Entrepreneurship & Economic
Development
E. Wayne Nafziger
Department of Economics
Kansas State University
October 20, 2005
Copyright by E. Wayne Nafziger
Nafziger/Entrepreneurship/10/20/5
William Baumol (1968)
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
Entrepreneur not
needed in
neoclassical model of
firm
Analyzes optimum in
well-defined
problems with
variables clearly
specified
Google images
Nafziger/Entrepreneurship/10/20/5
Harvey Leibenstein (1922-1994)
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If input and output
prices known,
marshaling resources
& producing output
trivial
In standard
competitive model,
no deficiency of
entrepreneurship
Google images
Nafziger/Entrepreneurship/10/20/5
Concepts of entrepreneur
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Decision maker & risk bearer (Knight)
Gap filler for poorly established markets
(Leibenstein)
Innovator who carries out new
combinations: new products, new
production functions, new markets, new
sources of material, new organization of
industry (Schumpeter)
Nafziger/Entrepreneurship/10/20/5
Joseph Schumpeter (1883-1950)
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
No role for
entrepreneur in
stationary state
Workers can perform
this routine
Entrepreneur
Innovation
Innovation
Profit
New bank credit finances innovation
Google images
Nafziger/Entrepreneurship/10/20/5
Innovators, adapters, & imitators
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Innovations arise in clusters depending on credit
Imitators eventually wipe out gains from
innovation
Innovators must keep a step ahead of rivals for
profits to continue
I contend, in disagreement with Schumpeter, that
adapters are entrepreneurs
Nafziger/Entrepreneurship/10/20/5
Stationary state gains
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High earnings for management
Monopoly gains
Windfalls
Speculative gains
But no profits
Nafziger/Entrepreneurship/10/20/5
Where are Schumpeterian
entrepreneurs?
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
Entrepreneur’s contribution can’t be
measured
Schumpeter – entrepreneur responsible for
novel ways of doing things – innovation
rough proxy for technical change (TFP)
Residual explains most of growth in output
per worker in DCs
Nafziger/Entrepreneurship/10/20/5
Sachs’ division of world . . .
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Technological innovators (Schumpeterian
entrepreneurs)
Technological adapters (Addison – LDCs’
imitation of DCs and increased education,
major contributors to TFP)
Technologically excluded
Nafziger/Entrepreneurship/10/20/5
Innovators, adapters & excluded
Nafziger 2006, Cambridge, inside back cover
Nafziger/Entrepreneurship/10/20/5
Characteristics of technologically
excluded economies
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Pervasive rent seeking (unproductive
activity to obtain private benefit from
public action)
State is soft and lacks clear business rules
of law (Myrdal 1968:vol. 2)
Returns to innovation precluded, e.g.,
arbitrary license grants (no explicit criteria
for allocation)
Nafziger/Entrepreneurship/10/20/5
Technologically excluded
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Tropical Africa
Bangladesh
Burma
Laos
Cambodia
Haiti
Nafziger/Entrepreneurship/10/20/5
LDC technological adaptation
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Meiji Japan – hired foreigners, bought foreign
machinery, & learned from foreign buyers’
standards, eventually displacing foreigners
As good standardized, can be mass produced by
LDCs (Meiji Japan) with less skilled labor
Participation in MNCs’ global production
network (producing components, parts, earlystage processing, especially ICT)
Nafziger/Entrepreneurship/10/20/5
Shortage of entrepreneurs?
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Demand – depends on other production
factors & state of arts
Supply – depends on education,
experience, socio-psychological factors
shaped by group identity
Nafziger/Entrepreneurship/10/20/5
Nafziger/Entrepreneurship/10/20/5
Role of the state
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Innovative and adaptive entrepreneurs are rare in
weak, soft, or failed states – states with pervasive
rent seeking
Pre-1991 India was soft state, lacking will &
competence to prevent pervasive rent seeking
(licenses, subsidies, and monopoly were granted
capriciously or corruptly) reducing returns to
innovation.
Many other LICs (remember map) are even softer
Nafziger/Entrepreneurship/10/20/5
Role of the state
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
Meiji Japan prime example of facilitative state
Today latecomers can take advantage of relative
backwardness to facilitate technological transfer
- 1. education from technological leaders
- 2. global production network participation
- 3. foreign investment & technology to replace
DCs when standardization favors cheap labor
Nafziger/Entrepreneurship/10/20/5
The crucial factor

The facilitating state that
- 1. minimizes rent seeking
- 2. refrains from hindering innovation &
adaptation
Nafziger/Entrepreneurship/10/20/5