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406 Part Three. Factors of Growth

TABLE 12-1. Caste and Religious Community of Entrepreneurs and Workers in an Indian City

Source: Nafziger 1978:65.

Education

Most studies indicate a higher level of education among entrepreneurs than for the population as a whole, and a direct relationship between education and the entrepreneur’s success. People with more education probably make sounder business decisions; in addition, their verbal skills are better and make acquiring new ideas and methods, corresponding and conversing in business relationships, and understanding instruction manuals and other routine, written information easier. Finally, the educated entrepreneur probably has a sound mathematical background, facilitating computation and recordkeeping.

However, the education of the entrepreneur may be negatively related to success in crafts requiring a lengthy apprenticeship such as weaving, blacksmithing, goldsmithing, shoemaking, and leathermaking. Time and money spent on formal education may represent relinquished opportunities in training more closely related to entrepreneurial activities (Nafziger 1977).6

Education may limit entrepreneurship by giving people other occupational choices. Thus, in the early 1960s, when Nigerians were replacing the remaining Britons in the civil service, Nigeria’s few university graduates turned to these jobs with their

6Nafziger and Terrell (1996:689–696) argue that, in India, firms founded by better educated (usually better connected) entrepreneurs are less likely to survive. The explanations are not only the greater opportunities by entrepreneurs in other pursuits but also to the reduction of returns from government connections and other forms of rent seeking during India’s economic liberalization.

high salary, security, prestige, and other perquisites rather than to entrepreneurial activity with its relatively low earnings and high risk. By contrast, in areas where university graduates are in excess supply, such as pre-1990 south India, some choose entrepreneurship to avoid unemployment or blue-collar jobs.

Gender

In the United States, there are relatively few women in business – not merely because of sex discrimination (though that plays a part) but because of the whole female socialization pattern in America. Some feminists charge that girls are brought up to aspire to be secretaries, nurses, dancers, and kindergarten teachers rather than to start a business.

In many developing countries, the percentage of female businesspersons is lower than in the United States. Despite certain exceptions, such as the concentrations of female traders in some large open-air market places in West Africa, only a small proportion of large-scale entrepreneurs in LDCs are women.

Most LDCs have cultural norms dictating how males and females should behave at work. Frequently, a woman’s physical mobility and social contact are restricted in LDCs. The anthropologist Johanna Lessinger (1980) states that in India women are not allowed to deal directly with strange men, as it is assumed that all unmonitored contact between unrelated men and women must be sexual. Furthermore, according to Lessinger, Indian women are viewed as naturally weaker, more emotional, less socially adept, less rational, and inferior to men. These views have been used not only to limit competition between women and men in business but also, in some instances, to justify a woman’s restriction to the household.

Moreover, the culture may view the characteristics of the successful entrepreneur – shrewdness, quick judgment, gregariousness, and force of personality – as inconsistent with those of a good and proper woman. Even where a woman is determined to be an entrepreneur, she is daily reminded that she is going against the norm: Sexual harassment is likely if she steps beyond the bounds of accepted behavior. Although a woman can get around these restrictions by surrounding herself with relatives, neighbors, and other women who can vouch for her good behavior, this strategy is cumbersome for the entrepreneur, who must be mobile. In addition to these social restrictions, bankers and suppliers may refuse the LDC businesswoman credit. In general, despite some slight variations, these attitudes toward female entrepreneurial activity are prevalent in developing countries.

Technological Mobilization and Entrepreneurship in Socialist

and Transitional Economies

Chapter 19 will indicate how difficult it was to motivate innovative activity in centrally planned economies such as the Soviet Union. Soviet managers resisted innovation, because resources diverted to technological change usually threatened the rewards for plan fulfillment.

Long-Term Property Rights

Perhaps a major barrier to innovation in socialist and some capitalist economies is the lack of secure property rights, discussed in Chapter 4. Are Chinese farmers going to invest and innovate when unsure that their use rights to the land are secure? Past experience suggests an uncertain continuity of a property rights regime, raising questions even about a 99-year lease. However, in 2004, China’s national legislature amended the constitution to formally protect private property rights.

