International Financial Integration and Entrepreneurship Laura Alfaro and Andrew Charlton

We explore the relation between international financial integration and the level of entrepreneurial activity in a country. Using a unique data set of approximately 24 million firms in nearly 100 countries in 1999 and 2004, we find suggestive evidence that international financial integration has been associated with higher levels of entrepreneurial activity. Our results are robust to using various proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution; controlling for level of economic development, regulation, institutional constraints, and other variables that might affect the business environment; and using different empirical specifications. We further explore various channels through which international financial integration can affect entrepreneurship (a foreign direct investment channel and a capital/credit availability channel) and provide consistent evidence to support our results. Acknowledgements We thank Galina Hale, Cheryl Long, and participants at the Stanford Institute for Theoretical Economics summer workshop on Emerging Market Firms’ Behavior for valuable comments and suggestions. We are grateful to Todd Mitton for providing us with the IO data, Dun & Bradstreet and Dennis Jacques for helping us with the D&B data set, and HBS and LSE for financial support. We further thank Pamela Arellano for excellent research assistance. Laura Alfaro is an Associate Professor at Harvard Business School. Andrew Charlton is a Research Officer at the Centre for Economic Performance, London School of Economics. JEL: F21, F23, F35, G15, G18, O19.