We explore the country-specific institutional characteristics likely to influence an individual’s decision to become an entrepreneur. We focus on the size of the government, on freedom from corruption and on “market freedom” defined as a cluster of variables related to protection of property rights and regulation. We test these relationships by combining country-level institutional indicators for 47 countries with working-age population survey data taken from the Global Entrepreneurship Monitor. Our results indicate that entrepreneurial entry is inversely related to the size of the government, and more weakly to the extent of corruption. A cluster of institutional indicators representing “market freedom” is only significant in some specifications. Freedom from corruption is significantly related to entrepreneurial entry, especially when the richest countries are removed from the sample, but unlike the size of government, the results on corruption are not confirmed by country-level fixed-effects models.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price excludes VAT (USA)
Tax calculation will be finalised during checkout.
An example of predatory entrepreneurship in this case would be “private” security companies which provide business protection at a price and that profit from maintaining weak local property rights (e.g. Sicily). This is a form of destructive entrepreneurship and has a negative overall effect on economic growth.
This variable measures the existence and extensiveness of private firms or non-governmental organizations that maintain databases on the creditworthiness of borrowers (Van Stel et al. 2007, p. 178).
Koellinger (2008) applies similar methodology to GEM data focussing on innovativeness.
World Bank “Governance” indicators would be an attractive alternative. Unfortunately, it is only in the most recent period that these have been reported annually. For the period we cover, some years are missing.
This indicator is available since 2005.
As accessed in February 2008. Since labour freedom is available from 2005 only, it was not included. However, we verified that it did not affect the results significantly. When we run factor analysis for a shorter period but with freedom of labour included, the first two factors still explain most of the variance, and loadings of labour freedom are not high on either of them. Empirically, labour freedom is negatively correlated with the size of government spending, and therefore its impact is difficult to separate when the size of the government is taken into account (see Aidis et al. 2007).
However, retaining two factors comes at the cost of a high uniqueness value for the trade freedom indicator (at 0.71); i.e. this variable is not well explained by the extracted factors. Generally, however, sampling adequacy is high: the overall Kaiser–Meyer–Olkin measure is 0.85.
As argued by Costello and Osborne (2005), orthogonal rotation does not utilise all available information. Moreover, if factors are truly uncorrelated, the results of oblique rotation are very similar to the results of orthogonal rotation. In our case the correlation between the two factors after oblique rotation is −0.14. We use oblimin method following recommendation by Fabrigar et al. (1999) and Russell (2002). We also applied promax and verified that the results based on the two approaches are almost indistinguishable for our data.
However, while the size of government measure as reported by the Heritage Foundation is simply based on the volume of government expenses, the tax measure includes the impact of marginal tax rates in addition to tax revenues.
These results can be obtained from the authors upon request. Estimation with GDP per capita squared does not produce a credible Wald statistics for the probit model. At the same time, the main results are not affected.
We also used a 20% threshold. The results were not affected.
Additional results can be obtained from the authors upon request.
The Polity IV project captures global trends in governance and currently includes 163 countries. The Polity conceptual scale examines concomitant dimensions of democratic and autocratic authority in governing institutions. It is based on six components that measure three key qualities: executive recruitment, constraints to executive authority and political competition (see also http://www.systemicpeace.org/polity/polity4.htm).
It is likely that there is a U-shaped relationship between the level of development and entrepreneurial entry, as postulated by Acs et al. (1994), Carree et al. (2002) and Wennekers et al. (2005). Unfortunately, with regards to our data, when we attempt to enter a linear and quadratic GDP per capita term in our specifications, the overall Wald statistics for the probit regression cannot be produced. For this reason, we stick to the logarithmic transformation.
Given the high significance of the size of the government we also explored what happens if a quadratic term is added; it is insignificant.
Acemoglu, D. (2005). Constitutions, politics and economics: A review essay on Persson and Tabellini’s The economic effect of constitutions. Journal of Economic Literature, 43, 1025–1048.
Acemoglu, D., & Johnson, S. (2005). Unbundling institutions. Journal of Political Economy, 113, 949–995.
Acemoglu, D., & Verdier, T. (2000). The choice between market failures and corruption. American Economic Review, 90, 194–211.
Acs, Z. (2006). Start-ups and entry barriers: Small and medium-sized firms population dynamics. In: M. Casson, B. Yeung, A. Basu, & N. Wadeson (2006). The Oxford handbook of entrepreneurship (pp. 194–224). Oxford: Oxford University Press.
Acs, Z., Audretsch, D., & Evans, D. (1994). Why does the self-employment rate vary across countries and over time? Discussion Paper 871. CEPR, London.
