Entrepreneurs and economic development

Article
  • 2011•03•23

    Wim Naudé

    Entrepreneurship-and-economic-development

    Photo: World Bank

    Global development is entering a phase where entrepreneurship will increasingly play a more important role. There are at least three reasons for this, each particular to certain types of countries. Firstly, in the West, the managed economy of the 1970s-2000s, characterized by reliance on big business and mass production, has given way to a so-called entrepreneurial economy. Here knowledge-driven goods and services are now more flexibly provided by smaller firms, and the emergence of a creative class requires a less interfering but more facilitating state.

    Secondly, in the emerging countries, most notably the BRICs – Brazil, Russia, India, China – impressive growth has been driven by a veritable entrepreneurial revolution. The need in these economies to sustain growth through sustainable access to resources, knowledge, markets, and low-carbon industrialization puts a premium on innovative entrepreneurship.

    Finally, in the least developed countries, where aid dependency is high, donors have been shifting the emphasis in development cooperation towards private sector development (see my recent piece in Development Today on this topic) . In many of these countries, including resource-poor North African countries, populations consist of many young people who see little prospects of gaining employment with decent wages. Promoting youth entrepreneurship here has become a vital policy objective of many development organizations and donors.

    Entrepreneurship and the state

    It is expected that entrepreneurship will, in light of the above, contribute to growth and employment creation in advanced, emerging and least developed economies alike. This is a reasonable expectation – one that is supported by recent findings of historians, economists and management scientists. The role of entrepreneurship in economic development has been the focus of a two-year United Nations University World Institute for Development Economics Research (UNU-WIDER) project, which resulted in the recent book ‘Entrepreneurship and Economic Development’. This book (available from Amazon here) has been described as “the single most informative work on the topic of entrepreneurship and economic development in print…”.

    In this book, the importance of innovative, high-growth entrepreneurship is emphasized and the important role of the state to support entrepreneurs (differently through different phases of development) is discussed. The book also argues for the need for entrepreneurial solutions to intricate global challenges – such as climate change, migration, and terrorism.

    “With too many entrepreneurs, levels of aspirations in a country may rise - it is well-known that with increasing material wealth (or opportunities) people’s aspirations increase.”

    There are two major caveats however. The first is that for entrepreneurs to play an appropriate role, the role of the state remains important, if not more so than before. Strong states, as regulators and gatekeepers, play a particularly vital role. In the absence of appropriate ‘rules of the game’, entrepreneurship may result in undesirable social outcomes, including corruption, crime, speculation and financial crises, and may worsen the vulnerabilities of people during natural disasters, as I have argued elsewhere.

    The second is that while entrepreneurship may raise economic growth and material welfare, it may not always result in improvements in non-material welfare (or happiness). Promotion of happiness is increasingly seen as an essential goal. The recent Commission on the Measurement of Economic Performance and Social Progress recommended that “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being’”.

    Entrepreneurship and national happiness

    Do entrepreneurs contribute to national happiness? The answer is both yes and no. In a paper to be published soon, Ernesto Amoros, Oscar Cristi and I investigated the empirical relationship between happiness and entrepreneurship across nations. We found that there exists an inverted U-shape relationship between national happiness and entrepreneurship: up to a certain level an increase in entrepreneurship will be associated with an increase in national level happiness, after which it would be associated with a declining level of happiness.

    Why would an increase in entrepreneurship at first lead to an increase in national happiness? Entrepreneurs create jobs – and we know that unemployment is a major and significant cause of unhappiness. We also know that goods that entrepreneurs provide, such as health and experiential activities, raise happiness levels. Moreover there is now a robust body of evidence that entrepreneurs experience higher levels of job satisfaction than non-entrepreneurs and entrepreneurs’ happiness can rub off on the happiness of non-entrepreneurs.

    But more entrepreneurs may also be associated with lower national happiness. This could be when most entrepreneurs are not so by choice, but by necessity. When people turn to entrepreneurship by necessity, they essentially lose their ‘agency’ or free will as far as their employment is concerned, and this is experienced as a loss of happiness. Evidence from the EU seems to support this: there is a robust negative relationship between the business ownership rate and entrepreneurs’ average job satisfaction across EU nations. This graph below illustrates how job satisfaction scores for entrepreneurs and business ownership rates vary across the EU. Clearly, job satisfaction amongst entrepreneurs is much higher when fewer of them need to be self-employed.
    BUSINESS OWNERSHIP RATE, 2002

    There is a second way in which entrepreneurship may lower national happiness after some stage or level. This is when there is too many rather than too few entrepreneurs in a country. With too many entrepreneurs, levels of aspirations in a country may rise – it is well-known that with increasing material wealth (or opportunities) people’s aspirations increase. When their performances fall short of these aspirations, their happiness will decrease. Hence from certain levels of entrepreneurship happiness may decline when entrepreneurs and their societies’ material aspirations start to outstrip their achievements. This will lead to a feeling of dissatisfaction and frustration – they become ‘frustrated achievers’. More competitive-minded entrepreneurs may experience more negative states of mind than others and report lower levels of happiness. In highly competitive and materialistic societies with high aspirations we see ”family solidarity and community integration” breaking down.

    Finally, in a very entrepreneurial society one may observe more income and wealth inequalities and more variability in entrepreneurial performance. People in more unequal societies tend to report lower levels of happiness than others.

    Thus, entrepreneurship may spur economic development if appropriately supported by the state. And entrepreneurship may also make nations happier – but only up to a point. As nations become happier, their need for entrepreneurship seems to decline. Perhaps relational goods – family and friends – become more important, and too much of an entrepreneurial culture detracts from this. It is very much as Shakespeare put it: ‘If music be the food of love, play on; Give me excess of it, that, surfeiting, The appetite may sicken, and so die’.

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    Entrepreneurship and Economic Development is edited by Wim Naudé from the United Nations University World Institute for Development Economics Research (UNU-WIDER) in Helsinki, Finland. Published by Palgrave Macmillan, the book is available for purchase online.

  • Vincent

    I would like to see Greece, Italy and Spain after 13 years of this graph.