Institutions, Human Capital and Entrepreneurial Orientation (EO): Implications for Growth Strategy

Motivated by the long established postulation by Adam Smith and Joseph Schumpeter that human capital and institutions enable Schumpeterian entrepreneurship which, in turn, facilitates economic growth, we sought to establish a more robust empirical support for this relationship. Adopting EO (i.e., innovativeness, proactiveness and risk-taking; Mthanti and Ojah, 2017, Research Policy, 46:4, 724-739) as the measure of Schumpeterian entrepreneurship at the macro-level, and using a sample of 93 countries, over 1980-2008, we employ system-GMM to investigate institutions and human capital as possible determinants of Schumpeterian entrepreneurship (EO). We find that the human capital—EO nexus is robust across economic development levels. However, there is a cross-country variation in the institutions—EO nexus. In line with theoretical predictions, institutions indeed drive EO in middle-to-high income countries. However, in low income countries, building institutions in order to foster EO yields perverse outcomes, which, for us and especially based on deeper analysis, suggest that improving the quality of institutions may not be a necessary precondition for EO/growth policy in low income countries. Furthermore, we find that EO is a highly persistent series, with self-reinforcing network effects; i.e., lofty EO behaviour encourages more lofty EO behaviour. Overall, therefore, we argue that where Schumpeterian entrepreneurship is hampered by low private returns or poor institutional environment, a sensible growth strategy would be to: (1) invest in human capital and (2) subsidize EO directly to exploit its network effects.