The Role the Informal Economy Plays on Entrepreneurship with an Emphasis on Institutional Quality Index

Abstract

The informal economy is one of the most important influencing factors on the type of entrepreneurial activity. In this study, the role of the informal economy on the formation of entrepreneurial activities (opportunity and necessity-based entrepreneurship) with an emphasis on the institutional quality index in selected oil producing countries during the period 2018–2008 has been investigated. This was done by using the three stage least squares model. In addition, the MIMIC model was used to extract the hidden variable of the informal economy volume and the principal components. Furthermore, the analysis model was used to extract the institutional quality index.The results show that increasing unemployment, increasing tax rates and increasing natural resource rent lead to an increase in the informal economy in these countries, whereas an increase in the informal economy leads to a decrease in opportunity-based entrepreneurship and increases necessity-based entrepreneurship. These results suggest that if the goal is to improve opportunity-based entrepreneurship, macroeconomic policies should be designed to reduce unemployment and lower tax rates and natural resources rent, thereby reducing the size of the informal economy in these countries. In such circumstances, an increase in opportunistic entrepreneurship is possible and an improvement in the economic growth of this field can be expected.