20. The Impact of Entrepreneurship on Economic Growth

See Audretsch et al. (2004) and Santarelli et al. (2006) for a survey of studies dealing with (violations of) Gibrat’s Law.

Other recent overviews of the literature include Audretsch et al. (2006) and Braunerhjelm (2008), focusing on the key role of entrepreneurs (who benefit from knowledge spillovers) in achieving growth. Parker (2009) devotes part of Chapter 11 to a literature survey of entrepreneurship and aggregate growth. In their literature survey of the relative contributions of entrepreneurs, Praag and Versloot (2007) distinguish four measures: employment, innovation, productivity, and individual utility levels. Carree and Thurik (2006) present a collection of seminal articles.

See Carree and Klomp (1996) and Davis et al. (1996) for further discussion.

This has led to the knowledge spillover theory approaches (Audretsch, 2007; Audretsch & Keilbach, 2008; Audretsch et al., 2006) which are dealt with elsewhere in this Handbook of Entrepreneurship Research. Entrepreneurship can contribute to growth by serving as a mechanism to help knowledge spilling over or to permeate the filter which impedes this spillover. The knowledge spillover theory attributes importance not just to the role of persons but also to that of regional agglomerations of knowledge activities (entrepreneurship capital) which then become the breeding ground of growth.

A full account of the relation between entrepreneurship and economic development and whether and why it would be U-shaped is given in Wennekers et al. (2010).

Some theoretical models propose to explain the decline of self-employment and of small business presence in general. Lucas (1978) shows how rising real wages may raise the opportunity cost of self-employment relative to the return. Given an underlying “managerial” talent distribution this induces marginal entrepreneurs (in this context, Lucas refers to managers) to become employees. This pushes up the average firm size. Iyigun and Owen (1998) develop a model implying that economic development is associated with a decline in the number of entrepreneurs relative to the total number of employees. They argue that fewer individuals are willing to run the risk associated with becoming an entrepreneur as “safe” professional earnings rise with economic development. See also Schaffner (1993).

Other sources showing that the increase in the importance of large businesses has come to a halt in Western countries are Carlsson (1989), Loveman and Sengenberger (1991), Acs and Audretsch (1993), Acs (1996) and Thurik (1999).

The US (non-agricultural) self-employment rate was stable at around 10% for many years. However, in the 2003–2007 period the rate went up in countries like France, Germany, the Netherlands and Sweden. See, e.g., the Compendia data in Carree et al. (2007).

Brock and Evans (1986) were the first to provide a detailed overview.

See Berkowitz and Holland (2001) for the effects of privatization on small enterprise formation in Russia.

See also Gartner (1989, 64) who asserts that “The entrepreneur is not a fixed state of existence, rather entrepreneurship is a role that individuals undertake to create organizations” and Schumpeter (1934, 78) who states that “Because being an entrepreneur is not a profession and as a rule not a lasting condition, entrepreneurs do not form a social class in the technical sense as, for example, landowners or capitalists or workmen do.”

The terms “self-employed” and “business owners” will be used interchangeably throughout this chapter.

Metzger (2006) notes that not every experience can be regarded as an indicator of enhanced human capital. The experience of failure can also be an indicator of entrepreneurial incompetence.

The Knightian entrepreneur has also been interpreted as the “neo-classical entrepreneur” (see, for instance, Shane, 2000). In the neo-classical (equilibrium) framework, entrepreneurship is explained by fundamental attributes of people (like the “taste” for uncertainty).

Yu (1998) provides an interesting analysis of the importance of Kirznerian (adaptive) entrepreneurship in explaining Hong Kong’s economic development. He finds that small Hong Kong firms are usually the first groups to get out of a declining sector and move onto new markets. He claims that the diversification of Hong Kong’s economy into the service sector “can be explained consistently by the dynamic operations of adaptive entrepreneurship” (pp. 902–903).

Ilmakunnas and Kanniainen (2001) find empirical evidence from OECD countries to support the Knightian view that economic risks shape equilibrium entrepreneurship in an occupational choice model. They find evidence that both “national economic risk” (changes in GDP) and social insurance for labor risks (unemployment compensation), assumed not to be available to the self-employed, negatively impact the self-employment rate.

The uncertainty in the return to entrepreneurial ventures is that with probability q an individual achieves an income of λ _t , the endogenously determined technology level, times his entrepreneurial capital and with probability 1-q he receives no income. There is no uncertainty assumed in the return to education, being λ _t times their professional capital (see Iyigun & Owen, 1999, 220).

The model is only concerned with occupational choice, not with the (dis)incentives present in economic “systems” to pursue product or process innovation.

See also Braunerhjelm (2008), who discusses how knowledge creation and diffusion can be integrated into existing growth models.

It may be argued that Schumpeterian entrepreneurship cannot be modeled using standard assumptions of the neo-classical model such as profit maximization. It is evident that the Aghion and Howitt models fail to do complete justice to Schumpeter’s discussions of the motivations that underlie entrepreneurial behavior.

The idea that entrepreneurial energy as such may not suffice for economic progress is also expressed by Baumol (1990), who stresses the importance of entrepreneurship being led into productive channels.

Other examples of the role of entrepreneurship in economic history are given in Wennekers et al. (2002, 2010).

Jaffe et al. (2007), in an editorial to a special issue of Journal of Economic Behavior and Organization on academic entrepreneurship, conclude that the “dual engines of growth” being the process of scientific discovery and industrial innovation, appear to reinforce each other in the contribution of research to the process of economic growth.

Engelbrecht (1997) also shows that inefficient corporate bureaucracies have had a negative impact on US export competitiveness. Denis and Shome (2005), among others, show that downsizing has had a positive effect on firm financial performance.

Carree et al. (2002, 2007) hypothesize a “U-shaped” equilibrium relationship between the rate of business ownership and per capita income but, in fact, find it to be impossible to statistically discriminate between U-shaped “equilibrium” functions and L-shaped functions.

In Italy, research and development expenditures are by far the lowest among the largest OECD countries as a percentage of gross national product. This is in line with the idea that when there are too many business owners, the scale advantages in research and development are not utilized. See Cohen and Klepper (1996).

The excess growth of small firms in that study is defined as the percentage change in the value-of-shipments accounted for by small firms minus that accounted for by large firms.

See Audretsch et al. (2002) for such a framework concerning the determinants of entrepreneurship. See also Wennekers et al. (2002) for more detailed frameworks.

Sternberg (1996) documents how the success of a number of different high-technology clusters spanning a number of developed countries is the direct result of enabling policies, such as the provision of venture capital or research support.

An example is the French government’s “auto-entrepreneur” stimulus plan that started in January 2009 and has led to tens of thousands of new business startups. See also Audretsch et al. (2007) and European Commission (2000).