All That’s Old is New Again: Capital Controls and the Macroeconomic Determinants of Entrepreneurship in Emerging Markets
The research touches upon the problems of these controls affect on entrepreneurship and domestic businesses in emerging markets.
Our study examined 112 developed and developing countries from 2004-09 and found that capital controls are an unequivocal negative for entrepreneurship, lowering firm entry substantially. This result held in the presence of controls for institutions, growth levels and growth rates, and the amount of credit issued by the banking sector. Moreover, capital controls had a negative influence in both developed and emerging market economies over the period tested, with firm entry most strongly influenced by domestic credit availability and the availability of foreign capital.
This study is the first work in the literature on financial account liberalization, as it is the first that uses data from countries that includes the first (and in some cases, second) year of the Global Financial Crisis (GFC), thus allowing researchers to see the effects of the latest wave of capital controls.
Key results of the study include:
Countries that are often held up as the examples of how capital controls are beneficial, such as Chile and Malaysia, have in reality seen problems with entrepreneurship during the period their controls were in place;
While the desire to open a business may differ from country-to-country, capital controls simply make it harder for businesses to start by restricting available capital;
Capital account openness can be taken as a proxy for a government’s general attitude towards business and the proper role of government in an economy.
Given these results, we conclude that while capital controls may afford a government some “breathing space” for its macroeconomic policies, capital controls have a real and enduring cost for the real economy in countries that enact them. Rather than focusing on building barriers, governments should play the role of facilitator, encouraging entrepreneurship across a broad variety of fronts; this can include traditional innovation policy and investment in R&D. However attention must also be paid to investment climate issues such as capital openness.