1

Unit three

Key Components of Economic Development

1. Division of labor opens the door to increased productivity by allowing people to

specialize at lines of production where they are most efficient.
2. Capital formation also contributes to economic progress by increasing the productivity
of the user.
3. Entrepreneurship is the third major contributor to economic development.

Entrepreneurship and Economic Development

Economic progress is the happy consequence of a highly developed division of labor, taking
advantage of an increasing capital stock wisely invested by entrepreneurs.

Small and medium-sized enterprises, under the direction of entrepreneurs, are considered to
be the driving force of economic growth and development.

Entrepreneurship is associated with;

Job creation, Poverty reduction and

Innovation, An increase in economic
Welfare distribution, performances of a country.

Summary of economic development

Economic development ideally refers to the sustained, concerted actions of communities

and policymakers that improve the standard of living and economic health of a specific
locality.
Economic development is an increase in living conditions, improvement of the citizens
self-esteem needs and free and a just society.
Economic development can also be referred to as the quantitative and qualitative
changes in an existing economy.
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Economic development involves development of human capital, increasing the

literacy ratio, improve important infrastructure, improvement of health and safety
and others areas that aims at increasing the general welfare of the citizens.
The terms economic development and economic growth are used interchangeably but
there is a very big difference between the two.
Economic growth can be viewed as a sub category of economic development.
Economic development is a government policy to increase the economic, social welfare
and ensuring a stable political environment.
Economic growth on the other hand is the general increase in the country products and
services output.
Economic growth will bring business opportunities to the country and the effects
spills over to all sectors of the economy.

The most accurate method of measuring economic development is the Human Development
Index which takes into account the literacy rates & life expectancy which in-turn has an
outright impact on productivity and could lead to Economic Growth.

However, economic development can also be measured by taking into account the GDI
(gender related index).

The indicators those economist uses to measure the level of economic development in a
country is:

Declining poverty rates, declining infant morbidity and

Increasing literacy rates, Increasing life expectancy.

Why entrepreneurs are important for the economy

The following are the common reasons why entrepreneurs are important to the economy.

1. Entrepreneurs Create New Businesses

2. Entrepreneurs Add to National Income
3. Entrepreneurs Create Social Change
4. Contribute to Community Development
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5. Strengthen the Role of States

6. They support the Bottom Line

The role of micro and small enterprise in the informal economy

The Informal Economy (Becker, 2004) provides

A comprehensive study of the informal economys role,

Structure,
Interaction with government, and
The donors perspective:

The informal economy has been observed to have more of a fixed character in developing
countries where incomes and assets are not equitably distributed.

In all developing countries, self-employment comprises a greater share of informal employment

than wage employment.

The transition from an informal to a formal status is gradual.

Many informal enterprises choose to expand horizontally and diversify their lines of businesses
instead of expanding vertically and formalizing themselves.

The benefits for entrepreneurs who operate in the informal economy include

The avoidance of costly and burdensome government regulations As well as high and
complex taxes.

Entrepreneurs in the informal sector weigh the costs of formality against the benefits of
informality based upon the monetary burdens and bureaucracy that may be associated with
formal registration and taxes.

Other important realities on the informal sector include:

The organization of trade carried out for the most part by urban based intermediaries is
crucial to relatively effective distribution of agricultural production.
Trade adds value in that the distribution of goods, which is as essential to the functioning
of the socio-economic system as production.
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Whereas in manufacturing subcontracting chains wage and employment relationships

dominate, in commerce, product supply chains and credit linkages determine different
levels of economic well-being and autonomy of small vendors.
Access to products and access to capital are crucial variables that define the
interrelationship between informal commerce and other sectors of urban, national, and
international economies.
Two aspects play an important role in determining the levels of potential capital
accumulation or profits:
1. The competitiveness of a product and
2. The relationship between vendor and supplier.

Capital supply is the second economic linkage that ties informal trade to the economy. It affects
the vendors economic activities, profits, and potential business growth.

The contribution of entrepreneurial activity to overall economic growth.

