International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 2, February 2013
Role of Entrepreneurship in Economic Development
With special focus on necessity entrepreneurship and opportunity entrepreneurship
Dr. Sangya Shrivastava, Director, Rai Business School, Raipur
Roopal Shrivastava, Research Scholar, MATS University, Raipur
ABSTRACT
Entrepreneurs are people who create new businesses,
which help create new jobs for people. They help in
intensifying competition, with the help of technology they
master in increasing productivity and thus contributing in
the development of the country, followed by economic
growth. So it can be said that entrepreneurship is good for
economic growth .The paper will justify how far this
stands true in reality. Now if the entrepreneurship allows
informal self employment which means without formally
creating new business then it could be assumed that high
levels of entrepreneurship would correlate with sluggish
economic growth and sheathing development. Study
further mentions findings of a survey known as Global
Entrepreneurship Monitor (GEM) project which is
related to understand how different types of
entrepreneurship affect development of the country. The
term necessity entrepreneurship, is in the paper, which
means to become an entrepreneur because you have no
better option. It is different from opportunity
entrepreneurship, which is an active choice to start a
new enterprise based on the perception that an
unexploited or underexploited business opportunity exists.
We have collected secondary data available and literature
previously studied. The data analyzed reveals that effects
of necessity and opportunity entrepreneurship on
economic growth and development vary greatly. The study
has been concluded that necessity entrepreneurship bears
no effect on economic development and opportunity
entrepreneurship has a positive and significant effect.
INTRODUCTION
"Business opportunities are like buses, there's always
another one coming."
- Richard Branson, founder of Virgin Enterprises
Entrepreneurship has at two meanings:
First, entrepreneurship refers to owning and
managing a business. This is the occupational
notion of entrepreneurship i.e. creation of new
business.
Second, entrepreneurship refers to entrepreneurial
behavior in the sense of seizing an economic
opportunity. This is the behavioral notion of
entrepreneurship.
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The entrepreneur, therefore, is someone who specializes
in making judgmental decisions about the coordination of
scarce resources. The term emphasizes that the
entrepreneur is an individual. As G. L. S. Schackle wrote,
The entrepreneur is a maker of history, but his guide in
making it is his judgment of possibilities and not a
calculation of certainties, and identified uncertainty-
bearing as the economic function of the entrepreneur.
According to Schumpeter, the entrepreneur is the prime
mover in economic development and his function is to
innovate. It is defined and established in traditional
theories that Investment in new knowledge increases the
technology opportunity set and sharpens the ability to look
into the future. entrepreneurial activity thus could be very
well understood as the activity that holds the discovery,
evaluation and exploitation of opportunities within the
defined established framework and how these
opportunities are discovered exploited is related to
institutional arrangement of the country or the individual.
During the study we found four types of ventures:
independent start-ups;
spin-offs;
acquisitions;
corporate ventures
How was the necessity entrepreneurship born?
After the fall of the Berlin Wall many uneconomical
factories were closed in Central Europe as economies
became integrated into the global economy. Those
workers who had jobs in the plants and factories of the
former socialist countries were productive members of
society. However, as factories were closed one after
another, many of these workers found them- selves with
no other options for work than self employment
necessity entrepreneurship. As one would expect, the
influx of many former wage workers into necessity
entrepreneurship resulted in several years of negative GDP
growth.
When a new business opportunity is taken up or exploited
it is assumed that it will lead to economic development but
on the other hand taking up of necessity entrepreneurship
may not lead to the same. It also may be the case that
under development may happen due to self employment.
Many countries have some level of both opportunity and
necessity entrepreneurship, studies suggest that the ratio of
opportunity-to-necessity entrepreneurship could be a
useful indicator of economic development; we can say it
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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 2, February 2013
can also act as a guide for development policy for the
policy makers. So the equation comes out to be of
positive relationship between the opportunity ratio and
GDP per capita. The suggestion could be given to less
developed countries that they should focus on
strengthening General National Framework Conditions,
and developed economies policy should focus on
strengthening the entrepreneurial framework conditions.
