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The Relationship Between National Institutional Structures and Domestic Entrepreneurial Activity in Europe, the U.S., and Japan: Implications for European Union Policy Makers
Jennifer W. Spencer School of Business and Public Management
The George Washington University 2023 G Street NW Lisner Hall 230
Washington, DC 20052 Tel: 202-994-9858 Fax: 202-994-7422 [email protected]
Paper prepared for European Union Research Center (EURC), GWU and the American Consortium on European Union Studies (ACES) Seed Grant program.
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ABSTRACT
This paper tests the relationship between regulatory, cognitive, and normative dimensions of a
country's institutional environment and domestic entrepreneurial activity within 11 European countries,
the US and Japan. The paper measures three types of entrepreneurship, ranging from fairly basic self-
employment activities, to more complex activities required for small business development, to advanced
activities reflected in the listing of new firms on a country's stock exchange.
The data suggest four primary results. First, the normative dimension, reflecting a society's level
of admiration of entrepreneurs, predicted more basic entrepreneurial activities such as self-employment
rates, but did not predict more advanced types of entrepreneurship. Second, the cognitive dimension,
reflecting residents' knowledge and skill base, predicted the prevalence of small firms. Third, the
regulatory dimension, reflecting government policies toward entrepreneurship, was negatively associated
with more basic self-employment activities, but marginally associated with advanced entrepreneurship.
Finally, per capita GDP predicted more basic forms of entrepreneurship, with poorer countries showing
higher rates of self-employment and small business development, but did not associate with advanced
entrepreneurship. These results suggest that the appropriate strategies for policy makers in the
European Union member states depend upon the type of entrepreneurship they would like to promote.
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The Relationship Between National Institutional Structures and Domestic Entrepreneurship Activity in Europe, the U.S., and Japan:
Implications for European Union Policy Makers
Scholars and government policy makers have touted entrepreneurship as a way to revitalize
stagnant economies (Wildeman et al, 1998), give life to liberalizing economies (Ivy, 1997; Karsai,
Wright & Filatotchev, 1997), and facilitate economic growth in many countries (Lado & Vozikis, 1996;
Storey, 1994). In particular, small firms may be more effective at creating jobs than larger, more
established firms (Ivy, 1997; Kassicieh, Radosevich & Umbarger, 1996; Kirchhoff & Phillips, 1988).
In addition, countries in which there is a strong entrepreneurial spirit may be more effective recipients of
technology transfer (Lado & Vozikis, 1996), and may be better able to leverage the benefits of inward
foreign direct investment to promote strong industrial advancement and real economic growth.
However, as researchers, we have a very limited understanding of why rates of entrepreneurship vary
cross nationally, and what policy makers can do to promote entrepreneurship within their national or
regional economies.
This paper takes an institutional perspective to explain cross-national differences in the
prevalence of different types of entrepreneurial activities among eleven European countries, the US, and
Japan. Entrepreneurship is a multidimensional construct that is subject to a diverse set of definitions.
Some authors have focused on individuals within a country that choose self-employment over
participation in an outside organization (e.g., Wildeman et al, 1998). Others have concentrated on the
prevalence of small firms within a national economy (Acs, 1992; Aronson, 1991). Still others have
focused their attention on the founding and success of new start-ups (Hawkins, 1993). This paper
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suggests that the dimensions of the institutional profile wield differing levels of influence on these various
types of entrepreneurial activity.
Self-employment is the simplest type of entrepreneurship because self-employment activities
rarely require substantial financial investment, advanced managerial skills, or an understanding of legal
requirements regarding incorporation or partnership contracts. Managing a small business is a relatively
more sophisticated endeavor, in that it generally requires greater investment and more advanced
organizational and managerial skills to facilitate the day-to-day operations. Finally, listing a new
business on a national stock exchange reflects a very advanced form of entrepreneurship. The act of
bringing a company to the stage of an initial public offering not only relies on more sophisticated
activities such as legal incorporation and attracting the support of investment bankers, but also suggests
that the new company has displayed enough success to attract the interest of private and institutional
investors.
