Saturday, November 6, 2010

Towards a theory of economic growth

A couple of years ago, whilst attempting to complete a masters degree in Business Administration 
I somewhat naively attempted to create a model linking entrepreneurship to economic growth. I began a 3 year quest to read all I could about entrepreneurship and economics. It become apparent early on, that academics simply do not agree on what entrepreneurship is. Furthermore modern economic theory has very little to say about the entrepreneur. I found this to be somewhat confusing, being a simple engineer, I expected there to be at least some basis on which to build an economic theory based on entrepreneurship. Afterall, it would seem evident from our current and historic experience that entrepreneurship (if we agree on what it is) generates economic growth. Almost every nation has a host of policies trying to stimulate entrepreneurship, however, academics did not seem to have a very good idea of how this growth worked. I presented my model for my dissertation, however, it was promptly dismissed. No matter, I wish to continue my process of discovery and continue the work I have started. 
I won't attempt here to provide all the references that led me to this model (which, I am happy to admit is far from explanatory). However, influential works by Schumpeter, Baumol , Kirtzner, Penrose, North, Chandler,
Aldrich, Audretsch, Casson, Mintzberg,  Shane & Venkataraman and Fleck - amongst others, were influential in my studies.
The first issue to overcome, was the question of entrepreneurship: what is it ? Some say innovation, others say it is simply starting an enterprise which survives for more than X years, others claim that growth is key, or that organizations are formed. This raises questions, for me, I wondered if the people selling drinks on the beach were entrepreneurs (they seemed quite creative) or were they simply distributors for the large drinks companies ? Eventually I settled on the view, that entrepreneurship is the process of "opportunity recognition".  This is an interesting view, as it relates entrepreneurship to a process, means that it can occur within an organization and does not restrict it to be innovative or stipulate the creation of an organization.
Levels of analysis are often confused in much of academic literature, I wanted to relate the individual to the societal, so I chose three levels of analysis - individual, group and societal. I also liked the approach by population ecologists who relate the formation of organizations to population ecology. Survival of the fittest, variation and all those lovely things we learn in school biology. This seemed to be a reasonable basis on which to construct the model. 
 I am lucky to have lived and worked in 4 countries on 4 continents. I have seen how the social institutions are different in each, which lead to a further curiosity in how these institutions might influence the availability of opportunity for the entrepreneur. There is no question in my mind, helped by the wonderful work by Sen, that opportunity is simply not distributed through society and especially in those societies where the institutions do not promote equality. At the time I was living in Brazil, which provides a very tangible example of the above. 

Institutions are responsible for the development of knowledge and skills, they importantly impact the symmetry of information and define the social bureaucracy or processes. Added to this are the coordination function that institutions provide. Two main functions are associated with coordination, incentives and enforcement. Oliver (1992) discusses both of these in terms of the deinstitutionalization process.
The outputs of the institutions lead to cooperation (or lack thereof). Cooperation here is used in the very general sense. For example setting up a company, requires that the entrepreneur understand the process (information), that he has sufficient ability to do so (knowledge), that it is worth his while to do so (incentives) or that he will deemed deviant if he does not (enforcement), this requires a certain amount of cooperation between the various institutions involved in the bureaucratic process. For example in the UK, companies house deals with this process, they send an information pack and forms. One is required to submit certain forms and documentation and establish a “business” bank account, furthermore one is required to register with the inland revenue for tax purposes. 
The bureaucratic process requires cooperation between all the institutions involved, alignment of systems and processes to make the registration process work (see my article on archetypes of bureaucracy). In other economies there is a miss-alignment of these bureaucratic process which makes the task slow and complicated (as in Brazil, according to the 2006 Worldbank report ). Cooperation here also refers to the cooperation required between firms and institutions to develop, for example, new products, services and knowledge.
The main output from the process of cooperation is legitimacy on the one hand, and when it leads to innovation of some form, opportunity for the entrepreneurial process. Consider an economy where the entrepreneur has applied for planning permission and progressed through the bureaucratic process, once granted his endeavours are legitimized to some extent. Consider the application for a bank loan, again, the successful completion of the process legitimizes the opportunity and hence the entrepreneurial process.
Cooperation is a necessary condition for sustained innovation Of course innovation may occur as a “flash in the pan”, but this is not the sustained innovation being discussed here. It is necessary as it drives innovation, without competition all business environments would be favorable (a monopoly for example)  and there would be very little need to innovate. Competition has the further effect of influencing the social and economic institutions. Look at how industry impact legislation (and visa versa) this is usually (although I admit not always) brought on by competitive environments where industry feels in necessary to lobby for new legislation or controls.
Importantly, growth creates more growth. Aside from human, financial and other capital that flows in times of growth, sentiment is positive. As is evident from the recent economic downturn, pessimism goes a long way to stifle growth.

By now, you may be bored. I would ask that you share your comments and look forward to them.

1 comment:

  1. I wonder if bureaucracy stifles entrepreneurship, or whether it’s other factors. If so, South Africa should be very un-entrepreneurial. Interesting example: a friend of mine had to set up a company in South Africa for a Singaporean crowd. He said it currently takes about 3-4 months for all the papers to come through. He did some research and found that it takes about 48 hours for the same thing to happen in Singapore. But I'm not sure that Singaporeans are entrepreneurial, although I think South Africans are.

    Will true entrepreneurs push through the bureaucracy, perhaps ignore the laws and go-ahead anyway? Is a can-do attitude a characteristic of an entrepreneur? I would definitely add ‘making-it-happen’ as a characteristic of an entrepreneur. I think all of us have some good ideas that have the potential to be commercially successful. But few of us have the self-confidence, willpower, willingness to sacrifice, know-how and persistence (and numerous other character traits) to try to commercialise our opportunities.


Please post your comments, I am interested in your views