Complete notes of the source
The source focuses on the question: how is entrepreneurship good for economic growth? Many people would answer the question by stating that entrepreneurship provides platforms for the creation of new businesses, and that the newly created business will in turn provide job opportunities, increase competition, and increase productivity through the change in technology. However, this is not the case as there are several complications behind the relationship between the entrepreneurship and economic growth. It should be understood that entrepreneurship refers to the ownership and management of a business or the entrepreneurial behavior that leads one to seize an economic opportunity (Acs, 2006, p. 105). On the other hand, an entrepreneur is a person who owns or makes judgmental decisions regarding the coordination of scarce resources in an entity (Acs, 2006, p.105).
As stated in the source, there are two types of entrepreneurship: opportunity and necessity entrepreneurship. Necessity entrepreneurship applies when someone has to become an entrepreneur because he or she has no other or better option, whereas opportunity entrepreneurship refers to the chance or choice that someone has to venture into or start a new enterprise because of the existence of an unexploited or underexploited business opportunity (Acs, 2006, p. 97). Opportunity entrepreneurship impacts positively on the economic growth of a country whereas necessity entrepreneurship has little or no impact on a country’s economic growth or development. It is argued that necessity entrepreneurship, which sees people being pushed to self-employment because there are no better options can lead to a country’s underdevelopment. Opportunity-necessity entrepreneurship ratio and income per capita in various countries are as follows.
Figure 1: Opportunity-necessity entrepreneurship ratio and income per capita
The Global Entrepreneurship Monitor (GEM) is a national program that assesses the national level of entrepreneurial activity (Acs, 2006, p. 98). GEM’s initiation was in 1999, with ten countries, and the number of expanded to 21 and 39 in 2005. Notably, both developing and already developed nations are covered by the program. Despite GEM’s efforts to collect official data on self-employment, number of plants and firms in countries, and the size of distribution firms, its shortcoming is evident in the fact that it is unable to deal with the issue of comparing entrepreneurial activity in already developed and developing countries. There is great difficulty in comparing economic growth in developed countries such as Japan, Sweden, and Germany, and developing countries such as Uganda, Ecuador, and Peru.
There are three stages of economic development, where in the first stage; a country economy is seen to specialize in agricultural production and small-scale manufacturing. In this stage, the rate of non-agricultural self-employment is high, and it should be noted that every economy experiences this stage. In the second stage, there is a shift of the economy from agricultural and small-scale manufacturing to large-scale manufacturing. This stage sees a decrease in the rates of self –employment as people shift to the manufacturing sector. In the third stage, there is a shift from large-scale manufacturing to services. This stage exhibits an increase in entrepreneurial activity, and this owes to factors such as the decrease in the share of manufacturing in the economy, the biases of technological change toward industries in which entrepreneurial activity is important and higher development that leads to higher average firm size that provides several job opportunities. According to Adam Smith, when the division of labor increases, economic development also increases, and this means that economic development is experienced particularly in the third stage (Forman-Barzilai, 2012, p 200).
The relationship between entrepreneurship and economic development is dependent on what is meant by entrepreneurship. Schackle believes that even though an entrepreneur is a maker of history, his guide in making the history is his judgment of possibilities and not a calculation of certainties, and thus he or she greatly influences the entrepreneurial process (Batstone & Pheby, 1996, p.23). In a situation where entrepreneurship is taken to mean self-employment, then economic development may not be seen or realized because of the lack of a mechanism to link self-employment activities such as agriculture and small-scale industry to economic development. Arguably, the economic development of a nation is greatly dependent on the success of entrepreneurship coupled with the establishment of large corporations. Economic development is also experienced when people shift from small businesses towards stable employment. Stable employment implies that people are employed in the manufacturing sector and have a stable source of income unlike the income obtained from self-employment that is often unpredictable.
Striking a balance between the General National Framework Conditions and the Entrepreneurial Conditions is a necessity for all countries. That is to say, prior to shifting their attention to entrepreneurial framework conditions, developing countries should strive to strengthen their SME sectors. On the other hand, developed economies need to focus their attention on strengthening the Entrepreneurial Framework Conditions in a bid to become entrepreneurial economies. This means that they should not only focus on developing their manufacturing sectors but also their small and medium-sized sectors.
Entrepreneurship, economic growth, Global Entrepreneurship Monitor (GEM), necessity entrepreneurship, opportunity entrepreneurship, entrepreneur, judgmental, less-developed countries, developing countries, developed countries, low-income countries, high-income countries, business opportunity, economic development, opportunity-necessity ratio, entrepreneurial activity, development economists, globalization, self-employment, sole proprietorships, manufacturing firms, service firms, marginal managers, private enterprise, capital stock, direct foreign investment, opportunity-to-necessity entrepreneurship ratio, GDP, Entrepreneurial Framework Conditions, National Framework Conditions.
Acs, Z. 2006. How is entrepreneurship good for economic growth? Innovations, 1(1), 97-107.
Batstone, S., & Pheby, J. 1996. Entrepreneurship and decision-making: the contribution of GLS Shackle. International Journal of Entrepreneurial Behavior & Research, 2(2), 34-51.
Forman-Barzilai, F. (Ed.). 2012. The Adam Smith Review (Vol. 6). Routledge.