The nexus between entrepreneurship and property rights:

Role of legal origin in entrepreneurship, property rights, and

economic growth
Yosuke Tomita (  yosuke.tomita@tyg.jp )
Toyo Gakuen University
Akinori Kimura
Toyo Gakuen University

Research Article

Keywords: entrepreneurship, property rights, legal origin, economic growth, Global Entrepreneurship Monitor

Posted Date: December 14th, 2022

DOI: https://doi.org/10.21203/rs.3.rs-2361553/v1

License:   This work is licensed under a Creative Commons Attribution 4.0 International License. Read Full License

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Abstract
Differences in legal origins result in varieties of capitalism, and this may influence the impact of property rights on
entrepreneurship and the relationship between entrepreneurship and economic growth. Therefore, we explored the
relationship between entrepreneurship, property rights, and economic growth by examining macro data from 51 countries
from 2001 to 2020 and classifying the countries based on their legal origins (English, French, German, and Scandinavian).
We obtained data on entrepreneurship from the Global Entrepreneurship Monitor, a research consortium developed by
Babson College and the London Business School. The results indicated that entrepreneurship is associated with economic
growth in civil law countries rather than in common law countries. In addition, the form of the function between
entrepreneurship and property rights differs depending on the legal origin. We observed a rising trend in the association
between entrepreneurship and property rights for countries with English and German legal origins, while we noted a gradual
quadratic function in the bell curve trend for countries with French legal origin. As for countries with Scandinavian legal
origin, we found a negative linear relationship between property rights and entrepreneurial activity.

JEL: L26, M13, P14, K15, O47

1. Introduction
Since the late 1990s, it has been argued that institutions in each country’s financial economy differ depending on the legal
origins adopted in the past (La Porta et al. 1997). According to La Porta et al. (1998, 2000, 2002), there are four legal origins:
English, French, German, and Scandinavian.[1] Such legal origins have implications for the financial system, including
shared ownership structures, minority shareholder protections, and creditor rights. Since La Porta et al. (1998), there have
been numerous reports on the impact of legal origin on financial markets. For instance, according to Ali et al. (2022), legal
origin affects risk-taking by banks, and De Vita et al. (2022) suggest that it affects financial development.[2]

Apart from financial markets, does legal origin also affect entrepreneurship, which is the foundation of the economy?
According to Erhardt and Haenni (2018), entrepreneurship is more influenced by institutional contexts such as culture, rather
than by entrepreneurial skills, and institutional context influences entrepreneurs’ risk aversion. Audretsch et al. (2021) report
that differences in institutional contexts affect entrepreneurship. These studies suggest that institutional factors influence
entrepreneurship.

Based on the importance of institutional factors, our research focuses on the nexus between entrepreneurship and legal
origin and determines whether entrepreneurial development is linked to economic growth. In particular, we empirically
explore two research questions: (1) Is entrepreneurship in different countries affected by the different property rights
according to their legal origins? (2) Does the revitalization of entrepreneurship stimulate macroeconomic growth? However,
regarding research question (1), the nexus between entrepreneurship and property rights may be nonlinear, depending on the
legal origin.

For this study, we obtained entrepreneurship data from the Global Entrepreneurship Monitor (GEM), a research consortium
developed by Babson College and the London Business School. By making country-by-country comparisons using macro
data on the 51 selected nations from 2001 to 2020, the years for which data were available, we investigated the link
between economic growth and entrepreneurship, as well as the relationship between property rights and entrepreneurship,
by legal origin.

Incidentally, Graff (2008) critically examined the “legal origin theory.” La Porta et al. (1998, 2000, 2002) had maintained that
institutions with a common law background provide a better framework for financial development and economic growth
than those with a civil law background. However, according to Graff (2008), there is no evidence that common law countries
have greater investor protections than civil law countries. Nevertheless, Graff (2008) found that institutional investors
choose to engage in different behaviors, depending on their legal origins, which are essential for shaping corporate law.

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Additionally, according to La Porta et al. (2008, 2013), legal origin affects not only the financial system but also various
areas of law, such as procedural formalism, judicial independence, and labor law. In other words, legal origins also impact
property rights. La Porta et al. (2008) developed a doctrine that asserts that “the legal origin is what matters.”[3]

In contrast, another theory argues that legal origin is not important. Berkowitz et al. (2003a, 2003b) contend that a critical
factor in the succession of legal origins in countries is whether the endogenous institutions and the legal origins of the
country in question are compatible. In essence, the idea is that any legal origin can achieve high economic performance if it
is compatible with the endogenous institutions of a country. The authors affirm that if institutional complementarity exists
between legal origins and endogenous institutions, institutional complementarity leads to high economic performance.[4]
Berkowitz et al.’s (2003a, 2003b) discussion leads to a consideration of the varieties of capitalism.[5]

In the context of varieties of capitalism, we will advance the discussion on the relevance of institutional context and
entrepreneurship. Wennekers and Thurik (1999) argued that culture and environment, as well as the institutional framework,
are necessary conditions that determine the rate of entrepreneurial activity and how entrepreneurial activity is conducted.
Culture and environment refer to the cultural setting of each country and the company’s internal culture. Wennekers and
Thurik (1999) suggested that this is because the institutional framework provides incentives for individual behavior at the
national and intra-firm levels. In other words, institutional complementarity between the macro level (e.g., the institutional
framework) and the micro level (e.g., individual firms or individuals) is paramount in stimulating entrepreneurial activity.
Wennekers and Thurik’s (1999) argument, like those of Audretsch et al. (2021) and Erhardt and Haenni (2018), suggests the
importance of institutions to entrepreneurship.

We believe that property rights are a critical institutional factor. According to Harper (2013), economic coordination by
“Ordoliberalismus” (Ordoliberalism) of Kirzner (2000) in the Austrian School produces efficient resource allocation through
the market. However, Harper (2013) also points out that Kirzner’s claim assumes a certain level of property rights. In other
words, according to Harper (2013), property rights vary from country to country, and therefore, in each country, institutions
too change in the market adjustment process.