Acs, Z., & Szerb, L. (2009). The Global Entrepreneurship Index (BEINDEX) and stages of economic development. Mimeo: George Mason University and Univerisity of Pécs.
Aidis, R., & Adachi, Y. (2007). Russia: Firm entry and survival barriers. Economic Systems, 31(4), 391–411.
Aidis, R., Estrin, S., & Mickiewicz, T. (2007). Entrepreneurship, institutions and the level of development. Working Paper 103. Retrieved October 19, 2007 from http://www.tiger.edu.pl/publikacje/twp103.pdf
Aidis, R., Estrin, S., & Mickiewicz, T. (2008). Institutions and entrepreneurship development in Russia: A comparative perspective. Journal of Business Venturing, 23, 656–672.
Aidis, R., & Mickiewicz, T. (2006). Entrepreneurs, expectations and business expansion: Lessons from Lithuania. Europe Asia Studies, 58(6), 855–880.
Aidt, T. (2009). Corruption, institutions and economic development. Oxford Review of Economic Policy, 25(2), 271–291.
Ardichvili, A., Cardozo, R., & Ray, S. (2003). A theory of entrepreneurial opportunity identification and development. Journal of Business Venturing, 18(1), 105–123.
Barkhatova, N. (2000). Russian small business, authorities and the state. Europe-Asia Studies, 52, 657–676.
Barzel, Y. (1997). The economic analysis of property rights. Cambridge: Cambridge University Press.
Baumol, W. (1990). Entrepreneurship: productive, unproductive, and destructive. Journal of Political Economy, 98, 893–921.
Baumol, W., Litan, R., & Scharamm, C. (2007). Sustaining entrepreneurial capitalism. Capitalism and Society, 2, 1–38.
Beach, W., & Kane, T. (2007). Methodology: Measuring the 10 economic freedoms. Washington: The Heritage Foundation. Retrieved March 5, 2009 from http://www.heritagefoudation.org
Botero, J., Djankov, S., La Porta, R., Lopez-de-Silvanes, F., & Shleifer, A. (2004). The regulation of labor. Quarterly Journal of Economics, 119, 1339–1382.
Carree, M., van Stel, A., Thurik, R., & Wennekers, S. (2002). Economic development and business ownership: An analysis using data of 23 OECD countries in the period 1976–1996. Small Business Economics, 19, 271–290.
Casson, M. (1982). The entrepreneur. An economic theory. Oxford: Martin Robertson.
Cooper, A. C., & Dunkelberg, W. C. (1988). Entrepreneurial research: Old questions, new answers and methodological issues. West Lafayette, IN: Purdue University, Krannert Graduate School of Management.
Costello, A., & Osborne, J. (2005). Best practices in exploratory factor analysis. Practical Assessment, Research & Evaluation, 10, 1–9.
Davidsson, P., & Honig, B. (2003). The role of social and human capital among nascent entrepreneurs. Journal of Business Venturing, 13, 301–331.
De Soto, H. (2001). The mystery of capital. London: Black Swan.
Delmar, F., & Davidsson, P. (2000). Where do they come from? Prevalence and characteristics of nascent entrepreneurs. Entrepreneurship and Regional Development, 12, 1–23.
Demirguc-Kunt, A., Love, I., & Maksimovic, V. (2006). Business environment and the incorporation decision. Journal of Banking & Finance, 30, 2967–2993.
Desai, M., Gompers, P., & Lerner, J. (2003). Institutions, capital constraints and entrepreneurial firm dynamics: Evidence from Europe. Harvard Negotiation, Organizations and Markets Research Papers 03–59.
DiMaggio, P., & Powell, W. (1983). The iron cage revisited: institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 47, 147–160.
Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 107, 1–37.
Djankov, S., La Porta, R., Lopez-de-Silvanes, F., & Shleifer, A. (2003). Courts. Quarterly Journal of Economics, 118, 453–517.
Djankov, S., Miguel, E., Qian, Y., Roland, G., & Zhuravskaya, E. (2005). Who are Russia’s entrepreneurs? Journal of European Economics, 3(2–3), 587–597.
Doucouliagos, C., & Ulubasoglu, M. A. (2006). Economic freedom and economic growth: Does specification make a difference? Journal of Political Economy, 22, 60–81.
Estrin, S., & Mickiewicz, T. (2010). Entrepreneurship in transition economies; The role of institutions and generational change. In M. Minniti (Ed.), The dynamics of entrepreneurial activity. Oxford: Oxford University Press.
