Innovative-oriented start-ups across countries: Conditions for the positive effect of a financial system

doi:10.21203/rs.3.rs-2495036/v1

Download PDF

Research

Innovative-oriented start-ups across countries: Conditions for the positive effect of a financial system

https://doi.org/10.21203/rs.3.rs-2495036/v1

This work is licensed under a CC BY 4.0 License

You are reading this latest preprint version

This study sets out to examine the effect of financial systems on the share of a nation's start-ups that are innovative-oriented. The study combines the national business systems perspective with the resource-based view to argue that the financial system substitutes for a weak state and skill development system. This argument is supported by an analysis of a panel data set comprising 283 country-year data over five years. The study shows that it is necessary to model innovative entrepreneurship differently than other aspirational entrepreneurship forms. Because innovations develop out of the efforts of multiple actors, it becomes necessary to model an interaction between system components.

innovation

entrepreneurship

finance

industry

cognition

institutions

Across countries, the ability to raise finance is a crucial constraint facing innovative-oriented entrepreneurs (Economidou, Grilli, Henrekson, & Sanders, 2018). In this study, I set out to examine the effect of financial systems on the share of a nation's start-ups that are innovative-oriented. Innovative-oriented start-ups introduce a new product or service based on knowledge and intangible assets (Audretsch, Bönte, & Mahagaonkar, 2012). Still, the Global Entrepreneurship Monitor has operationalised innovative start-ups also to include those that introduce products and services into their local market that are not necessarily new on the global front (Koellinger, 2008). These innovative activities are often associated with uncertainty and information asymmetry. To overcome these, entrepreneurs turn to numerous other service providers (Lundvall, 2007; Winter, 2007); not least are financial service providers (Hall & Lerner, 2010). One might expect a country's financial system to affect its proportion of innovative-oriented start-ups directly.

But while the financial system directly impacts a nation's proportion of growth-oriented start-ups (Bowen & De Clercq, 2008), it appears to impact innovative-oriented start-ups only under certain conditions (Chowdhury, Audretsch & Belitski, 2018; Yan & Guan, 2018). This confirms arguments that there is a clear distinction between innovative and other forms of entrepreneurship, with only a minority of the country's entrepreneurs who innovate (Autio et al., 2014; Darnihamedani & Block, 2018). Still, we have little understanding of why this might be so.

It has been suggested that innovation requires structured interaction between system actors (Lundvall, 1992; Nelson & Winter, 1982). At a country level, I turn to the national business systems perspective (Whitley, 1999), and I combine this with the resource-based view (Barney, 1991) to argue that when the state or skill development system is weak, a strong financial system can continue to maintain high shares of innovative entrepreneurial activity. The national business systems perspective proposes interactions between institutions such as the state, the financial system, the skill development system, and informal trust type institutions. Furthermore, the resource-based view (Barney, 1991) helps us predict the nature of the interaction. This view suggests that certain capabilities, such as those available within the financial system, take on greater value under challenging circumstances: for example when risks cannot be shared adequately because certain institutions are weak. As a country-level resource, financial systems become especially valuable when entrepreneurial risks increase, likely for a weak state and a weak skill development system. This leads us to argue that the financial system substitutes for weaknesses in other institutions.

The above argument is supported by an analysis of a panel data set comprising 283 country-year data over five years. This study contributes to a stream of research about the context for entrepreneurial aspirations or entrepreneurship quality (Bowen & De Clercq, 2008; Chowdhury et al., 2018; Stenholm, Acs, & Wuebker, 2013). In particular, it builds on prior arguments that the resource-based view provides stronger explanations of strategic economic activity when integrated with institutional theory (Oliver, 1997). Though it has long been recognised that innovations develop out of the efforts of multiple actors (for example, Lundvall, 1992), this study provides empirical confirmation of an idea seldom tested: the interplay required between systems components, such as institutions, for example, to increase innovative national capacity. This systems perspective of institutions moves attention from linear to interactive thinking about innovative entrepreneurship (Lundvall & Borrás, 2005; Pezeshkan, Smith, Stav, & Amirmahmood, 2016). Interestingly, but deserving of further research, this study's arguments and findings imply that innovative-oriented and growth-oriented entrepreneurs, though both considered manifestations of aspirational entrepreneurship, might deserve separate analysis because they do not appear to respond similarly to financial institutions.

Theory And Hypotheses

As a nation's financial resource, financial systems can be viewed as a generic resource that can be converted into the human, technological and other inputs required for innovation (Dollinger, 2008; Schneider & Veugelers, 2010). Actors are competent at assessing the risks facing SMEs and can help alleviate SMEs' innovation constraints and increase their access to external finance (Beck & Demirguc-Kunt, 2006); they can also help source finance from other private actors who may be willing to invest but lacking investment knowledge (Kenney & Patton, 2010). Strong financial systems also attract foreign direct investment, which also helps to stimulate entrepreneurship (Munemo, 2017). Strong financial systems also possess competencies in structuring finance for the R&D activities necessary for innovation (Pradhan, Arvin, Hall, & Nair, 2016).

Nevertheless, current evidence indicates that a country's financial system affects innovative entrepreneurship only under certain conditions. Chowdhury et al. (2018) looked at the effect of financial development on productive entrepreneurship across countries and found a positive relationship only for developing countries. Notably, their measure of productive entrepreneurship included not just the percentage of firms involved in total entrepreneurship activity that introduced a product new to the market but also had total patent applications in the country; and the percentage of firms engaged in entrepreneurial activity that aimed to create at least six jobs over the next five years. Other researchers, such as Yan and Guan (2018), found that financial capital positively affects innovative-oriented start-ups only when high entrepreneurial attention is high. Entrepreneurial attention is a cognitive resource that assists a country's entrepreneurs in perceiving new opportunities (Gifford, 1992). It appears that entrepreneurial attention might fall under the influence of cultural-cognitive institutions.

