Institutions and entrepreneurship: the mediating role of corruption
| Date | 10 July 2017 |
| DOI | https://doi.org/10.1108/WJEMSD-09-2016-0045 |
| Pages | 262-282 |
| Published date | 10 July 2017 |
| Author | Mohsen Mohammadi Khyareh |
| Subject Matter | Strategy,Business ethics,Sustainability |
Institutions and entrepreneurship:
the mediating role of corruption
Mohsen Mohammadi Khyareh
Gonbad Kavous University, Gonbad-e Kavous, Iran
Abstract
Purpose –The purpose of this paper is to examine the mediating role of corruption in the relationship
between entrepreneurship and institutional quality in a sample of 90 countries from all around the world.
Design/methodology/approach –The data were collected from the Global Entrepreneurship Monitor,
whichdeveloped a model where CorruptionPerception Indexas a proxy for corruptionmediates the relationship
between the variable rule of law as a proxy for institutional quality and opportunity entrepreneurship as a
proxy for productive entrepreneurship. Correlation, Baron and Kenny approach (causal steps approach) and
PROCESSMacro (normal test theory)developed by Hayes wereused to find out the direct andindirect effects of
institutional quality between corruption and entrepreneurship.
Findings –The bootstrap mediation results indicatedthat institutional quality was a significant predictor of
corruptionand corruption was a significantpredictor of entrepreneurship. Thesefindings support the mediation
hypothesis. In addition, findings showed that there is a negative relation between corruption and productive
entrepreneurship and a positive relationbetween institutional quality andproductive entrepreneurship.
Research limitations/implications –The current study only considered the single proxy for institutional
quality, i.e. rule of law; therefore, some other proxies for institutional quality such as government
effectiveness and doing business can be used for future studies. Moreover, the proposed model does not
control for the country differences like GDP or development stages of countries.
Practical implications –The findings of this study indicate that the total association between institutional
quality and entrepreneurship is not only direct but also that rule of law contributes to levels of
entrepreneurship through reduced levels of corruption. As a result, countries with higher levels of rule of law
tended to experience corruption at lower levels, which in turn contributed to the emergence of increased levels
of entrepreneurship. Furthermore, these results may be beneficial for organizations fighting against
corruption, because entrepreneurial activity can be add to the group of economical drivers constrained by
corruption. It is also beneficial for policy makers who focus on promoting entrepreneurship, since one way to
increase entrepreneurial activity is to lower the existing corruption level.
Originality/value –The results indicated that the direct effect of institutional quality on the
entrepreneurship remained significant when controlling for corruption, thus suggesting partial mediation.
In other words, corruption only mediates part of the effect of institutional quality on entrepreneurship, that is,
the intervention (institutional quality) has some residual direct effect even after the mediator (corruption) was
introduced into the model.
Keywords Institutional quality, Entrepreneurship, Corruption, Mediation effect
Paper type Research paper
1. Introduction
The significance of entrepreneurship has been recognized all around the world and has
become a primary focus for researchers and policy makers (Thurik, 2009). Entrepreneurial
opportunities and activities differ significantly across societies. These differences are an
important factor in the varying levels of wealth and prosperity across societies and nations
(see van Praag and Versloot,2007). One explanation for these differencesin entrepreneurship
focuses on the institutional context in which individuals act (Boettke and Coyne, 2009).
However, economic and entrepreneurial activities are falling short of expectations in
some developing countries that have all the premises needed for steady growth
(Munemo, 2011). This can be partially explained by the dysfunctionality of official
institutions and inefficiency of resources used. Corruption is seen as one of the main causes
for these issues, which prevents countries from reaching efficiency and setting up a
proper institutional system. Borrowing from several studies (Mo, 2001; Philp, 2002;
Helmke and Levitsky, 2004; Huffer, 2005; Rodriguez et al., 2006), we can define corruption as
a set of unwritten and illegal norms and rules that regulate interaction between public
World Journal of
Entrepreneurship, Management
and Sustainable Development
Vol. 13 No. 3, 2017
pp. 262-282
© Emerald PublishingLimited
2042-5961
DOI 10.1108/WJEMSD-09-2016-0045
The current issue and full text archive of this journal is available on Emerald Insight at:
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262
WJEMSD
13,3
servants and the general public and are enforced through informal channels outside of the
officially sanctioned ones.
