Since the late 1990s, it has been argued that institutions in each country’s financial economy differ depending on the legal origins adopted in the past (La Porta et al. 1997). According to La Porta et al. (1998, 2000, 2002), there are four legal origins: English, French, German, and Scandinavian.[1] Such legal origins have implications for the financial system, including shared ownership structures, minority shareholder protections, and creditor rights. Since La Porta et al. (1998), there have been numerous reports on the impact of legal origin on financial markets. For instance, according to Ali et al. (2022), legal origin affects risk-taking by banks, and De Vita et al. (2022) suggest that it affects financial development.[2]
Apart from financial markets, does legal origin also affect entrepreneurship, which is the foundation of the economy? According to Erhardt and Haenni (2018), entrepreneurship is more influenced by institutional contexts such as culture, rather than by entrepreneurial skills, and institutional context influences entrepreneurs’ risk aversion. Audretsch et al. (2021) report that differences in institutional contexts affect entrepreneurship. These studies suggest that institutional factors influence entrepreneurship.
Based on the importance of institutional factors, our research focuses on the nexus between entrepreneurship and legal origin and determines whether entrepreneurial development is linked to economic growth. In particular, we empirically explore two research questions: (1) Is entrepreneurship in different countries affected by the different property rights according to their legal origins? (2) Does the revitalization of entrepreneurship stimulate macroeconomic growth? However, regarding research question (1), the nexus between entrepreneurship and property rights may be nonlinear, depending on the legal origin.
For this study, we obtained entrepreneurship data from the Global Entrepreneurship Monitor (GEM), a research consortium developed by Babson College and the London Business School. By making country-by-country comparisons using macro data on the 51 selected nations from 2001 to 2020, the years for which data were available, we investigated the link between economic growth and entrepreneurship, as well as the relationship between property rights and entrepreneurship, by legal origin.
Incidentally, Graff (2008) critically examined the “legal origin theory.” La Porta et al. (1998, 2000, 2002) had maintained that institutions with a common law background provide a better framework for financial development and economic growth than those with a civil law background. However, according to Graff (2008), there is no evidence that common law countries have greater investor protections than civil law countries. Nevertheless, Graff (2008) found that institutional investors choose to engage in different behaviors, depending on their legal origins, which are essential for shaping corporate law.
Additionally, according to La Porta et al. (2008, 2013), legal origin affects not only the financial system but also various areas of law, such as procedural formalism, judicial independence, and labor law. In other words, legal origins also impact property rights. La Porta et al. (2008) developed a doctrine that asserts that “the legal origin is what matters.”[3]
In contrast, another theory argues that legal origin is not important. Berkowitz et al. (2003a, 2003b) contend that a critical factor in the succession of legal origins in countries is whether the endogenous institutions and the legal origins of the country in question are compatible. In essence, the idea is that any legal origin can achieve high economic performance if it is compatible with the endogenous institutions of a country. The authors affirm that if institutional complementarity exists between legal origins and endogenous institutions, institutional complementarity leads to high economic performance.[4] Berkowitz et al.’s (2003a, 2003b) discussion leads to a consideration of the varieties of capitalism.[5]
In the context of varieties of capitalism, we will advance the discussion on the relevance of institutional context and entrepreneurship. Wennekers and Thurik (1999) argued that culture and environment, as well as the institutional framework, are necessary conditions that determine the rate of entrepreneurial activity and how entrepreneurial activity is conducted. Culture and environment refer to the cultural setting of each country and the company’s internal culture. Wennekers and Thurik (1999) suggested that this is because the institutional framework provides incentives for individual behavior at the national and intra-firm levels. In other words, institutional complementarity between the macro level (e.g., the institutional framework) and the micro level (e.g., individual firms or individuals) is paramount in stimulating entrepreneurial activity. Wennekers and Thurik’s (1999) argument, like those of Audretsch et al. (2021) and Erhardt and Haenni (2018), suggests the importance of institutions to entrepreneurship.
We believe that property rights are a critical institutional factor. According to Harper (2013), economic coordination by “Ordoliberalismus” (Ordoliberalism) of Kirzner (2000) in the Austrian School produces efficient resource allocation through the market. However, Harper (2013) also points out that Kirzner’s claim assumes a certain level of property rights. In other words, according to Harper (2013), property rights vary from country to country, and therefore, in each country, institutions too change in the market adjustment process.
According to Tomita and Kimura (2021) and Tomita (2022), differences in legal origins create varieties of capitalism.[6] Suppose that one variety of capitalism is confirmed. In this case, differences in the legal origin of the sources of that variety should have distinct effects on the impact of property rights on entrepreneurship, as well as on the relationship between entrepreneurship and economic growth. In particular, the form of the function (i.e., linear or nonlinear) relevant to property rights and entrepreneurship may vary depending on legal origin.
The following section discusses the connections between economic growth, property rights, and entrepreneurship. Section 3 details the data and models. Section 4 describes the models’ estimation outcomes, and Section 5 presents an interpretation of the results. Finally, Section 6 presents the summary and implications of the study.
[1] The classification of legal origin is based on the comparative law research of Zweigert and Kötz (1998).
[2] According to Grassa (2020), the adaptability of the endogenous institution also positively impacts the development of Islamic finance. At the same time, Grassa (2020) argues that adaptability is affected by legal origin.
[3] Pogrebennyk (2014) argues that while common law is well suited to globalization, civil law has a slight advantage over globalization. Therefore, Pogrebennyk (2014) argues that countries based on civil law are better off with a legal environment that is intermediate between common law and civil law. Pogrebennyk’s (2014) argument is an extension of the “legal origin is what matters” line of research, but the author seeks a system intermediate between common law and civil law.
[4] According to Berkowitz et al. (2003a, 2003b), endogenous institutions indicate customs and informal constraints. In brief, legal origins and endogenous institutions interact with each other.
[5] Vidyarthi (2018) questions the hypothesis that there is less regulation in common law countries and more regulation in civil law ones. He argues that more regulation of common law can lead to the stagnation of the financial economy. However, the development of financial markets is also observed in civil law countries. Vidyarthi’s (2018) examination leads to an argument for institutional complementarity, in which common law regulations, but not civil law, lead to institutional discrepancies.
[6] According to Hall and Soskice (2001), varieties of capitalism refer to the hypothesis that capitalism diversifies in each country because even if different forms of capitalism are adopted, no differences exist in their economic performance. Since the work of Hall and Soskice (2001), many studies have been conducted on varieties of capitalism via the “regulation approach.” See, for example, Amable (2003) and Boyer (2015).