It is generally perceived that small and medium-sized companies, under the direction of
entrepreneurs, are major contributors to job creation and economic growth

Small and medium-sized enterprises and entrepreneurs (SMEE) provide

the great potential for employment creation,

Gross Domestic Product (GDP) growth,
more balanced income generation and
the creation of wealth,

Thus Policy makers have focused on adopting new approaches and new ways to foster SMEE
development.

Entrepreneurship is considered to be the driving force of economic growth and

development.

As a source of innovation and flexibility, they contribute to growth of productivity and economic
competitiveness.
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Entrepreneurs and small and medium-sized enterprises play an important role in creating
employment opportunities, thus reducing unemployment.

By seeking opportunities and taking risks, they create

new and advanced products and services,

new techniques in sales and distribution and
Explore new undiscovered markets.
SMEEs are a stable source of GDP growth
They contribute to more equal distribution of income and wealth, which consequently
leads to poverty reduction and more balanced regional development.

Entrepreneurs play a key role in the process of structural change which is a precondition of a
successful economic development.

They contribute to the productive reallocation of resources and are a source of innovation.

As a process, entrepreneurship is a way a person behaves in certain phases of his life or career
and it is commonly related to

risk taking, Innovativeness.

opportunity seeking and
Entrepreneurs are

Innovators Introduce new technologies and

They bring new ideas, processes and products to existing markets and
knowledge, Create new markets.
The development of entrepreneurship in Ethiopia is driven by economic and social factors, rather
than some other qualitatively different reasons.

Insufficiently developed SMEE sector is the result of

The structural problems in the economy,

Low availability of finance,
Lack of adequate legal and regulatory framework for private economic activity and
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Lack of institutional support aimed at business start-ups and SMEE survival and growth
as well.

What is the role of an entrepreneur in economic development?

Entrepreneurship is an approach to management that can be applied in start-up situations as well

as within more established businesses.

Small entrepreneurship has a fabulous potential in a developing country.

Economic growth and entrepreneurship

The major roles played by an entrepreneur in the economic development of an economy

are discussed in a systematic and orderly manner as follows.

Promotes Capital Formation:

Creates Large-Scale Employment Opportunities:
Promotes Balanced Regional Development:
Reduces Concentration of Economic Power:
Wealth Creation and Distribution:
Increasing Gross National Product and Per Capita Income:
Improvement in the Standard of Living:
Promotes Country's Export Trade:
Induces Backward and Forward Linkages:
Facilitates Overall Development:
(1) Promotes Capital Formation:
Entrepreneurs promote capital formation by mobilizing the idle savings of public.
They employ their own as well as borrowed resources for setting up their enterprises.

(2) Creates Large-Scale Employment Opportunities:

Entrepreneurs provide immediate large-scale employment to the unemployed.

(3) Promotes Balanced Regional Development:

Entrepreneurs help to remove regional disparities through setting up of industries in less

developed and backward areas.
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The growth of industries and business in these areas lead to a large number of public benefits
like road transport, health, education, entertainment, etc..

(4) Reduces Concentration of Economic Power:

Economic power is the natural outcome of industrial and business activity. Industrial
development normally leads to concentration of economic power in the hands of a few
individuals which results in the growth of monopolies.

In order to redress this problem a large number of entrepreneurs need to be developed, which
will help reduce the concentration of economic power amongst the population.

(5) Wealth Creation and Distribution:

It stimulates equitable redistribution of wealth and income in the interest of the country to more
people and geographic areas.
(6) Increasing Gross National Product and Per Capita Income:

Entrepreneurs help increasing gross national product as well as per capita income of the people
in a country. Increase in gross national product and per capita income of the people in a country,
is a sign of economic growth.

(7) Improvement in the Standard of Living:

Entrepreneurs play a key role in increasing the standard of living of the people by adopting latest
innovations in the production of wide variety of goods and services in large scale that too at a
lower cost. This enables the people to avail better quality goods at lower prices which results in
the improvement of their standard of living.
(8) Promotes Country's Export Trade:
Entrepreneurs help in promoting a country's export-trade, which is an important ingredient of
economic development.
Import substitution and export promotion ensure economic independence and development.

