Domestic credit effect on new business density in the high- and middle-income countries

In market-led economies, the provision of domestic credit can be critical in driving new business formation. The purpose of this study is to examine whether domestic credit to the private sector is critical to new business formation. By controlling several hypothesised candidate variables, the panel estimation procedure incorporating data for 85 countries worldwide is applied, where nations are disaggregated into high- and middle-income categories. The findings reveal that the provision of domestic credit to the private sector is statistically significantly correlated with new business density. The findings further indicate that equally important are improved regulatory quality, economic growth and the degree of urbanisation as these factors are found to be statistically significant and positive correlates of new business density. The main policy implication is that nations that improve their entrepreneurial activities and diversify their private sectors through new business formation should maintain a competitive financial sector with better, easier access to financial credit as part of new business formation policies. It is also essential for governments to minimise borrowing from domestic financial institutions to avoid crowding out of the private production and to create ample space for accessing domestic financial credit by new entrepreneurs. This study makes a new contribution through assessing the impact of domestic financial credit on new business formation, where entrepreneurial activities contribute to the expansion of private production by controlling several specific factors, some of which are overlooked in previous studies, but expected to impact new business density, hence, further advancing the business economics and entrepreneurship perspective on new business formation.