THE GEM PROGRAM
The Global Entrepreneurship Monitor (GEM) research
program is an annual assessment of the national level of
entrepreneurial activity. Initiated in 1999 with 10
countries, expanded to 21 in the year 2000 and 39
countries in 2005, the program covers both developed and
developing countries. The research program, based on a
harmonized assessment of the level of national
entrepreneurial activity for all participating countries,
involves exploration of the role of entrepreneurship in
national economic growth. Representative samples of
randomly selected adults, ranging in size from 1,000 to
almost 27,000 individuals, are surveyed each year in each
country in order to provide harmonized measures of the
prevalence of entrepreneurial activity. There is a wealth of
national features and characteristics associated with
entrepreneurial activity.
Source:www.gemcomnsortium.org
The GEM project provides data across countries. While all
countries collect official data on self-employment, the size
distribution of firms, census data on all or most plants and
firms, and firm and plant entry, almost none of these
registry sources are comparable across countries, even in
developed countries. Official data sources differ in the
way they define when an establishment enters a file, when
it leaves, and how they handle self employment, making
cross-national comparisons almost impossible.
P.D. Reynolds, N. S. Bosma, E. and Autio, Global
Entrepreneurship
Monitor: Data Collection Design and Implementation 1998-
2003. Small Business Economics, 2005
The strengths of the project is its application of uniform
definitions and data collection across countries for
international comparisons. A major shortcoming of the
GEM project has been its inability to effectively deal with
the issue of how to compare entrepreneurial activity in
developed and developing countries. For example, low-
income countries like Uganda, Peru and Ecuador have
very high levels of self-employment and therefore have
high levels of entrepreneurial activity as measured by the
GEM program. High-income countries like Japan, Sweden
and Germany have much lower levels of entrepreneurial
activity as measured by the GEM program. In order to
address this issue, when India entered the program, GEM
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researchers started to collect data on both opportunity
entrepreneurshipstarting a business to exploit a
perceived business opportunityand necessity
entrepreneurshipstarting a business because you are not
left with any other option. Both of these measures show
higher levels in developing countries than in developed
countries. The relationship between necessity
entrepreneurship and economic development is most likely
negative in low-income countries, while the relationship
between entrepreneurship and economic development in
high-income countries is mostly likely positive. This must
be further balanced by the fact that some low-income
countries like India and China have high levels of
opportunity entrepreneurship, at least in certain parts of
the country, and countries like Japan have very low levels
of opportunity entrepreneurship and low growth. In 2004
Global Entrepreneurship Report started to pursue the idea
of using the opportunity-necessity ratio as a composite
indicator of entrepreneurial activity and economic
development.
Z.J. Acs, P. Arenius, M. Hay and M. Minniti, 2004 Global
Entrepreneurship Monitor. (London Business School
and Babson College. London U.K. And Babson Park, MA, 2005).
Relationship between Economic Development and
Globalization
Three stages of development are defined by Development
Economists:
first state is , the economy specializes in the
production of agricultural products and small-scale
manufacturing.
second stage, the economy shifts from small-scale
production toward manufacturing.
third stage, with increasing wealth the economy
shifts away from manufacturing toward services.
M. Syrquin, Patterns of Structural Change. In Handbook of
Development Economics, edited by H. Chenery and T.N.
Srinivasan, 203-273. (Amsterdam / New York: North-Holland.,
1988)
The first stage is about high rates of non-agricultural self-
employment, sole proprietorships or the self-employed
which means small manufacturing firms and service firms.
The second stage talks about when rates of self-
employment are decreased. Entrepreneurial activity
decreases as economies become more developed. As the
economy becomes more developed fewer people pursue
entrepreneurial activities. Now coming to the third stage,
which simply sees increase in entrepreneurial activity,
which is moving from small firms towards larger
organizations. This came to in seen between 1970 s and
80s.The studies I have read indicates that firm size
distribution in more developed countries has moved
towards entrepreneurial activity.
