Cross-regional trade and investment flows between Latin America and Asia and their effect on entrepreneurship

Since 2003 Latin American and Asian countries have implemented 18 bilateral free trade agreements, involving not only traditional goods and services, but also investment, government procurement and competition policy. According to the World Trade Organization (WTO) International Trade and Tariff Database, Asia’s share in Latin American imports increased from 14 percent in the early 2000 to 20 percent in 2008.

In light of the above, this paper investigates empirically how the intra-regional trade and investment flows between Latin America and Asia affect the rate and type of entrepreneurial activity in the two regions, while controlling for the main factors affecting the level of entrepreneurial activity as documented in the economics and entrepreneurship literature. The empirical analysis is based on a cross-country comparison of 15 Latin American and 10 Asian countries from 2001 to 2010. The study builds upon a theoretical framework which examines the level of entrepreneurship by distinguishing demand from supply factors. The framework integrates government intervention through implementing policy rules and instruments that shift either the demand or supply. The effect of trade and investment flows on entrepreneurship is not clear-cut. It helps create opportunities through market integration and low trade barriers, but it also spurs competition, which might negatively affect the survival of small firms. Small firms, however, are better positioned to adapt to changes. Increased cross-cultural exposures and experiences, as well as prosperity have created demand for new, more diversified, products. Thus, new market niches are formed and new entrepreneurial opportunities created.

The empirical analysis is based on panel data estimators. The measures of entrepreneurship are taken from the Global Entrepreneurship Monitor and the World Bank (WB) Group's Entrepreneurship Survey. I use a set of trade variables and globalization indicators from: the WB World Development Indicators, International Monetary Fund (IMF) World Economic Outlook, United Nations (UN) Conference on Trade and Development Statistics, and the Fraser Institute of Economic Freedom of the World. I also include controls for government intervention and regulations. Participation in intra-regional trade agreements has a negative effect on nascent entrepreneurship and new business ownership rate, due to the decrease of necessity entrepreneurship. It positively affects the number of new corporations created, but has no effect on type of entrepreneurial activity.