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CEP discussion paper
International Financial Integration and Entrepreneurship
Laura Alfaro and Andrew Charlton
October 2006
Paper No' CEPDP0755:
Full Paper (pdf)

JEL Classification: F21; F23; F35; G15; G18; O19

Tags: international financial integration; capital mobility; entrepreneurship; firm entry; capital controls; foreign direct investment

We explore the relation between international financial integration and the level of entrepreneurial activity in a country. Using a unique data set of approximately 24 million firms in nearly 100 countries in 1999 and 2004, we find suggestive evidence that international financial integration has been associated with higher levels of entrepreneurial activity. Our results are robust to using various proxies for entrepreneurial activity such as entry, size, and skewness of the firm-size distribution; controlling for level of economic development, regulation, institutional constraints, and other variables that might affect the business environment; and using different empirical specifications. We further explore various channels through which international financial integration can affect entrepreneurship (a foreign direct investment channel and a capital/credit availability channel) and provide consistent evidence to support our results.