development of entrepreneurship in the economic development of a country

8/10/2019 development of entrepreneurship in the economic development of a country

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Abstract

This paper analyzes the results and perceives reference research related to the

role of the level of development of entrepreneurship in the economic

development of a country. Comparative analyzes indicators of entrepreneurial

activity in Bosnia and Herzegovina and selected countries in the region (Slovenia,Serbia and Croatia. !esults of the analysis sho"ed that Slovenia and Croatia

have the highest level of entrepreneurial activity among the analyzed countries.

#inally, the paper e$plores the lin% bet"een the level of economic freedom "ith

entrepreneurial activity and economic prosperity.

&. 'T!)*+CT')

ntrepreneurships are no" regarded as the generator of the economic gro"th.

ntrepreneurships are an important driver of economic gro"th of di-erent

sectors, industries and the economy as a "hole. There are signicant di-erences

in levels of entrepreneurship development among the countries. 'n some

countries there are a gro"ing number of entrepreneurs "ho establish ne"

businesses in various industries, "hile in others very fe" attempts at starting

ne" businesses. ntrepreneurial activity varies bet"een countries, but

un/uestionable their role is in shaping the economic environment. #rom the

macroeconomic point of vie", entrepreneurships can a-ect the level of

employment, technological progress of the country, the liberalization of closed

sectors and generally to encourage the development of %no"ledge. #rom a

microeconomic point of vie", entrepreneurial activity means the creation of ne"

businesses, creation of ne" products or services, detecting mar%et niches.

0odels of economic gro"th vary depending on the degree of development of the

country. 1hile developing countries mainly depend on the accumulation of

human capital and specialization as sources of economic gro"th in the advanced

industrialized economies, economic gro"th depends on technological progress

and the accumulation of %no"ledge. ntrepreneurships as a "ay of adoption anddi-usion of %no"ledge, ideas and innovation can play a signicant role in

achieving economic gro"th in developing countries and in developed countries.

ver since Adam Smith it is %no"n that freedom of choice and supply resources,

competition in business, trade and ensuring the rights of o"nership are %ey

prere/uisites for economic progress. 't can be said that economic freedom is a

fundamental right of every human being and that in the economically free

societies, individuals are free to "or%, produce, consume and invest, and that

their freedom is guaranteed by the state. Also, in such a society, labor, capitaland goods are allo"ed to move freely. conomic #reedoms guarantees the right


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to underta%e voluntary activities of trade and commerce "ithout the intervention

of the state or other coercion and fraud, the possibility of legal protection of

property rights, the right of citizens to dispose of their earned income.

conomic freedom is more li%ely to produce an entrepreneurial economy , "ith

many entrepreneurs and small businesses , "hile the economy under statecontrol consist of a small number of large companies that dominate the economy.

umerous studies have sho"n that a greater degree of economic freedom results

in higher levels of income for residents as freedom increases the opportunities for

entrepreneurial activity.


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2. T!3!+!SH'3S AS A 4!AT)! )# C))0'C ACT'5'T6

There is a proven fact that the economy cannot gro" and prosper "ithout

entrepreneurs. 't is a proven lin% bet"een the institutions of the mar%et economy

and entrepreneurships, and countries that stimulate entrepreneurial activity and

focus on mar%et demand as successful as measured by indicators of economic

activity and the level of "ell7being. Broad consensus "as reached that high

economic gro"th is achievable only "hen the government adopted economic

policies that enable enterprises to become the main driver of the economy.

By denition, an entrepreneur is an innovator "ho introduced ne" products,

production methods, mar%ets, sources of supply, or industrial combinations, the

entrepreneur is a source of economic changes. This is called the concept of

8creative destruction.8&The successful introduction of ne" products can destroy

previously e$isting products. Thus, for e$ample, C*s replaced cassettes. 'n his

conception of the entrepreneur loses the character of entrepreneurs as it built,

and opened its company after "hich it settled do"n and running its o"n

company.

According to some other concepts, entrepreneurship is nothing but the process of

decision ma%ing under uncertainty. ntrepreneurship can be dened as the ability

and "illingness of individuals to notice the ne" economic opportunities and

introduce their o"n "ays of e$ploiting these opportunities in conditions of

uncertainty. These opportunities may consist of ne" products, processes, forms

of organization, or combinations of products and mar%ets. )thers dene

entrepreneurs as o"ners of capital "ho are motivated by the realization of prots

for the purpose of underta%ing the ris%. They operate in the conte$t of mar%et

conditions and is therefore have limited processes in the mar%et. 3rot

businesses and consumers depend on the e$tent to "hich they approve of the

behavior of an underta%ing. ntrepreneurs are considered as revolutionaries of

our era. By having the opportunities to practice economic freedom,

entrepreneurs are a po"erful force in the establishment and maintenance of an

open democracy.

