Institutional environments for entrepreneurship: evidence from emerging economies in Eastern Europe

Entrepreneurship: Theory and Practice, Jan, 2008 by Tatiana S. Manolova, Rangamohan V. Eunni, Bojidar S. Gyoshev

In this article, we sought to empirically validate an instrument for measuring country institutional profiles for the promotion of entrepreneurship in a sample of 254 business students from three emerging economies: Bulgaria, Hungary, and Latvia. Results from the confirmatory factor analysis suggest high reliability, internal consistency, and construct validity of the instrument. Further, we find important differences in the three dimensions (regulatory, cognitive, and normative) of the institutional profiles across the three emerging economies, reflecting their idiosyncratic cultural norms and values, traditions, and institutional heritage in promoting entrepreneurship. Implications for future research, managerial practice, and public policy are discussed.

Introduction

The shape and pace of entrepreneurship in the emerging economies of Eastern and Central Europe is significantly determined by the dominant influence of the institutional environment (Ahlstrom & Bruton, 2002; Peng & Heath, 1996; Smallbone & Welter, 2001, 2006). On the one hand, sweeping institutional reforms made entrepreneurial endeavors possible, after decades of suppression of private initiative under the communist rule (Manev, Yan, & Manolova, 2005). On the other hand, the very same reforms, especially at the onset of the region's economic transition, created an institutional hiatus, which has severely constrained the entry and growth of new and small firms (Meyer & Peng, 2005; Peng, 2001, 2003). More than 15 years since the start of the reforms in the emerging economies of Central and Eastern Europe, it is still debatable how conducive the various institutional environments are for promoting entrepreneurship.

Surprisingly, empirical research to date has not yet come up with valid scales for measuring the complex effect of the institutional environment for unlocking entrepreneurial phenomena in emerging economies. A large part of the research has been either case-based (McCarthy, Puffer, & Naumov, 1997; Peng, 2001), or predominantly looked at the regulatory (formal) environment (Acs, Arenius, Hay, & Minniti, 2004; Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2002). This gap in extant research led to calls for the development of "good constructs and measures to capture countries' informal institutions (in addition to formal institutions)" (Meyer & Peng, 2005, p. 613; and see Hitt, Holmes, Miller, & Salmador, 2006). Hence, in this study we validate an instrument developed by Busenitz, Gomez, and Spencer (2000) to measure a country's institutional profile for the domain of entrepreneurship in three emerging economies: Bulgaria, Hungary, and Latvia. In addition, we extend Busenitz et al.'s work by using their instrument to investigate the differences in the institutional contexts of the three emerging economies and to examine which national contexts are more favorable for entrepreneurship.

The rest of our article is structured as follows. After presenting the conceptual background for our research questions, we report on our methods and results from statistical tests. The confirmatory factor analysis reveals high reliability, internal consistency, and construct validity of Busenitz et al.'s instrument. Further, the analysis of variance shows significant differences in the institutional profiles of the three emerging economies. We conclude with a discussion of the results of the study and its implications.

Theoretical Background and Research Questions

Predictability of behavior in social interactions is achieved through a set of norms or expected standards of behavior, reinforced by a system of rewards and sanctions to ensure compliance, which over time become social institutions (Bierstedt, 1974; Merton, 1968; Meyer & Rowan, 1977). Institutions, in other words, can be described as relatively widely diffused practices, technologies, or rules of social interaction that have become entrenched in the sense that it is costly to choose alternative practices, technologies, or rules (Lawrence, Hardy, & Phillips, 2002). The institutional framework of a society comprises the fundamental political, social, and legal ground rules that establish the basis for production and distribution, and organizations must conform to it if they are to receive support and legitimacy (North, 1990). In addition, the institutional environment shapes the structure of political, social, and economic incentives, and thereby limits the scope of strategic choices available to individuals and organizations (DiMaggio & Powell, 1983; Roy, 1997; Scott & Meyer, 1991).

Building on work by DiMaggio and Powell (1983, 1991), North (1990) and Scott (1995) classified the formal and informal institutions that impact organizations and organizational actors into regulatory, normative, and cognitive categories. Regulatory institutions refer to the formally codified, enacted, and enforced structure of laws in a community, society, or nation. Less formal are the normative institutions, which typically manifest in standards and commercial conventions such as those established by professional and trade associations, and business groups. Last, but certainly not the least, cognitive institutions are the axiomatic beliefs about the expected standards of behavior that are specific to a culture, which are typically learned through social interactions by living or growing up in a community or society. Despite some "family quarrel" about its accuracy (Hirsch & Lounsbury, 1997), the three-fold categorization has been widely used in organizational research (Ahlstrom & Bruton, 2002; Ahlstrom, Bruton, & Yeh, 2007; Bruton & Ahlstrom, 2003; Bruton, Fried, & Manigart, 2005; Kostova, 1997; Parkhe, 2003).