Entrepreneurship and geography are both important factors of economic development. Both have been recognized as posing problems for the long-run growth of the Russian economy. This chapter looks at a possible connection between these two factors.

Stunted Entrepreneurship

Theoretical arguments about the importance of new business creation for economic growth are usually traced back to Josef Schumpeter, and have been further developed in the last 25 years in the context of models of industry evolution. Empirical evidence in support of this proposition has long remained fragmentary, as in Audretsch (2002, pp. 17–27). Comprehensive data on firm dynamics across many countries now make it possible to estimate the contribution of firm births and deaths to the growth of labor productivity, which turns out to be significant (Bartelsman, et al. 2004, pp. 32–44). Unlike the mature market economies, where the annual number of firm births closely matches that of deaths, the more successful Eastern European economies have seen explosive growth in the number of new firms in the 1990s (Bartelsman et al. 2004, pp. 15–17). Indeed, it is argued that their success was, in large part, a result of this growth (McMillan and Woodruff 2002).

Data on firm births and deaths in Russia are not available, and published data on the total number of firms appear to be deeply flawed (Kontorovich 2005, pp. 243–4).