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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 2, February 2013
Mainly I came across three reasons why entrepreneurial
activity rises in the final stage of economic activity. All of
the industrialized market economies experienced a decline
in the share of manufacturing in their economies in the last
thirty years. The business service sector expended to
manufacturing. Service firms are smaller on average than
manufacturing firms, therefore, economy-wide average
firm size may decline. Moreover, service firms provide
more opportunities for entrepreneurship. This is clearly the
case in the U.S., as well as in several EU countries,
including Germany and Sweden.
Second, during the post-war period technological change
has been biased toward industries in which entrepreneurial
activity is important. Improvements in information
technologies such as telecommunications may increase the
returns to entrepreneurship. Express-mail services,
photocopying services, personal computers, the internet,
web services and mobile phone services make it less
expensive and less time consuming for geographically
separate individuals to exchange information.
D.W. Jorgenson, 2001, Information Technology and the U.S.
Economy. American Economic Review, 91 (1): 1-32.
Third, Robert Lucas derived a model where higher
development leads to higher average firm size because of a
negative relationship between the elasticity of factor
substitution and firm size. A high value of the elasticity of
factor substitution does not only lead to more per capita
capital, but makes it easier for an individual to become an
entrepreneur if the aggregate elasticity of substitution is
also negative. In an economy characterized by higher
values of the aggregate elasticity of substitution, we
should expect a higher level of development, more
entrepreneurs and smaller firms.
M. Aquilina, R. Klump and C. Pietrobelli, 2006, Factor
Substitution, Average Firm Size and Economic
Growth. Small Business Economics, in press
After the study of various theories on economic
development and findings of researchers I can say that
economies in middle of economic development is
negatively related to economic development as at this time
maximum people shift from self employment to wage
employment.But the case is different in developed
ecomies .their we can find people wil shift from wage
work to entrepreneurial activity.
Countries like Uganda, Peru and Ecuador are all
countries with high levels of entrepreneurial activity but
very low levels of per capita income. Countries with much
lower levels of entrepreneurial activity (for example,
Brazil and Argentina,) appear to have higher levels of per
capita income and are moving toward lower levels of
entrepreneurial activity. The middle represents a set of
countries that appear to be transitioning from a middle-
income level to a higher-income level and some haverising
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levels of entrepreneurial activity. High-income countries,
such as Germany, France, Belgium, Italy and Finland,
have relatively low levels of entrepreneurial activity. Two
outliers are Japan, with one of the lowest levels of
entrepreneurial activity, and the U.S., with one of the
highest levels of entrepreneurial activity.
Entrepreneurship and Economic Development: Do
they have positive relation?
To find out this we need to find type of entrepreneurial
activity countries are engaged in. Global Entrepreneurship
Monitor (GEM) data is used to identify the type of activity
in countries at different levels of development. The intent
of GEM is to systematically assess two things:
the level of start-up activity and the prevalence of
new or young firms that have survived the start-up phase.
First, start-up activity is measured by the proportion of the
adult population (18-64 years of age) in each country that
is currently engaged in the process of creating a nascent
business.
Second, the proportion of adults in each country
who are involved in operating a business that is less than
42 months old measures the presence of new firms. The
distinction between nascent and new firms is made in
order to determine the relationship of each to national
economic growth.
For both measures, the focus is on entrepreneurial activity
in which the individuals involvement have a direct
ownership interest in the business. Opportunity
entrepreneurship represents the voluntary nature of
participation and necessity entrepreneurship reflects the
individuals perception that such actions presented the best
option available for employment. Opportunity
entrepreneurs expect their ventures to produce more high-
growth firms and provide more new jobs. countries with
high levels of necessity entrepreneurship get ranked the
same as a country with low levels of entrepreneurship.
countries where more entrepreneurship is motivated by an
economic opportunity recognized than by necessity have
higher levels of income. We are finding How is
entrepreneurship good for economic development? for
his we need to find meaning of entrepreneurship and self
employment.entrepreneurship may not lead to economic
development as there is no mechanism to link the activity
to development.We have learned from the studies and
trend that self-employment declines as economies become
more developed. So we can conclude that when economies
remove people from self-employment ,there can be an
increase in development.
To quote Adam Smith, when the division of labor
increases, so will economic development.