According to Tomita and Kimura (2021) and Tomita (2022), differences in legal origins create varieties of capitalism.[6]
Suppose that one variety of capitalism is confirmed. In this case, differences in the legal origin of the sources of that variety
should have distinct effects on the impact of property rights on entrepreneurship, as well as on the relationship between
entrepreneurship and economic growth. In particular, the form of the function (i.e., linear or nonlinear) relevant to property
rights and entrepreneurship may vary depending on legal origin.

The following section discusses the connections between economic growth, property rights, and entrepreneurship. Section 3
details the data and models. Section 4 describes the models’ estimation outcomes, and Section 5 presents an interpretation
of the results. Finally, Section 6 presents the summary and implications of the study.

[1]
The classification of legal origin is based on the comparative law research of Zweigert and Kötz (1998).
[2]
According to Grassa (2020), the adaptability of the endogenous institution also positively impacts the development of
Islamic finance. At the same time, Grassa (2020) argues that adaptability is affected by legal origin.
[3]
Pogrebennyk (2014) argues that while common law is well suited to globalization, civil law has a slight advantage over
globalization. Therefore, Pogrebennyk (2014) argues that countries based on civil law are better off with a legal environment
that is intermediate between common law and civil law. Pogrebennyk’s (2014) argument is an extension of the “legal origin
is what matters” line of research, but the author seeks a system intermediate between common law and civil law.

[4]
According to Berkowitz et al. (2003a, 2003b), endogenous institutions indicate customs and informal constraints. In brief,
legal origins and endogenous institutions interact with each other.

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[5]
Vidyarthi (2018) questions the hypothesis that there is less regulation in common law countries and more regulation in
civil law ones. He argues that more regulation of common law can lead to the stagnation of the financial economy. However,
the development of financial markets is also observed in civil law countries. Vidyarthi’s (2018) examination leads to an
argument for institutional complementarity, in which common law regulations, but not civil law, lead to institutional
discrepancies.

[6]
According to Hall and Soskice (2001), varieties of capitalism refer to the hypothesis that capitalism diversifies in each
country because even if different forms of capitalism are adopted, no differences exist in their economic performance. Since
the work of Hall and Soskice (2001), many studies have been conducted on varieties of capitalism via the “regulation
approach.” See, for example, Amable (2003) and Boyer (2015).

2. Economic Growth, Property Rights, And Entrepreneurship

According to Audretsch and Thurik (2001) and Reynolds et al. (2004), a positive association exists between entrepreneurial
activity and economic growth.[7] Mokyr (2009) uses the example of technological progress during the Industrial Revolution
to argue that incentives for inventors are essential for technological progress, and concluded that, even today, intellectual
property rights (IPRs) are crucial and institutions are vital for economic growth.[8]

When entrepreneurial activity is viewed theoretically as a macroeconomic factor, the stimulation of entrepreneurial activity
creates new job opportunities and innovation. Consequently, fostering entrepreneurial activity generates economic growth.
However, economic growth may also lead to industrial development and, subsequently, to the activation of entrepreneurial
activity. Thus, to construct the regression models for this study, we needed to determine whether economic growth or
entrepreneurial activity was a predetermined variable by confirming time-series trends in entrepreneurial activity and
economic growth.

Along with the relationship between entrepreneurial activity and economic growth, we focused on the link between property
rights and entrepreneurial activity. Shane (2000) states that government interventions are necessary to promote
entrepreneurial activity, centered on entrepreneurial financing. Entrepreneurs must disclose the details of their startup
businesses to potential investors to raise funds because investors do not necessarily invest in entrepreneurs. Accordingly,
the government must guarantee the opportunity to start a business for entrepreneurs to increase their chances of obtaining
financing. In other words, the government must protect entrepreneurial opportunities through the patent system. This
discussion underscores the importance of property rights as a policy matter.

Shavell (2004) contends that, in the absence of property rights, entrepreneurs have less incentive to engage in
entrepreneurial activity because a third party may confiscate the intellectual property they produce. The incentive to work as
an entrepreneur decreases, meaning that entrepreneurs work fewer hours than is socially optimal. Conversely, Shavell (2004)
declares that entrepreneurial activity is stimulated under institutions where property rights exist because such rights reduce
market uncertainty risks (e.g., the risk of creating a monopoly market, a takeover threat, expropriation, and infringement of
private property rights).

However, Allen (2009) indicates that property rights that are too strongly protected may undermine “social benefits” when
individual property rights are heavily guaranteed for goods that produce external effects.[9] Given the different negative
aspects of strengthening property rights from a financing angle, reinforcing property rights naturally bolsters the rights of
investors, who provide financing to entrepreneurs. Thus, excessively strong investor protections may pose a threat to
entrepreneurs.[10] Further, fortifying property rights protects vested interests and may hinder the stimulation of
entrepreneurial activity. We believe that a situation in which the strengthening of property rights inhibits entrepreneurial
activity is one in which what the Schumpeterian school calls “creative destruction” is inhibited.

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The impact of property rights on entrepreneurial activity can be summarized as follows. First, strengthening property rights
enhances entrepreneurial incentives by bolstering corporate ownership and has the effect of protecting opportunities for
businesses through the protection of IPRs. Second, if strengthening property rights limits the external effects of public
goods, “social benefits” are undermined. Entrepreneurial opportunities decrease if the stagnation of “social benefits”
degrades a new basic industrial infrastructure. Third, strengthening property rights upholds the rights of funders to protect
investors, making entrepreneurs hesitant to raise capital. Last, when the strengthening of property rights leads to the
protection of vested interests, vested interests inhibit new entrepreneurial activity.

Strengthening property rights has two effects on entrepreneurial activity: one that stimulates entrepreneurial activity and one
that discourages. As such, because property rights differ by legal origin, their impact on entrepreneurial activity may have a
nonlinear relationship.

