Determinants of New Firm Formation: Does Location Matter?

Abstract

The link between location features and the propensity to start a new firm is a subject that did not get much attention in Iran until recently. This paper is the first attempt on this proposition and is concerned with deliberating the effect of demographical and industrial characteristics of location on start-up rates in Iranian manufacturing industries. To fulfill this aim, regional panel data based on Iranian provinces during 2002-2006 is used. Having employed the GLS method, the results of this paper show that demographical characteristics have a significant effect on new firm formation. Furthermore, we find considerable evidence suggesting that central regions succeeded in increasing the level of start-ups during the period under inspection. In addition, birth rates are greater in regions where GDP growth, security, and urbanization are high and experience abatement in regions with high minimum efficient scale and unemployment. The results of this paper can be considered as the basis of a policy that aims to promote development in borderland provinces. The government could also provide entrepreneurs with incentives to encourage them to create new firms and businesses in these regions.