Institutions and
Entrepreneurship in
Transition
Saul Estrin, London School of
Economics
Slides for presentation at AISSEC conference, Perugia, June 2009
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Outline
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Entrepreneurship in a comparative
perspective
Institutions and entrepreneurship
Institutions and entrepreneurship in
transition economies
Institutions and Female
Entrepreneurship
Entrepreneurship and the Credit
Crunch
2
Entrepreneurship in a
Comparative Perspective

New firm entry plays a critical role in a market economy:
 Transfers resources in line with demand from
industries with declining demand to industries with
rising demand
 Generates the variation in products and technologies
from which market based selection of more profitable
organisations can occur
 In this way, generates innovation and the diffusion of
new goods and production methods
 Socialist planning systems suggest that innovation
and “creative destruction” to raise productivity are
hard to achieve in the absence of new firm entry and
exit
The “entrepreneur” is the individual agent who
fulfils this function
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Defining the Entrepreneur
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We focus on individual entrepreneurs who
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Perceive and create new market
opportunities through innovative activity
Introduce their ideas in the face of
uncertainty and other obstacles
Create viable business that contribute to
the national economic growth and their
own livelihood
Engage in this activity at the opportunity
cost of pursuing other occupations
Significance of
Entrepreneurship:
Political and Social Factors
• Political effects: freedom of entry and
dispersion of economic power support
political freedom
• Entrepreneurship also has social effects: it
may create the effective way out of poverty
(De Soto; East Asia versus Latin America)
• Social, political & economic effects may be
related (outsiders-insiders; Acemoglu; Gerry &
Mickiewicz; Buccellato & Mickiewicz)
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Types of entrepreneurship / entry
High aspiration
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Genesis: pull / opportunity
Appears in up cycle
Goal: Accumulation
Input: Combining resources
Strategy: innovation, initiative
Contracts: complex, formal
Creates employment
Form: incorporated, ltd liability
Market: global
Source of tax revenue
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Low aspiration
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Genesis: push / necessity
Appears in down cycle
Goal: Survival / consumption
Input: Labour
Strategy: reactive, imitative
Contracts: simple, informal
Self-employment, own family
Form: proprietorship
Market: local
Low tax or tax evading
Based on Estrin, Meyer, Bytchkova (2008)
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attitudes to entrepreneurship differ across nations:
Iran
US
Mexico
UK
60
Turkey
India
Japan
Romania
Brazil
Germany
Hungary
40
France
Egypt
Croatia
Macedonia
Latvia
Russia
Slovenia
20
Serbia
Bosnia
10
20
30
40
50
60
Has Knowledge & Skills to Start a Business (% of Working Age Population)
7
Source: GEM 2008
Fear of failure is much higher in TE
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and some countries have more entrepreneurs than other...
70
Slovenia
60
US
UK
Japan
Spain
50
France
Thailand
Hungary
Romania
Argentina
40
Croatia
Latvia
China
Peru
Colombia
Brazil
Turkey
India
30
Russia
Serbia
0
10
20
Early Stage Entrepreneurs (% of Working Age Population)
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Source: GEM 2007
There is less entrepreneurial entry in TE
30
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Literature
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General Institutional Theory – North (1990, 1997)
 Role of entrepreneurs
 Distinction between formal and informal institutions
Williamson (1987), Barzel (1997), Rodrik (2000), Acemoglu and
Johnson (2005)
 Property rights as backbone of market economy
restrictions e.g.. with respect to ownership rights, freedom of
choice, mobility
Access to formal rights and role of informal sector (de Soto, 2001;
Sonin, 2003; Estrin, Korosteleva, Mickiewicz, 2009)
The role of formal institutions important for highervalue-added types of entrepreneurial activity
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May 29th 2009
Institutions and
Entrepreneurship
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Baumol (1990) – the form of entrepreneurial activity
depends on institutional context; weak institutions may
increase net returns to non-productive or destructive
entrepreneurship
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Literature suggests three main institutions relevant for
entrepreneurship:
 Property
rights (Harper, 2003; confirmed by Johnson et
al, 2002, Aidis, Estrin, Mickiewicz, 2009, but not
Dermigue-Kunt et al., 2006 nor Klapper et al., 2006)
 State-sector (Baumol, 1990; de Soto, 1990; Verheul et
al., 2001)
 Financial sector (Gros and Steinherr, 2004), both
formal and informal (Aidis, Estin, Mickiewicz, 2007;
Korosteleva and Mickiewicz 2008)
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May 29th 2009
Institutional Variables
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1.
