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Entrepreneurship and Economic Development

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 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

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Who 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,

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His 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

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 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

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 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

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 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-

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 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

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 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

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 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,

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 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.

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 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

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Let 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

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Capital: 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)

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Consequences 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

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