Cronyism and Entrepreneurship
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CRONYISM AND ENTREPRENEURSHIP: AN INTERNATIONAL ANALYSIS OF THE INFLUENCE OF CRONYSIM ON COUNTRY LEVEL PRODUCTIVE AND UNPRODUCTIVE ENTREPRENEURSHIP By SOHRAB SOLEIMANOF Bachelor of Science in Electrical Engineering University of Tehran Tehran, Iran 2008 Master Business Administration – General MBA Sharif University of Technology Tehran, Iran 2011 Submitted to the Faculty of the Graduate College of the Oklahoma State University in partial fulfillment of the requirements for the Degree of DOCTOR OF PHILOSOPHY May, 2016 CRONYISM AND ENTREPRENEURSHIP: AN INTERNATIONAL ANALYSIS OF THE INFLUENCE OF CRONYISM ON COUNTRY LEVEL PRODUCTIVE AND UNPRODUCTIVE ENTREPRENEUSHIP Dissertation Approved: Dr. Matthew W. Rutherford Dissertation Adviser Dr. Robert A. Baron Dr. Russell S. Sobel Dr. Justin W. Webb Dr. Aaron D. Hill ii Name: SOHRAB SOLEIMANOF Date of Degree: MAY, 2016 Title of Study: CRONYISM AND ENTREPRENEURSHIP: AN INTERNATIONAL ANALYSIS OF THE INFLUENCE OF CRONYISM ON COUNTRY LEVEL PRODUCTIVE AND UNPRODUCTIVE ENTREPRENEURSHIP Major Field: BUSINESS ADMINISTRATION 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. iii TABLE OF CONTENTS Chapter Page I. INTRODUCTION ......................................................................................................1 II. REVIEW OF LITERATURE..................................................................................13 Cronyism: Antecedents ..........................................................................................27 Cronyism: Consequences .......................................................................................36 Productive and Unproductive Entrepreneurship ....................................................46 Cronyism and Entrepreneurship ............................................................................53 III. METHODOLOGY ................................................................................................78 Data ........................................................................................................................78 Measures ................................................................................................................81 Measurement Model ..............................................................................................94 Conceptual Model ..................................................................................................97 Robustness Tests ..................................................................................................101 iv Chapter Page IV. FINDINGS ...........................................................................................................106 V. CONCLUSION ....................................................................................................119 Implications for Policy Makers and Entrepreneurs .............................................119 Future Research Direction ...................................................................................121 Limitations ...........................................................................................................124 REFERENCES ..........................................................................................................128 v LIST OF TABLES Table Page 1- Example Definitions of Cronyism ......................................................................15 2- Example Definitions of Crony Capitalism ..........................................................18 3- Cronyism and Similar Concepts… .....................................................................23 4- Measurement Variables ......................................................................................81 5- Measurement Model ...........................................................................................95 6- Descriptive Statistics ...........................................................................................97 7- SME Survey Results .........................................................................................101 8- Robustness Tests Regression Analysis .............................................................103 9- Ranking of Countries Based on the Level of Cronyism ...................................111 vi LIST OF FIGURES Figure Page 1- Cronyism – Antecedents and Consequences ......................................................47 2- Research Model ..................................................................................................77 3- SEM Results for Direct Paths .............................................................................98 4- SEM Results for Direct and Mediated Paths ....................................................100 5- Robustness Test Results for Direct Paths .........................................................104 6- Robustness Tests Results for Direct and Mediated Paths .................................105 vii CHAPTER I INTRODUCTION Since at least the 1930s, when Schumpeter proposed his creative destruction hypothesis and defined entrepreneurship as activities that involve different types of innovation, entrepreneurship has been generally framed as a positive phenomenon in societies. Such positive bias toward entrepreneurship is mainly because of its known positive effects on economic development and prosperity in a country (e.g. Reynolds, Hay, & Camp, 1999; Zacharakis, Shepherd, & Bygrave, 2000). However, more recently, scholars have noticed that entrepreneurship does not always include innovations in productive ways as Schumpeter suggested (new product, new process, new supply, new market, and new organizing method), but can also include innovations in unproductive forms, including “innovations in rent-seeking procedures, for example, discovery of a previously unused legal gambit that is effective in diverting rents to those who are first in exploiting it” (Baumol, 1990, p. 897). Research on factors that promote entrepreneurship in a society, especially in its productive forms, has attracted significant attention in different fields of knowledge, including economics, sociology, and entrepreneurship scholarship (e.g. Sobel, 2008). A major research stream in this area is the study of institutions and their influence on entrepreneurial efforts within different societies (North, 1990; Scott, 1995; 1 Acemoglu, 1995). Institutions are rules of the game that constrain or promote certain types of behaviors and interactions among people in a society (Hira & Hira, 2000). Hence, institutions can encourage/discourage people to engage in productive or unproductive forms of entrepreneurial behaviors (Baumol, 1990; Murphy, Shleifer, & Vishny, 1991). For example, Sobel (2008) demonstrates that better institutional frameworks (e.g., more secure property right regime, more balanced and fair judicial system, stronger contract enforcement, etc.) promote productive entrepreneurship (higher venture capital investments, higher rate of patents, faster rate of sole proprietorship growth, and higher establishment birth rates) and reduce unproductive entrepreneurship activities (lobbying activity and legal quality/lawsuit) within different states of the US. Prior research has mostly focused on effects of formal institutions (written rules, regulations, laws, etc.) on productive entrepreneurship (Bruton, Ahlstrom, & Li, 2010). Secure property rights, fair judiciary systems, strong enforcement agencies, and efficient tax codes are a few examples of formal institutions that are known to have positive effects on the level of productive entrepreneurship in a country. In contrast, with exception of national culture, research on effects of other informal institutions (social norms, beliefs, values, etc.) on entrepreneurship, especially in its unproductive forms, has attracted much less attention among scholars (Bruton et al., 2010). This study seeks to contribute in filling these gaps of knowledge by explaining how cronyism, as an understudied informal institution, influences the level of people’s involvement in both productive and unproductive forms of entrepreneurship in a country. Cronyism refers to the act of favoritism among members of a network based on their connections and mostly at the expense of outsiders. More accurately, cronyism as a practice 2 refers to “a reciprocal exchange transaction where party A shows favor to party B based on shared membership in a social network at the expense of party C's equal or superior claim to the valued resource.” (Khatri, Tsang, & Begley, 2006, p. 62). Cronyism refers to both private favoritism and public favoritism (government-business relationship). Private favoritism happens in a purely private domain between two parties (for example, in an organizational setting between managers and employees), however, public power is