A Long Story Made Short
Here is my summary of the field of entrepreneurship and development.
The Great Take-Off
Humanity has achieved tremendous economic development success over the past three hundred years, as is for instance reflected in this graph of GDP per capita, which depicts a “Great Take-Off”:
The development process is continuing to lift millions of people out of poverty each year. For instance, in the 15 minutes it will take to read this article, another 1,000 people will escape from absolute poverty (one can track the drop in global poverty using the World Poverty Clock https://worldpoverty.io/headline). Many other measures of development are showing similar improvements, as Steven Pinker (2018) documents.
Innovation and Trade
Ever since Adam Smith first explored the wealth of nations, scholars have identified the core drivers of development to be innovation and trade. The story goes approximately like this: trade allows people to specialise in production, and diversify consumption, thus attaining higher welfare levels (e.g., Matt Ridley, 2011). Specialisation in production allows learning-by-doing to be reaped, and through `tinkering’, generate innovations — as pointed out by economist Allyn Young back in 1928. Trade diffuses the innovations, and innovations stimulate further trade. Hence a virtuous cycle ensues.
In this virtuous cycle, the fuel is learning and knowledge — more specifically, ideas. As Paul Romer (1986) stressed, ideas are characterised by non-rivalry in consumption — unlike physical products. Ideas, therefore, underpin increasing returns in production. Because such increasing returns are the source of market power and dominance, it incentivises some economic agents to allocate their talents towards discovering and commercialising new ideas — i.e., to become entrepreneurs. Today, these entrepreneurs are described, referring to Joseph Schumpeter (1943), as so-called Schumpeterian entrepreneurs who bring helpful new products and services to the consumer through their innovations aiming at market dominance.
A substantial literature has grappled with explaining how these innovations come about and the government’s role in supporting these, based on the argument that the social benefit of innovation exceeds the private benefit (more below). Once inventions have become innovations, other entrepreneurs apply these innovations, copying and spreading them through trade from market to market and country to country — the second engine of development. Today, these entrepreneurs are described or labelled as so-called Kirznerian entrepreneurs, after Israel Kirzner (1979), who discussed the ability of specific economic agents to spot profitable arbitrage opportunities.
Both Schumpeterian and Kirznerian entrepreneurs will establish and grow firms to lower transaction and bargaining costs, as Ronald Coase (1937) explained in his theory of why firms exist. As empirical studies have found, larger firms tend to be more innovative, more productive, and more likely to trade. Hence it is no surprise that larger firms, and international firms, are closely associated with development.
Schumpeterian and Kirznerian entrepreneurs
Entrepreneurship as just described, consisting of Schumpeterian and Kirznerian activities, both motivated by profit and leading to the establishment and growth of firms, have been at the centre of a burgeoning literature detailing the relationship between development and a free, open, market-based society, supported by institutions that protect property rights and the rule of law. Without these conditions, neither form of entrepreneurship will exist. Centrally planned communities, where the state tries to substitute for Schumpeterian and Kirznerian entrepreneurs (e.g., the USSR), tend to fail because of incentive, transactional and informational problems.
The distinction between Schumpeterian and Kirznerian entrepreneurship has ignited interest in the personality and other traits of entrepreneurs. Schumpeterian entrepreneurship requires creativity and risk-taking, and Kirznerian entrepreneurship the ability to spot opportunities. In both kinds, motivation and agency have been of rising concern in light of evidence that entrepreneurs often earn less than they would have in wage employment and that their businesses most often fail. The scholarly quest has aimed to identify the “entrepreneurial personality”, including searching for a genetic basis for entrepreneurship, dissecting the process of entrepreneurship from latent to serial and portfolio entrepreneurship, and elaborating the cultural and social context that will allow entrepreneurial personalities to flourish. The underlying assumption is that if we can better understand these aspects, then we may then, through government policies, increase the entrepreneurial capital in the economy — and thus stimulate economic development.
Government Policy Failures
So far, while the long-run narrative of how entrepreneurship drive economic development is clear, it has remained easier to identify — primarily ex-post — how government policies can frustrate entrepreneurship rather than how it can effectively and proactively facilitate entrepreneurship. Appropriate institutions are necessary for Schumpeterian and Kirznerian entrepreneurship but not sufficient for these to make an impact. Zoltan Ács and co-authors (2016:37) lamented this gap in our understanding, exclaiming that entrepreneurship policies “waste taxpayers’ money, encourage those already intent on becoming entrepreneurs, and mostly generate one-employee businesses with low-growth intentions.” Moreover, the evidence that government funding of innovation matters is quite tenuous. Nicholas Bloom and colleagues (2020) have documented that research productivity in the US has declined by an average of 5 per cent a year since the 1930s. For example, they calculate that the number of researchers required today to maintain Moore’s Law (the doubling of computer chip density every two years) is 18 times more than in the 1970s.
