The interaction effect of formal and informal institutions on the development of entrepreneurial activity. A panel data analysis for emerging economies

Abstract

Varying institutional environments have provided the foundation for a great deal of entrepreneurship research; however, relatively little empirical work has examined the interaction effect between formal and informal institutions on the development of entrepreneurial activity in emerging economies. This is surprising given the importance placed on entrepreneurship, and especially new business start-ups, as a key determinant of economic growth, prosperity and sustainable development. Drawing from entrepreneurial and institutional theories, this doctoral study addresses this gap by examining the effect of formal institutions, such as the number of procedures, education and training, access to credit and firm-level technology absorption, on the rates of entrepreneurial activity in emerging economies. It will test the thesis that this relationship becomes more instrumental when they are accompanied by lower levels of corruption as an informal institution. Moreover, this thesis suggests that entrepreneurs in emerging economies respond differently to the dynamics of the institutional environment depending on the nature of opportunities that arise from the country’s stage of development, and whether they are factor-driven, efficiency-driven, or innovation-driven economies. A review of the theoretical and empirical literature reveals that the dynamics of the institutional environment on the development of entrepreneurial activity in emerging economies is imperfectly understood, and the empirical analysis undertaken in this thesis represents a step towards greater understanding in this area. The role of the institutional environment is investigated by testing a number of hypotheses reflecting formal and informal institutions, and the extent to which these variables can explain variations in the level of entrepreneurial activity. Panel data models were constructed for 44 emerging economies over a nine-year period (2006-2014), from which a variety of hypotheses will be tested, and conclusions drawn. On the basis of the quantitative data derived from several global research projects (i.e., the World Bank, UNESCO, and the Global Competitiveness Report), the research findings will show that lower levels of corruption moderates positively the effects of a country’s number of procedures, and education and training on the rates of entrepreneurial activity, whereas it moderates negatively the effects of access to credit and technology absorption on the levels of entrepreneurial activity. Furthermore, in emerging economies, these interaction effects are similar, regardless of the stage of economic development. This study is among the first to empirically examine the dynamics of institutional variables to predict new business activity; it paints a nuanced picture of how formal institutions might be more significant in contexts characterised by weak institutions if more control of corruption supported them. Regarding the theoretical debate, this thesis may provide empirical evidence for the idea that the variations in rates of entrepreneurial activity cannot be fully understood without giving attention to the context of the institutional environment dynamics in which those variables were observed. In particular, the main results of this thesis will suggest that the interaction effects of formal and informal institutions, rather than direct effects, are useful in explaining systematic variations in new business prevalence in emerging economies. On the basis of the results reported in this study, entrepreneurship policy should attempt to address the entrepreneurial deficit and focus on developing an attractive institutional environment towards entrepreneurship in order to promote economic growth, job creation and higher levels of investment in emerging economies.