Entrepreneurial activities have been viewed as an effective driver of economic development and expansion in a large body of literature in the field of entrepreneurship (Minniti, 2008; Ali and Hilman, 2020; Aloulou, 2021; Cai et al., 2021; Jiatong et al., 2021). This is due to the potential of entrepreneurial activities to facilitate firms’ growth and innovation and to increase people’s wealth (Chew et al., 2021). Entrepreneurship is a process that involves seizing an opportunity, exerting effort, taking risks and being competitive (Miller, 1983) to establish a new firm or improve an existing one. Entrepreneurship leads to the generation of new job possibilities and the reduction of poverty in the long run (Alshebami et al., 2020). Consequently, there has been an ongoing global and local effort to assist small and medium-sized enterprises (SMEs) and promote entrepreneurship because of their critical role in economic development (Gilmore et al., 2013).

Furthermore, despite the tremendous effort put into entrepreneurship, it has mostly focused on the impact of external criteria alone on the possibility of establishing a business (age, gender, income, etc.). Other subjective aspects, such as individual intentions and perspectives concerning the cultural, political, demographic and environmental contexts of entrepreneurship, should be investigated as well, as they have a role in entrepreneurial activities (AbuBakar et al., 2017). In short, institutional factors and their impact on entrepreneurship in particular, as well as economic growth in general, must be examined (Urbano et al., 2018).

Institutions are thought to be regulators of people’s conduct and attitudes in general. According to North (1991), institutions are of two types—namely formal and informal institutions. Formal institutions are defined as those formal rules, laws, constitutions and official regulations that individuals should follow. On the other hand, informal institutions are defined as informal constraints, such as taboo, customs and codes of conduct. These institutions have also been classified by Scott (1995) into three dimensions: regulative, normative and cultural-cognitive. The regulative dimension represents formal institutions, and the normative and cultural-cognitive dimensions represent informal institutions. Although these two classifications of institutions have different categorizations, they complement each other (Peng et al., 2009). Institutions, or so-called “social environment elements,” influence people’s decision about whether to establish a business and become entrepreneurs (Bruton et al., 2010)—not only that, they also influence the characteristics of the firms intended to be established (Fuentelsaz et al., 2015). Institutions are referred to as game rules because they arrange various forms such as economic, political and social ties, resulting in better networks (North, 1990). They also play a crucial role in discouraging or encouraging individuals to pursue opportunities in the market (Welter and Smallbone, 2008). Both formal and formal institutions exert different effects on individuals and their businesses. For example, in the extant literature, it has been found that formal institutions influence the business establishment (Urbano et al., 2018). On the other hand, informal institutions also influence entrepreneurial activities (Kreiser et al., 2010; Wennberg et al., 2013).

In this study, we considered the classification of Scott (1995) for defining institutions according to their regulative, normative and cultural-cognitive dimensions. We investigated how these institutions are linked to the nascent stage of entrepreneurial activities in the context of Saudi Arabia. This is because Saudi Arabia is an oil-rich country, and recently there has been a fluctuation in global oil prices, leading to a budget deficit in the country. Consequently, the government established plans and tactics to diversify its economy and income to meet continuous economic challenges. As a result, Saudi Vision 2030 was created to implement major economic reforms. The vision recognized the issues faced by the Saudi economy, especially the SME sector, and particularly the complexity and length of administrative procedures involved in starting a business. Thus, the effect of these institutional factors must be explored. Saudi Vision 2030 is intended to enhance the contribution of the SME sector to the national GDP from 20 to 35% by 2030 (Alamoudi and Bagaaifar, 2017; Khan and Alsharif, 2019) and to reduce the country’s unemployment rate from 11.6 to 7%. It also aims to support roughly 950,000 Saudi SMEs operating in the market since 2017. These SMEs are categorized as micro enterprises, employing about 1 million Saudis. Therefore, to encourage and help Saudi citizens to create small businesses and become entrepreneurs, the Saudi government has established incubators, initiatives and technical and financial organizations (Alshebami et al., 2020). These include, for example, Monshaat, the Human Resource Development Fund, Wadi Makkah, the Centennial Fund, Moden, King Abdul-Aziz City for Science and Technology, and others. However, and despite the support provided by the government, many challenges continue to be faced by the SME sector. For example, according to a study by Khan and Alsharif (2019), a significant barrier that individuals who want to start a business face are difficulties such as electricity tariffs, government regulations and licenses.

