Promoting Entrepreneurship and Innovation: The Institutional Framework

In the previous chapters, we have consistently emphasized the importance of entrepreneurship for innovation, renewal, growth, and job creation. However, these beneficial forces do not automatically reflect the individual entrepreneur’s aims. Even if factors such as social recognition and testing one’s ideas influence the desire to become an entrepreneur, the pursuit of profit plays a part that cannot be ignored. When entrepreneurs search for and attempt to create entrepreneurial rents, they are largely governed by the incentives—the reward structure—that prevail in the environment in which they pursue their entrepreneurship. These incentives are essentially determined by the institutional setup of the economic system, which is sometimes called “the rules of the game.” Good institutions or favorable rules are prerequisites for encouraging innovation and entrepreneurship and for channeling entrepreneurial effort towards socially productive venturing.