Entrepreneurship, Institutions and Skills in Low-Income Countries

24 Pages Posted: 1 May 2017

See all articles by Zuzana Brixiova

Zuzana Brixiova

International Monetary Fund (IMF) - European Department; African Development Bank

Balázs Égert

Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute

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Abstract

This paper develops a model of costly firm creation in an economy with weak institutions, costly business environment as well as skill gaps where one of the equilibrium outcomes is a low-productivity trap. The paper tests the implications of the model using a cross-sectional dataset including about 100 countries. Both theoretical and empirical results suggest that to move the economy into a productive equilibrium, complementarity matters: reforms to improve the business environment tend to be more effective in creating productive firms when accompanied by narrowing skill gaps. Similarly, more conducive business regulations amplify the positive impact on firm creation of better education and reduced skill mismatches. To escape a low-productivity trap, policymakers should thus create a pro-business framework and a well-functioning education system.

Keywords: model of start-ups and strategic complements, institutions, education, low-income countries, threshold regression

JEL Classification: L26, J24, J48, O17

Suggested Citation

Brixiova, Zuzana and Egert, Balazs, Entrepreneurship, Institutions and Skills in Low-Income Countries. IZA Discussion Paper No. 10704, Available at SSRN: https://ssrn.com/abstract=2960493 or http://dx.doi.org/10.2139/ssrn.2960493

Zuzana Brixiova (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

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African Development Bank ( email )

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Balazs Egert

Organization for Economic Co-Operation and Development (OECD) ( email )

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France

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Université Paris X Nanterre - Department of Economics

Nanterre Cedex, 92001
France

William Davidson Institute

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United States

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