In many LDCs, government provides credit and subsidized location in industrial estates for start-up firms. However, the lack of established property rights may limit growth, an example of de Soto’s dead capital, unusable under the existing property system and inaccessible as collateral for borrowing (see Chapter 4).

Conclusion

1.The political and cultural milieu in LDCs was generally not conducive to largescale industrial entrepreneurship before the 1960s or 1970s. Although LDC governments should encourage their entrepreneurs, it is not essential that they be captains of industry as glorified by Schumpeter.

2.To Schumpeter, the entrepreneur is an innovator, one who carries out new combinations. These innovations are the source of private profit and economic growth. However, LDCs need not unduly emphasize developing new combinations, because some technology can be borrowed or adapted from abroad.

3.Coase identifies the entrepreneur, who organizes within the firm, and the price mechanism as the two major coordinating instruments within the economy. The choice between organization within the firm or by the market reflects the transactions costs of using the price system.

4.The entrepreneur differs from the manager of a firm, who runs the business on established lines. The entrepreneur can fill gaps, complete inputs, and make up for market deficiencies.

5.Because they assume that most skills needed for an enterprise can be purchased in the market, Western economists frequently limit the entrepreneurial function to perceiving market opportunities and gaining command over resources. However, LDC entrepreneurs may have to provide some basic skills themselves, such as marketing, purchasing, dealing with government, human relations, supplier relations, customer relations, financial management, production management, and technological management, which are all skills in short supply in the market.

6.Although the family enterprise has the advantage of quick, unified decision making, its disadvantages include a conservative approach to taking risks, reluctance to hire professional managers, and paternalism in labor relationships.

7.McClelland contends that a society with a generally high need for achievement produces energetic entrepreneurs who bring about rapid economic growth. Some training institutions have used achievement motivation training as a part of programs at centers to develop entrepreneurship.

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8.Hagen argues that societies where children are raised democratically, so that they are encouraged to take initiative and be self-reliant, are more likely to produce entrepreneurs. However, critics are skeptical about Hagen’s claim that this creativity is linked to an earlier period of lost status.

9.Industrial entrepreneurs in LDCs come from a wide variety of occupational backgrounds, including trade, sales, and crafts. Few manufacturing entrepreneurs, however, come from farming, government employment, or factory work.

10.According to Weber, the spirit of the modern capitalist entrepreneur in Western Europe in the 16th century was found disproportionally among Puritans, whose religious asceticism manifested itself in worldly activity. Despite criticism of Weber’s thesis, his work has stimulated scholars to ask questions about how differences among religious and ethnic groups affect entrepreneurial activity. One such question, concerning the representation of marginal ethnic and social groups in entrepreneurial activity, has not been satisfactorily answered.

11.Generally, entrepreneurs come from a much higher socioeconomic background than the general population. In addition, they tend to be upwardly mobile.

12.Although education can increase the entrepreneurial supply by making available skills needed for business, it can decrease this supply by increasing a person’s job options.

13.Cultural norms in LDCs defining how women should behave at work limit female entrepreneurial activity. (Such problems occur in developed countries as well.)

14.Organization and innovation are important for growth in socialist as well as capitalist economies. It had been difficult for socialist countries, particularly the Soviet Union, to motivate managers and technicians to innovate.

15.Under China’s post-1978 industrial reform, self-employed individuals can innovate, start a new enterprise, combine capital and personnel, and, albeit with certain limits, expand the firm. The extent of China’s economic reform and protection of private property will help determine how much individual entrepreneurial activity will expand.

QUESTIONS TO DISCUSS

1.What is Schumpeter’s theory of economic development? What is the role of the entrepreneur in this theory? How applicable is Schumpeter’s concept of the entrepreneur to developing countries?

2.Which steps in the process of developing technical advances are essential for LDCs? Which steps in the process can they skip in full or in part?

