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Institutional environment and entrepreneurship: An empirical study across countries

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Abstract

Drawing on institutional theory, we synthesize previous literature that examined the impact of the regulatory, normative, and cognitive dimension of local institutional environment on entrepreneurship. We then test and replicate the link between the institutional environment and two types of entrepreneurial activities—opportunity-driven and necessity-driven entrepreneurship—using recent data on 43 countries. Consistent with prior literature, we find that countries characterized by less market openness, greater power distance, and collectivism tend to have higher levels of necessity-driven entrepreneurship and regulatory quality, and uncertainty avoidance do not seem to have a profound impact on this type of activity. On the other hand, countries with less market openness and regulatory quality, and smaller power distance are associated with opportunity-driven entrepreneurship.

Abstrakt

Basierend auf institutioneller Theorie fassen wir die existierende Literatur zusammen, welche die Einflüsse regulatorischer, normativer und kognitiver Dimensionen des lokalen institutionellen Umfelds auf Unternehmertum untersucht hat. Anschließend testen und reproduzieren wir—basierend auf aktuellen Daten aus 43 Ländern—die Verbindung zwischen dem institutionellem Umfeld und zwei Arten von Unternehmertum: Gelegenheitsgetriebenem und notwendigkeitsgetriebenem Unternehmertum. Übereinstimmend mit existierender Literatur kommen wir zu dem Schluss, dass Länder, die durch eine geringe Marktoffenheit, größere Machtdistanz, sowie Kollektivismus geprägt sind, zu einem höheren Level an notwendigkeitsgetriebenen Unternehmertum tendieren. Die Qualität des regulatorischen Umfelds und Ungewissheitsvermeidung scheinen keinen starken Einfluss auf diese Art des Unternehmertums zu haben. Andererseits sind Länder mit geringer Marktoffenheit und einem schlechteren regulatorischen Umfeld, sowie geringer Machtdistanz durch gelegenheitsgetriebenes Unternehmertum geprägt.

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Notes

  1. While necessity-driven entrepreneurship often occurs in the informal sector, we acknowledge that necessity-driven entrepreneurship can also be found in the formal sector. Using a decision-theory model, Sinclair-Desgagné (2012) suggests that entrepreneurs’ choice of sector (i.e., formal or informal) depends on the cost of starting a formal business, the level of social security, and certain psychological attributes of the entrepreneurs. In our study, we focus on the institutional influences affecting the motivations of entrepreneurs (necessity vs. opportunity), not the actual form the entrepreneurial activity.

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Authors and Affiliations

  1. Management & International Business, School of Business, Rutgers University–Camden, 227 Penn Street, Camden, NJ, 08102, USA

    Rakesh Sambharya

  2. Management Department, College of Business Administration, San Diego State University, 5500 Campanile Drive, San Diego, CA, 92182, USA

    Martina Musteen

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  1. Rakesh Sambharya
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  2. Martina Musteen
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Correspondence to Rakesh Sambharya.

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The end note

The authors wish to thank the three anonymous reviewers and the editor for their help in the revision of this manuscript. They also appreciate the help from Florian Taube, Benedict Kemmerer, and David Duwe.

Summary Highlights

Contributions: Our study uses relatively recent data from the Entrepreneurship Monitor (GEM) to examine the impact of institutional environment on two types of entrepreneurial activities—necessity- and opportunity-driven entrepreneurship. By doing so, it synthesizes and replicates some of the findings of previous studies on the role of institutional environment in entrepreneurship.

Purpose/Research Question: What is the impact of the normative, regulatory, and cognitive aspects of the institutional environment on the entrepreneurial activities across different countries? More specifically, how do market openness, regulatory quality, and culture influence the level of necessity and opportunity-driven entrepreneurship?

Findings/Results: Generalized least square (GLS) regression analyses were used to test our hypotheses using a cross-sectional time series data from 43 countries. We find that the cognitive dimensions of institutional environment are strong predictors of the opportunity-driven entrepreneurial activity across countries. In contrast, the normative and cognitive pillars of institutional theory appear to be better predictors of necessity-driven entrepreneurship.

Limitations: While providing interesting insights, our study is limited in terms of the number of countries and the measures of entrepreneurship used by GEM.

Theoretical Implications and Recommendations: Our study synthesizes previous research and suggests that while the institutional environment plays an important role in entrepreneurship, its impact is not the same across the types of entrepreneurial activities (i.e., necessity vs. opportunity). Further research is needed to understand the relationship between local institutional environment and entrepreneurial motivations.

Practical Implications and Recommendations: Policy makers seeking to implement policies that encourage entrepreneurship in their countries need to understand that the cognitive (i.e., cultural) influences appear to have the most profound impact. Appropriate changes in the educational systems and programs designed to increase awareness in this area may be the most helpful tools to promote entrepreneurial venturing.

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Sambharya, R., Musteen, M. Institutional environment and entrepreneurship: An empirical study across countries. J Int Entrep 12, 314–330 (2014). https://doi.org/10.1007/s10843-014-0137-1

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