Chapter 12
Entrepreneurship,
Organization &
Innovation
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Entrepreneurship, Organization,
& Innovation
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Schumpeter - entrepreneur, with a dream
and will to found a private kingdom, is a
heroic figure in economic development.
Economic historians emphasize role of
Schumpeterian captain of industry
(Rockefeller, Carnegie, Vanderbilt, Duke,
Gould, and Morgan) as leaders of the U.S.
1865-1914 expansion.
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William Baumol (1968)
“Entrepreneurship in
Economic Theory“ –
AER
 Entrepreneur not
needed in
neoclassical model of
firm.
 Analyzes optimum in
well-defined
problems with
variables clearly
specified.
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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.
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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).
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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
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Innovators, adapters, & imitators
 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.
 Nafziger contends, in disagreement with
Schumpeter, that adapters are
entrepreneurs.
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Stationary state gains
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High earnings for management.
Monopoly gains.
Windfalls.
Speculative gains.
But no profits.
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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.
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Sachs’ division of world . . .

Technological innovators (Schumpeterian
entrepreneurs).
Most of OECD plus Taiwan (15% of world’s
population).
 Technological adapters (Addison – LDCs’
imitation of DCs and increased education, major
contributors to TFP).
Mexico, Costa Rica, Argentina, Chile, Tunisia,
South Africa, Israel, most of India, Singapore,
Malaysia, Indonesia, Thailand, coastal China,
Baltic states, Russia (near St. Petersberg), EastCentral Europe (50% of world’s population).
 Technologically excluded (rest of world).
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Innovators, adapters & excluded
With some exceptions (not all blue are innovators, much of
India is adaptive, etc.), blue-colored (high-income) nations are
technological innovators, red & green (middle-income) nations
are adapters, & yellow (low-income) nations are excluded.
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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).
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Technologically excluded
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Tropical Africa
Bangladesh
Burma
Laos
Cambodia
Haiti
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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 multinational corporations’
global production network (producing
components, parts, early-stage processing,
especially information and communications
technology or ICT).
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Family as Entrepreneur
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Can mobilize large amounts of resources,
make quick, unified decisions, put
trustworthy people into management
positions, and constrain irresponsibility.
Can make investment in human capital.
Yet conservative about taking risks,
innovating, and delegating authority.
Sometimes paternalism in employeremployee relationships and reluctance to hire
professional managers.
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Achievement Motivation &
Self-Assessment
 Childhood in traditional societies produces
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an authoritarian personality with a low need
for achievement (urge to improve) and high
need for submission. Society requires
changes in child rearing to stress
independence and creativity (Hagen 1962).
McClelland (1961) contends that a society
with high need for achievement produces
more energetic entrepreneurs, who bring
about faster economic development.
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Achievement Motivation &
Self-Assessment
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Jovanovic (1982:649-670) finds that
differences in entrepreneurial ability,
learned over time, determine business
entry or exit.
From business experience, people
estimate their ability more precisely,
expanding output as they revise
estimates upward, and contracting with
downward revisions.
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Is there a shortage of entrepreneurs?
Let’s examine factors affecting the
supply of and demand for
entrepreneurs
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Factors affecting supply of
entrepreneurs
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Occupational background & other
experience.
Religious & ethnic origin.
Social origins & mobility.
Other socio-psychological factors
shaped by group identity.
Education.
Gender.
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Factors affecting demand for
entrepreneurs
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Other production factors.
State of arts.
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Long-term property rights
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A barrier to innovation is insecure property rights.
De Soto (2000) attributes Western success to
legally enforceable property titling, based on
painstaking accrual of legislation consistent with
the social contract.
Although LDC governments may provide credit
and industrial estates for startup firms, insufficient
property rights limit growth, illustrating de Soto’s
dead capital, inaccessible as collateral for
borrowing or bonds. Formal credit markets are
nonexistent for most LDC businesses.
Will Chinese capitalists invest and innovate when
land use rights are insecure?
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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 low-income countries are
even softer.
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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.
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The crucial factor for
entrepreneurship
The facilitating state that
- 1. minimizes rent seeking.
- 2. refrains from hindering
innovation & adaptation.
Source: E. Wayne Nafziger (2007).
"Entrepreneurship and Development." To be
published in International Handbook of Development
Studies, Edward Elgar Publishing. Edited by
Amitava Dutt and Jaime Ros.
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