This paper studies the effects of trade barriers on entrepreneurship. We first reveal a previously unknown fact: the higher the trade costs, the smaller the fraction of entrepreneurs. This fact holds across countries and across industries within the United States. To analyze this fact, we develop a model of international trade with occupational choice, borrowing elements from Lucas (1978) and Melitz (2003). The model delivers three new predictions, refining the relationship between entrepreneurship and trade costs: (i) domestic entrepreneurship increases with the trade costs of exporting from a foreign country to the home country, (ii) domestic entrepreneurship increases with the trade costs of exporting to the foreign country, and (iii) higher levels of entrepreneurship are associated with a lower fraction of exporting firms. We confirm these predictions using cross-country, cross-industry, and individual-level data.
Originally titled “Self-Employment in the Global Economy,” this paper was revised in June 2013.
JEL Classifications: F12, F16, J23
Keywords: occupational choice, entrepreneurship, international trade