With unemployment rising as a result of the global economic downturn, tradition dictates that this period coincides with a rise in “entrepreneurship”. Of course, in reality, this means that people who are made unemployed often turn to self-employment as an act of last resort to try and get some income coming in.

This so-called necessity-based entrepreneurship is often a far cry from the high-tech, rapid growth-oriented startups the tech press love to pore over. There was evidence of this trend after the financial crisis in 2007-2009, when business creation began to surge in the wake of rising unemployment.

Good or bad

Such is the thrall in which society is gripped by entrepreneurship, this boost in “entrepreneurial” activity is sometimes viewed as a positive side effect of unemployment. The view is that this surge is Schumpeterian cleansing of the economy in action, with the resultant wave of innovation pushing society forwards.

This doesn’t really tell the whole story, however, as research from University College Cork shows that the stimulation of business creation via unemployment is not evenly spread throughout countries, with wealthier regions far more likely to see business creation than smaller and poorer areas.

The researcher examined nearly 150 regions across Europe between 2008 and 2017, and found that business creation appeared to emerge primarily not only in wealthy parts of individual countries, but also in wealthier countries themselves. For instance, countries like Finland and the Netherlands saw far more entrepreneurial activity in the wake of a rise in unemployment than countries like Romania and Bulgaria. Indeed, the relationship in these poorer countries was actually negative, with a period of rising unemployment making it less likely that people would start their own businesses.

Urbanisation economies

The author suggests that some regions do better than others because of what is known as “urbanisation economies”. This describes the agglomeration effect that emerges in larger countries and cities that ensures a larger pool of potential talent and customers, as well as an array of beneficial services and support to help establish and grow the business.

As a result, capital cities and university towns tend to be much more active entrepreneurially than smaller towns and rural areas. This has long been suspected in terms of the more cutting-edge end of entrepreneurship, but the research reminds us that it also applies at the necessity-based end of entrepreneurship too.

The author believes that their findings illustrate why it’s folly for economists to explain economic performance based on national factors, as it is an inherently regional phenomenon. For instance, they cite the relatively low corporation tax rate in Ireland, which is often cited as a factor in their economic growth, yet the bulk of that growth is concentrated in Dublin and Cork, with smaller regions generating pitiful levels of entrepreneurship.

As a result, they remind us that while such national measures can work to bolster entrepreneurship, they can also leave many regions left behind while the larger cities surge ahead. This regional inequality is certainly evident in terms of unemployment, where cities seem able to recycle the unemployed into entrepreneurship in ways that smaller towns cannot.

If governments want to bugger the impact of the recession in terms of unemployment, therefore, it might well pay to focus on areas that tend not to get enough focus from those in power. Of course, this isn’t new and the last decade has shone a light on such “left behind” communities. Now is the time for governments to make good on the various promises they made to give these places the attention and support they need.