The relationship between entrepreneurship and economic growth

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Institutional theory

Research on institutions has largely been divided into two different research fields. As we have shortly mentioned earlier one of them is the rational agent model of institutional economics where actions are based on the cost-benefit preferences of the individuals. The other branch of institutional theory is based on social and cultural aspects in which indi-viduals are agents of change who are influenced by and influences their surroundings (Pacheco et al. 2010). The neoclassical view of the individual as a rational cost-benefit subject was substantially challenged by the notion of prospect theory in the late 70´s (Kahneman & Tversky, 1979). Observations in the real world of how individuals acted was not consistent with the existing theory and could not explain certain behaviours such as e.g. gambling with a negative expected outcome. DiMaggio and Powell (1991) outright rejected the rational agent model from neoclassical microeconomics in favour of socio-logical institutional theory according to which, action is taken and outcome is realised as a product of the institutions. These institutions thus form the individuals´ thinking and behaviour.
We stated in the previous chapter that entrepreneurship influences economic growth by being more productive and creating greater value with respect to Capital, Labour and Technology. We believe that it is important to study these factors from a perspective of social and cultural institutions given that we agree with DiMaggio and Powell (1991). Institutionalism has the capacity to set reward levels in society, but also to place cognitive limits on an aggregate level as social and cultural programming determines action and outcome. To acquire a better understanding of these institutions and how do they have the capacity of influence behaviours we are introducing institutional theory relying on North (1990) and Scott (2013).
Institutions are defined as rules and regulations, socially accepted forms of activities and behaviour, symbols and meanings that “provide stability and meaning to social life” (Scott, 2013, p.56). They are “multifaceted, durable social structures, made up of sym-bolic elements, social activities and material resources” (Scott, 2013, p.57). More practi-cally said, institutions can be everything from a handshake to taxation. Historically, North (1990) lead the way with differentiating between formal and informal institutions based mainly on the principles of institutional economics. Later on Scott (2013) created the so called “three pillars of institutions” in 1995 in order to organise the broad range of theo-ries and underlying assumptions behind institutional research (Scott, 2014). The pillars are placing the rules, laws, norms and social perceptions into three categories.
The regulative pillar is based on rules and indicated by laws and sanctions (Scott, 2013). It is following the logic of North’s (1990) formal institutions. To use regulative institu-tions as determinants of entrepreneurship means that we assume people abide by rules because they are afraid of the negative consequences of deviating, and are e.g. engaged in entrepreneurship because the laws and regulations enable them to (North, 1990). The pillar strongly relies on neoclassical economic fundamentals and assumptions, based on the aforementioned rational agent model of institutional economics and belongs to the economic/political branch of institutional theory (Bruton et al., 2010). It means that the driving forces are government structures and rule systems where agents act according to cost-benefit comparability. Regulative institutions could be measured for instance by how different taxation laws or difficulties in obtaining financial resources determine the effect of entrepreneurial activities on economic growth (Ahlstrom, Bruton & Lui, 2000; Bruton & Ahlstrom, 2003; Sobel, 2008).
The second, normative pillar of institutions, builds on social obligations and expectations, and its most common indicators are certifications and accreditations (Scott, 2013). It sug-gests that individuals are acting a certain way not out of fear for the negative conse-quences, but because of what is socially expected and morally acceptable (Bruton et al., 2010; Scott, 2013). This can be understood both on aggregate level and in smaller com-munities or groups. An example of this pillar is entrepreneurs pursue opportunities in a certain country because this is what common value dictates. The normative institutions, i.e. the values held by individuals also determine how the entrepreneurs are supposed to act morally (Scott, 2013). This pillar is grounded in the ideas of sociology/organisational branch of institutional theory meaning that the basic assumption is that these values and norms are tightly connected to the cultural frameworks they are embedded in (Bruton et al., 2013).
The third of Scott’s pillars is called cultural-cognitive pillar, the basis of which relies on common beliefs and shared understandings (Scott, 2013). This pillar provides frame-works for sense making. Scott (2013), relying on previous academics, highlights the im-portance of the cognitive and social elements as subjective meanings are made by re-peated social interactions and “maintained and transformed as they are employed to make sense of the ongoing stream of happenings” (Scott, 2013, p.67). The cultural-cognitive pillar also relies on the basic assumptions of sociology/organisational theory with the main force being the drive for achieving legitimacy and stability in uncertainty (Bruton et al., 2010). The second and third pillars make up North’s (1990) informal institutions.

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The moderating effects of institutional dimensions

Entrepreneurs do not act as separate entities independent from their environment; their motivations, decisions and actions are influenced by the political, economic, cultural and social environment they are embedded in (Aldrich & Zimmer, 1986; Granovetter, 1985). Fukuyama (1995) argues that all economic activity can be related to organisations, and organisations are embedded in institutional environments (Edquist & Johnson, 1997). In-stitutions being laws, rules, norms, values and shared beliefs regulate social interactions and the relationships of individuals and organisations with- and external to each other in society. Following this logic, individuals by definition highly depend on the environment they are embedded in, which leads to the conclusion that if institutions differ then the resulting action differs as well. In a sense this means that not all entrepreneurship is the same with respect to its direct relationship to economic growth as the support and limita-tions imposed by institutions strengthens or weakens the outcome. We have already pre-sented some concrete examples of entrepreneurship in connection to institutions and we have identified the determinant factors of economic growth above, which we wish to look at as: Technology, Capital and Labour. In the subsequent sections we will discuss the moderation of entrepreneurship-growth relationship with regard to economic-, social- and cultural embeddedness using the above described pillars.

1 Background
1.1 Problem description
1.2 Purpose
1.3 Research question
1.4 Outline
2 Theoretical framework
2.1 Necessity- and opportunity entrepreneurship
2.2 Economic growth
2.3 The relationship between entrepreneurship and economic growth
2.4 Institutional theory
2.5 The moderating effects of institutional dimensions
2.6 Cultural-cognitive and Normative dimensions affecting the entrepreneurship-growth relationship
3 Empirical Model and Method
3.1 Research philosophy and approach
3.2 Research design and strategy
3.3 Quality of the research design
3.4 Ethical considerations
3.5 Data
3.6 Data descriptives
3.7 Approach
4 Results
4.1 OLS regression results
4.2 Univariate time-series – Mixed Method
5 Analysi
6 Conclusion
7 Discussion
List of references
Appendix