Contagion Entrepreneurship: Institutional Support, Strategic Incoherence and the Social Costs of Over-entry
Abstract: Existing literature on the legitimizing role of institutions tilts towards a “more is better” perspective, proffering the notion that the liabilities of smallness and newness can be mitigated through institutional policies that foster acceptance, trust and confidence. Although this may seem reasonable, even desirable, institutional munificence can trigger massive over-entry, potentially causing unintended consequences and unwanted social costs. Using a dataset of nearly six million transaction-level decisions involving all 612 companies and 56,240 permitted projects from a complete industry history, I find that unforeseen costs arise when small, early-stage firms substitute the legitimizing effects of institutional support for strategic coherence. The findings are surprising and significant. While institutional support for new markets does in fact generate a surge in firm formations, the ill-effects of munificence are evidenced by indiscriminate, contagion-style market entry by unfit firms that perform poorly, fail quickly, and leave a long trail of regulatory violations in their collective wake. The study offers opportunities for scholars, practitioners and policy-makers to reassess the core assumptions related to the benefits and costs of institutional support for new industries, firms, and entrepreneurs.
