Entrepreneurship, Institutions, and Economic Growth: Does the Level of Development Matter?

Boudreaux, Christopher and Caudill, Steven (2019): Entrepreneurship, Institutions, and Economic Growth: Does the Level of Development Matter?

Abstract

This study questions the assumption that entrepreneurship unequivocally leads to economic growth. Using insights from institutional theory and development economics, we reevaluate entrepreneurship’s contribution towards economic growth. Our study uses Global Entrepreneurship Monitor (GEM) data for a panel of 83 countries from 2002 to 2014 and highlights several important findings. First, our evidence suggests that entrepreneurship encourages economic growth but not in developing countries. Second, we find that a country’s institutional environment—measured by GEM’s Entrepreneurial Framework Conditions (EFCs)—contributes to economic growth in more developed countries but not in developing countries. Lastly, we find that opportunity-motivated entrepreneurship encourages economic growth in developed countries, while necessity-motivated entrepreneurship discourages economic growth in developing countries. These findings have important policy implications. Namely, our evidence contradicts policy proposals that suggest entrepreneurship and the adoption of pro-market institutions that support it will encourage economic growth in developing countries. Our evidence suggests these policy proposals are unlikely to generate the desired economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Entrepreneurship, Institutions, Economic Growth, Policy, Global Entrepreneurship Monitor, Developing Countries
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; L - Industrial Organization > L5 - Regulation and Industrial Policy > L53 - Enterprise Policy; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Acemoglu, D., Johnson, S., & Robinson, J. A. (2005). Chapter 6 Institutions as a Fundamental Cause of Long-Run Growth. In P. A. and S. N. Durlauf (Ed.), Handbook of Economic Growth (Vol. 1, Part A, pp. 385–472). Retrieved from http://www.sciencedirect.com/science/article/pii/S1574068405010063

Acs, Z. (2006). How is entrepreneurship good for economic growth? Innovations, 1(1), 97–107. https://doi.org/10.1162/itgg.2006.1.1.97

Acs, Z., Åstebro, T., Audretsch, D., & Robinson, D. T. (2016). Public policy to promote entrepreneurship: a call to arms. Small Business Economics, 47(1), 35–51. https://doi.org/10.1007/s11187-016-9712-2

Acs, Z., Braunerhjelm, P., Audretsch, D. B., & Carlsson, B. (2009). The knowledge spillover theory of entrepreneurship. Small Business Economics, 32(1), 15–30. https://doi.org/10.1007/s11187-008-9157-3

Acs, Z., Desai, S., & Hessels, J. (2008). Entrepreneurship, economic development and institutions. Small Business Economics, 31(3), 219–234. https://doi.org/10.1007/s11187-008-9135-9

Acs, Z., Estrin, S., Mickiewicz, T., & Szerb, L. (2017). Institutions, Entrepreneurship and Growth: The Role of National Entrepreneurial Ecosystems (SSRN Scholarly Paper No. ID 2912453). Retrieved from Social Science Research Network website: https://papers.ssrn.com/abstract=2912453

Acs, Z. J., Arenius, P., Hay, M., & Minniti, M. (2004). Global entrepreneurship monitor.

Acs, Z. J., Audretsch, D. B., Braunerhjelm, P., & Carlsson, B. (2012). Growth and entrepreneurship. Small Business Economics, 39(2), 289–300. https://doi.org/10.1007/s11187-010-9307-2

Acs, Z. J., Estrin, S., Mickiewicz, T., & Szerb, L. (2018). Entrepreneurship, institutional economics, and economic growth: an ecosystem perspective. Small Business Economics, 51(2), 501–514. https://doi.org/10.1007/s11187-018-0013-9

Acs, Z. J., O’Gorman, C., Szerb, L., & Terjesen, S. (2007). Could the Irish Miracle be Repeated in Hungary? Small Business Economics, 28(2), 123–142. https://doi.org/10.1007/s11187-006-9027-9

Ács, Z. J., & Varga, A. (2005). Entrepreneurship, Agglomeration and Technological Change. Small Business Economics, 24(3), 323–334. https://doi.org/10.1007/s11187-005-1998-4

Acs, Z., & Szerb, L. (2007). Entrepreneurship, Economic Growth and Public Policy. Small Business Economics, 28(2–3), 109–122. https://doi.org/10.1007/s11187-006-9012-3

Alvarez, S. A., & Barney, J. B. (2014). Entrepreneurial opportunities and poverty alleviation. Entrepreneurship Theory and Practice, 38(1), 159–184.

