558488

research-article2014
JOMXXX10.1177/0149206314558488Journal of ManagementArin et al. / Determinants of Entrepreneurship: A BMA Approach

Journal of Management
Special Issue: Vol. 41 No. 2, February 2015 607­–631
Bayesian Probability and Statistics DOI: 10.1177/0149206314558488
in Management Research © The Author(s) 2014
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Revisiting the Determinants of Entrepreneurship:

A Bayesian Approach
K. Peren Arin
Victor Zengyu Huang
Zayed University
Maria Minniti
Syracuse University
Anup Menon Nandialath
Otto F. M. Reich
Zayed University

Entrepreneurship has long been seen as an important instrument in stimulating and generating
economic growth. The amount of research trying to identify key factors that drive entrepreneurship
is considerable; yet, little consensus has been achieved. We argue that this lack of consensus could
be on account of model uncertainty as empirical studies often tend to be selective on what vari-
ables are included in the final model. Drawing on recent literature, we demonstrate the benefits of
Bayesian model averaging (BMA) in reducing the impact of model uncertainty on empirical
research in entrepreneurship. Additionally, BMA provides measures of variable importance and
can be seen as a complementary approach to dominance/relative importance analysis. We show
that when model uncertainty is corrected for, gross domestic product per capita, unemployment,
the marginal tax rate, and the volatility of inflation are the only macro variables significantly and
universally associated with aggregate entrepreneurship. Furthermore, the emphasis on inflation
and taxation suggests that governments have the power to influence the quantity and distribution
of entrepreneurial activity by setting incentives that are not entrepreneurship specific but overlap
significantly with general and fundamental principles of economic stability.

Keywords: macro policy and entrepreneurial activity; model uncertainty; model averaging;
variable selection

Acknowledgments: Authors are listed in alphabetical order. All authors contributed equally. The suggestions and
thoughtful comments by Mike Zyphur and Fred Oswald, as well as two anonymous reviewers, have been invaluable
throughout the development of this article. The authors are grateful to Dean Shepherd, Paul Reynolds, and Bill
Schulze for their valuable advice at the Academy of Management 2014 annual meeting.
Corresponding author: Anup Menon Nandialath, College of Business, Zayed University, P.O. Box 19282, Dubai,
United Arab Emirates.
E-mail: anup.nandialath@zu.ac.ae
607
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608   Journal of Management / February 2015

Recent years have seen an increased focus on entrepreneurship as a major engine of eco-
nomic change and growth (Baumol & Strom, 2007; Minniti & Lévesque, 2010). As a result,
the macrolevel determinants of entrepreneurial activity have attracted considerable interest
(e.g., Parker, 2009, chap. 4, for a review of the literature). Existing research suggests the driv-
ers of entrepreneurship are manifold and span a wide spectrum of theories and explanations
(e.g., Levie, Autio, Acs, & Hart, 2014; Zahra & Wright, 2011). Also, given the relatively
large set of potential factors that may influence entrepreneurial activity, it is not surprising
that the literature provides evidence of a wide range of empirical modeling possibilities,
often leading to conflicting findings with respect to the statistical significance, sign, and rela-
tive importance of predictors (e.g., Dean, Shook, & Payne, 2007; Terjesen, Hessels, & Li,
2014).
For example, findings on the relationship between formal education and aggregate entre-
preneurship provide conflicting results (Sobel & King, 2008; van der Sluis, van Praag, &
Vijverberg, 2005). Similarly, some studies on the relationship between financial develop-
ment and aggregate entrepreneurship have found a positive and significant linkage (Klapper,
Amit, Mauro, & Delgado, 2007), while others have found no significant effects (Hurst &
Lusardi, 2004). The result of these inconsistencies is that although the number of puzzle
pieces is increasing, no coherent picture is emerging. This, of course, has important theoreti-
cal and policy implications for entrepreneurship research.
To address this gap in the literature, we suggest that the conflicting evidence may be
attributed, in large part, to discretionary choices by researchers, for instance, in the context
of deciding which variables to include in the empirical specification. Such discretionary
choices across studies are a reflection of what is known in the empirical literature as “model”
or “specification” uncertainty (see Simmons, Nelson, & Simohnson, 2011; Young, 2009).
Revisiting a large set of potential macrolevel drivers of entrepreneurship, we seek to probe
the robustness of individual predictors and demonstrate the possible effects of ignoring
model uncertainty by applying “traditional methods” and Bayesian model averaging (BMA)
to the data.
The issue of model uncertainty, while critically examined in the broader domain of the
social sciences (e.g., Leamer, 1983), has not attracted significant attention in the field of
entrepreneurship or management in general. Empirical entrepreneurship research regularly
acknowledges and accounts for sampling uncertainty, which arises when dealing with sam-
ples from a larger population. Traditional measures of statistical uncertainty, such as t statis-
tics and p values, help reduce concerns about the robustness of the empirical results with
respect to alternative samples from the same population. Model uncertainty, instead, derives
from uncertainty over which variables to include in the empirical specifications used to draw
inference. It is reflected in researchers’ experiments with different specifications in the esti-
mation process by adding or dropping variables from an empirical model. A robust empirical
design should in theory account for total uncertainty (sampling + model uncertainty).
However, traditional tests of statistical significance and model selection do not capture total
uncertainty and may have unintended consequences in terms of overstating or understating
the impact of key variables on the phenomenon being examined (e.g., Raftery, 1995; Young,
2009).
The dangers of ignoring model uncertainty can be averted through the application of BMA
(e.g., Fernandez, Ley, & Steel, 2001; Young, 2009). BMA formally integrates researchers’
experimentation with different specifications into the estimation process such that both

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   609

sampling and model uncertainty are accounted for. Inference is drawn based on a weighted
average of all possible model specifications as opposed to a particular specification. Hence,
BMA produces coefficient estimates and associated measures of dispersion (standard errors)
reflecting total uncertainty. Beyond that, BMA provides posterior model and inclusion prob-
abilities for particular regressors, which shed light on the importance of specific variables
being examined. As a consequence, BMA may be seen as a complementary approach to rela-
tive importance/dominance analysis (Budescu, 1993; Johnson & Lebreton, 2004).
This study contributes to the advancement of the entrepreneurship literature in several
ways. First, BMA analysis suggests that there is little or no evidence for the robustness of the
statistical association of many of the macrolevel variables routinely used in predicting entre-
preneurship rates across countries. Hence, it raises important concerns with respect to model
uncertainty, which researchers need to consider when assessing the contributions of research.
Second, through our analyses, we show that when model uncertainty is corrected for, gross
domestic product (GDP) per capita, unemployment, the marginal tax rate, and the volatility
of inflation are the only macro variables to emerge as being significantly and universally cor-
related with aggregate entrepreneurship. This is notable since the volatility of inflation, as a
predictor of entrepreneurial activity, has captured surprisingly little attention in prior litera-
ture. Third, and perhaps most importantly, our results on inflation and taxation suggest that
via monetary and fiscal policy, governments may influence the aggregate level of entrepre-
neurship more effectively by setting policy targets that emphasize the importance of general
macroeconomic stability than by focusing on entrepreneurship-specific targets.

