The interaction of entrepreneurship and institutions

Abstract

Previous research, notably Baumol (1990), has highlighted the role of institutions in channeling entrepreneurial supply into productive, unproductive, or destructive activities. However, entrepreneurship is not only influenced by institutions – entrepreneurs often help shape institutions themselves. The bilateral causal relation between entrepreneurs and institutions is examined in this paper. Entrepreneurs affect institutions in at least three ways. Entrepreneurshipabidingby existing institutions is occasionally disruptive enough to challenge the foundations of prevailing institutions. Entrepreneurs sometimes have the opportunity toevadeinstitutions, which tends to undermine the effectiveness of the institutions, or cause institutions to change for the better. Lastly, entrepreneurs can directlyalterinstitutions through innovative political entrepreneurship. Like business entrepreneurship, innovative political activity may be productive or unproductive, depending on the incentives facing entrepreneurs.