The ‘play’ of institutions and firm investment: Evidence from a transition economy

Abstract

According to recent literature in new institutional economics and entrepreneurship, institutions, including formal and informal ones (i.e., the rules) are important. However, in a homogeneous national institutional environment, it is unclear whether and how the execution of institutions (how the rules are implemented) matters. The purpose of this research is to assess the mechanisms that local governments can use to encourage entrepreneurial investment, which determines the future growth potential of small businesses. We find that (i) improving local institutional quality in general boosts entrepreneurial investment; and (ii) more financially constrained firms are more sensitive to informal local governance, while less financially constrained firms are more sensitive to local formal institutions, using a large‐scale small and medium‐sized enterprise (SME) dataset from Vietnam from 2006 to 2019.