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In a variety of papers, we use two main
measures of the institutional environment
Index of Economic Freedom (Heritage
Foundation) – fifty independent variables
grouped into ten sub-indices covering all
aspects of the economic environment.
Because of multicollinearity, we use an
average of all then indices, the “economic
freedom index”.
Institutional Variables 2
3.
12
Based on legal origin, La Porta et al.
(1999) classify countries by legal
environment. The categories are:
English, French ,German,
Scandinavian and Socialist
(==Transition)
To avoid low frequencies, we merge
German and Scandinavian.
Individual level data
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GEM is an ongoing multinational project created to
investigate the entrepreneurship both within and
across countries
Data is generated by surveys, which rely on stratified
samples of at least 2,000 individuals per country
The dataset includes a number of individual social and
economic characteristics and perceptions
The key advantage of the methodology relates to the
fact, that the sample is drawn from the whole working
age population
Individual level data
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We utilise all 2001 – 2005 surveys. Countries include:
Belgium, Denmark, France, Germany, Hungary,
Finland, Ireland, Israel, Italy, Latvia, Netherlands,
Norway, Poland, Portugal, Russia, Slovenia, Spain,
Sweden, United Kingdom,
Canada, United States,
Australia, New Zealand,
India, Japan, Korea, Singapore,
Argentina, Brazil, Mexico,
South Africa,
Example of Estimation
Framework
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Ententryijt = f(Strength of Property Rightsjt, Level of
Welfare Provision and Taxationjt, Availability of Formal
Financejt, Availability of Informal Financejt, GDP/capitajt,
GDP growth ratejt, Individual Level Controlsjit,)
Alternatively use legal origin as institutional variable
Estimated using probit, reported with robust standard
errors and allowing for possibility that observations are
not independent for each country–year sample
Estimated for entrepreneurial entry, high aspiration
entrepreneurial entry, opportunities entrepreneurial entry
and the structure of individual financing
High aspiration and opportunity start up jointly estimated
with likelihood of start up (bivariate probit)
May 29th 2009
Results on Entrepreneurship
and Institutions
Institutional features that encourage new firm
entrepreneurship are:
 “Rule of Law” and “Size of State Sector” Two factors derived from Heritage
Foundation measures
 Rule of Law impact sensitive to level of
development- effect tails off for richest 1020% countries
 Formal finance is less important at early
stages of development and becomes more
important later on
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Types of Entrepreneurship and
Institutional barriers; Main Results
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It is not direct business regulations but low
quality of “higher order” formal institutions which
is the most critical barrier, especially for more
sophisticated forms of entrepreneurship:
(Estrin, Korosteleva, Mickiewicz, 2009)
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Quality of property rights system matters most for HIGH
ASPIRATION ENTREPRENEURSHIP, and is less relevant for
LOW ASPIRATION ENTREPRENEURSHIP
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Underdeveloped financial system does not necessarily
hinder LOW ASPIRATION ENTREPRENEURSHIP; informal
finance may substitute for it. But HIGH ASPIRATION
ENTREPRENEURSHIP relies on more developed formal
financial
sector
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For high-powered
entrepreneurship that generates
growth and change, formal
institutions matter more:
complex forms of economic
activity require complex
contracts, and those in turn are
conditional on formal rules
(empirical results: Estrin,
Korosteleva, Mickiewicz, 2009)
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The formal institutions that matter are
‘higher order institutions’:
rule of law / protection of property
rights
which consists of two key elements:
constraints on the executive
branch of the government
 independent and wellfunctioning judicial system,
free from corruption
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(Note that those dimensions are not captured well
neither by World Bank “Doing Business” indicators of
government regulation
nor by EBRD indicators...)
