Culturally determined social norms can encourage — or limit — the formation of new firms, Wharton research shows.
A round the world, entrepreneurship drives growth and innovation. But why do some regions seem to naturally foster startups, risk-taking, and innovation, while others don’t? Wharton management professors Valentina Assenova and Raffi Amit set out to answer this question through their study of how culturally determined social norms affect attitudes toward entrepreneurship and the formation of firms.
“What we found in the study is that societies with looser social norms tend to foster higher rates of entrepreneurship by encouraging individual risk-taking and innovation,” Assenova said in an interview with Wharton Business Daily.
How Social Norms Influence Entrepreneurial Culture
The scholars examined how social norms that leave room for rule-breaking and individual expression — also known as cultural looseness — influence social attitudes towards entrepreneurship and new firm formation. They found that cultural looseness explained more than 56% of the variation in the number of new limited-liability companies registered per 1,000 people across 156 countries. Within the U.S., cultural looseness accounted for 71% of the differences across states in their rates of new entrepreneurs in the working-age population, and 58% of the variation in domestic patent applications for inventions per capita — all indicators of entrepreneurial dynamism.
These findings suggest that societies that support individual expression and risk-taking are often better positioned to spark innovation and new enterprises. “Societies with looser social norms, where rule-breaking and individual expression are more tolerated … tend to encourage risk-taking and creativity at the individual level, but also provide broader social support for entrepreneurs,” Assenova said.
In the U.S., the effects of cultural looseness stand out. States like California — home to Silicon Valley and known for its openness to individual expression — show much higher rates of entrepreneurship and innovation.
On the other hand, states with tighter cultural norms, like West Virginia and Pennsylvania, where stability and conformity are prioritized, tend to see lower levels of innovation and startup activity. According to the research, nearly 0.40% of California’s population are entrepreneurs, while states like West Virginia (0.19%) and Pennsylvania (0.17%) have some of the lowest rates.
“While economic development [and] formal institutions like government regulations [and] policies are crucial, our study highlights the often-overlooked role of the informal social norms in shaping these entrepreneurial ecosystems,” said Assenova.
How to Boost Innovation in Societies with More Rigid Norms
The research demonstrates that cultural looseness fosters a socially supportive ecosystem for entrepreneurs, enabling them to explore new ideas without excessive restrictions. Conversely, for societies with more rigid social norms, cultural tightness can often act as a barrier to innovation and new enterprise formation.
These cultures may need additional support systems, such as incubators and accelerators, to help entrepreneurs overcome societal resistance to new ventures. “We’ve seen a number of countries in other parts of the world with tighter social norms that have tried to implement these as policy tools to really encourage greater risk-taking and greater innovation,” Assenova said.
These findings offer a roadmap for fostering entrepreneurial ecosystems in even the most restrictive environments. Policymakers aiming to cultivate vibrant entrepreneurial environments like Silicon Valley in California, with its high concentration of startups, can draw on these insights.
While there isn’t a single “recipe” for fostering an entrepreneurial culture, certain elements are consistently correlated with higher rates of startup activity. Assenova highlighted the role of startup incubators and accelerators, which can create supportive microcultures within more restrictive environments. By creating spaces that celebrate experimentation and innovation, these programs help founders navigate and even overcome restrictive social norms.
That said, Assenova added that formal policies alone — like regulatory support or access to funding — are not sufficient to support startup activity. “We find that culture, in fact, does shape both individual behavior as well as these societal preferences for different types of rules,” she said. “And this is why … we see such a strong, prevalent, and robust correlation between cultural tightness or looseness [and] new firm formation rates.”
The study underlines how creating a culture that encourages entrepreneurship goes beyond enacting favorable policies — it requires cultivating an environment where people feel empowered to take risks, challenge norms, and innovate. Culture is, ultimately, a powerful but often underestimated driver of startup formation, shaping the mindset that keeps economies innovating.