Anokhin, S., Grichnik, D., & Hisrich, R. D. (2008). The Journey from Novice to Serial Entrepreneurship in China and Germany: Are the drivers the same? Managing Global Transitions, 6(2), 117.

Aquilina, M., Klump, R., & Pietrobelli, C. (2006). Factor Substitution, Average Firm Size and Economic Growth. Small Business Economics, 26(3), 203–214. https://doi.org/10.1007/s11187-005-4715-4

Audretsch, D. B., & Keilbach, M. (2007). The theory of knowledge spillover entrepreneurship. Journal of Management Studies, 44(7), 1242–1254.

Audretsch, D. B., Keilbach, M. C., & Lehmann, E. E. (2006). Entrepreneurship and Economic Growth. Oxford University Press, USA.

Autio, E. (2008). High-and low-aspiration entrepreneurship and economic growth in low-income economies. 21–23.

Baumol, W. J. (1986). Entrepreneurship and a century of growth. Journal of Business Venturing, 1(2), 141–145.

Baumol, W. J. (1990). Entrepreneurship: Productive, Unproductive, and Destructive. Journal of Political Economy, 98(5, Part 1), 893–921. https://doi.org/10.1086/261712

Baumol, W. J., & Strom, R. J. (2007). Entrepreneurship and economic growth. Strategic Entrepreneurship Journal, 1(3–4), 233–237. https://doi.org/10.1002/sej.26

Bjørnskov, C., & Foss, N. (2013). How Strategic Entrepreneurship and The Institutional Context Drive Economic Growth. Strategic Entrepreneurship Journal, 7(1), 50–69. https://doi.org/10.1002/sej.1148

Bjørnskov, C., & Foss, N. J. (2008). Economic freedom and entrepreneurial activity: Some cross-country evidence. Public Choice, 3(134), 307–328. https://doi.org/10.1007/s11127-007-9229-y

Bjørnskov, C., & Foss, N. J. (2016). Institutions, Entrepreneurship, and Economic Growth: What Do We Know and What Do We Still Need to Know? The Academy of Management Perspectives, 30(3), 292–315. https://doi.org/10.5465/amp.2015.0135

Bosma, N. (2013). The Global Entrepreneurship Monitor (GEM) and Its Impact on Entrepreneurship Research. Foundations and Trends® in Entrepreneurship, 9(2), 143–248. https://doi.org/10.1561/0300000033

Bosma, N., Content, J., Sanders, M., & Stam, E. (2018). Institutions, entrepreneurship, and economic growth in Europe. Small Business Economics, 51(2), 483–499. https://doi.org/10.1007/s11187-018-0012-x

Boudreaux, C. J. (2014). Jumping off of the Great Gatsby curve: how institutions facilitate entrepreneurship and intergenerational mobility. Journal of Institutional Economics, 10(2), 231–255. https://doi.org/10.1017/S1744137414000034

Boudreaux, C. J., & Nikolaev, B. (2018). Capital is not enough: opportunity entrepreneurship and formal institutions. Small Business Economics, 1–30. https://doi.org/10.1007/s11187-018-0068-7

Boudreaux, C. J., Nikolaev, B., & Holcombe, R. (2018). Corruption and destructive entrepreneurship. Small Business Economics, 51(1), 181–202. https://doi.org/10.1007/s11187-017-9927-x

Boudreaux, C. J., Nikolaev, B., & Klein, P. (2017). Entrepreneurial Traits, Institutions, and the Motivation to Engage in Entrepreneurship. Academy of Management Proceedings, 2017(1), 16427. https://doi.org/10.5465/AMBPP.2017.33

Boudreaux, C. J., Nikolaev, B. N., & Klein, P. (2019). Socio-cognitive traits and entrepreneurship: The moderating role of economic institutions. Journal of Business Venturing, 34(1), 178–196.

