Does Entrepreneurship Impact Economic Growth and Employment in Gcc Countries?

Recent research widely acknowledges that entrepreneurial activity plays a crucial role in driving economic development. Entrepreneurship is a crucial dimensions of a country's economic growth by creating innovation and improving competition. Some authors, like Acs (2006) and Fritsch and Changoluisa (2017), indicated that entrepreneurship contributes to the prosperity of companies, improves productivity, helps intensify competition, and has a positive impact on growth dynamics. The recent literature confirmed the link between entrepreneurship and growth dynamics (Kasseeah, 2016; Doran and O'Connor, 2018; Rico and Cabrer-Borrás, 2019; Pradhan, et al. 2020; Sabra and Shreteh, 2021; Tahir and Burki, 2023). Smith (2010) showed that entrepreneurship intensity has a significant positive effect on economic growth in a large sample of 77 countries. In addition, Chen (2014) confirmed the role of entrepreneurial activities in explaining growth rates in Taiwan. The author highlights the importance of creating a business environment conducive to stimulating entrepreneurship and consequently to boosting growth. Ben-Salha and Zmami (2019) further supported these findings by demonstrating the positive impact of a good business climate on domestic investments in the MENA region. Kasseeah (2016) used data from the World Bank Group's Entrepreneurship Survey in 125 countries. The empirical study revealed a positive relationship between productive entrepreneurship and economic development in the studied countries. Furthermore, Rico and Cabrer-Borrás (2019) studied the effects of different entrepreneurship forms on economic growth in a sample of firms operating in 17 regions in Spain. The authors concluded that entrepreneurship has a positive effect on the productive efficiency of firms and can explain regional differences in economic growth. Pradhan, et al. (2020) examined the relationship between innovation, entrepreneurship, and economic growth in a sample of Eurozone countries. The results highlight the importance for Eurozone countries to adopt growth strategies that prioritize innovation and entrepreneurship. Sabra and Shreteh (2021) assessed the relationship between entrepreneurship and economic growth in the MENA countries. The system GMM method shows a positive relationship between entrepreneurship and economic growth. Recently, Adeosun and Shittu (2022) used cointegration tests and the error correction model over the 1990–2016 period. The authors showed that entrepreneurship promotes the creation of small and medium-sized enterprises, and therefore contributes to the growth of the Nigerian economy. Tahir and Burki (2023) studied the effects of entrepreneurship on economic growth in emerging BRICS economies. The results of the panel approach revealed that entrepreneurship has a positive and significant effect on economic growth in these economies. Furthermore, causality tests revealed a one-way relationship between entrepreneurship to economic growth. Then, this study clearly concluded that entrepreneurship is a key determinant of economic growth.

To better understand the relationship between entrepreneurial activity and economic growth, a number of studies have highlighted the role of country-specific factors, such as institutional factors, in explaining the relationship between entrepreneurship and growth. Under this approach, the conditions that foster entrepreneurial dynamism are often linked to the institutional environment. Accordingly, a number of studies have shown that the regulatory environment is able to stimulate or inhibit entrepreneurial activities and the degree to which these activities affect economic growth. In this regard, Hamdan, et al. (2020) highlighted the role of public governance in explaining the relationship between entrepreneurship and growth dynamics in the UAE. The authors found that public governance reinforces the positive effect of entrepreneurship on economic growth in the UAE. This means that as the level of public governance increases, entrepreneurial activities will likely to hinder economic growth. Similarly, Khyareh (2023) highlighted the role of institutional quality in explaining the relationship between entrepreneurial activity and economic growth. Examining a sample of 54 countries over the 2008–2020 period, the author showed that governance quality reinforces the positive relationship between entrepreneurial activity and economic growth. Furthermore, Chowdhury, et al. (2024) found that entrepreneurial dynamics play an important role in boosting economic growth, based in South Asian countries during the period 2010–2022. Similarly, Munyo and Veiga (2024) found positive effects of entrepreneurial activities on growth dynamics in South American countries.