3.How valid is Baumol’s view that the oligopolistic competition to innovate can explain capitalism’s recent “growth miracle”?

4.What is meant by the entrepreneur as gap-filler? Why is this entrepreneurial concept more relevant to LDCs than DCs?

5.What are the functions of the entrepreneur in LDCs? How might these functions differ from those of the entrepreneur in DCs?

6.What are the advantages and disadvantages of family enterprises in LDCs?

7.What are some of the noneconomic factors affecting entrepreneurship in LDCs?

8.What are the socioeconomic factors that affect the supply of industrial entrepreneurs in mixed and capitalist LDCs?

9.Are marginal individuals more innovative than nonmarginal individuals as entrepreneurs?

10.Is the concept of entrepreneurship applicable to socialist economies?

GUIDE TO READINGS

Baumol (2002), like Schumpeter, views innovation as the prime source of economic growth, but unlike Schumpeter, Baumol thinks that oligopolies spur innovative competition. Some major contributions to explanations for the relationship between entrepreneurship and economic development – works by Schumpeter, Knight, Leibenstein, McClelland, and Weber – are available on the Internet (see Nafziger, Internet Assignment, 2006a).

In a newly discovered 1932 article, Schumpeter (2005) emphasized development as fundamentally discontinuous (jerky or leap-like) change, based on novelty, and growth as incremental change.

For Hamilton (2000:604–632), the major incentive to become an entrepreneur, despite its inferior returns to paid employment, is “being your own boss.”

The U.N.’s Journal of Development Planning no. 18 (1988), edited by Harvey Leibenstein and Dennis Ray, devotes a whole issue to entrepreneurship and economic development, including Ray’s “The Role of Entrepreneurship in Economic Development;” Baumol’s, “Is Entrepreneurship Always Productive?” Stevenson’s, “Women and Economic Development: A Focus on Entrepreneurship;” Nafziger’s, “Society and the Entrepreneur;” Kim’s, “Entrepreneurship and Innovation in a Rapidly Developing Country;” Kilby’s, “Breaking the Entrepreneurial Bottleneck in Late-Developing Countries: Is There a Useful Role for Government?,” and several other articles. Kilby (1971:1–40) discusses various perspectives on entrepreneurship, emphasizing the correlation of the theoretical literature from a large number of disciplines with existing empirical literature. In addition, Schumpeter, McClelland, and Hagen summarize their views on entrepreneurship in short articles in the Kilby volume. Arena and Romani (2002:167–183) examine Schumpeter’s approach to entrepreneurship.

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Kilby (2003:13–29) revisits issues about the entrepreneur. Nafziger (1978:12–23) sketches the concept of the entrepreneur in the history of economic theory and in contemporary economic analysis. Liedholm and Mead (1987) have a survey of the small-scale industry literature in developing countries. Grossman and Helpman (1991) analyze the contribution of innovation to economic growth. Lin, Cai, and Li (2003) concentrate on the role of economic reform and marketization in China’s “miracle” growth.

Themes related to entrepreneurship in other parts of the book include: technological innovation and adaptation (p. 372), barriers to entrepreneurship in weak states with pervasive rent seeking (pp. 115–117), the role of the state in spurring entrepreneurship (pp. 61–62, 64–65), the entrepreneur talking advantage of global production networks and shifts in the product cycle (Chapter 17), and group lending for microenterprises for women (pp. 203–204).

414Part Three. Factors of Growth

revenues in these oil exporting states varied widely from 1970 to 2005, following boom and bust cycles similar to those in Texas, Louisiana, Oklahoma, and Alberta.

Land, Natural Resources, and Environmental Resources

Land and natural resources are considered nonproducible, because, unlike capital, they cannot be replenished through production. In practice, however, the line between these resources and capital is blurred. Thus, we say land is nonproducible, but in some major port cities, such as Singapore, Mumbai (Bombay), and Boston, where land was scarce, landfills extended overall area. Although only about 11 percent of the earth’s land area is cultivated, new arable land is continually created through drainage, irrigation, and the use of fertilizer, new seeds, and new machinery. New techniques and cheap transport have made economical the exploitation of resources that were previously unused.

