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is not given or determined by technology but mainly reflects the transactions costs of using the price system, including the cost of discovering what prices are (Coase 1937:386–405).1

An entrepreneur (an individual or groups of individuals) has the rare capability of making up for market deficiencies or filling gaps. There is no one-to-one correspondence between sets of inputs and outputs. Many firms operate with a considerable degree of slack (Leibenstein 1966:392–415; Leibenstein 1968:72–83). Thus, the entrepreneur, especially in LDCs, may need to seek and evaluate economic opportunities; marshal financial resources; manage the firm; and acquire new economic information and translate it into new markets, techniques, and products, as it may not be possible to hire someone to do these tasks. To illustrate, if an upper skiving machine is essential for making men’s fine leather shoes; if no one in the country produces this machine; and if imports are barred, then only entrepreneurs who know how to construct the machine can enter the fine leather footwear industry.

The entrepreneur also must be an “input completer.” For any given economic activity, a minimum quantity of inputs must be marshaled. If less than the minimum is available, the entrepreneur steps in to make up for the lack of marketable inputs by developing more productive techniques; accumulating new knowledge; creating or adopting new goods, new markets, new materials, and new organizational forms; and creating new skills – all important elements in economic growth. As indicated in Chapter 11, growth cannot be explained merely by increases in standard inputs, such as labor and capital. Entrepreneurial gap filling and input completing help explain why labor and capital do not account for all outputs. No fixed relationship between inputs and outputs exists, partly because entrepreneurial contributions cannot be readily quantified, predicted, planned for, or controlled.

Functions of the Entrepreneur

As we hinted earlier, we feel Schumpeter’s concept of the entrepreneur should be broadened to include those who imitate, adapt, or modify already existing innovations.2 Indeed, Addison (2003:5) finds that LDCs’ imitating DCs, boosted by higher educational attainment, is the major factor contributing to increased total factor productivity. Most business activity in a nonstationary state requires some innovation. Each firm is uniquely located and organized, and its economic setting changes over time. Thus, absolute imitation is impossible, and techniques developed outside the firm must be adapted to its circumstances. This necessity is especially apparent when

1Coase argues that “a firm . . . consists of the system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur. . . . As a firm gets larger, there may be decreasing returns to the entrepreneur function, that is, the costs of organizing additional transactions within the firm may rise” (pp. 388–389).

2Although Schumpeter did not consider the imitator to be an entrepreneur, he did contrast the imitating entrepreneur with the innovating entrepreneur. Entrepreneurs who adapt innovations already in existence could be said to be involved in both imitation and innovation.

an LDC firm borrows technology from an advanced economy with different, relative factor prices – for example, a higher labor price relative to capital. These adaptations require, if you will, innovation if defined in a less restrictive sense than Schumpeter used it.

In a changing economy, it is difficult to distinguish between the adaptations of day-to-day management and the entrepreneur’s creative decisions. Peter Kilby’s following list (1971:1–40) of 13 entrepreneurial roles includes some management functions.

Exchange relationships

1.Seeing market opportunities (novel or imitative)

2.Gaining command over resources

3.Marketing the product and responding to competition

4.Purchasing inputs

Political administration

5.Dealing with the public bureaucracy (concessions, licenses, taxes, and so forth)

6.Managing human relations in the firm

7.Managing customer and supplier relations

Management control

8.Managing finances

9.Managing production (control by written records, supervision, coordinating input flows with customer orders, maintaining equipment)

Technological

10.Acquiring and overseeing plant assembly

11.Minimizing inputs with a given production process – industrial engineering

12.Upgrading processes and product quality

13.Introducing new production techniques and products

The economist who analyzes Western economies frequently limits the entrepreneurial function to activities 1 and 2: It is assumed that the remaining skills can be purchased in the marketplace. But the extent to which the entrepreneur can delegate these activities to competent subordinates depends on many variables: the scale of production; how well developed the market is for such highly skilled labor; the social factors governing how responsible hired personnel will be; and the entrepreneur’s efficiency in using high-level managerial employees. Because many of the markets for skilled people in developing countries are not well developed, entrepreneurs frequently have to perform these tasks themselves. Studies of entrepreneurs in LDCs indicate that production, financial, and technological management are least satisfactory (ibid.).3

3Indeed, Lazear (2004:208–211) contends that even in DCs entrepreneurs are jack-of-all-trades, exemplifying a variety of skills.

