Promoting Entrepreneurship in Developing Countries: Policy Challenges

Promoting Entrepreneurship in Developing Countries: Policy Challenges T RECENT ENTHUSIASM OF DONORS, DEVELOPMENT agencies and governments for promoting entrepreneurship as a route to development is perplexing. Entrepreneurs, called “heroes” by The Economist (14 March, 2009), appear upon closer scrutiny to be rather irrelevant and even impotent in many developing countries. Three decades ago, Nathan Leff was of the opinion that “entrepreneurship is no longer a problem” nor a “relevant constraint on the pace of development” in developing countries.1 Development economists point out that the vast majority of entrepreneurs in developing countries are involved in micro and small enterprises (MSE), often informal, contributing little to poverty alleviation and growth. Moreover, only a few new start-up firms survive for a long time; the majority fail within the first two years. The enthusiasm for promoting entrepreneurship is even more perplexing in the light of weak and ambiguous statistical evidence on whether entrepreneurship causes economic growth. Results do not seem to be very robust with regard to definitions, time-periods, quality of data, or estimation methods; reverse causality crops up. Some economists even report a negative relationship between entrepreneurial activity and economic growth. Added to the apparent irrelevance and impotence of entrepreneurs is the danger that well-intentioned support policies for entrepreneurship may have unintended negative consequences. These include patronage, corruption and rentseeking, and the prolonging of the life of inefficient and low-productivity firms. Moreover, policies that “place too much stress on entrepreneurship as the key to economic development can undermine collective and cumulative processes of organizational learning required for innovation”.2 In addition, general policies to facilitate the entry of entrepreneurs may disproportionately encourage entrepreneurs with low “entrepreneurial ability”, leading banks to reduce their overall extension of credit. If low-ability entrepreneurs also employ less productive workers at lower wages, the opportunity cost of being self-employed will fall, leading to the entrance of even more low-ability entrepreneurs. If, as a result, economic growth slows down, high-ability entrepreneurs, with fewer incentives to innovate, will exit. Overview