Investigating the anatomy of the employment effect of new business formation

We decompose the overall contribution of new business formation on regional employment into the direct employment effect and the indirect effects that entries have on incumbents. The results indicate that the overall effect of new business formation on incumbent employment is positive and quantitatively more important than the employment generated in the newcomers themselves. The major part of regional difference in employment change caused by entries is explained by differences in the entries' effects on incumbent employment. We conclude that the interaction of start-ups with their regional environment plays a decisive role in explaining their overall impact on regional development. Based on these findings, suggestions for policy and further research are offered.