(9) Induces Backward and Forward Linkages:

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When an enterprise is established in accordance with the changing technology, it induces

backward and forward linkages which stimulate the process of economic development in the
country.
(10) Facilitates Overall Development:

Entrepreneurs act as catalytic agent for change which results in chain reaction. Once an
enterprise is established, the process of industrialization is set in motion. This leads to overall
development of an area due to increase in demand and setting up of more and more units.

Unit 4

Innovating, networking and maintaining right image

Innovation is

The process of creating and implementing a new idea.

The process of taking useful ideas and converting them into useful products; services or
processes or methods of operation.

These useful ideas are the result of creativity, which is the prerequisite for innovation.

Creativity is

The ability to combine ideas in a unique way or to make useful association among ideas.
Provides new ideas for quality improvement in organizations and innovation puts these
ideas into action.

Change and innovation are closely related, even though they are not the same.

Change often involves new and better ideas. The new idea may be the creation of a new product
or process or it can be an idea about how to change completely the way business is carried out.

Importance of Innovation and creativity for success of an organization

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For both established organizations as well as new organizations, innovation and change become
important in a dynamic, changing environment. When a company fails to innovate and change as
needed, its customers, employees and the community at large can all suffer.

The ability to manage innovation and change is an essential part of a managers

competencies.

Technology and Innovation:

Technology is

Defined as the systematic application of scientific knowledge to a new product, process

or service.
It is also defined as the methods, processes, systems, and skills used to transform
resources into products.
Embedded in every product, service, process and procedure used or produced.

Innovation is a change in technology. When we find a better product, process or procedure

to do our task, we have an innovation.

Process innovations are changes which affect the methods of producing outputs.

For example, manufacturing practices such as

Just-in-time,
Mass customerization
Simultaneous or concurrent engineering are all innovations.

In contrast, product innovations are changes in the actual outputs themselves.

Technological innovation is

Daunting in its complexity and pace of change.

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It is vital for a firms competitive advantage because todays customers often demand
products that are yet to be designed.

As technologies develop, product obsolescence increases and innovative products will have
to be introduced into the markets.

The forces driving technological development

I. First, there must be a need or demand for the technology. The need acts as a driving force for
technological innovation to occur.

ii. Second, it must be theoretically possible to meet the need using the knowledge available from
basic science.

iii. Third, it must be possible to convert the scientific knowledge into practice in both
engineering and economic terms.

iv. Fourth, the necessary resources such as finance, skilled labor, time, space and other resources
must be available to develop the technology.

v. Finally entrepreneurial initiative is needed to identify and put all the elements together.

The diffusion of technological innovations:

For successful diffusion of a new technology over a period of time it should have the following
attributes:

1. Great advantage over its predecessor.

2. Compatible with existing systems, procedures, infrastructures and ways of thinking.
3. Has lesser complexity than its predecessor.
4. Can be easily tried and tested without significant cost or commitment.
5. Can be easily observed and copied (or adopted).

Benefits of networking and maintaining right image for an entrepreneur

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An entrepreneur can look forward to the following benefits from his/her network.

1. Entrepreneurial networks provide entrepreneurs with their only stable source of

accurate information.

Entrepreneurial networks have been known to provide entrepreneurs with reliable

information pertain-ing to competitors, industry events, channel concerns, etc.

2. In the early days, the information may be passed on to the entrepreneur with a healthy dose
of sound advice.

3. A network will help spread good word of mouth about the entrepreneurial enterprise. This
will help attract employees, good suppliers, and customers

4. Members of an entrepreneurs network will recommend the entrepreneur to other members

of their networks. Entrepreneurs can leverage these introductions to strike deals and to make
sales.

Importance of Networking and maintaining right image for an Entrepreneur

Here are some guidelines for maintaining the right image for your network:

i. Your appearance should be professional. Dress well and be appropriately turned out for the
occasion.

ii. Do what you have promised to do. Keep to your targets and deadlines.

iii. be prompt in returning calls and replying to e-mails

iv. Refrain from talking bad about people. It is safest to keep your opinions to yourself.

v. Do not reveal your flaws. There is no need to talk of the unflattering aspects of your
personality.
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vi. Do not complain or make excuses for your failures. No one reacts positively to whining.

vii. Remember to do these all the time.

