Seeking Assurances When Taking Action: Legal Systems, Social Trust, and Starting Businesses in Emerging Economies

Abstract

This study examines how institutional conditions provide assurances founders seek when creating businesses. Classical theories predict legal institutions promote supportive conditions that foster business creation. We develop an alternative theory for why this relationship is not as straightforward in emerging economies. In these regions, people may be discouraged from taking entrepreneurial action because of the difficulties in accessing legal protections efficiently. We also introduce theory regarding the moderating role of generalized social trust because of its normative influences on business creation. We argue generalized trust in strangers exerts positive moderating effects on the direct relationship between legal protections and entrepreneurship. The findings from our multilevel analysis of 30 emerging economies are consistent with our theory. Our work advances a new framework for how entrepreneurs cope with uncertain business conditions in emerging economies where informal, normative social structures offer more privately oriented safeguards than do formal, publically oriented institutions. Our study also reconnects macro-institutional theories with individual-level accounts of entrepreneurship.

Keywords: Legal systems, protective function of law, normative institutions, social trust, nascent entrepreneurship, emerging economies

JEL Classification: A14, C42, K40, M13, O17, O34, O57