Bowen, H. P., & Clercq, D. D. (2008). Institutional context and the allocation of entrepreneurial effort. Journal of International Business Studies, 39(4), 747–767. https://doi.org/10.1057/palgrave.jibs.8400343

Bradley, S. W., & Klein, P. (2016). Institutions, Economic Freedom, and Entrepreneurship: The Contribution of Management Scholarship. The Academy of Management Perspectives, 30(3), 211–221. https://doi.org/10.5465/amp.2013.0137

Braunerhjelm, P., Acs, Z. J., Audretsch, D. B., & Carlsson, B. (2010). The missing link: knowledge diffusion and entrepreneurship in endogenous growth. Small Business Economics, 34(2), 105–125. https://doi.org/10.1007/s11187-009-9235-1

Braunerhjelm, P., Ding, D., & Thulin, P. (2018). The knowledge spillover theory of intrapreneurship. Small Business Economics, 51(1), 1–30. https://doi.org/10.1007/s11187-017-9928-9

Bruton, G. D., Ketchen Jr, D. J., & Ireland, R. D. (2013). Entrepreneurship as a solution to poverty. Journal of Business Venturing, 28(6), 683–689.

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(3), 271–290. https://doi.org/10.1023/A:1019604426387

Cattell, R. B. (1966). The Scree Test For The Number Of Factors. Multivariate Behavioral Research, 1(2), 245–276. https://doi.org/10.1207/s15327906mbr0102_10

Caudill, S. B., Gropper, D. M., & Hartarska, V. (2009). Which Microfinance Institutions Are Becoming More Cost Effective with Time? Evidence from a Mixture Model. Journal of Money, Credit and Banking, 41(4), 651–672. https://doi.org/10.1111/j.1538-4616.2009.00226.x

Coleman, J. S. (1990). Foundations of Social Theory. Cambridge, MA: Harvard University Press.

Court, J., & Maxwell, S. (2005). Policy entrepreneurship for poverty reduction: bridging research and policy in international development. Journal of International Development: The Journal of the Development Studies Association, 17(6), 713–725.

Dawson, J. W. (1998). Institutions, Investment, and Growth: New Cross-Country and Panel Data Evidence. Economic Inquiry, 36(4), 603–619. https://doi.org/10.1111/j.1465-7295.1998.tb01739.x

De Clercq, D., Lim, D., & Oh, C. (2013). Individual-Level Resources and New Business Activity: The Contingent Role of Institutional Context. Entrepreneurship Theory and Practice, 37(2), 303–330. https://doi.org/10.1111/j.1540-6520.2011.00470.x

De Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books.

Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The Regulation of Entry. The Quarterly Journal of Economics, 117(1), 1–37. https://doi.org/10.1162/003355302753399436

Dollar, D., & Kraay, A. (2003). Institutions, trade, and growth. Journal of Monetary Economics, 50(1), 133–162. https://doi.org/10.1016/S0304-3932(02)00206-4

Douglas, E. J., & Shepherd, D. A. (2002). Self-employment as a Career Choice: Attitudes, Entrepreneurial Intentions, and Utility Maximization. Entrepreneurship Theory and Practice, 26(3), 81–90. GEM. (2016). GEM. Retrieved from http://www.gemconsortium.org

Goltz, S., Buche, M. W., & Pathak, S. (2015). Political Empowerment, Rule of Law, and Women’s Entry into Entrepreneurship. Journal of Small Business Management, 53(3), 605–626. https://doi.org/10.1111/jsbm.12177

Hechavarría, D. M., Terjesen, S. A., Stenholm, P., Brännback, M., & Lång, S. (2017). More than words: do gendered linguistic structures widen the gender gap in entrepreneurial activity? Entrepreneurship Theory and Practice.

Ho, Y.-P., & Wong, P.-K. (2007). Financing, Regulatory Costs and Entrepreneurial Propensity. Small Business Economics, 28(2–3), 187–204. https://doi.org/10.1007/s11187-006-9015-0

Holcombe, R. G. (1998). Entrepreneurship and economic growth. Quarterly Journal of Austrian Economics, 1(2), 45–62.

Islam, N. (1995). Growth Empirics: A Panel Data Approach. The Quarterly Journal of Economics, 110(4), 1127–1170. https://doi.org/10.2307/2946651

Jorgenson, D. W. (2001). Information technology and the US economy. American Economic Review, 91(1), 1–32. Kim, P. H., Wennberg, K., & Croidieu, G. (2016). Untapped riches of meso-level applications in multilevel entrepreneurship mechanisms. The Academy of Management Perspectives, 30(3), 273–291.

