The Effect of Institutional Uncertainty on Entrepreneurial Activity in Emerging Markets

A broad-based consensus exists in academia which states that institutional uncertainty reduces entrepreneurial activity. However, recent theoretical arguments by institutionalists suggest the contrary may be true, namely, institutional uncertainty fosters entrepreneurship. They argue that their claim may hold in the context of emerging markets. These recent arguments state that entrepreneurs pursue value-adding activities when facing institutional uncertainty. Yet, besides these theoretical arguments, empirical support is lacking. In response, this thesis pursues to empirically verify whether institutional uncertainty promotes entrepreneurial behavior. The use of a lagged instrumental variable enables this research to check for endogeneity between institutional uncertainty and entrepreneurship. The results show that institutional uncertainty indeed improves entrepreneurial activity when considering Mexico. To further justify whether similar results hold across other emerging markets, we included a nation similar to Mexico; Chile. Based on the analyses for both Mexico and Chile, we can confirm the fostering nature of institutional uncertainty towards entrepreneurial activity.