Scholars who have studied firm innovation from a national business systems perspective have recognized that a country's financial system acts together with other institutions (e.g., Pezeshkan et al., 2016; Rana & Allen, 2018). These scholars urge us to consider institutions not as isolated components of the business system but as configurations that complement or substitute for one another. Few scholars have adopted the national business systems perspective in the research area of entrepreneurial aspirations across countries (Bowen & De Clercq, 2008; Chowdhury et al., 2018). These scholars looked at each institution in isolation, only relying on the national business systems to identify salient institutional dimensions. To build on this prior research, this study responds to Pezeshkan et al. (2016) to propose that national institutions do not act alone; they interact; and there can be multiple combinations of institutions to foster firm innovation.

National business system and the resource-based view.

According to the national business systems perspective, institutions influence the conditions under which firms access resources (Whitley, 1994). And many of these institutions vary significantly between nations, which can give rise to distinct characteristics of business systems. These business systems can be delineated into the financial system, the skill development and control system, the state and its legal system, and finally, the dominant conventions governing trust and authority relations. The first three categories directly shape the business system; the fourth category functions as "background" institutions that indirectly influence economic behaviour (Whitley, 1999).

In line with Lundvall's (1992) innovation systems perspective, the national business systems perspective also suggests that a single institution does not act alone in affecting economic behaviour; instead, it works jointly with other institutions (Pezeshkan et al., 2016; Whitley, 1999). The national business systems framework presents a parsimonious framework that can encapsulate many of the finer delineations of system actors and components presented by Lundvall (1992) and others. But this perspective has not been used often by entrepreneurship scholars; they have tended to rely on an institutional perspective rooted in North (1990) and Scott (2008).

In any case, though the national business systems perspective urges us not to consider a country's institutions in isolation, it remains unclear about the nature of these interactions. To explain strategic economic activity, as is innovative entrepreneurship, it has been proposed before that institutional theory is best combined with the resource-based view (Oliver, 1997). Notably, the resource-based view focuses on firms and their internal resources. Still, it can also be applied to a country's internal resources in the context of countries competing against one another (Guillén, 2000). Because transactional activity relies on institutions, institutions have been considered important country-level resources (North, 1990; Wan, 2005). In addition, an institution can be treasured when it remains strong despite being surrounded by several other weak institutions (Oliver, 1997).

This study proposes that a nation's financial system takes on the role of such a valuable institutional resource when the state and skill development systems are weak. A key concept of the resource-based view is value: resources must enable a firm to implement strategies that improve its competitiveness. In innovation, such value becomes evident for innovative performance when the environment poses risk and uncertainty (Meeus & Oerlemans, 2000), as do weak institutions.

This study theorises that the resources available with a country's financial system can increase in value when other institutions are weak and pose risks to undertaking innovative economic activity. Taking from the proximate institutions of national business systems, I argue that a strong financial system can maintain high shares of innovative entrepreneurial activity when the state or skill development system is weak.

Financial system and the state

Innovative-oriented entrepreneurs remain uncertain that the market will support their new products or services. If the state, for example, does not instil confidence in entrepreneurial individuals wishing to risk introducing new products and services, then personal risk-taking increases. In nations with high rates of innovation through start-ups, the state invests in research and development, making it possible for small enterprises without capital to develop their intellectual property and technology. The state also provides grants and loans to these small enterprises, enabling them to demonstrate financial health to potential private sector funders. The state also helps ease the regulatory burdens facing high-technology initiatives (Audretsch & Keilbach, 2004; Colwell & Narayanan, 2010).

When this state system is not working well, the resource-based view predicts that the financial system becomes valuable and can serve as a welcome substitute. Innovative-oriented entrepreneurs see the need to share the risks of innovation with a partner, and when the nation's entrepreneurs cannot rely on the state, they might look to the financial markets to share in their risks. In this way, financial markets are accorded increased value by the nation's innovative-oriented entrepreneurs. In such a country context—weak state— it is more likely that entrepreneurs will respond to the strengthening of financial markets by allocating greater effort towards innovative-oriented activities. Notably, a robust financial system with strong credit and equity markets has been shown to substitute for less developed public governance institutions (Pezeshkan et al. 2016). Accordingly, I hypothesise:

Hypothesis 1

A nation's financial system will have a stronger positive effect on its innovative-oriented share of start-ups when it possesses a weak state than a strong state

Financial system and skill development system

Another characteristic of nations with high rates of innovation is their strong skill development system. To support the research and development required for innovation, entrepreneurs can draw from the technical skills available in universities and science parks (Colwell & Narayanan, 2010; Keller & Block, 2013). Business skills, too, are available to complement the technically-oriented resources available within a national innovation system (Guan & Chen, 2012). When these business skills are in short supply, entrepreneurs can look to actors in a nation's financial system. Though these actors might not possess the technical skills required to assess innovation, they possess the skills to determine the risk of introducing innovative products and services to the market. Thus, I argue that a nation's financial system can substitute for skill development system that might be weak. I hypothesise:

Hypothesis 2

A nation's financial system will have a stronger positive effect on its innovative-oriented share of start-ups when it possesses a weak skill development system than a strong skill development system

Overview of the sample and data sources

The above arguments were tested with an analysis of a panel data set comprising 283 country-year data over five years. There were 85 countries in the sample, with a minimum of one observation and a maximum of five observations (see Table 1). These data were extracted from three databases, including those of the World Economic Forum's (WEF) Global Competitiveness Index, the Global Entrepreneurship Monitor (GEM), and the Quality of Government (QOG) Institute. From the GEM panel, we collected data on the proportion of entrepreneurs whose young firms are innovative. To arrive at annual country-level measures, GEM computes weighted national averages of individual-level data (Reynolds et al., 2005). In each country, GEM uses private market survey firms to conduct interviews among a representative weighted sample of at least 2,000 adults (ages 18–64). The WEF conducts surveys that capture the opinions of over 14,000 business leaders in about 144 countries. The QoG Institute searches several freely available data sources for data related to government operations and uses these to compile several datasets.

Table 1

Countries in sample
Country	Observations	Country	Observations	Country	Observations
Algeria	3	Georgia	1	Norway	5
Angola	2	Germany	2	Pakistan	2
Argentina	5	Ghana	2	Panama	5
Australia	3	Guatemala	4	Peru	5
Austria	2	Hungary	3	Philippines	3
Bangladesh	1	India	3	Poland	5
Bolivia	1	Indonesia	3	Portugal	5
Bosnia and Herzegovina	3	Ireland	5	Qatar	1
Botswana	4	Israel	3	Romania	4
Brazil	4	Italy	4	Senegal	1
Bulgaria	1	Iran	4	Singapore	4
Burkina Faso	1	Jamaica	3	Slovakia	5
Cameroon	2	Japan	2	Slovenia	5
Canada	3	Kazakhstan	2	Suriname	2
Chile	5	Korean Republic	4	Sweden	5
China	4	Latvia	4	Switzerland	5
Columbia	5	Lebanon	1	Thailand	5
Costa Rica	2	Lithuania	4	Tunisia	1
Croatia	4	Luxembourg	3	Turkey	3
Czech Republic	2	Macedonia	2	Uganda	3
Denmark	2	Malawi	2	United Arab Emirates	1
Ecuador	3	Malaysia	5	United Kingdom	5
El Salvador	2	Mexico	5	Uruguay	5
Estonia	4	Morocco	1	Venezuela	1
Ethiopia	1	Namibia	2	Vietnam	3
Finland	5	Nigeria	3	Zambia	2

Dependent variable

The value of our dependent variable for each country is the observed share of entrepreneurs who report that their product or service is new to some customers. GEM assesses country-level entrepreneurship through its TEA index, which measures the proportion of a country's population aged 18 to 64 who are either in the start-up phase or are managing/owning a business less than 42 months old. The number of entrepreneurs who indicate that their product or service is new to at least some customers is then divided by the TEA index to arrive at the innovative-oriented share of start-ups in a country.

Explanatory variables

Several financial system measures are available in the WEF's database. These include the availability of financial services, affordability of financial services, ease of access to loans, and venture capital availability. I formed a scale of these four measures, which resulted in a Cronbach reliability of 0.92. For example, as a measure of financial affordability, WEF asks businesses, "In your country, to what extent are financial services affordable for businesses?" This is measured on a seven-point scale where one is equivalent to not affordable, and seven is equivalent to affordable.

For the skill development system, I drew on the WEF's data on tertiary education enrolment as a percent of the population of the age group that officially corresponds to the tertiary education level. For robustness, I also looked at the WEF's assessment of the local availability of specialized research and training services, which asks: "In your country, to what extent are high-quality, specialized training services available?" on a seven-point scale where one is not available at all and seven is widely available. In addition, I looked at the availability of scientists and engineers, which asks: "In your country, to what extent are scientists and engineers available?" on a seven-point scale where one is not at all and seven is equivalent to widely available.

This study relies on measures of government effectiveness to assess the state's influence on economic behaviour. Economic agents rely on the state to produce and implement good policies and deliver public goods. The government effectiveness measure used in this study was sourced from the QOG database (Dahlberg, Holmberg, Rothstein, Alvarado, & Richard, 2019). Government effectiveness combines into a single grouping response on the quality of public service provision, the quality of the bureaucracy, the competence of civil servants, the independence of the civil service from political pressures, and the credibility of the government's commitment to policies. The focus of this index is on the "inputs" required for the government to be able to produce and implement good policies and deliver public goods. For robustness, I also looked at the WEF's measure of regulatory burdens, which asks executives across countries, "How burdensome is it for businesses in your country to comply with governmental administrative requirements (e.g., permits, regulations, reporting)?" on a seven-point scale where one equals extremely burdensome and seven equals not burdensome at all.

Control variables

The study used several variables to represent alternative explanations for aspirational-type entrepreneurship. A country's level of economic development also affects its innovative economic activity (Porter, Sachs, & McArthur, 2001). This study used gross domestic product per capita (GDP) to represent this. Anokhin and Wincent (2012) correlated the log of per capita GDP with a binary variable of an innovation-driven economy and found the two to be highly related. Then a positive relationship has been found between a country's domestic rate of growth and its proportion of high-growth entrepreneurship (Bowen & De Clercq, 2008). With innovative entrepreneurship also being a form of aspirational entrepreneurship, there is a need to control a country's domestic rate of growth. Nevertheless, the longitudinal nature of this study's data accounts for changes in GDP over time.

