Municipal budget strategies and local economic growth

Local governments invest heavily in economic development, yet such spending often fails to produce entrepreneurial dynamism. This study examines how different configurations of municipal spending contribute to new firm formation across 336 Dutch municipalities. Using fuzzy-set Qualitative Comparative Analysis, we identify multiple, size-specific combinations of foundational infrastructure and business-climate interventions that are sufficient for higher entrepreneurial activity. The results show that the effectiveness of municipal spending depends on its alignment with local fiscal and institutional capacity, rather than on the presence of any single policy lever. We conceptualise this as a capacity logic of public investment, whereby different capacity regimes enable different causal pathways to entrepreneurship. The findings reframe local development from a search for universally effective instruments to the design of capacity-contingent policy bundles, offering an alternative basis for both theorising and governing subnational economic growth.