Entrepreneurship and economic development 18 12 17

Entrepreneurship and Economic Development Archana Dholakia 18-12-2017  Why study this relationship?  There is a very high and positive correlation between the number and growth of entrepreneurs and the economic growth and development  Growth of income is a quantitative outcome but it decides the size of the cake The distribution of cake decides the social as well as economic development which are qualitative in nature  There are a large number of countries which are abundant in natural resources but are still less developed due to lack of entrepreneurship on one hand and absence of strong institutions  Who is an entrepreneur?  Low risk low investment and low returns imply small businesses  Very high risk and high returns imply gambling  Low risk, low investment but high returns imply opportunity and the one who grabs this is an entrepreneurs Such opportunities are not for ever so timely plunge is important For example Bill gates and IBM and Ambani and Reliance company in India  Traditionally the one who manages all factors of production namely land, labor, capital and his skill, time and risk taking abilities can be defined as an entrepreneur  His major strength and contribution lies in innovation in carrying out the above activities  His major distinct characteristic is risk taking His rewards thus could be negative also  His important role is further expansion of economic activity and create economic and social value Cheaper products, greater variety, better quality, improvement in purchasing power of workers all occur due to this Also human development through education and skill formation occurs as a result of his activities  He not only tries to satisfy market demand but even try to create new demand!! Demand for a ride on the moon and mars, demand for naming a star on your girlfriend’s name, demand for spending time with dolphin!  Economic value creation through only profits? The answer is no Wages, rent, interest and profits all get created due to an entrepreneur  It is argued that in some activities like share selling and reselling of houses and offices no new value gets created But answer is he takes risk and redistributes several items as per demand and supply So the ‘ word arbitrage which is used for his reward is a reward for his intelligence, intuition and risk taking  Schumpeter and role of entrepreneurship(1934): He relates innovation with entrepreneurship  Due to scarcity of resources, Most of the entrepreneurs have to be innovative to find solutions which are cost effective  Predominant use of innovation and technology are the preconditions for persons to become an entrepreneur His concept was never as true as is today  Launching of a new product or the variety of existing products  Use of new methods or process of production  Opening up the new market not explored by others  Acquiring inputs or raw materials from novel - unexplored sources  Create new market structure- either creation or destruction of a monopoly  What is the motivation for entrepreneurship? The traditional way is to consider only profit as motivation  But Schumpeter considers “ Desire to create his own kingdom through successive creation of industry or trade or to achieve some goal, desire to fu fill the dream, willingness to give a fight or compete and winning for the sake of winning” could also be the strong motivating factors for the start and growth of ventures  Thus profit if at all could be one of the motivations This implies that his definition also includes social entrepreneurship which work for low or no profit purposes Thus to relate them only with  Like in the modern day we talk about disruption technology he talked about creative destruction implying giving up old technology and adopting the new one  Could we consider entrepreneurship as a dependent variable and economic development as an independent variable also? In other words is there a two way causality relationship between entrepreneurship and development?  The answer is yes The government through special policies and infrastructure can initiate the development process and create an enabling environment to create ‘crowding in’ effect  The government should try to ensure property rights, efficient and effective judiciary system , stability and free market approach implying minimum intervention Leiza fair policy means ‘ leave us alone’  Those governments which address growth first and then income inequality issue appear to be doing well The capitalist nations over the years have growing number of social entrepreneurship which takes care of masses  We can analyse the policies in terms of both Macro and Micro economic policies  Within macro we consider both fiscal and monetary policy affecting the motivation for entrepreneurship  Within fiscal policies we have taxation, non- tax income through service fees, subsidies, pricing of publicly provided goods and expenditures of government Country like India messed up on all these counts until 1991 after which some reforms were initiated  Monetary policy decides the amount Of capital and cost of capital for the entrepreneurs Interest rates, SLR, CRR, priority sector landing leaves little freedom to 26 public sector banks Also the issue of corruption and inefficiency means businesses depend on own funding or costly funding  Only small scales get benefits and subsidies hence large scale enterprises are completely discouraged Small scale would imply high cost and prices of products which harm consumers It also means low exports and therefore low growth, Development and low potential to import  Micro level policies affect prices of inputs- power and water are most expensive for enterprises Discouraging impact is obvious  Pollution control is quantity based and irrational policy based  Government intervention through MSP, MIP create distortion and deprive genuine demander of raw materials  Let us look at the policies by factors of production  Labor: abundant factor made more expensive through laws relating to wages, PF benefits, variety of leave benefits, LTC etc Bad hire and no fire policy  Government hiring people for the sake of employment creation raises overall wages without raising productivity Hence firms refuse to spend further on training and skills  Free entry but no exit: This policy for the entrepreneurship is not allowing people to start new ventures  Since the firms have the option of employing less people with high  Capital: inadequate and costly due to highly regulated banking and financial sector A major input for enterprise is denied in this way  Land: issues about agricultural land Regulation for acquisition Land ceiling Rent control acts and poor tenancy laws against owners Land and building availability for enterprises is a big problem Old firms are not allowed to sell excess land without permission of the government Highly skewed land market  Laws about depreciation and deductions of business expenses are helpful but accompanied by high corporate taxes and until the recent past multiple taxes ( about 17 total of the centre and states) Consequences of the above policies  As one can see from the Indian case, if the policies of the government are not geared to facilitate the entrepreneurship the number and growth of businesses remain stagnated and economic development and growth suffer  In India businesses have grown despite some restrictions as they have learnt to handle the problems However if the bottlenecks were absent we would have consistently grown at 7-8 rather than at so called’ Hindu rate of growth’ Thanks ... study this relationship?  There is a very high and positive correlation between the number and growth of entrepreneurs and the economic growth and development  Growth of income is a quantitative... education and skill formation occurs as a result of his activities  He not only tries to satisfy market demand but even try to create new demand!! Demand for a ride on the moon and mars, demand for... relationship between entrepreneurship and development?  The answer is yes The government through special policies and infrastructure can initiate the development process and create an enabling