diligent efforts and constructive comments throughout the review process.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The value for the GEM variable that identifies individual motivation was changed from a yes/no to a 5-point Likert scale after 2018. We created an equivalent score for 2019 data, and individuals who reported ‘strongly agree’ or ‘somewhat agree’ to ‘To build great wealth or a very high income’ were classified as ‘Opportunity entrepreneurs”, and individuals who reported strongly agreed or somewhat agree to ‘To earn a living because jobs are scarce’ were classified as ‘Necessity entrepreneurs’.

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