  This study examines how foreign aid and institutions affect entrepreneurship
activity following natural disasters. We use insights from the
entrepreneurship, development, and institutions literature to develop a model
of entrepreneurship activity in the aftermath of natural disasters. First, we
hypothesize the effect of natural disasters on entrepreneurship activity
depends on the amount of foreign aid received. Second, we hypothesize that
natural disasters and foreign aid either encourages or discourages
entrepreneurship activity depending on two important institutional conditions:
the quality of government and economic freedom. The findings from our panel of
85 countries from 2006 to 2016 indicate that natural disasters are negatively
associated with entrepreneurship activity, but both foreign aid and economic
freedom attenuate this effect. In addition, we observe that foreign aid is
positively associated with entrepreneurship activity but only in countries with
high quality government. Hence, we conclude that the effect of natural
disasters on entrepreneurship depends crucially on the quality of government,
economic freedom, and foreign aid. Our findings provide new insights into how
natural disasters and foreign aid affect entrepreneurship and highlight the
important role of the institutional context.
