November 2009, Leora Klapper and Inessa Love, DECRG-FP
Entrepreneurship is essential for the continued dynamism of the modern economy and economic growth. It is therefore critically important to examine the constraints to entrepreneurship, the promotion of high-growth entrepreneurship and the impact of institutional reforms on the nature of new and incumbent firms. The exploration of these issues, among others, was the focus of a conference on “Entrepreneurship and Growth” sponsored by the World Bank Group and the Kauffman Foundation, organized by Leora Klapper and Inessa Love of DECRG and held at the World Bank headquarters on November 19-20, 2009.
I. Constraints to Entrepreneurship
A major theme throughout the conference was the question of what constrains entrepreneurship. Does the absence of business training and access to financial services act as the primary brake on firm creation and growth? Or are the constraints of a more inherent nature, like gender and culture? A host of papers discussed new research that provides insight into these important questions.
Several papers focused on the absence of sound management practices and basic business education in developing countries and the negative impact that these voids can have on firm profitability and scale. David McKenzie (World Bank) presented findings from a randomized experiment in India highlighting the productivity gains that improved management can have for large manufacturing firms. Further evidence, this time from Pakistan and presented by Xavier Gine (World Bank), demonstrated that business training can improve firm and individual-level outcomes, though more so for men.
Given the limited access to banking services in the developing world, much work is being done to study how individuals and firms react to the removal of savings and credit constraints. Evidence presented from two different studies – one from Kenya (by Pascaline Dupas and Jonathan Robinson, University of California) and another one in Mexico (by Inessa Love and Miriam Bruhn, World Bank) suggests that the introduction of banking services can improve investment decisions and informal business creation but that the impacts vary significantly along gender lines.
Though famously difficult to measure, culture is also of great interest to those seeking a better understanding of entrepreneurship trends. Christian Busch (KOF Swiss Economic Institute) presented findings that suggest we cannot reject the hypothesis that culture plays a role in self-employment rates. However, a paper presented by Krishna Kumar (RAND) concludes that the relative success of Indian entrepreneurs abroad is largely explained by differences in observable characteristics, namely education.
II. Institutions and Entrepreneurship
From an institutional standpoint, it is important to understand how existing policies and potential reforms impact individual and firm-level decisions. Using a natural experiment from a constitutional reform in China, Charles Eesley (Stanford) presented evidence that the removal of institutional barriers can encourage entrepreneurship, particularly among the top quartiles of a talent distribution.
A number of papers discussed the theme of formality vs. informality, specifically: why do some firms remain informal and what factors influence this decision? A paper presented by Christopher Woodruff (University of Warwick) finds that small firms in Sri Lanka often remain informal even despite reimbursement for registration costs. This suggests that firms may act rationally in deciding to remain informal, which runs counter to the commonly held views that formalization is the result of burdensome registration costs, and that firms suffer from their informality.
III. Promoting High-Growth Entrepreneurship
On the first day of the conference, a distinguished panel chaired by Robert Litan (Kauffman Foundation) engaged in a lively discussion on how to best encourage the kind of entrepreneurship that drives economic growth. William Baumol (New York University) suggested that a discussion of high-growth entrepreneurship must center on “innovative” entrepreneurs, as opposed to “replicative” entrepreneurs, because it is the former who have the potential to boost a country’s economic growth. “Innovative” entrepreneurs are those who launch a new product or service, or introduce an existing product or service into a previously unserved market. In contrast, “replicative”, or “necessity” entrepreneurs, are drawn to self-employment as a means of basic income and may lack the motivation and resources to grow their business.
Though there was a general consensus that “innovative” entrepreneurs are the engine of economic growth, there was disagreement as to how policymakers can best foster this type of entrepreneurship. Panelists suggested the strengthening of technical college systems, increased openness to FDI and a greater emphasis on financial literacy. Andrei Shleifer (Harvard) argued that policymakers should concentrate on removing barriers to growth for existing firms rather than forming policies to promote the formalization of existing firms. Others emphasized the need to reshape business education to stress divergence from existing business paradigms. However, the modern business education, based on previous experience, is likely to encourage more replicative entrepreneurs; as Orna Berry (Gemini Israel Funds) put it: “you can’t teach me to think outside the box.”
The complete conference agenda and links to all papers and presentations is available at:
For additional information on the joint World Bank Group - Kauffman Foundation Entrepreneurship Project, see: http//econ.worldbank.org/research/entrepeneurship