A number of entrepreneurship researchers have implicitly adopted an institutional perspective by
articulating ways in which national institutional environments can influence domestic entrepreneurial
activities (e.g., Gnyawali & Fogel, 1994; Shane & Kolvereid, 1995). This paper builds from that
foundation to test whether cross-national differences in these three types of entrepreneurial activity can
be explained by national institutional environments. The paper further suggests that different dimensions
of a country’s institutional environment may associate with the different types of domestic
entrepreneurial activity. Some institutional arrangements may predict the number of people within a
country who choose entrepreneurial employment, others may coincide with the percentage of firms in
an economy that are small, and still others may associate with more advanced entrepreneurial activity
such as new listings on a country’s stock market.
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NATIONAL INSTITUTIONAL ENVIRONMENTS FOR ENTREPRENEURSHIP
A country’s institutional environment is comprised of relatively stable rules, social norms, and
cognitive structures that guide and constrain domestic economic activity. It is well understood that a
country’s institutional environment guides firms' strategies and helps determine the nature and amount of
business activity that takes place within the country's borders (Nelson, 1993; Sorge, 1991;
Bartholomew, 1997; Lundvall, 1992). The institutional environment sets the framework for market
transactions by defining the alternative courses of action open to firms (North, 1990), dictating the
potential risks and payoffs for different activities, and specifying the conditions under which firms hold
legitimacy (Meyer and Rowan, 1977). This paper argues that specific elements of a country’s
institutional environment will influence both the amount of entrepreneurial activity that takes place within
the country’s borders, and the level of sophistication of domestic entrepreneurial endeavors.
The paper draws on Busenitz et al.’s (2000) application of Kostova’s (1997) construct of a
country institutional profile to identify a diverse range of national institutions that may promote
entrepreneurship within a country. The concept of a country institutional profile builds from Scott’s
(1995) notion that institutional environments consist of three interrelated pillars reflecting normative,
cognitive, and regulatory dimensions. Drawing from this institutional perspective, a country's value
systems (normative dimension), widely shared social knowledge (cognitive dimension), and government
policies (regulatory dimension) likely influence domestic entrepreneurial activities. Cross-national
differences in each institutional dimension clearly persist after European Union integration. The
European Observatory (1996) found that EU integration caused neither convergence nor divergence in
government policy toward small and medium enterprises, or in small enterprise performance. However,
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since countries’ economies now tend to move in concert, SME activities may begin to follow a
“European growth path,” remaining distinct from one another, but developing in concert against other
world currencies. In addition, economic conditions within a country may prompt residents to start new
businesses. When a country has a relatively low level of economic development, or a relatively high
unemployment rate, residents may see opportunities for economic progress through starting and
operating their own business (Wildeman et al., 1998).
The next section describes each dimension of the institutional profile in greater depth. The
paper then develops a series of hypotheses relating the national institutional structures to different types
of domestic entrepreneurial activity. Finally, the paper presents regression results using empirical data
from Europe, the US, and Japan and discusses the implications for EU policy makers.
DIMENSIONS OF THE NATIONAL INSTITUTIONAL PROFILE
Normative Institutions
Normative institutional structures reflect the degree to which a country’s residents admire
entrepreneurial activity and value creative and innovative thinking. A number of researchers have drawn
parallels between a country’s cultural values and its entrepreneurial activity. However, inconsistent
empirical results suggest that the relationship is a complex one. For instance, Mueller and Thomas
(1997) found that entrepreneurial personality traits were positively associated with cultures that were
high in individualism. However, the European Observatory (1996) found an inverse relationship
between the overall level of individualism in a country and its rate of entrepreneurship, and Acs (1992)
concluded there to be a limited correlation between national levels of individualism and small business
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strength. It is likely that overall cultural measures are too general to sufficiently explain entrepreneurial
activity. For example, collectivist cultures such as Italy or Portugal may support entrepreneurship
because collectivist objectives—such as a desire to support an extended family—may motivate
individuals or families to start their own businesses.
