Entrepreneurship and Economic Development

This lecture covers role of entrepreneurship in Economic Development.

1. What Role for
Entrepreneurship in
Economic Development?

2. Types of Entrepreneurship
Arbitrage

Discovering the price gaps that exist and acting
on that margin to close the gap
Buy low – Sell high

Innovative

Discovering new trading opportunities (Smith)

Discovering lower cost or new technologies
(Schumpeter)

3. Graphical Representation
A
B C
GUNS
BUTTER

4. But What Determines the Type of
Entrepreneurship in a Society?
The quality of institutions in any given society
Rules of the game
The Legitimacy of the rules
Social capital issues
The enforcement of rules
Public Policies Adopted in any society
Security of Private Property Rights
Freedom of Contract
Monetary restraint
Fiscal responsibility
Free Trade

5. The New Comparative Economics
Framework: Analyzing Institutional Choice
Public
Predation
Private
Predation
Socialism
State
regulation
Common law courts
Self-government
Questions: (1) how do you move
between different enforcement
regimes, and (2) how do you shift
the entire institutional possibilities
frontier in to get less ‘bads’

6. Institutions and Entrepreneurship
Effectiveness of different regimes is a
function of relative price of enforcement
Relative prices guide behavioral adaptations
Entrepreneurial activity responds to relative
prices

Productive

Unproductive

Evasive

7. Evidence – papers with Chris Coyne
Productive
New start ups (not privatizing old firms, but new entrants)
Rates of innovation and technological absorption
Unproductive
Rent-seeking
Friedman evidence on regulatory burden
Corruption and Theft
Soviet Union
Romania
Evasive
Expenditure on avoiding detection
Romania
Dom Republic

8. Conclusion

Entrepreneurship is omnipresent – Entrepreneurs are present in
all settings. Cultural explanations for a lack of entrepreneurship
overlook what people have in common – namely alertness for
profit and to improve their general situations. Underdeveloped
nations do not lack entrepreneurship. Rather, entrepreneurial
activities exist, but are not directed toward productive ends
conducive to economic progress.

Government cannot create entrepreneurship – Given that
entrepreneurs are omnipresent, government policy cannot “create”
entrepreneurship. Instead, emphasis should be placed on
creating a general institutional framework, making payoffs to
productive entrepreneurship relatively high compared to
unproductive and evasive activities. Resources should not be
allocated to “encouraging” or “training” entrepreneurs, but to
developing the necessary institutional context to allow productive
activities to come to the forefront.

9. Conclusion (continued)

Transparency and accountability are critical for reform – In many cases, the
lack of transparency and accountability allows officials to abuse the law for
personal gains. One key mechanism for creating transparency is a free
media industry which serves as a check on those in positions to abuse the
political and legal institutions (see Coyne and Leeson 2004). Increased
transparency and accountability reduce the payoff to unproductive activities.

Reform needs to be decentralized – Reform efforts should be decentralized
to the local level so that those that truly understand these challenges are
involved in the reform process. For example, as discussed previously,
entrepreneurs in rural Romania face a special set of challenges. Currently,
the national government controls all reform efforts and neglects the unique
situation of rural entrepreneurs.
Identifying and maintaining indigenous institutions is key – Indigenous
institutions are embedded and accepted means of coordinating activities
and overcoming situations of conflict. As such, they provide a ready-made
framework for increasing coordination on a large scale. Institutions,
practices and markets that are informal or “black” should be incorporated
into the formal sector.