Institutions, entrepreneurship, and regional growth in Indonesia (1994-2010)

The aim of this chapter is to explain the relationship between institutions, entrepreneurship, and economic growth. It contributes to the modern Austrian theory of economic development by developing an original theory of institutional flexibility. It suggests that the Schumpeterian figure of the innovator and the Kirznerian figure of the discoverer may only appear when the institutions of economic order are flexible. Its originality is in the definition of institutional flexibility. An institutional system is deemed flexible when it constructs an order that is neither contingent nor determinist. Private property rights, contracts, and money organize human behavior without determining it. By protecting economic freedom, people may believe that they can act to change the future to their advantage It describes two motivations, both empirical and theoretical. The empirical aim is to contribute to the debate on the role of entrepreneurship in developing and poor countries. Entrepreneurship is a vital force in the economics of developed countries (Audretsch and Keilbach, 2004). However, its role in developing and poor countries remains unclear. Empirically, van Stel et al. (2005) found that entrepreneurial activity has a positive effect on economic growth in developed countries, whereas the effect is negative for poor countries and remains unclear in developing countries. Thus, this study seeks to uncover empirically the role of entrepreneurship in Indonesia as a developing country. It considers not only the dichotomies in defining entrepreneurship (i.e. formal/informal, legal/illegal and necessity/opportunity), but also the existence of regional spatial dependency.