We clarify two hypotheses. The first hypothesis is that the association between entrepreneurship and economic growth
depends on its legal origin. We also confirm whether the improvement of entrepreneurial activity precedes economic growth.
The second hypothesis is that the association between property rights and entrepreneurial activity depends on the legal
origin. We also examine whether these associations are linear or nonlinear. In the next section, we explain how we estimate
the relationship between economic growth, property rights, and entrepreneurial activity using the regression models.
[7]
In their regression models, Reynolds et al. (2004) estimate the entrepreneurial activity for the current period by
incorporating the economic growth rate of multiple prior periods. In other words, entrepreneurial activity rises after economic
growth occurs.

[8]
De Montoro Pons and Cuadrado (2008) investigate copyright in the music market and suggest that differences in legal
origin affect the enforcement of IPRs.
[9]
In addition, the occupation of available resources by vested interests via private property rights may also limit
entrepreneurial activity.
[10]
Iwasaki and Kim (2020) investigate Russian firms’ corporate form and survival and find that closed joint-stock companies
and firms adopting limited liability survive longer than open joint-stock companies, partnerships, and cooperatives. They
argue that the probability of firm survival increases due to restriction of property rights through making the firm’s shares
unlisted. In other words, their results indicate the negative consequences of strict property rights.

3. Data And Models

3.1. Data

Table 1 presents the definitions and sources of the variables. TEA, from the GEM, stands for total early-stage entrepreneurial
activity and is calculated as the percentage of members of the population aged 18–64 who are either nascent entrepreneurs
or owner-managers of a new business. We converted TEA to natural logarithms and then standardized the obtained values.
[11]

Property is the property rights score obtained from the Heritage Foundation’s Index of Economic Freedom. We standardized
Property following the same natural logarithmic conversion procedure as that followed with TEA. Higher numbers indicated
more substantial property rights. English, French, German, and Scandinavian were dummy variables representing legal
origins. Namely, English was 1 if the target country was of English legal origin and 0 if it was of any other legal origin. The
classification of legal origin followed La Porta et al. (2008).

Bank is the size of private credit provided by banks divided by gross domestic product (GDP) and converted to natural
logarithms. We derived Bank from the World Bank’s World Development Indicators (2022), which are public data. We
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obtained and imputed the missing values for Bank from Beck et al.’s (2019) Financial Development and Structure Dataset.
[12]
GDP is the purchasing power parity-adjusted GDP per capita, converted to the natural logarithm. Patent is the number of
patents and the standardized number after converting the original figure to the natural logarithm.[13] Growth is the GDP
growth rate and Inflation is the average consumer price index as the rate of change. Unemployment is the unemployment
rate and Inflow is the net amount of foreign direct investment divided by GDP.

Fig. 1 shows the arithmetic mean of TEA and property rights for each country covered in this study. The period covered was
2001–2020, and the number of countries covered was 51. Fig. 1 indicates that, in countries of French legal origin, the
distributions of TEA and property rights are extensive. In contrast, in nations of Scandinavian legal origin, TEA has a small
distribution, and the mean after natural log transformation is negative.

Table 2 presents descriptive statistics, and the data are unbalanced panel data. Table 3 displays the unit root test outcomes
for the panel data. All variables are stationary.[14] Fig. 2 splits the key variables by legal origin. Intuitively, the relationship
between TEA and property rights appears negative, except for countries with an English legal origin. However, since the
degree of progress in GDP and banking in each legal origin varies, these effects must be deducted before the observations.

Table 4 depicts the results of a t-test of mean differences to establish whether TEA and property rights differ by legal origin.
The mean TEA is high for English and French legal origins, while no difference exists between them. However, TEA is the
lowest for Scandinavian legal origin. Property is the highest for Scandinavian legal origin, followed by English, German, and
French legal origins.

Fig. 3 illustrates the relationship between TEA and property rights based on legal origin. In Fig. 3, the least squares method
estimates two types of relationships: linear and nonlinear (quadratic) functions. For convenience, we selected a model using
the coefficient of determination (R2). In this case, R2 was higher for quadratic functions than for linear functions for all
models of each legal origin, and the shape of the functions differed widely. However, because these functions were simple
models that do not include control variables, the regression analysis models presented in the next section are those that
control for several factors.

3.2. Models

For this section, we build models for linear and non-liner analyses. We use the first model to investigate the relationship
between TEA and economic growth rates, and the second to identify the shape of the functions related to TEA and property
rights for each legal origin. We use an interaction term to estimate the model. Using an interaction term with the explanatory
variable and the legal origin has the advantage of measuring the effect of the explanatory variable on the explained variable
at each legal origin.

First, when economic growth is the explained variable, it is necessary to deduct the endogeneity of legal origin or property
rights from the model. Therefore, we add instrumental variables using the Generalized Method of Moment (GMM).

We add the interaction terms of TEA and Legal origin to the model to compute the marginal effects on the relationship
between Growth and TEA for each legal origin. Instrumental variables are legal origins, Property, the interaction term
between legal origins and Property, Bank, and Year, excluding the dummy of base category. Here, i denotes the country, t
refers to the period, and ε is the error term. In addition, we estimate models that split the sample into each legal origin. The
instrumental variables used in the analysis are Property, Bank, and Year.

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Fig. 4 provides a time series of TEA and economic growth. Intuitively, economic growth seems to correlate with data from a
TEA period earlier than that of contemporary TEA. In other words, examining the causal effect of economic growth on TEA is
necessary.[15] Hence, the following model estimates the relationship between one period before TEA and economic growth:

In Eq. 2, the model first calculates all covered countries as a sample, and then makes a prediction based on a sample split
by legal origin.[16] Here, is the error term.

Second, we design the model (Eq. 3) to analyze the factors that influence TEA.

We add the interaction terms of Property and Legal origin to the model to compute the marginal effects on the relationship
between TEA and Property for each legal origin. The control variables in Eq. (3) are Bank, GDP, Patent, Growth, Inflation,
Unemployment, and Inflow, including year dummies.[17] indicates the error term. Eq. (3) allows us to determine the marginal
effect for each legal origin. It is possible to test whether the relevance of property rights and TEA differs for each legal origin.

Additionally, we estimate the model (Eq. 4) by dividing the sample by legal origin.

