DOI: 10.1002/jsc.

2139

RESEARCH ARTICLE

Entrepreneurial growth aspirations in challenging environment:

The role of institutional quality, human and social capital*

Saranda Lajqi1 | Besnik A. Krasniqi2

1University of Tirana, Department of

Management, Albania
2University of Prishtina, Prishtina, Kosovo
Correspondence
Saranda Lajqi, The Institute for
Entrepreneurship and Small Business, 10000
Kosta Novakovic, Prishtine, Republic of
Kosovo
Email: s.lajqi@iesb‐ks.org
Abstract
The role of formal and informal institutions is crucial in forming growth aspirations. Firms use
their resources and personal network, trusting to overcome or compensate for inadequate in‐
formal institutions. Transition countries can unlock their growth potential by targeting entre‐
preneurs with high growth aspiration through policy measures (increasing their level of human
capital through a higher quality of educational system, aligning formal and informal institutions,
promoting well‐functioning and impartial courts). Entrepreneurs use the informal institutions to
complement deficient or inadequate formal institutions. Firm size as an indicator of better access
to resources moderates positively the effects of informal institution barriers by having a positive
influence on growth aspiration. Training, networking, and trust have a positive effect on growth
aspiration and entrepreneurs use these practices in response to institutional deficiencies (inad‐
equate educational systems, inefficient courts and other formal institutions). Policy initiatives
should consider small firms as being affected by formal institutions.

1  |  INTRODUCTION
A growing body of literature suggests that history and institutional
context has a critical influence on entrepreneurial activity and growth
aspirations (Aidis & Mickiewicz, 2006; Autio & Fu, 2013; Desai, 2011;
Estrin, Korosteleva, & Mickiewicz, 2013a; Welter & Smallbone, 2011;
Williams & Shahid, 2016). In transition economies (TEs), the highly
unusual institutional and socioeconomic conditions of early transition
(breakdown of the old rules and regulations, disappearance of the com‐
munist authority, high inflation, macroeconomic instability, etc.) led
to different entrepreneurial aspirations as well as different entrepre‐
neurial engagements compared with more mature market economies
(Earle & Sakova, 2000; Grilo & Thurik, 2006; Hashi & Krasniqi, 2011;
Smallbone & Welter, 2009). However, the central focus of entrepre‐
neurship literature was largely on entrepreneurial entry, while there is
still a gap in studying how different institutional settings affect entre‐
preneurial growth aspirations, with higher potential for a contribution
to the national economy (Estrin et al., 2013a). In particular, there is
a need to shed more light on the incorporation of the heterogeneity
of institutional settings and micro‐level characteristics such as size of
*
JEL classification codes: L26, O25, P2, P3.
firm and type, and the characteristics of the entrepreneur such as role
of trust in explaining entrepreneurial behavior (Welter & Smallbone,
2011). There is a need to better understand how these entrepreneurial
characteristics, including personal trust and networking, act as a sub‐
stitute for deficiencies in the formal institutional framework in chal‐
lenging business environments.
Therefore, the aim of this study is to reduce this gap in the lit‐
erature by testing a conceptual framework, which analyzes how a
variety of different formal and informal institutional arrangements
affect the entrepreneurial growth aspirations in the post‐conflict
economy of Kosovo. This article focuses on the impact of institutional
quality, human and social capital in a country that started to build
its institutional framework from scratch after a war. Although post‐
conflict countries are fragile, they offer opportunities for research,
calling for particular consideration and interpretation of context
(Collier, 2007). In particular, Kosovo is a unique case—both a transi‐
tion and a post‐conflict country—often referred to in the literature as
an extreme environment for researching entrepreneurship or “natu‐
rally experimenting” with testing the theories of entrepreneurship
(Solymossy, 2005). TEs form an interesting context for the investiga‐
tion of institutional quality, as in their initial phase of transition to
a market economy, institutions were absent and largely based on
emerging informal institutions.

Strategic Change. 2017;26(4):385–401. wileyonlinelibrary.com/journal/jsc © 2017 John Wiley & Sons, Ltd. 385
386 LAJQI AND KRASNIQI

