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Book Review: Entrepreneurship and Economic Development

 

Entrepreneurship and Economic Development, edited by Wim Naudé, Palgrave Macmillan in association with the United Nations University – World Institute for Development Economics Research (UNU-WIDER), 2011, 373 pages.


This collection of essays from various scholars takes stock of the body of knowledge on the role of entrepreneurship in economic development. 

Relevance of the book
While private sector development (PSD) has become an important focus of development programmes, research on entrepreneurship has until recently mostly been separate from development economics: As one of the book contributors highlights, “(t)he explosion of interest in entrepreneurship has been sudden and has demanded significant investigation to uncover its true relationship with economic development”, especially for developing countries, where “ironically its dynamics are least clear”. With agencies increasingly looking for data and evidence to inform programme design and justify their PSD budgets, the book therefore addresses a very timely question. Some of the most relevant insights are summarised below. 

New data on entrepreneurship and how to use them
How to measure entrepreneurship and the business environment is the first main subject of the book: One reason why the empirical studies on entrepreneurship have often been inconclusive are the methodological difficulties attached to measuring entrepreneurship – including the lack of comparable data across countries and time (Naudé 2010). Two critical initiatives to produce comparable data have emerged in recent years, and are among the main data sources used in the book: The Global Entrepreneurship Monitor (GEM) and the World Bank Group Entrepreneurship Survey (WBGES). 

However, as Sameeksha Desai points out, it is important to consider that these indices reflect different kinds of entrepreneurship and hence may yield different research results: GEM data risk to overestimate entrepreneurship activities as they measure entrepreneurial intent, whereas the WBGES is limited to formal sector entrepreneurship, excluding a large part of economic activity in developing countries. She therefore cautions that these measures of entrepreneurship are only useful if tied to the economic development context of a country, carefully applied and interpreted. 

New insights on the impact of business environment reforms
Using data from the WBGES, Doing Business Reports and Kaufmann governance indicators to analyse the impact of business environment reforms, Klapper, Lewin and Delgado find that higher business entry rates are associated with cheaper, more efficient business registration procedures, and better governance. Studying the impact of modernised business registry in particular, they find a positive relationship between the implementation of electronic registration and an increase in the number of registered businesses. They conclude that these variables should be taken into account in the design, implementation and evaluation of PSD programmes. 

Conflict-affected environments: special challenges to measuring business environment constraints
DCED member agencies are increasingly operating in conflict-affected environments (CAEs). How to measure the business environment in such contexts is therefore another relevant topic addressed by the book. Scrutinizing one of the most widely used benchmarking of the formal regulatory environment, the WB Doing Business indicators, Chiara Guglielmetti concludes they do not adequately capture the various economic and non-economic barriers to entrepreneurship in fragile states, which are “harsher and more diversified” than in other contexts. A similar view is also expressed in the DCED’s Key resources for PSD practitioners in CAEs, which specifies limitations of the DB methodology for CAEs, based on the Doing Business review of the WB’s Independent Evaluation Group. The implication is that for economic assessments in CAEs, the Doing Business indicators should be complemented by other diagnostic tools to inform programme design. 

Institutional reform - necessary but not sufficient for entrepreneurial development
The two remaining parts of the book provide insights into the effect of policies and institutions on entrepreneurship, and the role of active government support. A common thread is that institutional reform may only be necessary but not sufficient for entrepreneurial development. 

For example, José Ernesto Amorós examines the relationship between different kinds of entrepreneurship (GEM data) and the quality of governance (WB worldwide governance indicators). The results are inconclusive, but they seem to suggest that the quality of institutions is positively related to opportunity driven (productive) entrepreneurship), which – as Wim Naudé establishes, drives economic growth – and has negative effects on necessity-based (unproductive) entrepreneurship. However, good institutions seem not to be sufficient to improve entrepreneurship. 

For Amorós the policy implication is that developing countries need to make the promotion of productive, innovation-based entrepreneurship a key concern of their policy agenda to achieve economic development. In terms of the kind of policies required, Wim Naudé’s finding that governance and start-up costs are not a significant determinant of opportunity entrepreneurship suggests that “regulatory reform (…) may not result in the type of entrepreneurship most beneficial to growth”. He concludes that pro-active state-actions may be required. 

Industrial Policy as a solution?
This view is supported by William Lazonick, who argues that a developmental state subsidizing and protecting infant industries is required to create innovative firms and economic growth. This touches on the resurgent debate on the role industrial policy for PSD – a collection of resources and country studies on this theme can also be found on the DCED website

Conclusion
A missing piece in the book, which is mainly concerned with cross-country studies, is country- and programme-specific evidence (including but not restricted to regulatory reforms). Overall however, it is encouraging that panel data on entrepreneurship are becoming more available and are used to inform the process of identifying its determinants and impacts. Many of the book contributions are therefore worthwhile reading for those involved in promoting institutional environments and specific policies conducive to entrepreneurship.

         Melina Heinrich, 17 January 2011


References:

Daniel Kaufmann et.al. (2008): Governance Matters VII. Aggregate and Individual Governance Indicators 1996-2007, World Bank Policy Research Working Paper No. 4654. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1148386&

DCED (2010): Private Sector Development in Conflict-Affected Environments. Key resources for Practitioners. http://www.enterprise-development.org/download.aspx?id=1627

Global Entrepreneurship Monitor data: http://www.gemconsortium.org/Data

Independent Evaluation Group (2008): Doing Business: An independent evaluation, The World Bank, Washington, DC. http://www.businessenvironment.org/dyn/be/docs/205/db_evaluation.pdf

The World Bank Doing Business Reports: http://www.doingbusiness.org/reports

The World Bank Group Entrepreneurship Survey: http://go.worldbank.org/T8G73Z9ZM0

The World Bank Group Worldwide Governance Indicators:http://info.worldbank.org/governance/wgi/index.asp

Wim Naudé: Promoting Entrepreneurship in Developing Countries: Policy Challenges, UNU-Wider Policy Brief Number 4, 2010. http://www.wider.unu.edu/publications/policy-briefs/en_GB/unupb4-2010/


Acronyms used:
CAE - Conflict-Affected Environment
GEM - Global Entrepreneurship Monitor
PSD - Private Sector Development
WB - World Bank
WBGES - World Bank Group Entrepreneurship Survey