Research@Ourso: When Connections Cripple Innovation

Ever heard the proverb "It’s not what you know, but who you know?”

While networking is a standard part of professional life, when personal connections become the primary path to success, it creates a corrosive system known as cronyism. This reliance on insider relationships does more than just frustrate those on the outside; new evidence suggests it fundamentally alters the economic landscape of entire nations.

Research published in the prestigious Journal of Management by Assistant Professor Sohrab Soleimanof in the LSU Stephenson Department of Entrepreneurship & Information Systems provides a comprehensive look at how cronyism impacts entrepreneurship globally. Titled "Cronyism, Rule of Law, and Entrepreneurship: A Country-Level Examination," the study, which also served as Soleimanof’s PhD dissertation, offers a rare data-driven view on how informal favoritism directs resources away from innovation and toward inefficiency.

 

Creation & Capture

For Soleimanof, the investigation was personal.

“The origins of this research trace back to my own life experience growing up in a developing country, Iran," he explained. “I was surrounded by exceptionally talented people ... yet many of them were unable to translate their capabilities into meaningful work [due to] limited access to opportunities and resources that were allocated based on affiliation with powerful groups.”

The study distinguished between two critical types of business activity: "productive entrepreneurship,” which is defined as innovation that creates wealth and social value, and "unproductive entrepreneurship,” which focuses on manipulating a system to transfer existing wealth without creating anything new. Soleimanof’s research suggests that cronyism does not necessarily reduce the number of entrepreneurs; it instead forces talented people to shift their focus from creating value to capturing it through favors.

 

Hunting for the Truth

Measuring an invisible social force like cronyism on a global scale is a complex challenge. To achieve this, Soleimanof and his coauthors constructed a dataset spanning 98 countries over an eight-year period, drawing on major global sources including the World Economic Forum, the Global Entrepreneurship Monitor, and the World Bank.

Because cronyism is often hidden, the study measured it through distinct indicators in both the public and private sectors. The researchers reviewed executive survey data regarding 1) how often government officials showed favoritism to well-connected firms when deciding policies, and 2) whether senior management positions in companies were held by professional managers or friends and relatives.

To measure a nation’s entrepreneurship, the team analyzed patent applications and modeled the ratio of “opportunity-motivated” ventures (innovative, high-growth) versus “necessity-motivated” ventures (survivalist), using an array of definitions vetted by an external panel of academic experts. Crucially, the model controlled for factors such as GDP, inflation rates, and taxes, allowing the researchers to isolate the specific economic drag caused by cronyism itself.

 

The Rule of Law Paradox

The findings were stark, but straightforward: societies with high levels of cronyism do not necessarily have fewer entrepreneurs, but they do have the wrong kind. Cronyism discourages true innovators while encouraging those who know how to work the system. However, the study also uncovered a surprising, contradictory effect involving the "rule of law."

Economists have long argued that stronger laws curb corruption. Soleimanof’s research turns this on its head: in environments where favoritism is entrenched, additional regulations reinforced the effects of cronyism. In this state of “crony capitalism,” well-connected elites use the legal system to their advantage, leveraging regulations to create barriers for competitors.

Soleimanof points to licensing as a prime example. “[Licensing rules are] often introduced to improve quality and oversight, but when informal favoritism is strong, complex processes can increase the value of connections. Well-connected individuals or firms may receive faster approvals ... while others face delays.” In these scenarios, stricter laws make connections more valuable than competence.

 

Key Takeaways

The study presents major lessons for policymakers and entrepreneurs alike. It suggests that simply adopting legal frameworks from developed nations doesn't guarantee economic development if the underlying culture still relies on favoritism. Strengthening laws without addressing cronyism can backfire, protecting existing elites while stifling innovation.

For aspiring entrepreneurs, the study serves as a warning against relying solely on connections. While leveraging extreme favoritism might offer short-term advantages, it ultimately undermines the broader economic environment and limits genuine innovation. Instead, the research suggests focusing on building enduring capabilities that allow a business to survive regardless of changes in political leadership.

“ When enough entrepreneurs make this choice [to resist cronyism], expectations about what drives success begin to shift, helping vicious cycles gradually give way to more productive and sustainable entrepreneurial systems. ”

Looking ahead, Soleimanof and his colleagues plan a deeper dive into how these dynamics play out in smaller networks. Ultimately, their goal is to understand how societies can reliably break the cycle and embrace a path towards a more productive and innovative business environment.