Banking sector openness and entrepreneurship

Abstract

Purpose Using an extensive data set of 137 nations spanning the period 2002–2014, this paper aims to examine the effect of banking sector openness on entrepreneurship, as measured by new business entry rate. Design/methodology/approach The paper uses a panel data estimation framework covering 137 nations during 2002–2014. This study uses fixed effects, two-stage instrumental variables, two-step systems-generalized method of moments and difference-in-difference estimation methodologies. Findings Greater banking sector openness significantly increases new business formations. This paper finds a one-unit increase in the share of non-residential bank loans leads to 1.25 new business start-ups in the average nation. Likewise, a unit increase in the ratio of external to domestic deposits raises new business formation by 1.31 new businesses. Furthermore, the positive impact of banking sector openness on entrepreneurial activities is strengthened in nations with deeper financial markets, ones with better business environments to start a business and those with higher economic growth and development. Practical implications These findings have key implications for policy measures on both institutional business entry reforms and banking sector openness and the interaction between the two. From a policy perspective, the results show greater banking sector openness can only maximize its benefits on entrepreneurship in the presence of an effective institutional framework and sound macroeconomic fundamentals in host nations. It is also imperative that policymakers simplify regulations for the entry of new businesses. Additionally, achieving higher economic growth rates and greater economic affluence should allow both current and potential business owners to respond better to changes in financing conditions like greater access to loans from foreign banks. Originality/value Entrepreneurship and new business formation are central to any economic and business activity in a nation. The entrance of new firms into an economy creates jobs, fosters research, diffusion of knowledge and innovation and contributes to economic growth. Liberalizing a nation’s banking industry may represent an invaluable source of capital for new entrepreneurs and foster the creation of new companies. However, there is scant literature that has empirically examined the impact of opening up a nation’s banking sector on new business formations.

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