Other researchers have focused more narrowly, and described how a society’s positive
(Gerschenkron, 1954) or negative (Hawkins, 1993) attitudes about entrepreneurs influence a country’s
level of entrepreneurial activity. This paper builds from Busenitz et al (2000), to suggest that the degree
to which society admires entrepreneurs may be a better indication of domestic entrepreneurial activity
than more general cultural measures.
Cognitive Institutions
Within any country, particular issues and knowledge sets become institutionalized, and certain
information becomes part of a shared social knowledge (Zucker, 1991; Berger & Luckman, 1967).
The cognitive dimension comprises the knowledge and skills possessed by people in a country, as well
as the frameworks used to categorize and evaluate information. For instance, in some countries,
knowledge about how to found a new business may be widely dispersed. In other countries, individuals
may lack the knowledge necessary to understand even the most basic steps required to start and
manage a new business.
The prevalence of particular skills within a country, such as the ability for people to simplify
problems and to delegate responsibility, may associate with an entrepreneurial culture (Casson, 1990).
For example, the existence of small business training programs (Dana, 1987), the distribution of
information relevant to new business owners (Dana, 1987), and the availability of assistance with market
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research and other business development activities (Hawkins, 1993; Phillips, 1993) contribute to
cognitive institutions that can build the entrepreneurial skill set of a society. These resources and
organizations can endow entrepreneurs with a common lens with which to view the opportunities and
threats inherent in the economic environment.
Regulatory Institutions
Finally, the regulatory dimension of the institutional profile consists of laws, regulations, and
government policies that promote certain behaviors and restrict others. Government regulations can
specify the responsibilities of small business owners, assign property rights, or reduce the risks involved
in starting a new business. For instance, the U.K. and Ireland implemented a policy to reduce
entrepreneurs’ risks by providing individuals with a year's unemployment compensation if they chose to
start a new business (Kirchhoff & Phillips, 1988). Other government programs have provided more
general financial support or preferential treatment for entrepreneurial ventures. For instance, resources
available through government procurement programs (Doutriaux, 1988), tax incentives (Harrison &
Mason, 1988), business development assistance (Phillips, 1993), universities (Pennings, 1982), and
government export assistance programs (Reynolds, 1997) contribute to the regulatory environment that
can aid individuals’ entrepreneurial efforts.
Similarly, researchers have found that burdensome procedural requirements may limit
entrepreneurial activity (Dana, 1990), and that uncertainty and instability in government policies toward
the private sector may reduce entrepreneurs’ interest in developing long-term growth strategies (Tan,
1996).
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HYPOTHESES
Self-Employment Activity
As a reflection of normative institutions, some societies value entrepreneurs for their creativity
and initiative (Casson, 1990), while others do not. These normative pressures should influence
individuals’ decisions to pursue an entrepreneurial career path and encourage individuals to choose
entrepreneurial forms of employment (Gerschenkron, 1954). Therefore, this paper hypothesizes a
relationship between a supportive normative institutional environment and self-employment.
In addition to normative pressures, economic factors may also lead to self-employment. For
example, the more unemployment there is in a country, the more individuals may explore sources of self-
employment (Evans & Leighton, 1990; Wildeman et al., 1998). Moreover, Wildeman et al. suggested
that as countries progress to higher levels of economic development, their domestic business activities
are more likely to require economies of scale and other advanced manufacturing techniques that stand
as barriers to entry for smaller start-up firms. Supporting this perspective, Lucas (1978) found that the
average size of domestic firms increased with greater levels of national income. In sum, a low per capita
GDP and a high unemployment rate may well be related to less advanced entrepreneurial activities, for
instance, motivating individuals to toward self-employment.
H1: There will be a positive relationship between the normative dimension of a country's institutional profile and the number of people within a country who are self-employed.
H2: There will be a positive relationship between a country's unemployment rate and the number of people in a country who are self-employed.
H3: There will be a negative relationship between a country's per capita GDP and the number of
people in a country who are self-employed.
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Small Business Activity
Just as we expect a country’s normative institutions to relate to the most basic type of
entrepreneurial activity, self-employment, an admiration for entrepreneurs may also lead individuals to
found small enterprises. Although small business management is a more complex undertaking than self-
employment, both activities require individuals to strike out on their own, rather than pursuing a more
conventional career path within established organizations. Individuals are more likely to take this risk
when their efforts are viewed as legitimate and even admirable by their society.