Drawing on the work of North (1990) and Williamson (2000) on develop the hypotheses. This is followed by an explanation of the data
the new institutional economics (NIEs), we develop an augmented and method. The next section presents the results of the determinants
conceptual framework, which in addition to informal and formal insti‐ of growth aspirations in Kosovo, and a final section concludes.
tutions, includes the resource dimension as well as the role of human
and social capital. In addition to the institutional context, which is of
2  |  RESEARCH CONTEXT:
paramount importance, the literature suggests that its relationship to
ENTREPRENEURSHIP IN
the other aspects of entrepreneurship—such as the knowledge and
skills possessed by the people operating small firms—is important POST‐CONFLICT KOSOVO
(Veciana & Urbano, 2008). In particular, the interplay between formal
This article reports the results of a study that examined the role of
and informal institutions, and how entrepreneurs react to institutional
institutional quality, human and social capital on entrepreneurial
changes, is of particular interest (Smallbone & Welter, 2012). Follow‐
growth aspirations in the post‐conflict and challenging environment of
ing this literature, we adopt and augment the institutional framework
Kosovo. Although, in terms of attempts to increase levels of entrepre‐
for testing the impact of institutional quality on growth aspirations
neurial activity, Kosovo shares similar features with other TEs found
and specifically control for the effect of the size moderator in formal
elsewhere, its differences in institutional settings, post‐conflict envi‐
and informal institutions, controlling for social capital in the form of
ronment, and development path of the private sector makes it unique.
business trust and networking.
The transitional path from centrally planned to market economy, inter‐
The study is based on entrepreneurs’ responses generated
rupted by conflict, occupation, and war (1998–1999), make Kosovo’s
through three recent surveys conducted by the Business Support Cen‐
economy interesting for the investigation of institutional context.
ter Kosovo (BSCK) during 2011, 2012, and 2013. The results largely
Kosovo is amongst the poorest European countries, with a gross
support our hypothesis suggesting that under weak functioning of
domestic product (GDP) per capita of 2,800 euros generated from ser‐
formal institutions, informal institutions become more important—as
vices (56%), industry (18%), agriculture (17%), and construction (10%)
posited by North (1990). In addition, we found that the size of the firm
(EU, 2014). Deindustrialization, marked by the shrinking industry
as a proxy for higher access to resources has a moderating effect in
share of GDP (from 47% in 1989 to 15% during the early stages of the
relation to the influence of informal institutions on growth aspirations
post‐conflict period), influenced heavy imbalances in macroeconomic
by mitigating formal institutional barriers. At the same time, we show
configuration. The trade deficit (reaching about 40% of GDP) and the
that in the context of a weakly installed institutional environment and
unemployment rate (above 30%) are key problems. In contrast, mac‐
very poor law enforcement, social capital (personal trust and network‐
roeconomic and fiscal stability and low inflation persisted, along with
ing) plays an important positive role for entrepreneurial growth aspira‐
modest economic growth of 2–4%. Remittances (about 14% of GDP)
tions. This adds to the literature suggesting that in weakly installed
and donor contributions, especially during the emergent reconstruc‐
formal institutional settings, entrepreneurs make use of social capital
tion phase, fueled the development of small and medium‐sized enter‐
to respond to institutional deficiencies and lack of resources (Welter &
prises (SMEs) by generating high aggregate demand. In terms of the
Smallbone, 2011).
institutional environment, in the aftermath of the war, Kosovo had to
This study contributes to the entrepreneurship literature in gen‐
start everything from scratch (Krasniqi, 2012b)—moving from a busi‐
eral, and the transition literature in particular, by filling an important
ness environment without any legislation in place at all, to a country
gap in exploring the effects of different dimensions of institutions on
which has progressed much in adopting its own legislation with EU
growth aspirations in a TE context. First, we adopt the NIE framework
laws. Although the legal framework is almost complete and in compli‐
by making a clear distinction between formal and informal institutions,
ance with EU standards, implementation and weak rule of law remain
augmented with resource and market condition dimensions, and test
a severe problem for entrepreneurship development.
this framework in an unexplored country’s institutional context—
Recent surveys report that the unfair competition, corruption, and
Kosovo. The formal and informal institutional dimensions are impor‐
rule of law hinder the general environment of doing business (BSCK,
tant, because all other institutional pillars influence entrepreneurial
2014). High corruption practices of public officials and an inherited
growth aspirations in a different way. In particular, we address some
tradition of a parallel system during the occupation created special
of the deficiencies of a few other studies in TEs by offering a multifac‐
forms of business practice—doing business partially or fully informally.†
eted institutional perspective and by controlling for the moderating
According to the most recent survey, the informal sector is estimated
effect of size on institutional dimensions. In line with this literature,
to be around 35% (Riinvest, 2013). Under these circumstances, this
the study contributes by incorporating the role of personalized trust
environment created incentives for emerging strong normative or
and business networking in growth aspirations while controlling for
informal social institutions, which acted as a complement to formal
the effect of other institutional variables and the interaction effect of
institutions or in some areas replaced them (Krasniqi & Mustafa,
the size of the firm. Finally, the study provides better insights for pol‐
icy‐makers and managers on factors that influence growth aspirations.
†
Note that during communism, the small‐firm sector was underdeveloped in
The remaining sections of this article are organized as follows. To
Montenegro, Macedonia, and the southern province of Kosovo, although in
begin, we first introduce the unique features of the context of entre‐ Kosovo a very large ethnic Albanian‐based informal sector compensated for the
preneurship development in Kosovo. Then, we discuss the theory and deficit in formal (i.e., registered) small enterprises (Bateman, 2000).
LAJQI AND KRASNIQI
2016). The experiences of entrepreneurs during the communist era
and during the period of occupation by Serbia rooted these practices
in social lives. Entrepreneurship took the form of parallel or informal
activity. Such a path‐dependent behavior of entrepreneurs can per‐
petuate informal institutions, in particular network and trust‐based
relationships as the usual way of doing business, as suggested by
Chavance (2008).
3  |  ENTREPRENEURIAL GROWTH
ASPIRATIONS: THEORY AND
HYPOTHESES
The NIE literature proposed that the incentives of value‐adding
behavior depend on institutional quality (North, 1990). North (1990)
states that institutions are the “humanly devised constraints that
structure political, economic, and social interaction.” Formal institu‐
tions include constitutional, legal, and organizational frameworks for
individual actions, providing the rules of the game and using a sanc‐
tioning mechanism to enforce them. In contrast, informal institutions
consist of unmodified attitudes and beliefs that are embodied in soci‐
ety, regulating individual behavior. North (2005) made a clear distinc‐
tion between informal and formal institutions influencing a society’s
incentive system and hence shaping individual behavior. In particular,
he distinguishes between formal institutions (constitutions and laws,
economic rules, property rights, and contracts) and informal institu‐
tion, which are embodied in the social lives of entrepreneurs and soci‐
ety as a whole (values, norms, sanctions, taboos, customs, traditions,
and codes of conduct).
The economic agents (entrepreneurs) should be regarded as social
actors as well. Social actors can be understood and interpreted only if
we position them within various institutions and social networks, and
not just as “atomized decision‐makers maximizing their own utilities”
(Ghezzi & Mingione, 2007). The informal institutions are embodied in
peoples’ values and norms. The role of social institutions should be
seen as complementary in understanding the role of other institu‐
tions. The main difference between formal and informal institutions is
that the former include rules that are enforced by the state and firms
in order to solve problems of collective action through third‐party
sanctions, while the latter include networks that are reinforced by
means of social relationships depending on the nature of the relation‐
ship between the parties in the network (Krasniqi, 2014; Krasniqi &
Desai, 2016; Nee, 1998). While neoclassical theory has neglected the
role of institutions in the operation of the market system, the pro‐
cess of transition in the former socialist countries demonstrates the
complete opposite—the crucial role of institutions for entrepreneur‐
ship development. These institutions include the legal environment
and rule of law, property rights, free trade laws, and other regula‐
tions necessary for the functioning of the emerging market system.
These institutional arrangements have been taken almost for granted
in mature market economies (Karlsson & Karlsson, 2002), driven by
the strong assumption of neoclassical economics that laws and courts
are in place to enforce contracts and protect the property rights of
387
parties in a transaction (Williamson, 2000). These institutional factors
in TEs have significant influences on firm behavior, as any strategic
choice (including the growth aspiration) that firms make is intrinsically
affected by both formal and informal institutions (Peng, 2003; Peng &
Heath, 1996).
Consequently, these arguments apply in the transition context
in general. Kosovo is not an exception. The institutional theory pro‐
vides a good guiding research framework, because of the specific
features of the external environment that influence entrepreneurship
compared with more mature market economies (Welter & Smallbone,
2011). Several studies used the institutional framework to explain
entrepreneurial growth aspirations. For example, Aidis, Estrin, and
Mickiewicz (2008) and Estrin, Mickiewicz, and Stephan (2013b) apply
Williamson’s (2000) hierarchy of institutions framework to investi‐
gate the growth aspiration behavior of entrepreneurs. Stenholm, Acs,
and Wuebker (2013) use and extend Scott’s three‐pillar institutional
framework to study entrepreneurial engagements. Following this lit‐
erature, in this study we use the North (1990) and Williamson (2000)
framework, and more recently the work of Estrin et al. (2013a) and
the conceptualization of institutional entrepreneurship by Welter
and Smallbone (2011), and classify institutions in three main pillars.
Accordingly, we place informal institutions at the top of the hierarchy.
These formal institutions include customs, traditions, social institu‐
tions, and religion, comprising slow‐changing institutions. In a tran‐
sition context, this may include corruption (Estrin et al., 2013a) and
informal practices of doing business. In the second level, we place
formal institutions, emphasizing the role of constitutional foundations
and lower‐level institutions, including regulatory frameworks (con‐
tracts, business regulations, and laws). In the third level, we place the
resource dimension, including the physical infrastructure, availability
of entrepreneurial capabilities, skilled labor, financial system, avail‐
ability of capital, and macroeconomic policy, which also belong to the
institutional environment. These institutional dimensions have been
under‐researched in other studies (Veciana & Urbano, 2008). The third
institutional level is important, because it is influenced directly by the
previous two levels and mainly by formal institutions via policy design
and implementation. In the remainder of this section, we discuss our
research framework to study entrepreneurial growth aspirations and
develop our hypothesis.
3.1  | Informal institutions
Institutional theory posits that informal institutions are deeply rooted
in society’s values and they become the norm. Such examples in
TEs include bribery and corruption, political connections, and favors
in public tenders, informality, and anticompetitive behavior. Given
the fundamental changes experienced by TEs, one would not have
expected that entrepreneurs and other individuals in society would
easily be able to change their behavior under the new economic and
social institutions brought about by the new market economy system
(Krasniqi & Desai, 2016). This is true at the beginning of the transi‐
