Corruption and entrepreneurship in emerging market

Abstract

The extant literature provided mixed findings on the relationship between corruption and entrepreneurship activities in national level. Integrating institutional-based view and transaction cost theory, we argue that corruption plays an informal institution channel to facilitate entrepreneur in sub-national regions with the imperfect formal institutional environment but only to the limited degree, considering increasing informal economy cost. Examining a longitudinal nationwide individual-level survey, coupled with several archival macro-level data, we confirm that sub-national corruption is positively associated with focal regions’ prevalence of entrepreneur at low levels, but negatively at higher levels, forming an inverted U relationship. Additionally, we find that sub-national regions with stronger marketization level (development of business-government interfaces and development of product markets) can offset the diminishing positive effect of corruption level. Our findings theoretically advance the puzzle of corruption-entrepreneurship relationship by considering the sub-national region differences. We also enrich the understanding of the role of informal institutions on entrepreneurship activities in emerging markets.