The Business Cycle and Early-Stage Entrepreneurship in Latvia

Abstract

Latvia’s dramatic macroeconomic development from double-digit economic growth to a double-digit fall in GDP, followed by a gradual recovery between 2005 and 2015, provides a fertile ground for examining how entrepreneurship is affected by the business cycle. Data from the Global Entrepreneurship Monitor shows that the changing macroeconomic conditions brought substantial variation in the prevalence rate of early-stage entrepreneurship. It was around 4–5% at the beginning of the period and more than doubled after the economic crisis hit Latvia, hence exhibiting a clear counter-cyclical pattern. Data also shows that this increase in total early-stage entrepreneurial activity was propelled mostly by necessity-driven entrepreneurship, i.e. supporting what in the literature is labelled the refugee or push effect. Furthermore, most of this entrepreneurial activity was of low quality in terms of ambitions and ceased once the labour market recovered. To get a deeper understanding of opportunity recognition, we construct a measure of opportunity confidence that helps us understand the cyclical behaviour of opportunity-driven entrepreneurship and the role played by the opportunity cost of entrepreneurship and the perceived fear of failure.