Land and natural resources, although often lumped together, have highly distinguishable properties. Land is immobile and potentially renewable. Natural resources, by contrast, are mobile, but most are nonrenewable – they cannot be replenished at a rate fast enough to be meaningful in terms of the human life span. Nonrenewable energy sources include petroleum, coal, lignite, peat, natural gas liquids, terrestrial heat flows, oil shale, tar sands, uranium, and thorium.

Resource flows. Renewable energy sources consist of photochemical energy stored in plants and animals (for example, food, wood, animal excrement, and vegetable fuel), and sun, water (including tidal energy), wind, and animal power (Cook 1976:17, 51). Some economists do not like calling them renewable resources, preferring the term resource flows, for even if they cannot be exhausted, they lack regenerative capacity (i.e., humans cannot regenerate these flows). Solar energy may be stored by trees, fossil fuels, or algae, and may be artificially stored by batteries or hot water tanks, but the stock of solar energy is the sun itself; our consumption of solar energy has no effect on the stock or our future consumption.

Environmental resources are resources provided by nature that are indivisible. An ecosystem, an ozone layer, or the lower atmosphere cannot be allocated unit by unit (as you would allocate oil or copper) or consumed directly, but people consume the services these resources provide (Kahn 1995:5).

Petroleum

The importance of physical geographical features can change substantially with technological change. Petroleum, for example, became a significant resource once the internal combustion engine fueled by gasoline became widespread. Moreover, technological change alters the habitability of the world’s regions. Air conditioning, dependent on the oil and gas industry, made the southern United States more pleasant to live in the summer, and accounts for much of the substantial population and

FIGURE 13-1. Petroleum Prices, 1960–2015 (projected). Source: World Bank. 2004f:273.

economic growth of Florida, Texas, and southern California during the last 25 years (Firebaugh 2003:180–81).

The fourfold price increase in crude petroleum over four months in 1973 and 1974 sent many LDC economies reeling. The LDC imports of fuels and lubricants (largely petroleum) as a percentage of total merchandise imports more than doubled from 8.0 percent in 1970 to 17.5 percent in 1977. As Nafziger (2006b) shows, the balance of trade (merchandise exports minus merchandise imports) for oil-importing LDCs dropped from −$18.0 billion in 1973 to −$72.1 billion in 1980 and −$77.0 billion in 1981, whereas it rose in oil-exporting countries from $18.9 billion in 1973 to $87.1 billion in 1974 to $170.8 billion in 1980. For India, oil import payments as a percentage of export receipts more than doubled from 18.6 percent in 1973 to 38.4 percent in 1974. Yet oil-importing LDCs recovered some from the 1973 to 1974 shock, growing as fast as oil-exporting LDCs from 1973 to 1980.

Nonoil LDCs’ balance of trade recovered during the collapse in oil prices in the 1980s, falling to −$9.2 billion in 1986, before turning positive in the late 1980s, whereas oil-exporting countries’ positive trade balance dropped throughout the 1980s and early 1990s (except 1990), turning negative in 1994. In 1993–97, oil importers’ deficits were more comparable to 1980–1981, before increasing to smaller deficits after 1997. Except for one year, 1997, oil exporting LDCs’ trade balance was substantial from 1995 to the beginning years of the 21st century.

Although oil-importing LDCs maintained their growth from the 1970s to 1980s, oil-exporting countries’ growth, the major determinant of which is the oil export price (Figure 13-1), declined to a negative rate (Rahimibrougerdi 1988:147–168).1 Not only in the 1980s but also in the 1990s, oil-importing LDCs had faster growth than oil exporters.

1In the United States, real (inflation-adjusted) retail gasoline prices have fallen steadily from 1967 to 2003 (except for the late 1970s and early 1980s) (Hack 2003:D3). Among DCs, U.S. prices are close to the lowest prices in the world.