Moreover, the government may stifle innovation if it takes too much of a centralised approach. Matt Ridley (2020) argues that “innovation prefers fragmented governance” because it is a bottom-up, trial-and-error process. In contrast to Ridley and the Romer-view of the commercialisation of ideas driven by individually incentivised entrepreneurs, Mariana Mazzucato (2011) instead has argued for the government centralisation of innovation through “mission-oriented industrial policies” or “moonshots” to steer the invention and diffusion of new technologies. Whether and how countries should invest substantial government resources in pursuing Schumpeterian innovation, given the tenuous state of empirical evidence on the matter, and controversies over the centralisation and decentralisation of innovation and whether government R&D spending will crowd-out private R&D expenditure, remain questions to which no certain answers can yet be given.
Declining Business Dynamism
While the poor record of entrepreneurship and innovation policies was gradually being acknowledged, another problem appeared. In contrast to the expectations held by many entrepreneurship scholars in the 1990s, for instance, David Audretsch and Roy Thurik (2000) that the world was on the cusp of an “entrepreneurial economy” characterised by more innovation and driven by small firms, the 2000s have experienced a decline in “business dynamism” — as reflected in start-up rates and productivity of innovation — see Ryan Decker and co-authors (2017).
Conclusion: Two Big Questions
Thus, two big questions driving contemporary research in entrepreneurship and development economics are: Why is government policy often failing entrepreneurship and innovation? Why is business dynamism declining?
Possible explanations may be that the theories on which policies are based are incomplete — for instance, that the roles of digital technology and changing demography are not well enough understood; that entrepreneurship may be a self-limiting process; that data is inadequate to evaluate the effectiveness of policy interventions appropriately; that decision-makers may be following other considerations rather than theoretically grounded policy advice. It may also be the case that entrepreneurship scholars should think more like plumbers rather than scientists or engineers, as Esther Duflo (2017) has argued economists should do.
All these explanations may hold to some extent, and more others are yet to be found. For a world still suffering from the COVID-19 pandemic, coming soon after the Global Financial Crisis, and facing “grand” challenges such as climate change and demographic shocks, finding answers to the two big questions are more relevant than ever.
References
Ács, Z., Astebro, T., Audretsch, D. and Robinson, D.T. (2016). Public Policy to Promote Entrepreneurship: A Call to Arms, Small Business Economics Journal, 47: 35–51.
Audretsch, D. and Thurik, A. (2000). Capitalism and Democracy in the 21st Century: From the Managed to the Entrepreneurial Economy. Journal of Evolutionary Economics, 10(1- 2): 17–34.
Bloom, N., Jones, C.I., Van Reenen, J. and Webb, M. (2020). Are Ideas Getting Harder to Find? American Economic Review, 110 (4): 1104–44.
Coase, R. (1937). The Nature of the Firm, Economica, 4 (16): 386–405.
Decker, R., Haltiwanger, J., Jarmin, R., and Miranda, J. (2017). Declining Dynamism, Allocative Efficiency, and the Productivity Slowdown, American Economic Review, Papers and Proceedings, 107(5): 322–326.
Duflo, E. (2017). The Economist as Plumber, American Economic Review, 107 (5): 1–26.
Hessels, J. and Naudé, W. (2019). The Intersection of the Fields of Entrepreneurship and Development Economics: A Review Towards a New View, Journal of Economic Surveys, 33 (2): 389–403.
Kirzner, I. M. (1979). Perception, Opportunity and Profit. Chicago: University of Chicago Press.
Mazzucato, M. (2011). The Entrepreneurial State. London: Penguin.
Pinker, S. (2018). Enlightenment Now: The Case for Reason, Science, Humanism and Progress. New York: Viking.
Ridley, M. (2011). The Rational Optimist. London: 4th Estate.
Ridley, M. (2020). How Innovation Works. London: 4th Estate.
Romer, P. M. (1986). Increasing Returns and Long-Run Growth, Journal of Political Economy, 94 (5): 1002–37.
Schumpeter, J.A. (1943). Capitalism, Socialism, and Democracy, 6th edition. George Allen & Unwin, London/New York.
Young, A. A. (1928). Increasing Returns and Economic Progress, The Economic Journal, 38 (12): 527–542.