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Kilby (2003:15), who later revisited his 1971 essay, stresses that LDCs have more of a deficiency in the demand (opportunity) for, rather than the supply (capacity) of, entrepreneurs. Deficient demand means impediments in the economic environment resulting from a lack of technology and complementary factors, including not only resources of production but also infrastructure, incentives, information, and bureaucratic skills (ibid.; Nafziger 1977:83–89; Schatz 1963:42–56).

Family as Entrepreneur

The family enterprise, which is widespread in less-industrialized countries, is usually small and managed primarily by the father or eldest son. As the dominant form of economic organization in 19th-century France, the family firm was conceived of as a fief to maintain and enhance the position of the family, and not as a mechanism for wealth and power (Landes 1949: 45–61). However, some of the leading industrial conglomerates in developing countries are family-owned. For example, India’s largest private manufacturers are usually members of old trading families, who control several companies. Frequently, family members specialize their roles according to industry, location, or management function.

Family entrepreneurship can mobilize large amounts of resources, make quick, unified decisions, put trustworthy people into management positions, and constrain irresponsibility. Thus, among the Igbo people in Nigeria, families guarantee that debts are paid, and their solidarity provides strong sanctions against default, as individual failure reflects on family reputation. The extended family frequently funds apprentice training and initial capitalization, although it may hinder the firm’s expansion by diverting resources to current consumption (Nafziger 1969:25–33).

In India, the extended family involved in business activity is usually methodical in choosing its investments in the human capital of its children. The family may use its income and enterprises to provide the training, education, travel, and business experience of its children, and to purchase plant and equipment that is most appropriate for the young businessperson’s entrepreneurial development. As youngsters, the children in business families are exposed to a business milieu and learn about the family enterprises. Where the family has sufficient income, it enrolls the children in excellent schools, frequently encouraging its offspring to study law, economics, engineering, or business administration at the university, and sometimes even providing foreign travel and training. A family with several children may diversify their educations among subjects relevant for business. During school vacations and after graduation, each son, and increasingly in the last two decades each daughter, is moved from job to job within the family’s production units, gradually increasing the child’s responsibility. Moreover, families sometimes arrange marriages to further alliances with other prosperous business families (Nafziger 1975:131–148).

Family entrepreneurship, however, may be conservative about taking risks, innovating, and delegating authority. Paternalistic attitudes in employer–employee relationships prevail, and family-owned firms are often reluctant to hire professional managers. This reluctance, however, may reflect the critical shortage of professionals

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Theory of Technological Creativity

HAGEN’S THEORY

On the Theory of Social Change (1962), by the economist Everett E Hagen, uses psychology, sociology, and anthropology to explain how a traditional agricultural society (with a hierarchical and authoritarian social structure where status is inherited) becomes one in which continuing technical progress occurs. Because the industrial and cultural complex of low-income societies is unique, they cannot merely imitate Western techniques. Thus, economic growth requires widespread adaptation, creativity, and problem solving, in addition to positive attitudes toward manual labor.

Hagen suggests that childhood environment and training in traditional societies produce an authoritarian personality with a low need for achievement, a high need for dependence and submission, and a fatalistic view of the world. If parents perceive children as fragile organisms without the capacity for understanding or managing the world, the offspring are treated oversolicitously and prevented from taking the initiative. The child, repressing anger, avoids anxiety by obeying the commands of powerful people.

Events that cause peasants, workers, and lower elites to feel they are no longer respected and valued may catalyze economic development. For Hagen, this process occurs over many generations. Increasingly, adults become angry and anxious; and sons retreat and reject their parents’ unsatisfying values. After several generations, women, reacting to their husbands’ ineffectiveness, respond with delight to their sons’ achievements. Such maternal attitudes combined with paternal weakness provide an almost ideal environment for the formation of an anxious, driving type of creativity. If sons are blocked from other careers, they will become entrepreneurs and spearhead the drive for economic growth.

A CRITIQUE

One problem with Hagen’s theory is that loss of status respect is an event so broadly defined that it may occur once or twice a decade in most societies. Nor does the theory explain groups, for example, 17th-century English Catholics, who lost status but did not become entrepreneurs. Furthermore, the interval between status loss and the emergence of creativity varies from 30 to 700 years, so that Hagen’s hypothesis fits almost any case.

