Entrepreneur schooling and business activity in Portugal

February 23, 2023

Cross-country regressions imply that human capital plays a major role in explaining output differences across countries, but may be biased by omitted factors such as the quality of institutions, culture or geography, among others. Within-country individual returns to schooling suggest a smaller role, but exclude any effect of human capital on total factor productivity (TFP). A recent literature links cross-country variation in TFP to differences in the average growth rate of firms, yet little is known about what underlies these differences.

This paper makes two points. First, it documents a strong relationship between entrepreneurial human capital and firm growth using administrative panel data on the universe of firms and workers in Portugal. Firms started by more educated entrepreneurs are both larger at entry and grow faster over their life cycle, and the relationship appears to be causal. In addition, the thickness of the right tail of the firm size distribution increases with entrepreneur schooling, which is consistent with a model in which schooling increases growth. The evidence points to several underlying mechanisms, with technology adoption playing an important part.

Second, the paper shows that accounting for the effect of human capital on TFP through firm growth can explain a substantial fraction of the gap between individual-level and cross-country estimates of returns to schooling. Using a simple model, the paper estimates aggregate returns to schooling of 20-26%, substantially higher than the 6-10% typically found in the literature on individual returns, and not far from those found in cross-country regressions. I also find that the fraction of cross-country income variation that can be explained by human and physical capital increases from the 40% reported in the literature to between 59% and 78%.

Click here to go to the paper by Francisco Queiró.


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