Entrepreneurship, Institutions and Economic Development: A Configuration Approach

The purpose of this research is to examine the interaction between formal and informal institutions and its subsequent effect on the relationship between economic development and entrepreneurial activity. Towards this, we also develop an integrative framework linking formal and informal institutions to entrepreneurial conditions. This research is among the first to use a three-way interaction in a cross-national study including both formal and informal institutions and both developed and developing nations. The study argues that it is important to understand the relationship between economic development and national entrepreneurial activity in terms of the mechanisms of interaction between a nation's formal and informal institutions. In addition, this framework will be valuable to theorists wishing to extend the opportunity theory of Shane and Venkataraman (2000) to cross national studies. To test the hypotheses, we analyse eight years of GEM expert study and World Bank data. An ANOVA analysis justifies the pooling of panel data. We use hierarchical regression analysis to determine the three- way interaction effects. Since World Bank new enterprise data is used, the study is limited to the formal economy i.e. legally registered companies, easily traceable to economic growth. The alignment of formal to informal institutions matters. When they are not in alignment, compensating mechanisms sets off a Kirznerian tendency towards equilibrium. A complementary mechanism does not have the same effect instead resulting in reduced entrepreneurial activity. High entrepreneurial activity through enterprise formation is not always necessary. Despite the debates around the importance of small enterprises (Birch, 1979) in increasing entrepreneurial activity, such contexts with complementary institutional mechanisms still attain high levels of economic development. There appears to be an ideal mix of new enterprise activity and existing corporate entrepreneurship accompanying economic development. Evident then is the neglect of corporate entrepreneurial activity or intrapreneurship in economic development discussions.