Although Hagen charges economists with ethnocentrism, he applies a Westernbased personality theory to vastly different societies and historical periods. In addition, his case studies provide no evidence of changes in parent–child relationships and child-training methods during the early historical periods of status loss. Moreover, the economic historian Alexander Gerschenkron (1965:90–94) convincingly argues that the position, training, and discipline of the child in modern Germany, Austria, and Sweden resemble those described in Hagen’s traditional society. Finally, Hagen slights the effect on entrepreneurial activity of changes in economic opportunities, such as improved transport, wider-reaching markets, the availability of foreign capital and technology, and social structure. But, despite its inadequacies, Hagen’s work

has made economists more aware of the importance of noneconomic variables in economic growth.

Occupational Background

Many studies of industrial entrepreneurs in developing countries indicate trade was their former occupation.5 A trading background gives the entrepreneur a familiarity with the market, some general management and commercial experience, sales outlets and contacts, and some capital. A number of traders entered manufacturing to ensure regular supplies or because they can increase profits. Frequently, a major catalyst for this shift was government policy following independence from colonial control. At that time, governments often encouraged import substitution in manufacturing through higher tariffs, tighter import quotas, and an industrial policy that encourages the use of domestic inputs. Even with government encouragement, traders going into manufacturing often have had trouble setting up a production line and coordinating a large labor force.

Writers on entrepreneurship occasionally mention a “trader mentality” that leads to an irrational preference for the quick turnover rather than the long-run returns that manufacturing offers. Frequently, however, the trader may lack industrial management and technical skills. In addition, the business milieu, social overhead services, and government policies may not encourage industry. It is not irrational for entrepreneurs to prefer trade to manufacturing if they believe incomes are higher in trade. For some traders, an industrial venture may await government programs in technical and management training, industrial extension, and financial assistance.

In most developing countries, numerous young people are apprenticed to learn such skills as baking, shoemaking, tinsmithing, blacksmithing, tanning, and dressmaking from a parent, relative, or other artisan. Even though some have argued that artisans trained in this way have less drive and vision and direct relatively small firms, some of them have, nonetheless, become major manufacturers. This transformation is especially pronounced in early phases of industrialization, such as in England’s Industrial Revolution and today’s less-developed countries. The scale of the enterprise may gradually expand over several years or even generations. Even so, relatively few artisans can make the leap from the small firm owner to manufacturer. However, artisans and their students benefit from industrial innovation as well as from training and extension programs. Apprentice systems inevitably improve with the introduction of new techniques. Economists should not overlook these artisans, since they contribute to industrial growth.

In general, most successful industrial entrepreneurs have borne or shared chief responsibility for the management of at least one enterprise before their present activity, whether this work was in another manufacturing unit or in handicrafts, trade,

5The following studies were consulted: Sayigh (1962); Alexander (1960:349–365); Alexander (1964); Kilby (1965); Harris (1967); Berna (1960); Nafziger (1978); Papanek (1962:46–58); Carroll (1965).

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transport, or contracting. Few industrialists, however, were once farmers. Except for landowners, very few farmers have had the funds to invest in industry. And even landlords are poorly represented. They tend to place a high value on consumption and real estate expenditure and lack experience in managing and coordinating a production process with specialized work tasks and machinery and in overseeing secondary labor relations.

Few people in developing countries move from government employment to entrepreneurship. In studies in Lebanon, Turkey, Greece, Pakistan, and India, less than 10 percent of the entrepreneurs were once in the civil service. Frequently, potentially capable entrepreneurs in government service have relatively high salaries, good working conditions, attractive fringe benefits, and tenure. Leaving such a job to enter entrepreneurial activity involves substantial risk.

Empirical studies indicate that an even smaller fraction of industrial entrepreneurs were previously blue-collar workers. Blue-collar workers are most likely to become entrepreneurs because of “push” factors, such as the lack of attractive job options or the threat of persistent unemployment, rather than “pull” factors, such as the prospect of rapidly expanding markets.

Barton H. Hamilton (2000:604–632) examines whether self-employment in entrepreneurial activity pays as well as paid employment. He finds that the present value of income to the median entrepreneur of a long-lasting business is substantially less than that of a paid job with zero tenure. The finding is strengthened when you consider the large proportions of businesses that fail to survive for more than four years in both DCs and LDCs (Nafziger 1968:111–116). Could it be that prospective entrepreneurs face “push” factors of few alternative options or, at the other pole, inflated expectations of “striking it rich”? No, for Hamilton (2000:628), the evidence is consistent with the notion that entrepreneurship offers significant nonmonetary benefits such as “being your own boss.” It may be this motive – one that I encountered scores of time among LDC entrepreneurs I interviewed – that is most important in spurring entrepreneurial activity.