In addition, we propose that a country’s cognitive institutional environment influences the ability
of individuals to successfully manage small business ventures. Unlike self-employment, which generally
does not place an emphasis on advanced management, marketing, or finance knowledge, managing a
small business requires more sophisticated business skills and understanding. Organizations that
facilitate the distribution of information relevant to business owners (Dana, 1987), training programs
geared toward small business owners (Dana, 1987), small business incubators (Smilor, Gibson, &
Dietrich, 1990), and the distribution of business magazines can help potential entrepreneurs gain the
requisite knowledge and skills to succeed in managing a small business. Such training and information
results in a skill set and management-related knowledge that become embedded in the individuals of a
given country.
As with self-employment, we expect that economic factors such as unemployment and per
capita GDP to affect the number of small businesses present in a country. Difficulty in finding and
holding a job may give individuals the opportunity and motivation to found their own enterprise (Evans
& Leighton, 1990). Additionally, just as with self-employment activity, the scale economies and
advanced manufacturing techniques prevalent in more developed economies (Wildeman et al., 1998)
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will likely serve as barriers to smaller firms, suggesting that smaller firms will proliferate in countries with
lower levels of per capita GDP. Therefore,
H4: There will be a positive relationship between the normative dimension of a country's institutional
profile and the percentage of domestic firms that are small. H5: There will be a positive relationship between the cognitive dimension of a country’s institutional
profile and the percentage of domestic firms that are small. H6: There will be a positive relationship between a country's unemployment rate and the percentage
of domestic firms that are small. H7: There will be a negative relationship between a country's per capita GDP and the percentage of
domestic firms that are small. New Listings on Domestic Stock Market
While a positive normative environment may encourage individuals to become self-employed
and perhaps even found a small company, societal admiration, itself, does not convey the knowledge
and necessary for companies to succeed at advanced forms of entrepreneurship. Similarly, admiration
of entrepreneurs, alone, cannot substitute for the presence of financial support programs that can help
ventures attract the attention of external investors. On the other hand, the skill set that may develop
from the cognitive institutions are more likely to help those entrepreneurs succeed in growing their
business and attracting external capital investment. Therefore, the paper suggests that the cognitive
dimension will be associated with both the percentage of firms in a country that are small, and also the
percentage of firms on a country’s stock market that are new listings.
Busenitz et al (2000) suggested that the regulatory dimension was most likely to associate with
the level of advanced entrepreneurship that takes place within a country. This paper suggests that self-
employment, the presence of small businesses in a country, and the introduction of new firms to a
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country’s stock exchange can be viewed as increasingly sophisticated forms of entrepreneurship. As
the sophistication of entrepreneurial activity increases, government support mechanisms serve a stronger
role in aiding would-be entrepreneurs. Indeed, a strong regulatory environment may well propel an
entrepreneur to ever more sophisticated forms of entrepreneurship, building a sole proprietorship into a
small business, and growing a small business into a larger firm that seeks external financing via a listing
on the domestic stock exchange. Therefore, the regulatory dimension should be associated with the
percentage of companies on a country’s stock exchange that are new listings, but is unlikely to relate to
more basic forms of entrepreneurship.
H8: There will be a positive relationship between the cognitive dimension of a country’s institutional
profile and the percentage of companies on a national stock exchange that are newly listed.
H9: There will be a positive relationship between the regulatory dimension of a country's institutional profile and the percentage of companies on their domestic stock exchange that are newly listed.
DATA SAMPLE AND METHODOLOGY
Data on each dimension of the institutional profile came from reports from two independent
sources of expert respondents familiar with the political and economic environment of each country.
The first consisted of political, economic, and commercial officers assigned to American embassies
operating in each country. The second was comprised of native residents from each country that were
employed as officers within that country's embassy in the United States. Because the daily activities of
these individuals focus on national political, economic, and commercial conditions, these respondents
are particularly well suited to report about the institutional environment in each country. Soliciting
responses from embassy personnel both in the US and abroad reduced potential reporting biases. In
order to provide a common anchor across all countries, respondents were asked to assess each item in
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the institutional profile for both the conditions present in the United States and the conditions in the
country of their expertise.
