Entrepreneurship under economic policy uncertainty: empirical insights from G7 countries

Abstract

Entrepreneurship is a vital driver of economic growth, innovation, and job creation, making it essential to understand its key determinants for sustaining economic dynamism. This study examines the impact of Economic Policy Uncertainty (EPU) on entrepreneurial activity, proxied by New Business Density (NBD), across G7 economies from 1997 to 2024, employing the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) model. The empirical findings reveal that heightened EPU significantly reduces NBD, indicating that policy unpredictability discourages new business formation. The results also highlight the roles of other macroeconomic and institutional factors, including foreign direct investment inflows, banking sector development, inflation, government sub­sidies, and political stability, in shaping entrepreneurial dynamics. The study concludes that policy uncertainty acts as a deterrent to entrepreneurship in advanced economies. These findings carry important implications for policymakers and stakeholders, emphasizing that reducing policy uncertainty and ensuring a stable regulatory environment are essential for fostering entrepreneurship and sustaining innovation. This study’s novelty lies in theoretically and empirically linking EPU to entrepreneurial decision-making under uncertainty, demonstrating how policy unpredictability alters risk expectations and discourages new firm creation in advanced economies.