Association for Public Policy Analysis & Management

What propels the creation of private firms? How can public policy promote entrepreneurship? These questions have long been under investigation by academics and policy-makers alike, given the potential contribution of new and young firms to job creation, innovation, productivity, and competition. However, there is no definite answer of these questions. The Knowledge Spillover Theory of Entrepreneurship (KSTE) purports to explain at least part of the process of firm creation and expansion which appears promising for research and policy implications. KSTE builds upon the endogenous growth theory to help answer the above posed questions through the role of knowledge spillover in the creation of new firms. Most of the empirical work on this theory is based on the data from Northern America and Europe as one of the propositions of the KSTE is that the theory may not hold in developing countries. This study contends the argument and hypothesizes that KSTE may hold outside northern America and Europe, including Asian countries. We may argue that the market value of knowledge in developing countries may be lower and the channels of spillover of knowledge may also differ, but it does not necessarily translate into a non-existent relationship between knowledge spillovers and entrepreneurship in these countries. Through panel data analysis of Asian countries, this study fills two salient gaps in the literature on KSTE. It attempts to demonstrate the validity and nature of the role of KSTE in another context; Asian countries. Secondly, it extends the scholarship by incorporating the role of urbanization in the process of knowledge spillover for entrepreneurship.

Results show that national research expenditures do not matter for firm creation that is contrary to earlier empirical work on the developed world. It points to the issues related to relevance and efficiency of research expenditures in Asian countries. However, other sources of knowledge spillovers namely tertiary education and patents contribute significantly towards the firm creation. Patents are generally considered to have a negative impact on the knowledge spillover as they restrict the diffusion of knowledge. However, a strong impact of patents on the firm creation in Asia may be attributed to a non-robust intellectual property regime. Urbanization on its own does not contribute to entrepreneurship but it positively affects new firm creation when it interacts with knowledge variables. It may imply that urbanization helps the diffusion of knowledge in societies. Moreover, a composite index of quality of urbanization has been constructed based on the share of urban population in a country, provision of water and sanitation, and access to broad band services. The results show that quality of urbanization significantly and strongly influences the establishment of new firms. Among the regulatory variables, the number of days to start a business is insignificant while the availability of private sector credit enhances the firm creation in Asian countries.

These findings can pivot the focus of policy-makers in rapidly urbanizing Asian countries towards areas that have greater potential to spur growth in number of new firms and consequent job creation for youth.