When Institutions Make Networks Matter: Start-Ups in Emerging vs. Developed Economies

What is it about?

This study develops a model linking social networks—measured through a country’s associational activity—to new business creation, emphasizing how institutional environments shape this relationship. It builds on the idea that regulatory systems, shared knowledge, and social norms influence entrepreneurship. Associational activity, or citizens’ participation in voluntary groups, fosters information and resource exchange that can help transform entrepreneurial ideas into start-ups, especially where market institutions are weak. Using cross-country data, the study finds that social networks play a stronger role in promoting new business activity in emerging than in developed economies. In emerging contexts, the positive effect of associational activity intensifies when regulatory and normative barriers are high—such as heavy bureaucracy or weak pro-entrepreneurial norms—because networks compensate for institutional gaps. In contrast, in developed economies where formal systems already function efficiently, these moderating effects disappear. The results suggest that strengthening social networks can be an effective policy lever for promoting entrepreneurship in emerging economies. Encouraging participation in professional, civic, or community organizations can help entrepreneurs access information, build trust, and mobilize resources when institutional support systems are limited. For policymakers in developed economies, where institutions already work well, network initiatives may still add value but offer diminishing returns compared to institutional reforms or innovation programs.

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Photo by Christian Chen on Unsplash

Photo by Christian Chen on Unsplash

Why is it important?

This study is unique in showing, with cross-national evidence, that the payoff from social networks is context-dependent: networks have greater startup-generating power in emerging economies, and their value intensifies under heavier regulatory and normative burdens—a pattern absent in developed economies. By integrating institutional dimensions with country-level networking intensity, it advances a substitution logic: where institutions are weaker, networks step in to reduce transaction costs and mobilize resources for new firm creation. It is timely because many emerging economies are seeking levers to stimulate entrepreneurship while formal reforms take time to materialize. The findings validate low-cost, near-term interventions—supporting voluntary associations, chambers, and professional groups—to catalyze start-ups amid institutional frictions, while reminding developed economies that institutional quality remains the primary engine keeping start-up pathways open. Policymakers thus gain a dual playbook: build networks to bridge gaps now and improve institutions for durable impact.