Entrepreneurship has been connected to several economic and social factors of our time, and it is considered to be an important mechanism for economic development (Acs et al,
2008; Carree & Thurik,
2003). The transition from the managed to the entrepreneurial economy that materialized in many developed countries over the last decades of the past century (Audretsch & Thurik,
2000) motivated scholars and policymakers to understand the determinants of entrepreneurial activity and the driving factors of its surge. Topics that have been linked to entrepreneurship are countless, ranging from economic growth (Aghion,
2017; Wennekers & Thurik,
1999) to job creation (Birch,
1981; Decker et al.,
2014), knowledge spillovers (Acs et al.,
2013; Ghio et al.,
2015), innovation (Block et al.,
2013; Morris et al.,
2010), and digitalization (Calvino et al., 2019). However, though conjectured, the direct linkage between entrepreneurship and democracy remains an unchartered territory. This is a non-negligible gap of knowledge in the entrepreneurship literature that needs to be addressed. Democracy and entrepreneurship are indeed two pillars of Western developed economies and key qualifying determinants of many social end economic cultures around the world. As the
CEO Today Magazine recently stated, “The relationship between business and democracy is an interesting one and may be something you wish to discuss further, read about or write about”.
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We build on the institutional theory of entrepreneurship (Aparicio et al.,
2016; Autio et al.,
2014; Baumol,
1990; Bennett et al.,
2022; Chowdhury et al.,
2019; Dorado & Ventresca,
2013; Estrin & Mickiewicz,
2011; North,
1990; Sobel,
2008; Urbano et al.,
2019), and we draw on the established view that institutional and contextual conditions are key determinants of entrepreneurial activity (Welter,
2011; Schmutzler et al.,
2019; Welter et al.,
2019, Audretsch et al., 2022). Entrepreneurship requires a context to make free choices in both thought and action (Bradley & Klein,
2016). The need of a contextualized perspective on entrepreneurship has stimulated scholars to study how institutional- and context-specific factors affect entrepreneurial activity. A wide array of issues have been considered, including the level of economic and financial development (Black & Strahan,
2002; Wennekers et al.,
2005), corruption (Anokhin & Schulze,
2009; Boudreaux et al.,
2018; Dutta & Sobel,
2016), education and human capital (Davidsson & Honig,
2003; Korosteleva & Belitski,
2017), family context (Aldrich & Cliff,
2003; Bettinelli et al.,
2014; Randerson et al.,
2015), bankruptcy law (Armour & Cumming,
2008; Fan & White,
2003; Fu et al.,
2020; Lee et al.,
2011; Peng et al.,
2010), and tax policies and business regulation (Belitski et al.,
2016; Keuschnigg & Bo Nielsen,
2004; Van Stel et al.,
2007). However, evidence that democracy per se is conducive to entrepreneurship has not yet been provided. Being democracy arguably the most qualifying and distinguishable institutional dimension in developed countries, understanding whether it directly fosters entrepreneurship is not of secondary importance.
We also ground in the acknowledged evidence that democracy shapes socio-economic outcomes. Scholars have shown the prominence of democracy for several issues, ranging from economic growth (Acemoglu et al.,
2019; Barro,
1996; Papaioannou & Siourounis,
2008) to income inequality and redistribution (Acemoglu et al.,
2008,
2015; Lee,
2005; Madsen et al.,
2015; Rodrik,
1999; Scheve & Stasavage,
2017), tax revenues and government expenditures (Acemoglu & Robinson,
2000; Acemoglu et al.,
2015; Aidt et al.,
2006; Mulligan et al.,
2004), education (Acemoglu et al.,
2005; Aghion et al.,
2019; Baum & Lake,
2003; Gallego,
2010; Harding & Stasavage,
2014; Lindert,
2004), health (Besley & Kudamatsu,
2006; Blaydes & Kayser,
2011; Cassan & Van Steenvoort,
2021; Gerring et al.,
2012; Kudamatsu,
2012; Pieters et al.,
2016), innovation (Gao et al.,
2017; Wang 2021), access to credit (Osei-Tutu & Weill,
2022), economic reforms (Giuliano et al.,
2013; Grosjean & Senik,
2011; Rode & Gwartney,
2012), and civil wars (Reynal-Querol,
2005). To date, entrepreneurship has not been considered among these outcomes.
