The Consequences of Short-Term Institutional Change in the Rule of Law for Entrepreneurship

Tomasz Mickiewicz*, Muntasir Shami, Ute Stephan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Research Summary: Past research views institutions as stable and slow to change and uses institutional differences to explain cross-national variation in entrepreneurship. This article introduces a new perspective to institutional theory, that of short-term institutional change. Integrating insights from cognitive science allows us to theorize not just about the significance of short-term institutional change but also about why and how deterioration versus improvements in institutions have distinct effects. We test how short-term institutional change impacts entrepreneurship in a cross-country multilevel study. We find that short-term change in the rule of law affects entrepreneurial entry and that institutional deterioration weighs heavier than institutional improvement. We argue and find that changes in the rule of law are more consequential for entrepreneurship compared to changes in business regulations. Managerial Summary: It is known that the quality of institutions affects individuals' decisions to pursue entrepreneurship. Yet, we newly investigate effects of year-to-year changes in national institutions. Not only changes in business regulations matter, but also changes in more fundamental institutional aspects, especially in the rule of law. We find that institutional change has an impact because, on its basis, potential entrepreneurs form expectations about the future and therefore about the riskiness of their investment. Deteriorations compared to improvements in the rule of law are more consequential for entrepreneurship, consistent with the fact that losses loom larger than gains in human decisions.

Original languageEnglish
Pages (from-to)709-739
Number of pages31
JournalGlobal Strategy Journal
Volume11
Issue number4
Early online date23 Jun 2021
DOIs
Publication statusPublished - Nov 2021

Bibliographical note

© 2021 The Authors. Global Strategy Journal published by John Wiley & Sons Ltd on behalf of Strategic Management Society.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

Keywords

  • Global Entrepreneurship Monitor
  • entrepreneurship
  • executive constraints
  • institutional change
  • prospect theory
  • rule of law

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