Entrepreneurship and Economic Freedom

By Gardner, John C.; McGowan, Carl B., Jr. et al. | International Journal of Entrepreneurship, Annual 2014 | Go to article overview

Entrepreneurship and Economic Freedom


Gardner, John C., McGowan, Carl B., Jr., Sissoko, Macki, International Journal of Entrepreneurship


INTRODUCTION

Over the past thirty years, the world has been experiencing a globalization trend, characterized by a growing interdependence among national economies, increased competition within domestic markets, and rapid technological innovation, especially in the fields of communication and transportation. Many nations responded to the forces of globalization by undergoing significant social, political, legal, and structural changes which contributed to the growth of entrepreneurship as a major factor of economic development. Moreover, many nations in Africa, Asia, South America, Russia and Eastern European nations have been privatizing many public sectors of their economies which are contributing to the development of entrepreneurship.

The growing entrepreneurial trend in the world has resulted into an increased interest on the part of scholars, policymakers and international organizations, about the nature of the relationship between entrepreneurship and economic development. Hence, the Global Entrepreneurship Monitor (GEM), whose membership rose from 10 countries in 1999 to 37 in 2009, was initiated by the London Business School and Babson College. The main objective of GEM is to explore the role of entrepreneurship in national economic growth based on a harmonized assessment of the level of national entrepreneurial activity (GEM, 2009). In 2005, the Organization for Economic Co-operation Development (OECD) held a conference entitled "Fostering Entrepreneurship: The Role of Higher Education," whose principal themes were: (1) higher education and entrepreneurship teaching, and (2) knowledge transfer from higher education to small and medium-sized enterprises (OECD, 2005).

Entrepreneurship is arguably one of the most important factors of production. Yet, the vast body of economic literature has been essentially focused on labor, capital, and land. The relationship between labor and capital is well documented both theoretically and empirically. Despite the various definitions and theories of entrepreneurship identified in the literature, the empirical research aspect is relatively scant. The objective of this paper is to explore the relationship between entrepreneurship, measured by the Global Entrepreneurship Monitor (GEM) and measures of economic freedom from the Heritage House data in the Index of Economic Freedom (IEF) for 2005. The research findings

Literature Review

Although economic theory identifies four basic economic resources, research effort has been essentially focused on labor and capital, and to a lesser extent on land for agricultural production. Hence, there is an extensive body of theoretical and empirical literature on labor and capital relationship and the dynamic impact of technological innovation on capital/labor ratio in production and economic development. In the neo-classical growth model developed by Solow (1956), economic development is essentially driven by enhancements to capital and labor inputs, and the role of entrepreneurship is treated implicitly. In contrast, entrepreneurship has been treated implicitly in mainstream economic research, despite its importance in business creation, technological innovation and economic development.

The role of entrepreneurship in economic development can be traced back to the early works of Schumpeter (1911) who viewed the entrepreneur as an innovator, whose role, though contributing to a creative destruction (Schumeter, 1942) is essential to economic growth. Hence, the innovative activity of entrepreneurs feeds a creative "destructive process" whose adjustment toward equilibrium causes an increase in the number of entrepreneurs, thus, leading to an increase in economic growth. More recently, several empirical studies have been documented on innovation as a factor of economic development (Lichtenberg, 1993; Coe and Helpman, 1995; Engelbrecht, 1997; Guellec and van Pottelsberghe de la Potterte, 2001). …

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