Institutional Quality and New Business Formation: The Role of Financial Inclusion in Emerging Markets

Abstract

This study examines the relationship between financial inclusion and new business density, including the moderating role of institutional quality. Using a balanced panel of 38 countries from 2018 to 2024, the study employs country fixed-effects regression with year indicators and Driscoll–Kraay standard errors, supplemented by robustness checks using alternative governance indicators and lagged variables. The results show that institutional quality was positively and significantly associated with new business density, whereas financial inclusion was insignificant. The interaction between financial inclusion and institutional quality was also insignificant, providing no evidence of moderation. Among the control variables, GDP per capita and inflation show positive and significant associations with new business density. Robustness analyses show mixed results across governance measures: government effectiveness was significantly and negatively associated with new business density, while regulatory quality was statistically insignificant. Lagged estimates show no significant associations for financial inclusion or institutional quality. Overall, the findings suggest that institutional quality matters for formal business formation, but the principal estimates do not support an independent association of financial inclusion or its interaction with institutional quality. These results highlight the importance of examining institutional conditions alongside financial access when investigating formal entrepreneurship, while recognizing that the observational design supports conclusions about associations rather than causality.