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Opportunity versus Necessity Entrepreneurship: Two Components of Business Creation

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

A common and seemingly paradoxical finding in the entrepreneurship literature is that business creation increases in recessions. We investigate this countercyclical pattern by separating business creation into two components: “opportunity” and “necessity” entrepreneurship. Although there is general agreement in the previous literature on the conceptual distinction between these two factors driving entrepreneurship, there are many challenges to creating a definition that is both objective and empirically feasible. The goal of this paper is to create an operational definition of opportunity versus necessity entrepreneurship using readily available nationally representative data. We create a distinction between the two types of entrepreneurship based on the entrepreneur’s prior work status that is consistent with the standard theoretical model of entrepreneurship. We document that “opportunity” entrepreneurship is pro-cyclical and “necessity” entrepreneurship is countercyclical. We also find that “opportunity” vs. “necessity” entrepreneurship is associated with the creation of more growth-oriented businesses. The operational distinction proposed here may be useful for future research in entrepreneurship.