Kirzner, I. M. (1973). Competition and Entrepreneurship (New edition edition). Chicago: University Of Chicago Press.

Kirzner, I. M. (1985). Discovery and the Capitalist Process. Chicago: Univ of Chicago Pr.

Klapper, L., Laeven, L., & Rajan, R. (2006). Entry regulation as a barrier to entrepreneurship. Journal of Financial Economics, 82(3), 591–629. https://doi.org/10.1016/j.jfineco.2005.09.006

Klein, P. G. (2008). Opportunity discovery, entrepreneurial action, and economic organization. Strategic Entrepreneurship Journal, 2(3), 175–190. https://doi.org/10.1002/sej.50

Knight, F. (1921). Risk, uncertainty and profit. New York: Hart, Schaffner and Marx.

Krasniqi, B. A., & Desai, S. (2016). Institutional drivers of high-growth firms: country-level evidence from 26 transition economies. Small Business Economics, 47(4), 1075–1094. https://doi.org/10.1007/s11187-016-9736-7

Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42. https://doi.org/10.1016/0304-3932(88)90168-7

Mason, C., & Brown, R. (2013). Creating good public policy to support high-growth firms. Small Business Economics, 40(2), 211–225. https://doi.org/10.1007/s11187-011-9369-9

McMullen, J. S. (2011). Delineating the Domain of Development Entrepreneurship: A Market–Based Approach to Facilitating Inclusive Economic Growth. Entrepreneurship Theory and Practice, 35(1), 185–215. https://doi.org/10.1111/j.1540-6520.2010.00428.x

McMullen, J. S., Bagby, D. R., & Palich, L. E. (2008). Economic Freedom and the Motivation to Engage in Entrepreneurial Action. Entrepreneurship Theory and Practice, 32(5), 875–895. https://doi.org/10.1111/j.1540-6520.2008.00260.x

McMullen, J. S., & Shepherd, D. A. (2006). Entrepreneurial Action And The Role Of Uncertainty In The Theory Of The Entrepreneur. Academy of Management Review, 31(1), 132–152. https://doi.org/10.5465/AMR.2006.19379628

Minniti, M., & Lévesque, M. (2010). Entrepreneurial types and economic growth. Journal of Business Venturing, 25(3), 305–314. https://doi.org/10.1016/j.jbusvent.2008.10.002

Mueller, P. (2007). Exploiting Entrepreneurial Opportunities: The Impact of Entrepreneurship on Growth. Small Business Economics, 28(4), 355–362. https://doi.org/10.1007/s11187-006-9035-9

Naudé, W. (2009). Entrepreneurship, developing countries, and development economics: new approaches and insights. Small Business Economics, 34(1), 1. https://doi.org/10.1007/s11187-009-9198-2

Nikolaev, B., Boudreaux, C. J., & Palich, L. E. (2018). Cross-Country Determinants of Early Stage Necessity and Opportunity-Motivated Entrepreneurship: Accounting for Model Uncertainty. Journal of Small Business Management. https://doi.org/10.1111/jsbm.12400

North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge University Press.

Nyström, K. (2008). The institutions of economic freedom and entrepreneurship: evidence from panel data. Public Choice, 136(3–4), 269–282. https://doi.org/10.1007/s11127-008-9295-9

Porter, M. E. (1990). The competitive advantage of nations.

Reynolds, P., Bosma, N., Autio, E., Hunt, S., Bono, N. D., Servais, I., … Chin, N. (2005). Global Entrepreneurship Monitor: Data Collection Design and Implementation 1998–2003. Small Business Economics, 24(3), 205–231. https://doi.org/10.1007/s11187-005-1980-1

Reynolds, P. D., Carter, N. M., Gartner, W. B., & Greene, P. G. (2004). The Prevalence of Nascent Entrepreneurs in the United States: Evidence from the Panel Study of Entrepreneurial Dynamics. Small Business Economics, 23(4), 263–284. https://doi.org/10.1023/B:SBEJ.0000032046.59790.45

Romer, P. M. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, 94(5), 1002–1037. https://doi.org/10.1086/261420

Romer, P. M. (1990). Endogenous Technological Change. Journal of Political Economy, 98(5, Part 2), S71–S102. https://doi.org/10.1086/261725

Sautet, F. (2013). Local and Systemic Entrepreneurship: Solving the Puzzle of Entrepreneurship and Economic Development. Entrepreneurship Theory and Practice, 37(2), 387–402. https://doi.org/10.1111/j.1540-6520.2011.00469.x

Schultz, T. W. (1975). The Value of the Ability to Deal with Disequilibria. Journal of Economic Literature, 13(3), 827–846.

