Financial Openness and Entrepreneurship

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Using a panel data set of 62 countries from 1995 through 2013, the effects of financial openness on changes in entrepreneurship rates in the economy are estimated for emerging and developed markets. Controlling for the effects of political risk in conjunction with capital controls, capital controls have a negative effect on entrepreneurialism in emerging market countries, but can have a positive effect on entrepreneurialism in developed markets. The imposition of financial controls have a greater effect in magnitude in developed markets than in emerging markets, indicating that development of the internal financial system plays a role in extenuating the effects of capital controls. The effect of the imposition of financial controls is not uniform across the various financial instruments. In particular, the imposition of capital controls on derivatives and real estate in developed markets is associated with a negative effect on entrepreneurialism, unlike for other financial instruments in developed markets. However, in emerging markets, the effects on entrepreneurialism of financial controls seems to be more uniform when controlling for the interaction of political risk and financial controls. In controlling for the effects of political risk on financial liberalization, the effects of financial controls between emerging markets and developed markets are not the same. In general, the imposition of financial controls in emerging markets is associated with a decline in entrepreneurialism, while the imposition of such controls in developed markets is associated with an increase in entrepreneurial activity.