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Entrepreneurship and
Transition:
The heritage from planning is poor:
 Need to reallocate resources e.g.
industry to services
 Absence of business to business
relations
 Need to restructure state owned
enterprises (SOEs), so new firms less
able to play leading role in reallocation
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Barriers to Entrepreneurship
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Key Barriers
Financial
 Institutional
 Human capital and socio-cultural
factors
 Weak cultural recognition of value of
entrepreneurship
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Financial Barriers
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Usual sources of start-up capital not
available at start of transition
Personal wealth could not be
accumulated under communism
 Financial markets almost non-existent
at start of transition
 Banks inexperienced in private sector
lending and lack of organizational
capacity to finance entrepreneurs
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Institutional Barriers
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Immature legal and institutional system
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Outdated or no-existent commercial code
Laws needed to define key concepts of
market economy
Legal system inexperienced
Weak protection of private property rights,
especially investor rights
Enforcement of contracts sometimes relies
on informal networks or threat of physical
force
How Much entrepreneurship
is there in transition
economies
Aidis, Estrin and Mickiewicz (2008) find:
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Entrepreneurial activity is lower in transition
economies than countries with other legal origins (La
Porta et al)
Entrepreneurial activity in transition economies is
lower than in other economies at a comparable level
of development
This holds even controlling for differences in
individual characteristics e.g. Skill, age, gender
Entrepreneurship levels are even lower in Russia than
in the group of former socialist economies
While some transition economies may be more entrepreneurial than the others,
the comparison with the rest of the world reveals a different story...
PE:PERU
EC:ECUADOR
VE:VENEZUELA
TH:THAILAND
JO:JORDAN
MX:MEXICO
CL:CHILE
BR:BRAZIL
CH:CHINA
KR:KOREA(SOUTH)
AR:ARGENTINA
US:UNITED STATES
PL:POLAND
LV:LATVIA
GR:GREECE
DE:GERMANY
ES:SPAIN
HU:HUNGRY
UK:UNITED KINGDOM
RU:RUSSIA
HR:CROATIA
SI:SLOVENIA
0
25
GEM 98-05 averages
.1
.2
Baby business (% of W AP)
.3
.4
Startups (% of WAP)
Yet there are differences between the TE
Number of Micro, Small, Medium Size Enterprises
per 1,000 people (2000-2005 average)
Slovenia
Poland
Kyrgyz Republic
Bulgaria
Macedonia, FYR
Romania
Tajikistan
Latvia
Slovak Republic
Albania
Serbia and Montenegro
Uzbekistan
Moldova
Azerbaijan
Bosnia and Herzegovina
Belarus
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0
5
10
15
20
25
30
35
40
45
50
101418222630
Regression of property rights (2008) on ln(GDP pc ppp) in 2007
Residuals for transition economies:
EST
MDA
HUN
2 6
CZE
-38-34-30-26-22-18-14-10
-6 -2
TJK
KGZ
UZB
LVA
MNGGEO
ARM
ALB
AZE
MAC
UKR
KAZ
POL LTU
ROM
BGR RUS
SVK
SVN
CRO
BEL
BIH
0
5000
27
(adopted from Mickiewicz (2009)
10000
15000
gdppcppp_07
20000
25000
27
To some extent informal institutions may substitute for
formal institutions.
For example:
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China and Russia are characterised by both weak formal
property rights and by financial repression. Both factors
should imply little use of external finance by entrepreneurs
and constraints to entrepreneurship.
However China scores much higher on social capital
indicators than most of the ex-Soviet countries
Accordingly, China is one of the two countries in Global
Enterprise Monitor dataset (the other being Thailand) with
the widest availability of informal finance (between 6-7%
prevalence rate); and the value of informal capital in China
has been estimated to vary between 2%-5% of GDP in the
early 2000s.
