The origins of self-employment

Abstract

We examine the factors affecting the transition to self-employment in Bosnia and Herzegovina, using a panel household survey for the years 2001-2004. The study represents a unique case in that in the early period of the panel (2000-2001) the country changed its legal framework concerning labor regulation and the business environment, with the primary aim to promote labor market flexibility and to encourage entrepreneurial activity, making it particularly interesting to examine entrepreneurship in the new environment. The data allows us to directly identify individuals that switched to self- employment during the sample period and the viability of this transition, in terms of business survival for more than one year. Our results suggest an important role for financing constraints. Specifically, wealthier households are more likely to become entrepreneurs and survive in self-employment, and having an existing bank relationship increases the chances of survival for the new entrepreneur. In contrast, we find that overseas – and in some cases domestic – remittances significantly decrease the likelihood of becoming an entrepreneur. Interestingly, NGO and government supported programs that provide grants and transfers to promote entrepreneurship seem to have worked not only in promoting entrepreneurship but also its success, filling an important financing gap in the absence of more developed formal financial institutions. Finally, people working in the informal sector are more likely to transition to becoming entrepreneurs and significantly more likely to survive.