Furthermore, other literature concerning Saudi Arabia and its environmental factors reported different results. For example, the presence of official institutions may serve as a strong motivator for supporting women entrepreneurs, while the presence of lack of saving culture, may negatively impact business establishments since they are unable to save and subsequently reinvest (Alshebami and Seraj, 2021b). Additionally, a study by AbuBakar et al. (2017) also examined the effect of institutions on the propensity to start small enterprises in Saudi Arabia and reported a different effect on entrepreneurship. However, they employed GEM data from 2009, which is considered outdated, taking into account the various reforms conducted in the country since 2009. In another article, by Alshebami and Seraj (2021a), It was disclosed that having a connection with other entrepreneurs, recognizing opportunities in the market, and having experience in business will all support individuals to become entrepreneurs. Aljarodi (2020), on the other hand, reported that the more female entrepreneurs are encouraged to launch new businesses due to favorable policies, the more such businesses are actually established. Moreover, a study by Albihany (2019) examined the role of Wasta (an informal institution) on Saudi early-stage entrepreneurship and reported significant results. Aloulou (2021) also found a substantial correlation between characteristics of the institutional context, students’ perceived desire to launch a new business, and the feasibility of entrepreneurial behavior. Other research has focused on various facets of entrepreneurship. Therefore, the above review demonstrates that the literature on the impact of institutional determinants on small business creation in Saudi Arabia is still limited (Farid et al., 2011; Aloulou, 2020). Accordingly, this study explored several elements from the regulative, normative and cultural-cognitive dimensions and their impact on small venture creation in Saudi Arabia. The following questions were addressed:

The remainder of this article is divided as follows. The next section reviews the relevant literature and formulates the hypotheses, after which, in the following section, the research approach is discussed. In the fourth section, the study’s results are reported, which is followed by a discussion of the results in the fifth section. Lastly, the final section covers the limitations of the research and provides recommendations for future research.

The research, based on institutional theory, divided institutions into three dimensions: regulative, normative and cultural-cognitive (Scott, 1995). The regulative dimension shows that individuals behave according to official laws and regulations, which are enacted by formal institutions. In the context of the present work, emphasis was placed on the provision of the necessary legislative support and policies to encourage the formation of new businesses. The normative dimension, on the other hand, includes what is desirable in a society; it pertains to social values and standards, which are enforced via informal institutions. In the current research, the normative dimension refers to how members of the community view entrepreneurs and how the media plays a role in the startup process. Finally, the cultural-cognitive dimension is defined as a shared understanding of the nature of social reality and the frames in which meaning is created (Scott, 2014). In this work, the cultural-cognitive dimension concerns the ways in which people’s thoughts and beliefs as well as their interactions with other entrepreneurs shape their desire to start a firm (Arenius and Minniti, 2005). Accordingly, we built on institutional theory to investigate the impact of selected institutions on establishing new businesses in Saudi Arabia.

Table 3 reveals a negative association between inadequate business legislation and policies and the intention to start small businesses in Saudi Arabia. Furthermore, it was discovered that sufficient media attention to successful entrepreneurs positively contributes to the formation of small enterprises. Additionally, the conferral of high status and respect to successful entrepreneurs was found to not have a positive relationship with the decision to start a small business. Moreover, no negative correlation was found between the fear of failure and the formation of small businesses. Lastly, age was found to have a positive relationship with the development of small businesses, although no such connection was revealed in terms of gender.

Table 4 outlines the correlations among the study constructs.

Table 5 provides the omnibus test results, demonstrating the model’s validity; if the omnibus values were less than 0.05, then the model would be accepted with a satisfactory fit. The findings revealed that the values were indeed all less than 0.05, indicating the satisfactory fit of the model.

The Hosmer and Lemeshow test was used to confirm the model’s strong fit. Table 6 demonstrates that the significance value of the Hosmer and Lemeshow test was more significant than 0.05, indicating the applicability and fit of the model.

The importance of institutions, regardless of their nature, in affecting the entrepreneurial behavior of individuals, either negatively or positively, has been noted repeatedly in the existing literature (North, 1990; Scott, 1995). Nevertheless, as most prior research has been undertaken in affluent countries, it was necessary to perform the same investigation in underdeveloped countries (Zeidan and Bahrami, 2011). Thus, the impact of the chosen institutions on the establishment of small businesses in Saudi Arabia was explored in present work, with a variety of outcomes.

