Analyze how formal and informal institutions affect entrepreneurship.

Question

What will be an ideal response?

Answer 1

Although entrepreneurship is thriving around the globe in general, its development is unequal. Whether entrepreneurship is facilitated or retarded significantly depends on formal institutions governing how entrepreneurs start up new firms. Using the relatively straightforward task of connecting electricity to a newly built commercial building, the World Bank finds that in general, governments in developed economies impose fewer procedures (an average of 4.6 procedures for OECD high-income countries) and a lower total cost (free in Japan and 5.1 percent of per capita gross domestic product (GDP) in Germany). On the other hand, entrepreneurs have to put up with harsher hurdles in poor countries. As a class of its own, Burundi imposes a total cost of 430 times of its per capita GDP for entrepreneurs to obtain electricity. Sierra Leone leads the world in requiring entrepreneurs to spend 441 days to obtain electricity.In addition to formal institutions, informal institutions such as cultural values and norms also affect entrepreneurship. For example, because entrepreneurs necessarily take more risk, individualistic and low uncertainty-avoidance societies tend to foster relatively more entrepreneurs, whereas collectivistic and high uncertainty-avoidance societies may result in relatively fewer entrepreneurs. Overall, the institution-based view suggests that both formal and informal institutions matter.