By incorporating the square of Property, it is possible to specify the shape of the function between TEA and Property. The
control variables in Eq. (4) are the same as those in Eq. (3). is the error term. The model in Eq. (4) is also helpful for checking
the robustness of Eq. (3). In the next section, we discuss the estimation outcomes of these three equations.

[11]
We converted TEA to the natural logarithms to fulfill stationarity requirements and then standardized them. The
conversion process is the same for Property and Patent as for TEA. We transformed the standardization so that the mean
was 0 and the standard deviation, 1.
[12]
The mean before imputation in Bank was 4.163, and the mean after imputation was 4.163. The standard error before
imputation was 0.022 and the standard error after imputation was 0.021. The number of observations before imputation
was 980, and 1,001 after imputation. We did not observe any drastic variation in standard errors due to imputation.
[13]
Patents exist for IPR protection. Fang et al. (2017) found that cities with strong IPR protection in China are expanding,
and private companies are more sensitive to IPR protection than state-owned enterprises.

[14]
The unit root tests for TEA and Property incorporate a trend, in addition to the constant term. In the panel data, the trend
in the time-series direction is controlled by incorporating year dummies into the regression analysis.

[15]
Although we attempted a dynamic panel data analysis that included Growth one period earlier as an instrumental
variable of GMM, it failed to pass the overidentifying restrictions test. Therefore, we modeled that estimated by ordinary
panel data analysis incorporating Growth one period ago in the explanatory variables.

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[16]
We used unbalanced panel data. Consequently, we performed model identification via the Hausman test; in the case of a
fixed effects model, the F test is run to compare it with the pooled regression model. If the Hausman test identifies a random
effects model, the Breusch-Pagan test is used to determine whether it is a random effects model or a pooled regression
model.

[17]
We included Bank in the model given its relevance in financing entrepreneurial activity. We included GDP as a control
variable for income level because we maintain that people tend to finance their entrepreneurial activity with their own funds.
We incorporated Patent into the model because we considered it to be associated with entrepreneurial activity.
Unemployment represents labor market conditions, and Inflow is used as a control variable because foreign funds could halt
TEA progress.

4. Estimation Outcomes
Table 5 reports the results of estimating Eq. (1) by GMM, which modeled the relationship between TEA and economic
growth. In Models 1 and 2, the coefficient on the interaction term between TEA and German legal origin is positive and
significant at the 1% level. At the same time, in Model 3, where German legal origin is the base category for the dummy
variable, the coefficient on the interaction term between TEA and English, French, and Scandinavian legal origin is negative
and significant at the 1%, 1%, and 10% level, respectively. In other words, the marginal effect of TEA on economic growth is
significantly higher in countries with German legal origin, and thus a TEA increase is associated with economic growth.

Table 6 shows the estimation results using GMM after dividing the sample by each legal origin. In Table 6, using all of the
target countries in the sample, the coefficient of TEA is positive and significant at the 1% level in the model. For the sample,
higher entrepreneurship is associated with economic growth.

The coefficients of TEA are positive and significant at the 1% level in the French and German legal origin models. Thus,
higher TEA is associated with increased economic growth of French and German legal origin, which are civil law based.

Table 7 presents the estimation outcomes of the time-series regression model, examining the impact of TEA on economic
growth (Eq. 2). TEA one period prior is not significant for Growth in the model using all target countries. Estimated using a
sample of countries with English legal origin, the coefficient of TEA one period prior is not significant for economic growth.
In countries with French and German legal origins, TEA has a positive association with economic growth. However, for
nations of Scandinavian legal origin, the rise in TEA has a negative relationship with economic growth. The results in Tables
6 and 7 generally show the same trend in the direction of TEA and economic growth at French and German legal origins.

Table 8 portrays a model that estimates the association between TEA and property rights using legal origin dummies and an
interaction term for property rights. In Model 1, where English legal origin is the base category for the dummy variable, the
coefficient of the interaction term between French legal origin and property rights is negative and significant at the 1% level.
The coefficient of the interaction term between German legal origin and property rights is negative and significant at the 5%
level. The coefficient of the interaction term between Scandinavian legal origin and property rights is negative and
significant at the 1% level. In other words, strengthening English legal origin property rights is more conducive to developing
TEA than strengthening any of the other three types of legal origin.

In Model 2, with French legal origin as the base category for the dummy variable, the coefficient of the interaction term
between Scandinavian legal origin and property rights is negative and significant at the 1% level. The coefficient of the
interaction term between German legal origin and property rights is not significant. In Model 3, with German legal origin as
the base category for the dummy variable, the coefficient of the interaction term between Scandinavian legal origin and
property rights is negative and significant at the 1% level. In essence, the slope of the function between property rights and
TEA is the lowest in countries of Scandinavian legal origin compared with nations of other legal origins. The impacts of
property rights in countries of French and German legal origin on TEA are equal.

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Based on the estimates in Table 7, Table 9 presents the calculations of the marginal effects of TEA and property rights by
legal origin. The marginal effects of TEA and property rights are the highest for countries of English legal origin, while the
marginal effects for states of French and German legal origin are positive and comparable. In nations of Scandinavian legal
origin, the marginal effects of TEA and property rights are negative.

Table 10 shows the outcomes of the estimation of Eq. (4) to specify the shape of the function between TEA and property
rights for each legal origin. In Model 1, which includes countries of English legal origin, the coefficient of property rights is
positive and significant at the 1% level. In Model 2, which incorporates the squared term, the coefficient of the squared term
is significant at the 10% level. In Model 3, where the sample is limited to countries of French legal origin, the coefficient of
property rights is not significant relative to TEA. However, in Model 4, which incorporates a squared term for property rights,
the coefficients of property rights and its squared term are negative and significant at the 5% and 1% levels, respectively.

In Model 5, for which we sampled countries of German legal origin, the coefficient of property rights is not significant.
Conversely, in Model 6, which includes the squared term of property rights, the coefficients of property rights and its squared
term are positive and significant at the 1% level. In Model 7, where the sample is composed of nations with Scandinavian
legal origin, the coefficient of property rights is negative and significant at the 1% level. However, in Model 8, which
incorporates the squared term of property rights, the coefficients of property rights and their squared term are not significant.

