Entrepreneurship and Economic Growth

Entrepreneurship is a multidimensional concept, the definition of which depends largely on the focus of the research undertaken. An entrepreneur can fulfill different functions (Fiet, 1996). Hébert and Link (1989) distinguish between the supply of financial capital, innovation, allocation of resources among alternative uses and decision-making. They use the following definition of an entrepreneur which encompasses the various functions: "the entrepreneur is someone who specializes in taking responsibility for and making judgmental decisions that affect the location, form, and the use of goods, resources or institutions" (Hébert and Link, 1989). Wennekers and Thurik (1999) give an alternative definition in which they focus on the perception of new economic opportunities and the subsequent introduction of new ideas in the market. These definitions from the world of economics differ from those in the management world. In their description of the difference between entrepreneurs and managers, Sahlman and Stevenson (1991) use the following definition: "entrepreneurship is a way of managing that involves pursuing opportunity without regard to the resources currently controlled.

Entrepreneurs identify opportunities, assemble required resources, implement a practical action plan, and harvest the reward in a timely, flexible way". (Verheul et al., 2001)

Many studies have shown that there is a link between entrepreneurship and development. The question of why some nations are rich and others are poor has been at the center of economic debate for over two centuries. While some dominated discussion of economic development focused on and emphasized the importance of such factors as foreign aid and government planning, it is now widely agreed that the entrepreneur is the prime driver of economic progress (Kasper and Streit, 1998; Leff, 1979).

Even though it is difficult to measure the direct effect of entrepreneurship, intermediate variables or linkages can be used to explain how entrepreneurship influences economic development. Moreover, there is no universal accepted theory of development Leibenstein (1968) point to two important elements in the process. First, per capita income growth requires shifts from less productive to more productive techniques per worker, the creation or adoption of new commodities, new materials, new markets, new organizational forms, the creation of new skills, and the accumulation of new knowledge. Second, part of the process is the interaction between the creation of economic capacity growth and demand growth takes places. The entrepreneur as a gap-filler and input-completer is probably the prime mover of the capacity creation part of these elements of the growth process.

On the one hand, when entrepreneurs see opportunities in the service sector that give them higher returns, they move to this sector accordingly. Moreover, some entrepreneurs have relocated their production out of the economy in order to reduce the demand for the territory's relatively scarce resources (Tan, 1992).

Kirzner (1973) contended that a unique feature of entrepreneurship lies in its alertness and opportunity exploitation. In the market process, the opportunity that human agents are alert to is monetary profit. The role of the entrepreneurs, as Kirzner argues, arises out of their

"alertness to hitherto unnoticed opportunities". They proceed through their alertness to discover and exploit situations in which they are able to sell for high prices that which they can buy for low prices. Alertness implies that the actor possesses a superior perception of economic opportunity. In this sense, Kirzner's mode of entrepreneurship broadly encompasses the functions of a gap filler or routine entrepreneurship (Leibenstein, 1968).

Extending Kirzner's insights to the catching-up process, Cheah (1992) has contended that entrepreneurs in latecomer economies "increase knowledge about the situation, reduce the

general level of uncertainty over time and promote market processes which help to reduce or to eliminate the gap between leaders and followers". For Cheah, these entrepreneurial activities include "arbitrage, speculation, risk taking, adaptive innovation, imitation as well as planning and management efforts in response to market signals".

In his analysis Porter (1990) states that four interrelated sets of factors or conditions determine the competitive strength of nations and thereby the possibilities for sustained productivity growth. These four sets of factors make up the so-called national “diamond”. The four determinants are:

• Factor conditions. Porter distinguishes basic factors (e.g. natural resources and cheap, unskilled labor) from advanced factors (highly skilled personnel, modern networks infrastructure);

•Demand conditions. These have three main elements: the nature of buyer needs (e.g.

sophisticated instead of basic), the size and the pattern of growth and the existence of mechanisms by which a nation’s domestic preferences are transmitted to foreign markets;

• Related and supporting industries. The presence of internationally competitive supplier and related industries stimulates rivalry and partial cooperation;

• The structure and culture of domestic rivalry. This encompasses a wide scope such as opportunities provided to possible new entrants, the nature of competition between incumbent firms, dominant business strategies and management practices.

The relevance of Porter’s diamond can be summed up in one sentence: “Invention and entrepreneurship are at the heart of national advantage” (Porter, 1990). More specifically, Porter’s “diamond” can help investigating the interface between entrepreneurship and

National factor creation mechanisms affect the pool of knowledge and talent. Supplier industries provide crucial help or are the source of new entrants. Domestic rivalry creates a good “incubation environment” for entrepreneurs, but it can also be a mechanism by which entrepreneurship contributes to growth. Finally, feedback mechanisms are relevant because entrepreneurship can enhance the quality of the factor conditions through the learning process which starting a business provides (Wennekers, Thurik, 1999).