Does democracy foster entrepreneurship?

Plain English SummaryIs there a link between democracy and entrepreneurship? This study provides the first systematic empirical evidence that the link actually exists. By using longitudinal data from 23 countries over the 1972-2010 period, we document that democracy is conducive to entrepreneurship. Not only transitions to democracy, but also changes in the intensity of democracy affect entrepreneurial activity. How can democracy foster entrepreneurship? We show that the promotion of freedom and social interchange, which facilitate the creation and the diffusion of knowledge, and the pursuit of civil society participation in political processes, which enhances institutional trust, are two channels driving the positive effect. We also find that entrepreneurship is sensitive to both contemporaneous and historical level of democratization. By providing the first evidence that entrepreneurship is directly connected to democracy, our findings make an important contribution to the entrepreneurship literature. Not only does entrepreneurship matter, but in particular, it is the result of vibrant democracy. If we want entrepreneurship to prosper, there is a need to preserve and nurture democracy. Entrepreneurship has been connected to several socio-economic issues. However, despite the growing conjectures, the links with democracy have yet to be substantiated. By using a country-level panel dataset over the 1972-2010 period, we find evidence that democracy is conducive to entrepreneurship. We shed light on the intensity and multidimensionality of democracy by showing that the promotion of free social interchange and the direct involvement of civil society in political processes are two dimensions of democracy driving such effect. We additionally observe that entrepreneurship is sensitive to both contemporaneous and historical values of democracy. By providing the first systematic empirical evidence that entrepreneurship and democracy are directly connected, this study suggests to consider their ongoing concomitant retreats as two related phenomena.