Academic journal article Academy of Entrepreneurship Journal

Entrepreneurship: Public or Private Good?

Academic journal article Academy of Entrepreneurship Journal

Entrepreneurship: Public or Private Good?

Article excerpt

ABSTRACT

The paper examines the rationale for using entrepreneurship (small business formation) as a strategy for economic transformation. The data set for 50 states is used to test the hypothesis that the states that promote more entrepreneurial activities tend to experience higher Gross State Product (GSP) growth. Learner and Levine methodology is used to test the robustness of the entrepreneurship coefficient by altering the conditioning variables. Cluster analysis is also used to further test the hypothesis. The paper finds credible evidence in support of the hypothesis that entrepreneurship is a significant strategy for fostering economic transformation of communities that are ravaged by the loss of industries due to globalization and out-sourcing.

INTRODUCTION

Entrepreneurship is defined as an innovative or creative act that adds value to an organization or society. Entrepreneurship thus defined can occur in any size business--small or large. However, for this study, entrepreneurship is deemed synonymous with small business formation. Indeed, when Schumpeter (1912) described the critical role of entrepreneurs in economic development, he thought of small size businesses that create new products, new processes and/or reengineer the existing methods of production. These inventions and innovations render the existing technology obsolete and contribute to "creative destruction" that Schumpeter deems essential for economy to grow and develop.

There are at least three reasons why the state funding for entrepreneurial activities has grown dramatically over the last two decades.

First, the break-up of Soviet Union and transition of Eastern Europe from centralized to market economies have renewed interest in small business formation. The interest in small businesses has been further galvanized by globalization which has resulted in some cases, mass scale closing of factories and plants. Many small communities are devastated because the closed factories were the major and, in some cases, their only source of employment. Outsourcing has further taken its toll even in some many mid-size towns. More and more communities and states are pinning their hopes on the small business formation to transform the communities affected by international competition so much so they are willing to dole out millions of dollars to create an environment that is friendly to entrepreneurial activities. More so because the cost of attracting large firms (measured by subsidies and tax breaks) could be prohibitive for a town with modest resources.

Second, Kirchhoff (1994) contends that small business role in economic development has changed because of flexibility in automation made possible by changes in technology, steady decline in transaction cost caused by the widespread of use and availability of internet, favorable environment created by knowledge based economy and demand for specialized goods created by global market. In view of these changes, small businesses are no longer considered a liability that needs to be maintained for social and political stability despite its inefficiencies. Kirchhoff believes that small business formation is indeed "a major source of innovations, employment opportunities and entrepreneurial activities".

Third, entrepreneurship, as defined above, satisfies the twin conditions for a public good: (1) Entrepreneurial activities create benefits that spillover in the entire economy. (2) It is difficult, impractical and cost ineffective to collect money from all those who benefit from initial entrepreneurial activities. The spillover benefits of entrepreneurial activities are chronicled by several studies: Audretsch, Carree and Thurik, (2001), Baumol (1993), Carree and Thurik (1998) and Shumpeter (1912). McDowell (2004) estimates that the direct and indirect effects of small business formation accounts for more than half of gross domestic product and approximately sixty to eighty percent of the new jobs created in this country. …

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