Traditional forms of full-time, open-end salaried employment are becoming less and less important in labor markets of developing countries. Only innovative projects seem to provide employment solutions, thanks to the added value they create. Consequently, the objective of public policy in numerous emerging countries appears to have been the promotion of entrepreneurial activities, particularly innovative enterprises. Indeed, most authorities are focusing their strategies on promoting entrepreneurial activity because of the impact these strategies have on employment dynamics and subsequently on reducing unemployment rates. Indeed, it is generally accepted that entrepreneurship helps to create jobs. The idea is derived from the consensus that small and medium-sized enterprises (SMEs) constitute the majority of the economic structure in many countries. It is these SMEs that generate the majority of new employment opportunities within these economies. Indeed, the idea that start-ups and new businesses create jobs is widely accepted among policymakers (European Commission, 2017; US Census Bureau, 2017). Stel, et al. (2005) explained the relationship between entrepreneurial activity and employment dynamics by the fact that entrepreneurs are seen as drivers of innovation and increased competition in different economic sectors. This can lead to improvements in productivity, which in turn can have a positive impact on employment (Acs, 2006; Doran, et al. 2016).

The debate on the potential effects of entrepreneurial dynamics on employment is not new. Birch's (1979) seminal study of the United States concludes that small businesses are the main engines of job creation in the American economy. At the same time, many studies have been carried out to investigate the effect of entrepreneurship on job creation. Recent empirical research confirms that newly founded enterprises play a large role in the dynamics of job creation and greatly contribute to the absorption of unemployment (Haltiwanger, et al., 2016; Kumar and Raj, 2019; Amoa-Gyarteng and Dhliwayo, 2023). In this context, Baptista, et al. (2008) found, for instance, that between 1982 and 2002, entrepreneurial activity in Portugal, measured by new firm start-ups, had both direct and indirect effects on regional employment dynamics. Examining data from the United States, Henderson and Weiler (2010) showed that entrepreneurship is linked to employment growth and that this relationship intensifies over time. Moreover, Chen (2014) studied the impact of entrepreneurial dynamics on employment in Taiwan by estimating a VAR model using quarterly data from 1987 to 2012. The empirical results confirmed that an increase in new businesses can positively and significantly increase employment rates after 6 years. These results are in line with previous studies, which indicated that the positive effect of entrepreneurship on employment could manifest after a period of 6–8 years. Doran, et al. (2016) examined the impact of regional entrepreneurial activities on employment in several European regions. The empirical analysis showed that entrepreneurial activities, represented by the creation of new businesses, have a positive effect on employment growth. Moreover, Kumar and Raj (2019) concluded that entrepreneurship plays a key role in job creation, innovation, and product improvement in India. Recently, Amoa-Gyarteng and Dhliwayo (2024) empirically confirmed an inverse relationship between entrepreneurship and unemployment in South Africa. The authors stated that it is critical to implement policies that build a robust entrepreneurial environment capable of contributing to growth and unemployment absorption.

Similarly, Ghazi, et al. (2024) showed that entrepreneurial decisions serve as solutions to employment challenges. This study highlighted the importance of aligning entrepreneurial projects with local employment needs. Likewise, Komninos, et al. (2024) underlined the crucial role of entrepreneurship in generating many job opportunities in the European Union. The finding revealed that entrepreneurship plays an important role in improving the employment rate in the European Union, as new start-ups and self-employment contribute significantly to job creation, particularly in service sectors that rely on innovation and technology. The study recommended the necessity of providing sufficient resources that support entrepreneurial activities, given their vital role in festering economic growth and creating employment.

