The role of institutions in entrepreneurship: implications for development policy

Abstract

The last fifty years of development aid have not been rewarded with success. Part of the reason for this failure has been the focus on macro approaches and policies, which did not emphasize the local institutional context faced by eco-nomic agents.In the last decade, the notion of institutions has come to the forefront of policy advice. At the same time however, the role of institutions in economic development remains unclear. As a result, it is being challenged by those who think that institutions are just the fad of the moment.This Policy Primer explains how institutions are vital to the expansion of entrepreneurial activity, which is at the heart of the process of development and economic growth. What is generally missing in countries with lackluster eco-nomic performance is not entrepreneurship as such but the right institutional context for entrepreneurship to take place and to be socially beneficial. What matters for development are the rules that individuals follow and how these rules are defined and enforced.In a successful economy, formal rules are aligned with informal norms and foster entrepreneurial activity by defin-ing and enforcing property rights. The aim of economic policy and social reform must be to re-establish an institutional framework that allows for socially productive entrepreneurial activity to flourish by reducing the cost of engaging in productive activities. This Policy Primer offers three policy implications: define a starting point for reform; build insti-tutional capacity; prepare an environment that favors productive entrepreneurship.In spite of the uncertainty surrounding the path to reform, it is important to keep in mind that the quality of the for-mal and informal institutions is the main determinant of productive entrepreneurship.