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Hunting for Heffalumps

David Burnett
Founder, Technopreneurial.com
September 2000

The Entrepreneurial
The History of
Entrepreneurship Theory
& Economic Development
The Supply of
Two Case
Calling for

Although economists have posed many theoretical interpretations of entrepreneurship, there has been very little empirical research conducted on this phenomenon, especially compared to the amount of research conducted on the other three factors of production. In particular, growth and development economics has "suffered rather seriously from the neglect of the entrepreneurial role" (Kirzner, 1985, 69). This neglect has occurred for two main reasons. First, entrepreneurship is difficult to measure empirically. Since few economists can even agree about how to define entrepreneurship, developing the tools to measure it has been especially problematic. Second, as explained in the theories above, entrepreneurship is characterized by uncertainty and typically occurs in the presence of imperfect information, unknown production functions, and market failure. As Leibenstein claims, entrepreneurship arises "to make up for a market deficiency" (1995). However, the majority of mainstream economic models assume perfect information and clearly defined production functions. Thus, entrepreneurs typically fall outside of these models (Leibenstein, 1995).

Like Leibenstein, Kilby suggests that entrepreneurship has been largely overlooked in economics. Kilby claims that entrepreneurship exists "only in the lower realms, where imperfect knowledge and market failure are granted an untidy presence;" as a result, many economists disregard this phenomenon, particularly in economic models dealing with developed countries (Kilby, 1983). However, many models that focus on the underdeveloped economies of LDCs relax their assumptions about perfect information. This more realistic view of economic markets allows entrepreneurship to stand out as one of the leading sources of market transformation and economic growth and development.

Leibenstein maintains that there are two simultaneous steps in the process of economic development for LDCs: economic growth and market transformation. In order for a country to increase its per capita income, it must have a "shift from less productive to more productive techniques per worker" (Leibenstein, 1995). This shift is the process of market transformation, and it can be manifested in the creation of new goods, new skills, and new markets. Entrepreneurship is the driving force behind both growth and transformation. Without entrepreneurs there would be no new innovation or creative imitation in the marketplace; hence, the transformation to new production methods and goods in the country would not take place. As entrepreneurs transform the market, not only do they provide new goods and services to the domestic market, they also provide a new source of employment to the economy (Praag, 1995). As a result, entrepreneurship is a necessary ingredient in the process of economic development; it both serves as the catalyst for market transformation and provides new opportunities for economic growth, employment, and increased per capita income.

Although entrepreneurship can directly affect the rate of an economy's transformation and development, few countries have actively pursued entrepreneurship encouragement programs. Additionally, many LDCs have focused more on encouraging entrepreneurship in the form of multi-national corporations (MNCs) rather than domestic and indigenous entrepreneurship. MNCs can certainly increase a country's income, provide market innovations, and serve as the catalyst for market transformations; thus, MNCs can be used as a source of entrepreneurship-led development. However, Saeed suggests that it is preferred for governments to promote domestic and indigenous entrepreneurship because domestic entrepreneurs are more aware of the market gaps that need to be filled domestically (Saeed, 1998). Thus, instead of producing goods that might not be consumed within the country, domestic market forces encourage domestic entrepreneurs to create innovations and creative imitations that fulfill a real market deficiency domestically. Hence, MNCs can be used for entrepreneurship-led development, but domestic entrepreneurship is thought to be more effective.

Theorists disagree, however, about whether or not informal sector self-employment is beneficial for entrepreneurship-led development. Saeed suggests that many of the small family enterprises and shop-houses that make up the informal sector are indeed entrepreneurial ventures. He asserts that the close-knit structure of the small-family enterprise is conducive for the incubation of ideas that are tested in the informal sector and later used to transform market products and processes. Additionally, Saeed claims that women and young people are traditionally excluded from the formal sector; thus, their entrepreneurial ideas are locked out of the formal market. However, since small-family enterprises in the informal sector typically involve women and youth participation, the informal sector can often serve as the outlet for their entrepreneurial ideas (Saeed, 1998).

Unlike Saeed, Carree et. al. suggest that self-employment in the informal sector can actually thwart entrepreneurship-led growth. They assert that an economy will suffer from lower growth rates both when it has too little and too much domestic business ownership. Since many enterprises in the informal sector sell goods or services that are already available in the formal sector market, informal sector enterprises are often redundant and fail to provide market transformations. According to Carree et. al., business ownership in the informal sector rarely transforms the structure of the economy or produces new market innovations or creative imitations. Thus the presence of business ownership in the informal sector of a country does not ensure entrepreneurship-led growth because simple business ownership is not necessarily market transforming. Hence, business ownership is not synonymous with entrepreneurship (Carree, 2000).

Since entrepreneurship can serve as a positive source of economic growth and development, governments should attempt to increase their supplies of market-transforming entrepreneurship. Although it is debatable as to whether the informal sector is truly a source of entrepreneurs, governments can insulate themselves from this debate by focusing on the encouragement of market-transforming entrepreneurship, and not simply business ownership in both the formal and informal sectors.1

 The Supply of Entrepreneurship

1 See the Policy Recommendations

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