Institutional and economic drivers of entrepreneurship: An international perspective

Abstract

Entrepreneurial activity varies significantly across countries and over time. The economic and institutional context is a determining factor that can drive and lend shape to entrepreneurial activity. The search for a deeper understanding of the role of this factor constitutes a promising and important research stream. A thorough review of the specialist literature identifies groups of countries with similar economic and institutional environments. Subsequent analysis highlights differences in entrepreneurial activity and innovation outcomes between these homogeneous groups. Results indicate significant differences, not only in entrepreneurial activity, but also in the type of entrepreneurship and innovation results. These findings mark a relevant step forward in the identification of different environment types, and the effects of environment on entrepreneurial activity and innovation results.

Introduction

Research into entrepreneurship dates back to 1755, when Cantillon introduced the term entrepreneur in his Essai sur la nature du commerce en général. The study of entrepreneurship is receiving increasing attention from researchers and policymakers because of the general view that entrepreneurship is essential to countries economic growth and development, driving employment and innovation (Cuervo et al., 2007, Pinillos and Reyes, 2011, Reynolds et al., 2001, Schumpeter, 1934, Wennekers and Thurik, 1999).

Entrepreneurship scholars seem to agree that the level of entrepreneurial activity varies significantly across countries and over time (Verheul, Wennekers, Audretsch, & Thurik, 2002). Due to the great importance of entrepreneurship, the quest for a deeper understanding of the factors that drive and shape entrepreneurial activity constitutes an important and productive stream of research (Engle, Schlaegel, & Dimitriadi, 2011).

Following this line of thought, the environment in which new ventures emerge is an important field of research, not only because environmental variables open up opportunities to exploit market inefficiencies as the economic approach highlights – but also because different environments can be more or less favorable to the success of new ventures (Stevenson & Jarillo, 1990). Consequently, studying the role of environmental determinants of entrepreneurial activity is critical.

Unquestionably, economic factors matter. For example, the contributions of the Global Entrepreneurship Monitor (GEM) in this area show that entrepreneurship activity is normally more prevalent in countries with greater income inequality. GEMs results also reveal that in developing countries, necessity entrepreneurship has a more pivotal function in the economy than opportunity entrepreneurship, apparently because finding paid work is more difficult than in other economic settings (Reynolds et al., 2001). Clearly, however, economic factors are not the only drivers of entrepreneurial activity. In fact, countries with similar economic conditions can have quite different rates of entrepreneurship (Van Stel, Storey, & Thurik, 2007).

Currently, institutional factors are receiving a great deal of attention in the subject specific literature. As Jackson and Deeg (2008, p.540) state, “institutions matter, but how they matter remains a hotly contested question.” Institutions differ significantly across countries, causing differences in the patterns of economic behavior and innovation results. North (1990) highlights that formal and informal institutions can promote or damage the entrepreneurial rate of a society, and affect the sustainability of new ventures. Institutions shape entrepreneurial activity via the reduction of uncertainty, establishing a structure that can limit the set of choices of individuals (Díaz-Casero et al., 2005, North, 1993). Different countries distinct institutional frameworks thus affect entrepreneurial activity differently, as the results of Stephen, Urbano, and Van Hemmen (2005) show.

Studies that analyze a sample of countries with different environmental conditions in an attempt to gain a better understanding of the role that economic, and formal and informal institutional factors play as drivers of entrepreneurial activity are scarce. Therefore, using a sample of 62 countries, this study aims to identify a typology of environments, with the ultimate goal of advancing knowledge of how environmental conditions affect the level of entrepreneurial activity, the kind of entrepreneurial activity, and the innovation performance of countries.

The remainder of the paper has the following structure. Section 2 analyzes the economic and institutional factors as determinants of entrepreneurial activity. Section 3 describes the methodology and Section 4 presents the results. These two sections identify groups of countries with similar economic and institutional environmental conditions and examine differences in entrepreneurial activity and innovation between these homogenous groups. Finally, Section 5 addresses the conclusions, implications, and limitations of the research.