ntrepreneurships are the %ey to economic prosperity and unfavorable

institutional infrastructure may adversely a-ect the entrepreneurial activity

because they are as such an obstacle and not a stimulant for entrepreneurial

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development. Several studies have sho"n that di-erences in entrepreneurial

activity are e$plained by one third to one half of the di-erence in national

economic gro"th rates. These di-erences arise due to the availability of nancial

resources , lac% of education focused on entrepreneurship , ta$ation systems 7

countries that have higher entrepreneurial activity have lo"er ta$ revenues as 9

of 4*3 , and the costs of ad:usting the "or%force demands of business operations.

There are t"o di-erent channels through "hich government policies are a-ecting

entrepreneurial activity. The rst is the impact on the /uantity and /uality of

inputs in the entrepreneurial process (education, ta$ brea%s, etc. . Another

channel of in;uence on the institutional structure is so7called

in the entrepreneurial processes=.

The gro"th of small, innovative companies has special signicance because it

leads to faster transfer of %no"ledge, development and better standards of living.

S0s are more productive, more innovative, more ;e$ible and more adaptable to

change. Also, it is important to point out that the success of small businesses

need the e$istence of "ell7 functioning large businesses that serve as sources of

input and > or output in the mar%et.

S0s create ?& 9 of 4*3 in developed countries, @ 9 in middle7incomecountries, & 9 in less developed countries. 'n BH Small Business ma%es .?9

of the total number of enterprises, employing .@ 9 of total employment and

accounts for ?.D 9 of total company prots.

4iven the proven lin% bet"een entrepreneurial activity and economic gro"th, "e

can create numerous policies and programs in order to create an entrepreneurial

economy and numerous incentives for entrepreneurship development. 'ncentives

gro"ing sector of small and medium enterprises, among other things allo" a

country to create a solid middle class. These incentives are usually re;ected in

the creation of an ade/uate institutional frame"or% for policies to"ards S0s,

ensuring the rule of la", the ta$ incentive policies, the development of nancial

instruments, providing consulting services, implementation of business

incubators.


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Figure 1. Entrepreneurship and national economic growth

#igure & sho"s the role of entrepreneurship in achieving national economic

gro"th. Social, political and cultural conte$t play an important role in creatingconditions for national economic gro"th. conomic gro"th is in;uenced by t"o

di-erent mechanismsE one that generated the already established company and

one that generates entrepreneurship. Terms national conditions, incentives for

gro"th eFciency, and incentives aimed at developing a frame"or% for

entrepreneurship gro"th of established companies and > or development of

entrepreneurships, "hich in both cases a positive e-ect on national economic

gro"th. ntrepreneurial settings, activities and aspirations represent dynamic

components of entrepreneurships. The vie"s and perceptions can have a

signicant impact on the supply and demand for entrepreneurships.


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Table & contains information about the 1orld Ban%Gs ease of use and operating

conditions in BH and selected countries in the region. According to available

data, it is evident that CroatiaGs top ran%ing "ith respect to the easy operations,

in 2&2 they are ran%ed on the &th place out of &I@ countries. Slovenia is on the

?Ith place, Serbia on th place, and Bosnia and Herzegovina is ran%ed on the

&&th place.

Table &E Terms and conditions of doing business, 2&2

Ease of doing

business ranking

The time required

to start a business

(days)

The cost of opening a

business (% of

personal income per

capita)

lo!enia "# $

erbia & 1' .1

roatia 1 ** #.+

,- 11& $ 1".#

SourceE Central Ban%, 2&2The motivation for starting entrepreneurial activity depends on many factors, includingthe time re/uired to open a ne" business, as "ell as the cost of these activities. 4iventhese factors, Slovenia is a country "here the cost of starting a ne" company is thelo"est (9 personal income and they have the shortest period of time ( days.

The situation is the "orst in Bosnia and Herzegovina, "here it ta%es days to start ane" business, and the cost of such activities ma%es &?.I9 of personal income (Table &.'n #igure D "as compared to the total number of micro, small and medium enterprises inthe four selected countriesE Croatia, Slovenia, Serbia and Bosnia and Herzegovina. As"ith the previous results of the analyzed data, and in this case, Croatia and Slovenia arevery similar. Specically, in Slovenia the number of listed companies is @ @2 and in

Croatia D.II.