The Macrolevel Determinants of Entrepreneurship

We build on classic works in entrepreneurship to propose a theoretical framework that can
accommodate logically and organically the broad and diverse body of extant empirical
research on cross-country entrepreneurship. Specifically, consistent with Baumol (1990) and
Kirzner (1997), we suggest that the aggregate level of entrepreneurial activity in a country
may be understood as the unintended consequence of a multifaceted interplay between
human capital, level of development, and institutions.

Human Capital
Human capital encompasses the productive capacities that individuals possess and allows
individuals to exploit profit opportunities. The actions of alert entrepreneurs, in turn, produce
unintended consequences at the market level and across markets (Kirzner, 1997). If the entrepre-
neur were not alert, change in economic life would be impossible. Human capital determines the
quality of those changes. Thus, entrepreneurship scholars have studied the relationship between
entrepreneurial activity and various aspects of human capital (Shane, 2003). Among those, pop-
ulation, education, and employment status have emerged as being particularly pertinent.

Population. Lévesque and Minniti (2011) developed a model showing that although

population size and growth rate increase the future demand for goods and services, the
distribution by age cohorts may have a negative effect on entrepreneurship if it creates exces-
sive competition for resources. As a result, the nature of the linkage between population and
entrepreneurship cannot be generalized theoretically. From an empirical point of view, how-

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610   Journal of Management / February 2015

ever, results seem to converge on positive effects of population growth and density on the
level of entrepreneurship. Brüderl and Preisendörfer (1998) and Florida (2003), for example,
found that urban areas with high population densities provide appropriate infrastructure for
business start-ups and development. Plummer and Pe’er (2010) describe a similar ecology to
explain the geographical agglomeration of new ventures.

Education.  Formal education improves individuals’ decision-making skills and their

understanding of markets (Casson, 1995). Yet, many entrepreneurs tend to be jacks-
of-all-trades, and their skills do not necessarily align with formal education (Lazear,
2005). Empirically, the majority of studies report a positive relationship between formal
education and the probability of becoming an entrepreneur. Results, however, are far
from consistent. Sobel and King (2008) found a positive relationship when accounting
for education quality, whereas after conducting a meta-analysis of published research,
van der Sluis et al. (2005) found a negative relationship especially for women, urban
residents, and inhabitants of poor countries. As a result, no convergence is emerging. In
fact, Parker (2009) reports that at the time of publication, 69 studies had found a posi-
tive relationship, 21 had found a negative relationship, and 27 had found no significant
relationship at all.

Unemployment.  Unemployment reduces the opportunity to generate income through paid

labor and, therefore, may push individuals into self-employment out of necessity. On the
other hand, when unemployment increases, entrepreneurs face a decline of markets for their
products. Thus, like in the case of population, the nature of the relationship between unem-
ployment and aggregate entrepreneurship cannot be determined theoretically and becomes an
empirical question with many nuances. Evans and Leighton (1990), for example, found that
unemployment is positively associated with the propensity to start new firms, but Audretsch
and Fritsch (1994) as well as Garofoli (1994) found that unemployment is negatively related
to starting new firms. Also, Thurik, Carree, van Stel, and Audretsch (2008) note that causality
is a tricky issue in this context and provide evidence that an increase in unemployment may
produce a lagged increase in entrepreneurship, which, in turn, will produce an improvement
in economic condition and, as a result, a shift back into wage labor. Again, no convergence
is emerging, with results being significantly different depending on whether cross-section or
longitudinal data are used (Parker, 2009).

Level of Development
A significant amount of entrepreneurship research has shown that the economic context
within which opportunities are discovered and exploited, in other words, the level of eco-
nomic development of a country, strongly influences aggregate entrepreneurship (Baumol,
1990; Boettke & Coyne, 2009; Wennekers, van Stel, Carree, and Thurik, 2010). Within this
context, the relationships between entrepreneurial activity and GDP per capita, technological
development, and financial development have captured considerable attention.

GDP per capita. Several studies have shown that the relationship between aggregate
entrepreneurship and GDP per capita is highly significant (Audretsch, 2007; Baumol &
Strom, 2007). Moreover, there exists a significant amount of empirical evidence showing

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   611

that the relationship is negative for all but the richest countries, where the relation turns
positive though less significant (Amoros & Bosma, 2014). The rationale behind this find-
ing is that at low levels of GDP, starting a business provides a path to circumvent the lack
of employment opportunities and often is seen as an effective source of poverty alleviation.
However, as GDP per capita increases, labor markets develop to provide more stable jobs and
cause a switch from self-employment to paid employment (Wennekers et al., 2010). In other
words, the negative relationship observed for many of the poorer countries captures the wide
phenomenon of necessity entrepreneurship in which individuals who would prefer being
employed are forced to start their own businesses due to the lack of employment alternatives
(Hessels, Gelderen, & Thurik, 2008). The negative trend continues all the way up to a thresh-
old level of per capita income where the combination of technological progress, developed
financial markets, and human capital renders self-employment again attractive, especially
for the wealthiest and most educated strata of population (Amoros & Bosma, 2014; Wen-
nekers et al., 2010). Although Audretsch and Acs (1994) and Carrasco (1999) proposed a
risk-based theory according to which entrepreneurship would behave in a procyclical way as
entrepreneurship becomes more profitable with productivity increases and market growth,
general consensus has emerged on the negative nature of the relationship when all types of
entrepreneurship are taken into account.

Financial development.  Much of the literature on the relationship between financing and
entrepreneurship examines the role that various types of investors play in mitigating agency
conflicts and asymmetric information surrounding entrepreneurial firms (Gompers, Lerner,
Scharfstein, & Kovner, 2010). In other words, most of the analysis is predicated on the idea
that entrepreneurship is systematically hindered by liquidity constraints (Evans & Jovanovic,
1989). While some empirical evidence supports this view, findings are highly contingent on
the way in which financial variables are operationalized and on the industries considered. On
the one hand, Klapper et al. (2007) found that financial development as measured by the ratio
of domestic credit to the private sector as a percentage of GDP is positively correlated with
entry rates and business density, suggesting that greater business opportunities and better
access to finance are related to a more robust entrepreneurial sector. On the other hand, Hurst
and Lusardi (2004) found that financial constraints do not really pose a problem for most
early-stages businesses since the vast majority of them require very little capital.

