Democracy and the Productivity Benefits of Entrepreneurship in Africa

Abstract

There are ongoing debates on whether democracy promotes entrepreneurship. The extant studies reveal mixed evidence on the nexus between the two variables. Furthermore, the implications of democracy for economic growth in developing economies remain a subject of controversy. Despite this intense debate, no known study has examined the interactive effect of democracy and entrepreneurship on labor productivity in developing economies. Our study fills this important gap. We investigate the effect of democracy on labor productivity. The role of democracy in the nexus between entrepreneurship and labor productivity is also investigated. The study is based on panel data of 31 African nations spanning a period from 2006 to 2022. Using instrumental variable (IV) estimator, the System generalized method of moments, and the panel data estimate based on robust standard errors, the study shows that democracy has a positive effect on labor productivity. Further empirical results show that the role of democracy in the relationship between entrepreneurship and labor productivity is positive and has a beneficial effect on labor productivity in the African continent. The implications of the results confirm that the interconnection between entrepreneurship and labor productivity relies on freedom, a foundation of a democratic system of government. Democracy enhances political and economic freedom and allows economic agents to exercise their free will as well as thoughts to be shared. This creates a conducive entrepreneurial environment for households and firms. Democracy allows citizens to seek and utilize economic and entrepreneurial opportunities, which finally boosts labor productivity in the economy. The study demonstrates that democracy provides a friendly business environment for entrepreneurial firms to innovate and grow.