2.1 Entrepreneurship in the regional context
A core question in entrepreneurship is what conditions explain variation in regional rates of entrepreneurial activity, as measured by the number of self-employed individuals or the rate of new firm formation (Reynolds et al.
1994; Acs and Storey
2004). Interest in this direction was stimulated by evidence linking the creation of new businesses to employment growth, increased productivity, and economic growth (Fritsch
1997; Acs and Szerb
2007). At the micro level, research on the determinants of regional entrepreneurship juxtaposed the spatial context with the personality traits of business founders (Zhao et al.
2010), their networks (Saxenian
1996), and the degree of acceptance of self-employment within their regions (Kibler et al.
2014). At a macro level, heterogeneity in entrepreneurship rates has been linked to the quality of institutions (Turok et al.
2017).
Institutional factors have been broadly defined, and span multiple levels of inquiry (North
1990). Common to work in this tradition is the idea that markets are embedded within broader social systems, which enable and constrain the decisions of economic actors therein. Williamson (
2000: 597) identified four distinct levels of institutions, ranging from macro aspects (customs, traditions, informal norms, culture, and religion) to environmental conditions (type and functioning of the judiciary system, bureaucratic levels) to meso- and micro-level factors affecting how daily economic transactions unfold, such as governance structures, contracts, and incentive systems. Empirical studies indicate that variation in regional founding rates might stem from heterogeneity in institutional factors that foster productive entrepreneurship at each of the abovementioned levels (see Fritsch and Storey
2014, for a review). For example, Nifo et al. (
2017) demonstrate that the quality of regional institutions, proxied by an index combining corruption control, government effectiveness, regulatory quality, the rule of law, and voice and accountability, shape the choice of post-secondary education in Italy. Bad institutions encourage rent-seeking career paths and discourage the pursuit of technical and scientific studies, typically associated with productive entrepreneurship. Along these lines, Boudreaux et al. (
2017) show that increased corruption shifts entrepreneurial activity towards constructions and away from educational, scientific, and technical ventures.
This paper extends this line of research on institutions and regional entrepreneurship, by placing a unique emphasis on the fight against organized crime, which received thus far scant attention. Elaborating on the mixed evidence concerning the effect of corruption on entrepreneurship (Sobel
2008; Dutta and Sobel
2016), we advance two contrasting arguments. From a market perspective, prior studies suggest that the pursuit of an entrepreneurial opportunity depends on the “portion of the value that the venture creates that the entrepreneur can capture for their own purpose” (Baumol
1990; Baker et al.
2005: 497; Bowen and De Clercq
2008). In regions with substantial organized crime infiltrations, the entrepreneur confronts greater uncertainty regarding the extent to which entrepreneurial rents can be appropriated. He also faces competition from firms connected to criminal organizations. In such conditions, economic actors are less likely to engage in productive entrepreneurship—venture creation and investment in physical, intellectual, and social capital. By contrast, strict policies against organized crime reduce the payoff associated with unproductive entrepreneurship and increase the share of the value that the entrepreneur expects to appropriate from a venture. In this perspective, a stricter enforcement of asset confiscation can have a positive direct effect on entry rates.
Alternative perspectives, however, suggest that the effect of policies against organized crime on regional entrepreneurship might be more convoluted (Elert and Henrekson
2017). A key assumption in the argument above is that legitimate institutions—the state, or local governments—can provide superior governance quality than private-order institutions. In other words, policies against organized crime result in increased productive entrepreneurship only insofar as the state can provide a speedy and balanced judicial system, intellectual property rights and contract enforcement, and effective transfer of economic wealth through taxation and regulation. Some studies suggest that this assumption can be challenged (Grossman and Kim
1995; Hirshleifer
2001; Dixit
2007). Leeson’s (
2007a,
b) empirical investigation of Somalia indicates that when governments act in a predatory fashion, they may not only fail to increase social welfare but can even reduce it below its level under statelessness. Along these lines, the Sicilian and Russian Mafia emerged in contexts where the local authorities could not guarantee contract enforcement and ensure property rights (Bandiera
2003). In Japan in August–September 1945, after the government collapse and before the US forces restored order, the Yakuza, the Japanese mafia, played a major role in getting markets restarted (Dower
1999; Whiting
1999: 10–11). Private-order institutions facilitate social and economic exchange in the absence of a well-functioning state (Blok
1975; Gambetta
1993; Varese
2001). In selected situations, organized crime may represent “an entrepreneurial response to inefficiencies in the property rights and enforcement framework supplied by the state” (Milhaupt and West
2000: 43). Weakening organized crime in these contexts creates an institutional vacuum that hurt founding rates in a region. In what follows, we advance a more nuanced account of the link between policies against organized crime and regional entrepreneurship reflecting both perspectives.
2.2 Asset confiscation and regional entrepreneurship
Institutional responses to organized crime activities, such as legal persecution and the freezing, seizure, or confiscation of assets resulting from organized crime activities, have been increasingly adopted in several countries. As the EU Action Plan to combat organized crime of April 1997 states, “The European Council stresses the importance for each Member State of having well-developed legislation in the field of confiscation of the proceeds from crime.”
