Institutions and entrepreneurship: Empirical evidence for OECD countries

Abstract

Objective: The objective of the article is to test the bidirectional association of institutions and entrepreneurship in 19 OECD countries over the period of 2014-2016.

Research Design & Methods: Most of the previous studies emphasise the role of institutions in entrepreneurial activity, while ignoring the role of entrepreneurship in the building of institutions. We estimate how institutions and entrepreneurship relate to each other and contribute to economic growth. For the estimation, we apply the structural equation modelling (SEM) with panel data.

Findings: Estimated results show that the regulatory dimension of institutions and entrepreneurship have a strong bidirectional relationship – as we expected – while the normative dimension of institutions and entrepreneurship have a unidirectional association. These two interrelated factors stimulate economic growth.

Implications & Recommendations: Policymakers should create a more friendly regulatory environment for entrepreneurship to flourish. In this process, institutional entrepreneurs also play an important role.

Contribution & Value Added: There is a need for research on the bilateral relationship between institutions and entrepreneurship. Most previous articles consider the effect that is transmitted from institutions to entrepreneurship. However, there exists a two-way causal relationship between institutions and entrepreneurship that is worth exploring. In this regard, the greatest contribution of this article is that it is one of the first empirical works devoted to testing the two-way causal relationship between institutions and entrepreneurship.