Entrepreneurship Economics and Development Economics : Five Areas of Convergence

With Jolanda Hessels, Erasmus University Rotterdam (EUR) — Erasmus School of Economics (ESE), Rotterdam, The Netherlands

There is a widespread belief that entrepreneurship is good for development and that small firms are vehicles for such entrepreneurship in both advanced economies and developed countries. Scholars and policy makers often consider SMEs important for job creation and new firm start-ups for innovation and growth. People talk about the need for an entrepreneurial revolution and policies to promote entrepreneurship and SMEs are very popular.

Picture: Pixabay

The scientific basis for such policies is, however, limited. Most entrepreneurs are not innovative and create no or few jobs. Entrepreneurship policies most often encourage those already intent to start their own business, mostly generate one-employee businesses with low-growth intentions, and waste scarce funding by channeling it to persons with low entrepreneurial ability. Such policies persist, partly because the positive impact of entrepreneurs is overestimated and their negative impact underestimated.

These two biases may stem from the fact that a unified scientific approach towards the role that entrepreneurship plays in development is lacking. The scholarly fields of entrepreneurship economics and development economics have been elaborated in isolation and only recently started to intersect. This intersection is still fragmented, ad hoc, and not based on a unifying theoretical approach.

Better policy making for economic development will benefit from further scholarly work that extends and deepens the intersection of the fields of entrepreneurship and development economics. In a recent article we contribute to this by providing a conceptual basis for the eventual elaboration of a unified theoretical approach and proposing a new (synthesis) definition of entrepreneurship.

The conceptual basis for a unified theoretical approach to the development economics of entrepreneurshiphas at least five pillars: these are areas where entrepreneurship economics and development economics are converging. These five pillars relate to i) externalities, ii) phase of development, iii) entrepreneurial ability, iv) institutions, and v) non-monetary incentives. In the remainder of this article we briefly elaborate these, arguing that the perspective they provide on the convergence of entrepreneurship and development economics supports the derivation of a new, synthesis, definition of entrepreneurship to guide future research and policy making.

Areas of convergence

Externalities: Externalities are unintended consequences or actions not captured in the market price of the product or service provided. While entrepreneurs can usually appropriate specific technological knowledge when developing new products or services, for example by means of patents, general technological knowledge which is developed as a by-product of the innovation process cannot be appropriated and may spill over to other economic actors. Such “knowledge spillovers” characterized the growth take-off in the West after the 1st Industrial Revolution. Before the take-off, and indeed, for most of history, known as the Malthusian era, per capita income levels remained around subsistence levels. The growth take-off was made possible by a shift in technologies towards capital and knowledge. Entrepreneurship drove this shift through the generation and utilization of externalities. For example, urbanization and population growth resulted in communities large enough to allow specialization. Specialisation in turn facilitated learning and innovation but required trade, which in turn boosted further innovations, creating a virtuous cycle of development. In both trade and innovation entrepreneurs, who created markets and matched people’s needs, were important, generating and benefiting from knowledge spillovers. In sum, whether entrepreneurs promote development will depend on the extent to which they create externalities themselves and absorb and use externalities generated by others.

Phase of development: There is agreement within both fields that entrepreneurs have different roles and impacts across different stages of development. For instance, after the 1st Industrial Revolution which started in Western Europe, other regions, (e.g. Asia) also started to experience rapid economic growth and did so in large part through the roles that entrepreneurs play in identifying and adopting existing technology. Catch up requires a lot of effort and capability building by the poorer country, such as undertaken by entrepreneurs who obtain licenses to use foreign technology or who just copy, reverse engineer or even steal new technologies without bearing all the sunk costs and risks of investments in new knowledge incurred by firms in advanced economies. Benefits of copying is that their entrepreneurs can focus on delivering incremental improvements to foreign designs, rather than the risky development of products and technologies new to the world. Once rapid growth is underway there is a gradual shift in the most successful countries to innovation at the frontiers of knowledge (e.g. as we see today in China). It implies that there are varieties of entrepreneurship and that entrepreneurship should not be equated only with high growth, high-tech innovative (Schumpeterian) entrepreneurship. In many countries, the imitating, copying entrepreneur is a vital source of progress.