Tapping into Other Peoples Networks:

To increase the reachability of your network, you should be able to effectively tap into the
networks of others who are part of your network.

The people who make up the contacts of your contacts.

They will fall into three sub-groups:

i. People you know but choose not to network with

ii. People you know but have not got around to having a networking relationship with

iii. People you do not know

Interactional Dimensions and the Structural Elements of Entrepreneurial Networks

Some of the dimensions of a network are discussed here.

Anchorage: Intensity:
Range: Durability:
Reachability: Frequency:
Brokers: Direction:
Content: Density:

1) Anchorage:
Refers to the focal point of the network.
Every person is the focal point of his/her network.
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Similarly, the entrepreneur is the focal point of his/her own professional network.
Sometimes, the network is not the entrepreneur but the entrepreneurial
organization that is the focal point of the network.
2) Density:
It is a measure of the extent to which an entrepreneur is connected to the network.
An indication of the density can be had from the speed at which information
moves through the network.
3) Range:
Refers to the number of people in direct contact with the entrepreneur (the
anchorage).
Also, the heterogeneity of these people will define the range of the network.
A narrow range will limit the opportunities available to the entrepreneur.
4) Reachability:
Is a measure of how far and how easily an entrepreneur is able to contact other people
and organizations
This includes all relationships that have to be taken into account while evaluating the
network.
So, the networks of other individuals in the entrepreneurs network are also included.

5) Brokers:
This does not just mean the professional broke
There are many people in a network who are extensively networked and they may act
as links by introducing the entrepreneur to others they are networked with and with
whom the entrepreneur does not have a direct relationship.
6) Content:
This refers to the reason behind the relationship.
It is common to have more than a single reason behind the relationships.

7) Intensity:
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This refers to the strength of the bonds between the networked individuals.
It can be defined as the degree to which individuals are prepared to honour
obligations, or feel free to exercise the rights implied in their link to some other
person
Indicates how far the individual is willing to go to help or accommodate the other
individual.
8) Durability:
It indicates the duration of the relationship.
Is dependent on the content of the relationship and the extent to which the individuals
perceive the relationship to be satisfying.
9) Frequency:
Refers to the amount of time individuals dedicate to the relationship, including the
number of interactions.
This will take the form of phone calls, e-mails, and face- to-face meetings.
Frequency and durability are often used as indicators of the intensity of the
relationship.
10) Direction:
Indicates the balance of power in a relationship.
Obviously, in the relationship between a boss and a subordinate, the subordinate will be
in a more vulnerable position.
Direction also indicates the flow of requests or favors within the relationship.

Setting-up a Right Entrepreneurship Infrastructure for Networking

People are going to network with you only if they feel that you are going to be helpful to
them. So, being helpful and receptive is an important part of the image you need to cultivate.

Conversely, you stand to lose if you very often shut out people because you are too busy.
There are some important aspects to be considered before you take steps to ensure your
availability around the clock:
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i. It will conflict with your busy lives and will interrupt your activities.

ii. Lack of approachability will signal the end of meaningful networking.

iii. Being curt or less helpful when your contact catches you at a busy time sends a negative
signal.

There are several ways for people to get in touch with you, and you should manage each
aspect of your contact details carefully as discussed here.

Address: Mobile Phone:

Phone (landline): Keep Details of Your Contacts:
E-mail:
The role of government to initiate, support and develop entrepreneurship.

Sustainable economic development is at the top of the political agenda in many fast developing
countries.

The aim is for growth to be faster, sustainable and more inclusive. The private sector,
particularly micro, small and medium-sized enterprises (MSMEs), is expected to be a key
driver here

The MSME sector, with numerous micro companies and thousands of small and medium-sized
businesses, has an enormous economic, social and environmental impact.

However, the sector faces several challenges, including strong international competition,
pressure to use key resources like energy, water and raw materials more efficiently and to
implement more environmentally sustainable production processes.

