Entrepreneurs have to deal with one-off start-up costs, such as notary charges as well as recurring costs in the form of income and corporate taxes. A number of prior studies have linked start-up costs and taxes to the level of entrepreneurial activity within and across economies (Djankov et al., 2002; Braunerhjelm and Eklund, 2014). Start-up costs and taxes may not only influence entrepreneurial entry but also the likelihood of innovative entrepreneurship (Schumpeter, 1934; Baumol, 1990).

Low start-up costs encourage the entry of lower quality entrepreneurs, and hence the pool of entrepreneurs is of higher quality when start-up costs are higher (Kaplan et al., 2011). Taxes, which represent recurring costs that reduce the gains from innovation, have a deterrent effect and discourage, in particular, risk-taking entrepreneurs with innovative ideas. Innovative entrepreneurs are motivated by the expectation of high returns on their innovative activities in the form of “entrepreneurial profit” (Baumol et al., 2007).