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Defining opportunity versus necessity entrepreneurship: two components of business creation

Apr 2017
Working Paper
17-014
By  Robert W. Fairlie, Frank M. Fossen

A proposed explanation for why business creation is often found to increase in recessions is that there are two components to entrepreneurship – “opportunity” and “necessity” – one of which is counter-cyclical. Although there is general agreement on the conceptual distinction between these two factors driving entrepreneurship, there is no consensus in the literature on empirical definitions. We propose an operational definition of opportunity versus necessity entrepreneurship based on the entrepreneur’s prior work status (i.e. based on previous unemployment) that is objective, and empirically feasible using many large, nationally representative datasets. We then validate the definitions with theory and empirical evidence. Using large, nationally representative datasets from the United States and Germany we find that 80-90 percent of entrepreneurs are opportunity entrepreneurs. Using our proposed definitions, we find that opportunity entrepreneurship is generally pro-cyclical and necessity entrepreneurship is strongly counter-cyclical both at the national levels and across local economic conditions. We also find that opportunity vs. necessity entrepreneurship is associated with the creation of more growth-oriented businesses. The operational definitions of opportunity and necessity entrepreneurship proposed here may provide a useful starting and comparison point for distinguishing between the two types of entrepreneurship in future research.