The Contribution of Entrepreneurship to Economic Growth

Sustaining Entrepreneurship and Economic Growth : Lessons in Policy and Industry Innovations from Germany and India, 7-26 (2008) 01/2009; DOI: 10.1007/978-0-387-78695-7_1
Source: OAI
  • The Economic Journal 02/1982; 92(367):630-53. · 1.95 Impact Factor
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    ABSTRACT: Examines the role played by true uncertainty, defined as the possibility of alternative outcomes whose probabilities are not capable of measurement, in an economic system, and distinguishes uncertainty from risk. Classical economic theory teaches that perfect competition ought to drive an economy into equilibrium and eliminate opportunities for economic profit. Nevertheless, economic profit persists in the real world. The introductory sections of the book provide a historical and critical review of early attempts to reconcile theory and observation. Then, beginning with a simplified model economy of individuals as producers-and-consumers, the author derives familiar features of static economics. The model goes through further refinements of joint production, and changes with uncertainty absent with similar results. The final model is one that demonstrates how perfect competition tends to eliminate profit. The author then takes up the question of how risk and uncertainty may upset the equilibrium. Risk is the possibility of alternative outcomes whose probabilities are capable of measurement; uncertainty is the possibility of alternative outcome whose probabilities are not capable of measurement. When probabilities are known, adverse outcomes may be insured against. Uncertainty is handled by judgment, an unequally distributed ability. The successful entrepreneur is one who has the sound judgment, either in the direction of the enterprise itself or in the selection of its managers (as shareholders do). The recompense for this talent is profit. (CAR)
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    ABSTRACT: This paper argues that recent trends in the global economy have led to a shift in developed countries’ comparative advantage from mature industrial to early stage entrepreneurial production. We develop a three stage product life cycle model in which we distinguish between life cycle stages characterized by new, mature and off-shored production. In that model we analyze the impact of a level shock in the supply of unskilled labor in the South, a decrease in the level of political risk associated with outward foreign direct investment (off-shoring), and the widespread diffusion of a general purpose technology such as ICT. Due to endogenous responses in the allocation of entrepreneurial activity, the above shocks all result in a shift in the comparative advantage of developed countries towards new varieties, which corresponds to activities in the early stages of the product life cycle. Moreover, because entrepreneurs also serve as the agents that move varieties between life cycle stages, their value added increases due to globalization and technical change. By contrast, the factors of production employed in the mature stage of the life cycle, e.g. low skilled northern labor, become less valuable. Thus, the model predicts the emergence of an entrepreneurial economy in the North as the South opens up to trade and industrializes.