Public Funding and Non-Frontier Entrepreneurship

Abstract

While high‑tech and VC-backed firms drive innovation, most employment originates from non‑frontier incorporated entrepreneurs. Can public funding alleviate liquidity constraints for these entrepreneurs? We study a Portuguese program that allows unemployment insurance recipients to collect their benefits up front to start a business, provided they either forgo other work for three years or repay the amount received. Exploiting age‑based discontinuities in benefit duration, we estimate an elasticity of incorporated entry with respect to funding of 0.65, more than three times that for unincorporated entry. The response is strongest among higher‑wage workers, women, and during periods of financial stress. Consistent with a liquidity channel, program funding also increases firm size, capital intensity, productivity, and access to credit. Each €10,000 of funding generates 1.5 job-years by age 1 and 5.3 job-years by age 8. The evidence suggests that the repayment obligation for re-entering employment does not impose lasting financial hardship.

Keywords: Entrepreneurship, Financial constraints, Unemployment insurance, Public funding

JEL Classification: G38, H81, J24, J65, L26