International Financial Integration and Entrepreneurship

We explore the relation between international financial integration and the level of entrepreneurial activity in a country. Researchers have stressed the role of new firm activity and economic dynamism on growth. Yet, the empirical effects of international capital mobility on entrepreneurial activity have received little attention in the literature albeit the ambiguous theoretical predictions and the intense policy debate. Using a unique comprehensive data set of nearly 24 million firms in a close to 100 developed and developing countries in 2004, we find higher entrepreneurial activity in countries with fewer restrictions to international capital flows. Our results are robust to using other proxies for entrepreneurial activity such as entry, skweness of the firm-size and firm-age distribution and controlling for other variables that might affect the business environment such as the size of the market, regulation, enforcement of property rights and other institutional variables. We also use different empirical specifications in our analysis. We further explore various channels through which international financial integration can affect entrepreneurship and provide consistent evidence to support our results. In particular, we find that the presence of downstream foreign firms has a positive effect on firm activity (a foreign direct investment channel) and we find higher entrepreneurial activity in sectors more reliant on external finance (a capital/credit availability channel). Overall our study provides suggestive evidence that international financial integration has been associated with higher levels of entrepreneurial activity. JEL Classification: F21, F23, F35, G15, G18, O19.