Entrepreneurship in autocratic regimes – how neo-patrimonialism constrains innovation

Autocratic regimes form an institutional environment for entrepreneurship that differs substantially from those in democratic capitalist societies. In general, democracy guarantees equality before the law. According to Hayek, the rule of law protects property rights rather than profits of established firms. Innovative outsiders can thereby challenge incumbents, which is a legal requirement for creative destruction. In autocratic regimes, by contrast, political power is interlaced with the command of economic resources. Entrepreneurship faces political constraints defined by economic interests of political powerholders who are typically, either directly or indirectly, also engaged in economic activities. The paper analyzes how autocratic political systems subordinate the economy in order to create rents and maintain power. The (neo-) Weberian conception of neo-patrimonialism is transferred and used as an analytical tool to describe the institutional environment for market activities. The paper places an emphasis on post-communist transition economies and demonstrates the institutional lock-in effect that makes the market economy dependent on political power. The deliberate coexistence of legal norms and arbitrariness in neo-patrimonial regimes institutionalizes uncertainty in particular. A typology of entrepreneurial adjustments to institutions of the neo-patrimonial order is discussed. Most of them will impede economic dynamism.