How Does Entrepreneurship Fit Into the Economic Development Process?

Development is a profoundly human process. People who combine resources – natural, capital, and technological – in new ways and to new ends are the dynamic elements in the economic equation. These individuals are usually called entrepreneurs. The classic definition of an entrepreneur is someone who creates value in an economy “by moving resources out of areas of low productivity and into areas of higher productivity and greater yield."[1] Hence, entrepreneurship is one of the major drivers of the structural changes, generating the volatility, benefits, and hardships that characterize capitalism. Economist Joseph Schumpeter called these the “gales of creative destruction.” (1942). The popular image of the entrepreneur is that of a white, male engineer in his midthirties, starting a high-tech business backed by venture capital. Yet, this is an accurate picture of only some of the hundreds of thousands of Americans who start a business each year, or, more importantly, of those who could start a business.

Despite popular wisdom, most entrepreneurs are made, not bom. The extent of “made” entrepreneurs depends on how they are perceived by society – and by themselves – as potential creators of wealth. It equally depends on how much encouragement, education, and access to capital would-be entrepreneurs receive to hone their talents. There is evidence, however, that the entrepreneur who wants to develop new products and services and grow a business exhibits different psychological aptitudes and work styles than the business owner who wants to stay small and balance his or her home and working lives.[2]

Numerous studies have identified the same essential factors of a “climate” conducive to entrepreneurship: venture capital access, bank capital reluctance, experienced entrepreneurs in the area, technically skilled workforce, availability of suppliers, access to customers or new markets, universities, favorable government policies, good local quality of life, transportation access, degree of community's isolation, and so on. An inhospitable environment is characterized by perverse regulatory and tax policies: antiquated and excessive building codes, zoning, land use regulations, local and state business licensing requirements, and business and property taxes.

This means that aiding entrepreneurship involves mainly the creation of a supportive environment rather than a lot of direct assistance, although both are needed:[3]

1. Strategically targeted tax, spending; and regulatory policies to foster economic development and entrepreneurship ("development climate”); and

2. Customized support to encourage new enterprise development and new products, services, markets, and ventures.

  • [1] The ideas on entrepreneurship are highly based on the writings of Roger Vaughan, especially the classic The Wealth of States (1985). The thinking of my colleague Bob Friedman is much in evidence here as well.
  • [2] For a contemporary, more conservative view along these lines, see William J. Baumol, Robert E. Litan, and Carl J. Schramm, Good Capitalism. Bad Capitalism and the Economics of Growth and Prosperity (New Haven, CT: Yale University Press, 2007).
  • [3] See Baumol, Litan, and Schramm, Good Capitalism, Bad Capitalism, and visit CFED's “Development Report Card for the States" for more on these issues.
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