In contrast, availability of external informal finance in
Russia is low (between 1-2% prevalence rate). Results for
other ex-Soviet TE are not much better.
28 Mickiewicz (2008)
Korosteleva and
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Significance of social capital (trust)
for entrepreneurship
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“Sociability in ordinary civil affairs promotes a vigorous economic
life as well, by schooling people in cooperation and selforganisation. People good at self-government are also likely to be
good at combining for business purposes” (Fukuyama, 1995, p. 273)
Level of trust is low in ex-Soviet transition economies. (Unlike
China, the Soviet system left a heritage of highly individualistic,
atomised societies (Fukuyama, 1995, p. 28).
“Despotic governments broke asunder the civil associations that
united the citizens, leaving them isolated and more genuinely
individualistic”. (Fukuyama, 1995, p. 273)
And informal institutions are persistent. Low social trust in TE is
also reflected by low quality of government as represented by
corruption.
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Transition Economies did not follow one uniform
development path
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In some TE (eg. Russia, Ukraine), big players became
entrenched while new entrants face obstacles to enter
Insider entrepreneurship:
(Aidis, Estrin, Mickiewicz, 2008)
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businesses more likely to be started by those
already engaged in business activity,
entrepreneurs who closed down their businesses
not likely to enter again,
characteristics such as age and gender play
important role
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Formal institutions, informal institutions
and entrepreneurship interact in transition
1.
2.
3.
4.
Weak ‘higher order institutions’ (lack of rule of law and weak
property rights) created opportunities for entrepreneurial
gains perceived as illegitimate in some TE as widespread
corruption and weak property rights drove entrepreneurship
towards unproductive activities
Where economic gains were not perceived as legitimate, it
created support for state intervention, re-nationalisation
(amplifying anti-market attitudes inherited from the Soviet
past) (Ireland et al., 2008)
In turn, statist and anti-market policies led to entrenchment
of strong incumbents (‘oligarchs’) that emerged from the
early transition phase
That results in low level of market-based and high
aspiration- entrepreneurship, and low public support for
entrepreneurship, which in turn makes the politicaleconomic structure stable.
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Low-entrepreneurship equilibrium supported by attitudes: an illustration
Social attitudes towards entrepreneurship are important. At present Russian
women rank entrepreneurs at the bottom of the list of men
they would32like to marry.
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Female Entrepreneurship
and Institutions
Current work; based on analysis of
interactive terms between factors
representing institutions and female
gender
 Wide variation in female
entrepreneurship rates across
countries
 Results for males and females not the
same
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Figure 3
atios of Female to Male Startup Rates and Ru
1
Thailand
Peru
.6
.8
Venezuela
Mexico
Portugal
Ecuador
Chile Australia
India
Brazil
China
South Africa
Uganda
Argentina
Hungary
Korea US
New Zeland
Israel
Denmark
Chile – the
opposite
34
.4
Jordan
Russia
Canada
Ireland
Hong Kong
UK
Singapore
Iceland
Netherlands
Finland
Sweden
Italy
Germany
Belgium
Slovenia
France
Czech Rep.
Taiwan
Greece
Japan
Spain
Poland
Croatia
Norway
.2
TE weak
rule of law
and weak
female
entry rates
-1
34
0
1
Rule of Law
2
3
May 29th 2009
Figure 4
s of female to male startup rates and size of th
1
Thailand
Peru
The opposite:
France,
Sweden
35
.8
Venezuela
Mexico
Ecuador
Chile
Portugal
Brazil
Australia South Africa
India
China
Uganda
Argentina
Hungary
US Korea
.6
Israel
New Zeland
.4
Denmark
Canada
Jordan
Ireland
Hong K
Singapore
Iceland UK
Germany
Italy
Netherlands
Taiwan
Finland
Sweden
Slovenia
Czech Rep.