1 The keystone of the fight against organized crime in Europe is the EU Directive on “Freezing and confiscation of proceeds of crime” (2014/42/EU). Hailed as a breakthrough, the legislation provided principles for the disposal and management of assets which “…derive directly or indirectly from a criminal offense, including any form of property and any subsequent reinvestment or transformation of direct proceeds and any valuable benefits.” Asset confiscation counters organized crime’s interests by limiting the gains resulting from their activities (Jamieson
1999; Paoli
2007). However, the consequences of confiscation for the assets themselves, and for the regions where they are located, remain contested (Caramazza
2014).
In line with the previous section, we suggest that the effect of confiscation on regional entrepreneurship depends on the type of assets involved. Confiscated assets include properties used by members of organized crime groups to carry out their illicit activities (e.g., territorial control, private protection, and extortion), such as real estate, land or vehicles—which we label operational assets—and economic assets—savings, financial products, and company shares, resulting from market investments of organized crime groups. These types of assets vary in their end use and the ease of redeployment. Operational assets are primarily used to exercise criminal sovereignty in a region through intimidation, while economic assets are deployed towards legitimate business objectives, and their connection to their criminal owners is less visible. Operational assets are tailored to the needs of their criminal owners: they are designed to serve illegal purposes and hard to be deployed. By contrast, financial resources or equity shares in companies are, to some extent, easier to convert or transfer.
These distinctions help understand the different consequences that confiscation of economic and operational assets entails. When organized crime operates in legitimate businesses, local entrepreneurs compete for resources in regional markets with firms financed by or connected to organized crime. As suggested by prior studies (Arlacchi
2007; Bonaccorsi di Patti
2009; Lo Bello
2011), businesses infiltrated by organized crime groups have certain competitive advantages compared to legal ones: they operate in quasi-monopolies or oligopolies, they incur lower labor costs, they have easier access to capital, and they are more skilled at rent-seeking market behaviors, such as bargaining on tax and social security contributions and work negotiations. Prospective entrants confronting such competitors face more challenging business conditions and a higher risk that their venture will be unsuccessful. Confiscation of economic assets in regional markets, by way of seizure of established players connected to organized crime, or stalling financial flows, reduces the competitive disadvantage of new ventures and triggers conditions that are favorable for entrants, such as intermediate levels of concentration (Caves and Porter
1977). Confiscation also allows the reallocation of existing resources or demands to new legitimate players. The conjecture is consistent with recent research in strategy and industrial organization, which shows that the exit of dominant players from regional markets disrupts local networks and challenges competitive dynamics in the region. This, in turn, creates conditions for resource redeployment and innovative pathways for new entrants (Pe'er and Vertinsky
2008; Lieberman et al.
2017).
When confiscation targets operational assets used by organized crime to control their territory and provide governance, its effect is less straightforward. Organized crime groups act as monopolists in the provision of protection over an allocated territory, defined by geography and by the type of activity being protected (Gambetta
1993). Even though criminal organizations do so by exercising coercion and threat, extorting payments for the services they provide (Vaccaro
2012), their intervention might facilitate social and economic exchanges when the state is incapable of upholding law and order (Greif et al.
1994; Dixit
2007). In such Hobbesian situations, organized crime can stabilize and make the market environment of productive activities more predictable (Douhan and Henrekson
2010). Weakening governance provided by private-order institutions through confiscation of operational assets might engender uncertainty that can reduce founding rates. The negative effect of operational asset confiscation might, to some extent, be compensated by an improvement of the business conditions or resource redeployment. However, these effects are not going to be reckonable in the short term: significant investments are needed to redeploy highly specific assets to legal ends. Similarly, economic asset confiscation can also trigger some institutional uncertainty. Yet, the destabilizing effect is minor, given that economic assets are not visibly connected to organized crime, or used to exercise sovereignty. Thus, we hypothesize that the following:
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H1a: The enforcement of confiscation orders targeting organized crime’s economic assets in a region is positively related to the number of entrepreneurial entries therein.
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H1b: The enforcement of confiscation orders targeting organized crime’s operational assets in a region is negatively related to the number of entrepreneurial entries therein.
In developing our first set of hypotheses, we argued that the key reason underlying the negative effect of operational asset confiscation on entry is the institutional void following the visible contestation of organized crime’s sovereignty on a territory. Such a conclusion leaves unanswered the question of what local institutions can do to fill this void. We use the term
local institutional responsiveness to label the capacity of institutions to handle the asset confiscation process and the uncertainty triggered by confiscation. Local institutional responsiveness relates to existing constructs in the literature on institutions and entrepreneurship, such as the rule of law, regulatory quality, or corruption control (Dilli et al.
2017; Nifo et al.
2017). However, it differs in two important respects. First, it has an exclusive focus on receptiveness to organized crime, as opposed to rule enforcement in general. It proxies the priority granted to the fight against organized crime by local governments. Several regions characterized by high regulatory quality or the rule of law have a normative system that is unapt to respond to organized crime activities (Germany in the European context, or Tuscany in Italy). Second, responsiveness typically entails concrete, operational acts of sovereignty, rather than appealing to broad principles. For example, it assesses local institutions’ capacity to handle the legal practices related to operational asset confiscation, to finance asset refurbishment, to reduce credit uncertainty, to increase presence and governance on the territory, or to reduce uncertainty in the redeployment process. We argue that such provisions can contribute to filling the institutional voids and favor resource redeployment, reducing the negative effect of operational asset confiscation: