Entrepreneurial activity, industry orientation and economic growth

Jaap Bos(Maastricht University, Faculty of Economics and Business)

Jolanda Hessels (Erasmus School of Economics and Panteia/EIM)

Mark Sanders (Utrecht School of Economics)

Peter van der Zwan (Panteia/EIM and Erasmus School of Economics)

GEM-conference

20-21 June, Barcelona, Spain

Background

Economists interest in economic growth:

Before 1990s: mainly within context of lower-income countries (development economics)

Since 1990s: Increased interest in economic growth in higher-income countries (following Romer/Lucas)

Debate on role of entrepreneurship in economic growth (entrepreneurship, growth and development economics)

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 2 of 17

Views on entrepreneurship

Market theory: static equilibrium, no profit opportunities, no room for entrepreneurship

Market process theory: disequilibrium, profit opportunities: Kirzner (1973): entrepreneurs bring markets in equilibrium

by pursuing opportunities (alertness, judgment) Schumpeter (1934): entrepreneurs bring markets out of

equilibrium by doing something new (innovation).

Entrepreneurs act as agents of change by changing output and prices or by doing something new

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 3 of 17

Views on entrepreneurship

… a person who assumes risk associated with uncertainty… an innovator… a decision maker… an industrial leader… an allocator of resources among alternative uses… an organizer/coordinator of economic resources

… an arbitrageur… the owner of an enterprise… an employer of factors of production… a person who supplies financial capital… a manager or superintendent

Different functions entrepreneurs (Hébert & Link, 2009); The entrepreneur is:

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 4 of 17

5

Entrepreneurship and growth

Traditional neoclassical growth theory (Harrod Domar, Lewis); Endogenous growth theory (Romer)

Models of entrepreneurship and growth (Schmitz, 1989; Murphy et al., 1991; Iyigun and Owen, 1999)

Knowledge spillover theory of entrepreneurship (Audretsch and Keilbach, 2004)

Empirical studies: positive relationship entrepreneurship with economic growth in higher income countries

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 5 of 17

6

Entrepreneurship and growth

How entrepreneurship contributes to growth:

Schumpeterian Growth Models

Knowledge Spillover Theory of Entrepreneurship

Self-Employment and Self-Realization

Entrepreneurs create value directly and through diversity, knowledge spillovers and competition in markets

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 6 of 17

7

Types of entrepreneurship

Segmentation within entrepreneurship:

Employers versus own account workers

Opportunity versus necessity entrepreneurs

Innovators versus imitators

Etc…

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 7 of 17

8

Types of entrepreneurship and growth

This paper:

Explore if contribution of entrepreneurs differs by sector of activity.

Explore if contribution of entrepreneur differs across industries and countries by development stage.

Explore who sorts into what sector of activity.

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 8 of 17

9

Data

Global Entrepreneurship Monitor (GEM):

9 years (2001-2009) GEM from 1999 onwards; 29 countries in total in 2001; 55 in

2009

78 countries for which TEA rates are known Total early-stage entrepreneurial activity 20 factor-driven, 27 efficiency-driven, 31 innovation-driven

13 countries participated each year (e.g., Belgium, the Netherlands, UK, US); factor-driven economies mostly only once

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 9 of 17

TEA rates for UK, NL, US, BE

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2001 2002 2003 2004 2005 2006 2007 2008 2009survey year

TE

A r

ate

UK

NL

US

BE

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 10 of 17

Decomposition of TEA

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 All years

TE

A r

ate

survey year

(not known)

high tech TEA

low tech TEA

no tech TEA

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 11 of 17

Empirical Strategy

Empirical growth literature Cross-country differences pooled OLS rather than panel

regression with fixed or random effects. Annual GDP growth is regressed on TEA rates in the

previous year and usual controls. Year dummies are included to avoid selection bias. Correlations, not causality. By type (3) and development stage (3) What activity benefits what countries?

Ordered logit on types of entrepreneurship Usual suspects Who engages in what activity under what growth regime?

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 12 of 17

Results

For all countries and for all years (n=337) Overall TEA (log) positive significant influence at 1% GDP per capita (log) negative significant influence at 5% When distinguishing between industries:

High-tech TEA (log) significant at 1% The other industry TEAs are not significantly related to

economic growth

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 13 of 17

Results (2)

Distinguishing between stage of development Factor-driven economies (n=30):

No significant influences for the TEA rates; no and low-tech TEA have negative sign.

Efficiency-driven economies (n=109) Overall TEA (5%) and high-tech TEA (1%) positive

significant, others insignificant. Innovation-driven economies (n=198)

Overall TEA (5%) positive significant, others insignificant.

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 14 of 17

Results (3)

Who selects into what type of activity? All countries, individual observations (n=61400):

Male. Older. More Educated. Ambitious. Opportunity driven.

Further refinements By development regime Control for time

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 15 of 17

16

Conclusion

Preliminary conclusions:

On the importance of high tech entrepreneurship: Pronounced only in efficiency driven countries

On Entrepreneurship and Growth (in developed countries)

Positive correlation growth and TEA.

On Entrepreneurship and Development (in developing countries)

No impact of TEA in LDCs. Low Quality?

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 16 of 17

17

Discussion

Entrepreneurship (TEA) is too coarse a measure to capture relevant entrepreneurial activity:

Importance of institutions (e.g., Boettke and Coyne, 2003): certain institutions (e.g., rule of law) that encourage entrepreneurial aspects must be present

Importance of policies (e.g., Dias and McDermott, 2006): different policies (e.g., education and tax relief for entrepreneurs) work together to achieve growth

GEM-conference

Mark Sanders 20-21 June, Barcelona, Spain 17 of 17