Entrepreneurship - the key to prosperity?

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Following the G20 summit this weekend, the leaders of the world's largest economies issued a statement explaining how they intend to remake the world's economic architecture. On the very first page of the statement you'll run across the following:

Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.

It might be tempting to treat this merely as empty rhetoric, but I think it's worthwhile to look at what the data actually shows about these relationships. The most recent data from the World Bank Group Entrepreneurship Survey - which covers 100 countries - indicates a very strong (and statistically significant) relationship between entre- preneurship and economic well-being. (Entrepreneurship is measured by the entry density rate of limited liability companies and economic well-being is measured by GDP per capita.)

Entry 

Of course, the normal caveats apply in terms of assigning causality to correlations. Yet it seems quite plausible that the causality runs from entrepreneurship to high GDP per capita, and the collection of more longitudinal data - the Entrepreneurship Survey is now in its third year - should enable researchers to make more robust conclusions about causality.

In other words, we shouldn't be so quick to dismiss the G20's statement as empty rhetoric.

For more on entrepreneurship around the world, check out some of these resources:

Cross-posted on the Doing Business blog.

Authors

Ryan Hahn

Operations Officer

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Elizabeth
November 20, 2008

It's wonderful to see the data helping to establish the credibility of the important role that entrepreneurship plays in creating prosperity around the world. Thank you for sharing these important resources.

Henry Maigurira
November 21, 2008

Broader policy making and responses to economic well being - An African Perspective.

This comment identifies good practices in funding of communities in ways that respond to the needs of poor people. I cite examples from Africa such as ZamSIF, LSP, and other CDD programmes.These mechanisms to fund communities have had a major impact and can be an effective weapon to address poverty and inequality. The following are mechanisms for funding communities:

* Community Investment Funds

* Community Foundations

* Community Trusts

* Community based Natural Resource Management (CBNRM)

* Community Banks and

* Social Transfers

Funding mechanisms illustrate the potential to empower communities to take forward their own development. In this regard similar schemes and mechanisms should be encouraged and seen as important weapons to address development within specific regions. The CIF, Foundations and Trusts require well-established systems and processes so that funds are distributed easily and fairly to communities.The process also promotes revenue sharing and entrenches community ownership in the way funds are spent.

The main concern about these mechanisms was that they needed start up capital, well established community networks and strong management; otherwise, their short-term impact is not as effective as other methods. The selection of appropriate funding mechanisms should be related to the needs of the local community as well as its environmental potential. If the primary challenge to development is simply an inability of local communities to access funds, some form of government or semi- government structure to provide loans and/or grants to marginalised communities may go a long way to stimulating development.

The comment concludes that the challenge ahead is to move beyond the distrust of communities, a paternalistic approach and one that creates dependency on the state. Towards a process of liberating people's energy, putting in the catalyst which releases local energy to change people's lives. There is room for policy adjustment in a range of sectors to facilitate investment in new businesses and growth in employment, particularly in network industries. New power generation, greater responsiveness to environmental needs, expanding our access to advanced telecommunications, and the redevelopment of water and transport

infrastructure, among others, imply fertile ground for private and public partnership and new economic activity.

The global financial crisis is already beginning to have an impact on the 'real economy' in poorer countries around the world. However, the debate in the west about the impact of the crisis has largely ignored its impact on the developing world, and the voices of people from these countries are rarely heard. Results show that developing countries cannot be treated as a homogeneous block - concerns vary significantly across countries, depending on their current economic situation, exposure to specific impacts and capacity to respond. Isolation from world financial markets will not protect the poorest countries, as the indirect impacts are likely to be severe. I propose increase in aid flows, enhancing social protection, and restructuring International Financial Institutions.

High inflation is a danger for Africa, as is a possible downturn in growth in Asian countries. The magnitude of the crisis will depend on how well the US and EU are able to respond with rescue measures.

One of the main dangers for developing countries is financial contagion and spillovers for stock markets in emerging markets. The Russian and Indian stock markets have experienced large falls at the same time as the USA. A better understanding of the nature of financial linkages is required to see if contagion can be minimized. Possible policy responses require a better understanding of different processes.

maurice
November 21, 2008

Using registered ltd companies as a measure of entrepreneurship is fundamentally flawed. In poorer countries you are more likely to have more unregistered entrepreneurial activity. That indicator shows the level of registration of companies, not necessarily entrepreneurial activity.

Ryan Hahn
November 21, 2008

Maurice, you are right that the measure employed is imperfect. Leora Klapper, the author of the 2008 Overview of the Entrepreneurship Survey, addresses these issues in the overview and elsewhere. In fact, one of the stated goals of the survey is "To better understand what drives entrepreneurs to transition from the informal to the formal sector." I recommend the overview that I linked to in the post for more details on this topic.

Christian von Drachenfels
November 25, 2008

I'd like to support Maurice's comment. WBGES is certainly a very interesting and important project, however, taking a look at the figure on slide 6 of Leora Klapper's presentation I am wondering if there is a problem with regard to the definition/understanding of entrepreneurship in developing countries. Development paths within the informal sector seem to end up either in self-employment or micro-businesses. There is no doubt that this is the reality for many entrepreneurs in developing countries, who are driven by necessity rather than by opportunity. But, it should not be neglected that often much of economic activity is conducted informally (not declaring full amount of profits, not registering workers etc.) by rather large companies or business networks, which are often belonging to owner's, who are well connected to government. Therefore they are able to operate informally despite they are actually running large companies. Stories of business networks basically running some places but not paying any taxes are well known…but I admit that these things are very difficult to address for research.

Leora Klapper
November 25, 2008

Thanks for these interesting comments. I agree that informal self-employment plays an important role in many developing countries. However, we take the position that the formal sector is more likely to encourage high-growth entrepreneurship that leads to aggregate growth, employment creation, and poverty alleviation. Therefore, the WBGES focuses on the formal sector and its advantages, such as police and judicial protection (and less vulnerability to corruption and the demand for bribes), access to formal credit institutions, the ability to use formal labor contracts, and greater access to foreign markets. In addition, the WBGES data can be an important benchmark for the analysis of the growth of the formal private sector, relative to the informal sector, and the identification of factors that encourage firms to begin operations in or transition to the formal sector.

In a new related paper, "The Unofficial Economy and Economic Development" Rafael La Porta and Andrei Shleifer use cross-country micro survey data on firm and owner characteristics. They find evidence that informal firms are run by entrepreneurs who have lower human capital than formal firm owners and that informal firms do not compete with formal ones since they are less productive and cater to different markets. The authors conclude that growth policy should focus on creating new large, formal firms that will eventually absorb the labor currently employed in informal firms.

Meshack Wachira
November 26, 2008

I agree that entrepreneurship in Africa is what is going to uplift the level/standard of living, but there is a major problem with startups due to lack of funding. Many people have brilliant ideas on projects that could employ quite a number of people - especially the youth - but money is a big hindrance. So if there is a way to guarantee people that they can put their dreams to reality, then we would not be talking of poverty in Africa, or the rest of the world.

Thank you.

Meshack Wachira

[email protected]

Ngetha
May 05, 2009

As wachira says, funding is the bottle neck here in Africa, there are great ideas here :) like ours :D

http://www.tulipe.co.ke