This article aims to gain a better understanding of the relationship between economic recession and entrepreneurship. The process of entrepreneurship, rather than the action itself, is a complex phenomenon, and such complexity surfaces when local context conditions worsen after an economic recession. This paper addresses the issue of how the likelihood of individuals to engage in the creation of new firms is affected by a recessionary climate. Furthermore, the study focuses on how the recession-driven shake-out effect varies across local contexts (i.e., sub-national regions). The case of Spain in the critical period of 2007—2010 is examined by using multilevel logistic mediation models on individual-level and sub-national region-level panel data. The results show that entrepreneurship shrinks during economic downturns, suggesting a pro-cyclical trend. A weaker perception by individuals of business opportunities resulting from the shake-out explains, to a large extent, the lower propensity to create firms during economic recession.

Introduction

In recent years, world economies have witnessed one of the most severe economic recessions since the Great Depression of the 1930s (IMF, 2009; Parker, 2012; Shane, 2011; World Bank, 2009). Peripheral countries of Europe, such as Portugal, Italy, Ireland, Greece, and Spain, have been some of the most affected economies after the 2007—2009 financial crisis. A rise in the unemployment rate, limited access to financing, and a decline in the growth of gross domestic product (GDP) are noticeable consequences of this economic recession (Papaoikonomou et al., 2012; Mishkin, 2011). Although entrepreneurial activity is seen as an engine of growth, it is not exempt from shake-out effects of economic downturns (Congregado et al., 2012; Rampini, 2004). However, beyond the main macroeconomic indicators, how does a global crisis affect the process of entrepreneurship? Most scholars agree that understanding the relationship between economic cycles and entrepreneurship is important for policy intervention in order to predict and generate more favourable conditions for firm creation (Fairlie, 2013; Koellinger and Thurik, 2012; Ghatak et al., 2007). However, this relationship warrants further research as the entrepreneurship literature provides mixed results on the effect of business cycles on business start-up rates (Parker, 2011). Moreover, little is known about the effect of sudden shocks in the economy on different stages of the entrepreneurial process (Simón-Moya et al., 2014; Santos et al., 2017). The vast majority of previous studies has analyzed such impacts by focusing on the entrepreneurial activity as an outcome (i.e., the action of creating a firm) rather than on the process itself (i.e., a continuum of steps from opportunity recognition to firm creation). Indeed, a large bulk of studies has examined such relationships at the country level. Only a few studies have emphasized the effect of a shock on the inner territories of a given country (e.g., Bishop and Shilcof, 2017; Williams and Vorley, 2014). We believe that such an impact is manifested in different forms and different levels of intensity across sub-national regions. Not all the local regions suffer the consequences of the crisis in the same manner (i.e., because local territories are naturally, physically, financially and intangibly differently endowed), neither they need one same national policy to recover from it. In fact, the entrepreneurial activity varies substantially across NUT-2 regions in Spain (GonzálezPernía et al., 2012).