Does Monetary Aid Catalyse New Business Creation? Analysing the Impact of Global Aid Flows on Formal and Informal Entrepreneurship

• Author: Jonathan Doh,Elizabeth M. Moore,Luis Alfonso Dau
• DOI: http://doi.org/10.1111/joms.12552
• Date: 01 May 2020
• Published date: 01 May 2020

© 2019 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

Does Monetary Aid Catalyse New Business Creation?

Analysing the Impact of Global Aid Flows on Formal

and Informal Entrepreneurship*

Elizabeth M. Moorea, Luis Alfonso Daua and

Jonathan Dohb

aNortheastern University; bVillanova University

ABSTRACT Official development aid – monetary transfers to developing countries to promote so-

cial and economic development – reached more than $140 billion in 2016. However, traditional

forms of government bilateral aid continue to decline, while private aid is rising. Nevertheless,

the impact of this aid, including its potential to stimulate economic development through new

business formation, remains uncertain. In this study, we examine the impact of three sources

of monetary aid flows on formal and informal entrepreneurship. Drawing from the interna-

tional political economy literature we argue that bilateral aid and private aid are associated with

higher levels of infor mal entrepreneurship, while multilateral aid is accompanied by lower levels.

Moreover, we show that bilateral and private aid are linked with lower levels of formal entre-

preneurship, while multilateral aid has no impact. The analyses of a panel of 313 observations

from 49 countries provide robust support for these arguments.

Keywords: economic development, formal entrepreneurship, informal entrepreneurship,

institutional theory, international monetary aid, principal-agent aid theory

INTRODUCTION

On 1 January 1 2010, a devastating earthquake in Haiti killed more than 300,000 resi-

dents there and displaced another 1.5 million people. More than US$13 billion has been

earmarked for recovery, rebuilding, and economic development. However, in addition

to ‘official’ aid from governments and multilateral organizations, aid also flowed from

Journal of Man agement Studi es 57:3 May 2020

doi:10. 1111/jo ms.1 255 2

Address for reprints: Jonathan Doh, Villanova University, 2079 Bartley Hall Rm, 800 Lancaster Avenue,

Villanova PA 19085, USA (Jonathan.Doh@villanova.edu).

*This paper was under review with JMS prior to Jonathan Doh’s appointment as Senior Associate Editor of

JMS.

Does Monetary Aid Catalyse New Business Creation? 439

© 2019 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

private organizations such as the Red Cross and Oxfam and large foundations such as

Gates (Gates, 2017). At one point, an estimated 10,000 private non-governmental orga-

nizations (NGOs) were operating in Haiti. Further, of the $500 million initially dispersed

by the US Agency for International Development, an estimated 70 percent ‘passed

through the hands of private parties’ (The Economist, 2017). This is the ‘new nor mal’ of

aid: increased donations from private entities, along with increased participation by pri-

vate entities with aid from more traditional sources (e.g., multilateral organizations and

governments), and a decline of bilateral aid from governments.1 2

In the case of Haiti, the

infusion of developmental assistance was given to facilitate the creation of thousands of

businesses, both formal and informal. Yet questions remained about the overall impact

of this aid on the strategic choices local firms and entrepreneurs make and the ensuring

outcomes (Easterly and Williamson, 2011). Thus, with multiple sources of aid in flux, the

time is ripe to parse out these differential effects.

Given the new normal in the post-recession context of declining aid budgets from

donor countries, recurring doubts about aid’s effectiveness, and lingering questions on

how best to stimulate job-creating entrepreneurship in developing economies, greater at-

tention is warranted as to whether and how aid can bolster institutional development and

entrepreneurial activity. Since development aid and entrepreneurship are postulated to

positively influence economic development (Bulíř and Hamann, 2008; Wong et al., 2005),

a better understanding of the interplay between aid and entrepreneurship can foster new

and improved scholarly and managerial insights. Yet despite considerable research on the

role of development aid and sustained economic progress, and entrepreneurship’s role in

stimulating economic activity (Ahlstrom, 2010), there has been little research examining

how the source and form of aid might stimulate different types of entrepreneurship. As such,

we explore the question: ‘How might international aid affect the growth and development of different

forms of entrepreneurship in developing countries, and how might the source of aid matter?’.

