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

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.

💡 Research Summary

This study investigates the impact of foreign aid and institutions on entrepreneurship following natural disasters. The authors develop a model based on insights from entrepreneurship, development, and institutional literature to explore how these factors affect entrepreneurial activity post-disaster. They hypothesize that the effect of natural disasters on entrepreneurship depends on the amount of foreign aid received and that both natural disasters and foreign aid can either encourage or discourage entrepreneurship depending on two key institutional conditions: government quality and economic freedom.

Using panel data from 85 countries between 2006 and 2016, the study finds that natural disasters are negatively associated with entrepreneurial activity. However, this negative impact is mitigated by both foreign aid and economic freedom. Additionally, the research observes a positive correlation between foreign aid and entrepreneurship but only in countries with high-quality government.

The findings indicate that the relationship between natural disasters and entrepreneurship is significantly influenced by the quality of government, economic freedom, and foreign aid. The study provides new insights into how natural disasters and foreign aid affect entrepreneurial activity and underscores the critical role played by institutional context. This research highlights the importance of considering both external support (foreign aid) and internal governance structures when assessing the impact of natural disasters on local economies and entrepreneurship.