Religious and Ethnic Origin

WEBER’S THESIS: THE PROTESTANT ETHIC

Capitalism is an economic system in which private owners of capital and their agents, making decisions based on private profit, hire legally free, but capital-less, workers. Max Weber’s The Protestant Ethic and the Spirit of Capitalism (1904–05) tried to explain why the continuous and rational development of the capitalist system originated in Western Europe in about the 16th century. Weber noted that European businessmen and skilled laborers were overwhelmingly Protestant and that capitalism was most advanced in Protestant countries, such as England and Holland. He held to the view, discussed in Chapter 3, that Protestant asceticism was expressed in a secular vocation. Although Puritans (or ascetic Protestants) opposed materialism as much as the Roman Catholic Church, they did not disapprove of accumulating wealth. They

did, however, restrict extravagance and conspicuous consumption and frowned on laziness. These attitudes resulted in a high savings rate and continued hard work – both factors favorable to economic progress.

Calvinists (Reformed churches and Presbyterians), Pietists, Methodists, Baptists, Quakers, and Mennonites made up the major ascetic Protestant denominations. The 16th-century French reformer John Calvin taught that those elected by God were to be diligent, thrifty, honest, and prudent, virtues coinciding with the spirit essential for capitalist development.

EVALUATION OF WEBER

The Protestant Reformation and the rise of capitalism, although correlated, need not indicate causation. A third factor – the disruption of the Catholic social system and loss of civil power – may have been partly responsible for both. Alternatively, the Protestant ethic may have changed to accommodate the needs of the rising capitalist class. Another explanation is that the secularization, ethical relativism, and social realism of Protestantism may have been as important as its “this-worldly” asceticism in explaining its contribution to economic development.

Robert Barro and Rachel McCleary’s analysis (2003) is broader, examining the role of religion generally in economic growth. Their study of 59 countries finds that growth in real per-capita GDP, 1965–75, 1975–85, and 1985–95, responds positively to religious beliefs, notably those in hell and heaven, but negatively to church attendance, suggesting that growth depends on believing rather than belonging. Their analysis is consistent with Gerhard Lenski’s classic study of Detroit, Michigan (1961), which shows that religious belief and commitment were linked to a spirit of capitalism and a humanitarian outlook whereas religious communalism (belonging to or involvement in a socioreligious subculture, such as white Protestantism, Catholicism, Judaism, or African-American Protestantism) fosters a provincial view of the world.

MARGINAL INDIVIDUALS AS ENTREPRENEURS

Despite criticisms, Weber’s work has stimulated scholars to ask important questions about how entrepreneurial activity is affected by religious, ethnic, and linguistic communities. One question concerns marginal ethnic and social groups, that is, those whose values differ greatly from the majority of the population. To what extent do marginal individuals, because of their ambiguous position, tend to be innovative?

In a confirmation of Weber’s study, Hagen (1962) finds that Nonconformists (Quakers, Methodists, Congregationalists, Baptists, Anabaptists, and Unitarians), with only 7 percent of the population, contributed 41 percent of the leading entrepreneurs during the English Industrial Revolution (1760–1830). Other marginal communities disproportionally represented in entrepreneurial activity include Jews in medieval Europe, Huguenots in 17thand 18th-century France, Old Believers in 19thcentury Russia, Indians in East Africa before the 1970s, Chinese in Southeast Asia, Lebanese in West Africa, Marwaris in Calcutta, and Gujaratis in Bombay. Refugees

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from the 1947 partition between India and Pakistan, and the exchange of minorities between Turkey and Greece in the 1920s, were overrepresented among industrialists in these four countries. Displaced Armenians, Jews, Europeans, Palestinians, and Arab expatriates, escaping persecution, political hostility, and economic depression, were responsible for the rise in entrepreneurial activity in the Middle East between 1930 and 1955. For migrants, the challenge of a new environment may have a beneficial educational and psychological effect, and the geographical dispersion of friends and relatives may allow the rejection of local values, obligations, and sanctions that impede rational business practice.