Technological progress.  By influencing productivity, technological progress is a primary

driver of growth (Acs & Audretsch, 2005; Romer, 1990). In turn, increased productivity
creates new profit opportunities and, therefore, should encourage self-employment. Indeed,
Anokhin and Wincent (2011); Casson (1995); and Wennekers, Uhlaner, and Thurik (2002) all
have shown that small firms play an important role in the development as well as diffusion
of innovation. In contrast, it has also been argued that technological developments may cre-
ate barriers to entry for new firms due to high research and development (R&D) costs (EIM/
ENSR, 1996). In an attempt to reconcile these empirical findings, Acs, Audretsch, and Evans
(1994) have suggested that the relationship between entrepreneurship and technological
change may be U shaped and contingent on a country’s level of development. Unfortunately,
notwithstanding existing research efforts, empirical findings are inconclusive, and as Parker
(2009) reports, up to the date of publication, four studies had found a positive relationship,
four showed a negative relationship, and two showed no significant connection.

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612   Journal of Management / February 2015

Institutions
While the connections between human capital, level of development, and entrepreneurial
activities have received substantial attention, research into the effects of institutions on
aggregate entrepreneurship has burgeoned in recent years. Institutions set the rules of the
game and have the power to influence the allocation of activity between productive, unpro-
ductive, and destructive entrepreneurship (Baumol, 1990; Boettke & Coyne, 2009; Murphy,
Shleifer, & Vishny, 1991). Within this context, the relationship between entrepreneurial
activity and taxes, inflation, administrative complexity, and globalization has received par-
ticular attention.

Administrative complexity.  The theory of regulation suggests that administrative com-

plexity, by increasing the costs of entry, is negatively associated to entrepreneurship (Gurley-
Calvez & Bruce, 2008). Bjørnskov and Foss (2008) and Fogel, Morck, and Yeung (2008)
contend that administrative complexity as manifested through institutional features, such as
the amount of bureaucracy, the intellectual property rights regime, and the level of corrup-
tion, all can affect the level of entrepreneurship in a country. They also argue that a larger
government is associated with higher levels of publicly financed provision of various ser-
vices (such as health and education), which decreases the incentives for individual wealth
formation. Empirical evidence largely supports the theoretical suggestions (Ciccone & Papa-
ioannou, 2007; Fonseca, Lopez-Garcia, & Pissarides, 2001; Ho & Wong, 2007). On the other
hand, Brock and Evans (1986) found little evidence that regulation had disproportionately
harmed smaller firms in the United States. Moreover, van Stel, Storey, and Thurik (2007)
found no significant effects in a large cross-country study.

Globalization.  Trade theory argues that the integration of world markets creates new
entrepreneurial opportunities (Acs, Morck, & Yeung, 2001). Indeed, a sizeable amount
of literature suggests that market openness stimulates competition and entrepreneurial
activity (Sobel, 2008). Empirical results support the idea that increased trade flows not
only allow entrepreneurs to take advantage of international opportunities but also give
them access to international capital markets (Alhorr, Moore, & Payne, 2008). However,
increasing competition in international markets may have a negative impact on the sur-
vival rates of small businesses, thus dampening the interest in entrepreneurship (Keupp
& Gaussmann, 2009). Finally, the relationship between market openness and entrepre-
neurship has been shown to be mediated by a country’s religion and postcommunism
transition status (Ireland, Tihanyi, & Webb, 2008). As the integration of global markets
increases, the literature on international entrepreneurship is providing increasing insights
on the entrepreneurial drivers. Yet, in an insightful and comprehensive review of extant
literature on internalization, Terjesen et al. (2014) document a wide array of inconsistent
and divergent results.

Taxes.  Because of its obvious political dimensions, the relationship between taxes and
aggregate entrepreneurship has received a surprisingly large amount of attention (Parker,
2009). The theoretical literature states that taxation may influence entrepreneurship posi-
tively or negatively depending on changes in its absolute, relative, evasion, and insurance
channels (Henrekson & Stenkula, 2010). Overall, although taxation has a negative influ-

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   613

ence on entry rates as an added production cost, its net effect depends on the way in which
taxes are manipulated and on their nature. It is, in other words, an empirical question.
Lee and Gordon (2005), for example, contend that the single most important channel by
which high statutory corporate tax rates retard economic growth is the entrepreneurship
channel. Henrekson (2005), more specifically, suggests that higher rates of personal taxa-
tion discourage the market provision of household-related products. Finally, Adam and
Bevan (2005) highlighted the importance of nonlinearities in the way taxation influences
the economy. Similarly, Gentry and Hubbard (2000) showed that the progressivity of the
tax system matters. Given the range of taxes and taxation regimes, it is not surprising that
no general agreement has yet emerged.

Inflation. Inflation and its volatility in particular discourage entrepreneurship

because they render the business environment riskier and make it harder for entrepre-
neurs to recuperate the value of their investments and to form accurate expectations
about the market (Parker, 2009). Similarly, McMillan and Woodruff (2002) suggest
that volatility in macroeconomic policies discourages long-term contracts and relations
necessary for successful entrepreneurship, as it is hard to distinguish whether or not the
transaction partner is behaving honestly. This is consistent with empirical findings by
Robbins, Pantuosco, Parker, and Fuller (2000), who report a significant negative cor-
relation between inflation rates and percentages of employment in small businesses in
the United States.

Summary
In spite of the tension inherent in the complex interplay of theory and empirical findings
existing in entrepreneurship research up to date, the literature we reviewed provides us
with the components of an organic framework in which aggregate entrepreneurship
emerges at the intersection of human capital, level of development, and institutions.
Importantly, this framework is consistent with Kirzner’s (1997) view of entrepreneurship
as a universal form of human action and Baumol’s (1990) argument that the aggregate
quantity and quality of entrepreneurship emerge at the intersection of economic develop-
ment and institutions. Of course, while relatively broad, the list of variables we consider is
far from complete. Indeed, the goal of our review was not to list all possible macroeco-
nomic variables but, rather, to discuss well-established, theory-grounded drivers of aggre-
gate entrepreneurial activity and to show that while our theoretical framework justifies the
choice and inclusion of specific variables, it does not explain why findings have been often
inconsistent with respect to significance and signs. This problem is widespread in the
entrepreneurship literature, and it is compounded by the fact that several proxies have been
used in the literature to measure theoretical constructs although little evidence exists on the
reliability of some of these measures. Importantly, the contradictory evidence renders deci-
sion making tricky and places a considerable burden on policy makers. As mentioned in the
introduction, we believe that the answer to this question is largely empirical and that a
BMA approach can significantly contribute to the entrepreneurship literature by establish-
ing which among those variables have a universal linkage to aggregate entrepreneurship
and what the nature of that linkage is.

