While scholars agree that institutions are critical for enabling and constraining entrepreneurial action, the mechanisms by which institutions shape individual entrepreneurs’ actions remain underdeveloped. Whereas a prior work focuses on the direct and moderating effects of institutions on entrepreneurial action, we propose that institutions also indirectly influence entrepreneurial action through their influence on the mental models of actors. To that end, we theorize an underexplored role of institutions: shaping three socio-cognitive traits (SCT)—opportunity recognition, entrepreneurial self-efficacy, and fear of failure—that influence entrepreneurial action. Using GEM data from 735,244 individuals in 86 countries, we test and find evidence that SCTs mediate the relationship between institutions and opportunity entrepreneurship.
The social legitimacy of entrepreneurship exerts a weaker direct effect on opportunity entrepreneurship but a stronger indirect effect through the SCT channels relative to pro-market institutions. Our study thus provides more nuanced findings concerning the ways formal and informal institutions, as well as the direct and indirect effects of institutions, enable and constrain entrepreneurial action.