Sample
Surveys were mailed to American embassies abroad and foreign embassies within the United
States for all countries. All respondents rated the institutional environment of the United States. An
average of 4.7 reviewers submitted responses for each the countries in this sample. Inter-rater reliability
of the informant responses was assessed through the use of the intraclass correlation coefficient (ICC)
(Shrout & Fleiss, 1979), which provides an indication of the agreement of ratings among independent
judges (Chen, Farh, & MacMillan, 1993). Because a random sample of judges was asked to rate each
item of the country's institutional profile, inter-rater reliability was estimated as (Shrout & Fleiss, 1979):
BMS1-EMS . BMS+(k-1)EMS+k(JMS-EMS)/n
All countries in the sample received ICC scores that were highly significant (ranging from p<. 02
to p<.000), indicating significant agreement among informants within each group.
Independent Variables
All three dimensions of the institutional profile were operationalized using the instrument
validated by Busenitz et al (2000). The normative dimension consisted of four items (α=.92) identifying
public attitudes toward entrepreneurial activities. Examples of these items are, "Entrepreneurs are
admired in this country," and "Turning new ideas into businesses is an admired career path in this
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country." Countries' levels of per capita GDP were drawn from UN (1999) and countries'
unemployment rates were taken from World Bank (1999). Table 1 lists countries in rank order based
on their score on the normative dimension of the institutional profile for entrepreneurship.
Table 1: Normative Institutions Toward Entrepreneurship
Country Rankings
COUNTRY Score (7 point Likert Scale) AUSTRIA 2.33
UNITED KINGDOM 3.13 SWEDEN 3.50 FRANCE 3.81
GERMANY 3.86 PORTUGAL 4.25
JAPAN 4.27 SWITZERLAND 4.38
SPAIN 4.67 ITALY 4.75
NETHERLANDS 4.80 FINLAND 5.50
UNITED STATES 6.23
The cognitive dimension consisted of four items (α=.89) focusing on the public’s awareness of
how to operate and manage a new business. Items include, "Individuals know how to legally protect a
new business," and "Those who start new businesses know how to manage risk." Table 2 provides a
rank order of countries based on their score on the cognitive dimension of the institutional profile.
Table 2: Cognitive Institutions Toward Entrepreneurship Country Rankings
1 where BMS=Between targets mean square, WMS=Within target mean square, JMS=Between judges mean square, EMS=Residual mean square, k= Number of judges, and n= Number of targets.
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COUNTRY Score (7 point Likert Scale) AUSTRIA 2.83
PORTUGAL 2.87 SPAIN 3.00
FINLAND 3.35 GERMANY 3.50
JAPAN 3.68 FRANCE 3.69 SWEDEN 3.69
UNITED STATES 3.82 UNITED KINGDOM 3.88
ITALY 4.29 NETHERLANDS 4.30 SWITZERLAND 4.54
The regulatory dimension consisted of five items pertaining to government policies towards
domestic entrepreneurship (α=.85). While a wide range of government policies can affect
entrepreneurs, the intent of the regulatory dimension was to measure those institutional arrangements that
are likely to affect the domain of entrepreneurship as a whole. Examples of items include, "Government
organizations in this country assist individuals with starting their own business," and "The government
sponsors organizations that help new businesses develop." Table 3 shows the rank order of countries
on the regulatory dimension.
Table 3: Regulatory Institutions Toward Entrepreneurship Country Rankings
COUNTRY Score (7 point Likert Scale)
SWITZERLAND 2.73 AUSTRIA 3.07
ITALY 3.43 PORTUGAL 3.70
SWEDEN 3.95 JAPAN 4.11
FRANCE 4.15
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GERMANY 4.24 SPAIN 4.27
UNITED KINGDOM 4.50 UNITED STATES 4.74
FINLAND 4.76 NETHERLANDS 4.80
Dependent Variables
The paper proposed that specific elements of a country's institutional environment associate with
different measures of each country's level of entrepreneurship. The number of people within a country
who choose entrepreneurial employment was measured as the percentage of all working persons in
non-agricultural sectors who are self-employed. Because published data differ slightly, data were
averaged from self-employment rates published by ILO (1996) and OECD (1998). The prevalence of
small firms was measured using data from OECD (1999), as the percentage of firms within a country
that employ fewer than 100 people.
Data on advanced entrepreneurial activity came from the International Federation of Stock
Exchanges. This variable was calculated as the percentage of the domestic companies on each
country's stock exchange that were newly listed in 1996, 1997, 1998, 1999. In order to capture a long
term trend in new venture listings, the ratio of newly listed to total firms was averaged over these four
years. Because of the hurdles that must be overcome before a new stock market listing, this measure
reflects the presence of entrepreneurial ventures that have achieved enough success to become
legitimated and attract external financing on capital markets.
RESULTS
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Table 4 presents correlations between all variables included in the analysis. It is interesting to
note that the three dimensions of entrepreneurship are actually fairly independent phenomena, with self-
employment actually having a negative (though highly insignificant) correlation with more advanced
entrepreneurial activities
Table 4 Means, Standard Deviations, and Correlations
Mean St. Dev.
1 2 3 4 5 6 7 8
1 Cognitive 3.65 0.54 1.00 2 Normative 4.27 1.00 0.28 1.00 3 Regulatory 4.04 0.65 -0.04 0.46 1.00 4 Per Capita GDP 20,874 4,748.83 0.43 0.02 -0.13 1.00 5 Unemployment 9.24 5.17 -0.34 0.17 0.18 -0.56 1.00 6 Advanced
Entrepreneurship 0.09 0.04 0.01 0.15 0.47 -0.15 0.65 1.00 7 Small Firms (<100
employees) 90.30 11.76 0.58 0.56 0.28 -0.34 -0.03 0.18 1.00 8 Self-Employment 13.27 6.26 -0.14 0.14 -0.36 -0.73 0.38 -0.06 0.44 1.00 Correlations above .56 are significant at p<.05.
To test Hypotheses 1-3, the three dimensions of the institutional profile, as well as countries' per
capita GDP and unemployment rates, were used to predict the level of self-employment in each country.
Table 5 reports these results. Per capita GDP emerged as one of the strongest (negative) predictors of
a country's self-employment rate, lending support to H3. The country's unemployment rate did not
predict its self-employment rate; therefore, H2 was not supported. The normative dimension
significantly predicted self-employment, lending support to H1. As expected, the cognitive dimension
did not predict self-employment. Interestingly, the regulatory dimension emerged as a significant
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negative predictor of self-employment, indicating that countries that have a regulatory environment that
supports entrepreneurship actually have lower levels of self-employment activity.
Table 5 Regression Analysis Predicting
Self-Employment Standardized
Beta Normative .53* Cognitive .28 Regulatory -.76** Per Capita GDP -.84** Unemployment .28 F 11.25** Adj. R-Square .82 **: p<.01; *. p<.05; + p<.10
To test Hypotheses 4-7, the three dimensions of the country institutional profile, as well as per
capita GDP and unemployment rates, were used to predict the prevalence of small firms. Table 6
reports these results. Contrary to expectations, the normative dimension did not emerge as a significant
predictor of the presence of small firms in an economy. This finding fails to support H4. However, the
cognitive dimension did serve as a predictor of the presence of small firms (p<.05), providing support
for H5. As expected, neither the regulatory dimension nor countries’ unemployment rates predicted the
prevalence of small firms in the national economy. In contrast, countries’ levels of per capita GDP did
predict the prevalence of small firms (p<.05), providing support for H7.
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Table 6 Regression Analysis Predicting the Prevalence of
Small Firms Fewer than 100
employees Normative .41 Cognitive .64* Regulatory .08 Per Capita GDP -.70* Unemployment -.33 F 6.47* Adj. R-Square .73 **: p<.01; *. p<.05; + p<.10
To test H8 and H9, the three dimensions of the institutional profile, as well as per capita GDP
and unemployment rates, were used to predict the percentage of firms on a country’s stock exchange
that are newly listed. Note that this third regression model was significant only at p<.07. Table 7 shows
that the cognitive dimension did not predict advanced entrepreneurship, but the regulatory dimension
emerged as a marginally significant predictor of this more sophisticated form of entrepreneurship
(p<.07), providing partial support for H9. As expected, the normative dimension did not predict
countries' levels of advanced entrepreneurial activity, but the country’s unemployment rate was
significantly associated with the presence of advanced entrepreneurship.
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Table 7 Regression Analysis Predicting
Advanced Entrepreneurial Activity Standardized
Beta Normative -.32 Cognitive .29 Regulatory .51+ Per Capita GDP .28 Unemployment .87** F 3.43+ Adj. R-Square .50 **: p<.01; *. p<.05; + p<.10
DISCUSSION
This paper has focused on three types of entrepreneurship, ranging from fairly basic self-
employment activities, to more complex activities required for small business development, to advanced
activities reflected in the listing of new firms on a country's stock exchange. It appears that the three
dimensions of entrepreneurship are fairly independent in their presence in national economies. It also
appears that the dimensions of the institutional profile play different roles in promoting different types of
entrepreneurial activity. Table 8 summarizes associations between the three dimensions of the
institutional profile and the various types of entrepreneurial activity.
Table 8 Relationships Between Institutional Profile and Forms of Entrepreneurship
Regulatory Negative** No relationship Positive+ Cognitive No Relationship Positive* No relationship Normative Positive * No relationship No relationship Basic
(Self-Employment) Moderate
(Small Businesses) Advanced
(New Stock Listings) **: p<.01; *. p<.05; + p<.10
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Taken together, the results lead to four conclusions. First, the normative dimension, reflecting a
society's level of admiration of entrepreneurs, predicted basic entrepreneurial activities encapsulated in
self-employment rates, but did not predict more advanced types of entrepreneurship. The relationship
between a society’s attitude towards entrepreneurs and more basic forms of entrepreneurship suggests
that researchers should not concentrate only on broad cultural values when exploring the basis for
domestic business activity because a country's value system, alone, may not provide a strong enough
impetus to promote advanced entrepreneurship.
EU governments striving to promote self-employment activity may wish to implement polices
targeted toward improving their country’s normative environment. For instance, “entrepreneur of the
year” awards may improve societal attitudes toward entrepreneurship (Gnyawali & Fogel, 1994), and
frequent mention of small or new businesses in public addresses may legitimate entrepreneurial
enterprises.
Second, the relationship between the cognitive dimension and the proliferation of small
enterprises emphasizes the importance of the abilities and skill sets of likely entrepreneurs. Murray
(1996) noted that while many studies have concentrated on the motivation behind entrepreneurial
activities, few have focused on the technical and business know-how that are critical to entrepreneurial
success. While most self-employment activities do not require exceptional capabilities regarding
founding and managing a private firm, small business management depends extensively on this type of
knowledge.
The importance of the cognitive dimension suggests that policy makers in the European Union
may encourage small enterprise activity by providing technical training and development workshops to
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would-be entrepreneurs (Gnyawali & Fogel, 1994), as well as by pursuing other strategies to ensure
that the requisite knowledge and skills are distributed throughout a society.
Third, although the relationship between the regulatory dimension and the percentage of firms on
a domestic stock market that were newly listed was only marginally significant, this finding is consistent
with other research suggesting that government policies may sometimes play an important role in the
success of entrepreneurial ventures. For instance, Dana (1990) compared two national environments
located on the same Caribbean island--Saint Martin and Sint Maarten. He found that entrepreneurship
flourished in Sint Maarten, which assisted new businesses by offering direct support programs,
providing low taxes and import duties, and eliminating exchange controls and complex bureaucratic
procedures. At the same time, entrepreneurship faltered in Saint Martin, where entrepreneurs were
burdened with extensive paperwork and regulatory restrictions.
