Weathering the Storm: How Foreign Aid and Institutions Affect Entrepreneurship Following Natural Disasters

TL;DR

This paper investigates how natural disasters impact entrepreneurship and how foreign aid and institutional quality can mitigate or amplify these effects across 85 countries from 2006 to 2016.

Contribution

It develops a model linking natural disasters, foreign aid, and institutional factors to entrepreneurship activity, highlighting the conditional effects of government quality and economic freedom.

Findings

Natural disasters negatively affect entrepreneurship.

Foreign aid and economic freedom mitigate disaster impacts.

Foreign aid boosts entrepreneurship only with high-quality government.

Abstract

This study examines how foreign aid and institutions affect entrepreneurship activity following natural disasters. We use insights from the entrepreneurship, development, and institutions literature to develop a model of entrepreneurship activity in the aftermath of natural disasters. First, we hypothesize the effect of natural disasters on entrepreneurship activity depends on the amount of foreign aid received. Second, we hypothesize that natural disasters and foreign aid either encourages or discourages entrepreneurship activity depending on two important institutional conditions: the quality of government and economic freedom. The findings from our panel of 85 countries from 2006 to 2016 indicate that natural disasters are negatively associated with entrepreneurship activity, but both foreign aid and economic freedom attenuate this effect. In addition, we observe that foreign aid is positively associated with entrepreneurship activity but only in countries with high quality government. Hence, we conclude that the effect of natural disasters on entrepreneurship depends crucially on the quality of government, economic freedom, and foreign aid. Our findings provide new insights into how natural disasters and foreign aid affect entrepreneurship and highlight the important role of the institutional context.