By modernizing and adopting green and inclusive innovations, developing countries MSME
sector can create new economic opportunities and strengthen its long-term competitiveness.

Impact of government actions on entrepreneurship development

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Determinant factors for the development of entrepreneurship.

The public commitment and

actions undertaken by governmental institutions
Clearly expressed industrial policy; promote entrepreneurship.

By creating basic facilities, utilities and services, the Government can create a facilitative set up
to establish enterprises by the entrepreneurs.

Development of industrial estates, export promotion zones, special economic zones, etc. aims at,
among other things, to create a facilitative environment for establishing enterprises in these
areas.

Government can also encourage prospective entrepreneurs to establish enterprises by providing

them various incentives and concessions to offset the initial costs involved in establishing
enterprises.

One way of examining the role of Government in influencing entrepreneurship may be the extent
to which the Government is a competitor with entrepreneurs from private sector, whether for
factors of production or for markets. The greater the extent of this competitive role, the less
favorable the opportunity conditions for private entrepreneurship will be.

Government can help in two ways

1. Ensure that the economic environment is conducive to entrepreneurial activity and

2. Provide direct investments.

The role of local government in the process of entrepreneurship

Stimulation of entrepreneurship has become a task for public administration.

Support of entrepreneurship is defined as

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a support by institutions (state, local authorities, companies), for building and developing
personal and social features may enable free and unrestricted individual development of
entrepreneurship for an individual and structures in his environment.

Stimulation of the economic development or mainly entrepreneurship means introducing and

proposing such tools which considerably increase the employment rate and stimulate the local
businesses.
Factors determining entrepreneurship development
Economic integration, globalization and fast technological changes as well as economic crisis
influenced the change of patterns for entrepreneurs and their businesses. The current business
model is the model based on knowledge. Therefore the support of entrepreneurship has to be
adequate to these conditions.
The process of entrepreneurship development is conditioned by three main groups of
provisions. They include:
1) Endogenous factors,
2) Exogenous factors,
3) Reactions for the changes in the external environment
Endogenous provisions
Referring to the internal potential underlying the nature of local communities,
Allow for the identification and development of unique local virtues and
Constructing on their basis strategies of entrepreneurship support.
The remaining two groups of factors seem to be complimentary.
Regardless of the source of factors affecting entrepreneurship they can either stimulate or
slowdown entrepreneurship development.

Factors determining location of business activities

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New business idea and growing entrepreneurship

In transitioning markets (where entrepreneurs do not have much access to private sector
financing), government officials, donors, and business leaders are experimenting with creative
approaches to support the growth of entrepreneurs.
New Business Ideas for the Budding Entrepreneur
Here are some places where you can start digging for ideas:
Build a global business network. Patented Products.
Read, read, read! Existing Companies.
Market Currents. Investing Partners.
Untapped Markets. Market Research

Growing entrepreneurship in transitioning economies

The establishment and growth of new enterprises is central to the transition process. This is
because the change in economic system from communism to capitalism implies a reallocation of
resources in which new firms have to be the main actors

Defining Entrepreneurship in a Transition Context

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Productive entrepreneurship is defined as entailing innovative activity under uncertainty

resulting in an economically productive business.
Thus, entrepreneurship does not necessarily require the establishment of a new enterprise, but
includes leaders that took over state owned enterprises and employ new combinations of
resources during transition periods.
This definition includes the formation of new businesses as well as spinoffs from former state
firms and management employee buyouts but excludes managers continuing in their role in old
enterprises.
We refine this definition by focusing on individuals who:
1. Perceive and create new economic opportunities through innovative activity
2. Introduce their ideas in the market in the face of uncertainty and other obstacles
3. Undertake efforts that result in a viable business that contributes to national economic
growth and personal livelihood, and
4. Engage in this activity at opportunity cost of pursuing other occupations.
Barriers to Entrepreneurship in Transition
Institutions affect entrepreneurial endeavors in two ways.
Firstly they may hinder the creation of firms, thus lowering total number of entrants into
the market.
Second they may create obstacles to firm performance, as measured by survival period,
growth or profits.
Financial Barriers
Entrepreneurs require financial resources in order to establish and run their new
enterprises.
They must either provide this from their own (or family) saving, or borrow it from
financial markets.
Neither of these sources was widely available, particularly at the onset of transition.
Access to finance may be crucial for growth of small businesses, but less for their initial
establishment.
Institutional Environment
Several institutions are argued to affect entrepreneurial Endeavour:
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quality of commercial code,