Belgium
France
Japan
GreeceRussia
Croatia
Spain
Norway Poland
.2
Small state
& high
female
entry rates;
Thailand,
Peru; some
rich English
Legal Origin
Countries
-3
35
-2
-1
0
Limited state sector
1
2
May 29th 2009
Figure 5
s of female to male startup rates and supply of f
.8
Venezuela
Mexico
Ecuador
Chile
India
Brazil
Uganda
Argentina
Hungary
Portugal
Australia
South Africa
China
.6
US
Korea
Israel
New Zeland
Denmark
Canada
Jordan
Ireland
Hong Kong
Singapore UK
Iceland
Germany
Italy
Finland
Taiwan Netherlands
Slovenia
Czech Rep.
Belgium
Sweden
France
Japan
Greece
Russia
Spain
Croatia
Poland
.2
The opposite:
TE
Peru
.4
Developed
Formal
Finance &
Relatively
High female
Entry Rate:
United States
1
Thailand
0
36
36
50
100
150
Credit to Private Sector / GDP
200
May 29th 2009
Figure 6
of female to male startup rates and supply of in
.8
Venezuela
Mexico
.6
Brazil
Portugal
India
Chile
Australia
China
South Africa
Argentina
Hungary
Korea
US New
Zeland
Israel
Denmark
Ecuador
Ireland
Canada
Hong Kong
UK
Singapore
Italy Germany
Iceland
Netherlands
Finland
Belgium
FranceCzech Rep.
Sweden
Russia
Taiwan
Slovenia
Japan
Spain
Poland
Croatia
Greece
Norway
Uganda
Jordan
.2
The
Opposite:
Russia,
Croatia...
Peru
.4
Informal
Finance
And
Female
Entry:
Peru,
Ecuador,
Uganda
1
Thailand
0
37
37
.05
.1
.15
business angels prevalence rate
May 29th 2009
Summary of Results
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Controls confirm many findings in literature e.g.. probability of
being an entrepreneur less in all countries for women, older
people, less educated, less well networked
Rule of law does not affect female entrepreneurship
Female entrepreneurship is reduced by a large state sector.
Holds for high aspiration and opportunity entrepreneurs
No effect of formal finance on female entrepreneurship
Informal finance is significant for female startup but not
for high aspiration or opportunity female
entrepreneurship
Men more likely than women to rely on formal than
informal finance
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May 29th 2009
Entrepreneurship and the
Credit Crunch
Entrepreneurship may be “recession
pull” because opportunity cost of
being an entrepreneur lower in a
recession –necessity?
 Alternatively, may be “prosperity pull”
because of larger gains to e’ship in a
boom – opportunity?
 In our work, forces tend to offset or
displays recession pull.
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Conclusions
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40
The links between entrepreneurship, economic
performance, formal institutions and informal
institutions are complex.
The place to start is the judicial system. Yet
eliminating judicial corruption is not easy; it
requires changing both formal rules and
informal culture.
In many TEs, corruption is still widespread and
entrepreneurship is weak.
Yet, as they are reaching the mature posttransition stage, weak entrepreneurship will
affect economic performance more.
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Key References
•
•
•
•
•
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R. Aidis, S. Estrin, T. Mickiewicz (2007a), “Entrepreneurship,
Institutions and the Level of Development”, Tiger Working
Paper No 103.
R. Aidis, S. Estrin, T. Mickiewicz (2007b), “Entrepreneurship in
Emerging Markets: Which Institutions Matter?”, CSESCE
Working Paper No 81.
R. Aidis, S. Estrin, T. Mickiewicz (2008), “Institutions and
Entrepreneurship Development in Russia: A Comparative
Perspective”, Journal of Business Venturing, 23, 653-672.
S. Estrin, K. Meyer, M. Bytchkova (2008), “Entrepreneurship in
Transition Economies”, in M. Casson et al. Oxford Handbook
of Entrepreneurship (Oxford: Oxford University Press).
S. Estrin, J. Korosteleva, T. Mickiewicz (2009), “High-Growth
Aspiration Entrepreneurship”, mimeo.
S. Estrin and T. Mickiewicz (2008), “Do Institutions have a
Greater Effect on Female Entrepreneurs?”, World Bank 2009
41