Capital Controls and the Determinants of Entrepreneurship

There is consensus on the need for entrepreneurship (a micro phenomenon) to drive the larger macroeconomy. However, little research has been done on how specific macroeconomic policies might in turn impact entrepreneurship. This paper examines how one particular macroeconomic policy, capital account openness, affects the creation of firms in a country. Using a new dataset of 112 countries from 2004–2011 and utilizing system-GMM and Bayesian model averaging (BMA) techniques I find that capital openness is strongly correlated with new firm entry, a result that holds across several specifications and for both developed and emerging markets. We can conclude that governments looking to promote entrepreneurship should avoid capital controls and instead encourage other investment climate reforms.