This paper presents an empirical study exploring the effect of globalization on the level of entrepreneurial activity in Latin America over the past decade. I build upon the economics literature on productive and unproductive entrepreneurship in the context of international trade. Reducing tariffs provides incentives to entrepreneurs to move from unproductive to productive entrepreneurship. In a global environment, with cross-border trade and competition, this move can help increase productivity and ultimately improve living standards. Local governments, however, under the influence of lobbyists, often exercise protectionism.
The measure of entrepreneurship is taken from two sources. The first one is the Global Entrepreneurship Monitor (GEM), a cross-country research program studying the national level of entrepreneurial activity on an annual basis. According to the GEM, an entrepreneur is a person currently in the process of starting-up a new business less than three months old, or a person who owns and manages a young company less than 42 months old. The second source is the World Bank Group's Entrepreneurship Survey's entry density in assessing the rate of entrepreneurial activity in a country. The entry density is defined as the number of newly registered limited liability companies per 1.000 working-age people (aged between 15 and 64).
As measures of the country level of globalization, I use a set of trade variables and globalization indicators found in a few different data bases: the World Bank World Development Indicators, International Monetary Fund World Economic Outlook, United Nations Conference on Trade and Development statistics, and Fraser Institute Economic Freedom of the World. The trade variables in the study include trade openness, economic flows, trade-weighted tariffs, trade restrictions, trade reforms, and revenue from trade taxes. The globalization indicators include FDI, trade diversification, personal contacts, information flows, geographical distance of a country with respect to its current partners and KOF globalization index. I also include controls for government intervention and regulations, such as rule of law, prevalence of corruption, government accountability, product market regulation, price controls, administrative burden and centralization of wage bargaining taken from the World Bank Doing Business data base.
The empirical analysis is based on a panel data approach, making use of the variation of entrepreneurship rates both between countries and within countries over the ten year period. Panel data estimators are applied, making the assumption that variations in entrepreneurship rates within countries over time are not affected by any underlying differences in the variable definitions.