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614   Journal of Management / February 2015

Data and Method

Data
A significant amount of past research has considered self-employment as a proxy measure
of entrepreneurial activities (Grilo & Irigoyen, 2006). To track individual activity in venture
creation and management, as well as ventures as the units of analysis (using the respondent
as the informant for the venture), we use the Global Entrepreneurship Monitor (GEM) data—
total early-stage entrepreneurial activity (TEA)—as a proxy of the dependent variable, that
is, the level of entrepreneurial activities. The GEM project, which is the only globally harmo-
nized data set dedicated to the study of individual-level entrepreneurial behavior across
countries, provides an indicator of a country’s entrepreneurial activity by measuring the TEA
rate. The TEA rate is calculated from surveys of the adult population in each country. The
surveys register, among other things, the percentage of entrepreneurial initiatives carried out
in a 1-year period. On this basis, the TEA rate measures the percentage of the adult popula-
tion of a country (18 to 64 years old) that either is actively involved in starting a new venture
or is the owner/manager of a business that is less than 42 months old (Reynolds, Bygrave,
Autio, Cox, & Hay, 2002). The TEA data in this paper are obtained from the GEM database
(available data set from 1999 to 2005).
Data for the independent variables are collated from various databases. To be included as
a candidate predictor for explaining entrepreneurship rates across countries, variables were
drawn from the wider entrepreneurship literature as discussed in the previous section. We
should note that many of these variables are also standard variables used in the empirical
macroeconomics literature. There are 32 variables, each with 80 observations. Given the
number of variables, we chose to summarize them in a table rather than discuss them in the
text. Table 1 defines the variables and provides information on the exact data sources.

Method
Model uncertainty raises an important question: How should researchers select the appro-
priate statistical model? Raftery (1995) suggests that researchers have three possible options
to choose from. The first is to select few models based on the personal discretion of the
researcher. However this strategy suffers from possible overconfidence in inference. An
alternative is the presentation of all possible model combinations. Although unsystematic,
doing so is preferable to the first option but poses substantial logistical issues. For instance,
a model with, say, 10 explanatory variables requires reports on 210 = 1,024 possible models,
which is rather impractical. The third option is to explicitly account for model uncertainty
through model averaging, where researchers can remove any impending uncertainty on
account of erroneous model specification due to doubts about the inclusion of variables by
creating a single unified model (e.g., Shou & Smithson, 2013; Young, 2009).

An intuitive approach towards model averaging.  To illustrate the conceptual ideas behind
BMA, we use a simple and intuitive example drawn from Chatfield (1995). Suppose that a
researcher is interested in explaining the variation in a variable y with a potential explana-
tory variable x. Assuming no prior knowledge on the specification, there exist two possible
models, enumerated as follows:

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   615

Table 1
Variable Description and Sources

Variable Description Source

Dependent variable  
  Entrepreneurship rate Overall total entrepreneurial activity Global Entrepreneurship
(TEA) Monitor consortium
Independent variables  
  Human capital  
  Population Population growth rate, urbanization World Development Indicators
rate
  Education Gross secondary school enrollment World Development Indicators
rate, gross tertiary school
enrollment rate
  Unemployment Unemployment rate as a percentage World Development Indicators
of labor force
  Level of development  
   GDP per capita Growth in real per capita GDP, log of World Development Indicators
real GDP per capita
  Financial development Lending interest rate, domestic credit IMF International Financial
to private sector as a percentage of Statistics
GDP
  Technological progress R&D as a percentage of GDP, log of World Telecommunication
researchers per 1 million inhabitants Indicators
 Institutions  
  Administrative Corruption perception index, Freedom House
complexity administrative requirements index,
bureaucracy costs, protection of IPR
  Globalization Imports as a percentage of GDP, World Development Indicators
exports as a percentage of GDP,
trade (imports + exports) as a
percentage of GDP, net FDI
inflows as a percentage of GDP,
net FDI outflows as a percentage of
GDP, religion, net migration as a
percentage of population
  Taxes Indirect taxes, indirect taxes squared, Freedom House
direct taxes, direct taxes squared,
corporate marginal tax, corporate
marginal tax squared, individual
marginal tax, individual marginal
tax squared
  Inflation Annual inflation, standard deviation World Development Indicators
of annual inflation

Note: FDI = foreign direct investment; GDP = gross domestic product; IMF = International Monetary Fund;
IPR = intellectual property rights; R&D = research and development; TEA = total early-stage entrepreneurial
activity.

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616   Journal of Management / February 2015

y = α1 + ε1. (M1)
y = α2 + βx + ε2. (M2)

Model 1 (M1) is an intercept-only model, where the data-generating process assumes that x
has no impact on y, and Model 2 (M2) includes the variable x. Either of the above models can
be estimated using traditional ordinary least squares (OLS). Estimating M2 via OLS implies
the estimated regression equation

y = α 2 + β$ x.

Given the estimate β , the coefficient’s standard error and the implied t statistic and p value,
a statistically significant relationship between x and y may be supported or rejected in favor
of M1. In the former case, β measures the unit effect of x on y. Note that in the process of
testing for statistical significance of β , we have hypothesized that M2 is the “correct” speci-
fication; that is, we have set the prior probability of M1 being the “correct” specification
equal to zero.
In this framework, it is important to understand that t statistics and p values account for
uncertainty associated with repeated sampling of the data only (sampling uncertainty). To
clarify, the obtained t statistics for variables may change if other variables are included/
dropped from a specification. However, the t statistic is expected to remain consistent across
repeated samples using the same specification. Interpreting the tests in the presence of alter-
nate models is not the same (e.g., Young, 2009, among others). One possible remedy could
be model selection tests. Model selection tests inherently compare two models at a time and
assume that between the two models, one is “correct.” When the model space is large (e.g.,
with possible 1,024 models), the total model comparisons required would run into millions,
making this approach difficult and impractical. In practice, most researchers tend to estimate
and compare a few models, a procedure often motivated to ensure “robustness” of the find-
ings. Though well intentioned and considered good practice, inference drawn in this manner
may often reach wrong conclusions as it is a possibility that none of the estimated models is
representative of the true underlying process that generated the data.
The BMA approach addresses and solves many of the problems discussed above. BMA
works by assuming from the start that each of the models is “probabilistically correct” with
probabilities p1 and p2 = 1 – p1, the prior probabilities for M1 and M2, and generates poste-
rior model probabilities � p1 and � p 2 , where the posterior probabilities are obtained from
updating the prior probabilities using the evidence given by the observed data. Taking
account of the posterior model probabilities, the averaged regression equation and predic-
tion is therefore

y = p1 α1 + p 2 α 2 + p 2 β$ x.

It follows that the predicted unit effect of x on y is now p 2 β$ ; that is, the posterior weighted
impact of x on y. Hence, the BMA approach reflects model uncertainty in prediction.
Analogously, it reflects model uncertainty in inference, which is based on averaged

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   617

coefficient distributions and averaged standard deviations. Note that if the researcher’s forced
prior belief, “M2 is the correct specification,” in the context of traditional OLS estimation of
M2 were true, then � p 2 should converge toward unity.

