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

For newly forming organizations, the institutional environment defines, creates, and limits entrepreneurial opportunities, and thus affects the speed and scope of entrepreneurial entry rates (Aldrich, 1990; Gnyawali & Fogel, 1994; Hwang & Powell, 2005). The institutional environment further determines the process of gaining cognitive and sociopolitical legitimacy, which is critical for entrepreneurial organizations to overcome the liabilities of newness (Stinchcombe, 1965) and smallness (Aldrich & Auster, 1986) and to increase their survival prospects (Freeman, Carroll, & Hannan, 1983). Legitimacy comes at a cost, however. Because entrepreneurial organizations need to behave in a desirable or appropriate manner within a socially constructed system (Suchman, 1995), or face sanctions for deviation from the accepted norms, the range of strategic options and the degree of individual agency available to the new venture is constrained (Ahlstrom & Bruton, 2002; Roy, 1997). Thus, the institutional environment exerts a powerful influence not only on entrepreneurial entry rates, but also on the ensuing trajectories of entrepreneurial initiatives. The powerful impact of the institutional environment for unlocking entrepreneurial phenomena prompted Aldrich and Wiedenmayer (1993) to assert that it could create or destroy entrepreneurship in a country. Baumol (1990) added that the institutional environment can promulgate productive, unproductive, or even destructive entrepreneurship.

Busenitz et al. (2000) followed the classification proposed by Scott (1995) and designed an instrument to measure a country's institutional profile for the development of entrepreneurship. In their instrument, they adopted somewhat narrower definitions than were originally intended. For instance, the cognitive dimension is defined as "the knowledge and skills possessed by the people in a country pertaining to establishing and operating a new business" while the normative dimension measures "the degree to which a country's residents admire entrepreneurial activity and value creative and innovative thinking" (Busenitz et al., 2000, p. 995). In our study, we seek to validate the instrument developed by Busenitz et al; hence, we adopted their definitions.

The Research Questions

Our first question deals with the appropriateness of the instrument developed by Busenitz et al. (2000) for the context of emerging economies. With respect to the formal, regulatory dimension, previous research noted the predominantly vertically oriented, state-centered institutional environment in emerging economies of Eastern Europe wherein a legacy of central planning is still powerful and permeates the business task environment through excessive regulation (Manolova & Yan, 2002, p. 177). Radical economic reforms in these countries led to excessive and persistent unemployment levels. As a result, the opportunity costs of self-employment decreased, leading to large-scale predominantly "necessity-based" rather than the more desirable "opportunity" entrepreneurship (Acs et al., 2004).