Entrepreneurship and economic development 18 12 17

 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..  Who is an entrepr

Entrepreneurship and Economic Development

Archana Dholakia

18-12-2017

 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

property rights, judiciary system and free markets on the other

 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,

labor, capital and his skill, time and

risk taking abilities can be defined as

an entrepreneur.

 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

determines growth and development - both quantitative and qualitative progress

 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

used for his reward is a reward for his intelligence, intuition and risk taking

 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

entrepreneur His concept was

never as true as is today

 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-

either creation or destruction of a monopoly.

 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

entrepreneurship which work for low

or no profit purposes Thus to relate them only with profit would amount

to underestimating their contribution

 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

environment to create ‘crowding in’ effect

 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,

namely land, labour, capital and

entrepreneurship

 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

 Monetary policy decides the amount

Of capital and cost of capital for the entrepreneurs Interest rates, SLR,

CRR, priority sector landing leaves

little freedom to 26 public sector

banks Also the issue of corruption

and inefficiency means businesses

depend on own funding or costly

funding

 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

deprive genuine demander of raw

materials

 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

Unemployment thus remains high.

 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)

 Introduction of GST might help to

reduce this burden

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

grown at 7-8 rather than at so called’ Hindu rate of growth’

Thanks