BMA in practice.  The above intuitive explanation suggests that to implement BMA in
practice, researchers should be able to estimate two quantities, namely, the parameters α and
β, and the posterior probabilities for each model as captured by � p1 and � p 2 in our example.
To fix ideas, we consider multiple linear regression models, where an outcome variable Y
is regressed on subsets of k = 32 potential explanatory variables that in turn can give rise to
232 different models. We may denote a representative model of these models by Mj, which is
identified by a typical OLS regression model

Y = α + βjXj + ε.

Estimating the coefficient of interest β after model averaging.  Estimating the coefficients
β in the Bayesian framework requires estimation of the posterior model probabilities. Math-
ematically, we can derive the posterior model probabilities of P(Mj | D) of each model Mj
conditional (|) on the observed data D by applying Bayes’ law:

P(Mj | D) ∝ P(D | Mj)P(Mj), . . . j = 1, . . . , 2k.

Note that the quantity P(D | Mj) is known as the likelihood, which is an object familiar from
maximum likelihood estimation in traditional frequentist statistics. The posterior model
probabilities P(Mj | D) are used to calculate the posterior inclusion probabilities (PIP) of the
32 potential explanatory variables. In particular, the PIP of regressor Zi is equal to the sum of
the posterior model probabilities of those models containing regressor Zi. Evidently, the
larger an explanatory variable’s PIP, the stronger is the evidence that the variable is important
for predicting the outcome variable Y. A Bayesian point estimator E(β | D) for the coefficients
β, the analogue to the standard coefficient estimate in OLS, may now be obtained by taking
a weighted average over the mean coefficients E(β | Mj, D) with the weights being the cor-
responding posterior model probabilities.
2k
( ) (
E (β | D ) = ∑ E β | M j , D P M j | D .
j =1
)

Integral to the BMA approach is the specification of prior distributions for the coefficients
β to be estimated as well as the set of candidate models {M1, M2, . . . , Mj} making up the model
space. Turning to the prior distribution for the coefficients first, observe that we report BMA
results based on three different prior distributions for the coefficients. All of these prior distri-
butions are variants on Zellner’s g prior and can be implemented easily in the statistical pro-
gram R (see appendix). The prior distributions of the coefficients are thereby assumed normal
−1
 
with a prior mean of zero and a variance consistent with Zellner’s g prior σ2  1 X ’j X j  .
g 
Our three different choices in modeling g are grounded in the current state of the literature (e.g.,
Fernandez et al., 2001). While the choice of g may seem arbitrary, values of g = n and g = k2,
where n equals the number of observations and k equals the number of explanatory variables,

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618   Journal of Management / February 2015

have been shown to provide consistent estimators of the coefficients. The common approach
with g = n is known as the unit information prior (UIP), since the choice contributes approxi-
mately as much importance to the prior as is embodied in one observation (Kass & Wasserman,
1995). The approach with g = k2 is based on work by Foster and George (1994) and is
referred to as risk inflation criterion (RIC). It tends to lead to smaller mean model sizes, that
is, more parsimonious model specifications (Ley & Steel, 2009). The third approach follows
Liang, Paulo, Molina, Clyde, and Berger (2008) and places a hyper prior on g (hyper-g),
thereby abandoning the fixed-g assumption of the previous two choices. The hyper-g prior
structure is suggested to be more robust to possible misspecifications due to a fixed-g
assumption, an argument also advanced by Feldkircher and Zeugner (2009).
Two remarks shall round off this description of our coefficient prior choice. First, note that
the wider literature on BMA, as well as the articles referred to in this paragraph, provides
evidence that the results can be sensitive to the choice of g. Dispelling such concerns is the
purpose of choosing alternative prior structures. Second, note that all three prior structures,
in conjunction with the prior model probabilities to be specified below, belong to the class of
uninformative priors. Common to uninformative prior structures is that the posterior deter-
mination is predominantly driven by the data via the likelihood as opposed to depending
more heavily on the prior specification (see Zyphur & Oswald, 2013).
We conclude the discussion on prior choices in specifying a prior distribution for the
model space {M1, M2, . . . , Mj}. The specification of prior model probabilities P(Mj) has been
an area of active research interest (Ley & Steel, 2009). We follow the approach recom-
mended by Ley and Steel (2009) and implement a fully random prior for the model space to
allow for minimum interference with posterior inference. The advantage of their prior struc-
ture over the previously more common structure implying a binomially distributed model
size (Fernandez et al., 2001, among others) is that it allows the researcher to impose less prior
information. This completes our model set up.

Results
In the following subsections, we shall illustrate the potential arbitrariness of common
frequentist model selection methods in the context of identifying the macrolevel determi-
nants of entrepreneurship before moving to the findings of the BMA approach.

Multiple Linear Regression

Most empirical research employs some form of a regression-based approach (e.g., linear
regression, probit/logit, panel data methods, structural equation models) to test relationships
between variables. The goal of the enterprise would be to use statistical significance, as
judged by a standard t test or F test at a particular level of significance (e.g., 5% or 10%), as
evidence to support/disprove a particular theoretical proposition. Consistent with this
approach, we regress TEA on various sets of independent variables drawn from the list pre-
sented in Table 2. While we have identified 32 variables as potentially important determi-
nants of entrepreneurship, our objective is to show what happens when researchers base their
inference on various subsets of the entire set of candidate regressors. The results for Models
1 through 4 are presented in Table 2.

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   619

Table 2
Economic Determinants of Entrepreneurial Activity

Variable Model 1 Model 2 Model 3 Model 4

Log GDP −7.02*** −8.57*** −8.04*** −7.84***

GDP growth 0.02 −0.07 −0.05 0.03
R&D expenditure −0.54*** −0.22 −0.08 1.02**
Log researchers 2.03** 0.08 0.36 0.48
Exports 0.10*** 25.48 17.07 23.56
Imports −0.14*** 25.31 16.93 23.59
Unemployment −0.10*** −0.10*** 0.00
Trade −25.41 −17.01 −23.58
Secondary school enroll −0.01 −0.01* −0.01
Tertiary school enroll 0.02* 0.00 0.03
FDI inflows −0.01 −0.04 −0.01
FDI outflows 0.03 0.02 0.04
Population growth 0.36 0.48 0.27
Total urban population 0.02* 0.02
Credit to private sector −0.98 2.53
Indirect taxes 0.25
Indirect taxes squared −0.01**
Direct taxes −0.14
Direct taxes squared 0.01
Protecting IPR −0.43**
Standard deviation of annual inflation −0.04
Annual inflation −0.13**
Administrative requirements 0.21
Bureaucracy cost −0.19
Corruption index 0.10
Net migration rate 0.12
Religion 0.68
Interest rate −0.05
Corporate marginal tax −0.20
Corporate marginal tax squared 0.00
Individual marginal tax 0.50***
Individual marginal tax squared −0.005**
Constant 27.49*** 40.46*** 38.62*** 35.52***
Number of observations 80 80 80 80
Adjusted R2 .62 .69 .70 .81
Likelihood ratio tests 23.19 7.47 60.9
Chi-square p value .00 .02 .00

Note: FDI = foreign direct investment; GDP = gross domestic product; IPR = intellectual property rights; R&D =
research and development.
*p < .10.
**p < .05.
***p < .01.