2.1 Linking democracy to entrepreneurship
Several arguments motivate us to explore the direct link between democracy and entrepreneurship. First and foremost, democracy and entrepreneurship share the same underlying force of context. It is well accepted that individual and social freedom, together with decentralized decision-making systems, are pillars of democracy (Dahl,
1998) and also crucial conditions for developing successful entrepreneurial activities (Bradley & Klein,
2016; Florida,
2004; Lazear,
2005; Lehmann & Seitz,
2017; Vivona,
2023). Though direct evidence of the democracy–entrepreneurship link is still missing, prior contributions show that entrepreneurship, or some antecedents of entrepreneurship, can be affected by several factors qualifying democratic contexts. For instance, institutional environments with effective checks and balances and strong political rights can facilitate risk-taking decisions (Ashraf,
2017; Boubakri et al.,
2013) and access to funding (Osei-Tutu & Weill,
2022; Qi et al.,
2010), both essential components for running a business (Parker,
2018). Similarly, contexts where social interactions are not constrained can inspire new entrepreneurial ideas by promoting face-to-face contacts and social networks (Audretsch & Thurik,
2000; Batjargal et al.,
2013). Other factors encouraging individuals to engage in entrepreneurial activity include social tolerance, which can boost creative entrepreneurship by promoting personal autonomy and diversity (Berggren & Elinder,
2012), equal distribution of power and low power distance (Liñán, F., and Fernandez-Serrano, 2014), and property rights and sound rule of law (Mickiewicz et al.,
2021). Furthermore, democratic processes can be consistent with higher levels of academic (Berggren & Bjørnskov,
2022) and economic freedom (Lawson et al.,
2020), which are both positive for ventures creation and growth (Aghion et al.,
2008; Bennett,
2021; McMullen et al.,
2008). Accordingly, there is a quite converging recognition that an entrepreneurial culture benefits from decentralized and autonomous socio-institutional systems (Audretsch & Moog,
2022; Bradley & Klein,
2016; Vivona,
2023). In line with this view, lower levels of entrepreneurship have been observed in formerly centrally planned countries (Aidis et al.,
2008). We believe that the aforementioned factors (a decentralized decision-making system, stronger checks and balances and political rights, unconstrained social interactions, distribution of power, property rights, rule of law, high levels of social tolerance and freedom) are more likely to be safeguarded in democratic contexts, and therefore that democracy has intrinsic attributes that can unleash entrepreneurial initiatives.
A second underlying argument linking democracy to entrepreneurship is that both of them have been positively associated with economic development. On the one hand, there is sound evidence of the positive effect of democracy on economic growth (Acemoglu et al.,
2019; Colagrossi et al.,
2020). On the other, likewise robust evidence shows that entrepreneurship as well plays a relevant role in promoting economic growth (Aghion,
2017; Audretsch et al.,
2006; Van Stel et al.,
2005; Wennekers & Thurik,
1999). It does so mainly by creating new jobs (Audretsch & Thurik,
2000; Decker et al.,
2014) and, as the knowledge spillovers theory of entrepreneurship suggests, by fostering innovation and transforming unexploited new knowledge in economic commercialized knowledge (Acs et al.,
2013; Audretsch & Belitski,
2020; Audretsch & Lehmann,
2005; Block et al.,
2013; Ghio et al.,
2015). The fact that both democracy and entrepreneurship are considered to be important determinants of economic development is a further suggestion of their common attributes.
In sum, due to the intrinsic characteristics of democracy and the common foundation with entrepreneurship, we expect to observe a direct relationship between these phenomena and particularly that democracy is conducive to more entrepreneurship. Therefore, concerning our first research question, we hypothesize the following:
Next, we investigate potential mechanisms through which democracy can foster entrepreneurship. Democracy is a multifaceted phenomenon, characterized by different nuances and several complementary dimensions. As such, as our second research question states, it is important to identify those dimensions through which democracy is likely to affect entrepreneurship.
The first dimension we examine refers to the promotion of freedom of thought, action, expression, and association, arguably the main cornerstone of democracy (Dahl,
1998). These are not only qualifying components of democracy, but also crucial prerequisites for the creation and diffusion of knowledge (Ober,
2008). By promoting free social relationships, democracy should help to connect knowledge that is dispersed among institutions and individuals, which is a crucial requirement for problem solving and business creation (Hayek,
1945; Utterback,
1971), and facilitate face-to-face contacts, which are potent conduits for transmitting knowledge (von Hippel,
1994) and for developing creative entrepreneurial ideas (Andersson & Larsson,
2016; Audretsch & Thurik,
2000; Giannetti & Simonov,
2009). The link between knowledge diffusion and entrepreneurship is also well documented by the knowledge spillovers theory of entrepreneurship (Acs et al.,
2013; Audretsch & Belitski,
2020; Ghio et al.,
2015; Gu et al.,
2022), which identifies in the creation and commercialization of knowledge a key element fostering entrepreneurial activity. Unconstrained social networks help entrepreneurs to access resources (Batjargal et al.,
2013), and they feature social structures where knowledge and creativity can spillover (Hauser et al.,
2007). Moreover, institutional support for interactions and the diffusion of knowledge about new ventures can aid firms to build the cognitive and sociopolitical legitimation needed for an enduring activity (Aldrich & Fiol,
1994). Akcigit and Ates (
2021) similarly refer to the connection between knowledge diffusion and entrepreneurial activity by showing that the slowdown in knowledge diffusion is a prominent cause of the ongoing decline in business dynamism in the USA.
