Impact of institutions on entrepreneurship: a panel data analysis

Abstract

The purpose of this paper is to study the relation between institutions and entrepreneurship from the perspective of institutional economics. In the first section, we discuss the importance, role, and interaction of the institutions and entrepreneurs in the economic and social change/development process. In this context, we point out three roles of institutions: the role of facilitating economic/social exchange, the coordination role of economic actors' decisions, and the role of the allocation of entrepreneurs between various sectors. In the second part, we investigate the impacts of formal institutions and institutions of governance on formal and informal entrepreneurship using an unbalanced panel data set of 54 countries over the 2004-2012 period. Estimation results reveal that while both formal institutions and governance stimulate formal entrepreneurship, the former is negatively associated with informal entrepreneurship. In addition, we find that financial development increases the positive impact of institutions on formal entrepreneurship. These results also shed light on the link between institutions and entrepreneurship, as suggested by Baumol and de Soto.