The Mediating Role of Institutional Factor on the Relationship between Entrepreneurship and Economic Growth

Entrepreneurship has long been perceived as a crucial determinant for economic growth. There has been a considerable upsurge in researches trying to determine the main elements driving entrepreneurship and the channel through which entrepreneurship generates economic growth; however, a global consensus has not been reached yet on theoretical, methodological and empirical levels.  The basic problem arises from the choice of appropriate variables reflecting the measures of the entrepreneurial activity and institutional environment and the outcome of such measures. This study examines the relationship between entrepreneurship and economic growth as well as the determinants of entrepreneurship in an unbalanced data set for 86 countries for the period 1996-2015 by considering different measures of entrepreneurial activity (TEA and Business Density) and different institutional arrangements (Distance to Frontier, Global Competitiveness index and composite governance index). A system of simultaneous equations is adopted in order to adjust for the fact that we are not able of controlling all possible bases of endogeneity between Entrepreneurship and institutions.  Results have revealed different coefficients sign and magnitude based on the measures being assessed.  Our findings suggest that institutional variables have positive and significant effect on entrepreneurship measured by Business Density and the latter has also a positive effect on economic growth though the significance level differ depending on the institutional variables employed. Similar conclusions cannot be drawn for entrepreneurship measured as TEA where certain measures of institutions appeared to have e negative effect on entrepreneurship and the latter has also a negative effect on economic growth.