Similarly, economic liberalization and reduced government intervention led to a business
environment that encouraged innovative entrepreneurship in Argentina (Dana, 1997). Low interest
loans and government grants facilitated entrepreneurship in Singapore (Dana, 1987). Tax and tariff
concessions promoted entrepreneurial activity in the Virgin Islands (Dana, 1987). Government
procurement and research grants promoted the founding and success of high technology firms in Canada
(Doutriaux, 1988). And tax relief for new equity investments helped entrepreneurs overcome capital
constraints in Britain (Harrison & Mason, 1988). While EU officials should look to success stories from
other countries when devising their own policies to foster entrepreneurship, they must also recognize that
countries vary in their capabilities to implement programs benefiting private businesses. Therefore, EU
policy makers must be cognizant of their own limitations, as well as the particular obstacles faced by
their firms, when they design policies to promote entrepreneurship.
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Interestingly, regulatory institutions were actually negatively associated with the most basic type
of entrepreneurship activity, self-employment, and were not significantly related – positively or
negatively – with the percentage of businesses in a country that were small. One explanation is that
countries that displayed a positive regulatory environment were able to encourage potential
entrepreneurs to pursue more advanced forms of entrepreneurship. That is, when the regulatory
institutions were strong, individuals appeared to be pushed away from self-employment and towards the
most advanced form of entrepreneurship. Further research should explore the basis for individuals’
decisions to pursue various types of entrepreneurial activities.
While the focus of this paper has been on the positive role that policy makers can play in
fostering domestic entrepreneurship, it is important to note that government policies can also place
burdens on entrepreneurs. For instance, Kirchhoff and Phillips (1988) found that consistent intervention
in the labor market by European governments eliminated entrepreneurs’ abilities to take advantage of
declines in real wage rates. Therefore, just as EU policy makers may want to consider emulating the
most successful programs in other countries, officials must also evaluate their programs to identify
policies that may have unintended negative effects on new firm creation and growth.
Finally, per capita GDP predicted more basic forms of entrepreneurship, with poorer countries
showing higher rates of self-employment and small business development. This suggests that economic
necessity may motivate individuals towards basic types of entrepreneurship, but not advanced
entrepreneurship.
Unemployment did not predict more basic types of entrepreneurship, but was related to
advanced entrepreneurial activities. Despite the fact that the data was collected and reported by
international organizations, the informal economic sector in poorer countries may not have been
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accurately represented in unemployment and self-employment data. For instance, in some countries
unemployment figures may not have included individuals who returned to family farms due to a lack of
external employment opportunities. And in other countries, unemployment rates may have been
overstated due to individuals who claimed to be unemployed despite working in the informal sector.
Therefore, the results regarding the relationship between unemployment and entrepreneurship are
inconclusive. Researchers should continue to assess the roles that these macroeconomic variables play
in fostering and inhibiting entrepreneurship because studies have shown that broader government
policies that affect the macro environment can obstruct entrepreneurs’ best efforts at succeeding with a
new start-up (Young & Welsh, 1993).
EU officials should note that while societal values may encourage individuals to seek
entrepreneurial employment, other institutional arrangements may be required to propel those
entrepreneurs to more advanced business development activities. When a society values
entrepreneurship, public institutions can play an active role in helping entrepreneurs succeed and grow.
Indeed, even when a country's residents appear not to admire entrepreneurs, policy makers may be
able to implement regulatory policies that contribute to advanced entrepreneurial activity.
If EU officials wish to promote small business development, they may consider policies to
provide educational and training programs to potential entrepreneurs, or to disseminate knowledge and
information concerning small business development to society at large. If they wish to promote more
advanced entrepreneurship they may couple these education programs with a regulatory environment
that provides financing assistance, special procurement opportunities, or other government assistance
programs to small and new businesses.
25
The formation of new businesses and the flourishing of small enterprises are often touted as
roads to economic prosperity for national economies. By clarifying the ways in which national
institutional structures influence domestic entrepreneurial activities, future research on institutional
environments for entrepreneurship can help national and regional policymaking institutions formulate and
implement policies of long term economic growth for their economies.
26
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