AbstractThe contribution of entrepreneurship to economic growth varies across countries at different stages of economic development. The type of entrepreneurship also varies as countries develop: the ratio of necessity-based entrepreneurial firms (new entrepreneurial ventures born to escape unemployment) relative to opportunity-based entrepreneurial firms (new entrepreneurial ventures driven by business opportunities) changes as economies grow. Government has an interest in shaping the institutional environment in a way that supports dynamic entrepreneurial activity and contributes to economic growth. In this paper, we endogenize institutional variety into modern evolutionary models of diffusion; variety not only in organizational structures but also in investment financing of entrepreneurial firms. We discuss how our analysis updates understanding of modern evolutionary models of diffusion and we reflect on the practical implications for policy-makers to support entrepreneurial activities and stimulate economic growth.Keywords: necessity entrepreneurshipopportunity entrepreneurshipinstitutional varietyinvestment financingdiffusion models AcknowledgementsWe are very thankful to the following for valuable comments on previous versions of this paper: Stan Metcalfe, Richard Nelson, Franco Malerba, Bengt-Åke Lundvall, Morris Teubal, Arnold Wentzel, Rodrigo Arocena, Jonathan Aylen, Francis Chittenden and Ray Oakey. We also acknowledge the two anonymous reviewers and the editor of Innovation and Development, whose comments have enabled us to significantly improve this article.Notes1. This classification is similar to the ‘4F's’ (Bygrave and Quill Citation2006) which distinguish between informal investors such as founders, friends, family and ‘fool-hardy strangers’. See, for example, data on formal and informal investment for Hong Kong and Shenzhen in the Global Entrepreneurship Monitor Report (2004).2. An alternative perspective, stemming from the International Labor Organization Report on Kenya in 1972, suggests that, far from disappearing, the necessity-based entrepreneurial sector could instead provide a basis for employment creation and economic growth in its own right (Rado Citation1973; Bennet and Estrin 2007).3. We reach this result by using the methodology of simplification strategies by elimination valid under complex environments under bounded rationality (Tversky Citation1972; Sunstein and Thaler Citation2008).