We examine the factors affecting the transition to self-employment in Bosnia and Herzegovina, using a panel household survey for the years 2001-2004. In the beginning of the sample the country changed its legal framework, with the primary aim to promote labor market flexibility and to encourage entrepreneurial activity. We identify individuals that switched to self-employment (employers and own account) during the sample period and the viability of this transition, in terms of business survival for more than one year. Our results suggest an important role for financing constraints. Specifically, wealthier households are more likely to become entrepreneurs and survive in self-employment, and having an existing bank relationship increases the chances of survival for the new entrepreneur. In contrast, we find that overseas – and in some cases domestic – remittances decrease the likelihood of becoming an entrepreneur. Finally, people working in the informal sector are more likely to become entrepreneurs, particularly those provided with loans from micro-credit organizations. They are also more likely to survive.
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