Entrepreneurial activity, industry orientation and economic growth Jaap Bos (Maastricht University, Faculty of Economics and Business) Jolanda Hessels (Erasmus School of Economics and Panteia/EIM) Mark Sanders (Utrecht School of Economics) Peter van der Zwan (Panteia/EIM and Erasmus School of Economics) GEM-conference 20-21 June, Barcelona, Spain 1

Background Economists interest in economic growth: Before 1990s: mainly within context of lower-income countries (development economics) Since 1990s: Increased interest in economic growth in higher-income countries (following Romer/Lucas) Debate on role of entrepreneurship in economic growth (entrepreneurship, growth and development economics) GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 2 of 17

Views on entrepreneurship Market theory: static equilibrium, no profit opportunities, no room for entrepreneurship Market process theory: disequilibrium, profit opportunities: Kirzner (1973): entrepreneurs bring markets in equilibrium by pursuing opportunities (alertness, judgment) Schumpeter (1934): entrepreneurs bring markets out of equilibrium by doing something new (innovation). Entrepreneurs act as agents of change by changing output and prices or by doing something new GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 3 of 17

Views on entrepreneurship Different functions entrepreneurs (Hébert & Link, 2009); The entrepreneur is: … a person who assumes risk associated with uncertainty … an innovator … a decision maker … an industrial leader … an allocator of resources among alternative uses … an organizer/coordinator of economic resources … an arbitrageur … the owner of an enterprise … an employer of factors of production … a person who supplies financial capital … a manager or superintendent GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 4 of 17

Entrepreneurship and growth Traditional neoclassical growth theory (Harrod Domar, Lewis); Endogenous growth theory (Romer) Models of entrepreneurship and growth (Schmitz, 1989; Murphy et al., 1991; Iyigun and Owen, 1999) Knowledge spillover theory of entrepreneurship (Audretsch and Keilbach, 2004) Empirical studies: positive relationship entrepreneurship with economic growth in higher income countries GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 5 of 17 5 5

Entrepreneurship and growth How entrepreneurship contributes to growth: Schumpeterian Growth Models Knowledge Spillover Theory of Entrepreneurship Self-Employment and Self-Realization Entrepreneurs create value directly and through diversity, knowledge spillovers and competition in markets GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 6 of 17 6

Types of entrepreneurship Segmentation within entrepreneurship: Employers versus own account workers Opportunity versus necessity entrepreneurs Innovators versus imitators Etc… GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 7 of 17 7

Types of entrepreneurship and growth This paper: Explore if contribution of entrepreneurs differs by sector of activity. Explore if contribution of entrepreneur differs across industries and countries by development stage. Explore who sorts into what sector of activity. GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 8 of 17 8 8

Data Global Entrepreneurship Monitor (GEM): 9 years (2001-2009) GEM from 1999 onwards; 29 countries in total in 2001; 55 in 2009 78 countries for which TEA rates are known Total early-stage entrepreneurial activity 20 factor-driven, 27 efficiency-driven, 31 innovation-driven 13 countries participated each year (e.g., Belgium, the Netherlands, UK, US); factor-driven economies mostly only once GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 9 of 17 9 9

TEA rates for UK, NL, US, BE GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 10 of 17

Decomposition of TEA GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 11 of 17

Empirical Strategy Empirical growth literature Cross-country differences  pooled OLS rather than panel regression with fixed or random effects. Annual GDP growth is regressed on TEA rates in the previous year and usual controls. Year dummies are included to avoid selection bias. Correlations, not causality. By type (3) and development stage (3) What activity benefits what countries? Ordered logit on types of entrepreneurship Usual suspects Who engages in what activity under what growth regime? GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 12 of 17

Results For all countries and for all years (n=337) Overall TEA (log) positive significant influence at 1% GDP per capita (log) negative significant influence at 5% When distinguishing between industries: High-tech TEA (log) significant at 1% The other industry TEAs are not significantly related to economic growth GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 13 of 17

Results (2) Distinguishing between stage of development Factor-driven economies (n=30): No significant influences for the TEA rates; no and low-tech TEA have negative sign. Efficiency-driven economies (n=109) Overall TEA (5%) and high-tech TEA (1%) positive significant, others insignificant. Innovation-driven economies (n=198) Overall TEA (5%) positive significant, others insignificant. GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 14 of 17

Results (3) Who selects into what type of activity? All countries, individual observations (n=61400): Male. Older. More Educated. Ambitious. Opportunity driven. Further refinements By development regime Control for time GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 15 of 17

Conclusion Preliminary conclusions: On the importance of high tech entrepreneurship: Pronounced only in efficiency driven countries On Entrepreneurship and Growth (in developed countries) Positive correlation growth and TEA. On Entrepreneurship and Development (in developing countries) No impact of TEA in LDCs. Low Quality? GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 16 of 17 16 16

Discussion Entrepreneurship (TEA) is too coarse a measure to capture relevant entrepreneurial activity: Importance of institutions (e.g., Boettke and Coyne, 2003): certain institutions (e.g., rule of law) that encourage entrepreneurial aspects must be present Importance of policies (e.g., Dias and McDermott, 2006): different policies (e.g., education and tax relief for entrepreneurs) work together to achieve growth GEM-conference Mark Sanders 20-21 June, Barcelona, Spain 17 of 17 17