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Fractionalization, entrepreneurship, and the institutional environment for entrepreneurship

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Abstract

The vast majority of the literature on ethnicity and entrepreneurship focuses on the construct of ethnic entrepreneurship. However, very little is known about how ethnic heterogeneity affects entrepreneurship, and the institutional arrangements affecting entrepreneurship. This study attempts to fill the gap, and thus examines the effect of ethnic heterogeneity on various outcomes associated with entrepreneurship and the institutional environment for entrepreneurship. Using indices of ethnic and linguistic fractionalization, we show that ethnic heterogeneity negatively influences entrepreneurship. We argue that potential channels that can explain the negative effect of fractionalization on entrepreneurship include trust, social network, and innovation, among others. This study provides a new perspective on the existing debate that seeks to understand why the levels of entrepreneurial success vary across countries.

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Notes

  1. Where \(s_{\text{ej}}\) is the share of ethnic group e in country j, \({\text{FRACTIONALIZATION}}_{j} = 1 - \mathop \sum _{e = 1}^{N} S_{ej}^{2}\).

  2. For details on index construction, see Alesina and Zhuravskaya (2011).

  3. Our preference was to take the average of a decade starting from the year 2000; however, due to data limitations, we are not able to do that.

  4. The World Bank reports on six measures of institutional quality namely government effectiveness, control of corruption, political stability, voice and accountability, rule of law, and regulatory quality.

  5. Using a similar cross-sectional framework, Easterly and Levine (1997) and Alesina et al. (2003) use the technique of seemingly unrelated regressions. On the other hand, studies such as Wang and Steiner (2015) treat ethnic diversity as endogenous.

  6. See Michalopoulos (2012) for details on the intuition behind the correlation between geographic variables and ethnolinguistic diversity.

  7. Species richness refers to the number of different species represented in an ecological community, regions, or landscape.

  8. Studies such as Wang and Steiner (2015) have used latitude, elevation, and variation in land quality as instrument for ethnolinguistic diversity. Data on land quality were assembled by Ramankutty et al. (2002) and adopted for use by Michalopoulos (2012). For our analysis, data on latitude, variation in land quality, and elevation are taken directly from Michalopoulos (2012). See Michalopoulos (2012) for a detailed description of dataset and how they are constructed. Details on the exogeneity of geographical variable and how they correlate with ethnolinguistic diversity can also be found in Michalopoulos (2012) and Wang and Steiner (2015).

  9. To achieve brevity, we report only coefficients for our main explanatory variable (fractionalization). Full tables are available on request.

  10. For brevity, tables for robust checks are not presented here. However, they can be provided on request.

  11. Note that the social network variable is dropped from these regressions due to a high correlation with trust. Further, we use mixed effects panel regressions here. The inclusion of trust, social network, and innovation in our cross-sectional regressions significantly reduces the number of observations, thus making it difficult to make meaningful inferences.

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Acknowledgments

This is a substantially revised version of the working paper, “Fractionalization and entrepreneurial activities”. The paper has benefitted from comments and suggestions from three anonymous referees and the editor. Any remaining errors are mine.

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  1. Department of Economics, Monash University, Wellington Road, Melbourne, VIC, 3800, Australia

    Sefa Awaworyi Churchill

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Table 7 List of countries in analysis
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Awaworyi Churchill, S. Fractionalization, entrepreneurship, and the institutional environment for entrepreneurship. Small Bus Econ 48, 577–597 (2017). https://doi.org/10.1007/s11187-016-9796-8

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