Fig. 5 plots the relationship between TEA and property rights by legal origin.[18] TEA rises quadratically for countries of
English and German legal origin as property rights grow stronger. In countries of French legal origin, fortifying property rights
increases TEA to a certain level, while subsequent reinforcement of property rights decreases TEA. In countries of
Scandinavian legal origin, bolstering property rights is associated with a decline in TEA. In the next section, we present our
interpretation of the estimation outcomes.

[18]
We set the constant term for English legal origin to 0. For other constant terms of legal origin, we used the coefficients of
the legal origin dummy in Model 1, described in Table 7. We used the coefficients in Table 9 for Property and its squared
term. In addition, the model encompasses the squared term if Property and its squared term are significant. If the squared
term is not significant, the model does not use it.

5. Discussion
As Table 5 shows, using GMM to remove endogeneity, the association between TEA and economic growth has a high
marginal effect in German legal origin. Moreover, Table 6 shows that economic growth and entrepreneurial activity are
positively associated when taking the sample as a whole. However, the impact of TEA on economic growth one period prior
is irrelevant in Table 7. For the sample as a whole, the effects of TEA on economic growth tend to act contemporaneously.

According to the GMM estimation results, economic growth is not associated with TEA for English legal origin. In such
countries, it may take a long time for entrepreneurial activity to become active and impact economic growth, or it may not be
relevant. Table 6 shows that no association between economic growth and TEA was observed in Scandinavian legal origin,
but there is a possibility of a negative association of the model with TEA for one period prior (Table 7). In countries of
Scandinavian legal origin, economic growth appears to be hampered by increased entrepreneurial activity, perhaps due to
the small sample size of the target countries. Nevertheless, we can infer that there is no association between economic
growth and TEA because it is not significant in the model in Table 6, in which endogeneity is removed.

Moreover, the model’s lag-setting period may have been incompatible with countries of English or Scandinavian legal origin.
In short, although not observed in our estimation results, the period in which the effects of stimulating entrepreneurial
activity are reflected in economic growth may be even more extended for countries of English and Scandinavian legal origin.
Otherwise, in countries with common law elements, entrepreneurial activity and economic growth may not be related.
However, in countries with a civil law-based legal system (French or German legal origin), the development of entrepreneurial

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activity is linked to economic growth simultaneously or one year prior. This conclusion regarding countries of French and
German legal origin could be a reason to encourage policies that emphasize the activation of entrepreneurial activity. In civil
law countries, the association between TEA and economic growth is positive, consistent with Audretsch and Thurik (2001)
and Reynolds et al. (2004). However, we believe that TEA is a predetermined variable to economic growth in civil law
countries.

In the following section, we discuss the relevance of property rights to TEA. The marginal effect of property rights on TEA is
the highest in countries of English legal origin. In such countries, the strength of property rights is second only to that of
countries of Scandinavian legal origin. In other words, in nations of English legal origin, strengthening property rights is
complementary to accelerating entrepreneurial activity. The results point to the complementarity of legal origin and
endogenous institutions, highlighted in the work of Berkowitz et al. (2003a, 2003b). The marginal effect of property rights in
countries of French and German legal origin on TEA is positive. However, the marginal effect is negative in countries of
Scandinavian legal origin, probably because the strength of property rights is already the highest in such nations. Further,
the small sample size of only four target countries that adopted the Scandinavian legal origin may be a contributing factor.

We measured the shape of the functions between TEA and property rights and the marginal effects and found that the
condition of those functions differs depending on the legal origin. Improvements in property rights and TEA have a positive
quadratic relationship in countries of English and German legal origin. Reinforcing property rights retains institutional
features that complement the activation of entrepreneurial activity. We assert that fortifying property rights in countries of
English and German legal origin will bolster incentives for entrepreneurial activity. In other words, in such countries,
strengthening property rights has a greater impact on promoting entrepreneurial activity than discouraging it. In countries of
English and German legal origins, as Shavell (2004) argues, property rights can be interpreted as removing uncertainty and
enhancing entrepreneurship.

In countries of French legal origin, boosting property rights up to a certain degree leads to an increase in TEA, and a
stagnation in entrepreneurial activity after that. Specifically, the structure is such that reinforcing property rights increases
entrepreneurial incentives and opportunities to protect entrepreneurship. Nevertheless, suppose that property rights are
strengthened excessively. In that case, external effects are suppressed, protection against investors and vested interests is
more likely to occur, and entrepreneurial activity stagnates in nations of French legal origin. In French legal origin, as Shavell
(2004) and Allen (2009) state, strict property rights can lead to negative aspects, such as effects leading to the loss of social
benefits and the rise of vested interests.

In our view, although stronger property rights are associated with stagnation of entrepreneurial activity in countries of
Scandinavian legal origin, we predict negative outcomes because of the higher level of property rights and fewer
observations in such countries.

6. Conclusion And Implications

We categorized 51 countries into four types of legal origin and analyzed whether stimulating entrepreneurial activity
affected economic growth positively. We found that activating entrepreneurial activity did not produce economic growth in
nations of English and Scandinavian legal origin, but did so in countries of French and German legal origin, which have civil
law. Policies that foster entrepreneurial activity in terms of legal origin based on civil law are especially desirable.

Next, we examined whether strengthening property rights (which vary by legal origin) would increase entrepreneurial activity.
Even if the property rights were at the same level, different legal origins influenced entrepreneurial activity differently. In
addition, the relationship between the activation of entrepreneurial activity and the strengthening of property rights was not
always linear.

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Reinforcing property rights increases entrepreneurial activity in countries of English and German legal origin. In other words,
the transformation function is convex, downward, and increases monotonically. In countries of French legal origin, the
function of property rights and entrepreneurship produces an upward, convex quadratic function, with entrepreneurship
rising as property rights grow stronger up to a certain level. Still, entrepreneurship declines as the intensity of property rights
exceeds a certain level. The link between property rights and entrepreneurial activity in countries of Scandinavian legal
origin is declining linearly. In addition to the small number of countries with Scandinavian legal origin, this may be because
property rights have much more robust legal origin in countries with a Scandinavian legal background compared with
countries with other legal origins (i.e., English, German, French).

