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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

Before policy makers can increase the supply of entrepreneurship, it is necessary for them to understand what factors affect the supply of entrepreneurs. At its most basic level, the supply of entrepreneurship is determined by two factors: opportunity and willingness to become an entrepreneur. According to Praag (1995), opportunity is "the possibility to become self- employed if one wants to." The primary factors affecting opportunity include one's intrinsic entrepreneurial ability, starting capital, ease of entry into the market, and the general macroeconomic environment. Alternatively, willingness is the relative valuation of work in self-employment compared to one's other options for employment. In terms of opportunity cost, an individual's willingness is positive whenever self-employment is perceived as the best available career option. Thus, willingness is inherently affected by the anticipated market incentives that are available for would-be entrepreneurs, namely profit and economic benefits (Praag, 1995).

The supply of entrepreneurship is thus dependent on both individual level factors and general economic factors. Policymakers can improve the economic factors that face potential entrepreneurs by initiating market reforms that both increase the market incentives and the availability of capital that is available to entrepreneurs (Wilken, 1979).2 In terms of the non-economic factors that affect entrepreneurship, policymakers are more limited in what they can achieve. Many economists such as Marshall and Mill suggest that not just anyone can be an entrepreneur. Nonetheless Marshall implies that the skills of an entrepreneur can be taught (1994).3 Thus, policymakers can affect the level of entrepreneurship in their countries by crafting policies that reform the market in order to encourage entrepreneurship both economically and educationally.

Not surprisingly, regional variations have been found in the levels of entrepreneurship between countries. In their cross-national study of entrepreneurship, Davidsson and Wiklund (1995) suggest that regional variations in the levels of entrepreneurship are influenced by the cultural values of the people. They claim that "cultural and economic-structural determinants of the new firm formation rate were positively correlated," thus suggesting that cultural differences in both values and beliefs help explain regional variances in the supply of entrepreneurship. Despite this relationship, other studies on migrant and ethnic entrepreneurs have found that cultural beliefs and values rarely suppress aspiring entrepreneurs. Although cultural hostility towards entrepreneurship may stifle it in a particular region, migrant entrepreneurs frequently move to new areas in order to start their enterprises. Thus, cultural hostility may prevent entrepreneurship in a particular region, but some other region will, in part, benefit from the migration of the ethnic entrepreneurs (nDoen, 1998).

Basic economics teaches that supply is only a one-sided story of market phenomena. Thus, for countries to benefit from increasing their supplies of entrepreneurship, traditional economics suggests that those countries' would also need to promote the demand for entrepreneurship. However, little has been written about the demand side of entrepreneurship because it a calculation of demand is intrinsically built into entrepreneurship. As Leibenstein suggests, entrepreneurs are gap-fillers who perceive and correct for market deficiencies. Thus, so long as there are market deficiencies, there will naturally be demand for entrepreneurs to correct them. As a result, when governments promote the supply of entrepreneurship, they are essentially encouraging entrepreneurs to seek out what parts of the market demand them.4

 Policy Recommendations

2 One example of a possible market reform is the following: To increase the market incentives to entrepreneurs, remove price ceilings that are below the market equilibrium for certain goods.
3 See the Policy Recommendations.
4 This does not mean that entrepreneurs correctly perceive where they are demanded; the fact that they often do not is evidenced by the countless numbers of failed entrepreneurs. However, so long as there are market deficiencies, there is a demand for entrepreneurs. More often than not, it is up to the entrepreneur to properly interpret that market demand.

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