In the contemporary world, most dominant communities value economic achievement. Thus, leading business communities include the Protestants of Northern and Western European origin living in the United States, and Hindu high castes in India. In Lebanon in 1959, the politically dominant Maronites and other Christians comprised 80 percent of the innovative entrepreneurs, but only 50 percent of the population. The Yorubas and Igbos, the largest ethnic communities in the more industrialized region of southern Nigeria, are the leading entrepreneurs.

Unlike the preceding groups, aliens have usually not been innovative in industry requiring large fixed investment, which can easily be confiscated. Furthermore, the technical change they introduce is usually not imitated by other groups. The English Nonconformists, Huguenots, Old Believers, Marwaris, Gujaratis, and the south Asian and Mediterranean refugees mentioned previously are not considered alien groups, as their roots have been in their country’s culture. Even though there are instances in which aliens have made important contributions to technical change, there is no evidence they are generally more innovative than natives.

Are marginal individuals especially innovative? Because no one has conducted a systematic worldwide test, we simply cannot say.

Social Origins and Mobility

THE UNITED STATES

The dominant American folk hero has been the person who goes from rags to riches through business operations. One of the most celebrated was the steel magnate Andrew Carnegie (1835–1919), an uneducated immigrant, the son of a working man, forced to seek employment at a young age. Through cleverness and hard work, he rose from bobbin boy to messenger to assistant railroad superintendent to industrial leader. For him, “The millionaires who are in active control started as poor boys and were trained in the sternest but most efficient of all schools – poverty” (Carnegie 1902:109). Even so, his story is atypical. The Horatio Alger stories of the 19th century are largely legend. The typical successful industrial leader in the late 19th and early 20th centuries was usually American by birth, English in national origin, urban in early environment, educated through high school, and born and bred in an atmosphere in which business and a relatively high social status were intimately associated with his family life (Miller 1962).

OTHER CAPITALIST AND MIXED ECONOMIES

It should not be surprising that industrialists outside the United States have a similar sociological profile. Innovators during the English Industrial Revolution were primarily sons of men in comfortable circumstances (Hagen 1962). Industrial entrepreneurs from Greece, Nigeria, Pakistan, India, and the Philippines had an occupational and family status substantially higher than the population as a whole. Industrial corporate managers, mostly from families having the funds to pay for a university education, generally have an even higher socioeconomic status than entrepreneurs.

SOCIALIST COUNTRIES

In the Soviet Union in 1936, one of the few studies with reliable information on parental occupational origins, sons of white-collar employees, professionals, or businessowners had six times the representation in industrial, executive positions that the sons of manual workers and farmers had. This situation existed despite the 1917 revolution, which had ostensibly overturned the existing class structure (Granick 1961). Even in China, capitalists, supporting the 1949 revolution that had not been allied to foreign interests, continued (except for the Cultural Revolution, 1966–76) to receive interest on their investments and to be paid fairly high salaries for managing joint public–private enterprises. Members and children of the prerevolutionary Chinese bourgeoisie still hold a large number of positions in industry, administration, and education, despite attacks on their privileges from 1966 through 1976 (Deleyne 1971; Lyons 1987).

ADVANTAGES OF PRIVILEGED BACKGROUNDS

The entrepreneur or manager frequently profits from having some monopoly advantage. This advantage (except for inherited talent) is usually the result of greater opportunities, such as (1) access to more economic information than competitors,

(2) superior access to training and education, (3) a lower discount of future earnings,

(4) larger firm size, and (5) lucrative agreements to restrict entry or output. All five are facilitated by wealth or position (Dobb 1926).

Accordingly in India, high castes, upper classes, and large business families use such monopoly advantages to become industrial entrepreneurs in disproportionate numbers. In one Indian city, 52 percent of these entrepreneurs (in contrast to only 11 percent of blue-collar workers) were from high Hindu castes, which comprise only 26 percent of the total population. A disproportionate share of blue-collar workers (but none of the entrepreneurs), was from low-caste backgrounds (that is, Dalits and Protestant or Roman Catholic Christians). This lopsided distribution of business activity – shown in Table 12-1, which reflects differences in economic opportunities between the privileged and less-privileged portions of the population – is typical of many other countries as well.

Entrepreneurial activity is frequently a means of moving one or two notches up the economic ladder. Research indicates that the socioeconomic status of entrepreneurs is higher than their parents’ status, which is substantially higher than that of the general population.