The results imply that the relevance of property rights and entrepreneurial activity varies according to the legal origin of the
country. In other words, government interventions required to stimulate entrepreneurial activity differ according to legal
origin. The findings also indicate that there is no uniform entrepreneurship policy in any one country, and it is necessary to
contemplate the legal origin and endogenous institutions of one’s own nation and to develop policies therein.

A limitation of this study is its inability to address individual policy differences in legal origins in detail. It remains necessary
to examine what specific aspects of legal origins lead to increased entrepreneurship.

Declarations
Sources of funding

The authors did not receive support from any organization for the submitted work.

Competing interests

The authors have no conflicts of interest directly relevant to the content of this article.

Author contributions

All authors contributed to the conception and design of this study. Yosuke Tomita performed data collection and analysis.
Akinori Kimura performed the literature review and editing. Yosuke Tomita wrote the first draft of the manuscript, and all
authors commented on the previous draft. The final manuscript was read and approved by all authors.

Data, material, and/or code availability

The data used in the manuscript are publicly available from the Global Entrepreneurship Monitor, The Heritage Foundation,
the World Bank, and the International Monetary Fund. The datasets generated and or analyzed during the current study are
available on Yosuke Tomita's home page. URL: https://sites.google.com/site/yosuketomita2017/home?authuser=0

Ethical Approval and Informed Consent

Not Applicable.

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Tables
Table 1 Definitions and sources of study variables

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 Variables Definition Source

TEA Total early-stage entrepreneurial activity (TEA) (%): TEA is Global Entrepreneurship Monitor
the value obtained by converting the original value to the
natural logarithm and then standardizing the value.

Property Property rights score: Property is the value obtained by The Heritage Foundation’s
converting the original value to the natural logarithm and
then standardizing the value. Index of Economic Freedom

English If the target country has an English legal origin, it is a La Porta et al. (2008)
dummy variable set to 1; otherwise, 0.

French If the target country has a French legal origin, it is a dummy La Porta et al. (2008)
variable set to 1; otherwise, 0.

German If the target country has a German legal origin, it is a La Porta et al. (2008)
dummy variable set to 1; otherwise, 0.

Scandinavian If the target country has a Scandinavian legal origin, it is a La Porta et al. (2008)
dummy variable set to 1; otherwise, 0.

Bank Bank/GDP (%): The variable of Bank refers to domestic
credit granted by banks to the private sector divided by
GDP. Bank is in a natural logarithm.
The World Bank’s World Development
Indicators
The Financial Structure Database’s
Financial Development and Structure
Dataset (updated in September 2019)

GDP GDP/capita (Purchasing power parity, USD): The value of International Monetary Fund’s World
GDP per capita is in a natural logarithm. Economic Outlook Database, October
2021

Patent Number of patent applications filed by residents: Patent is The World Bank’s World Development
the value obtained by converting the original value to the Indicators
natural logarithm and then standardizing the value.

Growth GDP growth rate (%) International Monetary Fund’s World

Economic Outlook Database, October
2021

Inflation Inflation rate (%) International Monetary Fund’s World

Economic Outlook Database, October
Average consumer price index 2021

Unemployment Unemployment rate (%) The World Bank’s World Development

Indicators

Inflow Inflow/GDP (%): Inflow is the net flow of foreign direct The World Bank’s World Development
investment divided by GDP. Indicators

Note: The World Bank’s “domestic credit granted by banks to the private sector” has many missing values, which we
supplemented using the Financial Structure Database’s Financial Development and Structure Dataset. As for the variables,
we imputed the previous year’s data if the data for the current year did not exist. If data from the prior year also did not exist,
we imputed the data from the following year (We supplemented only one year before and after the year in question. The
period was limited to one year before and after to prevent arbitrarily lowering the standard error).

Source: Authors’ compilation from the following databases. Global Entrepreneurship Monitor, The Heritage Foundation’s
Index of Economic Freedom, La Porta et al. (2008), The World Bank’s World Development Indicators, The Financial Structure
Database’s Financial Development and Structure Dataset (updated in September 2019), International Monetary Fund’s World
Economic Outlook Database, October 2021

Table 2 Descriptive statistics

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 Mean Median SD Min Max 95% CI Obs.

TEA 0.000 −0.023 1.001 −3.024 2.670 0.066 886

Property 0.000 0.373 1.000 −3.894 1.120 0.061 1020

English 0.275 0.000 0.446 0.000 1.000 0.027 1020

French 0.412 0.000 0.492 0.000 1.000 0.030 1020

German 0.235 0.000 0.424 0.000 1.000 0.026 1020

Scandinavian 0.078 0.000 0.269 0.000 1.000 0.017 1020

Bank 4.163 4.225 0.660 2.158 5.555 0.041 1001

GDP 10.203 10.311 0.686 7.798 11.568 0.042 1020

Patent 0.000 −0.070 1.001 −2.803 2.935 0.063 985

Growth 2.538 2.644 3.729 −14.260 25.177 0.229 1020

Inflation 4.011 2.488 5.548 −3.046 54.246 0.341 1019

Unemployment 7.788 6.740 4.879 0.250 33.290 0.300 1020

Inflow 4.626 2.560 9.383 −40.081 108.420 0.577 1020

Note: SD, standard deviation; 95% CI, 95% confidence interval; Obs., number of observations.

Table 3 Results of the unit root test

Levin, Lin & Chu test ADF–Fisher test

TEA −7.224*** 168.587***

Property −6.942*** 149.933***

Bank −6.906*** 190.954***

GDP −9.940*** 167.511***

Patent −5.013*** 150.483***

Growth −2.147*** 200.855***

Inflation −17.375*** 363.631***

Unemployment −5.378*** 196.882***

Inflow −11.887*** 332.278***

Note: ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. TEA and Property contain constant terms and
trends, while the other variables include only constant terms. Lags are automatically selected based on SIC.