strength of legal enforcement,
administrative barriers,
Extra-legal payments and lack of market-supporting institutions.
Entrepreneurs are often more affected by corruption and ineffective regulatory frameworks
because they lack bargaining power vis--vis the public bureaucracy.
Human Capital and Socio-Economic Factors
Human capital is also an important ingredient for entrepreneurship, and this is confirmed by who
show that new human capital was a crucial ingredient for successful new entry by small firms in
developing countries.
An important aspect of the human capital is also the age structure of the population as most
entrepreneurs are in the age range of 30 to 45, while young customers are more likely to adopt
new products and services.
There is also evidence that managerial skills are in short supply. Most top directors in transition
economies came from an engineering background and lacked managerial skills as well as market
experience. The economy had been run bureaucratically. Its concentration of reward on plan
attainment suppressed the appetite for risk and instead bred habits of obedience and playing it
safe.
Unit 5

Modernizing and diversifying

Modernizing and diversifying SMEs includes both

The creation of new ventures in order to revise the structure of the economy and
Transformation of existing businesses.

Policy for modernizing and diversifying structure of the economy (distribution of the businesses)
could include measures and instruments that create potential for new industries and discourage
entrepreneurship in traditional sectors (e.g. in agriculture and fishing).
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The pace of modernization is slower in small firms since they lack awareness of new
manufacturing methods and opportunity to acquire hands-on experience with new
technologies.

Modernization could be interpreted as introducing entrepreneurship and innovations in

existing firms.

Diversification is perhaps the most inadequately treated characteristic of business firms in

economic analysis.

It is known that diversification is sometimes called spreading of production or integration

which seems to accompany the growth of the firm.

This means that diversification is clearly connected with business growth. Thus, policies to
promote diversification in SMEs will be closely connected with policies to foster business
growth.

Utilization of excess capacity of human capital is the trigger that drives corporate growth and
diversification.

In order to realize economies of scale, diversification requires resource sharing and/or skills
transfer between two or more otherwise distinct businesses.

A more modern approach to diversification introduces a product market matrix which

describes the newness of a product or service in relation to the newness of markets.

Product diversification means the supply of new products to the existing market, whereas
market diversification represents the opportunity to sell existing products to new markets.
Diversification may take place with new products in new markets.

In radical innovations, the knowledge required to exploit innovation is competence-destroying,

whereas incremental innovation means that the needed knowledge is competence-enhancing.
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Successful diversification requires careful analysis of the market e.g. through a feasibility study.

A successful diversification strategy requires both planning and the education and training of
entrepreneurs to foster needed change.

At the firm level, recognition of new opportunities, R&D activities, innovation policy,
technology base, knowledge of technology and business, and business skills link diversification
with changing internal and external circumstances which affect the productivity of the firm.

Driving factors and challenges for modernizing and diversifying SMEs

Four attributes as driving forces of the economy.

These forces create new challenges and opportunities.

Driving forces are

globalization,
Accelerated pace,
Knowledge base, and
Networks.

The driving factors for the need for modernizing and diversifying are:

1. Accelerating pace and faster dissemination of information and technological development

(knowledge base) which lead to a shortening of product life cycles;
2. The demand for (low-cost country) outsourcing because of the need to maintain
competitiveness.
3. The need for a widening resource base through networking;
4. harmonization of norms and regulations (e.g. Single Euro Payments Area);
5. Increased demand for safety because of tensions between different cultures and religions.
 23

In addition to globalization, one trend is digital development which affects the appearance of
new opportunities. If there is access to the networks and such facilities as broadband, they may
create new opportunities for ventures in remote areas and create possibilities for distant work.

