Can Capital Inflows Stifle Local Entrepreneurship?

76 Pages Posted: 25 Apr 2022 Last revised: 5 Apr 2024

See all articles by Jiajie Xu

Jiajie Xu

University of Iowa - Henry B. Tippie College of Business

Date Written: July 15, 2021

Abstract

This paper examines the impact of capital inflow on local entrepreneurship. Using the Opportunity Zone policy as a quasi-natural experiment, the paper reveals a dichotomy: capital inflows to economically distressed areas lead to a decline in local entrepreneurship. Motivated by a simple model, I show that increased private investments favor existing firms, discouraging new business formation, particularly in sectors with local competition. Further, the policy negatively affected local employment and was not effective in attracting population inflows or reducing income inequality. Future policy designs should consider potential distributional effects among firms when offering market-based tax incentives.

Keywords: Entrepreneurship, Capital Inflow, Tax Credits, Opportunity Zones, Local Market Competition, Access to Finance

JEL Classification: G18, H25, L26, R51

Suggested Citation

Xu, Jiajie, Can Capital Inflows Stifle Local Entrepreneurship? (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=4082335 or http://dx.doi.org/10.2139/ssrn.4082335

Jiajie Xu (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Pappajohn Business Building S296
Iowa City, IA 52242-1000
United States

HOME PAGE: http://www.jiajiexu.com/

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