Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe

Abstract

We explore the impact of the institutional environment on the nature of entrepreneurial activity across Europe. Political, legal, and regulatory variables that have been shown to impact capital market development influence entrepreneurial activity in the emerging markets of Europe, but not in the more mature economies of Europe. Greater fairness and greater protection of property rights increase entry rates, reduce exit rates, and lower average firm size. Additionally, these same factors also associated with increased industrial vintage - a size-weighted measure of age - and reduced skewness in firm-size distributions. The results suggest that capital constraints induced by these institutional factors impact both entry and the ability of firms to transition and grow, particularly in lesser-developed markets.

Keywords: Entrepreneurship, Institutions, Capital Constraints, Firm Size Distributions, Entry, Exit, Legal Regimes

JEL Classification: L1, G3