In this section, we present the model used to estimate the effects of entrepreneurial dynamics on two important economic variables, namely economic growth and employment, in six GCC countries between 2006 and 2019. In accordance with previous studies on the effects of entrepreneurship on economic growth, we introduce a variable measuring entrepreneurship and some control variables (Li, et al., 2012; Kasseeah, 2016; Stoica, et al., 2020; Tahir and Burki, 2023). As control variables, we use employment, openness rate measured by the sum of exports and imports to GDP, foreign direct investment to GDP, public expenditure to GDP, and population. Then, the following model is written (1): 1GWt=α0+α1NBDt+α2EMPt+α3TO+α4FDIt+α5GGDPt+α6POPt+μt\matrix{ {G{W_t}} \hfill & { = {\alpha _0} + {\alpha _1}NB{D_t} + {\alpha _2}EM{P_t}} \hfill \cr {} \hfill & {\,\,\,\,\,\,\,\,\,\,\,\;\;\;\;\; + {\alpha _3}TO + {\alpha _4}FD{I_t}} \hfill \cr {} \hfill & {\,\,\,\,\,\,\,\,\,\,\,\;\;\;\;\; + {\alpha _5}GGD{P_t} + {\alpha _6}PO{P_t}} \hfill \cr {} \hfill & {\,\,\,\,\,\,\,\,\,\,\,\;\;\;\;\; + {\mu _t}} \hfill \cr }

Similarly, following the literature dealing with the relationship between employment and entrepreneurship, we model employment dynamics in the GCC region as a function of entrepreneurship. We also introduce other control variables, such as GDP, trade openness to GDP, foreign direct investment to GDP, public expenditure to GDP, and population, which represent other independent variables affecting employment (Chen, 2014; Doran, et al., 2016; Ben-Salha and Zmami, 2021). As a result, the following model is estimated (2): 2EMPt=β0+β1NBDt+β2GWt+β3TO+β4FDIt+β5GGDPt+β6POPt+vt\matrix{ {EM{P_t}} \hfill & { = {\beta _0} + {\beta _1}NB{D_t} + {\beta _2}G{W_t}} \hfill \cr {} \hfill & {\,\,\,\,\,\,\,\,\,\,\;\;\;\; + {\beta _3}TO + {\beta _4}FD{I_t}} \hfill \cr {} \hfill & {\,\,\,\,\,\,\,\,\,\,\;\;\;\; + {\beta _5}GGD{P_t} + {\beta _6}PO{P_t}} \hfill \cr {} \hfill & {\,\,\,\,\,\,\,\,\,\;\;\;\;\, + {v_t}} \hfill \cr } where GW represents GDP per capita, EMP represents employment, NBD is a proxy for entrepreneurship measured by new business density (new licenses per 1000 people aged 15–64), TO represents trade openness measured by the sum of exports and imports to GDP, FDI is the foreign direct investment to GDP, GGDP represents public expenditure to GDP, and population (POP) is total population. All variables are taken in logarithmic forms.

Our study focuses on a panel of six GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates). The study period is 2006–2019. Data on the dependent variables (growth and employment) and the independent variables (entrepreneurship, GDP, Trade openness, foreign direct investment, public expenditure, and population) come from different sources. Table 1 presents the different variables as well as their sources.

The relationship between entrepreneurial activity, growth, and employment varies across countries. It is, therefore, important to correctly model the individual heterogeneity of the different countries. We, therefore, use a panel data approach. Indeed, the panel data approach is more relevant than the time series and crosssection frameworks because it allows to account for both dynamics and heterogeneity. In addition, the panel data approach allows to obtain convergent estimators due to the high number of observations. Panel data econometrics allows for the treatment of individual heterogeneity by means of the fixed-effects model and the random-effects model. To distinguish the fixed-effects model from the random-effects model, we use the Hausman test.

We use the fixed-effects model and the random-effects models to quantify the effects of entrepreneurial dynamics on economic growth for the sample of Gulf countries (Saudi Arabia, United Arab Emirates, Qatar Bahrain, Kuwait, and Oman) during the period 2006–2019. The different results are summarized in Table 2.

