Entrepreneurship development and high tax revenue agenda in Africa: cointegration and Bayesian VAR approach

Abstract

This study investigates the dynamic relationship between entrepreneurship development and tax revenue in Africa, examining whether entrepreneurship can support the continent’s fiscal resilience agenda. Specifically, it assesses whether quantity-led, quality-led, or hybrid entrepreneurship policies align with taxation objectives. The paper uses data from 54 African countries spanning 2000Q1 to 2021Q4 from the World Development Indicators and the Global Entrepreneurship Development Institute. The analysis employs Denton proportional disaggregation for frequency harmonisation. Tax revenue is measured as a percentage of GDP, while entrepreneurship development is operationalised through entrepreneurial intensity and quality dimensions. Dynamic ordinary least squares estimates long-run elasticities, a Bayesian Vector Autoregressive model captures endogenous and dynamic interactions, and Impulse Response Functions trace entrepreneurial shocks on tax revenue. Results indicate that new venture creation gradually broadens the tax base; however, improvements in entrepreneurial quality yield larger and more persistent tax gains. While quantity-oriented policies expand the fiscal base, quality-enhancing policies generate higher per-firm tax contributions, enhancing fiscal resilience. The study proposes a calibrated policy mix that smooths formalisation, digitalises tax compliance, and incentivises high-quality firm creation, contributing relevant insights to African fiscal policy debates.