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As far as the average number of micro, small and medium enterprises per &,

populations in the same period (#igure ?, Slovenia leads "ith D.I9 micro, small

and medium enterprises per &, inhabitants. Croatia follo"s "ith 2&.29,

Bosnia and Herzegovina "ith &I.29, and last in Serbia "ith only .I9 micro,

small and medium enterprises per &, inhabitants.


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1hen "e compare the above data "ith the averages for the +72J (#igure , it is

seen that Slovenia is above the +72J average, "hile the other observed

countriesE Serbia, Bosnia and Croatia are under the average +72J. They

analyzed the + 0ember States 2J, to detect signicant di-erences among the

member countries. Thus, according to uro7stat data for 2&2, the number or

density of micro enterprises per &, inhabitants in the Czech !epublic "as

I&.I, and in Slova%ia D.?.

#igure J sho"s the comparative analysis of entrepreneurial activities, attitudes

about entrepreneurship and indices of total entrepreneurial activity of four

selected countries in the region. !egarding the Total ntrepreneurial Activity

(TA, "hich indicates the number of entrepreneurially active people "ho "ant to

start or have started "or% on the & surveyed populations, aged &I7D years,

the best situation in BH. The lo"est inde$ is in Slovenia, and Croatia and Serbia

are e/ual.


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4. Economic freedom , entrepreneurial activity and economicprosperity

#reedom , "hether it be on the economic , civil or political , is "hat economists

refer to as institutions in the economy. 4ood institutions are an important

determinant and a prere/uisite for economic gro"th and development .

'ndividuals have economic freedom "hen they are free to use , e$change or

transfer their property to others as long as there are no problems "hen their

assets "ere ac/uired "ithout the use of force , fraud or threats protected from

physical attac%s of others. 'n an economically free society, the basic function ofgovernment is to protect property and contract rights .

'f economic activity in a sector is mostly nationalized , opportunities for

entrepreneurship are reduced . Also , if the state o-ers a high level of public

services of education , social "elfare, etc. , it reduce the incentives for

enterprises considering that some minimums need to be guaranteed. Karge

budget e$penditures must be nanced by high ta$es , "hich in turn limit

entrepreneurial activity .

Analyzing the issue of economic freedom , great attention in the literature

reference is given to the level of security of property rights. 4iven the above , itcan be said that the /uality of regulatory systems and eFcient :udiciary a-ect


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the overall entrepreneurial activity . Another fre/uently cited measure of

economic freedom is the variability of in;ation. Ho"ever , "hile it can be said to

predict the future relative prices have a signicant role in decision7ma%ing in the

economy and it is debatable "hether the stated have impact on entrepreneurial

activity , given that entrepreneurs are generally speculators .

There are ve sub7 indices of economic freedomE2( & size of government , "hich

measures the e$tent to "hich the state intervenes in the economy through

government spending , redistribution transfers, public investment and ta$ation ,

(2 the legislative frame"or% , "hich consists of indicators of independence and

impartiality of the :udiciary , protection of intellectual property rights , the

involvement of the military in la" and policy , and the integrity of the legal

system , (@ the rate of the variability of the in;ation, (D international trade ,

"hich measures the e$tent of trade and trade and capital ;o" bariers, but the

actual trade and investment ;o"s , and ( ? the /uality of the regulatory

system , "hich is composed of three sub 7 inde$es that measure the freedom of

government regulation and control of the labor mar%et , nancial mar%ets and

control prices in the mar%et for goods and services . 'n a sample of 2 countries it

is sho"ed that the size of government and the /uality of monetary policy are

important determinants of entrepreneurships@. The share of government

consumption in total consumption a-ects entrepreneurship out of necessity ,

"hile transfers and subsidies and the level of ta$ation are negatively associated

"ith entrepreneurship of opportunities .

ntrepreneurial activity can not be considered "ithout private property , mar%et

rules and consumerGs choice , so no businesses outside the free mar%et . The

most important is to ensure the right of o"nership and e-ective legislation . The

e$plosion of economic initiatives in countries such as China , Katin America and

Central urope attests to the fact that the aFrmation of private initiative does

not depend on the cultural model , but the structure of incentives o-ered by the

institution .

2

@


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conomic freedom promotes gro"th through the gro"th of total factors of

productivity and by encouraging capital accumulation. 't is possible to identify si$

elements of the economic freedom , "hich are signicantly correlated "ith

productivity factors and capital accumulationED( & a lo" rate of gro"th of money

, ( 2 the role of small state7o"ned enterprises , ( @ rare negative real interest

rates , ( D a small di-erence bet"een oFcial and 8blac%8 e$change rate , ( ? huge trade sectors , and ( freedom of citizens to enter the capital transactions

"ith foreigners.

