This article analyses the possible link between

entrepreneurship and economic development

for the case of India

This link has been studied extensively for

developed countries, but less so for developing

countries.

Sierdjan Koster is a Post-Doctoral Researcher at

the Urban and Regional Studies

Institute, Faculty of Spatial Sciences, Groningen

University, The Netherlands, and

Shailendra Kumar Rai is Assistant Professor at

the Management Devel-opment

Institute, Gurgaon, India.

Literature Review

Entrepreneurship is generally accepted to be a necessary condition for sound long-term economic development (Carree & Thurik, 2003).

Entrepreneurs introduce new products and new production processes in an economy. In the process, incumbent firms are forced to innovate in order to withstand the pressure generated by new firms. As a result, entrepreneurship has a rejuvenating effect on economies. This theoretical relationship has inspired a large body of empirical work, largely in agreement with the expected positive effect between entrepreneurship and economic growth (Praag et al., 2007).

whether entrepreneurship has the same positive

role in developing countries as it has in the

developed world.

This study tries to contribute to

this literature by exploring the relationship

between entrepreneurship and development

level in the context of a developing country,

which is India in this case.

From 1991 onwards, India has displayed a remarkable economic growth, averaging at 6 per cent per year.

India has participated in the Global Entrepreneurship Monitor (GEM) on several occasions.

The GEM is a unique project in which a standardized methodology is used to assess entrepreneurial activity all over the globe.

The relationship between entrepreneurship and economic development.

Special attention is given to the methodology and results of the GEM project.

Third section, India is introduced as a case study.

Fourth section describes data and methods used for the analysis.

Fifth section, the results are described and finally, section six concludes.

Entrepreneurship is commonly seen as a positive, even pivotal, aspect of economic development.

Schumpeter discusses that by introducing new ideas, products, production processes and organizational structures, entrepreneurs challenge current economic conditions.

Existing firms need to adapt to the new standards set. Firms that are unable to do this will experience

performance loss and will eventually disappear. This process of ‘creative destruction’ enhances regional

productivity, regional competitiveness and as a consequence, regional economic development.

In developing countries, many new firms are started for different reasons.

The distinction between opportunity and necessityentrepreneurship is relevant in this respect.

Opportunity entrepreneurs base their new firms on perceived business opportunities.

Whereas necessity entrepreneurs are pushed into entrepreneurship because all other options for work are either absent or unsatisfactory

Opportunity entrepreneurs can be said to contribute to the market by testing new combinations. It is not so for necessity entrepreneurs.

GEM report on global entrepreneurship.

Countries were included, both from developing and developed countries.

Developing countries show high rates of entrepreneurship.

Figure;-1

Source: GEM report 2006 (Bosma & Harding, 2007); Peru and UAE

excluded.

Developing countries show high rates of entrepreneurship.

With development level rising, entrepreneurship intensity declines.

To start climbing again for countries with the highest GDP levels.

The high entrepreneurship rates in developing countries are the result of a high share of necessity entrepreneurs.

In the last stage, entrepreneurship intensities increase again because of a shift towards service industries.

In the second stage, larger manufacturing firms tend to drive economic development,.

Whereas in the third stage service industries are seen as most important .

Service firms are typically smaller and require less start-up costs than manufacturing firms. This offers good opportunities for small entrepreneurial firms. As a result, entrepreneurship intensity goes up again

‘Nascent entrepreneurs are those individuals, between the ages of 18 and 64 years, who have taken some action towards creating a new business in the past year.

In order to qualify in this category, these individuals must also expect to own a share of the business they are starting and the business must not have paid any wages or salaries for more than three months.

New business owners are individuals who are active as owner-managers of a new business that has paid wages or salaries for more than three months, but less than 42 months’. (Bosma & Harding, 2007, p. 2)

Nascent entrepreneurs

Two clear expectations can be formulated by GEM model

First, a developing country that experiences GDP growth should show declining entrepreneurship intensity, because of increasing employment opportunities.

Second, the composition of the types of entrepreneurship should change.

A shift from necessity-based entrepreneurship towards opportunity-based entrepreneurship is expected.

India has been one of the fastest growing economies in the world with an average growth rate of about 6 per cent since 1991.

In the early 1990s, India witnessed an acute macroeconomic imbalance, leading to a crisis in the balance of payment (BOP) which and pushed the inflation rate to 17 per cent, an all time high.

The nation had protected her domestic industries against foreign competition through a variety of devices such as tariffs, quota restrictions, import licensing and other discretionary controls.