We also looked at the dynamism of the market, which allows entrepreneurs to exploit opportunities when changes occur. GEM conducts a national expert survey about the country's conditions for entrepreneurship. But unlike the WEF, GEM uses a five-point Likert scale. One of the conditions it assesses is the dynamism of local markets. Other measures we drew from the GEM expert survey included conditions of the extent to which the local culture and government policy supported entrepreneurial behaviour. Market dynamism was assessed by asking experts whether the local markets for consumer goods and services change dramatically from year to year; and whether the local markets for business-to-business goods and services change dramatically. An important indicator of the GEM culture measures is whether the local society supports risk-taking and innovation. Innovative activity is risk-prone, and entrepreneurs must collaborate with many other suppliers who will share in the entrepreneur's risks. When all these participants can deal with risk, entrepreneurs can take courage in their risks. In addition, GEM assesses whether government policies favour new firms through procurement, whether support for new and growing firms is a high priority for policy at the national government level and whether it is a high priority at the local government level. Finally, we included year dummy variables to accommodate changes in other country contexts across time.

Data analysis

Due to the longitudinal structure of the data, we did not select the ordinary least squares regression. Ordinary least squares regression assumes observations are independent. Still, longitudinal data contains repeat observations of entrepreneurs from the same country across time, which may compromise the independence criterion of regression analysis. If these linkages are not addressed, they will be transferred into the error term, resulting in biased and inconsistent effect sizes. Therefore, we used specific panel regression techniques to test the significance of the two-way interaction term.

To test if the coefficients estimated in both random and fixed effects models are the same, we used a Hausman-like test of fixed versus random effects: the Stata xtoverid command (Schaffer & Stillman, 2006). Unlike the Hausman version, the xtoverid test enabled us to use the coefficients of the cluster-robust panel regression. Following the test, we found that fixed and random effects were similar, which means that omitted variable bias is also minimal with random effects. When this is the case, the norm is to select random effects estimation because it is more efficient (Wooldridge, 2010).

Because we predicted interaction effects, we included multiplicative interaction terms in the models. Still, all main effects were included in the full two-way interaction model (Cohen, Cohen, West, & Aiken, 2002). First, the study looks at whether the interaction term is significant; and if significant, one then proceeds to plot the simple slopes (Dawson & Richter, 2006) to examine the nature of the interaction: whether the primary variable causes the dependent variable to increase or decrease more sharply at certain levels of the moderating variable.

Aside from determining whether start-ups will be innovative, the financial system, the skill development system and the state affect the general entry of individuals into entrepreneurship. This can result in selection bias. The study thus employed a Heckman model to calculate an inverse Mills ratio variable, which can be inserted into the regression models to control for selection bias. The two-stage Heckman regression in Stata outputs an inverse Mills ratio variable, which can be used as a control in the innovative start-up model. To identify the first stage of the Heckman selection model, we added GEM's opportunity perception variable that is correlated with entrepreneurial entry and uncorrelated with the share of innovative start-ups.

To ease our interpretation of model coefficients, we standardized our variables. Often in an unstandardized model, the difference in magnitude of coefficients can appear large. For example, tertiary education was measured on a percent scale, GDP was measured in per capita UD dollars, and other measures arose from a seven-point scale.

Table 2 illustrates the variables' means, standard deviations, and pairwise correlations. There appears to be a very high correlation, greater than 0.7, between GDP, the state, and the skill development system. I considered removing the GDP variable, but this risks regression coefficients for the state and the skill development system that might not be theoretically meaningful: the coefficients might contain representations of country wealth, for example. Notably, mean and individual variation inflation factors (VIF) were below five (Hair et al., 2009), suggesting that the model is not at risk of multicollinearity. In addition, the Stata software also omits severe collinear terms from a model, which it did not in this instance.

Table 2

Descriptive statistics
	Mean	s.d.	1	2	3	4	5	6	7
1. Innovative-oriented start-ups	25.63	10.40
2. Market dynamism	3.01	0.51	-0.28*
3. Government policy	2.55	0.48	0.22*	0.14*
4. Entrepreneurial culture	2.81	0.47	0.13*	0.09*	0.34*
5. GDP ln	9.51	1.15	0.35*	-0.17*	0.26*	0.06
6. Financial system	3.77	0.80	0.29*	-0.09*	0.44*	0.34*	0.54*
7. State	0.63	0.87	0.38*	-0.10*	0.44*	0.17*	0.85*	0.67*
8. Skill development system	51.49	24.46	0.27*	-0.03	0.05	0.05	0.71*	0.18*	0.60*
*p < 0.05

The convention for interaction models is to center all variables before the interaction terms are included (Aiken & West, 1991). Because we use standardized coefficients, there was no need further to apply the centering procedure.

Table 3 presents the results of our panel regressions. Despite separating the models into separate control, direct and moderating, in a stepwise fashion, I use only the full models to check, for instance, whether any direct effects of variables were significant. There has been debate about the adequacy of using stepwise regression to select variables because it can lead to a model that is not theoretically well motivated (O'Brien, 2007). Organizational scholars are also beginning to argue that a direct effect in the real world does not occur in isolation. The direct effect occurs among its interactions with other variables. Thus, it is appropriate to test a direct effect for any predictor in the complete interaction model possessing all interactions (Aguinis, Edwards, & Bradley, 2017).