A growing body of research revealed negative effects of corruption on a variety of
economic indicators including investment and foreign direct investment (Habib and
Zurawicki, 2002; Mauro, 1995; Tanzi and Davoodi, 1998), productivity (Lambsdorff, 2003;
Rivera-Batiz, 2002), the borrowing cost for governments and firms (Ciocchini et al., 2003),
income and wealth equality ( Jong-Sung and Khagram, 2005), human capital development
(Rose-Ackerman, 1999, 2004, 2008), exports (Zelekha and Sharabi, 2012), per capita GDP and
economic growth (Kaufmann et al., 2009; Kaufmann and Kraay, 2003; Mauro, 1995).
Prior empirical studies have addressed the relationship between institutional quality and
corruption (Broadman and Recanatini, 2001; Aidt, 2009; Tonoyan et al., 2010). However,
some of contributions have addressed only the nature and extent of the relationship between
entrepreneurship and corruption. While most of the concerned publications have shown that
higher levels of corruption limit the expansion of entrepreneurship (see Murphy et al., 1993;
Baumol, 1990; Desai et al., 2010; Sanders and Weitzel, 2010), some have shown the opposite
effect according to the “grease the wheels”hypothesis (see Huntington, 1968; Leff, 1964;
Leys, 1965). Moreover, several studies have been considering the existence of a U-shaped
relationship between the two sets of variables (Álvarez and Urbano, 2011). In their study,
Álvarez and Urbano (2011) examine the influence of environmental factors on
entrepreneurship; the results show that factors like political instability, corruption
control, and role models affect entrepreneurship. In fact, there is a U-shaped relationship
between political stability, which is mainly affected by corruption, and entrepreneurship.
Nevertheless, most of these results show that institutional quality turns out to be an
important part in understanding the relation between corruption and productive
entrepreneurship. This fact leads to the idea that corruption violates the quality of
institutions and negatively affects productive entrepreneurship.
Consequently, analyzing the above studies, we can notice that the results are mixed.
Most of the studies used direct relationships to confirm the impact of institutional quality on
entrepreneurship. Some of them have proved the significant impact of institutional quality
on entrepreneurship (Baumol, 1990; Kreft and Sobel, 2005; Nyström, 2008; Parker, 2009;
Wiseman and Young, 2013), while others have shown insignificant impact of institutional
quality on entrepreneurship in a direct relationship (Hartog et al., 2010). The insignificant
direct relationship of the variables and the importance of institutional quality-corruption
entrepreneurship nexus push us to think about the indirect and mediating relationship,
which is the main goal of the current study. In addition, while prior research focused
primarily to determine if there is a relationship between any pair of these three variables, the
primary concern of the current study is to fill the gap and examine the relation among these
three variables through incorporating indirect relationships of corruption between
institutional quality and entrepreneurship. Thus, in this study, mediation bootstrap
analysis is performed to test whether corruption mediates the relationship between
institutional quality and productive entrepreneurship.
The remaining of the paper study has been divided into seven sections. Section 2
discusses the literature of entrepreneurship and its relevance to corruption and institutional
quality, while the third one introduces the empirical method applied and the data used.
Section 4 focuses on research methodology. The remaining sections are devoted to the
practical implication, conclusion and limitations of this paper.
2. Literature review
2.1 Entrepreneurship and corruption
Several theoretical explanations for the relationship between corruption and
entrepreneurship exist (Avnimelech et al., 2014; Baumol, 1990; Boudreaux, 2014;
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Mediating role
of corruption
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