ENTREPRENEURSHIP

Can Governments Encourage Entrepreneurship?

Can Governments Encourage Entrepreneurship?

Introduction

Entrepreneurship has been an elusive phenomenon in much economics scholarship. The conception of entrepreneurship offered by Israel Kirzner has received increasing attention from economists in the past few years. Avibrant economy is characterized by its ability to create a continuous flow of new enterprises. Visionary entrepreneurs create new organisations, utilize new methods, bring in new products to satisfy unfilled demands, and correct market deficiency. Entrepreneurial entry also heightens competitions and forces incumbents to be more innovative and productive. Schumpeter (1942) famously envisioned entrepreneurs as the radical innovators who disrupt existing equilibrium and mastermind the “creative destruction,” a process “of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (p. 83).

Long-run economic growth and job creation will not happen without a continuous supply of new, innovative enterprises. In the United States, small businesses, those employing fewer than 500 employees, generated 60% to 80% of net new jobs, and created over 50% of nonfarm private gross domestic product (GDP) over the last decade (U.S. Small Business Administration, Office of Advocacy, 2005). International comparison shows that small firms employing fewer than 250 employees are strikingly more important in some countries than others (Ayyagari, Beck, & Demirgüç-Kunt, 2007). For example, small businesses account for 68.7% of formal employment in Denmark but only 5.38% in Ukraine. On average, high-income countries rely on small businesses to contribute about 60% of the total employment and over 50% of GDP, whereas low-income countries see less than 20% coming from businesses of similar sizes.

While it might be plausible that some cultures value and encourage entrepreneurial pursuit more than others, it is hardly convincing that people in high-income country groups possess more entrepreneurial spirits than their counterparts in low-income country groups. The cultures of Japan and Denmark could not be more different compared to those of Denmark and Ukraine, and yet Japan and Denmark, but not Ukraine, enjoy high entrepreneurial entry. Also, entrepreneurial skills are economically scarce human capital that cannot be inherited or be “born with.” Therefore, richer countries do not have a greater advantage of entrepreneurial heritage over poorer countries. The difference in the size and importance of entrepreneurial activities across country groups therefore begs the question of why some countries produce more entrepreneurs than others. The next section focuses on government qualities and behaviors and explores the effects of various government policies on promoting (or hampering) entrepreneurial formation.

Entrepreneurial Creation and the Quality of Government

This section discusses how measures related to government quality and government behaviors might facilitate or impede entrepreneurial formation. Government could promote entrepreneurship by securing property rights; simplifying entry procedures and reducing the cost of entry; facilitating the exchange of information; and providing start-up financing. On the other hand, certain government policies impede new venture creation. Examples include corruption, the prevalence of government-controlled businesses (the “crowd-out” effect; Kornai, 1986), and public policy that favors established firms.

Private Property Rights Protection

Entrepreneurship is fundamentally determined by the level of private property right ...