Defining Opportunity Versus Necessity Entrepreneurship: Two Components of Business Creation

52 Pages Posted: 21 Oct 2019 Last revised: 28 Jul 2024

See all articles by Robert W. Fairlie

Robert W. Fairlie

University of California, Los Angeles (UCLA); National Bureau of Economic Research

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Date Written: October 2019

Abstract

A proposed explanation for why business creation is often found to increase in recessions is that there are two components to entrepreneurship – “opportunity” and “necessity” – the latter of which is mostly counter-cyclical. Although there is some agreement on the conceptual distinction between these two factors driving entrepreneurship, there is little consensus in the literature on empirical definitions. The goal of this paper is to propose an operational definition of opportunity versus necessity entrepreneurship based on the entrepreneur’s prior work status (i.e. based on previous unemployment) that is straightforward, based on objective information, and empirically feasible using many large, nationally representative datasets. We then explore the validity of the definitions with theory and empirical evidence. Using datasets from the United States and Germany we find that 80-90 percent of entrepreneurs are opportunity entrepreneurs. Applying our proposed definitions, we document that opportunity entrepreneurship is generally pro-cyclical and necessity entrepreneurship is strongly counter-cyclical both at the national levels and across local economic conditions. We also find that opportunity vs. necessity entrepreneurship is associated with the creation of more growth-oriented businesses. The operational definitions of opportunity and necessity entrepreneurship proposed here may be useful for distinguishing between the two types of entrepreneurship in future research.

Suggested Citation

Fairlie, Robert W. and Fossen, Frank M., Defining Opportunity Versus Necessity Entrepreneurship: Two Components of Business Creation (October 2019). NBER Working Paper No. w26377, Available at SSRN: https://ssrn.com/abstract=3472812

Robert W. Fairlie (Contact Author)

University of California, Los Angeles (UCLA) ( email )

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National Bureau of Economic Research ( email )

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Frank M. Fossen

University of Nevada, Reno ( email )

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HOME PAGE: http://business.unr.edu/faculty/ffossen/

IZA Institute of Labor Economics

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Germany

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