Linking entrepreneurship and economic growth in Sweden, 1850-2000

Entrepreneurship has gained increasing support from governments in recent decades. Entrepreneurship is considered to generate new jobs, innovations, and economic growth. The dominating theoretical paradigm in entrepreneurship research maintains a positive, causal association between entrepreneurial activity and economic growth. Furthermore, various models identify a positive effect from entrepreneurship on economic development in advanced, innovation-driven economies in the most recent decades – a time when several Western countries transformed from ‘managed’ to ‘entrepreneurial’ economies. Such models also maintain that, as – or if – countries become more economically advanced, the positive significance of entrepreneurship for economic growth increases, while entrepreneurship may have smaller or even negative effects in low-income economies.

   Our study analyzes the causal relationship between growth in self-employment – one of the most common indicators of entrepreneurship in both research and policy – and macroeconomic growth over 150 years in Sweden (1850-2000). Although self-employment may not be an ideal or even appropriate indicator of entrepreneurship, a long observation period has several advantages. Long series may reveal patterns and relationships that cannot be detected with short observation periods, and they are ideal for testing previous assumptions, hypotheses and theories, as well as for generating new hypotheses.

   For the entire period, variations in self-employment had a statistically significant, positive immediate effect on GDP growth. However, these results should not be overemphasized, since the growth rates series over self-employment and GDP are endogenous. Furthermore, one structural break in the relationship between self-employment and GDP is also identified, occurring in late 1940s. The positive, immediate relationship between self-employment growth and GDP growth was significant for the first period (1851-1948) but not for the 1949-2000 period. Granger causality tests furthermore reveal that variations in self-employment do not cause growth in GDP. More specifically, between 1851 and 1948, there is no Granger causality between self-employment and GDP in neither direction. For the other segment (1949-2000), GDP growth Granger-caused self-employment growth, but not the other way around. Granger causality tests in the frequency domain furthermore show that GDP growth has prediction power on self-employment growth in the typical business cycle and in the long-run.

   Thus, from the post-war period and onwards in Sweden, self-employment change did not affect GDP growth – rather, GDP growth affected self-employment growth. Given that self-employment is a suitable indicator for entrepreneurship, the empirical results in this study are in several respects in disagreement with dominating assumptions in mainstream entrepreneurship research.