From this table, we note that the results of the fixed-effects model and random-effects model are relatively similar. The Hausman test, which can be found at the bottom of the table, is used to compare the two models. The probability of this test is less than 1%, indicating that the fixed-effects model is recommended over the random-effects model. As a result, we just interpret the results from the fixed-effects model. Overall, we note that the empirical analysis of the growth specification in GCC countries reveals that entrepreneurial dynamics measured by the creation of new businesses has a positive effect on economic growth. This confirms the conclusions of theoretical literature according to which entrepreneurial dynamics represents an important factor in the diversification of goods and services, innovation, and consequently, growth dynamics. It is important to note that these results are also consistent with the empirical conclusions of several previous works that highlighted a positive relationship between entrepreneurship and growth.

Indeed, several authors, such as Pradhan, et al. (2020), Sabra and Shreteh (2021), and Tahir and Burki (2023), have concluded the existence of a positive effect of entrepreneurship on the dynamics of growth in the Eurozone, MENA, and the BRICS economies, respectively. Moreover, our results are consistent with those of Moneo and Vega (2024) and Chowdhury, et al. (2024), which clearly concluded that entrepreneurship is an important factor for economic growth in Latin America and South Asian countries, respectively.

Regarding the effects of control variables on economic growth, the results show that the effects of employment are positive because employment is considered an essential production factor and therefore affects positively economic growth. Similarly, we observe that trade openness coefficients are notably positive since a high openness rate results in more exports and imports, which positively influences overall supply and demand and hence the equilibrium level of national production and its growth rate. The impact of foreign direct investments is also favorable, as they serve as an important channel for technological transfer and capital movements that are crucial for financing. Finally, the effects of public expenditure and population are not significant.

Regarding the relationship between entrepreneurship and employment dynamics, the results are provided in Table 3. The empirical analysis on the nature of the relationship between entrepreneurship and employment dynamics yields three findings. First, the results obtained under the fixed-effects model were relatively similar to the results of the random-effects model. However, the Hausman tests favor the adoption of the random-effects model. Second, the estimation results suggested that the increase in the number of firms that constitute a proxy of entrepreneurship is associated with the increase in employment in GCC countries. This is explained by the importance of jobs created directly or indirectly by new firms. These results are consistent with the conclusions of several empirical works that have highlighted the existence of a positive relationship between entrepreneurship and the creation of employment in different countries (Baptista, et al. (2008) for Portugal, Chen (2014) for Taiwan, Doran, et al. (2016) for European countries, and Amoa-Gyarteng and Dhliwayo (2024) for South Africa). It is also important to note that our results are also consistent with the findings of other recent studies. For example, Komninos, et al. (2024) found that the new business start-ups and self-employment represent one of the most important solutions to enhance employment in the European Union. Likewise, Adenutsi (2023) argues that entrepreneurship plays a crucial role in the development of job creation and poverty reduction in low-income economies.

Third, regarding the reaction of the dynamics of employment to the other control variables, the estimations showed that coefficient associated with GDP is statistically significant and positive, given that the increase in GDP is often accompanied by the increase in the level of employment. These results are consistent with those of Ben-Salha and Zmami (2021), and Zmami and Ben-Salha (2024) showed that economic growth is a driver of employment in GCC countries. The estimation results also show that trade openness is positively related to employment. The foreign direct investment flows also have a positive effect on employment dynamics, while the public expenditure and population variables are not significant.

In order to ensure the robustness of the results, we estimate in this section the rivers of economic growth and employment using alternative techniques. For this purpose, we employ the Ordinary Least Squares (OLS), Feasible Generalized Least Squares (FGLS), and Panel-Corrected Standard Errors (PCSE) techniques. The estimation results of coefficients related to the impacts of entrepreneurship on economic growth and employment are presented in Table 4. The findings show that entrepreneurship positively and significantly affects the dynamics of growth and employment in the GCC region.

This supports the earlier findings obtained using the fixed-effects and random-effects models. Our findings indicate that entrepreneurship can be seen as a crucial factor aiming at fostering economic growth and addressing unemployment in the GCC region. Indeed, entrepreneurship and entrepreneurs are considered important drivers of economic growth because they participate in the emergence of new innovations and the creation of new products and contribute directly and indirectly to the creation of new jobs.