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Small Business Economics

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01.06.2013

Modeling productive entrepreneurship in developing countries

verfasst von: Zuzana Brixiova

Erschienen in: Small Business Economics | Ausgabe 1/2013

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Abstract

This paper develops a model of entrepreneurial start ups in an economy with costly firm creation, costly entry to the skilled labor market, and a mismatch between skilled workers and available jobs, as prevailing in many developing countries. It examines several mitigating policies, such as improving the business environment, reducing tax rates and cost of starting business, and subsidizing entrepreneurial search and skilled employment. To be effective, policies need to target the most binding constraints to productive entrepreneurship. When the constraints are on the side of firms, search subsidies would be more effective in encouraging productive start ups than subsidies to skilled employment, although fewer entrepreneurs may choose to operate in the formal sector than under the latter. Both types of subsidies should be phased out with reforms of the business environment and improved labor markets.

Vorheriger Artikel Formal business networking and SME growth

Nächster Artikel The role of business subsidies in job creation of start-ups, gazelles and incumbents

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As Parker (2009) underscores, a distinction needs to be made between entrepreneurship and SMEs, as firm size definitions do not necessarily correspond to entrepreneurship. This paper defines entrepreneur as someone who ‘perceives an opportunity, and creates an organization to pursue it’ (Bygrave and Hofer 1991, p. 14).

Temple (2005) provides a literature review of dual economy models.

A more technical version of the model, utilizing the dynamic programming approach, is in Brixiova (2010). This paper addresses a broader set of issues through, as the framework explicitly models: (i) workers’ decision to acquire skills, (ii) entrepreneurs’ decision to open their firm in either the formal or the informal sector, and (iii) cost-benefit comparison of subsidizing entrepreneurs’ search and employment of skilled workers.

See Baliamoune-Lutz (2007). This paper emphasizes productive firms. As Baumol (1990) underscores, policies and cultural norms determine if entrepreneurs get involved in highly productive, socially beneficial activities or not. In many developing countries, especially in Africa, the high unemployment rates have put a renewed focus on entrepreneurship, since it can contribute to growth and job creation (Herrington et al. 2009).

Not all constraints that entrepreneurs face are explicitly modelled here. For example, because of their importance—especially in low income countries—credit constraints have already received substantial attention in the literature; this paper leaves them for further research. On the other hand, the model in this paper provides a detailed analysis of constraints on the workers’ side, especially skill shortages, which have been understudied.

This terminology is adopted from the Global Entrepreneurship Monitoring Reports. In the factor-driven stage, economies are driven by their factor endowments—primarily unskilled labor and natural resources. In the efficiency-driven stage, their production processes become more efficient and/or quality of products higher. In the innovation-driven stage, countries compete on the basis of new and unique products.

Framework conditions can be divided further, depending on the level of the country’s development into ‘basic requirements’ (e.g., infrastructure, institutions), ‘efficiency enhancers’ (e.g., financial markets, goods and labor market efficiency) and ‘innovation’ (e.g., R&D transfer) (Herrington et al. 2009).

A similar assumption—that supply of entrepreneurs is exogenous—is used in Gelb et al. (2008) for Africa. Baumol (1990) noted that supplies of entrepreneurs in societies tend to be constant, and policies do not impact them much. This can be explained, for example, by an observation that entrepreneurs tend to be individuals with specific family characteristics; this had a strong influence on becoming an entrepreneur in China and Russia, respectively (Djankov et. al., 2005a, b). A more rigorous, occupational choice approach would assume substantial differences in entrepreneurial abilities between the two groups (Parker 2009).

A < 1 since skilled workers have imperfect information about available vacancies and entrepreneurs with skilled vacancies about available skilled workers. As Snower (1996) points out, in such circumstances even skills that are useful to all firms are not general since not all firms have access to these workers. Such skills are also not specific since more than one firm has access to an available skilled worker.

More generally, \( \varepsilon \) reflects quality of formal institutions. Amoros (2009) shows empirically that differences in institutional quality help explain differences in entrepreneurship across countries.

