Entrepreneurship and Economic Development
Trang 2 Why study this relationship?
There is a very high and positive
correlation between the number and growth of entrepreneurs and the
economic growth and development
Growth of income is a quantitative
outcome but it decides the size of the cake The distribution of cake decides the social as well as economic
development which are qualitative in nature.
There are a large number of countries which are abundant in natural
resources but are still less developed due to lack of entrepreneurship on
one hand and absence of strong institutions defined in terms of
Trang 3Who is an entrepreneur?
Low risk low investment and low returns imply small businesses.
Very high risk and high returns imply gambling.
Low risk, low investment but high
returns imply opportunity and the one who grabs this is an entrepreneurs
Such opportunities are not for ever so timely plunge is important For
example Bill gates and IBM and Ambani and Reliance company in India
Traditionally the one who manages all factors of production namely land,
Trang 4His major strength and contribution lies in innovation in carrying out the above
activities
His major distinct characteristic is risk
taking His rewards thus could be negative also.
His important role is further expansion of economic activity and create economic and social value Cheaper products, greater
variety, better quality, improvement in
purchasing power of workers all occur due to this Also human development through
education and skill formation occurs as a result of his activities
He not only tries to satisfy market demand but even try to create new demand!!
Demand for a ride on the moon and mars, demand for naming a star on your
girlfriend’s name, demand for spending time with dolphin!
The magnitude of such value creation
Trang 5 Economic value creation through only profits? The answer is no
Wages, rent, interest and profits all get created due to an
entrepreneur
It is argued that in some activities like share selling and reselling of houses and offices no new value gets created But answer is he
takes risk and redistributes several items as per demand and supply So the ‘ word arbitrage which is
Trang 6 Schumpeter and role of
entrepreneurship(1934): He relates innovation with
entrepreneurship
Due to scarcity of resources, Most of the entrepreneurs have to be
innovative to find solutions which are cost effective
Predominant use of innovation and technology are the preconditions
for persons to become an
Trang 7 1 Launching of a new product or the variety of existing products.
2 Use of new methods or process of production
Opening up the new market not explored by others.
Acquiring inputs or raw materials from novel - unexplored sources.
Create new market structure-
Trang 8 What is the motivation for
entrepreneurship? The traditional way is to consider only profit as motivation.
But Schumpeter considers “ Desire to create his own kingdom through
successive creation of industry or
trade or to achieve some goal, desire to fu fill the dream, willingness to
give a fight or compete and winning for the sake of winning” could also be the strong motivating factors for the start and growth of ventures
Thus profit if at all could be one of
the motivations This implies that his definition also includes social
Trang 9 Like in the modern day we talk about disruption technology he talked about creative destruction implying giving up old technology and adopting the new one.
Could we consider
entrepreneurship as a dependent variable and economic
development as an independent variable also? In other words is there a two way causality
relationship between entrepreneurship and development?
The answer is yes The
government through special policies and infrastructure can
initiate the development process and create an enabling
Trang 10 The government should try to ensure property rights, efficient and effective judiciary system , stability and free
market approach implying minimum intervention Leiza fair policy means ‘ leave us alone’.
Those governments which address growth first and then income
inequality issue appear to be doing well The capitalist nations over the years have growing number of social entrepreneurship which takes care of masses.
We can analyse the policies in terms of both Macro and Micro economic
policies.
We can also consider the policies affecting factors of production,
Trang 11 Within macro we consider both fiscal and monetary policy affecting the
motivation for entrepreneurship Within fiscal policies we have
taxation, non- tax income through service fees, subsidies, pricing of publicly provided goods and
expenditures of government Country like India messed up on all these
counts until 1991 after which some reforms were initiated.
Trang 12 Only small scales get benefits and subsidies hence large scale
enterprises are completely
discouraged Small scale would imply high cost and prices of products
which harm consumers It also
means low exports and therefore low growth, Development and low
potential to import.
Micro level policies affect prices of inputs- power and water are most expensive for enterprises
Discouraging impact is obvious Pollution control is quantity based
and irrational policy based.
Government intervention through MSP, MIP create distortion and
Trang 13Let us look at the policies by factors of production
Labor: abundant factor made more expensive through laws relating to wages, PF benefits, variety of leave
benefits, LTC etc Bad hire and no fire policy.
Government hiring people for the sake of employment creation raises overall wages without raising productivity
Hence firms refuse to spend further on training and skills
Free entry but no exit: This policy for the entrepreneurship is not allowing people to start new ventures
Since the firms have the option of
employing less people with high wages rather than more people with low
wages they practice that
Trang 14Capital: inadequate and costly due to highly regulated banking and financial sector A major input for enterprise is denied in this way
Land: issues about agricultural land
Regulation for acquisition Land ceiling Rent control acts and poor tenancy
laws against owners Land and building availability for enterprises is a big
problem Old firms are not allowed to sell excess land without permission of the government Highly skewed land market.
Laws about depreciation and
deductions of business expenses are helpful but accompanied by high
corporate taxes and until the recent
past multiple taxes ( about 17 total of the centre and states)
Trang 15Consequences of the above policies
As one can see from the Indian case, if the policies of the government are not geared to facilitate the
entrepreneurship the number and growth of businesses remain
stagnated and economic
development and growth suffer
In India businesses have grown despite some restrictions as they
have learnt to handle the problems However if the bottlenecks were
absent we would have consistently