The effects of trade integration on formal and informal entrepreneurship: The moderating role of economic development

Does entrepreneurship in a country benefit from trade integration? Moreover, do all types of entrepreneurs respond the same way to this integration? Specifically focusing on formal and informal entrepreneurship, we analyze the effects of trade integration in the context of different levels of economic development. First, we propose that trade integration increases a country’s formal entrepreneurship while decreasing a country’s informal entrepreneurship. A key mechanism explains this relationship: trade agreements provide supranational institutional structures that encourage formal, and discourage informal, venture creation. We dig deeper into this issue by arguing that these effects are stronger in less developed countries than highly developed countries. Analyses using a panel of 68 countries spanning 11 years provide robust support for these assertions. While our findings are aligned with previous scholarship that describes the asymmetric benefits of trade agreements for member nations, we add refinement by teasing out where the impacts are strongest (e.g., for entrepreneurial formalization in less developed countries) and where the impacts are less pronounced (e.g., for entrepreneurial formalization in highest developed countries). Thus, as policy makers continue to face challenging questions related to trade relationships, these results prompt future scholarship to examine other such potential benefits and asymmetries.