Table 3

Regression models: Random effects: Maximum Likelihood
Models	1	2	3	4	5	6
Constant	0.12	0.15	-0.18	0.10	0.06	0.13
Mills inverse ratio	0.01	-0.01	0.10	0.09	0.10	0.11
Market dynamism	− .17**	-0.17**	-0.15*	-0.18**	-0.16**	-0.19**
Government policy	0.13+	0.12+	0.12+	0.16*	0.15*	0.16*
Entrepreneurial culture	0.13+	0.12	0.08	0.10	0.09	0.11
GDP	0.31***	0.25*	0.11	0.27**	0.26*	0.22*
Financial system		0.11			0.13	0.10
State			0.42**		0.28
Skill development system				0.18+		0.13
Financial system x State					-0.31**
Financial system x Skill development system						-0.19**
Overall R square	0.18	0.19	0.23	0.21	0.29	0.27
Chi square statistic	42.89***	43.69***	49.46***	46.89***	56.98***	53.99***
Likelihood ratio test		0.81	6.57**	9.59**	7.52*	7.1*
Log Likelihood	-293.99	-293.59	-290.70	-289.20	-286.94	-285.65
AIC	611.98	613.17	607.41	604.39	603.88	601.30
0.001* 0.01 0.05* 0.1+, 283 observations and 85 countries. Year effects controlled for but not shown.

Hypothesis 1

proposed that nation's financial system would have a more substantial positive effect on its innovative-oriented share of start-ups in nations possessing a weak state than a strong state. Model 5 in Table 3 shows that the interaction between the financial system and the state is significant (b = -0.31, p < 0.01), which lends partial support to hypothesis 1. Notably, neither the financial system nor the state is significant. To examine whether the financial system has a more substantial positive effect ups in nations possessing a weak state, we need to look at the slopes in Fig. 1. Indeed, the slope is more positive for a weak state.

Hypothesis 2

proposed that nation's financial system would have a stronger positive effect on its innovative-oriented share of start-ups in nations possessing a weak skill development system than a strong one. Model 6 in Table 3 shows that the interaction between the financial and skill development systems is significant (b = -0.19, p < 0.01), which lends partial support to hypothesis 1. To examine whether the financial system has a stronger positive effect in nations possessing a weak skill development system, we need to look at the slopes in Fig. 2, which show that the slope is more positive for a weak skill development system.

Finally, I ran robustness checks on our hypotheses using other indicators of a financial system, the state, and the skill development system. For the financial system, I used GEM's finance entrepreneurial framework condition. This is a scale of six items, assessing whether, in a particular country, there is sufficient equity funding, debt funding, government subsidies, funding available from private individuals, venture capitalist funding, and funding available through initial public offerings. For the state, I used the WEF measure of regulatory burdens. In addition, I used the WEF's measures of research availability and that of scientists and engineers for the skill development system. All these substitutions gave the same pattern as the selected initial measures.

This study looked at the role of national financial systems on countries' share of innovative-oriented start-ups. Because innovation results from the joint efforts of many actors (e.g., Nelson & Winter, 1982), the study argues that it is unlikely that the role of a nation's financial system can be considered in isolation. The study combines Whitley's (1999) proximate institutions and Barney's (1991) resource-based view to hypothesise that a nation's financial system will play a significant positive role only when the state or skill development system is weak. The strength of the state was indicated by the Quality of Government Institutes' assessment of government effectiveness (Dahlberg et al., 2019); the strength of the skill development system was indicated by tertiary education enrolment as a percent of the population of the age group that officially corresponds to the tertiary education level as well as skills available through scientists and engineers. The above hypotheses were supported by an analysis of five years of country data.

Contributions and implications

Overall, this study contributes to a stream of research about the context for entrepreneurial aspirations or entrepreneurship quality, which manifests in growth and innovation (e.g., Bowen & De Clercq, 2008; Chowdhury et al., 2018; Stenholm et al., 2013). In particular, it builds on prior arguments that the resource-based view provides stronger explanations of strategic economic activity when integrated with institutional theory (e.g., Oliver, 1997). To this extent, one recalls that institutions can serve as national resources (North, 1990), interacting with one another in the case of innovative economic activity (Lundvall, 1992; Pezeshkan et al., 2016).

Deserving of further research, this study's findings imply that innovative-oriented and growth-oriented entrepreneurs, though both considered manifestations of aspirational entrepreneurship, might deserve separate analysis because they do not appear to respond similarly to financial institutions. Bowen and De Clerq (2008), for example, found that growth-oriented entrepreneurs respond directly to financial systems. Still, this study's findings do not show evidence of a direct effect on innovation-oriented entrepreneurs. Other researchers have also shown that financial systems do not act alone when innovative-oriented entrepreneurship is involved (Chowdhury et al., 2018; Yan & Guan, 2018). This appears to make sense, considering that not all growth aspirations are attained through innovative products and services; growth can be reached, for instance, by selling more of an existing product or service. Empirically, this idea has not been tested at a national level, perhaps because, until now, it has been challenging to collate sufficient national-level data.

But, this study has proposed compensating interactions for innovative economic activity instead of complementary interactions. Systems perspectives often imply complementary interactions. Nevertheless, this study has argued for compensating type interactions by integrating the resource-based view (Barney, 1991) into the national business systems perspective. Prior attempts to integrate the resource based-view with institutional theory suggest that resources and capabilities in one context may not be as valuable as in other contexts (Brouthers, Brouthers, & Werner, 2008; Oliver, 1997; Peng, Meyer, Estrin, & Kumar, 2009). For example, finance service providers may not willingly share risks with innovative-oriented start-ups in countries with strong skill development systems because other skilled agents can imitate innovations relatively quickly. And innovative start-ups can lose their competitive advantage relatively quickly in such environments compared to environments where agents are not skilled enough to replicate an innovation. Thus, this study demonstrates how the resource-based view can be integrated with the national business system's institutional approach to explaining variations in innovative entrepreneurship across countries. This systems perspective of institutions moves attention from linear to interactive thinking about innovative entrepreneurship (Lundvall & Borras, 2005; Pezeshkan et al., 2016). By combining the resource-based view with institutional theory, this study builds on arguments that differences in nations' institutional environments may alter resource-based advantages (Brouthers et al., 2008).

