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This paper examines the effects of pro-market institutions on two types of entrepreneurship: formal and informal. Formal entrepreneurship has long been studied in economic literature, whereas informal entrepreneurship has been less frequently discussed. The purpose of this paper, therefore, is not only to examine the impact of pro-market institutions, but also to carve out a better understanding, and introduce a method to measure, informal entrepreneurship. For the purpose of this paper, pro-market institutions are broken into their two main components: economic liberalization and governance levels. The arguments state that economic liberalization positively impacts both formal and informal entrepreneurship; whereas governance levels have a positive impact on formal entrepreneurship but a negative one on informal entrepreneurship. Furthermore, governance levels reduce informal entrepreneurship to a greater extent than they increase formal entrepreneurship, leading to a net reduction in entrepreneurial activity. The analyses of a panel covering 51 countries from 2002-2009 provide robust support for these arguments.
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