Determinants of Regional Variations in the Business Start-up Ratio

Since the 1990s, new firm formation rate in Japan has been quite low, even lower than the closure rate. Therefore, promotion of business start-ups is one of the most important policy issues. However, despite distinct regional variations in the start-up ratio, there exist few econometric studies on the determinants of these regional variations in Japan. Thus, this paper analyzes the regional determinants of the start-up ratio in the latter half of the 1990s using two datasets with different levels of regional segmentation. The explanatory variables represent demand, cost, human resource, financial, industry agglomeration and industrial structure, and other factors. The empirical results obtained using WLS and OLS analyses demonstrate that while all the above factors significantly affect the start-up ratio at the municipality level, some of these factors are not significant at a larger economic area level. In particular, we obtained evidence that human resource factors together with the average wage and average size of establishments are important determinants of the regional start-up ratio in both the samples. These results suggest that the accumulation of human resources is essential to vitalize regional economies through start-up activities.