The institutional context, entrepreneurship decisions, and venture types: evidence from Mexico

Abstract

Purpose The research aims to applying Baumol’s framework to address some research gaps in the literature. This paper aims to analyze how institutional variations at the subnational level impact entrepreneurship decisions and the path toward productive or unproductive entrepreneurship in an institutionally underdeveloped country. The results offer potentially new theoretical insights and practical implications for developing or emergent countries. Design/methodology/approach The research applies Baumol’s framework to Mexico’s context. The research collects data compounded by individual- and state-level variables from diverse sources for the 32 Mexican states. The individual level and some controls were obtained from sources of regular frequency, but the institutional variables were derived from surveys of irregular frequency, nonsynchronic and mostly nonoverlapping, which required aligning and centered them around 2016 and 2019 to match with the individual variables. The authors apply multilevel nonlinear mixed-effects probit regression to test nine hypotheses regarding the impact of institutional variables on entrepreneurial decisions and the path toward productive or unproductive entrepreneurship. Findings Improved formal institutions across the Mexican states reduce the entrepreneurship probability, implying interactions with other variables and indirect effects; encourage the selection of productive entrepreneurship, e.g. formal ventures; and discourage self-employment. Consequently, those institutions do not encourage entrepreneurship selection as an occupation but entrepreneurial quality, i.e. the selection of productive-formal entrepreneurship and larger ventures. Deficient informal institutions increase the entrepreneurship and formal entrepreneurship probabilities, implying the interactions with other variables and indirect effects and supporting the corruption “greases the wheels” hypothesis, consequently encouraging productive ventures. New evidence of the positive relationship between criminality and entrepreneurship types in Mexico is reported. Research limitations/implications Our findings indicate important impacts of the individual-level variables on the entrepreneurship decisions and that most of those decisions are potentially necessity driven and a minority are driven by opportunity, given their relationship with the macroeconomic controls and the institutional variables. The authors report mixed results on the relationship between institutions and entrepreneurship partially consistent with the literature; some results contribute additional evidence on controversial hypotheses or imply the existence of indirect effects. Overall, the results suggest that institutions impact the individual decisions to venture and the type of venture consequently affecting the amount and quality of entrepreneurship across states. Originality/value The research addresses some of the literature gaps by providing empirical evidence on a middle-income country and how diverging regional institutional contexts, including formal and informal institutions, impact the individual’s entrepreneurship decisions within an institutionally underdeveloped country. The paper contributes new knowledge and insights into entrepreneurship in emerging or developing countries with implications for Baumol’s framework in this context and adds to the debated hypothesis on the relationship between some institutions, e.g. corruption and criminality and entrepreneurship.