A Review of Effects of Governance on Entrepreneurship

Introduction

In their 2018 article titled “Effects of governance on entrepreneurship: European Union vs non-European Union,” Rodríguez-Gulías et al. (2018) analyze the effect that certain governance indicators have on the creation of new businesses. More specifically, the effects are observed for two groups: countries that are members of the European Union (EU) and countries that are not (Rodríguez-Gulías et al., 2018). The following two hypotheses are tested: “The various dimensions of governance help in explaining the immediate creation of new businesses in European and non-European countries” and “The various dimensions of governance help in explaining the deferred creation of new businesses in European and non-European countries” (Rodríguez-Gulías et al., 2018, Section 2. Literature review).

A Review of Effects of Governance on Entrepreneurship

Rodríguez-Gulías et al. (2018) used data from the World Bank to complete the study. One source of data is the World Bank’s Entrepreneurship Survey, which collects data on newly registered companies (World Bank, n.d.). A second source of data is the Worldwide Governance Indicators (WGI), which are provided by the World Bank and calculated by Kaufmann et al. (2011). The WGI consists of the following six dimensions: “control of corruption,” “government effectiveness,” “political stability and absence of violence/terrorism,” “regulatory quality,” “rule of law,” and “voice and accountability” (Rodríguez-Gulías et al., 2018, Section 3. Methodology and sample).

Analysis of the data found that 5.2 new companies per 1,000 people were created annually in the EU for the specified timeframe and population (Rodríguez-Gulías et al., 2018). This metric was defined as the “mean entry density” (Rodríguez-Gulías et al., 2018, Section 4.1 Univariate Analysis). The authors observed a lower mean entry density in non-EU countries, coming in at only 2.7 (Rodríguez-Gulías et al., 2018). The authors also observed that each of the six governance indicators was negatively correlated with mean entry density in non-EU countries, while all six were positively correlated in EU countries (Rodríguez-Gulías et al., 2018).

The GDP of EU countries was observed to be significantly higher than the GDP of non-EU countries (Rodríguez-Gulías et al., 2018). GDP also demonstrated a statistically significant positive correlation with all six governance indicators (Rodríguez-Gulías et al., 2018).

The implementation of multivariate analyses returned mixed results. The first set of models Rodríguez-Gulías et al. (2018) constructed tested the effect of all six governance indicators on mean entry density at various intervals of lagged years for EU countries. The only variable that showed statistical significance was government effectiveness for four out of the five models (Rodríguez-Gulías et al., 2018). The second set of models used the same parameters, except they used the population of non-EU countries (Rodríguez-Gulías et al., 2018). This set of models did not have any variables demonstrate statistical significance until the model with the most amount of lagged time had slight significance on the rule of law variable (Rodríguez-Gulías et al., 2018).

Conclusion

Rodríguez-Gulías et al. (2018) concluded that they could confirm both hypotheses for the population of EU countries for the government effectiveness variable. For non-EU countries, the authors concluded that they could confirm the second hypothesis with “a slightly significant delayed effect of [rule of law] on entrepreneurship” (Rodríguez-Gulías et al., 2018, Section 5. Conclusions). Regarding the first hypothesis, they also concluded that “the results obtained for non-EU countries suggest no significant immediate effects” (Rodríguez-Gulías et al., 2018, Section 5. Conclusions); however, a failure to reject the null hypothesis should not be used as a basis to claim there is no effect (Hemenway, 2009).

References

Hemenway, D. (2009). How to find nothing. Journal of Public Health Policy, 30(3), 260–268. https://doi.org/10.1057/jphp.2009.26

Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The Worldwide Governance Indicators: Methodology and analytical issues. Hague Journal on the Rule of Law, 3(02), 220–246. https://doi.org/10.1017/s1876404511200046

Rodríguez-Gulías, M. J., De Sousa Gabriel, V. M., & Rodeiro-Pazos, D. (2018). Effects of governance on entrepreneurship: European Union vs non-European Union. Competitiveness Review, 28(1), 43–57. https://doi.org/10.1108/cr-06-2016-0035

World Bank. (n.d.). Entrepreneurship. Retrieved June 9, 2024, from https://www.worldbank.org/en/programs/entrepreneurship