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  • Shivaji Lokam

Role of Entrepreneurship in Economic Development

Updated: Apr 28, 2022

The concept of economic development

Economic development is the expansion of the national wealth or capital stock of a developing country primarily by modernizing all economic activities using technology. Economic development is when a low-income country undergoes a process of gradual accumulation and growth of national capital over a time-span.

The concept of economic growth and development is pertinent in the context of low income counties such as the Sub Saharan African countries and South Asian nations. These low income countries usually have low life expectancy, weak labour force, poor health care, high birth rates, extreme income inequality, and gross inequity in income distribution. They are further characterized by a weak private sector, low productivity growth, high poverty levels, inflation, bloated government expenditure and government corruption. Although not all such nations lack natural resource, most of them lack productivity and size in human capital and capital goods machines. As such, human development remains a problem. In addition, these countries usually experience a demographic transition, have low literacy rate, resulting in the lack of growth in real national income and low average income.

Economic development results in poverty reduction, human development, and a complete transformation in living standards. Developed countries such as the USA, Australia, Japan and others score high on human development index whereas poor countries perform worse. A successful economic policy is required to attain sustainable development and inclusive growth in these countries.

The concept of economic development elevates in its applicability and scope within the subject of low income countries and emerging market. However, the terms economic growth and development gain importance within the context of both developed country and developing country.

The role of Entrepreneurship

Entrepreneurial activity consists of opening up new businesses based on market demand and supply and after weighing risks, evaluating entry and exit barriers, considering opportunities and threats of the potential venture.

As such, a nation's per capita income will rise with the new business and capital formation, driven by a vigorous activity of entrepreneurship. Entrepreneurship creates new employment opportunities, expanding the choice and role of work within a low-income nation beyond the primary and tertiary sector.

It is ideal for a developing nation to pursue a balanced regional development with economic power spread across the country, creating ample employment opportunities all around. However, local economic development will be driven by factors related to the level of economic activity and the presence of innovative entrepreneurs.

Existing firms also play a major role in wealth creation as they expand their reach across industry verticals and product segments. That is why regional development, driven by SME (composed of existing firms and new firms), is key to job creation, wealth creation and societal development.

The role of national savings and government

Entrepreneurship is primarily linked to the accessibility to loans or savings for capital investment. As such, entrepreneurial activity will flourish when there is ample national savings in the country.

It is easy to see that entrepreneurial activity will drive economic statistics of a nation, resulting in sustained growth of the economy. But new business creation and entrepreneurial ventures is dependent on access to funds for investment. Successfully developed nations such as South Korea, Taiwan and China have all had high savings rate for over three decades.

Governments in developing countries should focus on creating new infrastructural facilities that will benefit new firms and unlock productive resources. Entrepreneurship development and growth should be the primary pursuit of the national development authority in the country. A developing nation is subjected to various shifts in the economy, primarily being the movement of workforce from primary and tertiary sectors to secondary sectors. Labour looking for new work in urban centres necessitate an adequate level of entrepreneurship in the region. As such, job opportunities arise when entrepreneurship activity grows in commensurate with national and regional development.

How economic development can be achieved

Economic development in developing countries can be achieved through the following two routes. Economic development through the industrialization route involves the process of industrialization and modernization. The economy is transformed during this process, driven by investment in resource and innovation. The accumulation of Heavy Industry business capital represents the process of industrialization, wherein the resource and technology is acquired and assimilated helping the modernization process of the country. South Korea, Taiwan, and China have expanded investment and national wealth, grew their national incomes by many times, through this route of economic development.

Economic development through the non-industrial route involves modernization alone. Modernization of developing countries through this route is achieved on the back of the industrialization (and therefore the heavy industry) of foreign nations, wherein technology (in the form of heavy industry machinery and equipment) is imported. The economy of Chile belongs to this category. Other examples include Botswana, UAE, and New Zealand.

On the whole, the per capita income of a nation is linked to the level and growth of entrepreneurship flourishing in the country, primarily within the manufacturing industry and mining industry for nations pursuing industrialization.

