The Role of Institutions in the Early Entrepreneurial Process

Much entrepreneurship research has focused on explaining why some countries and regions have more entrepreneurial activity than others, and the role played in this regard by cross-national and cross-regional differences in institutions. However, this stream has not considered entrepreneurship from a process perspective that is, as a set of activities that unfold over different, discernible stages, and has therefore not examined how institutions and policies impact entrepreneurship in different stages of the process. To address this highly policy-relevant gap, we consider the role of institutions for both nascent and realized entrepreneurship, combining cross-country data of entrepreneurial nascency and start-up activity with standard measures of institutions in structural models to obtain estimates of the moderating and mediating effects of policies and institutions of different quality. Analyzing data on early entrepreneurial activities from the Global Entrepreneurship Monitor, data on new firm formation from the World Bank, and Economic Freedom of the World and Doing Business data, we find that a larger government sector leads to lower levels of both measures of entrepreneurship, while legal quality only impacts later-stage entrepreneurship. In general, the main impact of institutions lies in the later stage of entrepreneurship. We suggest that attention allocation by entrepreneurs may help explain these findings.