At this stage, we refrain from attributing interpretations to particular regressors and shall
comment on the findings in the Discussion. For the first specification (Model 1), we find that

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620   Journal of Management / February 2015

five out of the six variables included are statistically significant. In Model 2, we add seven
additional relevant variables and find that only two out of the 13 variables included are sta-
tistically significant. Adding two more variables in Model 3, four explanatory variables turn
out statistically significant. Finally, we run the fully saturated regression model including all
32 regressors and find that six of the variables are statistically significant at conventional
levels. Thus, depending on which specification is chosen, the number of significant variables
changes.
Looking beyond this rather aggregate information, we find that only one among the 32
variables, log GDP, is statistically significant across all four specifications. The significance
of several other variables, in contrast, changes depending on the specification. For instance,
unemployment, while significant in Models 2 and 3, is insignificant in Model 4. Similarly for
R&D, while negative and significant in Model 1, the variable turns positive and significant
in Model 4. Clearly, this indicates that the sign and statistical significance of variables of
interest may change depending on the specification used, thus implying a considerable bur-
den on inference.
Next we seek the help of traditional model selection tools. For instance, on the basis of
explanatory power, we find that Model 4 has the highest adjusted R2 of around 89%. This is
not surprising, as it is well known that increasing variables in a regression model will lead to
larger R2s. The F statistic is also not very helpful in our case as for each of the models, the
joint hypothesis test of all coefficients being equal to zero is rejected. Finally, we look at the
Bayesian information criterion (BIC) to help aid model selection. Selection using the BIC
statistic is based on identifying the model with the lowest possible BIC value. In this context,
we find that BIC recommends Model 1. This recommendation is expected, because the BIC
statistic includes a penalty term for additional parameters in a model. Inference based on this
result, however, is likely erroneous as it suffers from several omitted correlated variables. Up
to this point, our analysis indicates the dangers of ad hoc model selection and the limitations
of standard model selection methods in use. In fact, the purpose of this exercise was to show
that many of the inconsistencies found in existing cross-country studies of aggregate entre-
preneurship may be attributed to model uncertainty and specification biases. Next, we dis-
cuss results from BMA.

BMA
We begin our BMA analysis by studying aggregate information on the implementation of
the estimation process. In data sets with a large number of potential regressors, not every
single model is estimated. An algorithm combs the model space (Markov Chain Monte Carlo
[MCMC] sampler) and approximates the posterior model distribution. With the BMA results
being based on MCMC simulations, the number of model draws needs to be specified by the
researcher. In line with the literature, we chose 500,000 draws and dropped the first 50,000
as the burn-in sample. Final inference was based on the remaining 450,000 draws. We set the
number of draws to be fairly high to ensure better convergence of the algorithm exploring the
model space. Convergence in the case of BMA is indicated when the correlations of the pos-
terior model probabilities are closer to unity (e.g., Fernandez et al., 2001). In our application,
we find that model convergence was fairly high across all prior specifications (with the low-
est being around 99.5% under the hyper-g prior), which allows us to turn to the presentation
of the BMA findings.

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   621

One of our goals from using BMA is to identify the most relevant of the 32 candidate
macrolevel regressors for predicting entrepreneurial activity. In the social sciences, a com-
monly used approach to assess variable importance is dominance analysis (Budescu, 1993)
and relative importance (Lebreton & Tonidandel, 2011). Recent research suggests that when
predicting mean effects, both BMA and dominance analysis tend to perform equally well,
thus offering stronger evidence of complementarity between the two methods (Shou &
Smithson, 2013). We shall briefly return to these methods in the Discussion section. Predictor
relevance in the BMA context can be inferred from PIPs, which indicate the regressors’ prob-
abilities of being included in the unknown specification having generated the data. Table 3
provides the PIPs across the three prior specifications.
The differences in results between the BMA findings and the linear regression models are
striking. First, we find that once we account for model uncertainty and average across the
model space, only three variables, log of GDP per capita, unemployment as a percentage of
the workforce, and the standard deviation of annual inflation, are suggested as key determi-
nants of entrepreneurial activity. As can be seen from the table, these three variables have
PIPs exceeding 90% across all three prior specifications. None of the other variables consis-
tently finds its way into model specifications. Based on the order of importance, the next
most important variable is the indirect tax rate, with an average probability of around 59%.
Beyond variable and model selection, most management scholars want to draw inference
in terms of the size, sign, and statistical significance of the coefficients. BMA provides
researchers with the posterior distributions for the coefficients, which can be used to compute
a variety of statistics. In Table 4, we chose to report standardized estimates of the posterior
mean coefficients as well as the associated posterior standard deviations (allows for easier
comparison across prior choices). Since the effect sizes and uncertainty were qualitatively
consistent across the different prior distributions, which indicates minimal influence on
account of the prior coefficient distributions on the posterior means, we chose to report the
results based on the benchmark prior (BRIC), suggested by Fernandez et al. (2001), only
(other results are available from the authors upon request).
In line with the long regression estimate shown in Table 1, the mean coefficient on GDP
per capita is negative and statistically significant. In contrast to the long regression estimates,
the other mean coefficients on the three variables identified as important according to PIPs,
namely, unemployment, standard deviation of annual inflation, and indirect taxes, turn out
statistically significant when accounting for model uncertainty. Moreover, the sign of the
mean coefficient for indirect taxes is negative as opposed to positive in the long regression.
Statistical significance of the mean coefficients may be illustrated with the help of high-
posterior-density (HPD) plots, where the densities are model-weighted mixtures. Figures 1,
2, 3, and 4 plot the densities along with 95% HPD intervals (the vertical hyphenated lines to
the left and the right of the mean of the distributions) for the four variables found to be most
important. As is evident from visual inspection of the graph, zero is not within the 95% HPD
interval in any of the four graphs, hence indicating statistical significance of the
coefficients.
Note finally that the standardized coefficients analysis sheds further light on the relative
importance of the variables identified as important. In light of the PIPs, the variables
Unemployment and Standard deviation of annual inflation seem almost as important as GDP
per capita. While there is very strong evidence for the inclusion of GDP per capita,

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622   Journal of Management / February 2015