tion, where the fundamental shift from old institutions to new ones
took place almost simultaneously. As predicted by NIE, the behavior of
388
informal institutions is path‐dependent, which means that they change
slowly and are rooted in society, creating inertia against the change
(Clark & Soulsby, 2005; North, 1990; Williamson, 2000). This is one of
the most severe problems associated with institutional reforms at the
beginning of Kosovo’s late transition. In particular, during the process
of deinstitutionalizing through the war and reinstitutionalizing in the
aftermath of the war, it is still struggling to build coherent and market‐
economy institutions. This is largely because the process of institu‐
tional building and change was plagued by social inertia, as argued by
Clark and Soulsby (2005). Accordingly, while the construction of new
formal institutions—such as the legal structure and procedures—can
have an immediate effect, their realization in social practice will take
place slowly, as social values take time to be reproduced in routinized
conduct. This may result in the tendency of entrepreneurs to operate
in the informal sector being a result of the institutional asymmetry
between formal and informal institutions (Williams & Shahid, 2016).
For example, some TEs may have advanced their legal framework on
the books, but in reality the implementation might be very different
because of informal institutions. In keeping with the above, the trust
of economic agents in institutions is important for the economic per‐
formance of the country, as well as of the entrepreneur. This is because
economic agents (entrepreneurs) form their expectations based on the
quality of institutions, which guides their business expansion decisions
(Aidis & Mickiewicz, 2006). Institutions also have a capacity to gener‐
alize trust among citizens, to the extent that they embody the values
of fairness, justice, and truth, mediate efficiently between people, and
sanction any dishonest behavior of the economic agents involved in a
transaction (Offe, 1999).
In particular, non‐efficient and inadequate formal institutions
create incentives for the emergence of informal institutions (North,
1990). For example, the nature of regulation (and especially the com‐
plicated and excessively regulated environment) creates an incentive
for entrepreneurs to evade regulations by moving partially or fully
into the informal (Johnson, Kaufmann, McMillan, & Woodruff, 2000).
It also encourages rent‐seeking behavior by public officials and eases
the growth of corruption. Combined, informal activities and corrup‐
tion contribute to an anticompetitive environment in which the mar‐
ket fails to allocate resources efficiently, because some market players
work outside the law, leaving those operating within the legal sys‐
tem to face the increased cost of “doing business” legally or higher
transaction costs. Djankov, La Porta, Lopez‐de‐Silanes, and Shleifer
(2002) point out the high cost of entry related to burdensome regula‐
tion associated with corruption and a larger unofficial economy. For
that reason, the existence and functioning of informal institutions do
not always have a constraining effect on entrepreneurship. These can
become constraints if they create inefficiencies in resource allocation.
For example, if private entrepreneurial networks (entrepreneurs and
politicians) act in the shadow of the state and secure resources from
the government for their group, at the expenses of competitors (Nee,
1998). Other studies suggest that a turbulent and corrupt transition
environment is to the detriment of the growth of firms and in turn
stimulates short‐term‐oriented entrepreneurs, informal network‐
ing, and opportunism (Manolova & Yan, 2002) instead of long‐term
LAJQI AND KRASNIQI
entrepreneurs with strategic orientation (Meyer, Estrin, Bhaumik,
Kumar, & Peng, 2009). Thus we hypothesize
H1 The likelihood that individuals have growth aspirations is negatively
influenced by the presence of informal institutional barriers.
3.2  | Formal institutions
The most important dimension of the formal institutional framework
is legislation or constitutional‐related factors. In a broader sense, the
formal institutions consist, among other things, of the legal system,
the effectiveness of the judiciary, the regulatory framework, proce‐
dures for start‐up and business licensing, and permits. The rule of law
and property rights are amongst the most important formal institu‐
tions because other formal institutions are based on them, and they
also tend to coexist and complement each other (Troilo, 2011). The
state has a direct influence over formal institutions, which can also
indirectly influence informal institutional settings such as the values,
attitudes, and norms of a society (Welter & Smallbone, 2011). For
example, if there is no properly installed property rights system, then
we will have fewer incentives to invest in productive entrepreneurship
such as innovation. Therefore, society’s payoff structure depends on
the quality of institutions, which in turn may have different impacts
on the supply of different types of entrepreneurs by changing the
incentives for entrepreneurship (Baumol, 1990; Sobel, 2008). In partic‐
ular, the formal institutions pertinent to business operations can affect
the overall burden of starting, operating, and closing the business (Lee,
Yamakawa, Peng, & Barney, 2011). Countries with a low‐quality insti‐
tutional framework while have enormous quantities of procedures
and regulations, and inconsistent implementation of them has a sig‐
nificant impact on increasing the cost of doing business formally (Autio &
Fu, 2013). For example, the legal framework should make it easy for
entrepreneurs to enter into contractual agreements that facilitate
their growth. Entrepreneurs, with considerable capital at stake, need
to ensure that they can protect their property rights and harvest their
productive investment.
Taxation and tax legislation are another aspect of formal institu‐
tions which is important for developing businesses, because policy‐
makers can change the pattern and decisions of entrepreneurs to
invest through taxation (Krasniqi, 2007). Aidis and Mickiewicz (2006)
found that a high level of taxes has a negative influence on growth
aspirations. In particular, complicated procedures of taxation often
force small firms to employ outside advisers, increasing the cost of
doing business. The increased time that entrepreneurs spend dealing
with public officials poses barriers for SMEs and facilitates corruption
in informal institutions (Fries, Lysenko, & Polanec, 2007).
Not only formal institutions per se, but also the frequent changes
in rules and regulations, laws, and administrative procedures, resulting
in uncertainty and higher information and compliance costs, have an
influence on entrepreneurial behavior. Therefore, because of improper
policies, the environment becomes hostile to business growth, mak‐
ing it difficult for entrepreneurs to predict future economic prospects
and enter contractual relationships (Carlin, Fries, Schaffer, & Seabright,
LAJQI AND KRASNIQI
2001). This may discourage entrepreneurs from taking risks and invest‐
ing, in particular entrepreneurs with growth aspirations. Small firms in
particular were disproportionately affected by these changes, as the
compliance cost bears more heavily on smaller firms (Storey, 1994).
Generally, the presence of formal institutional barriers reduces the
growth aspiration of firms (Estrin, Korosteleva, & Mickiewicz, 2009).
Thus, we put the hypothesis
H2 The likelihood that individuals have growth aspirations is negatively
influenced by the presence of formal institutional barriers.
3.3  | Interplay of formal and informal institutions:
The effect of the firm size
Williamson (2000) highlights the role of governance in adjusting indi‐
viduals’ behavior and aligning institutions to specific situations. This
implies that institutional change is necessary to provide a satisfactory
institutional framework for entrepreneurship and growth of firms.
Formal institutions are important, because their quality influences
directly informal institutional settings. If the formal institutions are not
adequate or absent, then there is room for the emergence of stronger
informal institutions. For example, in situations where formal rules are
inadequate or absent, institutional trust is low or absent, whereas per‐
sonal trust becomes dominant and substitutes for the deficient formal
framework (Welter & Smallbone, 2011). This is because entrepreneurs
respond to the challenging institutional environment in their efforts
to find solutions. In doing so, entrepreneurs interpret the formal insti‐
tutional change in their local context and develop their own solutions
to the institutional gaps that can become the basis for institutional
change (Kalantaridis, 2007), since they can act as a signal to policy‐
makers on institutional holes. In the context of TEs, we argue that a
key factor to finding these solutions is the ability or the resources of
entrepreneurs to develop relationships with public officials, become
part of a business network for lobbying, or have resources for compli‐
ance costs of formal institutions or in specific situations use bribes to
evade compliance. Corruption can become an informal social norm,
providing advantages to incumbents or firms sharing benefits with
government officials at the cost of newcomers (Aidis et al., 2008;
Desai, Acs, & Weitzel, 2013), having a redistributive or unproductive
rather than a productive wealth‐creating effect on entrepreneurship
(Baumol, 1990).
In general, small firms are in a disadvantageous position for
institutional setup. Several studies have shown that the quality of
institutions is more important for smaller firms. For example, Beck,
Demirgüç‐Kunt, and Maksimovic (2005) found that poor institutions
have a greater negative impact on the growth of small firms than
large firms. Do and Levchenko (2009) showed that small firms have
a stronger preference for better‐functioning institutions than larger
firms, because trade favors larger firms by enabling them to become
even larger. Their argument is based on the firms’ preferences for
institutional quality, as they found that poor institutions affect larger
firms less than small and medium‐sized firms. Further, they argue that
larger firms may prefer to make institutions weaker, ceteris paribus to
389
forestall entry, and decrease competition in both goods and factor
markets. The resource‐based view also supports the idea that smaller
firms have less access to resources (Penrose, 1959), making it diffi‐
cult for small firms to deal with institutional arrangements. In line with
these arguments, we hypothesize
H3 The likelihood that individuals have growth aspirations is positively
influenced by firm size in the presence of formal and informal institutional
barriers.
3.4  | Resources
Resources—in the form of available finance, capital, entrepreneurial
abilities, skilled labor, physical infrastructure, and macroeconomic
policies—form another dimension of the institutional environment
(Veciana & Urbano, 2008). The importance of these resources for firm
growth is acknowledged by Penrose’s (1959) theory of firm growth,
which postulates that the expansion of the firm is mainly determined
by firm resources and knowledge. In Penrose’s view, firms can achieve
growth by the accumulation of knowledge in two ways. The more
resources the firm employs, the more likely it is that managers will
discover new combinations in response to new opportunities, provid‐
ing a basis for persistent growth. However, the access to and utiliza‐
tion of these resources does not depend only on the firm’s strategy
and its absorption capacities, but also on the availability of resources
in a given environment. Therefore, these resources depend to a large
extent on their availability in the market, which is influenced directly
by the quality of institutions via (in)effective policy‐making. For exam‐
ple, the availability of skilled labor, availability of external finance,
physical infrastructure, technological inputs, provision of a stable
macroeconomic environment, and other resources depend largely on
institutional quality. Carlin and Schaffer (2011) refer to this range of
institutions as public goods, which are important for firm growth in a
market economy. They argue that better‐performing firms incur higher
costs from unpredictable or poor functioning of these public goods.
Among the major adverse features of the institutional environ‐
ment, recognized by many studies, is the poor supply of external finance
for new businesses (Demirgüc‐Kunt, Klapper, & Panos, 2011; Hashi,
2001), especially at the early transition stage (Cassano, Jõeveer, &
Svejnar, 2013). Although the owners may raise some finance from
their own sources or through grants via public‐sector assistance, these
are generally limited, especially for young and small businesses, while
growth‐oriented small firms need external sources of finance such
as banks and venture capital. The availability of external finance and
start‐up support schemes is largely influenced by the quality of insti‐
tutions (both formal and informal).‡ Therefore, the availability of and
access to credit is considered a purely institutional variable (Autio &
Fu, 2013; Casero, González, Escobedo, Martínez, & Mogollón, 2013),
because the role of the government is also to correct for market fail‐
ures (Williamson, 2000). For example, the amount of collateral to
‡
External finance is usually not available to small firms for a variety of reasons,
mainly market imperfections.
390
obtain a loan is a formal institution, while the need to bribe financial
agents is an informal institution. Formal institutions that have a direct
influence over the access to bank finance for small firms also influence
the macroeconomic policy on loan interest rates. Other legal aspects,
such as collateral and bankruptcy law, play a part too. These legal
aspects can enhance the likelihood that individual creditors will realize
their claims against a debtor as well, ensuring claims after a debtor has
become insolvent (Haselmann, Pistor, & Vig, 2010).
Besides finance, the unstable macroeconomic environment influ‐
ences the behavior at the micro level (Smallbone & Welter, 2001). For
example, the decline in GDP and persistently high unemployment rates
contributed to the decline in real earnings in the early transition, affecting
the prospects of entrepreneurship (Earle & Sakova, 2000), and therefore
leading to depressed demand for goods and services and thus limited
SME growth potential. Evidence from Bulgaria suggests that inadequate
government policies contributed to the number of loss‐making enter‐
prises exceeding the number of profitable enterprises for SMEs (Bartlett
& Rangelova, 1997). Thus, this discussion leads to the hypotheses
H4 The likelihood that individuals have growth aspirations is positively
related to the presence of resource‐related barriers.
H5 The likelihood that individuals have growth aspirations is positively
related to the higher presence of market condition‐related constraints.
4  |  HUMAN AND SOCIAL CAPITAL
4.1  | Human capital
Many researchers in both developed and developing countries have
recognized the impact of human capital on a firm’s growth, by show‐
ing that the education of employees and managers contributes to
better firm performance (Aidis & Van Praag, 2007; Ganotakis, 2012;
Macpherson & Holt, 2007) and higher growth aspirations (Estrin
et al., 2013a). Human capital refers to the range of skills, knowledge,
and experience that facilitate growth. Comprehensive meta‐analysis
evidence suggests that there is a positive relationship with success
for both general and specific human capital (Unger, Rauch, Frese, &
Rosenbusch, 2011). While the literature on developed economies is
more consistent in terms of effect of education on firm growth, in
TEs the empirical evidence is rather mixed. For example, in contrast
to studies for less‐developed economies (Van der Sluis, Van Praag,
& Vijverberg, 2005), several studies reported a negative effect of
entrepreneurial education on firm growth in TEs (Bartlett & Bukvič,
2001; Krasniqi, 2012a; Xheneti & Bartlett, 2012). Studies reporting a
negative effect of entrepreneurial education on growth suggest that
higher education is not a prerequisite for business growth in the low‐
development Albanian (Xheneti & Bartlett, 2012) and Kosovan (Kras‐
niqi, 2012a) transition environment, pointing also to the deficiencies
produced by low‐quality education systems, calling for alternative
interpretation and particular attention to the role of training as a sub‐
stitute for low‐quality education.
Haber and Reichel (2007) found that the human capital of the
entrepreneur, especially in the form of managerial skills, was the
LAJQI AND KRASNIQI
greatest contributing factor to performance. Other authors point to
the role of training as an alternative for improving employees’ and
managers’ skills (Cosh, Hughes, & Weeks, 2000). They find a positive
relationship between training and employment growth, especially if
the training embodies the wide range of management and human
relations practices in the firm. Training is directly associated with high
growth, in particular if the firm is involved in innovation and competes
based on quality rather than simply price (Bryan, 2006). Better edu‐
cationally endowed entrepreneurs are more productive because they
have higher problem‐solving abilities and management skills, leading
to greater efficiency within the firm and growth aspirations. To sum
up, firms which are strongly motivated to grow, train their workforce
to promote the growth. Based on discussion, we state the hypothesis
H6 The likelihood of individuals having growth aspirations is positively
influenced by (6a) entrepreneur’s education and (6b) entrepreneur’s
training.
Entrepreneur’s experience is another dimension of human capital.
Several studies reported a positive relationship between entrepre‐
neurial experience and firm growth (Capelleras & Rabetino, 2008).
Beside the fact that entrepreneurs’ experience is important for
growth, how that experience develops and is influenced by the
overall context or interactions remains unclear (Macpherson & Holt,
2007). For example, in the context of TEs, pre‐existing knowledge
in the form of experience might not have expected positive effects,
because as experience develops it interacts with the rapidly chang‐
ing environment, and therefore experience might not be a useful
guide to the entrepreneur’s future actions. Evidence found that
experience in the form of general business skills has a positive effect
on growth aspirations (Estrin et al., 2013a). Thus, the discussion
above leads us to the hypothesis
H7 The likelihood that individuals have growth aspirations is positively
influenced by entrepreneur’s experience.
4.2  | Social capital
There is wide agreement in the literature that social capital, or entre‐
preneurs’ personal networks, are critical for small firm performance
(Maine, Shapiro, & Vining, 2010; Stam, Arzlanian, & Elfring, 2014).
Entrepreneurs benefit from positive externalities of networks, includ‐
ing improved information flow, training, facilitating foreign coopera‐
tion, as well as other benefits (Brown, Earle, & Lup, 2005; Zheng,
Li, & Wu, 2013). Trust is another component of social capital, which
includes the relationships with partners and is an important factor
that facilitates business and growth. Trust is defined as “the common
confidence that no party in an exchange will exploit another’s vulner‐
abilities” (Barney & Hansen, 1994) and is considered as an impor‐
tant non‐market governance mechanism, which facilitates long‐term
relationships between firms (Gulati, 1995). In particular, trustworthi‐
ness is important for business in TEs, considering the weak formal
institutional framework, which is not sufficient to facilitate efficient
LAJQI AND KRASNIQI
contract implementation and secure property rights. Note that effi‐
cient contract property rights are important for firms with high growth
aspirations, which in TEs usually pass the phase of informal business
practices and need an efficient legal frame to facilitate their shift to
more complex contractual relationships with suppliers or partners.
Evidence supports the view that as the transition to a market economy
progresses, the relative importance of market‐supporting institutions
increases (McMillan & Woodruff, 2002).
Under the challenging, turbulent, uncertain environment, and
with low institutional trust, personal trust is often considered a device
to overcome obstacles by helping entrepreneurs to access the neces‐
sary resources, and also as a means to decrease the costs and risks of
business transactions (Manolova, Gyoshev, & Manev, 2007; Welter,
2012; Welter & Smallbone, 2006). For example, in a TE environment,
firms often face constraints on accessing the financial resources avail‐
able and may rely upon suppliers as creditors. A firm’s networking
can help to overcome that limitation, by allowing the firm to connect
with banks close to the network or to other firms (or family members)
that may have these funds. However, there should be common trust
between firms in a network, and particularly firms having a flow or
exchange of resources. Also, firms in TEs that have stronger networks
and well‐developed social capital (strong norms of trust relationship
and shared language) may facilitate cooperation in developing knowl‐
edge and transferring it to businesses so they can increase productiv‐
ity (Brunetto & Farr‐Wharton, 2007; Wright, Filatotchev, Hoskisson, &
Peng, 2005). Informed by the above discussion, our central view is that
entrepreneurship is socially embedded in network structures (Jack &
Anderson, 2002), and entrepreneurs with higher endowed social capi‐
tal may have higher access to resources and be more likely to have
growth aspirations. This highlights the role of personal trust in explain‐
ing entrepreneurial behavior patterns in challenging institutional
environments. Specifically, we focus on business networks, namely
membership of business associations and personalized business trust
in partners. Hence, we hypothesize
H8 The likelihood of individuals having growth aspirations is positively
influenced by (8a) membership of business associations and (8b) entrepre‐
neurs’ trust in business partners.
5  |  DATA AND METHODS
5.1  | Sample and descriptive statistics
This study uses survey responses from three rounds of surveys with
500 Kosovan entrepreneurs who completed questionnaires through
face‐to‐face interviews during January 2011, 2012, and 2013. The
BSCK team conducted SME surveys and the principal author had a
lead role in this research project. Samples were selected randomly from
the business register kept at the Kosovo Business Registration Agency
(KBRA). Interviewers were conducted by experienced and trained
final‐year students from the Faculty of Economics at the University
of Prishtina and monitored carefully by the BSCK research team.
Respondents were key informants, mainly the owner or occasionally
391
the general manager, of companies who had information about the
entrepreneur and company.
The sample was stratified based on three sectors (trade, services,
and manufacturing) and three company size cohorts based on num‐
ber of employees (less than 10 employees; 10–49 employees; 50 or
more employees). No company size limits were applied in sampling, to
ensure the representativeness of the overall private sector in Kosovo.
The stratification yielded the following sectorial distribution of the
firms: trade 55.57%, services 27%, and manufacturing 17.43%. On the
basis of the public records kept at KABR, we have around 19% of firms
that could not be surveyed, because they either closed their activities
or could not be reached. This could cause sample selection bias, with
low‐performing firms excluded from the sample that were forced out
to exit (Krasniqi, 2012). For the remaining 81% the response rate was
very high, with an average of 95.8%. However, for various variables
of interest, we have a different response rate, which in total led to a
usable sample of 666 to 914 firms depending on models, variables,
and interaction terms used in different specifications.§ We have no
observations missing for that dependent variable.
Details of the variables used in the analysis, including descriptive
statistics, are presented in Table 1. The data show that overall, the
mean size of the companies (measured by number of employees) in
the sample is very small, around 11 employees. The surveys indicate
the recent origin of the private sector, with a firm age mean of around
10 years. From the total sample, 39.79% of entrepreneurs declared
that they have growth aspirations in terms of number of employees.
5.2  | Pooling data
We use the pooled data technique to test the set of econometric mod‐
els of entrepreneurial growth aspirations. The pooled data contains
information from three independent surveys for the period 2011,
2012, and 2013. An “independently pooled cross‐section” technique
is obtained by pooling randomly sampled cross‐sections at different
points in time (Wooldridge, 2006). The dataset used in this study
meets the conditions of the surveys being random and independent of
each other, using the same research instrument and identical depen‐
dent and independent variables in estimations. From the statistical
point of view, the independently pooled cross‐section data has sev‐
eral important features (Wooldridge, 2006). It rules out the correlation
between the error terms across different observations, controls for
changes over time with the inclusion of year dummy variables, pro‐
vides more precise estimates and more powerful diagnostic test sta‐
tistics, increases the number of observations, and, hence, has a larger
sample size and more robust coefficients. This is particularly important
for the present research, which accounts for a large number of vari‐
ables that otherwise would be econometrically difficult to implement.
§
We performed a simple statistical check to investigate whether the non‐re‐
sponses for variables were missing at random by using a logit regression. Our
dependent variable was coded as 1 for missing data and 0 for non‐missing data.
We used all our variables of interest that can indirectly predict the probability of
missingness. This exercise shows that our missing data is completely at random,
and therefore we do not have the problem of non‐response bias selection.
392 LAJQI AND KRASNIQI

TA BL E 1   Definition and descriptive statistics of variables

Variable Definition Mean Std. dev

Dependent variable
Growth aspiration of Dummy variable taking value of 1 if an entrepreneur has concrete plans to increase the .39 .48
entrepreneur number of employees in three years from the time of the survey, 0 otherwise
Institutional quality
Resource‐related Component is composed of the following groups of barriers based on entrepreneur’s ranking −1.14E‐10 1
component from 1 = not a barrier to 5 = very severe barrier: skilled labor, lack of business information,
supply of inputs (materials and machinery), managerial skills, insufficient capacities, delay of
payments, access and cost of finance
Informal institution Component is composed of the following groups of barriers based on entrepreneur’s ranking −1.37E‐10 1
component from 1 = not a barrier to 5 = very severe barrier: theft and crime, informal economy, corrup‐
tion, fiscal evasion, political instability
Formal institution Component is composed of the following groups of barriers based on entrepreneur’s ranking 1.13E‐09 1
component from 1 = not a barrier to 5 = very severe barrier: tax rates, tax administration burden, legal
framework
Market conditions Component is composed of the following groups of barriers based on entrepreneur’s rank‐ −6.25E‐10 1
component ing from 1 = not a barrier to 5 = very severe barrier: strong competition, lack of demand for
products and services
Human capital
Entrepreneur’s gender Dummy variable taking value of 1 if entrepreneur is male, 0 if female 0.92 0.27
Entrepreneur’s education Dummy variable taking value of 1 if entrepreneur has university degree or more, 0 otherwise 0.32 0.47
Entrepreneur’s training Dummy variable taking value of 1 if entrepreneur had management training in previous three 0.27 0.44
years, 0 otherwise
Entrepreneur’s age Years of entrepreneur 37.78 11.15
Entrepreneur’s age Years of entrepreneur squared 1,552 918
squared
Entrepreneur’s Dummy variable taking value of 1 if entrepreneur has working experience in business field 0.71 0.45
experience before start‐up
Social capital
Member of business Dummy variable taking value of 1 if entrepreneur is a member of a business association, 0.15 0.35
association 0 otherwise
Trust in business Dummy variable taking value of 1 if entrepreneur declared 3 = very high in a scale of 1 = not 0.54 0.50
partners important, 2 = neutral, and 3 = very important on question: Is your trust in other business part‐
ners an important factor to compensate for the lack of assets and resources you need?
Control variables
Firm age Years of the firm since operation 10.18 9.32
Firm size Number of employees 11.06 45.38
Firm size (logarithm) Natural logarithm of number of employees 1.17 1.18
Firm age (logarithm) Natural logarithm of years of the firm in operation 1.94 0.94
Manufacturing Dummy variable taking value of 1 if company belongs to manufacturing (main area of 0.16 0.37
business)
Services Dummy variable taking value of 1 if company belongs to services (main area of business) 0.43 0.25

To ensure a purely random sample, we have deleted a few cases
in which the same company was sampled more than one year (only
32 cases).
5.3  | Principal component analysis
In this section, we quantify the institutional indicators using princi‐
pal component analysis (PCA). Very large numbers of dimensions
measuring institutional environment as well as other barriers to the
operation and growth of businesses are not very usable for further
investigation in regression analysis. In particular, this is a problem of
multicollinearity between explanatory institutional variables. Usually,
the institutional variables are highly correlated with each other, which
violates the assumption of linear independence of independent vari‐
ables. In this study, we have asked entrepreneurs to rank the factors
that pose a barrier to their operation and growth using a five‐point
Likert scale (1 = not a barrier at all, 5 = severe barrier) (Table 1). PCA is
an important tool to investigate whether the data from the real world
confirms the relationships between constructs as predicted by theo‐
ries discussed in the literature review section. Therefore, we use PCA
LAJQI AND KRASNIQI 393

to deal with these two issues. The score of each element was based on TABLE 2  Principal component analysis: the rotated component matrix
the factor weights of 17 variables to uncover the common variance of Component
quality institutional variables across firms in our sample. By ordering
Variables 1 2 3 4 Cronbach’s
the extracted factors, according to the magnitude of their eigenvalues alpha
(larger than 1), we produce the scree plot shown in Figure 1. There is Resources
a break after the fourth factor, as the eigenvalue drops from 1.06 to Skilled labor 0.762 0.787
0.91. Following Pett, Lackey, and Sullivan (2003), we retain the first
Lack of business 0.631 0.786
four factors for further analysis. information
We conducted an exploratory factor analysis using Varimax‐ Supply of inputs 0.623 0.786
rotation with Kaiser normalization. The rotated matrix generated a (materials and
machinery)
four‐factor solution with acceptable level results (Kaiser–Meyer–
Olkin measure of sampling adequacy = 0.821, p < 0.000). In addition, Managerial skills 0.596 0.793

we performed a scale test using Cronbach’s alpha for a 17‐item scale. Insufficient capacities 0.579 0.781
Overall, the items of the scale hang together pretty well. The Cron‐ Delay of payments 0.493 0.789
bach’s alpha scale reliability coefficient of 0.795 is clearly acceptable. Access and cost of 0.420 0.783
Table 2 reveals that the first factor combines responses related to finance

perceptions about skilled labor, availability of technology and mate‐ Informal barriers
rial inputs in the market, and financial resources, which we refer to Theft and crime 0.768 0.778
as a resource‐related barriers component. In this component, “skilled Informal economy 0.763 0.783
labor” and “lack of business information” has the highest loading on Corruption 0.758 0.775
the first factor, explaining most of the resource‐related variance. Fiscal evasion 0.528 0.781
The third highest loading in this factor is “supply of inputs,” then Political instability 0.517 0.780
“managerial skills,” “insufficient capacities,” “delay of payments,” and
Formal barriers
“access and cost of finance.” The second factor forms a group of bar‐
Tax rates 0.859 0.785
riers related to “theft and crime,” “informal economy,” “corruption,”
Tax administration 0.855 0.783
“fiscal evasion,” and “political instability,” which we call the infor‐
Legislation 0.623 0.782
mal institution‐related barrier. The third factor combines responses
Market conditions
related to “tax rates,” “tax administration,” and “Legislation,” forming a
group called the formal institutions barrier. Finally, the fourth group Strong competition 0.814 0.793

incorporates “strong competition” and “lack of demand,” which we Lack of demand 0.609 0.789

call the market conditions barrier. In Table 2, we also note that infor‐
mal and formal institutions should be considered separately from
each other and are distinctive groups of institutions, as proposed by
Note: Rotation method: Varimax with Kaiser normalization. Kaiser’s measure
of sampling adequacy = 0.821; Bartlett’s test p < 0.000. Cumulative explained
variance of four factors: 75.60%.

F IG U RE 1   Scree plot of eigenvalues after factor analysis [Color figure can be viewed at wileyonlinelibrary.com]
394
NIE (North, 1990). Our factor analysis revealed that the impact of
the institutions on firm growth should be treated conceptually and
empirically separately. Referring to the literature review section, the
factor analysis disentangled the framework of institutional theory by
dividing formal and informal institutions (North, 1990). However, for
empirical purposes, we need to use the interaction between these
institutional arrangements or include the moderating effects of size,
age, or human capital in order to control for their interrelatedness, as
suggested by the theory.
5.4  | Empirical model
To test whether the presence of institution‐related barriers and
human and social capital variables has an influence upon the
growth aspirations of entrepreneurs, we use a series of logit regres‐
sion models. The following generalized logit model is specified to
fit our data:
P (y = 1 | x ) = β 0 + β1 x1 +  + β k x k 1
where the outcome y is equal to one if the entrepreneur has growth
aspirations (increase in number of employees) and zero otherwise;
x is a vector of explanatory variables with βi as the corresponding vec‐
tor of coefficients. Based on equation (1) we specify the following
baseline logit model:
P(Growth aspirationi = 1 | x) = β0 + β1 Informal institutionsi
+ β2 Formal institutionsi + β3 Resourcesi + β4 Market conditionsi
+ β5 Entrepreneur’s educationi + β6 Entrepreneur’s trainingi
+ β7 Entrepreneur’s experiencei + β6 Networkingi + β6 Trusti
+ β6 Control variablesi + εi2
where β0 is a constant term, β1 to βn are vectors of parameters to
be estimated from the n independent variables, and εi is the logis‐
tic distributed error term for the ith case. We augment equation (1)
with additional interaction variables in order to control the moder‐
ating effect of size on the formal and informal institutions in terms
of growth aspirations. We also include the interaction term between
formal and informal institutional barriers to test for a complementary
effect. The third equation takes the following form:
P(Growth aspirationi = 1 | x) = β0 + β1 Informal institutionsi
+ β2 Formal institutionsi + β3 Informal institutionsi * Formal
institutionsi + β4 Informal institutionsi * Firm sizei + β5 Formal
institioni * Firm sizei + β6 Resourcesi + β7 Market conditionsi
+ β8 Entrepreneur’s educationi + β9 Entrepreneur’s trainingi
+ β10 Entrepreneur’s experiencei + β11 Networkingi + β12 Trusti
+ β13 Control variablesi + εi3
In equations (1) and (2), control variables correspond to the entrepre‐
neur’s profile (i.e., entrepreneur’s gender and firm characteristics of age,
size, and sectoral dummies). Based on equations (1) and (2), we estimate
various econometric specifications discussed in the next section.
LAJQI AND KRASNIQI
6  |  RESULTS AND DISCUSSION
Before we discuss the findings, we briefly discuss the diagnostics of our
regression models. Table 3 presents the findings of the different speci‐
fications of the logit model of the binary decision of an entrepreneur to
have growth aspirations in terms of number of employees. One of the
most frequent problems faced in regression analyses, particularly when
a large number of dummy variables are used, is the presence of multicol‐
linearity (Hair et al., 1998). To check for the presence of multicollinear‐
ity, we first examine the correlation matrix as suggested by Wooldridge
(2012) and find no problem of multicollinearity (Table 1 in the Appen‐
dix). Correlational coefficients of explanatory variables are very small,
with a maximum of 0.33 (not considering interaction terms). In addition,
we tested for multicollinearity using the variable inflated factor (VIF) in
Stata, which suggested that multicollinearity was not a problem in our
estimations. Our VIF factors are in the range from 1.03 to 1.46, much
smaller than the accepted level of 3, confirming that no significant multi‐
collinearity exists in the estimated model. Although pseudo‐R2 statistics
lack the straightforward explained variance and interpretation of true R2
as in ordinary least squares regression, it can be informative and provide
a quick way to describe or compare the fit of different models for the
same dependent variable (Hamilton, 2012). In this case, for the esti‐
mated logistic regressions we reported McFadden pseudo‐R2 ranging
from 0.022 to 0.111, suggesting that the data fits the model quite well
and the explanatory power has improved significantly after the inclusion
of interaction terms; the full model is in the last column of Table 3. After
fitting the model, we obtained a classification table and related statis‐
tics using the default cutoff option of 0.5 in Stata. The overall correctly
classified rate is therefore in the range of 67.72–75.2%. The table also
gives conditional probabilities such as sensitivity or the percentage of
observations with p > .5 given that growth aspirations occurred in the
range of 39–41.2% for various models, which is typical for this type of
model as suggested by Hamilton (2012). Finally, we tested whether the
parameters are jointly statistically significant and different from zero
(β = 0). All maximum likelihood models have passed the Wald statistical
test for the joint statistical significance of the explanatory variables, sug‐
gesting that the explanatory power of independent variables in explain‐
ing growth aspirations is significant.
Now we turn to the discussion of findings. Given that our key inter‐
est is in examining the importance of the institutional quality and human
and social capital on the probability of an entrepreneur having growth
aspirations, we discuss each of the findings in the following order: insti‐
tutional quality, human capital, and social capital characteristics.
6.1  | The effect of institutional quality on
growth aspirations
The results of the different applications of the logit model in Table 2
suggest consistent results on the statistical significance of the effect
of institutional variables on the likelihood of entrepreneurs having
growth aspirations. Starting from specification 1, we estimated the
basic model, which included only variables that capture the influence
of institutional quality. We found that resource‐related components
TA BLE 3   Logit estimates of determinants of growth aspiration (dependent variable dichotomous, equals 1 if a firm plans to increase number of employees, 0 otherwise)

Variables (1) (2) (3) (4) (5) (6)

LAJQI AND KRASNIQI

Institutional quality
Resource‐related component 1.185** (0.0811) 1.174** (0.0921) 1.184** (0.0934) 1.195** (0.0981) 1.207** (0.102) 1.219** (0.105)
Informal institution component 1.048 (0.0723) 1.043 (0.0813) 0.989 (0.0810) 0.959 (0.0825) 0.937 (0.0849) 0.956 (0.0883)
Formal institution component 0.895 (0.0620) 0.946 (0.0741) 0.920 (0.0758) 0.925 (0.0804) 0.934 (0.0842) 0.910 (0.0832)
Market conditions component 0.750*** (0.0516) 0.796*** (0.0625) 0.795*** (0.0628) 0.796*** (0.0684) 0.819** (0.0726) 0.835** (0.0749)
Interaction (formal institution*informal institution) 1.089 (0.0853) 1.107 (0.0902) 1.143 (0.0957)
Interaction (informal institution*firm size) 1.007** (0.00306) 1.007** (0.00355) 1.008** (0.00353) 1.007* (0.00355)
Interaction (formal institution*firm size) 1.003 (0.00295) 1.004 (0.00328) 1.005 (0.00315) 1.004 (0.00311)
Human capital
Entrepreneur’s gender 1.884* (0.714) 1.938* (0.740) 1.903* (0.733)
Entrepreneur’s education 0.854 (0.152) 0.861 (0.159) 0.879 (0.165)
Entrepreneur’s age 1.007 (0.00781) 1.072 (0.0495) 1.060 (0.0497)
Entrepreneur’s age squared 0.999 (0.000552) 0.999 (0.000561)
Entrepreneur’s experience 1.002 (0.187) 0.991 (0.192) 0.912 (0.180)
Entrepreneur’s training 1.924*** (0.394)
Social capital
Member of business association 1.654** (0.409) 1.345 (0.349)
Trust in business partners 1.437** (0.251) 1.429** (0.253)
Controls
Size of firm (logarithm) 1.711*** (0.125) 1.746*** (0.130) 1.775*** (0.145) 1.616*** (0.144) 1.541*** (0.140)
Age of firm (logarithm) 0.754*** (0.0709) 0.756*** (0.0712) 0.732*** (0.0762) 0.752*** (0.0801) 0.735*** (0.0794)
Manufacturing 1.254 (0.276) 1.198 (0.266)
Services 1.116 (0.223) 1.087 (0.221)
Constant 0.618*** (0.0428) 0.591*** (0.120) 0.577*** (0.118) 0.280*** (0.136) 0.0640*** (0.0661) 0.0813** (0.0850)
Diagnostics
Observations 914 783 783 696 666 660
Wald test 26.05 > 0.000 71.72 > 0.000 72.80 > 0.000 68.31 > 0.000 71.79 >0.000 79.95 > 0.000
McFadden’s pseudo‐R2 0.0221 0.0824 0.0867 0.0915 0.1003 0.1119
Note: ***significant at 1 %; **significant at 5 %; *significant at 10 %.
395
396
and the market conditions component are statistically significant and
have a positive effect on growth aspirations (H4 supported). This find‐
ing suggests that entrepreneurs who have more complaints about
access to resources (both human and physical) and market condi‐
tions (stronger competition and slack demand) are more likely to have
growth aspirations. These findings are in line with Veciana and Urbano
(2008), suggesting that firms with higher growth potential need
resources to support their growth.
However, the resource‐related component and market conditions
are at the lower level of the institutional hierarchy and are influenced by
the top pillars of institutions, such as informal and formal institutions.
Results suggest that when entered separately into the equation, both
informal and formal institutional variables are not statistically significant
across all specifications (1–6) (H1 and H2 not supported). In line with
NIE theory, we found that they are important if they interact with each
other (H3 supported). Specifications 3–6 include the interaction terms
that capture the influence of the interaction of formal and informal insti‐
tution factors, as well as the interaction of the size of the firm with both
informal and formal institutional variables and their effect on growth
aspirations, consistent with H3. As proposed by the literature, larger
firms with more resources can make use of networking and use institu‐
tional deficiencies or gaps for their own interests. Results show that only
the interaction of the size of the firm and informal institution has a sta‐
tistically significant and positive effect on growth aspirations. The inter‐
action term between formal and informal institutions is not significant.
This suggests that the effect of size captures the effect on institutional
quality, meaning that the larger the firm, the larger the possibility of mak‐
ing use of informal institutions in the presence of a higher perception
barrier. The informal institution‐related constraints interacting with size
have a positive and statistically significant effect on growth, suggest‐
ing that the more the informal institutions are perceived as barriers to
growth and the larger the firm, the more likely it is to have growth aspi‐
rations. This implies that the more corruption, and other related factors,
are perceived as barrier, the better they have learned to cope with it. This
is a positive function of the size of the firm. Similar results were found in
transition contexts for Albania (Xheneti & Bartlett, 2012) and other TEs
(Hashi & Krasniqi, 2011). They argue that another possible explanation is
that corruption acts as a mechanism to “grease the wheels” of business
and that firms which make corrupt payments, although having a nega‐
tive perception of the phenomenon, grow faster than those firms that
do not make corrupt payments or are not in a position to do so as pro‐
posed by institutional theory. In line with this theory (Aidis et al., 2008;
Desai et al., 2013), we confirm that higher corruption and other variables
related to formal institution‐related components may act as a barrier for
other companies, or even new entrants, that cannot make use of these
benefits and possible links with public officials, confirming the proposi‐
tion that firms will find their own solutions to institutional deficiencies.
6.2  | The effect of human capital on growth
aspirations
To capture the effect of human capital variables on growth aspira‐
tions, we augmented the model in specifications 4–6. Specification 4
LAJQI AND KRASNIQI
includes the following variables: entrepreneur’s education, age (proxy
for general experience), and entrepreneur’s experience in the busi‐
ness in a related field prior to start‐up. The results show that of all
human capital‐related variables, only entrepreneur’s training is statisti‐
cally significant and has a positive effect on growth aspirations (H6a
not supported; H6b supported; H7 not supported). This is in line with
other studies in TEs, which questioned the quality of educational sys‐
tems in some post‐conflict and laggard economies (Krasniqi, 2012a;
Xheneti & Bartlett, 2012). Instead, entrepreneurs have to rely on alter‐
native mechanisms to compensate for these institutional deficiencies,
reflected in poor educational systems. As a result, training becomes
more important for growth. Variables indicate that gender is statis‐
tically significant with a positive sign, suggesting that men are more
likely than women to have growth aspirations. In contrast to Capelle‐
ras and Rabetino (2008) and Estrin et al. (2013a), we found that nei‐
ther pre‐start‐up experience nor general experience (measured by
age) has a significant effect on growth aspirations.
6.3  | The effect of social capital on growth aspirations
To explore the effect of social capital on growth aspirations in a country
with a weak institutional environment, we included two variables: mem‐
bership in a business association and trust in business partners. Specifi‐
cations 5 and 6 show the results of this exercise and suggest that both
variables are statistically significant, suggesting that networking and trust
have a positive influence on growth aspirations (H8a, H8b supported).
In particular, the magnitude of the trust in business partners’ coefficient
is very large, and this result affirms the importance of social capital and
other benefits of networking, consistent with Manolova et al. (2007).
This suggests that entrepreneurs who are part of a larger network
of firms can benefit from positive externalities, as predicted by theory
(in terms of knowledge follows, lobbying, know‐how, but also mak‐
ing links with public officials), and translate that into future long‐term
growth aspirations. In a country like Kosovo, where resources are slack,
trust becomes a necessary and important factor to compensate for lack
of resources and assets. Bearing in mind that Kosovo, compared with
other TEs, has very difficult terms and conditions for loans, trust can
play a critical role in the substitution of formal bank loans with trade
credit via inputs from suppliers. In addition, trust is an important fac‐
tor in facilitating contractual relationships, as predicted by Peng (2003)
and Welter and Smallbone (2011). In a country where informal institu‐
tions are stronger than formal ones, as we found in our analysis, trust
is used to alleviate the problems of contracts as well as to compensate
for the lack of resources. In relation to the role of trust, it is important
to cite the response of one entrepreneur during the survey who said:
My main business partner–supplier has helped me to get out
of financial difficulties. I had a big problem and the bank did
not gave me a loan… he (the business partner) supplied me
with inputs for my company, and I did not have to pay him
immediately, so I could pay the money‐back after I sold my
goods. He trusted me because I worked for him for several
years and I keep my word.
LAJQI AND KRASNIQI 397

In order to have more precise estimates, we reported the calculated
marginal effects at sample means for continuous variables and speci‐
fied at 1 for dummies. The results of the marginal factors for the last
specification in column 6 of Table 2 are presented in Table 4. We inter‐
preted the marginal effects when all other continuous variables equal
their means, or specified at 1 for dummy variables.
This exercise shows that holding all variables constant (variables
in the second model), males are 15.9% more likely to having growth
aspirations compared to females. Entrepreneurs with management
training are 16% more likely to having growth aspirations. On social
capital, we found that entrepreneurs who trust their business partners
are almost 9% more likely to have growth aspirations compared to
their counterparts. Finally, everything considered, entrepreneurs are
59% more likely to have growth aspirations.
7  |  CONCLUSION AND POLICY AND
MANAGERIAL IMPLICATIONS
This article has explored how institutional quality, human capital, and
social capital affect entrepreneurs’ employment growth aspirations.
Drawing on the concepts of NIE developed by North (1990, 2005) and
Williamson (2000), as well as the more recent empirical work of Estrin
et al. (2013a) and Stenholm et al. (2013) on human capital theory and
social capital, we frame our empirical research to test which institu‐
tions are important to explain employment growth aspirations.
Using large‐scale recent surveys with a 914 cross‐individual data‐
set and logistic regression modeling, the article supports the hypothe‐
sis that institutional quality has an important role in examining growth
aspirations. In particular, we found that resources and market con‐
ditions may inhibit the future growth of SMEs. Informal institutions
play a positive role for existing entrepreneurs, moderated by size of
company, suggesting the possible use of an uncompetitive environ‐
ment for their interests or other ways to deal with formal institutions.
This may also suggest that firms who reported higher barriers have
learned to cope with informal institutions and, although they see them
as a barrier, have growth aspirations because they have knowledge
and experience of how to deal with them. Government policies should
focus on creating a more competitive business environment, as there
is a risk that existing companies will make use of their informal net‐
works and corruption to pose barriers to entry for new entrants and
other competitors who do not make use of such informal networks for
their benefit.
Our findings on the role of human capital are partially in line with
the human capital and resource‐based view. We did not find sup‐
port for the positive effect of entrepreneur’s education on growth

TA BL E 4   Marginal effects after logistic y = Pr(growth aspiration)(predict) = .586

Variable dy/dx Std. err. z P>|z| [95% C.I.] X

Institutional quality
Resource‐related component 0.048 0.021 2.310 0.021** 0.007 0.089 −0.021
Informal institution component −0.011 0.022 −0.490 0.625 −0.055 0.033 0.003
Formal institution component −0.023 0.022 −1.030 0.305 −0.067 0.021 0.042
Market conditions component −0.044 0.022 −1.980 0.048** −0.087 0.000 0.061
Interaction (formal institution*informal institution) 0.032 0.020 1.590 0.111 −0.007 0.072 0.017
Interaction (informal institution*firm size) 0.002 0.001 1.870 0.062* 0.000 0.003 0.733
Interaction (formal institution*firm size) 0.001 0.001 1.300 0.195 −0.001 0.002 −0.085
Human capital
Entrepreneur’s gender 0.159 0.094 1.690 0.091* −0.025 0.344 1.000
Entrepreneur’s education −0.031 0.045 −0.690 0.491 −0.119 0.057 1.000
Entrepreneur’s age 0.014 0.011 1.240 0.216 −0.008 0.036 38.000
Entrepreneur’s age squared 0.000 0.000 −1.140 0.253 0.000 0.000 1596.370
Entrepreneur’s experience −0.022 0.047 −0.470 0.640 −0.114 0.070 1.000
Entrepreneur’s training 0.162 0.050 3.250 0.001*** 0.064 0.260 1.000
Social capital
Member of business association 0.073 0.063 1.150 0.249 −0.051 0.198 1.000
Trust in business partners 0.088 0.044 2.020 0.044** 0.002 0.174 1.000
Controls
Size of firm (logarithm) 0.105 0.024 4.290 0.000*** 0.057 0.153 1.213
Age of firm (logarithm) −0.075 0.026 −2.820 0.005*** −0.127 −0.023 2.043
Manufacturing 0.043 0.053 0.820 0.410 −0.060 0.147 0.211
Services 0.020 0.049 0.410 0.679 −0.075 0.116 0.255
Notes: Marginal probabilities dy/dx are calculated at mean values for continuous variables and 1 for dummy variables (i.e., discrete change of dummy variable from 0 to 1).
***significant at 1 %; **significant at 5 %; *significant at 10 %.
398
aspirations, but we did find strong support for the role of training. This
finding is in line with the recent transition literature on education of
entrepreneurs in TEs such as Kosovo, and may reflect the low quality
of the education system and hence the entrepreneur’s use of training
as an alternative means to compensate for a deficiency of knowledge
acquired through formal education. This recommends a more active
role of government in supporting educational institutions and in par‐
ticular, promoting entrepreneurship and business‐related programs.
In contrast, social capital is found to have a high positive influence
on growth aspirations. Business networking through membership of
business associations can have a positive impact on growth aspira‐
tions. Firms belonging to networks can enjoy positive externalities and
complement their resources and knowledge sharing. In addition, we
found an even stronger positive effect of trust in business partners
on growth aspirations. Entrepreneurs with high trust in their business
partners benefit from their business networks in terms of supply, with
the resources and assets that they need. In particular, the findings
suggest that in weakly installed institutional environments trust may
be used both as a complement and a substitution for inadequate for‐
mal institutions. The study proposes that entrepreneurs with growth
potential should make use of trust and networking in order to promote
and achieve their growth aspirations.
Our findings have important implications for policy‐makers and
owner‐managers. Institutions are multifaceted, and formal institu‐
tions are important in determining growth aspirations in the way that
they influence informal institutions, resources, and market conditions.
Policy efforts should consider informal practices when designing
institutional frameworks. In particular, our findings suggest that pol‐
icy‐makers concerned to promote employment growth through entre‐
preneurship first try to understand which institutional environment
is deficient. We found that other lower‐level institutional dimensions
such as recourses and market conditions, which are directly influenced
by formal institutions, are critical for the growth orientation of entre‐
preneurs. We have shown that entrepreneurs with growth aspirations
had to rely on informal networks and personalized trust to mitigate
the formal institutional deficiencies. In addition, the important finding
is that future policy design should consider the size of firms, as smaller
companies are more affected by the formal institutional burden, show‐
ing that larger firms use informal networks with public officials to their
own interests, hindering fair competition.
In terms of managerial implications, the study points out that
training is important to compensate for institutional shortages in the
educational system in Kosovo, and entrepreneurs may use this to
support growth. In addition, entrepreneurs wishing to expand should
make use of networking through business associations and other
organizations, to enjoy positive external benefits. Finally, personalized
trust was shown to be critical for developing contractual relationships
to facilitate growth.
Finally, this article identifies a few limitations and avenues of
future research. The key limitation of our empirical investigation
arises from the qualitative nature of the survey data, because some
of our variables of interest are self‐reported. We do not have panel
data for a dynamic approach to investigating the relationship between
LAJQI AND KRASNIQI
institutional quality and human and social capital on growth aspira‐
tions. This would enable us to investigate the changes in institutional
quality over the changes in growth aspirations. The study also points
to further research on an empirical investigation of the role of differ‐
ent types of institution, using qualitative interviews in order to have a
deeper understanding of the phenomenon—the institutions/entrepre‐
neurship nexus, and how entrepreneurs make strategic choices under
heterogeneous institutional settings.
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AU T HO R B I O G R AP HY
Saranda Lajqi is completing her PhD in Management at the University
of Tirana. She is an Executive Director of the Institute for Entrepre‐
neurship and Small Business in Kosovo. Her main research interests
include entrepreneurial intentions, human and social capital of SMEs,
and growth of SMEs in transition environments.
Besnik A. Krasniqi, a Fulbright Scholar, teaches small business and
entrepreneurship at University of Prishtina. His career spans teach‐
ing and research in entrepreneurship at Maastricht School of Manage‐
ment (Netherlands), Indiana University (United States), and University
of Michigan (United States). His work in the area of entrepreneurship,
SMEs, and transition economies has appeared in international jour‐
nals. His main expertise and research interests include determinants
of entrepreneurship and small business growth, financial obstacles
facing SMEs, SME policies, institutions and private sector develop‐
ment in transition economies, and innovation behavior of firms. He is
Funding Director of the Business Support Center Kosovo.
How to cite this article: Lajqi S, Krasniqi BA. Entrepreneurial
growth aspirations in challenging environment: The role of
institutional quality, human and social capital. Strategic Change.
2017;26:385–401. https://doi.org/10.1002/jsc.2139
 LAJQI AND KRASNIQI

APPENDIX
TA BLE A 1   Correlation matrix of explanatory variables

Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 Resource‐related component 1.000
2 Informal institution component 0.021 1.000
3 Formal institution component 0.002 0.017 1.000
4 Market conditions component −0.021 −0.008 −0.037 1.000
5 Entrepreneur’s gender −0.033 0.090 −0.067 0.007 1.000
6 Entrepreneur’s education 0.012 0.023 −0.120 −0.112 0.059 1.000
7 Entrepreneur’s training −0.017 0.025 0.019 −0.112 0.052 0.062 1.000
8 Entrepreneur’s age 0.041 −0.052 −0.034 0.122 0.031 −0.053 −0.054 1.000
9 Entrepreneur’s age squared 0.028 −0.073 −0.038 0.108 0.034 −0.033 −0.058 0.984 1.000
10 Entrepreneur’s experience 0.041 −0.056 −0.069 −0.046 −0.036 0.045 0.131 0.028 0.042 1.000
11 Member of business association −0.022 0.105 −0.090 −0.041 0.037 0.068 0.218 −0.053 −0.047 0.035 1.000
12 Trust in business partners −0.102 0.071 0.075 −0.076 0.013 −0.012 −0.010 0.001 0.000 −0.001 0.034 1.000
13 Size of firm (logarithm) −0.035 0.056 −0.019 −0.154 0.127 0.241 0.328 0.027 0.034 0.113 0.332 0.002 1.000
14 Age of firm (logarithm) −0.042 0.032 −0.082 −0.001 0.119 0.045 0.085 0.212 0.209 0.047 −0.016 −0.030 0.179 1.000
15 Manufacturing 0.069 0.008 −0.037 −0.017 0.039 0.053 0.108 0.080 0.086 −0.011 0.064 −0.041 0.246 0.061 1.000
16 Services −0.007 0.009 −0.015 −0.072 −0.033 0.030 0.008 0.022 0.026 0.009 −0.053 −0.014 0.004 −0.030 −0.185 1.000
401