Entrepreneurship and political risk
| Date | 07 October 2013 |
| Published date | 07 October 2013 |
| DOI | https://doi.org/10.1108/JEPP-03-2012-0018 |
| Pages | 130-143 |
| Author | Nabamita Dutta,Russell S. Sobel,Sanjukta Roy |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Entrepreneurship and
political risk
Nabamita Dutta
Department of Economics, College of Business Administration,
University of Wisconsin, La Crosse, Wisconsin, USA
Russell S. Sobel
The Citadel, Charleston, South Carolina, USA, and
Sanjukta Roy
World Bank Institute, Arlington, Virginia, USA
Abstract
Purpose – Previous literature has clearly demonstrated the need for sound government policies or
“institutions” to promote and support entrepreneurship in a country. The purpose of this paper is to
explore the role of one such institution – political stability – in boosting entrepreneurial endeavors. A
politically stable nation will have lower risk and transaction/contracting costs, and higher levels of
government transparency, predictability, and accountability. Thus, the paper should expect that with
greater political stability there should be a greater deg ree of entrepreneurial activity.
Design/methodology/approach – Using dynamic panel estimators (System GMM estimators) and
considering multiple proxies of political risk, our results confirm this hypothesis. Such estimators
handle challenges associated with panel data efficiently.
Findings – The paper’s results show that greater political stability for a country does indeed lead to
an increased rate of entrepreneurship and wealth creation.
Originality/value – Entrepreneurship is critical to the process of economic growth and development.
To prosper, countries must unleash the creative talents of their citizens through the decentralized
process of formal private sector entrepreneurship. New legal businesses create jobs, opportunities,
wealth, and goods and services that make a nation grow. Sadly in manynations, this process is stifled
and poverty is the result. While previous research has examined which types of specific policies
matter for promoting entrepreneurship, the paper considers the different question of how the stability
of political institutions impacts the rate of entrepreneurship.
Keywords Entrepreneurs, Development, Economic growth
Paper type Research paper
1. Introduction
The development literature has stressed the lack of political stability as a major
impediment to the economic growth and development of a nation (Aisen and Veiga,
2006; Jong-a-Pin, 2009; Alesina and Perotti, 1996; Levine and Renelt, 1992; Barro, 1996).
Many studies have found that higher levels of socio-political instability lower
investment and lead to inflation (Alesina and Perotti, 1996; Aisen and Veiga, 2006).
Financial institutions and specifically, financial development are also negatively
affected by political instability (Roe and Siegel, 2011). In this paper, we test the effect of
political stability on entrepreneurship rates in countries. Political instability leads to
greater risk and uncertainty in contracting, applications of legal rules, the str ucture
of property rights, and tax/expenditure poli cies. On the other hand, stable and sound
institutions reduce transaction costs and, thus allow individuals to capture the
gains from exchange in market transactions (Boettke and Coyne, 2003, 2006). Games
of inter-culture conflict can be converted into ones of inter-cultural cooperation in the
presence of better “rules of the game” or good institutions (Coyne, 2008; Easterly,
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2045-2101.htm
Journal of Entrepreneurship and
Public Policy
Vol. 2 No. 2, 2013
pp. 130-143
rEmeraldGroup PublishingLimited
2045-2101
DOI 10.1108/JEPP-03-2012-0018
130
JEPP
2,2
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