Skill Composition and Regional Entrepreneurship: A Comparative Study Between Germany and Portugal

The availability of skilled labor has frequently been characterized as a key determinant of entrepreneurial activity in a region. Little is known, however, whether the composition of the regional skill base will have an effect on new firm creation. In regional economics, particularly the Marshallian specialization and the Jacobs diversity argument have attracted attention. While the former states that economics growth will benefit most if industrial activity is clustered enabling knowledge spillovers between similar firms, the latter argues that diversity provides more opportunities for cross-fertilization and the realization of complementarity effects. We transfer these arguments to the context of regional entrepreneurial activity and argue that the skill composition in a region, along with the generally available human capital, will shape firm entry in different groups of knowledgebased industries. Moreover, we argue that a key role is played by the institutional infrastructures for entrepreneurship which presumably moderate the relationship between the skill composition and regional entrepreneurial activity. We define these infrastructures as the result a region’s legal, institutional and social factors conducive to entrepreneurship. As these should predominantly vary at the national level, we present a comparative study of this relationship for Germany and Portugal. Both countries, though member states of the European Union, are fairly different from each other in terms of economic capacity and geography. Hence, the institutional infrastructures for entrepreneurship may vary considerably between the two countries. Using harmonized datasets for both countries thus allows shedding light on the institutional infrastructures of both countries which are supposed to moderate the relationship between regional skill composition and entrepreneurial activity. Our results are based on regional data at the NUTS III level for both countries from 2000 to 2004. They indicate that, besides the importance of human capital available in a region, the composition of skills matters considerably. While it turns out that in Portugal firm entries are positively affected by a high concentration of skills, it is the opposite result for Germany which apparently benefits from higher diversity. Hence, we suggest that both concentration and diversity may be important but contingent on the institutional infrastructures for entrepreneurship. Regional development policies directed at fostering entrepreneurial activity should acknowledge that both specialization and diversity of the regional skill base may benefit entrepreneurship instead of promoting, all too generally, the clustering of certain industries. Our research provides an indication that diversity may pay off most in a highly developed country context while specialization seems to be key in less developed countries. The reason for this may be that the effectiveness of knowledge spillovers is contingent to the institutional infrastructures, and that the effectiveness may either be spurred through specialization or diversity. In addition, these results indicate that policy measures fostering new firm formation, especially in knowledge intensive sectors, should be considered on a more local level, considering the specificities of each region.

Mendonça, Joana and Christoph Grimpe (2009), Skill Composition and Regional Entrepreneurship: A Comparative Study Between Germany and Portugal, ZEW Discussion Paper No. 09-060, Mannheim, published in: Journal of Technology Transfer.