Abstract
Though current research identifies which institutions are important as boundary
conditions for entrepreneurship, questions remain about how they actually influence
national entrepreneurial activity, particularly through start-ups. Specifically, the authors
attempt to answer the following question: How do formal incentives influence
the start-up rates across countries? Through a conceptual framework where formal
incentives and societal legitimacy represent formal and informal institutions, respectively,
the authors contribute to existing knowledge about national start-up activity by
showing both the mechanism and conditions under which formal incentives increase
the start-up rate. First, it is argued that formal incentives influence the start-up rate
indirectly through the market opportunities available through economic development.
Second, it is argued that these formal and informal institutions substitute for one another.
The arguments are confirmed with a panel dataset on 57 countries from the
World Bank Group Entrepreneurship Surveys and Global Entrepreneurship Monitor.
A key implication of the findings is that early efforts at stimulating economic development,
for example, by incentivizing foreign investments in new technology, can also
kickstart the entrepreneurial activity as much as entrepreneurial activity also contributes
to economic development in return.