The rich, the poor and the entrepreneur:Entrepreneurship across personal and country income class

In this paper we use available survey data from 43 countries to compute the rates of business creation across twin income categories – individual and personal income. Both personal and country income are summary statistics that are strongly related to other characteristics, at the personal and country level, respectively, including wealth, financial sophistication, education and human capital, health, etc. We use entrepreneurship rates across both income categories and test for statistical differences in the likelihood of starting a business across personal income classes – for given country income, and across country income classes – for given relative income classes. Our exercise reveals how this likelihood of starting a business changes with personal income – it increases, and with country income – it decreases strongly. Our results suggest that both personal and country characteristics are important determinants of entrepreneurship. Country income levels seem to matter more than individual income levels, and the former work in an opposite direction, with higher income associated with lower likelihood of starting a business, i.e., it is the poorer countries that display the highest entrepreneurship rates. We believe these twin facts have not been sufficiently taken into account in the theoretical literature on the determinants of entrepreneurship. In addition, our results suggest that a complete theory of the determinants of entrepreneurship needs to explain the contrasting role of income at the personal and country levels; while higher personal income facilitates business creation, the opposite holds for country income. We thus uncover the likely dual role of entrepreneurial activity, as a positive consequence of higher personal income, and as a substitute or alternative occupation at low levels of country development. Our results highlight the importance of recognizing the complex nature of the personal and environmental incentives to create a business.