Recently, leading voices have advocated that management scholars provide greater

attention to the role of management and fir ms in the ‘grand challenges’ afflicting soci-

ety, including climate change, inequality, and poverty alleviation (George et al., 2016).

One challenge relevant to our research is economic development. Entrepreneurship has

a positive record in stimulating economic development (Audretsch, 2007; Schumpeter,

1946). However, there are gaps in understanding how policy lifts institutional constraints

that may stifle entrepreneurship (Baumol, 1990). Moreover, as a result of the recent

2008–09 ‘great recession’ reducing governments’ budgets, as well as the growing criti-

cisms of the politicized nature of traditional aid sources, the source of development aid

has shifted, with greater shares coming from – and funnelled through – private sources,

a trend designed to achieve greater efficiency and effectiveness in allocating aid dollars

(Addison and Tarp, 2014; Dollar and Levin, 2006; Minoiu and Reddy, 2010). We assert

that this new normal of aid could change the entrepreneurial environment of a country.

Thus, we contribute to the growing literature on grand challenges and the new normal

by demonstrating how different sources of aid have differential effects on entrepreneur-

ship. This allows for better informed policy decisions resulting from a nuanced under-

standing of the entrepreneurial process.

Drawing on the international political economy literature on the mechanisms through

which aid affects host countries, and perspectives from the new institutional economics

440 E. M. Moore et al.

© 2019 Society for the Advancement of Management Studies and John Wiley & Sons, Ltd.

on entrepreneurship, we hypothesize that multilateral aid is associated positively with

formal entrepreneurship and negatively with informal entrepreneurship.3

Moreover, we

suggest that bilateral aid is negatively associated with formal and positively linked with

informal entrepreneurship. Finally, we suggest that a newer form of aid, private aid, is

negatively associated with formal entrepreneurship and positively associated with infor-

mal entrepreneurship. Analysing panel data from 49 countries spanning from 2002 to

2015 in a cross-sectional time-series generalized least squares (GLS) regression model, we

provide robust support for these assertions.

We make several contributions to management theory and practice. First, we respond

to calls for management research to take up grand challenges (George et al., 2016) by

highlighting how different types of aid, often aimed at poverty alleviation, actually im-

pact the entrepreneurial environment in countries. This is critical for both management

scholars and policy makers alike tasked with constructing policies that promote eco-

nomic development. Second, we leverage and integrate insights from the international

relations literature regarding the relative effectiveness of aid within a new institutional

economics framework to develop theory regarding how different sources of aid can stim-

ulate entrepreneurial activity in recipient countries. Third, we extend research on formal

versus informal entrepreneurship in developing countries. Finally, we demonstrate how a

discontinuous shift in development aid toward a new normal of increased participation

from private actors can impact a critical process of organizational change and renewal.

ENTREPRENEURIAL ACTIVITY AND INTERNATIONAL AID FLOWS

Monetary aid, also known as official development assistance (ODA)4

, has crossed borders

for decades. Concurrently, research on the effectiveness of that aid has been a focus of

academic inquiry (Wright and Winters, 2010)5

. Indeed, scholarly research in develop-

ment economics has been equivocal regarding the benefits of development aid (Clemens

et al., 2007; Easterly and Pfutze, 2008; Hudson and Mosley, 2008). In this section, we re-

view the research on aid’s impact on economic development and develop our theoretical

argument regarding the role of institutions and entrepreneurship.

The Differential Role of Aid Sources and Motivations

Examining multiple donor motivations is a good starting point for understanding why

some aid is effective and some is not. In theory, a donor sends aid to a recipient country

to promote economic growth and development, alleviate poverty, provide disaster re-

lief, or accomplish another social objective (Bräutigam, 2000; Easterly and Pfutze, 2008;

Hansen, 2001). Aid is intended for infrastructure projects, educational improvements,

government projects, immediate disaster relief, health care reforms and projects, and

other essentials (Kosack, 2003). But the demonstrated impacts of this aid are often mixed

and sometimes detrimental, calling into question its primary motivations.

Aid comes from a variety of donors, including national governments, international

organizations, and, increasingly, private (non-governmental) organizations (Dollar and

Levin, 2006; Ostrom et al., 2002; Woods, 2008). While each source is designed to contrib-

ute to economic and social development, the pathways through which aid is distributed,