Limitations and further research

Because of certain limitations, further research is necessary. For example, the national business systems perspective provides a detailed and comprehensive analytical framework that includes cultural cognitive and proximate institutions to pinpoint the critical characteristics of institutions that shape firm characteristics and entrepreneurial initiatives. Though this study controls for cultural institutions, it focuses only on the interactions between proximate institutions. Further research might attempt interactions between proximate institutions and dimensions of culture. For example, those dimensions that influence risk-taking and confidence (Koellinger, 2008; Zimmerman & Zeitz, 2002) and those that affect trust and social cooperation can advance understanding the most relevant institutional framework for innovative-oriented start-ups. This is salient considering that business models for innovation are often "imagined," and speedy decisions required to enjoy first-mover advantage rely on perceived more than objective environmental factors because it takes time to gather objective information (Tang, Kreiser, Marino, & Weaver, 2010). To access any objective information, innovative entrepreneurs have to wait to test and pivot their ideas in the marketplace (Blank, 2013). For example, actors within financial systems might possess heuristics in evaluating potential business ideas where uncertainty abounds and thus develop a higher level of tolerance for risk-taking situations.

In addition, this study focuses on a broad and aggregate conceptualization of innovation based on whether customers perceive the product or service of the start-up as new. Within developing economies, opportunities for innovative-oriented start-ups might not arise from investment in new technological knowledge (Acs, Amorós, & Bosma, 2009), which can be measured as the number of patent applications filed in each country (Yoon, Kim, Buisson, & Phillips, 2018). Thus, further research might replicate this study by using other innovation measures such as patent applications.

This study has argued that a nation's financial system will play a significant positive role in its innovative-oriented entrepreneurship share only when the state or skill development system is weak. In this innovation-oriented entrepreneurship context, financial systems can be vital because they can encourage risk-taking amongst the nation's potential entrepreneurs. Innovation is a risk-prone activity, and an entrepreneur's risks can be exacerbated in environments where one cannot rely on the state. In addition, for example, when the required support from skilled service providers is unavailable, entrepreneurs may need financial support to look across their borders for the required skills or knowledge.

This study contributes to the literature by uncovering the relationship between the system of national institutions and innovative-oriented entrepreneurship across a diverse set of economies. Understanding what encourages innovative economic activity is fundamental to

a country's economic development, attractiveness, and competitiveness in the 21st century. Mainly, developing nation governments may go some way to increase the innovative-oriented share of entrepreneurial activity by beginning to strengthen the nation's financial systems.

GEM

Global entrepreneurship monitor

GDP

Gross domestic product

QOG

Quality of government

SME

Small and medium enterprise

TEA

Total entrepreneurial activity

VIF

Variation inflation factor

Availability of data and materials: Secondary data used in this study were obtained from the World Bank and Global Entrepreneurship Monitor databases.

Competing interests: The author declares no competing interests.

Funding: College of Business and Economics University of Johannesburg has provided professional fee for the authors. The college has the mandate to follow up the completion and submission of the result.

Acknowledgement: The researcher acknowledges all the parties involved in the study including the College of Business and Economics for its permission to conduct the study and provide professional fee. Authors also acknowledge the source of secondary data (World Bank and Global Entrepreneurship Monitor) for availing their data open access.

