Entrepreneurship, Local Governance Quality, and Shadow Economy: Insights From an Emerging Economy

ABSTRACT This paper investigates the impact of entrepreneurship on local governance quality as well as the impact of local governance quality and entrepreneurship on the shadow economy for a panel dataset of 63 provinces in Vietnam over the period of 2006–2021. Results point out the important roles of entrepreneurship and local governance in reducing the shadow economy. Remarkably, entrepreneurship reduces the shadow economy not only directly but also indirectly through the improvement of local governance. More interestingly, the indirect effect is even stronger than the direct effect. We also acknowledge and test the reverse path—better governance fosters entrepreneurship—and document heterogeneity across the six governance dimensions, with corruption control and administrative procedures exerting the strongest effects on the shadow economy. These findings highlight the importance of fostering entrepreneurial activities and strengthening governance structures at the local level to create a more transparent and formal economic environment.