Table 3
Posterior Inclusion Probabilities Across Different Coefficient Priors

Variable UIP BRIC Hyper-g

(Intercept) 1.00 1.00 1.00

Log of GDP per capita 1.00 1.00 1.00
Annual GDP per capita growth .07 .02 .10
R&D expenses as % of GDP .11 .02 .21
Log of researchers per 1 million inhabitants .05 .01 .10
Exports as % of GDP .14 .02 .19
Imports as % of GDP .18 .06 .25
Trade as % of GDP .15 .03 .21
Gross secondary school enrollment .03 .00 .07
Gross tertiary school enrollment .04 .01 .09
FDI inflows as % of GDP .06 .02 .09
FDI outflows as % of GDP .04 .01 .07
Annual population growth .20 .08 .25
Unemployment as % of total labor force .99 .99 .97
Total urban population .04 .01 .10
Domestic credit to private sector as % of GDP .10 .03 .16
Indirect taxes .59 .57 .57
Indirect taxes squared .38 .40 .42
Direct taxes .04 .01 .09
Direct taxes squared .04 .01 .08
Protection of IPR .04 .01 .09
Standard deviation of annual inflation .92 .97 .89
Annual inflation .12 .03 .20
Administrative requirements .08 .02 .11
Bureaucracy cost .03 .01 .06
Corruption index .04 .01 .09
Net migration rate .04 .01 .08
Religion .04 .01 .09
Interest rate .04 .01 .10
Corporate marginal tax .06 .01 .12
Corporate marginal tax squared .06 .01 .12
Individual marginal tax .13 .02 .25
Individual marginal tax squared .10 .01 .20

Note: BRIC = benchmark prior (from Hernandez, et al., 2001); FDI = foreign direct investment; GDP = gross
domestic product; IPR = intellectual property rights; R&D = research and development ; UIP = unit information prior.

the evidence for the other two variables appears only slightly weaker. Yet, the standardized
coefficients suggest otherwise, with the impact of the variables Unemployment and SD of
inflation being clearly dominated in magnitude by the impact of GDP per capita. To a lesser
extent, the same observation holds for the variable Indirect taxes.

Discussion
The study of macroeconomic factors influencing aggregate entrepreneurship is, of course,
a complex phenomenon. On the basis of classic works by Kirzner and Baumol, we present a

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   623

Table 4
Posterior Estimates (BRIC Prior)

Variable Posterior M Posterior SD

Log of GDP per capita −6.35 .68

Annual GDP per capita growth −.00 .01
R&D expenses as % of GDP .00 .04
Log of researchers per 1 million inhabitants .01 .10
Exports as % of GDP .00 .24
Imports as % of GDP −.00 .24
Trade as % of GDP −.00 .24
Gross secondary school enrollment .00 .00
Gross tertiary school enrollment .00 .00
FDI inflows as % of GDP −.00 .02
FDI outflows as % of GDP .00 .00
Annual population growth .04 .15
Unemployment as % of total labor force −.09 .02
Total urban population .00 .00
Domestic credit to private sector as % of GDP .04 .27
Indirect taxes −.07 .07
Indirect taxes squared −.00 .00
Direct taxes .00 .00
Direct taxes squared .00 .00
Protection of IPR .00 .01
Standard deviation of annual inflation −.06 .02
Annual inflation −.00 .01
Administrative requirements .00 .03
Bureaucracy cost .00 .01
Corruption index .00 .01
Net migration rate .00 .01
Religion −.00 .02
Interest rate .00 .00
Corporate marginal tax .00 .00
Corporate marginal tax squared .00 .00
Individual marginal tax .00 .02
Individual marginal tax squared .00 .00

Note: FDI = foreign direct investment; GDP = gross domestic product; IPR = intellectual property rights; R&D =
research and development.

broad, theoretically grounded framework for the study of aggregate entrepreneurship. Results
obtained from testing this framework with appropriate analytical techniques allow us to then
identify a set of empirically grounded variables that are significantly and systematically
linked to aggregate entrepreneurial activity across countries. Specifically, our BMA analysis
based on 32 macrolevel predictors routinely used in empirical entrepreneurship research
identified only four variables as being universally relevant in explaining the linkages between
macroeconomic conditions and aggregate entrepreneurship.
First, GDP per capita emerges as a key factor driving aggregate entrepreneurship. Our
results show the relationship between GDP per capita and aggregate entrepreneurship to be

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624   Journal of Management / February 2015

Figure 1
Marginal Density of Log Gross Domestic Product

Cond. EV
0.6

2x Cond. SD
Median
0.5
0.4
Density
0.3
0.2
0.1
0.0

−10 −8 −6 −4 −2
Coefficient

Note. PIP 100%.

Figure 2
Marginal Density of Unemployment
20

Cond. EV
2x Cond. SD
Median
15
Density
10
5
0

−0.15 −0.10 −0.05

Coefficient

Note. PIP 99.05%.

negative and significant in both our BMA and standard regressions. This confirms previous
findings by Amoros and Bosma (2014) and Wennekers et al. (2010), among others. This
negative relationship is in part the result of necessity entrepreneurship. In other words, it
reflects the activity of people who choose to start microbusinesses due to the lack of better
employment alternatives. While not new, the important lesson is that no credible study of

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   625

Figure 3
Marginal Density of Standard Deviation of Annual Inflation

Cond. EV
30

2x Cond. SD
Median
25
20
Density
15
10
5
0

−0.15 −0.10 −0.05 0.00

Coefficient

Note. PIP 97.67%.

Figure 4
Marginal Density of Indirect Taxes

Cond. EV
2x Cond. SD
8

Median
6
Density
4
2
0

−0.25 −0.20 −0.15 −0.10 −0.05 0.00 0.05

Coefficient

Note. PIP 57.29%.

macroeconomic determinants of entrepreneurship can abstract from considering the level of

economic development.
Second, in our BMA analysis, unemployment emerges unequivocally as being negative
and significant. This is a clearer result compared to existing literature, where, akin to our own
standard regressions, different model specifications have shown the relationship to be

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626   Journal of Management / February 2015