The government should aim to achieve a high degree of political and economic

stability, along "ith a mar%et7oriented environment. The gro"th of economic

freedom should be a %ey priority for policy ma%ers. conomically freer country or

countries in "hich there is no rule of la", ensuring property rights, mar%et

coordination of resources and freely traded, have higher rates of economic

gro"th than less free countries. And less free countries benet from more free

countries. Available developed countries provide a model source technology andthe mar%et for the products. umerous analyzes have sho"n that in countries in

transition, the necessary state and institutional reforms for sustainable gro"th

"ith that of the institutional reforms , and institutional /uality standards in terms

of economic freedom . As long as enough institutions or public capital, human

capital is underused. Healthy institutions are crucial in encouraging economic

freedom "hich is necessary for economic gro"th.

There are three %ey things for the continuous preservation of peaceE

?international institutions, democratic governance and international trade.conomic freedom is essential for the preservation of peace. 't is ? times more

e-ective than democracy in reducing con;ict and econometric studies have

sho"n that the impact of economic freedom on "hether states have a highly

signicant military con;icts , countries "ith lo" levels of economic freedom are

&D times more prone to armed con;ict than those "ith high levels of economic

freedom .

And Lreft and Sobel sho" that the level of economic freedom in an area

signicantly a-ects the level of entrepreneurial activity in the area.)r, in other

"ords, lo" ta$es, good regulation and security of property rights is "hat

encourages entrepreneurial activity "hich is crucial for the achievement of

economic gro"th. The /uality of institutions can e$plain di-erences in

D

?

Mames *. 4"artney, !ichard K. Stroup, !ussell S. Sobel, *avid A. 0acphersonN

0icroeconomicsE 3rivate and 3ublic ChoiceN 3ublisherE Cengage KearningN 2&2N 3. &@J7

&D


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entrepreneurial activity bet"een countries. conomic theory suggests that

private property, a stable monetary environment, lo" ta$es and freedom of trade

contribute to economic prosperity.

Campbell and !ogers sho" that a greater degree of economic freedom results in

higher levels of income for residents such as freedom increases the opportunities

for entrepreneurial activity.JThus, economic freedom is positively and

signicantly correlated "ith net business formation measured as the net change

in the number of companies as a percentage of the total number of enterprises in

the country. Thus, countries "ith lo"er levels of economic freedom have lo"er

rates of formation of ne" businesses because the benets of private

entrepreneurial activity decreased relative to other forms of economic and

political activities.

The number of start7ups is considered to be a %ey determinant of economicgro"th and competitiveness of modern economies. e"ly established companies

increase competitive pressure on e$isting companies and forcing them to

increase their eFciency. 'n this "ay they stimulate innovation and encourage the

adoption of ne" technologies and thereby a-ect aggregate productivity gro"th in

the economy. #rom a statistical point of vie", so7called 8Birth8 companies or start7

ups are considered by creating a combination of production factors "ith the

restriction involving any other company. This indicator does not include mergers,

ac/uisitions, separation of enterprises, etc.

J

Mohn K. Campbell, M. !ogers Hollings"orth, Keon . KindbergN 4overnance of theAmerican conomy (Structural Analysis in the Social SciencesN 3ublisherE Cambridge

+niversity 3ressN &&N p. @7I


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averages for the +7 2J, it is seen that Slovenia is above the +72J average,

"hile the other observed countriesE Serbia, Bosnia and Croatia are under the

average +72J.

The inde$ of entrepreneurial activity is the highest in BH , and the lo"est in

Slovenia of the surveyed countries. Serbia and Croatia are e/ual according to this

indicator. According to gures from the total entrepreneurial activity (TA and

the inde$ of economic freedom in countries included in 40Os report for 2&2, it

is evident that it is not necessary that countries "ith a high inde$ of economic

freedom have high TA inde$ among the selected countries. The largest TA

inde$ is in countries li%e Angola, Bolivia, Colombia, 3eru and the *ominican

!epublic, "hile the economically freest countries are 'reland, the +.S., *enmar%,

4reat Britain, and Chile.

'n conclusion, it can be noted that the space for the development ofentrepreneurship and entrepreneurial activity in BH still has and should

continue to encourage the development of enterprise economic policy measures,

the construction and improvement of the legislative frame"or% and institutions to

encourage entrepreneurial activity. The state has developed a system of

incentives and institutional support to entrepreneurs in the form of various

agencies that provide assistance. 't is possible and necessary to use the best

practices of successful countries in fostering entrepreneurships. Analysis of

incentives and policies need to be applied in order to enable and accelerate the

development of entrepreneurship as a generator of economic gro"th in BH and

the region "ill be the sub:ect of future broader researches.

Documents

development of entrepreneurship in the economic development of a country