Entrepreneurship in the Digital Age

Information and communication technology (ICT) reduces the cost of starting a business by facilitating extensive outsourcing of activities and eliminating the need for physical retail space even as it enables new firms to reach customers far and wide at low cost through the internet. Better access to foreign business partners and customers through ICT boosts internationalization and exports. More generally, digitalization improves productivity and efficiency, lowering the cost of economic transactions. Digital technology expands not only the opportunity landscape for entrepreneurs but also the avenues available for pursuing new opportunities.

The Global Index of Digital Entrepreneurship Systems (GIDES) measures the quality of the environment for digital entrepreneurs by capturing the degree of digitalization in society and the economy and how it supports the entrepreneurial ecosystem. The index is constructed with eight pillars that capture the diverse elements of the digital entrepreneurship environment: culture, institutions, market conditions, infrastructure, human capital, knowledge, finance, and networking. Significantly, the index allows for a meaningful comparison of the quality of national digital ecosystems across 113 global economies.

Singapore, which has the top GIDES score at 81.3, is one of only 15 leaders. The 10 followers are primarily innovation-driven high-income economies such as France, Israel, and the Republic of Korea while the 15 catchers-up are a mixed group which includes Chile, the People's Republic of China, Italy, and Malaysia. The 32 laggards, which include 7 DMCs, are mainly upper-middle-income while the 41 tailenders, which include 10 DMCs, are mostly low-income and lower-middle-income. Two stylized facts stand out. First, there is sizable scope for improvement even for leaders, which have an average score of 71.2 out of 100. Second, there is a huge gap between economies since the four other group averages are 53.8, 39.1, 26.0, and 14.2.

New analysis of more than 190,000 entrepreneurs in 14 DMCs explored the relationship between the national digital environment, measured by GIDES, and firm productivity. For new businesses which are less than 42 months old, GIDES had a significantly positive effect on two indicators of individual firm productivity: product innovation and expected future job creation. For example, an increase by one standard deviation in GIDES is associated with a 9.1 percentage point increase in the probability of innovation by a new business.

Digitalization facilitates entrepreneurship but it does not reduce the inherent riskiness and uncertainty of starting a new business, which entails a high likelihood of failure. Institutions define the rules of the game in an economy, both formal and informal, that organize economic relations. Growth-conducive institutions cited in the research literature include strong property rights, honest and effective governments, political stability, reliable legal systems, and open and competitive markets. They reduce the cost of economic transactions, create incentives to invest in human and physical capital, and contribute to more efficient allocation of resources. Intuitively, good institutions are beneficial for entrepreneurial activity because they mitigate the high level of risk and uncertainty that entrepreneurs face.

A growing literature examines the link between institutions and entrepreneurship. In new analysis drawing on more than 230,000 individuals in 15 DMCs, this chapter confirms a strong relationship between national institutional conditions and productivity of individual firms. In particular, strong rule of law, which mitigates the risk and uncertainty that entrepreneurs face, has a strong positive association with the propensity of entrepreneurs to introduce new products. A one-standard deviation improvement in the rule of law was associated with an increase in the likelihood of product innovation by businesses less than 42 months old by 5.4%.

Starting a business requires an individual to assume a lot of risk because many new ventures fail. Corruption deepens risk by potentially reducing returns from successful risks with the threat that profits may be arbitrarily expropriated. New cross-country empirical analysis confirms that corruption is significantly associated with lower entrepreneurship. A decrease in corruption by one standard deviation is associated with an in increase in the entry of new entrepreneurs by as much as 10 percentage points.