The role of political and economic institutions in informal entrepreneurship
| Date | 11 November 2019 |
| DOI | https://doi.org/10.1108/WJEMSD-05-2019-0035 |
| Published date | 11 November 2019 |
| Pages | 366-383 |
| Author | Eunice Santos,Cristina I. Fernandes,João J. Ferreira |
| Subject Matter | Strategy |
The role of political and
economic institutions in
informal entrepreneurship
Eunice Santos, Cristina I. Fernandes and João J. Ferreira
Department of Management and Economics,
NECE Research Unit in Business Sciences,
University of Beira Interior, Covilhã, Portugal
Abstract
Purpose –There has been a diverse range of research on the factors enabling informal entrepreneurship as
well as the means to avoid or to eradicate its incidence. However, the authors may also identify how a
significant proportion of research on this field of study centres around developing economies and
correspondingly justifying the application of such analysis to countries with different levels of economic
development as is the case of Europe. The purpose of this paper is to depict the ways in which economic and
political institutions influence informal entrepreneurship.
Design/methodology/approach –To this end, the authors apply aggregate data at the national level
collected from different sources, in particular the World Bank, the Organisation for Economic Cooperation
and Development, the Global Entrepreneurship Monitor and Freedom House, for the years between 2006 and
2015 and for 23 European countries amounting to a total of 229 observations (unbalanced panel).
Findings –Through recourse to econometric estimations, based upon multiple regression model
methodologies for panel data, the authors may report that the greater the quality of economic and political
institutions, the lower the level of informal entrepreneurship.
Originality/value –The authors thus seek to contribute towards a better understanding of the influence of
institutions and the policies that may feasibly influence informal entrepreneurship.
Keywords Informal entrepreneurship, Economic institutions, Institutions trust, Political institutions,
Quality institutions
Paper type Research paper
Introduction
Various researchers maintain that an appropriate institutional environment provides the
necessary conditions for individuals to identify market opportunities, begin new activities,
introduce innovations and new products and services and thereby create employment
(Verheul et al., n.d.; Baumol, 2002; Aparicio et al., 2016). Baumol (1990) defends that the
quality of the institutional context influences the allocation of different types of
entrepreneurship. Within this framework, North (1990) defines institutions as the rules
of the game that orient the behaviours of individuals and provide incentive structures for
agents while reducing transaction problems. In this sense, according to Boettke and Coyne
(2009), institutions may facilitate economic, political and social interactions, providing
incentives for different courses of action and guiding the options taken by economic actors.
When these rules are well-defined, opportunism declines, confidence rises and with the
implementation of long-term contracts, reducing transaction costs and driving
the emergence of efficient institutional structures (Arias and Caballero, 2006).
Furthermore, low-quality institutions reduce the incentives for investing and hindering
the allocation of resources to the most productive ends (Knowles and Weatherson, 2006).
Indeed, various authors also establish the relationship between the quality of institutions
and entrepreneurship: the government (Dau and Cuervo-Cazurra, 2014), economic freedom
(McMullen et al., 2008), rights of ownership and financial capital (Desai et al., 2003;
Bowen and De Clercq, 2008), regulation over market entries (Klapper et al., 2006) and
controlling corruption (Anokhin and Schulze, 2009) feature among the leading institutional
World Journal of
Entrepreneurship, Management
and Sustainable Development
Vol. 15 No. 4, 2019
pp. 366-383
© Emerald PublishingLimited
2042-5961
DOI 10.1108/WJEMSD-05-2019-0035
Received 27 May 2019
Revised 27 June 2019
Accepted 7 July 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-5961.htm
366
WJEMSD
15,4
factors taken into consideration. McMullen et al. (2008) defend how the institutional context
shapes entrepreneurship out of need in different ways. Bowen and De Clercq (2008)
demonstrate that the allocation of business resources to high growth activities positively
correlates with financing and education and relates negatively to the level of corruption
prevailing in a country. Similarly, Anokhin and Schulze (2009) and Bowen and De Clercq
(2008) identify how controlling corruption boosts the confidence of individuals in the
government and encourages entrepreneurial activities and innovation. Fuentelsaz et al.
(2018), following their analysis of Global Entrepreneurship Monitor (GEM) data, confirm
how countries displaying more individualist orientations towards relationships between
formal institutions and entrepreneurship make them more intense as happens in societies
with lower levels of uncertainty.
Researchers that deploy institutional theory correspondingly apply a distinction between
the formal institutions (the laws and codified regulations) and the informal institutions
(norms, values and codes of behaviour) and the informal sector, portraying how
entrepreneurs operate beyond the limits of formal institutions but within those of informal
institutions (De Castro et al., 2014; Webb et al., 2009, 2013, 2014; Welter and Smallbone, 2014;
Williams and Vorley, 2014; OIT, 2019). Based on the institutional perspective, the trend for
entrepreneurs to operate in the informal sector stems from the asymmetries between the
formal and informal institutions in any society. The greater the incongruence between these
institutions, the greater the tendency for businesses to operate in the informal sector.
We thus enter a gap in the literature, as this institutional explanation for the informal
entrepreneurial sector has tended to facilitate analysis in separating informal entrepreneurs
from their formal and “traditional”counterparts and studying them as a separate
category or sub-field (Williams and Shahid, 2016). There thus emerges our objective:
ascertaining in what ways does the quality of institutions influence the advance or retreat of
informal entrepreneurship.
The informal economy has represented a constant problem both in the developing
world and in more advanced economies, such as those of the European Union (EU).
Since the 1970s, industrial downsizing and tertiarisation processes renewed the
importance of small scale firms that are better positioned to hide data about their
activities than large scale companies. Simultaneously, the EU economies have become
increasingly regulated, which has raised the costs of launching and running businesses
and therefore driven more companies and their staff into the informal sector (OECD, 2015;
Nielsen and Smeets, 2018). We may thus portray the need to study the relationship
between the quality of institutions and the existence of informal entrepreneurship.
Thus, we arrive at our research question:
RQ1. What influence does the quality of political and economic institutions hold over
informal entrepreneurship?
Our research aims to contribute to this field of study as, despite the existing studies
on the impact of institutions on entrepreneurship, there is a shortage of research findings
on informal entrepreneurship in the case of various countries. A large proportion of
informal entrepreneurship studies did not extend beyond a single country due to the lack
of robust data for comparisons among countries. Williams (2014) reports that this theme
does not usually get approached in Europe and thereby furthermore justifying its
importance. Hence, we contribute to the literature through highlighting the important
influence that political and economic institutions have on the decisions of individuals
at the point in time of opting whether or not to formally register their companies.
We demonstrate that the quality of economic and political institutions does have an
effect on the inverse reflected proportionality of informal entrepreneurship. Given that
the extent to which the perceptions held by individuals about these two types of
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Role of political
and economic
institutions
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