The 4% Solution by The Bush Institute

Author:The Bush Institute [Bush, George W.]
Language: eng
Format: epub
ISBN: 978-0-307-98615-3
Publisher: Crown Religion/Business/Forum
Published: 2012-07-17T04:00:00+00:00

WHAT DOES THE DATA SAY ABOUT THE RELATIONSHIP BETWEEN ENTREPRENEURSHIP AND ECONOMIC GROWTH?

Clearly, entrepreneurship is a complex phenomenon and can be found in a variety of settings and situations. Thus no single measurement, no matter how precise, can capture the entrepreneurial landscape of a country. This is why the empirical literature addressing the relationship between entrepreneurship and economic growth is broader than the theoretical one, spanning a large variety of methods (ethnologic approaches, case studies, interviews, surveys, and countrywide indicators) and countries. In most macroeconomic studies that are relevant to our current discussion, entrepreneurship is measured through self-employment, the prevalence of start-up initiatives, or the existence of new or small businesses. Although these measures can all be criticized on various grounds, each of them provides important insights. For example, recent studies have shown the existence of a systematic relationship among the per capita GDP of a country, its economic growth, and its level and type of start-up activity.

Countries with similar per capita GDP tend to exhibit a similarity in both the prevalence and type of new firm formation, while significant differences exist across countries with different levels of GDP per capita. At low levels of per capita income, start-ups provide job opportunities and scope for the creation of new markets. As per capita income increases, the emergence of new technologies and economies of scale allows larger and established firms to satisfy the increasing demand of growing markets and to increase their relative role in the economy.

This increase in the role of large firms is usually accompanied by a reduction in the number of new firms, since a growing number of people find stable employment in large industrial plants. As further increases in per capita GDP are experienced, however, the role played by the entrepreneurial sector increases again, as more individuals have the resources to go into business for themselves in an economic environment that allows the exploitation of opportunities. In high-income economies, through lower costs and accelerated technology development, entrepreneurial firms enjoy a newfound competitive advantage.14

As a result of the analysis just described, some agreement has begun to emerge among scholars that the empirical relationship between entrepreneurship (using as a proxy the number of start-ups) and economic growth (proxied by per capita GDP) can be illustrated by a shallow inverted U function as shown in Figure 1 below.15

Figure 1

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