Entrepreneurial Entry: Which Institutions Matter?

In this paper we explore the relationship between the individual decision to become anentrepreneur and the institutional context. We pinpoint the critical roles of property rights andthe size of the state sector for entrepreneurial activity and test the relationships empirically bycombining country-level institutional indicators for 44 countries with working age populationsurvey data taken from the Global Enterprise Monitor. A methodological contribution is theuse of factor analysis to reduce the statistical problems with the array of highly collinearinstitutional indicators. We find that the key institutional features that enhance entrepreneurialactivity are indeed the rule of law and limits to the state sector. However, these results aresensitive to the level of development....