Cronyism, Rule of Law, and Entrepreneurship: A Country-Level Examination

Cronyism promotes the exchange of favors among connected parties based on relationships rather than merit, granting them undue advantages in securing opportunities and resources. This study examines the impact of cronyism on the quantity and quality of entrepreneurship. The analysis of data from 98 countries over 8 years (482 country-year observations) indicates that cronyism is negatively associated with the quantity of productive entrepreneurship, and positively associated with the prevalence of unproductive entrepreneurship. Furthermore, the results reveal that cronyism diminishes the quality of entrepreneurship productivity across countries. Interestingly, the findings suggest that a stronger rule of law exacerbates the detrimental effects of cronyism on entrepreneurship productivity. These results extend our understanding of cronyism as a crucial yet understudied informal institution with major implications for management and entrepreneurship.