Regional determinants of entrepreneurial start-ups in a developing country

Abstract

In this paper we use data from a developing country, South Africa, to empirically identify the determinants of start-up rates across different sub-national regions and in particular to investigate the role of access to finance on a regional (sub-national) level on start-ups. We find that the most important determinants of start-up rates across South Africa's magisterial districts are profit rates, educational levels, agglomeration as measured by the economic size of a district, and access to formal bank finance. Profits have by far the strongest effect on start-up rates. This, together with the insignificance of unemployment for start-ups, may imply that start-ups in South Africa are mainly opportunity-driven, as opposed to being necessity driven. It is also found that access to formal bank finance matter for regional start-up rates, which is not typical for a developing country and that market-size (agglomerations) is negatively associated with start-up rates in South Africa–an unexpected finding which may imply the existence of ‘congesting' factors such as increased competition, tougher barriers to entry, monopolistic behaviour, and a greater difficulty to be innovative and novel.