This led to the situation in which Indian products became highly uncompetitive

The Indian government reformulated economic

strategy which is known as the new economic

policy (NEP) of which liberalization,

privatization and globalization were integral

parts.

Soon thereafter, India’s growth rate picked up

Foreign exchange started to flow into the nation

at an unprecedented rate and the information

technology sector boomed, making India a

recognized player on the global scene.

The role of entrepreneurship in this process of

restructuring is notable.

Thereafter, small-scale entrepreneurship was

promoted much more as a viable development

strategy.

Despite the impressive economic growth in

India, the country is still clearly developing in

terms of the GEM model.

The key problem in entrepreneurship studies in developing countries is data availability.

The ten-year census and yearly updated economic surveys provide a consistent framework of data collection that is represented by longitudinal data about industry dynamics both at the country level and the regional level.

The distinction between opportunity and necessity entrepreneurship cannot be made directly. The data, however, do allow for mapping the dynamics in the Small Scale Industries (SSI), which is divided in registered and unregistered firms.

An SSI is defined as an undertaking in which the investmentin fixed assets, held either on ownership terms or on lease oron hire purchase, does not exceed Rs 10 million ($250,000)subject to the condition that the unit is not owned orcontrolled by or is a subsidiary of any other industrialundertaking (Ministry of Micro, Small and MediumEnterprise, Government of India).

SSIs are small to medium-sized, independent firms.

The SSI definition includes independent firms in allindustries that have limited fixed assets.

TEA directly assesses entrepreneurial activity, whereas SSIrepresents the outcome of this activity.

To describe the composition of

entrepreneurship, this study uses the distinction

between registered and unregistered SSIs.

Registration as an SSI is voluntary in India.

Particularly for somewhat larger firms

though, registration has some important tax

benefits.

Both the quantitative and the qualitative differences in Indian entrepreneurship over time and space are assessed here.

GEM Data on India

The data do show a distinct upward trend in the first years, whereas the most recent year has a somewhat lower TEA rate.

Refer table 1

shows the yearly growth

in the number of SSIs

and for the whole

Indian industry.

GDP growth runs

parallel with an increase

in the entrepreneurial

activity in the Indian

economy.

Sources: http://www.indiastat.com and Handbook of Statistics

on Indian Economy (2006).

One of the downsides of the longitudinal

analysis of India as a whole is that GDP

development, in absolute terms, is still limited

even though economic growth, in relative terms,

has been staggering.

Possible differences in the size and composition

of the small-scale industry are more visible

Sources: http//www.indiastat.com and Economic Survey, 2006–07.

There seems to be no pattern in the relationship

between GDP and small-scale

entrepreneurship.

There seems to be somewhat more

entrepreneurial activity in the regions with the

greatest GDP per capita.

Source: Handbook of Statistics on Indian Economy (2006).

Here, for the poorest states, a positive relationship between registered firms and GDP development is found.

This adds to the idea of GEM that economic development leads to a qualitatively higher degree of entrepreneurship. The relationship only holds for the least developed states. If the five most developed states are included, the upward trend disappears almost completely

This, however, could be explained by the fact that these states are dominated by cities and as such attract relatively great numbers of poor people who have to rely on entrepreneurship for self-sustenance.

This article addresses the link between small firm development and economic growth in India. doing so, it adds to the understanding of entrepreneurship in the context of a developing country.

The issue is approached with the model developed by GEM as reference. This model predicts that in the early stages of economic development in a country, entrepreneurship will decrease because a wider range of employment possibilities becomes available to the public.

The data, however, shows little support for the expectations based on the GEM model.

Small-scale industries, a measure of entrepreneurship, remain very important in the development of India and the share is increasing rather than decreasing.

The share of registered firms, a measure of the viability of businesses, is relatively stable over time.

Only for the least developed regions a weak positive relationship between GDP level and the share of registered firms is recorded.

This suggests that a shift to a more formal way of entrepreneurship is not (yet) observable in India.

the range of GDP covered by India covers only

a small part of the GEM model. It could be that

India has to grow more before the predicted

changes actually occur.

India could be a special case to which the

mechanisms used as explanations of the model

do not apply.

There seem to be at least two reasons for that. First, it has to be recognized that India comes from a

situation in which entrepreneurship was not stimulated India appears to skip the phase of industrialization.

GEM expects a decrease of entrepreneurship because of employment generation by larger, particularly manufacturing firms. The Indian economic development, however, is very much based on service sector growth. This type of economic development accommodates smaller firms much better than what manufacturing-based growth does.

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