Are more start-ups really better? Quantity and quality of new businesses and their effect on regional development

Empirical analyses suggest that the employment creating effect of start-ups is highest in regions with a low level of new business formation and that an increase in the regional start-up rate beyond a certain level may lead to negative employment effect. In explaining these results, we assume that the average quality of regional start-ups decreases with the number of start-ups, while the costs of the induced resource reallocation increase. Our model implies that it is not the number of start-ups but their quality that is decisive for their effect on economic development. Therefore, a policy aiming at stimulating economic growth through entrepreneurship should focus on high-quality start-ups.