This paper aims to examine how economic freedom impacts the initial choice of legal structure for startup firms. The authors do this by first exploring whether economic freedom is an essential determinant of the initial legal form of organization (LFO). The authors then explore the impact of economic freedom on firms' choice of changing their initial legal structure over time and how this change impacts their survival rate.
The authors employ a multinomial logistic regression model to measure the initial determinants of LFO by utilizing an eight-year panel data set of 4,928 startups in the USA through the Kauffman firm survey and merge it with the Economic Freedom in North American index from the Fraser Institute. The authors then employ a logistic regression model to examine the determinants facilitating a change in legal structure over time.
The results show that economic freedom is a significant determinant in the choice of legal structure. The findings also report that the majority of startups do not change their legal form, but of those that do change the legal structure show a higher survival rate.
Major limitations are the size of the data and the nature of somewhat limited economic freedom differences with the USA. More nuanced measures of economic freedom would be highly desirable.
Policymakers should take note that limited red tape, smoothly working labor markets and straightforward processes for changes of legal structures of organizations would improve survival and growth odds for entrepreneurs.
Drawing on the theory of institutions, the authors attempt to bridge a gap in the literature by explicitly analyzing the determinants of the legal structure in startups in light of economic freedom. Institutional factors do not work in isolation; therefore, the authors also employ traditional entrepreneur-specific variables that affect the choice of legal structure in addition to the institutional framework.
This paper forms part of a special section “Startup Innovation: The Role of Regulation in Entrepreneurship”, guest edited by Richard A. Epstein, Seth Oranburg and Liya Palagashvili.The authors are thankful to the Kauffman Foundation for providing the restricted use Kauffman Firm Survey data for empirical analysis.
Khurana, I., Krichevskiy, D., Dempster, G. and Stimpson, S. (2021), "Institutions, entrepreneurial adaptation, and the legal form of the organization", Journal of Entrepreneurship and Public Policy, Vol. 10 No. 2, pp. 261-283. https://doi.org/10.1108/JEPP-10-2019-0087
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