How Do Institutions Shape Productive Entrepreneurship Across Levels of Economic Development?

We examine the influence of institutional framework conditions on the productivity potential of new entrepreneurial businesses in advanced and developing economies using primary data from the Global Entrepreneurship Monitor from 2006 to 2022. We combine each economy’s institutional conditions for entrepreneurship with individual-level data on entrepreneurial activity, productivity, and aspirations. We use three measures to proxy for productive entrepreneurship: new product innovation, export activity, and high-growth expectations. The three institutional conditions examined are business regulations, rule of law, and financial conditions. Using a two-stage Heckman model to control for selection bias, we find that an economy’s institutional framework is instrumental in shaping productive entrepreneurship, and the effects are more pronounced in developing economies, with evidence of decreasing returns for advanced economies. The novelty of our analysis is in the use of an extended panel, the use of a multilevel design to appropriately control for individual-level effects, and the exploration of the moderating effect of economic development.