Business regulation, rule of law and formal entrepreneurship: evidence from developing countries
| Published date | 08 July 2019 |
| Pages | 254-271 |
| DOI | https://doi.org/10.1108/JEPP-03-2019-0019 |
| Date | 08 July 2019 |
| Author | Aldo Salinas,Cristian Ortiz,Moreno Muffatto |
| Subject Matter | Strategy |
Business regulation, rule of law
and formal entrepreneurship:
evidence from developing countries
Aldo Salinas
ESAI Business School,
Universidad de Especialidades Espiritu Santo, Guayas, Ecuador
Cristian Ortiz
Department of Economics, Universidad Católica del Norte, Antofagasta, Chile and
Department of Economics, Universidad Nacional de Loja, Loja, Ecuador, and
Moreno Muffatto
Department of Industrial Engineering, University of Padua, Padova, Italy
Abstract
Purpose –The purpose of this paper is to examine the influence of formal rules such as business regulation
and rule of law on the level of formal entrepreneurship in Latin America countries over time.
Design/methodology/approach –The authorsuse the panel regressiontechniques to examine the influence
of business regulation and rule of law on formal entrepreneurship. In particular, they implement together two
alternativeviews of formal entrepreneurshipsuggested in the literature:the “dual”and “legalistic”view. Atthe
empirical level, the“dual”definition corresponds to the business owners’rate. As for the “legal”definition, it
corresponds to the business registration rate.The evidence presented is based on two panels. Thefirst panel
covers the period 2004–2015, and the data set contains 180 observations in 18 countries. The second panel
covers the period 2006–2015, and the data set contains134 observations in 14 countries.
Findings –The impact of institutional variables on formal entrepreneurship depends on the definition
employed: “dual”or “legal.”Thus, the results suggest that business owners’rate is more substantial in Latin
American countries that have weak property rights. Conversely, from a legal definition, the business
registration rate is more significant in Latin American countries that have most secure property rights and
fewer labor regulations. These contradictory results sugges t that the legal definition of formal
entrepreneurship, but not the dual definition, seems to be associated with the type of entrepreneurial
activity that promotes economic growth and development.
Research limitations/implications –The results support the importance of conducting analyzes that take
into account the different types of entrepreneurial activities that are present in an economy, and in addition
the relevance of understanding what each measure is capturing of the heterogeneous phenomenon
of entrepreneurship.
Practical implications –The results suggest that the entrepreneurship policy should focus on the quality
of entrepreneurship, rather than merely seeking to increase the number of new businesses. Additionally, the
results suggest that the legalistic definition of formal entrepreneurship is probably the most relevant for
many policy issues.
Originality/value –The paper analyzes together two alternative views of formal entrepreneurship
suggested in the literature: the “dual”and “legalistic”views. Also, the paper has used the Latinobarómetro
data set, which has not been extensively used by scholars in the field of entrepreneurship and which could be
useful for longitudinal research on entrepreneurial activity in Latin American countries.
Keywords Latin America, Panel data, Rule of law, Business regulation, Formal entrepreneurship
Paper type Research paper
1. Introduction
Institutional arrangements that arise in society can lead to different economic outcomes and
types of entrepreneurship. As argued by North (1990), institutions, alongside the ordinary
constraints of economic theory, determine the productive opportunities in society. In the
same vein, Baumol (1990) argues that an institutional environment can either positively or
negatively impact entrepreneurial decision making, including decisions regarding what
Journal of Entrepreneurship and
Public Policy
Vol. 8 No. 2, 2019
pp. 254-271
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-03-2019-0019
Received 18 March 2019
Revised 27 March 2019
Accepted 27 March 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
254
JEPP
8,2
type of entrepreneurship to deploy. For instance, the allocation of entrepreneurial talent
toward productive activities will largely depend on the incentives and payments offered by
the institutional matrix (Baumol, 1990). For Acemoglu et al. (2005), many societies in
developing countries are trapped in a kind of extractive institutional structure that does not
generate incentives nor allow its inhabitants to fully participate in the type of
entrepreneurial opportunities that flourish in developed societies under inclusive
institutions. For these reasons, an analysis of the kind of incentives or game rules that
promote or deter the allocation of entrepreneurial talent to productive activities such as
formal entrepreneurship is a field of enormous relevance, especially for developing countries
(Naudé, 2010; Desai, 2011).
In recent decades, there is more considerable agreement regarding the relevance of the
entrepreneurial factor to economic processes for its contribution to the creation of jobs,
and the introduction of innovation and knowledge (Audretsch et al., 2006). However, the
empirical evidence has produced contradictory results concerning the contribution of
entrepreneurship to economic development. For example, Van Stel et al. (2005) found that
the impact of entrepreneurial activity on economic growth varies from country to country
at different stages of development. In the case of developed countries, a positive
relationship was found. However, this link is not sustained for nations that are at the
initial stages of development.
These paradoxical findings have led to the need to move the analysis toward the various
types of entrepreneurial activities that arise in an economy (Baumol, 1990). Implicit in this
argument is the fact that not all types of entrepreneurship are associated with economic
development (Boettke and Coyne, 2003; Jia, 2018) and more specifically with employment,
innovation and welfare (Acs et al., 2008). Therefore, the ways in which diverse societies
assign entrepreneurship can restrict or promote economic growth (Williamson, 2013). For
example, statistics coming from the Global Entrepreneurship Monitor (GEM) show that
Latin American countries exhibit one of the highest rates of entrepreneurial activity.
However, that does not correspond to their ordinary rates of economic growth (Larroulet
and Couyoumdjian, 2009).
Accordingly, as noted by Desai (2011), in developing countries there are different types of
entrepreneurial activities which, in turn, impact economic growth differently. For instance,
formal entrepreneurship has been associated with economic development (De Soto, 1989)
and there have been very few studied in the literature of entrepreneurship (Dau and
Cuervo-Cazurra, 2014; Autio and Fu, 2015). Formal entrepreneurs contribute to the
provisioning of goods and public services and social welfare through the payment of taxes
and their compliance with environmental and labor regulations. Furthermore, economies
with a majority of their activities developed within the formal sector minimize the levels of
corruption in the government and therefore contribute to better institutional quality (Dreher
and Schneider, 2010). Finally, a vibrant formal sector is a reflection of a level playing field
for all economic agents. Through it, entrepreneurs can obtain a productivity benefit from
access to public services, such as access to courts to resolve commercial disputes or enforce
their property rights (La Porta and Shleifer, 2008; Klapper et al., 2010). These same elements
are associated with the development of impersonal markets, and therefore with the growth
of enterprises (North, 1990).
However, in the literature the categorization of entrepreneurial activities within the
formal–informal sector has not been ruled out of controversy, joined with the difficulty of
empirically implementing each of the definitions that have been proposed (Feige, 1990). Despite
this ambiguity in the definition, two approaches have been dominant in the literature on
formality-informality: “dual”and “legalistic”views (La Porta and Shleifer, 2008, 2014).
The “dual”view is related to the dual economy theory of development (Lewis, 1954).
According to this view, informal firms look very different from formal firms. For instance,
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Evidence from
developing
countries
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