Cronyism and entrepreneurship: An international analysis of the influence of cronysim on country level productive and unproductive entrepreneurship

Abstract

Cronyism or the practice of favoritism based on network connections represents a strong informal institution or rule of the game in many countries. This study adopts Baumol's model of productive, unproductive, and destructive entrepreneurship to explain how the prevalence of cronyism in a country encourages unproductive entrepreneurial behaviors and discourages productive entrepreneurial behaviors in that country. Analysis of data for 132 countries provides empirical supports for cronyism's direct positive and negative effects on, respectively, unproductive and productive entrepreneurship. Also, results indicate that cronyism's direct effects on both types of entrepreneurship are mediated through cronyism's influence on the levels of institutional trust and market competition in each country.