The model thus distinguishes between ‘necessity’ and ‘opportunity’ entrepreneurship. Consistently with Acs and Vagra (2005), the opportunity entrepreneurship has a significant positive effect on development, but the necessity one has almost none.

x (and q) are restricted to be between 0 and 1. This assumes that despite their efforts, workers (entrepreneurs) occasionally fail to acquire skills (find business opportunities).

Recontracting is assumed away. Bougheas and Riezman (2010) use a mechanism where surplus from the match is divided between workers and firms and show that results are robust to alternative matching mechanisms.

The model either has (i) a unique trivial equilibrium where workers and entrepreneurs exert zero effort, or (ii) a trivial equilibrium and a unique one with positive effort by workers and entrepreneurs. In what follows, we focus on the unique equilibrium with positive workers’ and entrepreneurs’ efforts.

The third case, when \( \phi = 1 \), will not be considered as it implies efficient allocation with no shortages, where the number of skilled workers equals the number of skilled job openings.

As Fig. 1 showed, labor market regulations constitute a less severe constraint in the Enterprise Surveys and hence are not explicitly modeled here. Their impact is examined in Davidson and Henrekson (2002). Since the focus of the paper is on interaction between labor and product markets, credit constraints—while important—are captured only roughly as part of the cost of setting up businesses. Li (1998) analyzes the issue of entrepreneurs’ access to credit in general and Gries and Naudé (2010) do so in the context of the global financial crisis.

Entrepreneurs’ search subsidies refers to business advice (e.g., mentoring, training) to mitigate the lack of information on how to start a business, develop a business plan, obtain finance, and how to comply with regulations during the start up process, etc.—in either public institutions or publicly supported private institutions (Parker 2009). Entrepreneurial training has been developed in, for example, South Africa where the lack of entrepreneurial skills is well recognized as a key constraint.

Biggs (2003) provides an argument for subsidizing SMEs, which is akin to the one modeled in this paper. Specifically, in the cases where the first best solution—removing of distortions or imperfections—is not feasible, subsidies may provide a complementary solution that will stimulate creation of SMEs. Korea, for example, adopted a proactive and successful policy towards SMEs.

Subsidies could be payments to entrepreneurs’ who document their effort to open business, providing information about available opportunities as well as training of entrepreneurs. Martinez et al. (2010) found that greatest effect of such training on early-stage entrepreneurial activity is in countries with favorable institutional contexts, consistently with the model in this paper.

Another way to subsidize entrepreneurs search would be through covering part of the cost or raising efficiency of the search, \( \gamma \). The subsidy is assumed to be financed by the lump-sum tax. Typically, consumption taxes are more efficient for financing these subsidies than profit taxes.

Acs, Z. J., & Varga, A. (2005). Entrepreneurship, agglomeration and technological change. Small Business Economics, 24(3), 323–334.CrossRef

Amoros, J. A. (2009). Entrepreneurship and quality of institutions: A developing-country approach. UNU-WIDER Research Paper, No. 2009/07.

Baliamoune-Lutz, M. (2007). Entrepreneurship, reforms and development: Empirical evidence, ICER Working Paper No. 38/2007. Turin: International Centre for Economic Research.

Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive and destructive. Journal of Political Economy, 98(5), 893–921.CrossRef

Baumol, W. J. (2010). The micro-theory of innovative entrepreneurship. Princeton: Princeton University Press.

Biggs, T. (2003). Is small beautiful and worthy of subsidy? A literature review. Washington: IFC.

Black, J., & de Meza, D. (1997). Everyone may benefit from subsidizing entry to risky occupations. Journal of Public Economics, 66, 409–424.CrossRef

Bougheas, S. & Riezman, R. (2010). Market entry costs, unemployment and international trade. University of Nottingham Research Paper 2010/18.

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Djankov, S., Qian, Y., Roland, G., & Zhuravskaya, E. (2005b). Who are China’s entrepreneurs? American Economics Review Papers and Proceedings, 96(2), 348–352.CrossRef

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Titel: Modeling productive entrepreneurship in developing countries
verfasst von: Zuzana Brixiova
Publikationsdatum: 01.06.2013
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 1/2013
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-011-9410-z

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