Acs, Z., Amorós, J. E., & Bosma, N. (2009). From entrepreneurship to economic development: celebrating ten years of global entrepreneurship monitor. … Frontiers of Entrepreneurship Research…, 29(16), 1–15. Retrieved from http://digitalknowledge.babson.edu/fer/vol29/iss16/1/
Aguinis, H., Edwards, J. R., & Bradley, K. J. (2017). Improving Our Understanding of Moderation and Mediation in Strategic Management Research. Organizational Research Methods, 20(4), 665–685. https://doi.org/10.1177/1094428115627498.
Aiken, L. S., & West, S. G. (1991). The effects of predictor scaling on coefficients of regression equations. Multiple Regression: Testing and Interpreting Interactions.
Anokhin, S., & Wincent, J. (2012). Start-up rates and innovation: A cross-country examination. Journal of International Business Studies, 43(1), 41–60.
Audretsch, D. B., Bönte, W., & Mahagaonkar, P. (2012). Financial signaling by innovative nascent ventures: The relevance of patents and prototypes. Research Policy, 41(8), 1407–1421. https://doi.org/10.1016/j.respol.2012.02.003.
Audretsch, D. B., & Keilbach, M. (2004). Entrepreneurship capital and economic performance. Regional Studies, 38(8), 949–959. https://doi.org/10.1080/0034340042000280956.
Autio, E., Kenney, M., Mustar, P., Siegel, D., Wright, M., Autio, E., & Wright, M. (2014). Entrepreneurial innovation: The importance of context. Research Policy, 43(7), 1097–1108. https://doi.org/10.1016/j.respol.2014.01.015.
Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99–120. https://doi.org/10.1177/014920639101700108.
Beck, T., & Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking and Finance, 30(11), 2931–2943. https://doi.org/10.1016/j.jbankfin.2006.05.009.
Blank, S. (2013). Why the Lean Start-Up Changes Everything. Retrieved from http://host.uniroma3.it/facolta/economia/db/materiali/insegnamenti/611_8959.pdf
Bowen, H. P., & De Clercq, D. (2008). Institutional context and the allocation of entrepreneurial effort. Journal of International Business Studies, 39(4), 747–767. https://doi.org/10.1057/palgrave.jibs.8400343.
Brouthers, K. D., Brouthers, L. E., & Werner, S. (2008). Resource-based advantages in an International context. Journal of Management, 34(2), 189–217. https://doi.org/10.1177/0149206307312508.
Chowdhury, F., Audretsch, D. B., & Belitski, M. (2018). Institutions and Entrepreneurship Quality. Entrepreneurship Theory and Practice, 43(1), 51–81. https://doi.org/10.1177/1042258718780431.
Cohen, J., Cohen, P., West, S., & Aiken, L. (2002). Applied Multiple Regression/Correlation for the Behavioral Sciences. L. Erlbaum Associates.
Colwell, K., & Narayanan, V. K. (2010). Foresight in economic development policy: Shaping the institutional context for entrepreneurial innovation. Futures, 42(4), 295–303. https://doi.org/10.1016/j.futures.2009.11.015.
Dahlberg, S., Holmberg, S., Rothstein, B., Alvarado, N., & Richard, P. (2019). &. The QOG Basic Data Codebook. https://doi.org/10.18157/qogbasjan19
Darnihamedani, P., & Block, J. H. (2018). Taxes, start-up costs, and innovative entrepreneurship.
Dawson, J. F., & Richter, A. W. (2006). Probing three-way interactions in moderated multiple regression: Development and application of a slope difference test. Journal of Applied Psychology, 91(4), 917–926. https://doi.org/10.1037/0021-9010.91.4.917.
Dollinger, M. J. (2008). Entrepreneurship: strategies and resources. Marsh Publications. Retrieved from https://scholar.google.co.za/scholar?hl=en&as_sdt=0%2C5&q=Entrepreneurship%3A+Strategies+and+Resources+dollinger&btnG=
Economidou, C., Grilli, L., Henrekson, M., & Sanders, M. (2018). Financial and Institutional Reforms for an Entrepreneurial Society. Small Business Economics, 51(2), 279–291. https://doi.org/10.1007/s11187-018-0001-0.
Gifford, S. (1992). Allocation of entrepreneurial attention. Journal of Economic Behavior and Organization, 19(3), 265–284. https://doi.org/10.1016/0167-2681(92)90038-D.
Guan, J., & Chen, K. (2012). Modeling the relative efficiency of national innovation systems. Research Policy, 41(1), 102–115. https://doi.org/10.1016/j.respol.2011.07.001.
Guillén, M. F. (2000). Business groups in emerging economies: A resource-based view. Academy of Management Journal. https://doi.org/10.2307/1556400.
Hair, J. F., Black, W. C. W. C., Babin, B. J., Anderson, R. E., Babin, B. J., & Black, W. C. W. C. (2009). Multivariate data analysis: A global perspective. In Multivariate Data Analysis: A Global Perspective. https://doi.org/10.1016/j.ijpharm.2011.02.019
Hall, B. H., & Lerner, J. (2010). The financing of R&D and innovation. In Handbook of the Economics of Innovation (Vol. 1, pp. 609–639). North-Holland. https://doi.org/10.1016/S0169-7218(10)01014-2
Keller, M. R., & Block, F. (2013). Explaining the transformation in the US innovation system: The impact of a small government program. Socio-Economic Review, 11(4), 629–656. https://doi.org/10.1093/ser/mws021.
Kenney, M., & Patton, D. (2010). Entrepreneurial Geographies: Support Networks in Three High-Technology Industries. Economic Geography, 81(2), 201–228. https://doi.org/10.1111/j.1944-8287.2005.tb00265.x.
Koellinger, P. (2008). Why are some entrepreneurs more innovative than others? Small Business Economics, 31(1), 21–37. https://doi.org/10.1007/s11187-008-9107-0.
Lundvall, B. (1992). National systems of innovationtowards a theory of innovation and interactive learning. Towards a theory of innovation and interactive learning. London, Pinter. Pinter.
Lundvall, B. (2007). National innovation systems - Analytical concept and development tool. Industry and Innovation, 14(1), 95–119. https://doi.org/10.1080/13662710601130863.
Lundvall, B., & Borrás, S. (2005). Science, Technology, and Innovation Policy. In The Oxford Handbook of Innovation (pp. 599–631). Retrieved from https://www.researchgate.net/profile/Susana_Borras2/publication/254372446_Science_Technology_and_ Innovation_Policy/links/5bb49b5c92851ca9ed3766dc/Science-Technology-and-Innovation-Policy.pdf
Meeus, M. T. H., & Oerlemans, L. A. G. (2000). Firm behaviour and innovative performance An empirical exploration of the selection-adaptive debate. Research Policy, 29(1), 41. Retrieved from http://proquest.umi.com/pqdweb?did=736839251&Fmt=7&clientId=12010&RQT=309&VName=PQD
