How Do Institutions Facilitate Entrepreneurship?

The great Peruvian democracy advocate Hernando de Soto has spent much of his career focused on bringing informal entrepreneurs into the formal sector, where their rights are enshrined in and protected by law. When citizens have the tools to access to capital and a business environment that supports them, they are able to move up the development ladder from the survival entrepreneurship of the informal sector to the prosperity of the formal economy.

De Soto’s work encouraged an important new way of thinking about how to create opportunity where none previously existed. In so doing, he and his organization, the Institute for Liberty and Democracy (ILD) in Peru, have had a profound and positive impact on the lives of millions in Peru and around the world. CIPE’s first partner 25 years ago, De Soto’s and ILD’s work personifies the proven belief that strong markets require vigorous governance and vice versa, and that open participation in both markets and government are a foundation of democracy.

In this most recent Economic Reform Feature Service article, De Soto looks at the necessity of institutions—and specifically the rule of law—to create and nurture a successful entrepreneurial environment.

Article at a glance

  • Creating wealth through entrepreneurship requires combining different resources (for example, the parts of a pencil or those of a watch). Institutions are crucial to facilitating that combination.
  • To do all the things that entrepreneurs in developed countries take for granted – like dividing labor, using property as collateral, protecting personal assets, expanding markets, or creating economies of scale – entrepreneurs in developing nations need the standards that only legal institutions can provide.
  • The wealthy in developing nations have convinced the poor that no matter how talented or enterprising they are, they will never succeed. In fact, the world’s most successful entrepreneurs just have access to superior legal institutions.

Read the entire article.

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