Institutions and Entrepreneurial Activity: The Interactive Influence of Misaligned Formal and Informal Institutions

Abstract

Abstract. We contribute to the institutions and entrepreneurship literature by examining the interactive influence of formal and informal institutions on new business creation, survival, and growth. Prior literature demonstrates how formal and informal institutions shape the level of entrepreneurship. This paper extends this to examine the cases when formal and informal institutions conflict with one another to cast an analytic eye on why countries differ in the type of entrepreneurial activity in terms of entry, survival, and growth. We argue that national and regional differences can be better explained by the interactive influence of formal and informal institutions. Moreover, we argue that informal institutions dominate formal institutions due to the former's characteristics of deep embeddedness and resistance to change over time. These ideas are presented and summarized into a typology of institutional effects on entrepreneurship activity depending on the combination of formal and informal institutions. The paper concludes with implications for future theory and research on the joint influence of different institutional effects and particularly on the intersection between institutions and entrepreneurship.

From farms to fuel tanks: Stakeholder framing contests and entrepreneurship in the emergent U.S. biodiesel market

“…Although recent scholarship offers examples of movements facilitating entrepreneurial opportunities and exploitation, these studies largely evoke a “hero” image of a powerful stakeholder championing a new organizational form, technology, or practice, when the institutional environment typically reflects many types of stakeholders promoting and attacking competing practices and technologies (Briscoe & Gupta, ; Eesley, Decelles, & Lenox, ; Vasi & King, ). Moreover, pluralistic pressures exerted by multiple actors may greatly affect entrepreneurial decision‐making in emerging markets where technologies are unproven and category meanings are unsettled (Eesley, Eberhart, Skousen, & Cheng, ). By exploring competing frames from three stakeholder groups, we answer scholarly calls to take a “more agency‐motivated approach” to category research (Durand & Khaire, , p. 89) and begin to identify the underlying mechanisms whereby multiple stakeholders can influence new market emergence and evolution.…”

Strategy and the Institutional Envelope

“…In such demanding situations, one would expect that many institutions would be subject to ongoing pressures for change, a situation that heightens the importance of understanding not just the static but the dynamic relationships among the institutional envelope, firms, and other societal players. To be sure, some institutions are more immutable in the medium term than others (see, e.g., Eesley et al 2018), but when institutions that bear on a firm's activities are mutable, achieving and sustaining competitive advantage may depend on a firm or industry's success in the nonmarket arena.…”

“…The papers can largely be split into two groups. The first set of articles exploits cross-geography and cross-time variation in institutional envelopes to explore various ways in which the institutional envelope affects firm choice (Nartey et al 2018, Waguespack et al 2018) and industry structure (Eesley et al 2018, Jourdan 2018. In all of the articles, informal structure plays a major role in outcomes.…”

“…Relating to our earlier discussion of the institutionsbased model, Nartey et al (2018) highlights the idea that the institutional envelope, specifically, the rule of law, can serve as a moderator of firm strategy. Eesley et al (2018) provide an explanation for the level of entrepreneurship based on interaction of formal and informal institutions, especially when they conflict. The authors argue that in conflict settings the informal institutions dominate and propose a theory in which the differences in the combination of formal and informal institutions at a country level explain the vibrancy of entrepreneurial activity.…”

“…Understanding the effects of the institutional envelope on firms may entail not just understanding the relations between formal and informal institutions and firm behavior and performance but also the relationship between formal and informal institutions that can serve as both complements and substitutes to each other. Indeed, formal and informal institutions may conflict with each other (see Eesley et al 2018).…”