The Cyclical Dynamics of Business Activity: Causal Patterns and Driving Factors in Spanish Regions

Abstract

This paper examines how business dynamics in Spain respond to economic cycles, proxied by real GDP and employment, emphasizing regional heterogeneity and asymmetric responses across phases of the cycle. It also examines how underlying structural conditions related to regional productive and knowledge capacities shape these dynamics. Using causality tests within a VAR framework, we assess both symmetric and asymmetric Granger-causal relationships between business cycle and business creation across NUTS-3 Spanish regions. The results reveal strong asymmetric effects: Negative employment shocks are associated with increases in business creation in many regions, consistent with a labor-market-driven adjustment mechanism and the predominance of necessity-based entrepreneurship during downturns. In contrast, positive macroeconomic shocks show weak or no causal effects on entrepreneurial activity, indicating limited opportunity-driven dynamics during economic expansions. To explore the sources of regional heterogeneity, we estimate a series of logit models using structural variables from the ARDECO database for the period 2000–2023. The results highlight the role of regional structural conditions, linked to absorptive capacity, labor-market quality, and investment intensity, in shaping asymmetric causal relationships: Lower labor costs are associated with a higher likelihood of firm destruction during recessions, while higher productivity increases the probability of firm creation under adverse conditions. Gross Fixed Capital Formation (GFCF) is positively associated with cases in which business creation precedes GDP recovery, suggesting a localized and conditional anticipatory role rather than a generalized growth mechanism. Overall, the findings indicate that business dynamics in Spain are largely counter-cyclical and strongly mediated by regional structural characteristics.