Do institutions matter for entrepreneurship?

Although institutions and entrepreneurship have no place in the mainstream economics, there have always been scholars who cut across the boundaries of neoclassical economics to explain social and economic changes in societies via these concepts. From Cantillion to Baumol, entrepreneurship has been regarded as an arbitrageur or the key figure of economic development or one who chooses to become productive/unproductive depending on the rules of the game in the economy. On the other hand, economic institutions have gained attention recently as stimulating growth by shaping the incentives of the key economic actors in society and influencing investments in physical and human capital and technology and the organization of production (Acemoglu et al., (2005): 2). Since “the Achilles heel of the New Institutional Economics (NIE) is the difficulty of empirical testing” (Lin and Nugent, 1995:2305), the relationship between institutions and entrepreneurship must be subject to empirical scrutiny.

To that end, in this paper, we first discuss the importance, role and interaction of the institutions and entrepreneurs in the economic and social change/development process and make a critical assessment of the development of entrepreneurship theory in economics. Second we make an econometric analysis of the impacts of institutions on entrepreneurship using an unbalanced panel data set of 54 countries over the period 2004-2012. More specifically we split entrepreneurship into formal and informal entrepreneurship and use them as dependent variables separately. In doing so, we shed light on the link between institutions and Baumol’s classification of productive/unproductive entrepreneurship since formal entrepreneurship is positively associated with economic growth while informal entrepreneurship is uncorrelated with it. Equally important, we consider both formal and informal institutions to check whether institutions behave differently depending on the type of the entrepreneurship. Our results indicate that while both formal and informal institutions stimulate formal entrepreneurship, the former has statistically significant negative effects on informal entrepreneurship. It is also worth noting that this relationship differs considerably depending on the innovation capacity and legal origin of countries.