The Interactive Effect of Financial Development and Human Capital on Entrepreneurship in Selected Countries

The role of entrepreneurs and entrepreneurship in any economy’s economic growth and development is evident. The literature argues that entrepreneurship is essential for the dynamism of the modern market economy and a greater entry rate of new businesses, which can foster competition and economic growth. Entrepreneurs are the engine of sustainable economic growth and innovation within an economy. Factors determining entrepreneurship can be financial, institutional, economic, and framework conditions. The literature treated human capital’s effects on entrepreneurship in isolation, while in reality, its effects depend on access to financial capital, and the human capital’s effects on entrepreneurship are contingent on financial development levels. The main objective of this paper is to investigate the impact of human capital on entrepreneurship, considering the role of financial development in selected factor-driven and innovation-driven economies. This paper re-explores the integrated findings in the literature regarding human capital’s effects on entrepreneurial outcomes, aiming to broaden the analysis by focusing on the effects of higher education on entrepreneurship rates and the role of financial development. The sample consists of 17 countries, and the selected factor-driven (or transition from stage 1 to stage 2) countries, including Iran, Kazakhstan, India, Vietnam, Pakistan, Philippines, and Algeria, and innovation-driven ones, including the United States, Netherlands, France, Spain, Japan, Germany, Italy, Switzerland, and Sweden. Data were collected from the World Bank’s World Development Indicators, the Worldwide Governance Indicators, International Financial Statistics, the International Monetary Fund, and the Global Entrepreneurship Monitor. For each category of countries, three models were estimated according to the three indicators of financial development separately and using tabular and consolidated data from 2012 to 2020. the research results showed that in innovation-driven economies, the benefits of tertiary enrollment rates in entrepreneurship are high when the level of financial development is low. For factor-driven economies, the effect of tertiary enrollment rates in entrepreneurship is higher when levels of financial development are high. In other words, in these countries, financial development and human capital complement each other to strengthen entrepreneurship. The literature exploring education’s effects on entrepreneurship levels revealed integrated results. The analysis results of the present study suggested one main reason: literature ignored the complex and significant interaction between human capital and financial capital. In innovation-driven economies, without adequate financial capital, countries benefit greatly from a rise in tertiary enrollment rates as the educated cohort receives skills in grabbing entrepreneurial opportunities. Thus, a boost in the entrepreneurship rate can be observed. However, once financial development improves for countries, the boost in entrepreneurship provided by human capital is reduced. Quite simply, the impact of higher education on entrepreneurship rates is strongest in countries with the lowest levels of capital availability and financial development.In contrast, in factor-driven economies, the results indicate that the impact of human capital on entrepreneurship will increase with the expansion of financial development. In other words, higher levels of human capital for an individual lead to expanded job opportunities within existing companies and businesses, increasing the opportunity cost for the individual to become an entrepreneur. The effect of higher education on entrepreneurship rates becomes more positive and stronger in factor-driven economies with the highest levels of capital availability and financial development. Finally, considering the non-linear effects of human capital on entrepreneurship, the results showed that while the substitutability relationship between human and financial capital exists at all levels of tertiary enrollment rates in innovation-driven economies, in factor-driven economies, a supplementary effect was observed between financial development and tertiary enrollment rates.