Entrepreneurial ability: The concept of entrepreneurial ability is another aspect on which the development economics and entrepreneurship economics literatures are converging. A challenge that many countries face is to make the transition towards an innovation-driven economy and avoid the so-called middle-income trap. Three suggested interrelated sources important for such transition are: allocation of talent, accumulation of human capital and technological progress. These three factors reflect or constitute entrepreneurial ability. Entrepreneurial ability is moreover central to whether positive externalities occur or not, for instance highly talented entrepreneurs are required to bring an innovation to the market which will create knowledge that can underpin further innovations. An example is of the iPad which created opportunities for business through making possible the development of various apps.

Institutions: In entrepreneurship economics research there is a convergence with development economics thinking in terms of the recognition of the importance of institutions. Whether entrepreneurs with ability will have the incentive to commercialize ideas may depend on the way in which entrepreneurial ability is allocated for which institutions play a central role. The growth take-off in the West was accompanied by facilitating institutions, both formal (e.g., property rights) and informal (e.g. social networks) that encouraged and rewarded risk-taking by entrepreneurs. The recognition that governments are important for generating positive externalities by addressing market failures and laying institutional foundations for growth, is consistent with the early development economics literature which emphasized the need for a big push, and with the more recent development economics literature on the need for good institutions.

Non-monetary incentives: Just as in development economics there has been the recognition that development is about more than monetary wealth and that subjective well-being matters as well, so entrepreneurship scholars recognize now that entrepreneurship is not always motivated by dreams of wealth — that the subjective well-being from being independent and creating and running one’s own business has inherent and procedural utility. This implies that scholars and policy makers should not be too obsessed with equating entrepreneurship with only high-tech or high-growth activities and also give attention to aspects which influence the life-satisfaction of entrepreneurs such as high stress-levels, low levels of work-life balance, and threats of burn-out and depression.

A synthesis definition

So far, we have described the convergence between entrepreneurship economics and development economics. This suggests that the intersection between the two fields are evolving. To recognize this and to further this convergence we promote a synthesis definition of entrepreneurship, elaborated from Gries and Naudé, as

the resource, process and state of being through which individuals with ability and agency utilize positive opportunities in the market for generating individual and/or social value.

As resource, process and state of being, entrepreneurship is consistent with a variety of occupations, and encompasses many newer notions of entrepreneurship, such as social, corporate and public entrepreneurship. There are three reasons why we think such a definition would promote the intersection of the two fields.

First, it is useful to approach entrepreneurship as a resource given that a large part of the literature in both fields are concerned with entrepreneurial capital or ability as a production factor in economic growth and development. Resource constraints, and the accumulation and protection of resources should include entrepreneurial ability.

Second, entrepreneurship is also a process, on the one hand a process to recognize and exploit opportunities for individual value creation and on the other hand a process that can also create value for society. This process is however not yet fully captured in measures of development. For instance, entrepreneurial externalities that lead to changes in laws, customs and notions within which all businesses operate can be truly transformative for development but will not be captured by snapshot single level measures of development. Furthermore, entrepreneurship as a process resonates with approaches in management literature to link entrepreneurship and development such as through community-based enterprises in which the community acts entrepreneurially to create and operate a new enterprise. Thus, recognizing entrepreneurship as a process facilitates a more multi-disciplinary approach.

Third, our definition recognizes entrepreneurship as also a state of being.It is a human functioning that can be intrinsically valued and does not have to be instrumental. This brings entrepreneurship closer to the strands of development economics that appreciates broader human wellbeing, security and capabilities. If being an entrepreneur is valued for its own sake than it is restrictive to define entrepreneurs as only those who introduce novelty. This misses completely the internalities of entrepreneurship. Individuals can through entrepreneurship introduce novelty within their own lives.

In conclusion, we have argued in this article that entrepreneurship economics and development economics have been converging in at least five areas and proposed a new synthesis definition of entrepreneurship in order to further this. The benefits of a synthesis definition that admits entrepreneurship as a resource, process and state of being will also in our opinion facilitate policies that can better support the kind of entrepreneurship that generates the positive externalities on which development depends.

Further reading:

Jolanda Hessels and Wim Naudé (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.

I write about technology, entrepreneurship and human flourishing. http://wimnaude.com

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