Firms have been making fundamental changes to their business because of

intensified competition, technological advances,

escalating customer expectations; regulatory concerns, and
unexpected market shifts workforce Globalization.
issues,
Obstacles for modernizing and diversifying SMEs

Deficiencies are:

1) Lack of entrepreneurial culture and values,

2) lack of networks and support services,
3) Lack of tradition of entrepreneurship and family businesses in the area,
4) absence of innovative industries,
5) Weak infrastructure,
6) Weak capital markets,
7) Few effective government incentives.

Obstacles for modernizing and diversifying SMEs could be connected to the resources required
in the process and situational factors. Resources include human, physical and social capital.

As per the other scholars of the area the obstacles to entrepreneurship to include

1. Obstacles to use resources, 3. Availability of work force,

2. Availability of raw materials,
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4. Information about the resources 6. Delivery problems, and

(visibility), 7. Capacity problems.
5. Costs,
Comparing the characteristics of small and large firms, the principal disadvantage faced by small
firms is the shortage of resources, especially financial resources available for large businesses for
expansion and diversification.

Many small private SMEs need to address liabilities relating to smallness and inexperience.

Access to financing is one hindrance for SME development. Public support could be allocated to
reduce the impact of market deficiencies (negative externalities) or to improve the level of
knowledge and technology and to promote internationalization of businesses (positive
externalities).

Growth and internationalization

Endogenous growth has been one of the major approaches in regional growth studies.
Endogenous growth theories explain growth from a micro-theoretic perspective so that
consumers maximize their utility and firm their profit with respect to their budget constraints.

In the framework of endogenous growth, the development of human capital and new technology
play a remarkable role.

Internationalization is one part of growth strategy, and thus the growth process will be a dynamic
one where we may identify similar internal decision-making characteristics and situational
factors.

Education, training and counseling

Manager training and education to raise the level of intellectual capital of existing SMEs could
be a cost-effective way to promote local economic growth and welfare.
The following areas which could be addressed by training:
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Surviving in the first critical years (Death Valley),

Developing new opportunities (growth),
Widening understanding and knowledge of markets (growth, internationalisation) and
Business transfer (succession).
Radical innovation means that the knowledge required to exploit innovation is competence-
destroying.
Areas for policy intervention
Why will local and regional policy will be needed?
The improvement of market functionality and the elimination of market failures should be the
basis for sound economic policy.
Market failures may be caused by deficiencies and asymmetries of information, business location
or previous economic development. Information deficiencies will be typical characteristics,
especially in start-ups.
Market failures caused by business location may be alleviated through regional policy and
support systems.
Market failures relating to imperfect and asymmetric information, externalities and incomplete
property rights, imperfect market structures and poor regulation can constrain SME
development.
The tools for local and regional business development which have been used worldwide include
both measures that have a direct impact on stimulating business as well as instruments which
indirectly affect local development.
The most widely used measures include making financial instruments and support funding
available, e.g. venture capital, R&D funding support, and start-up grants.
Small business development centers, incubators, technology villages, and science parks are
examples of organized environments to support business development.
Fostering entrepreneurship in rural areas
Scholars identified three specific challenges currently affecting rural areas, which have
implications for entrepreneurship, namely:
1. Declining employment opportunities in primary industries (mainly agriculture), as a
result of structural change, intensified by changes in policy.
 26

2. An aging population, associated with an outmigration of young people and an in-

migration of retired people,
3. Difficulties in maintaining a critical mass of facilities to support economic development,
including a range of business services.
New opportunities identified in many researchers included:

1. Increased demand for rural amenities on the part of urban residents;

2. Sources of economic success, such as dynamic SME clusters; and

3. Development of diversified agro-industries and rural tourism.

The heterogeneity of rural environments
Peripheral rural areas are characterized by
remoteness from major markets;
depopulation;
infrastructural deficiencies; and
high dependence on land-based activities.
Accessible or more central rural areas, by contrast, typically have
higher population densities;
closer proximity to markets;
less dependency on agriculture; and
a more diversified economic base.
Definitional issues: entrepreneurship and rurality
Referring to the USA, Shields (2005) defined rural areas as non metropolitan areas, exhibiting
low population density and low densities are commonly incorporated into most statistical
definitions of rural areas.