Table 4 Results of the independent t-tests

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 TEA Property

English n.s. English***

vs. French (−0.781) [238, 364] (12.928) [280, 420]

English English*** English***

vs. German (6.137) [238, 213] (4.670) [280, 240]

English English*** Scandinavian***

vs. Scandinavian (10.881) [238, 71] (−14.689) [280, 80]

French French*** German***

vs. German (6.411) [364, 213] (−7.167) [420, 240]

French French*** Scandinavian***

vs. Scandinavian (10.756) [364, 71] (−25.038) [420, 80]

German German*** Scandinavian***

vs. Scandinavian (4.223) [213, 71] (−15.563) [240, 80]

Note: ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. Numbers in parentheses ( ) indicate t-values,
while numbers in [ ] refer to the number of observations. The name of the legal origin with the higher mean is denoted. The
symbol n.s. means that no difference exists. We estimated the independent t-tests using Welch’s method, which does not
assume equal variances.

Table 5 Impact of TEA on economic growth rate 1

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 Growth

Total

GMM

Model 1 Model 2 Model 3

TEA 0.932 2.136*** 5.196

(0.772) (4.802) (6.807)

TEA × −1.204 −4.264***

English (−0.864) (−3.004)

TEA × 1.204 −3.060***

French (0.864) (−3.642)

TEA × 4.264*** 3.060***

German (3.004) (3.642)

TEA × 0.676 −0.528 −3.588*

Scandinavian (0.304) (−0.264) (−1.720)

English 1.168*** −1.342***

(3.471) (−2.786)

French −1.168*** −2.510***

(−3.471) (−5.852)

German 1.342*** 2.510***

(2.786) (5.852)

Scandinavian −0.591 0.578 −1.933

(−0.473) (0.466) (−1.511)

Con. −0.810 −1.978*** 0.532

(−1.179) (−2.806) (0.687)

Year Yes Yes Yes

Adj. R2 0.225 0.225 0.225

Overidentifying 0.299 0.299 0.299

restrictions test [0.585] [0.585] [0.585]

Obs. 870 870 870

Note: ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. Numbers in parentheses ( ) indicate t-values. If
Year is Yes, a year dummy is incorporated. GMM was estimated employing the generalized method of moments (Two-step
system GMM). The GMM instrumental variables are legal origins, Property, the interaction term between legal origin and

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Property, Bank, and Year, excluding the dummy of base category. The number of explained variables, k = 26, and the number
of instrumental variables, l = 27, including the constant term. Obs. indicates the number of observations.

Table 6 Impact of TEA on economic growth rate 2

Growth

Total English French German Scandinavian

GMM

TEA 1.512*** 0.840 2.072*** 5.232*** 1.445

(5.408) (0.894) (5.990) (8.308) (0.793)

Con. −1.166** −0.499 −3.021*** 1.021 1.105

(−1.970) (−0.495) (−2.510) (0.735) (1.216)

Year Yes Yes Yes Yes Yes

Adj. R2 0.265 0.140 0.254 0.243 0.524

Overidentifying 2.209 0.196 0.499 0.109 3.348*

restrictions test [0.137] [0.658] [0.480] [0.742] [0.067]

Obs. 870 229 360 210 71

Note: ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. Numbers in parentheses ( ) indicate t-values. If
Year is Yes, a year dummy is incorporated. GMM was estimated employing the generalized method of moments (Two-step
system GMM). The GMM instrumental variables are Property, Bank, and Year. The number of explained variables, k = 20,
and the number of instrumental variables, l = 21, including the constant term. Obs. indicates the number of observations.

Table 7 Impact of TEA on economic growth rate 3

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 Growth

Total English French German Scandinavian

Fixed effects Pooled model Pooled model Pooled model Pooled model

Growtht-1 0.340*** 0.482*** 0.470*** 0.701*** 0.169

(6.134) (4.912) (4.437) (10.110) (1.533)

TEAt-1 0.070 −0.428 0.483*** 0.634*** −0.306**

(0.376) (−1.557) (3.827) (3.083) (−2.276)

Con. −5.216*** −6.343*** −5.447*** −2.037

(−3.351) (−5.658) (−8.414) (−2.203)

Year Yes Yes Yes Yes Yes

Adj.R2 0.613 0.497 0.537 0.758 0.661

Hausman test 29.647*** 0.027 7.590* 3.046 0.039

F test 2.606***

LM test 0.164 0.004 0.018 0.000

Log likelihood −1880.850 −524.343 −827.519 −403.055 −105.741

Obs. 849 229 349 202 69

Note: ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. Numbers in parentheses ( ) indicate t-values. If
Year is Yes, a year dummy is incorporated. The F test identifies whether we should specify a fixed-effects or pooled model.
Total means the total number of observations. White’s heteroskedastic robust standard errors are the standard errors used in
this estimation. Obs. indicates the number of observations.

Table 8 Impact of property rights on TEA

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 TEA

Pooled model

Model 1 Model 2 Model 3

Property 0.890*** 0.026 0.089

(2.507) (0.205) (0.460)

Property × 0.864*** 0.801**

English (2.599) (2.297)

Property × −0.864*** −0.063

French (−2.599) (−0.322)

Property × −0.801** 0.063

German (−2.297) (0.322)

Property × −3.289*** −2.425*** −2.488***

Scandinavian (−3.443) (−2.869) (−2.888)

English −0.131 0.031

(−0.503) (0.109)

French 0.131 0.162

(0.503) (0.889)

German −0.031 −0.162

(−0.109) (−0.889)

Scandinavian 2.307*** 2.177*** 2.338***

(2.848) (2.771) (3.021)

Bank −0.037 −0.037 −0.037

(−0.187) (−0.187) (−0.187)

GDP −0.975*** −0.975*** −0.975***

(−4.151) (−4.151) (−4.151)

Patent −0.259** −0.259** −0.259**

(−2.270) (−2.270) (−2.270)

Growth 0.002 0.002 0.002

(0.157) (0.157) (0.157)

Inflation −0.008 −0.008 −0.008

(−0.536) (−0.536) (−0.536)

Unemployment −0.041*** −0.041*** −0.041***

(−3.700) (−3.700) (−3.700)

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 Inflow −0.009* −0.009* −0.009*

(−1.752) (−1.752) (−1.752)

Con. 10.624*** 10.755*** 10.593***

(4.663) (4.753) (4.684)

Year Yes Yes Yes

Adj. R2 0.482 0.482 0.482

Hausman test 4.666 4.666 4.666

Breusch-Pagan test 1.012 1.012 1.012

Log likelihood −903.214 −903.214 −903.214

Obs. 838 838 838

Note: ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. Numbers in parentheses ( ) indicate t-values. If
Year is Yes, a year dummy is incorporated. White’s heteroskedastic robust standard errors are the standard errors used in this
estimation. Obs. indicates the number of observations.