Grounded in these arguments, we expect that, to the extent to which it promotes free social interchange, democracy can foster entrepreneurship through the creation and diffusion of knowledge. We call this the
knowledge channel, and we hypothesize the following:
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Hypothesis 2 (H2): Democracy fosters entrepreneurship by facilitating knowledge creation and diffusion. It does so by promoting social and cultural interchange through freedom of thought, action, expression, and association (knowledge channel).
The second dimension of democracy we look at is the direct involvement of civil society in political and decision-making processes. The participatory principle is a prominent one in democratic societies (Smith,
2009). This includes the active civic engagement in electoral and non-electoral processes, the direct popular vote, and the interchange with local governments. Prior research suggests that the direct consultation of civil society is a way through which democratic institutions can build institutional trust (Freitag & Ackermann,
2016; Ljunge,
2014; Rainer & Siedler,
2009). Citizens feel more esteemed and respected if they are active parts of social and political decision-making processes.
Along with the stock of knowledge, institutional trust is a key factor affecting entrepreneurial activity (Audretsch et al.,
2018; Welter & Smallbone,
2006). While the creation and diffusion of knowledge can inspire new entrepreneurial ideas, mistrust in institutions may discourage individuals to implement these projects and to assume the burden of risk of owning a business. Trust is a necessary condition for cooperative behavior (Brunetto & Farr-Wharton,
2007), and for that reason, entrepreneurs are more likely to become successful if they can build on networks of trust that help them create legitimacy in the market or society (Aldrich,
2000). Interpersonal and institutional trust influences risk-taking decisions (McLain & Hackman,
1999), facilitates knowledge transfer and social capital creation (Lockett et al.,
2008), and encourages people to collaborate and share trustworthy knowledge (Audretsch et al.,
2018). Therefore, it is an important ingredient for starting and growing a new business (Welter,
2012). Furthermore, entrepreneurs would be more prone to assume the burden of risk of owning a business if they have the chance to be directly involved in those political processes that can potentially affect the performance of their businesses (Boubakri et al.,
2013).
The
World Economic Forum has recently advocated this link by referring to political entrepreneurs, defined as “People who build something from nothing to address societal problems”: “To build the new generation of political entrepreneurs we must further encourage wider participation in politics. […] Global trust in political institution has decreased”.
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In light of these arguments, we expect that, to the extent to which it promotes a direct involvement of civil society in political and decision-making processes, democracy can foster entrepreneurship through the enhancement of institutional trust. We call this the
trust channel, and we hypothesize the following:
After positing the direction and exploring two driving mechanisms of the effect of democracy on entrepreneurship, we further qualify their relationship by examining the temporal dimension of the effect. In this regard, we expect to observe both a short-run and a long-run impact of democracy on entrepreneurship. On the one hand, an increase in democratization can unleash the implementation of those entrepreneurial ideas that are already defined, but still not realized because of the lack of a propitious context. Entrepreneurs are markedly now-oriented people, who can make quick decisions in order to adjust to the environment (Bird,
1988), and they are sensitive to short-term institutional changes (Mickiewicz et al.,
2021). On the other hand, prior studies suggest that democracy can take time to produce socio-economic outcomes (Gao et al.,
2017; Geddes,
1999; Rodrik & Wacziarg,
2005). Part of the effect of democracy on entrepreneurship through the knowledge and the trust channels may not materialize immediately. Accordingly, we expect entrepreneurship to be sensitive to both contemporaneous and historical values of democracy. In line with these arguments, prior research linking democracy to other factors has investigated both the short- and the longer-term relationship by considering also past values of democracy (Bhattacharyya & Hodler,
2010; Gerring et al.,
2012; Giuliano et al.,
2013; Gründler et al., 2016; Scheve & Stasavage,
2017). Therefore, we posit the following hypothesis: