Entrepreneurial dynamism and entrepreneurial ecosystem in emerging economies: The role of infrastructure

Why doesn’t more infrastructure always lead to more and better entrepreneurship?

Across emerging economies, infrastructure is widely seen as the foundation of growth. Governments invest heavily in highways, power systems, banks, and educational institutions, expecting these investments to naturally stimulate entrepreneurship. The logic appears simple: more infrastructure lowers barriers, reduces costs, and enables new businesses to emerge and grow.

But what if this widely accepted assumption is incomplete?

Our recent research on India’s entrepreneurial ecosystem suggests that infrastructure alone does not automatically lead to more and higher-quality entrepreneurship. What matters far more is something often overlooked: the quality of infrastructure and how different components work together as a system.

Looking beyond numbers: What is entrepreneurial dynamism?

To unpack this relationship, we focus on entrepreneurial dynamism—not just how many firms are created, but how meaningful they are for economic transformation.

We distinguish between: 1) entrepreneurship quantity: the rate of new firm creation, and 2) entrepreneurship quality: the size and growth potential of these firms

This distinction is critical. While necessity-driven ventures play an important role in livelihoods and social inclusion, sustained economic transformation depends on the emergence of scalable, growth-oriented businesses.

The surprising reality: More infrastructure is not enough

Using data from Indian states over nearly two decades (2000–2019), we examined how transport, banking, education, and power infrastructure shape entrepreneurship. A key finding is that simply increasing infrastructure does not consistently lead to higher levels of either entrepreneurship quantity or quality.

Why does this happen? The answer lies not in availability, but in how infrastructure functions in practice.

In many regions, infrastructure may exist in a formal sense, yet it does not function effectively enough to support entrepreneurship. Roads may be congested or poorly maintained, electricity supply may remain unreliable, access to formal finance may be limited or expensive, and educational systems may not always equip individuals with skills that match industry needs. In such contexts, infrastructure becomes something entrepreneurs must work around rather than build upon. Hidden costs, such as delays, inefficiencies, and uncertainty, further constrain firms’ ability to emerge, operate efficiently, and grow.

Quality is the critical enabler

A central insight from our research is that infrastructure begins to meaningfully support entrepreneurship only when it is high-quality, i.e., reliable, efficient, and accessible.

When infrastructure systems function well, costs become more predictable, coordination becomes easier, and entrepreneurs can pursue opportunities at scale. In contrast, poor-quality infrastructure forces firms into costly adaptations, such as maintaining excess inventory, relying on informal finance, or investing in backup systems. These adjustments reduce both efficiency and ambition, limiting the potential for growth.

Infrastructure works as a system

Beyond quality, another key insight is that infrastructure does not operate in isolation; it functions as an interconnected and interdependent system. Policy discussions often treat transport, finance, education, and energy as separate levers. However, their impact is not additive but interdependent; each component amplifies or constrains the others.

For example:

When these elements align, they create a complementary ecosystem that reduces friction and enables firms to scale. But when one element is weak, it can undermine the entire system. A region may have good roads but limited credit, skilled talent but unreliable electricity, or strong banks but poor market access. In each case, the absence of complementarity constrains entrepreneurship.

Differential effect of infrastructure on entrepreneurship quantity and quality

Another important insight is that infrastructure has a stronger effect on the quality of entrepreneurship than on its quantity. In other words, better, well-coordinated infrastructure does not necessarily lead to more ventures, but it does lead to stronger and more scalable ventures. For instance, robust banking systems enable firms to start at larger scales, effective education enhances capabilities and innovation, and reliable energy improves productivity and operational consistency. Together, these factors help economies shift from subsistence-oriented entrepreneurship toward more productive, growth-oriented ventures that generate employment, spur innovation, and drive long-term economic development.

Implications for policy and practice

For policymakers, the message is:

For business leaders and entrepreneurs:

Rethinking Infrastructure for Entrepreneurship

As emerging economies continue to invest heavily in infrastructure, the key question is no longer how much we build, but how well it functions, both in terms of quality and how effectively its components work together. Entrepreneurship does not thrive simply because infrastructure exists. It thrives when infrastructure is reliable, coordinated, and aligned with businesses’ needs.

Key Takeaways