Institution Constraints in the Quest for Growth in the Portuguese Economy

by Venancio, Ana, Ph.D., CARNEGIE MELLON UNIVERSITY, 2011, 113 pages; 3516098


A fundamental question facing governments, in light of the current economic crisis, is what policies promote economic growth and job creation. Encouraging entrepreneurship is generally regarded as a possible answer. New ventures are credited not only for increasing competition and pushing out unproductive incumbents, but also for accelerating the speed of innovation and dissemination of new technologies and products. Yet, it is less clear what structural features deter entrepreneurial activity and how governments should intervene to encourage and support firm formation and job creation. While there has been some research on understanding what forces constrain entrepreneurial activity, this central question remains partially unanswered and therefore it will be the focus of this dissertation.

Economic growth is also affected by changes in global trade policy. Since the mid-19805, there has been an unprecedented increase of imports from low-income countries. At the same time, high-income countries have experienced job losses and income inequality increases. These parallel developments have led some critics of globalization to question the benefits of trade for economic growth and to lobby for protective measures against low-income countries. However, despite the proliferation of research on how globalization affects firms and employment, disagreement regarding the effects of international trade continues to persist. Therefore, the last chapter of this dissertation addresses these issues.

In summary, this dissertation explores the role of three institutional features wealth constraints, entry regulation and import competition – in explaining variations in the pattern of entrepreneurial activity in Portugal. In addition, the last chapter also evaluates the impact of import competition more generally on employment and firms.

The first chapter addresses a fundamental issue in entrepreneurship: understanding the relationship between lack of liquidity and the individual's choice to move into entrepreneurship and how it affects subsequent firms' performance and survival. Although this seems a simple question to investigate, the liquidity constraints theory presents several challenges which have not been properly addressed by previous literature. For example, previous studies show that the income level of the individual is a systematic predictor of entrepreneurship (Evans and Jovanovic, 1989; Evans and Leighton, 1989). In this chapter, we evaluate this claim by addressing some of the challenges of testing the liquidity constraint theory. In order to do so, we develop a structured economic framework that models business steps (entry funding, performance and survival) in causal chain. We probe these relationships by computing a new exogenous measure of liquidity of the founders (historical earnings) and developing instruments to cope with the difficulty of measuring business quality. We apply this framework to a unique Portuguese database that traces the mobility of the founders across firms and matches founders with their ventures' characteristics.

The second chapter seeks to uncover the results of a business registration reform that simplified and reduced significantly the number of days required to formalize a business. The aim is to show how this regulatory reform affected not only the quantity but also the quality of entrepreneurs who are brought into the market in response to this change. Previous literature suggests that reducing entry regulation promotes firm entry and job creation, but little is known about the characteristics of the firms and jobs created through these reforms. To shed light on this issue, we employ data from Portugal, a country which implemented one of the most dramatic and thorough policies of entry deregulation in the industrialized world. The impact of these major changes can be traced with a matched employer-employee database that provides unusually rich information on the quality of founders and employees associated with the new firms.

The third chapter evaluates the impact of import competition on employment and firms. More specifically, we analyze which firms are more likely to experience higher failure rate and larger lay-offs, and we identify some of the strategies implemented by the firms to escape competition. Additionally, we evaluate if these strategies, in turn, were transmitted to the labor market – whether there was a trade-off between employment and salaries and which type of individuals are more likely to be harmed. To investigate this, we examine the effects of rising Chinese import competition to Europe on Portugal's local markets from 1994 to 2009. We account for endogeneity using the growth of Chinese imports to the US. With this instrument, we disentangle the supply-driven component (productivity gains and reduction of trade costs) from the Chinese imports. (Abstract shortened by UMI.)

Source TypeDissertation
SubjectsBusiness administration; Economics
Publication Number3516098

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