ABSTRACT
Introduction Several studies have analysed different aspects of entrepreneurship, defined as the level of self-employment. They include van Stel et al. (2005) who analyse the effect of entrepreneurship on economic growth and find that the former’s influence on the latter depends on the level of income. Freytag and Thurik (2007) find that non-economic factors such as culture are important determinants of entrepreneurship. Robson (2007) studies the effect of social protection and political culture on entrepreneurship and finds that political culture has a strong incidence on entrepreneurship: the rate of entrepreneurship tends to be low in countries with a history of communist rule. Ilmakunnas and Kanniainen (2001) highlight the importance of risk and labour insurance on entrepreneurship in OECD countries. Klapper et al. (2006) find that entry regulations act as a barrier to entrepreneurship while Klapper and Love (2010) find that the 2008 financial crisis had an important negative impact on entrepreneurship. This chapter analyses the relationship between income per capita and entrepreneurship, defined here as the number of limited liability firms per 1,000 active persons, registered in a country in one year (Ayyagari et al., 2011).2 Entrepreneurs in high-income countries are generally considered as people who primarily engage in business as a result of a deliberate personal choice to pursue a perceived business opportunity, be in control of one’s life, achieve a feeling of selfesteem or have more independence (Roberts and Robinson, 2010; Hessels et al., 2008). They are called ‘opportunity entrepreneurs’. Influential models of occupational choice (e.g. Banerjee and Newman, 1993) consider these individuals as belonging to the high end of the income distribution – given that their activities often require collateral – in opposition to wage earners who are viewed as belonging to the lower end of the income distribution. This description of entrepreneurship does not fully capture the reality of many low-income countries where two types of entrepreneurship coexist. While people with high incomes may become opportunity entrepreneurs, those with low incomes might be forced to embrace entrepreneurship out of necessity or survival. These ‘necessity entrepreneurs’ (Acs, 2007; van Stel et al., 2005) are more common in economies where employment opportunities are limited and social safety nets catering for the basic needs of people on very low incomes are weak
or lacking. These entrepreneurs are ‘reluctant entrepreneurs’ (Charman and Petersen, 2009) given that they turn to business as a result of their inability to find paid employment.3 The implication is that one would expect to find a large number of ‘necessity entrepreneurs’ in poor countries and more ‘opportunity entrepreneurs’ in rich countries illustrating the core of Maslow’s Hierarchy of Needs Theory.4 Whereas the main objective of necessity entrepreneurs is to address basic needs at the bottom of Maslow’s Pyramid, opportunity entrepreneurs engage in business to satisfy needs at the top of the pyramid. This process suggests a convex relationship between entrepreneurship and income with high levels of entrepreneurship at both low-and high-income levels. Understanding the relationship between income per capita and entrepreneurship is relevant for industrial policy. In Africa, for example, it is useful to explore how the steady increase in income per capita observed over the last ten years, if it persists, will likely change the dynamic in the private sector with implications for employment creation.5 Such analysis could help in crafting development policies that seek to transform developing economies into ‘entrepreneurial economies’. So far, the empirical research on the relationship between income level and entrepreneurship has largely been carried out on OECD economies with inconclusive results.6 Most studies are historical and country based. They explore the evolution of entrepreneurship over a long period of time from as far back as the year 1800. They find some evidence of a U-shape relationship implying a decline followed by a recovery in entrepreneurship, over time. For example, various sources show a long-term decline of entrepreneurship in France, Sweden, USA, Germany, the Netherlands and the UK since the nineteenth century followed by a revival starting from the early 1970s. The analysis of 23 OECD countries covering the period 1972-2007 reveals that the number of business owners increased by 1.38 per cent per year against an increase of 1.15 per cent for the total labour force. This translated in the creation of 18.5 million owner-managed firms over the 35-year period. Other studies find an L-shape relationship suggesting a decline without recovery of entrepreneurship, over time, within the OECD group of countries (Wennekers et al., 2010; Carree et al., 2002, 2007). This chapter differs from previous studies on entrepreneurship in several respects. First, it adopts a different approach as it explores the relationship between entrepreneurship and income per capita using a large group of African and other countries at different levels of income over the relatively short period 2004-2009. Second, the chapter uses a different definition of entrepreneurship that allows capturing a large cross-section of countries. The availability of data on the creation of limited liability firms made possible the inclusion in the sample of a number of African countries that are not covered by the Global Entrepreneurship Monitor (GEM) database which has provided the data used in most empirical analyses of the subject. Third, this chapter adopts a quantitative approach that has not been pursued in the existing studies we are aware of.7 Entrepreneurship is modelled both as a static process using random effects models and as a dynamic phenomenon using the Generalized Method of Moments (GMM) approach. This appears to be a novelty relative to past studies.