The first hypothesis concerned the regulative dimension, i.e., Saudi Arabia’s business laws and policies and their relationship to the establishment of businesses in Saudi Arabia, and revealed a negative correlation (β = −0.288, P < 0.05). This is clear since the presence of insufficient business laws and policies discourages people in general, and entrepreneurs in particular, from beginning or expanding their businesses by 0.750 times. This result supports the first hypothesis, consistent with earlier research (Stephen et al., 2005; Van Stel et al., 2007; Urbano and Alvarez, 2013; Ram et al., 2017; Aljarodi, 2020).

In addition, hypotheses relating to the normative dimension, i.e., media attention to successful entrepreneurs and Saudi society’s conferral of high status to entrepreneurs, yielded intriguing results. The presence of adequate media coverage of entrepreneurs was found to have a significant effect (β = 0.187, P < 0.10). To put it another way, the more media attention is given to successful businesses, the more entrepreneurs are created, by 1.205 times. These findings are consistent with those of Urbano and Alvarez (2013). In contrast, the connection between high status and entrepreneurs in Saudi society was found to not be significant (β = 0.073, P > 0.05), which contradicts the conclusions of previous studies (Aidis et al., 2008; Urbano and Alvarez, 2013; Aljarodi, 2020). This could be due to the prevalence of traditional Saudi culture, values and perceptions, which tend to negatively regard the establishment of small enterprises and the pursuit of government jobs.

Likewise, the cultural and cognitive dimension of the fear of failure was investigated, with the findings revealing no significant negative link to starting a business (β = 0.086, P > 0.05). The results for this hypothesis also contradict those of prior investigations (Noguera et al., 2013; Urbano and Alvarez, 2013; AbuBakar et al., 2017). This could be attributable to the fact that Saudi young are willing to take greater risks to gain meaningful employment, especially in light of the government’s new, rigorous laws on employment in the public sector. This might be interpreted as Saudi entrepreneurs being younger and more enthusiastic, especially as 50% of the Saudi population are young, i.e., under the age of 29 (Nieva, 2015). Thus, they are ready to take greater risks. In terms of the control factors, the respondents’ age was shown to have a significant relationship with the decision to start a business (β = 0.016, P < 0.05), which is consistent with the findings of Urbano and Alvarez (2013). This could mean that the younger an entrepreneur is, the more interested he or she is in starting a business. Finally, gender had no significant link with the decision to start a small business (β = 0.127, P > 0.05), which contradicts previous findings (Le and Minniti, 2006; Urbano and Alvarez, 2013; Aljarodi, 2020).

The goal of this study was to examine the impact of selected institutions (in terms of business legislations and policies, media attention, entrepreneurs’ status, and fear of failure) on the decision to start a small business in Saudi Arabia. The study used institutional theory, dividing institutions into three types (regulative, normative and cultural-cognitive), and GEM data from 3,376 male and female respondents. The research adds to existing literature by providing empirical evidence on the influence of the selected institutions on the potential for launching new small businesses in Saudi Arabia. The research revealed intriguing findings that supported the hypothesis that there is a negative relationship between business legislations and policies and the ambition to establish a new small business. Furthermore, the results revealed a positive association between media attention and the establishment of businesses. Surprisingly, expectations concerning the fear of failure and high status among successful entrepreneurs were false. Furthermore, the control variables of age and gender were discovered to have varied effects on the respondents’ entrepreneurial intentions. The study recommends giving more attention to institutions in the country and minimizing their adverse effects by creating an encouraging, supportive and rewarding atmosphere for those in the SME sector to stimulate and reinforce creativity, innovation and performance. Finally, the narrow scope of the research and its focus on only a single country may be considered limitations. As a result, future research should more closely examine a greater diversity of institutions within other Gulf countries and conduct inter-institutional and inter-national comparisons. Such research could also assess the impact of institutions on potential entrepreneurs, such as students or those colloquially considered part of Generation Z.

The original contributions presented in this study are included in the article/supplementary material, further inquiries can be directed to the corresponding author.

Both authors listed have made a substantial, direct, and intellectual contribution to the work, and approved it for publication.

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

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