Self-employment and economic performance: A geographically weighted regression approach for European regions

The self-employment rate includes entrepreneurs out of opportunity and entrepreneurs out of necessity. While the effect of opportunity entrepreneurs on economic development should be positive, there should be no or a negative effect of necessity entrepreneurship. We use a geographically weighted regression (GWR) approach to analyze whether the effect of self-employment on economic development is heterogeneous across European NUTS-2 regions. We find that regions having a significant positive effect of self-employment on economic development in the GWR estimation have, on average, a lower self-employment rate than regions with a significant negative effect. The concept of equilibrium rate of entrepreneurship is applied in an attempt to estimate a level of the self-employment rate from which relatively more entrepreneurs are self-employed out of necessity than out of opportunity. We find that in regions where the self-employment rate is above the equilibrium rate, self-employment has indeed a negative effect, while in regions where it is below the equilibrium rate the effect is positive.