Munemo, J. (2017). Foreign direct investment and business start-up in developing countries: The role of financial market development. Quarterly Review of Economics and Finance, 65, 97–106. https://doi.org/10.1016/j.qref.2016.08.010.
Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change (Digitally). Cambridge Mass.: Belknap Press of Harvard University Press. Retrieved from https://www.worldcat.org/title/evolutionary-theory-of-economic-change/oclc/255191816&referer=brief_results
North, D. C. (1990). INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE. Cambridge University Press. Retrieved from https://www.cambridge.org/za/academic/subjects/politics-international-relations/political-economy/institutions-institutional-change-and-economic-performance?format=PB&isbn=9780521397346
O'Brien, R. M. (2007). A caution regarding rules of thumb for variance inflation factors. Quality and Quantity, 41(5), 673–690. https://doi.org/10.1007/s11135-006-9018-6.
Oliver, C. (1997). Sustainable competitive advantage: combining institutional and resource-based views. Strategic Management Journal, 18(9), 697–713. Retrieved from
http://dx.doi.org/10.1002/
(SICI)1097-0266(199710)18:9%3C697::AID-SMJ909%3E3.0.CO;2-C
Peng, M. W., Meyer, K. E., Estrin, S., & Kumar, S. (2009). Institutions, resources and entry strategies in emerging economies. Strategic Management Journal, 80(January 2007), 61–80. https://doi.org/10.1002/smj
Pezeshkan, A., Smith, A., Stav, F., & Amirmahmood, A. S. (2016). National business systems and firm innovation: A study of developing economies. Journal of Business Research, 69(11), 5413–5418. https://doi.org/10.1016/j.jbusres.2016.04.147.
Porter, M., Sachs, J., & McArthur, J. (2001). Executive summary: Competitiveness and stages of economic development. In M. Porter, J. Sachs, P. K. Cornelius, W. J. McArthur, & K. Schwab (Eds.), The global competitiveness report 2001–2002 (pp. 16–25).
Pradhan, R. P., Arvin, M. B., Hall, J. H., & Nair, M. (2016). Innovation, financial development and economic growth in Eurozone countries, 4851. https://doi.org/10.1080/13504851.2016.1139668
Rana, M. B., & Allen, M. M. C. (2018). The Palgrave Handbook of Multidisciplinary Perspectives on Entrepreneurship. The Palgrave Handbook of Multidisciplinary Perspectives on Entrepreneurship. https://doi.org/10.1007/978-3-319-91611-8
Reynolds, P., Bosma, N., Autio, E., Hunt, S., De Bono, N., Servais, I., & Chin, N. (2005). Global entrepreneurship monitor: Data collection design and implementation 1998–2003. Small Business Economics, 24(3), 205–231. https://doi.org/10.1007/s11187-005-1980-1.
Schaffer, M. E., & Stillman, S. (2006, January 5). xtoverid: Stata module to calculate tests of overidentifying restrictions after xtreg, xtivreg, xtivreg2, and xthtaylor. Retrieved April 12, 2019, from https://econpapers.repec.org/software/bocbocode/s456779.htm
Schneider, C., & Veugelers, R. (2010). On young highly innovative companies: why they matter and how (not) to policy support them. Industrial and Corporate Change, 19(4), 969–1007. Retrieved from https://academic.oup.com/icc/article-abstract/19/4/969/658017
Scott, W. R. (2008). Institutions and organizations: ideas and interests. Sage Publications. Retrieved from https://books.google.co.za/books/about/Institutions_and_Organizations.html?id=7Y-0bDCw_aEC&source=kp_book_description&redir_esc=y
Stenholm, P., Acs, Z. J., & Wuebker, R. (2013). Exploring country-level institutional arrangements on the rate and type of entrepreneurial activity. Journal of Business Venturing, 28, 176–193. https://doi.org/10.1016/j.jbusvent.2011.11.002.
Tang, Z., Kreiser, P. M., Marino, L., & Weaver, K. M. (2010). Process of Perceiving Industrial Munificence: A Field Study of SMEs in Four Countries, 48(2),97–115.
Wan, W. P. (2005). Country resource environments, firm capabilities, and corporate diversification strategies. Journal of Management Studies. https://doi.org/10.1111/j.1467-6486.2005.00492.x.
Whitley, R. (1994). Dominant Forms of Economic Organization in Market Economies. Organization Studies. https://doi.org/10.1177/017084069401500201.
Whitley, R. (1999). Divergent Capitalisms: the Social Structuring and Change of Business Systems. UK: Oxford University Press.
Winter, S. G. (2007). Developing Evolutionary Theory for Economics and Management. In M. Hitt & K. G. Smith (Eds.), Great Minds in Management. The Process of Theory Development (pp. 509–546). Oxford,: Oxford University Press. Retrieved from http://etss.net/files/Winter_2005-01.pdf
Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data. MIT Press.
Yan, Y., & Guan, J. (2018). Entrepreneurial ecosystem, entrepreneurial rate and innovation: the moderating role of internet attention. International Entrepreneurship and Management Journal, 1–26. https://doi.org/10.1007/s11365-018-0493-8.
Yoon, H. (David), Kim, N., Buisson, B., & Phillips, F. (Eds.). (2018). A cross-national study of knowledge, government intervention, and innovative nascent entrepreneurship. Journal of Business Research, 84(November 2017), 243–252. https://doi.org/10.1016/j.jbusres.2017.11.040
Zimmerman, M. A., & Zeitz, G. I. J. (2002). Beyond Survival: Achieving New Venture Growth By Building Legitimacy. Academy of Management Review, 27(3), 414–431. https://doi.org/10.5465/AMR.2002.7389921.

Download PDF

Reviewer #3 agreed at journal
20 Apr, 2023
Reviewer #2 agreed at journal
17 Apr, 2023
Reviewer #1 agreed at journal
17 Apr, 2023
Reviewers invited by journal
16 Apr, 2023
Editor assigned by journal
21 Jan, 2023
Submission checks completed at journal
21 Jan, 2023
Editor invited by journal
21 Jan, 2023
First submitted to journal
19 Jan, 2023

You are reading this latest preprint version

Innovative-oriented start-ups across countries: Conditions for the positive effect of a financial system

Status:

Version 1

Abstract

Figures

Introduction

Theory And Hypotheses

Financial system and the state

Financial system and skill development system

Method

Overview of the sample and data sources

Dependent variable

Explanatory variables

Control variables

Data analysis

Results

Discussion

Contributions and implications

Limitations and further research

Conclusion

Abbreviations

Declarations

References

Status:

Version 1