CHAPTER 12©E.Wayne Nafziger Development Economics 1 Chapter 12 Entrepreneurship, Organization & Innovation.

CHAPTER 12 ©E.Wayne Nafziger Development Economics1

Chapter 12

Entrepreneurship, Organization &

Innovation


Entrepreneurship, Organization, & Innovation

Schumpeter - entrepreneur, with a dream and will to found a private kingdom, is a heroic figure in economic development.

Economic historians emphasize role of Schumpeterian captain of industry (Rockefeller, Carnegie, Vanderbilt, Duke, Gould, and Morgan) as leaders of the U.S. 1865-1914 expansion.


William Baumol (1968)“Entrepreneurship in Economic Theory“ –AER

Entrepreneur not

needed in neoclassical model of firm.

Analyzes optimum in well-defined problems with variables clearly specified.

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Harvey Leibenstein (1922-1994)

If input and output prices known, marshaling resources & producing output trivial.

In standard competitive model, no deficiency of entrepreneurship.

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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).


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

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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. Nafziger contends, in disagreement with

Schumpeter, that adapters are entrepreneurs.


Stationary state gains

High earnings for management. Monopoly gains. Windfalls. Speculative gains. But no profits.


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.


Sachs’ division of world . . . Technological innovators (Schumpeterian

entrepreneurs). Most of OECD plus Taiwan (15% of world’s

population). Technological adapters (Addison – LDCs’

imitation of DCs and increased education, major contributors to TFP).Mexico, Costa Rica, Argentina, Chile, Tunisia, South Africa, Israel, most of India, Singapore, Malaysia, Indonesia, Thailand, coastal China, Baltic states, Russia (near St. Petersberg), East-Central Europe (50% of world’s population).

Technologically excluded (rest of world).


Innovators, adapters & excluded

With some exceptions (not all blue are innovators, much of India is adaptive, etc.), blue-colored (high-income) nations are technological innovators, red & green (middle-income) nations are adapters, & yellow (low-income) nations are excluded.


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).


Technologically excluded

Tropical Africa Bangladesh Burma Laos Cambodia Haiti


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 multinational corporations’ global production network (producing components, parts, early-stage processing, especially information and communications technology or ICT).


Family as Entrepreneur Can mobilize large amounts of resources,

make quick, unified decisions, put trustworthy people into management positions, and constrain irresponsibility.

Can make investment in human capital. Yet conservative about taking risks,

innovating, and delegating authority. Sometimes paternalism in employer-employee relationships and reluctance to hire professional managers.


Achievement Motivation & Self-Assessment

Childhood in traditional societies produces an authoritarian personality with a low need for achievement (urge to improve) and high need for submission. Society requires changes in child rearing to stress independence and creativity (Hagen 1962).

McClelland (1961) contends that a society with high need for achievement produces more energetic entrepreneurs, who bring about faster economic development.


Achievement Motivation & Self-Assessment

Jovanovic (1982:649-670) finds that differences in entrepreneurial ability, learned over time, determine business entry or exit.

From business experience, people estimate their ability more precisely, expanding output as they revise estimates upward, and contracting with downward revisions.


Is there a shortage of entrepreneurs?

Let’s examine factors affecting the supply of and demand for entrepreneurs


Factors affecting supply of entrepreneurs

Occupational background & other experience.

Religious & ethnic origin. Social origins & mobility. Other socio-psychological factors

shaped by group identity. Education. Gender.


Factors affecting demand for entrepreneurs

Other production factors. State of arts.


Long-term property rights A barrier to innovation is insecure property rights.

De Soto (2000) attributes Western success to legally enforceable property titling, based on painstaking accrual of legislation consistent with the social contract.

Although LDC governments may provide credit and industrial estates for startup firms, insufficient property rights limit growth, illustrating de Soto’s dead capital, inaccessible as collateral for borrowing or bonds. Formal credit markets are nonexistent for most LDC businesses.

Will Chinese capitalists invest and innovate when land use rights are insecure?


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 low-income countries are even softer.


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.


The crucial factor for entrepreneurship

The facilitating state that - 1. minimizes rent seeking. - 2. refrains from hindering innovation & adaptation.

Source: E. Wayne Nafziger (2007). "Entrepreneurship and Development." To be published in International Handbook of Development Studies, Edward Elgar Publishing. Edited by Amitava Dutt and Jaime Ros.

CHAPTER 12©E.Wayne Nafziger Development Economics 1 Chapter 12 Entrepreneurship, Organization & Innovation.

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economic development

organization innovation

new markets

new products

new combinations

new production functions

new sources of material

joseph schumpeter