alternatively positive (Evans & Leighton, 1990) and negative (Audretsch & Frisch, 1994).
When model uncertainty is taken into account and corrected for, it appears that the reduction
in entrepreneurship caused by markets’ decline outweighs necessity entry. Importantly, our
models do not take into account long-term effects. Thus, our results do not deny the possibil-
ity of a positive long-term linkage (Thurik et al., 2008).
Third, we found the variability of inflation to be significantly and negatively correlated to
aggregate entrepreneurship. The same variable, however, was found not significant in our
standard regression estimate. Our result confirms that volatility in macroeconomic policies
discourages long-term contracts and relations necessary for successful entrepreneurship
(McMillan & Woodruff, 2002). More importantly, our result highlights that the linkage
between monetary policy and aggregate entrepreneurship is universally important.
Surprisingly, this relationship has been relatively neglected in the literature. In fact, only a
few studies have considered monetary instability. Even in those cases, researchers have
focused on interest rates as a way to gauge costs of financing (Parker, 2009) rather than on
the implications of unchecked increases of the money supply. Importantly, conditioning on
the stage of development, the negative correlations between entrepreneurship and inflation
and between entrepreneurship and unemployment suggest that net venture creation declines
as the state of the economy worsens. This result confirms existing literature showing that
entrepreneurship may be procyclical (Rampini, 2004).
Last, we found the relationship between individual marginal taxes and aggregate level of
entrepreneurial activity to be significant and negative, although the effect is not as strong as
for the three previous variables. By comparison, our standard regression estimate showed a
significant but positive relationship, whereas results from existing literature are inconclusive
or show other types of taxes to be significant. This illustrates the importance of correcting for
model uncertainty. Our result supports existing research showing that the progressivity of the
tax system matters (Gentry & Hubbard, 2000) and that higher rates of personal taxation dis-
courage the market provision of household products (Henrekson, 2005).
Overall, in addition to providing evidence for the universal importance of these four vari-
ables and possible explanations for inconsistencies found in previous empirical literature, our
results force entrepreneurship researchers to cogitate the relationship between aggregate
entrepreneurship and macroeconomic variables in a fundamentally different way. While
much entrepreneurship literature focuses on the identification of entrepreneurship-specific
factors and the creation of related incentives, our results suggest that aggregate entrepreneur-
ship is universally and significantly linked to a small set of important macroeconomic indica-
tors that are not entrepreneurship specific but, instead, play a fundamental role in the creation
of systemwide economic incentives and stability. This, of course, does not imply that other
variables may not be importantly linked to entrepreneurship in specific contexts.
The previous considerations lend themselves to important policy implications. Our results
indicate that entrepreneurship is significantly and systematically linked to inflation and taxa-
tion, two variables directly connected to macroeconomic stability that the government has
the power to control. For example, policy makers interested in promoting entrepreneurial
activity will want to pay close attention to the trade-off produced by an expansionary mon-
etary policy with lower interest rates but a higher risk of inflation. Similarly, a fiscal policy
with a lower marginal tax burden may be more effective than business-related taxes or public
expenditure in the form of support programs. Although very preliminary, our policy analysis

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 Arin et al. / Determinants of Entrepreneurship: A BMA Approach   627

is consistent with Baumol’s (1990) argument that governments have the power to influence
the distribution of entrepreneurial types by setting the appropriate incentives. We expand on
his argument by showing that those incentives are not entrepreneurship specific but overlap
significantly with general and fundamental economic principles.
Of course, while our results make a significant contribution to entrepreneurship theory,
our main contribution remains in the application of BMA to the empirical investigation of
entrepreneurship at the aggregate level and in showing the importance of accounting for
model uncertainty.
Notwithstanding our intention to make a case for BMA analysis as a research tool, we do
not want to suggest that traditional approaches toward empirical research should be dis-
carded or ignored. In fact, we recommend the opposite. There is no substitute to good theory.
This principle applies even to BMA-based empirical work. Had we not adopted a theoretical
framework based on Kirzner (1997) and Baumol (1990), we could have chosen a different set
of variables and obtained different results. We acknowledge this possible limitation. However,
we note that BMA is particularly well suited to be used in conjunction with traditional
approaches, such as multiple linear regressions. For instance, on the basis of theoretical con-
siderations, an entrepreneurship researcher may identify certain variables explaining a par-
ticular outcome, and traditional methods can be used to draw such inference. Within the
purview of BMA, these variables should be included in every possible specification
(researcher imposes a prior probability of inclusion to one based on theoretical knowledge).
Model averaging can now be used to test the impact of including or deleting other variables
on the key variable of interest, hence explicitly ensuring robustness to model uncertainty in
theory confirmation.
In a similar vein, a researcher can also control for unobserved heterogeneity by forcing the
inclusion of country-/firm-specific dummy variables (as the case may be) onto every specifi-
cation. Thus, concerns related to endogeneity can be effectively addressed using model aver-
aged fixed-effect estimators. Finally, endogeneity concerns typically plague much of research
in the organizational sciences. A solution to this problem is the use of instrumental variable
estimators. In cases where several possible candidates as instruments are available, a
researcher may be forced to choose a smaller set of instruments from a larger universe of
available instruments. BMA can reduce uncertainty in the choice of instruments by averaging
over the entire universe of available instruments as shown by Lenkoski, Eicher, and Raftery
(2014). This innovation, coupled with the ease of implementation of fixed-effects models in
the model-averaging framework, not only allows entrepreneurship researchers to effectively
address model uncertainty but also helps allay endogeneity concerns.

Conclusion
In this paper, our major contribution is to address and help to alleviate a thorny issue,
namely, model uncertainty, concerning much of empirical research in entrepreneurship and
management in general. Having discussed the implications of our findings with respect to the
entrepreneurship literature in the previous section, we conclude with a methodological
remark in the context of our empirical results. Specifically, we showed that variables that
were not captured as being significant in the full model specification turn out to be critical in

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628   Journal of Management / February 2015

determining aggregate entrepreneurship, thus raising concerns on how specification/model

uncertainty can taint empirical inference.
In light of this finding, we would like to note that one of the important outputs from the
BMA process is information on variable importance, and as such, the method offers a com-
plementary approach to the better-known importance and dominance analysis (Budescu,
1993). The key difference between dominance analysis and BMA is that any form of relative
importance analysis does depend on model specifications as well. For instance, if we esti-
mate four different models (with subsets of independent variables), the relative importance
of variables may change depending on which variables are included in the specification
being analyzed (see Lebreton & Tonidandel, 2011). Beyond that, BMA analysis offers addi-
tional insights in the form of model-averaged coefficients and standard errors, which are not
offered by dominance analysis. Finally, dominance analysis becomes computationally infea-
sible as the number of independent variables increases, whereas BMA offers a computation-
ally attractive and statistically rigorous approach toward identifying variable importance
even when the universe of potential predictors is expansive.

Appendix
R-Code for Bayesian Model Averaging
## Load the library needed for conducting BMA analysis
library(BMS)
## Reads in your original dataset with the first column as the dependent variable
bmadata <- as.data.frame(read.csv(“findat.csv”, header=T)
## Classical OLS Regression. Replicate Table II in the paper
summary(lm(bmadata[,1]~bmadata[,-1]))
## Model averaging using BMA. (see help file and vignette for further details)
bms1 <- bms(bmadata, burn=50000, iter=500000, g=“UIP”)
## Replace g =“UIP” with “BRIC” and “hyper=BRIC” for alternative priors
## Replicating Table III in the manuscript
pipmat <- as.matrix(cbind(coef1[,1],coef2[,1],coef3[,1]))
## Replicating Table IV from the manuscript.
bma.coefficients <- coef(bms1,std.coefs = T, order.by.pip = F, include.constant = T)
## Replicating the density graphs as in Figures I-IV from the manuscript starting with file path
density(bms1,reg=“Log.GDP”) ## Example for Log. GDP

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