A new EBRD Working Paper (number 236)
We study the impact of the recent migration crisis on entrepreneurship in transit countries using a unique locality-level panel from the 2010 and 2016 rounds of the Life in Transition Survey for 18 European countries. To capture the exogenous variation in exposure to transit migration, we construct an instrument that exploits the distance of each locality to the optimal routes that minimise travelling time between the main origin and destination countries. We find that the entrepreneurial activity of natives falls considerably in localities that are more exposed to mass migration, compared to those located further away. We rule out mechanisms related to the outmigration of the local population and changes in local labour market conditions. Instead, our analysis suggests that increases in risk aversion and perceived political instability, accompanied by a decrease in governmental trust are the main mechanisms explaining the fall in entrepreneurial activity. Consistent with these results, we also document an increase in the anti-migrant sentiment while attitudes towards other population groups remained unchanged.