Entrepreneurship & Economic Development E. Wayne Nafziger Department of Economics Kansas State University October 20, 2005 Copyright by E. Wayne Nafziger Nafziger/Entrepreneurship/10/20/5

Nafziger/Entrepreneurship/10/20/5 William Baumol (1968) Entrepreneur not needed in neoclassical model of firm Analyzes optimum in well-defined problems with variables clearly specified Google images Nafziger/Entrepreneurship/10/20/5

Harvey Leibenstein (1922-1994) If input and output prices known, marshaling resources & producing output trivial In standard competitive model, no deficiency of entrepreneurship Google images Nafziger/Entrepreneurship/10/20/5

Concepts of entrepreneur Decision maker & risk bearer (Knight) Gap filler for poorly established markets (Leibenstein) Innovator who carries out new combinations: new products, new production functions, new markets, new sources of material, new organization of industry (Schumpeter) Nafziger/Entrepreneurship/10/20/5

Nafziger/Entrepreneurship/10/20/5 Joseph Schumpeter (1883-1950) No role for entrepreneur in stationary state Workers can perform this routine Entrepreneur Innovation Innovation Profit New bank credit finances innovation Google images Nafziger/Entrepreneurship/10/20/5

Innovators, adapters, & imitators Innovations arise in clusters depending on credit Imitators eventually wipe out gains from innovation Innovators must keep a step ahead of rivals for profits to continue I contend, in disagreement with Schumpeter, that adapters are entrepreneurs Nafziger/Entrepreneurship/10/20/5

Stationary state gains High earnings for management Monopoly gains Windfalls Speculative gains But no profits Nafziger/Entrepreneurship/10/20/5

Where are Schumpeterian entrepreneurs? Entrepreneur’s contribution can’t be measured Schumpeter – entrepreneur responsible for novel ways of doing things – innovation rough proxy for technical change (TFP) Residual explains most of growth in output per worker in DCs Nafziger/Entrepreneurship/10/20/5

Sachs’ division of world . . . Technological innovators (Schumpeterian entrepreneurs) Technological adapters (Addison – LDCs’ imitation of DCs and increased education, major contributors to TFP) Technologically excluded Nafziger/Entrepreneurship/10/20/5

Innovators, adapters & excluded Nafziger 2006, Cambridge, inside back cover Nafziger/Entrepreneurship/10/20/5

Characteristics of technologically excluded economies Pervasive rent seeking (unproductive activity to obtain private benefit from public action) State is soft and lacks clear business rules of law (Myrdal 1968:vol. 2) Returns to innovation precluded, e.g., arbitrary license grants (no explicit criteria for allocation) Nafziger/Entrepreneurship/10/20/5

Technologically excluded Tropical Africa Bangladesh Burma Laos Cambodia Haiti Nafziger/Entrepreneurship/10/20/5

LDC technological adaptation Meiji Japan – hired foreigners, bought foreign machinery, & learned from foreign buyers’ standards, eventually displacing foreigners As good standardized, can be mass produced by LDCs (Meiji Japan) with less skilled labor Participation in MNCs’ global production network (producing components, parts, early-stage processing, especially ICT) Nafziger/Entrepreneurship/10/20/5

Shortage of entrepreneurs? Demand – depends on other production factors & state of arts Supply – depends on education, experience, socio-psychological factors shaped by group identity Nafziger/Entrepreneurship/10/20/5

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Nafziger/Entrepreneurship/10/20/5 Role of the state Innovative and adaptive entrepreneurs are rare in weak, soft, or failed states – states with pervasive rent seeking Pre-1991 India was soft state, lacking will & competence to prevent pervasive rent seeking (licenses, subsidies, and monopoly were granted capriciously or corruptly) reducing returns to innovation. Many other LICs (remember map) are even softer Nafziger/Entrepreneurship/10/20/5

Nafziger/Entrepreneurship/10/20/5 Role of the state Meiji Japan prime example of facilitative state Today latecomers can take advantage of relative backwardness to facilitate technological transfer - 1. education from technological leaders - 2. global production network participation - 3. foreign investment & technology to replace DCs when standardization favors cheap labor Nafziger/Entrepreneurship/10/20/5

Nafziger/Entrepreneurship/10/20/5 The crucial factor The facilitating state that - 1. minimizes rent seeking - 2. refrains from hindering innovation & adaptation Nafziger/Entrepreneurship/10/20/5