How Institutions Shape Entrepreneurial Productivity Differently Across Economic Stages

The study by leading global institutions finds that strong business regulations, rule of law, and financial development significantly boost productive entrepreneurship, especially in developing economies. However, in advanced economies, the impact of further institutional improvements shows diminishing returns.

In a remarkable collaboration, researchers from Loughborough University, EGADE Business School at Tecnológico de Monterrey, Imperial College London Business School, the Asian Development Bank, and Xiamen University, Malaysia have unveiled a seminal study powered by data from the Global Entrepreneurship Monitor spanning from 2006 to 2022 that examines how the strength of institutions affects entrepreneurial productivity, and crucially, how these effects diverge between developing and advanced economies. With a rigorous multilevel analytical design and Heckman correction for self-selection biases, the study stands out as one of the most methodologically robust investigations into the link between institutions and entrepreneurship to date.

The central premise is clear: entrepreneurship’s potential to drive economic growth is highly sensitive to institutional quality. Entrepreneurs can channel resources into productive, innovative businesses or, if institutions are weak, into ventures that are stagnant or even harmful to economic well-being. Building on the foundational theories of William Baumol and a growing body of empirical evidence, the research emphasizes that institutions such as legal frameworks, regulatory environments, and financial systems are decisive factors that determine whether entrepreneurial activity adds to or detracts from national prosperity.

Entrepreneurship’s Double-Edged Sword: Institutions as the Guiding Hand

Not all entrepreneurship is created equal. The study cleverly operationalizes "productive entrepreneurship" through three firm-level indicators: introducing new products to the market, engaging in export activity, and projecting high employment growth. It zeroes in on three institutional pillars, business regulation quality, the strength of the rule of law, and access to finance, to uncover how these elements either propel or stifle entrepreneurial dynamism.

The findings are nothing short of revealing. In developing economies, improvements in these institutional factors lead to significantly stronger positive entrepreneurship outcomes than in wealthier nations. Better business regulations are associated with higher rates of innovation and internationalization among startups in poorer economies. Similarly, strengthening the rule of law, through enhanced property rights and reduced corruption, sharply boosts the chances of firms engaging in innovation and exports. Financial development, too, emerges as a critical enabler: wider access to credit substantially raises the probability of entrepreneurs investing in product development, scaling operations, and planning for high-growth futures.

Meanwhile, in advanced economies, the returns on institutional improvements are markedly lower. In some cases, such as business regulation refinement, the effects even turn negative, suggesting that once institutional maturity is achieved, additional tweaks may yield diminishing or counterproductive outcomes.

A Tale of Two Worlds: Development Level Alters the Impact

One of the most powerful insights from the study is the clear divergence in how institutions affect entrepreneurship depending on an economy’s development level. Detailed marginal effects analysis vividly illustrates that in less developed economies, strengthening business regulations can increase the likelihood of product innovation by several percentage points, whereas the same reform in advanced economies shows little to no benefit.

Similarly, improvements in the rule of law drive dramatic gains in export propensity in developing countries but yield only modest or even negative effects among richer nations. Access to finance tells the same story: it acts as a bottleneck in low-income countries, meaning that even modest improvements can unlock waves of entrepreneurial innovation. In high-income economies, where diverse funding sources are already abundant, additional finance flows produce much smaller shifts in entrepreneurial behavior.

The implication is unmistakable: institutional reforms are not a one-size-fits-all strategy. For developing economies, reforms targeting legal protections, business transparency, and financial inclusion can deliver disproportionately large benefits. For advanced economies, however, the entrepreneurship agenda must pivot toward fostering ecosystems of innovation, advanced skills development, and network building.

A Blueprint for Smarter Policy in a Complex World

The research is not just academic, it carries direct lessons for policymakers. In countries where informal entrepreneurship dominates due to regulatory barriers or lack of legal protections, formalizing businesses through smarter regulation could trigger major productivity gains. Strengthening the rule of law can boost trust, enhance contract enforcement, and reduce corruption, enabling entrepreneurs to take greater risks and invest in long-term growth strategies.

Similarly, expanding access to finance through microcredit programs, SME-focused banking reforms, and emerging fintech solutions could be transformational in developing contexts. The study cautions that reforms must be realistic and context-sensitive, as institutional change is costly and politically complex. Nevertheless, the rewards of getting it right, in terms of jobs, innovation, and economic resilience, are profound.

For richer nations, where traditional institutional improvements have less to offer, the focus should shift to policies that nurture entrepreneurial ambition and resilience in a highly competitive, innovation-driven global market.

Charting the Next Frontiers in Entrepreneurship Research

While groundbreaking, the study also points to future directions. More research is needed to explore the sequencing of reforms, for example, whether financial sector development should precede legal reforms, or vice versa. There is also scope for deeper exploration of informal institutions, cultural norms, and their interplay with formal frameworks. Emerging technologies like digital platforms and blockchain financing open exciting new possibilities for expanding entrepreneurial opportunities even in institutionally weak environments.

Ultimately, the study underscores a simple but powerful message: institutions shape entrepreneurship, but their influence is deeply conditioned by the stage of economic development. Recognizing and acting on this complexity could mark the difference between stagnant self-employment and vibrant entrepreneurial ecosystems that fuel innovation, prosperity, and inclusive growth across the world.