Evans, D., & Jovanovic, B. (1989). An estimated model of entrepreneurial choice under liquidity constraints’. Journal of Political Economy, 97, 808–827.
Evans, D., & Leighton, L. (1989). Some empirical aspects of entrepreneurship. American Economic Review, 79, 519–535.
Fabrigar, L., Wegener, D., MacCallum, R., & Strahan, E. (1999). Evaluating the use of exploratory factor analysis in psychological research. Psychological Methods, 4, 272–299.
Glaeser, E., Scheinkman, J., & Shleifer, A. (2003). Injustice of inequality. Journal of Monetary Economics, 50, 199–222.
Grilo, I., & Irigoyen, J. (2006). Entrepreneurship in the EU: To wish and not to be. Small Business Economics, 26, 305–318.
Grilo, I., & Thurik, R. (2005). Latent and actual entrepreneurship in Europe and the US. International Entrepreneurship and Management Journal, 1, 441–459.
Gros, D., & Steinherr, A. (2004). Economic transition in central and eastern Europe. Cambridge: Cambridge University Press.
Haan, J., & de Sturm, J. E. (2000). On the relationship between economic freedom and economic growth. European Journal of Political Economy, 16, 215–241.
Harper, D. (2003). Foundations of entrepreneurship and economic development. Abingdon: Routledge.
Heckelman, J. C. (2000). Economic freedom and economic growth: A short-run causal investigation. Journal of Applied Economics, 3(1), 71–91.
Hellman, J., Jones, G., & Kaufmann, D. (2003). Seize the state, seize the day: State capture and influence in transition economies. Journal of Comparative Economics, 31, 751–773.
Henrekson, M. (2005). Entrepreneurship: A weak link in the welfare state. Industrial and Corporate Change, 14 (3), 437–467.
Henrekson, M. (2007). Entrepreneurship and institutions. Comparative Labor Law and Policy Journal, 28, 717–742.
Hills, G. E., Lumpkin, G. T., & Singh, R. P. (1997). Opportunity recognition: Perceptions and behaviours of entrepreneurs. Frontiers of entrepreneurship research. Wellesley, MA: Babson College.
Hirschman, A. (1958). The strategy of economic development. New Haven: Yale University Press.
Hodler, R. (2009). Industrial policy in an imperfect world. Journal of Development Economics, 90, 85–93.
Hurst, E., & Lusardi, A. (2004). Liquidity constraints, household wealth and entrepreneurship. Journal of Political Economy, 112, 319–347.
Johnson, S., Kaufmann, D., & Shleifer, A. (1997). Politics and entrepreneurship in transition economies. Working Paper No 57, William Davidson Institute, University of Michigan.
Kirzner, I. (1973). Competition and entrepreneurship. Chicago: University of Chicago.
Klapper, L., Amit, R., Guillen, M., & Quesada, J. (2007). Entrepreneurship and firm formation across countries. Policy Research Working Paper 4313, World Bank.
Klapper, L., Laeven, L., & Rajan, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82, 591–629.
Koellinger, P. (2008). Why are some entrepreneurs more innovative than others? Small Business Economics, 31, 21–37.
Koellinger, P., & Minniti, M. (2009). Unemployment benefits crowd out nascent entrepreneurial activity. Economic Letters, 103, 96–98.
Koellinger, P., & Thurik, A. (2009). Entrepreneurship and the business cycle. Discussion Paper No 032/3, Tinbergen Institute.
Korosteleva, J., & Mickiewicz, T. (2008). Finance and entrepreneurial entry. Centre for the study of economic and social change in Europe. Working Paper No 96, University College London.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999). The quality of government. Journal of Law, Economics and Organisation, 15, 222–279.
Levesque, M., & Minniti, M. (2006). The effect of aging on entrepreneurial behavior. Journal of Business Venturing, 21, 177–194.
Lumpkin, G., & Dess, G. (1996). Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management Review, 21, 135–172.
Marshall, M., & Jaggers, K. (2007). Polity IV Project Dataset User’s Manual. Center for Systemic Peace. http://www.systemicpeace.org/polity
McMullen, J., Bagby, D., & Palich, L. (2008). Economic freedom and the motivation to engage in entrepreneurial action. Entrepreneurship Theory and Practice, 32(5), 875–895.
Mickiewicz, T. (2005). Economic transition in central Europe and the commonwealth of independent states. Houndmills: Palgrave Macmillan.
Mickiewicz, T. (2009). Property rights, corporate governance and privatisation in Central-Eastern Europe and Central Asia. Economics Working Paper No 90, Centre for the Study of Economic and Social Change in Europe, UCL.
