Impact of Crime on Firm Entry: Evidence from South Africa

In this paper, we analyse the relationship between crime and the entry of firms across local municipalities in South Africa. We use data on the incidence of crime, sourced from the South African Police Service, and a unique database of business registrations over the period 2003 to 2011, to show that crime reduces business entry. These results are robust to the use of rainfall shocks as an instrumental variable for crime, in order to control for potential bias arising from the fact that crime might be a consequence, rather than a cause of the entry of firms. This paper highlights the importance of strong local institutions that can lower the costs of doing business for business dynamism. Our study has implications for employment and economic growth at the regional level and hence for dealing with regional inequality.