# **_2.3 Comparative Analysis_**

To compare entrepreneurship rates between the two databases, we calculate the spread between the “nascent” and “baby” entrepreneurship rates in GEM and the “corporate” entrepreneurship rate in WBGES<sup>7</sup> . The first new indicator, SPR_N_C, measures the difference between percentages of individuals who in the process of starting a business (the GEM “nascent” rate) and those who have actually started a formal corporation. The second new indicator, SPR_B_C, measures the difference between the percentage of individuals operating a young business in either the formal or informal sector (“baby”), with the percentage of individuals who have chosen and/or succeeded in starting a formal corporation (“corporate”).

We interpret these spreads to reflect, in some part, a loss of potential formal sector participation. In other words, this can represent those individuals that were unsuccessful in registering their business, because of barriers to registration that we later introduce, or that chose to operate in the informal sector. The tendency of GEM data to be higher than WBGES data for developing countries is likely partly indicative of lost formal sector participation due to barriers to participation, and partly indicative of the informal economy due to choice. These are not mutually exclusive. In either case, the individual may still have started a business – but as we mentioned in the introduction, firm _formation_ does not mean _registration_ . We expect a higher spread – indicating a larger loss of entrepreneurial potential – in countries with weaker business environments.<sup>8</sup> The quality of the business environment, as measured by the Doing Business and other indicators, is collectively accepted as a critical determinant of entrepreneurial activity. These spreads, by country, are shown in Figure 1.

7 The SPR_B_C cannot be strictly compared. The nascent prevalence rate is for one point in time, so it is more or less an annual rate. However, the baby business data is for 42 months of activity, so it is not actually an ‘entry rate’ of new firms. The GEM data can be estimated for an annual rate. First, you need to estimate how many new births the numbers represents. Since there is an annual attrition rate at the end of six months 95% of the firms would still be in operating. For example, if 100 are born, this assumes that 95 will be operating at month seven. This increases the total count by 16% to compensate for the discontinuances. Second, we adjust from 42 months to one year. The final correction factor is 0.33. Using data from the 2004 U.S. GEM Survey and using the U.S. population base between 18-74 the mean baby business rate is 0.73 with a 95% confidence interval from 0.66 to 0.77. If you assume half are selfemployed, as suggested by Census research, this is an annual birth rate of employer firms of about 0.36, with a 95% confidence interval from 0.33 to 0.38. We can compare this with the official U.S. Census data for the U.S. of about 0.36. So the GEM estimates are clearly within the limits of official U.S. statistics (http://www.sba.gov/advo/research/dyn_b_d8904.pdf).

8 Data, by country, is shown in Annex A.

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