The entrepreneur in developing nations-the case of Japan, South Korea and Taiwan

Let's see how the governments in the most successful developed countries Japan, South Korea and Taiwan deployed mechanisms creating new industries, businesses, allowing entrepreneurs to flourish.

In Japan, South Korea, and Taiwan, the state effectively employed three critical interventions, which helped transform their nascent, rural and agrarian economies with low-income per capita within a generation to sprawling urban and industrial economies with high-income per capita.

The aim of the first intervention was to maximize output from agriculture. Achieving farm output that sufficiently meets the daily intake of the citizens is the first of the two ways farming can prime industrialization for take-off. Production of surplus food for exports is the second and crucial outcome that enables a country to shelve the economy's dependence on the agricultural sector to one of dependence on light manufacturing industry and beyond. At any given time the capabilities of rural agricultural societies rest heavily on land, labour, and fertilizers, and therefore, the capacity to achieve a productive surplus out of it depends on the interplay between farmland and labour, besides others. A transformation in the interplay between the two can be achieved by restructuring agriculture as a labour-intensive household farming activity to make use of all the abundant rural labour. Farm yields per acre take priority instead of yield per person. Here, the return on investment does not have to be the measuring bar. Within the context of a semi-rural or rural agricultural society, it is the maximization of crop output that is of importance with the input of most of the available labour.

The second intervention was aimed at directing investment and entrepreneurs toward manufacturing industry to make effective use of the limited productive skills of the workforce migrating from agriculture. Machines imported from abroad serve to utilize unskilled and semi-skilled labour to create productive value, unlike the many service industries that require skills to begin with. Manufacturing enables employment of workers with minimal training, or workers with on-the-job training, and enables entrepreneurs to scale up production capacity easily. Productivity gains from manufacturing offer much greater capacity for output expansion, unlike the services industry.

In Japan, South Korea, Taiwan, and China, the state by employing various mechanisms at its behest has accelerated economic development, entering early into light industry manufacturing and then moving to heavy industry manufacturing. The government nurtured domestic manufacturers by offering subsidies on private capital investment in those industries that were deemed strategic on a changing, stage-by-stage, five-year plan basis. It enacted substantial import tariffs to enable manufacturers to learn on the shop floor but also forced them to export and face global competition. The state ensured the export performance of firms by offering tax rebates and other incentives in return for exports, thus overseeing the technological upgrading and improvement in quality standards of export products. When firms failed to perform, it withdrew subsidies and tax incentives and often oversaw the killing of failing business entities-forcing them to merge with the successful ones or bankrupted them and sold their assets to its competitors. The governments pursued export promotion policy to incentivize entrepreneurs to create products with world class standards.

The third intervention by the government was aimed at directing capital and scarce resources to achieve the above two objectives-producing high yield agricultural output and the acquisition of manufacturing skills. That meant state intervention in the financial industry. Ensuring domestic competition in an industry and forcing manufacturers to export-enforced by a mechanism called export discipline-meant subsidy and protection from international competition adequately prevented the traditional problem of producing laggards who pocket financial incentives but fail to grow. The government kept the financial system under close supervision to direct funds to achieve state development objectives. Bank lending was manipulated to enforce export discipline on firms.

Those three critical interventions were employed effectively in Japan, South Korea, and Taiwan. Thus, with an ambitious goal of rapid industrialization-achieved largely within a span of three-and-a-half decades of sustained growth-North East Asia emerged as an industrial powerhouse rivaling the old industrial leaders of the West. By contrast, the South East Asian states Malaysia, Thailand, Indonesia and Philippines-even though equally or better endowed with resources and set off with the same ambitions to industrialize-did not follow the same policies, but they achieved fast growth for a limited period only to prove unsustainable thereafter.

In many respects, those South East Asian countries diverged markedly from the North East Asian ones regarding policy and its implementation. The General Theory of Rapid Economic Development book dives into detail about the experiences of North East Asian nations and helps understand how economic development can be achieved successfully.

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