A Double-Edged Sword: Diversity Within Religion and Market Emergence

Although societies are becoming increasingly secularized, religion continues to play an important role worldwide. However, few studies have focused on how religion affects the entrepreneurial emergence novel markets. To address this gap, I examine the impact of Islam, as a decentralized belief system, on entrepreneurship in the context of developing Islamic investment fund markets across countries. I focus on religious diversity within Islam as an instance of intrainstitutional complexity and analyze a country-level panel dataset of Islamic investment funds in addition to complementary qualitative data. Intriguingly, I find that religious diversity within Islam plays a paradoxical role: it promotes the entrepreneurial supply of Islamic investment funds in a country, but it also reduces the investor demand for these funds. This complex effect is moderated by interinstitutional forces: the market logic positively moderates the effect on supply dynamics, whereas the state logic negatively moderates the effect on supply and positively that on demand. This study contributes to the research on religion and market emergence, institutional complexity, and Islamic finance.