Schumpeter, J. A. (1934). The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle. Transaction Publishers.

Schwab, K. (2008). World Economic Forum, Global Competitiveness Report. Geneva: WEF.

Scott, W. R. (1995). Institutions and organizations. Foundations for organizational science. London: A Sage Publication Series.

Shane, S. (2000). Prior Knowledge and the Discovery of Entrepreneurial Opportunities. Organization Science, 11(4), 448–469. https://doi.org/10.1287/orsc.11.4.448.14602

Shane, S. (2009). Why encouraging more people to become entrepreneurs is bad public policy. Small Business Economics, 33(2), 141–149. https://doi.org/10.1007/s11187-009-9215-5

Sobel, R. S. (2008). Testing Baumol: Institutional quality and the productivity of entrepreneurship. Journal of Business Venturing, 23(6), 641–655. https://doi.org/10.1016/j.jbusvent.2008.01.004

Sternberg, R., & Wennekers, S. (2005). Determinants and Effects of New Business Creation Using Global Entrepreneurship Monitor Data. Small Business Economics, 24(3), 193–203.

Sutter, C., Bruton, G. D., & Chen, J. (2019). Entrepreneurship as a solution to extreme poverty: A review and future research directions. Journal of Business Venturing, 34(1), 197–214. https://doi.org/10.1016/j.jbusvent.2018.06.003

Terjesen, S., Hessels, J., & Li, D. (2016). Comparative International Entrepreneurship A Review and Research Agenda. Journal of Management, 42(1), 299–344. https://doi.org/10.1177/0149206313486259

Urbano, D., & Alvarez, C. (2014). Institutional dimensions and entrepreneurial activity: an international study. Small Business Economics, 42(4), 703–716. https://doi.org/10.1007/s11187-013-9523-7

Urbano, D., Aparicio, S., & Audretsch, D. (2018). Twenty-five years of research on institutions, entrepreneurship, and economic growth: what has been learned? Small Business Economics. https://doi.org/10.1007/s11187-018-0038-0

Van Stel, A., Carree, M., & Thurik, R. (2005). The Effect of Entrepreneurial Activity on National Economic Growth. Small Business Economics, 24(3), 311–321. https://doi.org/10.1007/s11187-005-1996-6

Van Stel, A., Storey, D. J., & Thurik, A. R. (2007). The Effect of Business Regulations on Nascent and Young Business Entrepreneurship. Small Business Economics, 28(2–3), 171–186. https://doi.org/10.1007/s11187-006-9014-1

Webb, J. W., Tihanyi, L., Ireland, R. D., & Sirmon, D. G. (2009). You Say Illegal, I Say Legitimate: Entrepreneurship in the Informal Economy. Academy of Management Review, 34(3), 492–510. https://doi.org/10.5465/amr.2009.40632826

Wennberg, K., Pathak, S., & Autio, E. (2013). How culture moulds the effects of self-efficacy and fear of failure on entrepreneurship. Entrepreneurship & Regional Development, 25(9–10), 756–780. https://doi.org/10.1080/08985626.2013.862975

Wennekers, S., & Thurik, R. (1999). Linking Entrepreneurship and Economic Growth. Small Business Economics, 13(1), 27–56. https://doi.org/10.1023/A:1008063200484

Wiklund, J., Davidsson, P., & Delmar, F. (2003). What Do They Think and Feel about Growth? An Expectancy–Value Approach to Small Business Managers’ Attitudes Toward Growth. Entrepreneurship Theory and Practice, 27(3), 247–270. https://doi.org/10.1111/1540-8520.00014

Xavier-Oliveira, E., Laplume, A. O., & Pathak, S. (2015). What motivates entrepreneurial entry under economic inequality? The role of human and financial capital. Human Relations, 68(7), 1183–1207. https://doi.org/10.1177/0018726715578200