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Monday, 18 May 2009

Boosting entreprenuerial activity...

A new paper confirms some important conclusions on how institutions can boost or hinder entrepreneurial activity :

We have found that the strong protection of property rights plays a pivotal role in the institutional environment conducive to entrepreneurial activity, especially at lower levels of development. Most of the other institutional indicators, including freedom from corruption, lack of entry barriers and absence of other regulatory barriers cluster around property rights forming our ‘Rule of Law’. This is consistent with De Soto: ‘Marx would probably be shocked to find how in developing countries much of the teeming mass does not consist of oppressed legal proletarians but of oppressed extralegal small entrepreneurs’ (De Soto 2001: 229). However, the variation in “the rule of law“has less impact in developed countries and...these are the countries where the rule of law is already high.

We also identify a strong and robust negative effect from the size of the state sector on entrepreneurial activity and this holds throughout the full range of income per capita in our sample. However, we recognise that this result abstracts from some important issues; the characteristics of the state sector as well as its size are important. Baumol et al. (2007) argue against welfare provision based on employment status as it discourages a movement from employment towards entrepreneurship. Thus, some of the key policy discussions are not only about the size of government spending but also about its design.

The relationship between the level of development and entrepreneurship is negative and non-linear; a logarithmic function performs best with our data. Access to finance is also found to matter for the entrepreneurial activity. However, when the level of development is taken into account we obtain the opposite results to those on property rights: formal finance is less important in poor countries, but becomes increasingly significant at the higher stages of development.

Our results contain interesting implications for policy makers as well as directions for further research. We have found that that the promotion of individual choices to become entrepreneurs is heavily dependent on two key aspects of the business environment: the rule of law and the size of the state sector. Moreover, priorities with respect to the provision of finance may be conditional on the level of development (Acs and Szerb (2009)). These results suggest that policymakers might benefit from focusing their attention on the elements of the institutional environment that are most critical at a given level of development in their efforts to enhance entrepreneurial activity.

However, our most consistent result concerns the negative impact of the state sector (comprising in our second factor the level of taxation and the extent of welfare provision) on entrepreneurial activity. It would seem that at every level of development, higher rates of taxation reduces the incentives to be entrepreneurial rather than follow other forms of work while higher welfare provision raises the opportunity cost of entrepreneurial activity. Policies to increase the fiscal role of the state in the economy are therefore in direct conflict with aspirations to create a more entrepreneurial society.

Future research might wish to pay greater attention in developing both theory and
empirical work to non-linearities, especially concerning effects from various measures of the level of development. Further effort to find better institutional measures should result in sharper policy prescription, but our results suggest that all the dimensions of protection of property rights matter, and these include a well-functioning judicial system protecting security of contracts and transactions between individuals and firms, an effective system of registering property and low risk of expropriation by government action. Property rights should be seen as important in entrepreneurship-oriented development strategies. Our results also suggest why their significance has been largely overlooked: most research onentrepreneurship is concerned with developed countries, where we have found that impact of institutional variation in the rule of law is lower.

1 comment:

  1. There are a lot of things the government could do to stimulate entrepreneurs.

    1) Capacity building

    Universal education, including vocational training. At the core of every business person is a skill - car maintenance, farming (crops, livestock), programming, etc. all start with the ability to make something or do something, which is why it is so important for the future of the economy to get all children into school, and why the present free market attitude to education is so disastrous.

    2) Integration of local SMEs with MFEZ zones

    This would mean the government would have to depart from the policy of allowing FDI to choose their own suppliers from outside the country, when they are available in the country. If necessary, have FDI train up local SMEs to raise their production standards.

    3) A general policy of promoting SMEs, protecting them with tariffs, making available credit at very low interest rates, streamlining licenses and regulations to reduce their costs.

    Back in Januari, I posted this link at the NCC website:

    IDE DISCUSSION PAPER No. 134Unlocking the Potential of Zambian
    Micro, Small and Medium Enterprises “Learning from the international best practices – the Southeast Asian Experience”
    Chibwe CHISALA

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