Minniti, M. (2005). Entrepreneurship and network externalities. Journal of Economic Behavior & Organization, 57, 1–27.
Minniti, M., Arenius, P., & Langowitz, N. (2005a). GEM 2004 report on women and entrepreneurship, Retrieved October 19, 2007 from http://www.gemconsortium.org
Minniti, M., Bygrave, D. & Autio, E. (2005b). Global Entrepreneurship Monitor. 2005 Executive Report. Babson College, MA: US and London Business School, UK. Retrieved September 8, 2007 from http://www.gemconsortium.org
North, D. (1990). Institutions, institutional change and economic performance. New York: Cambridge University Press.
North, D. (1994). Economic performance over time. American Economic Review, 84, 359–368.
North, D. (1997). The contribution of the new institutional economics to an understanding of the transitional problem. Paper presented at Wider Annual Lectures, United Nationals University World Institute for Development Economics Research, Helsinki.
North, D., & Thomas, R. (1973). The rise of the western word: A new economic history. Cambridge: Cambridge University Press.
Olson, M. (2000). Power and prosperity. New York: Basic Books.
Parker, S. (2004). The economics of self-employment and entrepreneurship. Cambridge: Cambridge University Press.
Parker, S. (2007). Law and the economics of entrepreneurship. Comparative Labor Law and Policy Journal, 28, 695–716.
Pett, M., Lackey, N., & Sullivan, J. (2003). Making sense of factor analysis. Thousand Oaks, CA: Sage.
Reynolds, P., Bosma, N., Autio, E., Hunt, S., De Bono, N., Servais, A., et al. (2005). Global entrepreneurship monitor: Data collection design and implementation 1998–2003. Small Business Economics, 24, 205–231.
Reynolds, P., Bygrave, W., Autio, E., Cox, L., & Hay, M. (2002). Global Entrepreneurship Monitor: 2002 Executive Report. Retrieved September 8, 3007, from http://www.gemconsortium.org
Robinson, P. B., & Sexton, E. A. (1994). The effect of education and experience on self-employment success. Journal of Business Venturing, 9, 141–156.
Rodrik, D. (2000). Institutions for high-quality growth: What they are and how to acquire them. Studies in Comparative International Development, 35, 3–31.
Russell, D. (2002). In search of underlying dimensions: the use (and abuse) of factor analysis. Personality and Social Psychology Bulletin.
Schaffer, M., Carlin, W., & Seabright, P. (2006). Where are the real bottlenecks? A Lagrangian approach to identifying constraints on growth from subjective data. Paper presented at the Centre for Economic Development and Institutions inaugural conference, University of Brunel.
Schumpeter, J. (1934). The theory of economic development. Cambridge, MA: Harvard University Press.
Shleifer, A., & Vishny, R. (1993). Corruption. The Quarterly Journal of Economics, 108(3), 599–617.
Singh, R. P., Hills, G. E., Hybels, R., & Lumpkin, G. T. (1999). Opportunity recognition through social network characteristics of entrepreneurs. Frontiers of entrepreneurship research. Wellesley, MA: Babson College.
Sonin, K. (2003). Why the rich may favor poor protection of property rights. Journal of Comparative Economics, 31, 715–731.
Tanzi, V. (1998). Corruption around the world. IMF Staff Papers, 45(4), 559–594.
Van Stel, A., Storey, D., & Thurik, R. (2007). The effect of business regulations on nascent and young business entrepreneurship. Small Business Economics, 28, 171–186.
Verheul, I., van Stel, A., & Thurik, R. (2006). Explaining female and male entrepreneurship across 29 countries. Entrepreneurship and Regional Development, 18, 151–183.
Wei, S. (2000). Bribery in the economies: Grease or sand? Brookings Institute Working Paper, http://www.brookings.org/scholars/swei.htm
Wennekers, S., van Stel, A., Thurik, R., & Reynolds, P. (2005). Nascent entrepreneurship and the level of economic development. Small Business Economics, 24, 293–309.
Williamson, O. (1985). The economic institutions of capitalism. Firms, markets, relational contracting. New York: Free.
Williamson, O. (2000). New institutional economics. Journal of Economic Literature, 38, 595–613.
Rights and permissions
About this article
Cite this article
Aidis, R., Estrin, S. & Mickiewicz, T.M. Size matters: entrepreneurial entry and government. Small Bus Econ 39, 119–139 (2012). https://doi.org/10.1007/s11187-010-9299-y
- Market freedom