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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 jspencer@gwu.edu

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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