The findings and previous studies clearly reflects that the
ratio of opportunity-to-necessity entrepreneurship is a key
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International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 2, February 2013
indicator of economic development. When more of the
population gets involved in opportunity entrepreneurship
and more people leaves necessity entrepreneurship which
is basically self employment, we can see the raising level
of economic development.
Relationship between entrepreneurship, corporations,
and economic development
We know that Corporations influence economic growth of
the country by creating new plants which in turn provides
ample of job opportunities. Researchers states that earlier
analysis of economic development use to focus on big
corporations ignoring the innovations that comes from
small business .the potential entrepreneurs if thinking to
start a business had to refer to Entrepreneurial Framework
Conditions which means need to business is influenced by
additional characteristics within the existing business
environment. This have a significant affect on
entrepreneurial process as this may lead to increase in
innovation and competition having direct impact on
national economic growth. Entrepreneurship is vital for
larger economy. A nations economic development
depends on successful entrepreneurship joint with the
force of established corporations. However, the beneficial
value of this mechanism varies with the national income,
as measured by GDP per capita. At low levels of national
income, self-employment provides job opportunities and
scope for the creation of markets. As GDP per capita
income increases, the emergence of new technologies and
economies of scale allows larger and established firms to
satisfy the increasing demand of growing markets and to
increase their relative role in the economy. It is also
observed that if people find stable employment, it will
decrease business start ups. Studies states that in high
income economy, where lower costs and technology
deleopment is fast, entrepreneurs plays competitive
adnantage. Therefore entrepreneurs in different countries
having different levels of GDP per capita face different
challenges. This means conditions and framework for
entrepreneur in one country may not be favourable and as
effective in other region.
How balance can be made between GNF and EFC to
ignite economic growth?
After studying various research papers and views of
various economist it can be said that a proper balance
should be maintained between the General National
Framework Conditions and the Entrepreneurial
Framework Conditions which basically depends on the
level of economic development of the country. Countries
who are less developed need to focus and strengthen more
small and medium sized sector rather than entrepreneurial
framework conditions. Foreign direct investment should
be employed in underdeveloped countries to help people
leaving agriculture and self-employment. A strong
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attention to paid on education and training, both at the
elementary and secondary levels. Developing countries
with less and weak education background will end up in
necessity entrepreneurship. Developing countries require
a more balanced approach to both the National Framework
Conditions and the Entrepreneurial Framework Conditions
. Economic development of a country should focus and
strengthen the conditions that would improve
infrastructure, labour market, financial market, rules and
policies, which will help in building a pillar for
entrepreneurship environment and develop management
skills. These conditions are also of value to attract foreign
direct investment that will help generate employment,
technology exchange, improve imports -exports and tax
revenues. For developed economies, the focus shifts to
strengthening the Entrepreneurial Framework Conditions
if they want to be entrepreneurial economies. Further it
could be concluded that Entrepreneurial activity in
developed countries should focus on high value-added,
high technology, innovation ,higher education system
,research and development and technology
commercialization.
REFERENCES
[1] www.gemcomnsortium.org
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Global Entrepreneurship Monitor: Data
Collection Design and Implementation 1998-
2003. Small Business Economics, 2005.
[3] Z.J. Acs, P. Arenius, M. Hay and M. Minniti,
2004 Global Entrepreneurship Monitor. (London
Business School and Babson College. London
U.K. And Babson Park, MA, 2005).
[4] M. Syrquin, Patterns of Structural Change. In
Handbook of Development Economics, edited by
H. Chenery and T.N. Srinivasan, 203-273.
(Amsterdam / New York: North-Holland., 1988)
[5] J. Acs and A.Varga, Agglomeration,
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Small Business Economics, 2005.
[6] Z. Acs, D. Audretsch and D. Evans. 1994. Why
Does the Self-Employment Rate Vary Across
Countries and OverTime? Discussion Paper No.
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Review.
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EconomicGrowth. Small Business Economics,
in press.
[9] Z. Acs, D. Audretsch, P. Braunerhjelm and B.
Carlsson, 2004, The Missing Link: The
Knowledge Filter and Entrepreneurship in
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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 5
Volume 2, No. 2, February 2013

Endogenous Growth. Discussion Paper, Center

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