Table 9 Results of the marginal effects

TEA

Interaction term with Property Marginal effect Legal origin

English vs. French 0.890 0.026 English***

English vs. German 0.890 0.089 English**

English vs. Scandinavian 0.890 −2.399 English***

French vs. German 0.026 0.089 n.s.

French vs. Scandinavian 0.026 −2.399 French***

German vs. Scandinavian 0.089 −2.399 German***

Note: We calculated the marginal effects based on Table 6. The Legal origin column denotes the legal origin for which the
value is significantly larger. ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. n.s. means that the result
is not significant.

Table 10 Relevance of TEA and property rights: non-linear

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 TEA

English French German Scandinavian

Fixed- Fixed- Random Fixed- Random Pooled Fixed- Fixed-

effects effects effects effects effects model effects effects

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Property 0.693*** 0.639*** −0.095 −0.419** 0.000 0.601*** −2.709*** −3.726

(3.240) (5.006) (−1.370) (−2.297) (0.001) (5.031) (−3.784) (−0.320)

Property2 0.590* −0.085*** 0.224*** 0.534

(1.617) (−2.501) (2.404) (0.091)

Bank −0.935** −0.930** 0.230 0.170 0.267 0.693*** −0.779 −0.785

(−2.317) (−2.214) (1.537) (0.452) (1.518) (2.957) (−1.418) (−1.321)

GDP −0.893 −0.910* −1.195*** −0.633 −0.940*** −1.244*** 9.730*** 9.749***

(−1.487) (−1.769) (−5.037) (−0.530) (−4.587) (−5.820) (5.063) (4.797)

Patent 0.158 0.117 −0.177 0.299 −0.222*** −0.346*** −0.916 −0.927

(0.232) (0.178) (−1.484) (0.864) (−2.364) (−4.202) (−0.561) (−0.559)

Growth −0.021 −0.020 0.011 0.011 −0.001 0.056** −0.046* −0.046

(−0.984) (−0.961) (0.952) (0.714) (−0.065) (1.963) (−1.669) (−1.504)

Inflation 0.030* 0.043*** −0.019*** −0.015 −0.012 0.029 −0.093* −0.093*

(1.641) (2.373) (−2.203) (−0.991) (−0.484) (0.619) (−1.750) (−1.721)

Unemployment −0.061*** −0.056** −0.048*** −0.039 0.007 0.036 −0.047* −0.047*

(−2.387) (−2.056) (−4.269) (−1.374) (0.381) (1.399) (−1.920) (−1.888)

Inflow 0.022** 0.021** −0.003 −0.004** −0.007 −0.005 −0.003 −0.003

(2.239) (2.255) (−0.822) (−1.969) (−1.214) (−1.494) (−0.392) (−0.299)

Con. 12.125*** 8.641*** 9.622***

(5.341) (3.856) (3.616)

Year Yes Yes Yes Yes Yes Yes Yes Yes

Adj. R2 0.665 0.675 0.570 0.825 0.454 0.512 0.538 0.526

Hausman test 39.705*** 17.512*** 7.652 247.354*** 1.7411 1.889 88.095*** 32.908***

F test 15.837*** 15.772*** 17.898*** 8.057*** 6.867***

Breusch-Pagan 4.642** 3.748** 2.029

test

LM test 253.468*** 108.926***

Log likelihood −115.156 −111.121 −219.652 −171.700 3.411 3.412

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 Obs. 209 209 352 352 206 206 71 71

Note: ***, **, and * are significant at the 1%, 5%, and 10% levels, respectively. Numbers in parentheses ( ) indicate t-values. If
Year is Yes, a year dummy is incorporated. The F test identifies whether we should specify a fixed-effects or pooled model.
White’s heteroskedastic robust standard errors are the standard errors used in this estimation. Obs. indicates the number of
observations.

Figures

Figure 1

Target countries, TEA, and property rights

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Note: There are 51 target countries, and the period covered is 2001–2020; we created TEA and Property rights according to
the definitions outlined in Table 1. We classified the legal origins based on the work of La Porta et al. (2008).

Source: Authors’ compilation from the Global Entrepreneurship Monitor and Heritage Foundation’s Index of Economic
Freedom.

Figure 2

Mean values for each legal origin in key variables

Note: Values for each legal origin are arithmetic means from 2001 to 2020. Variables are based on the definitions outlined in
Table 1.

Source: Authors’ compilation from the data presented in Table 1.

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Figure 3

Relationship between TEA and property rights

Note: Values for each country are arithmetic means from 2001 to 2020. We estimated the linear and quadratic functions for
each sample of legal origin with ordinary least squares. The country code is ISO 3166-1 alpha-3.

Source: Authors’ compilation from the Global Entrepreneurship Monitor and Heritage Foundation’s Index of Economic
Freedom.

Page 25/27
Figure 4

TEA and economic growth trends and causality

Note: We used the arithmetic mean for each year in all target countries. TEA (t-1) refers to one period before TEA (data from
one year prior).

Source: Authors’ compilation from the Global Entrepreneurship Monitor and the International Monetary Fund’s World
Economic Outlook Database.

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Figure 5

Model of the marginal effects computed from the regression equations

Note: We set the constant term to 0 for countries of English legal origin. We took the constant terms for French, German, and
Scandinavian legal origins from the coefficient of a legal origin dummy variable in Table 6, Model 1. In the adopted model,
the coefficient of the squared term in Propertyis significant.

Source: Authors’ compilation from the data presented in Table 1.

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