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

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.

Effect of AfT flows on Investment-Oriented Remittances flows

“…Moreover, aid allocated for the development of infrastructure boosts entrepreneurship and incentivized competition with homogeneous products. More recently, Boudreaux et al (2021) have found empirically that development aid mitigates the adverse effects of natural disasters on entrepreneurship.…”

Natural disasters, entrepreneurship activity, and the moderating role of country governance

“…Moreover, the communication between various units is often problematic because these countries lack the infrastructure for collective action (Dixit 2009). Boudreaux et al (2021) find the quality of institutions moderates the effect of foreign aid on starting a new business after a disaster.…”

“…sample period (2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016). Most studies, including ours, that attempt to quantify the intensity of the disasters use a measure based on the number of people affected, injured, or killed from ED-DAT (for example, see Loayza et al 2012;Klomp and Valckx 2014;Noy 2009;Boudreaux et al 2021). Therefore, we define the "intensity of natural disaster" as the sum of the total number of people affected, injured, and homeless due to a natural disaster.…”

How Institutions Moderated the Pandemic's Economic Impact in EU Member States

“…Balavac and Pugh (2016, p. 284) are interested in transition countries and argue 'that improvements in institutional qualityespecially political institutionsattenuate output volatility'. Boudreaux et al (2021) maintain that the quality of government and economic freedom are important factors regarding the extent to which natural disasters affect entrepreneurship. Institutional quality, furthermore, has been found to moderate the impact of financial crises on economic growth (Furceri and Mourougane, 2012).…”

“…Boudreaux et al . (2021) maintain that the quality of government and economic freedom are important factors regarding the extent to which natural disasters affect entrepreneurship. Institutional quality, furthermore, has been found to moderate the impact of financial crises on economic growth (Furceri and Mourougane, 2012).…”