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Theoretical Economics Letters, 2021, 11, 1002-1019
https://www.scirp.org/journal/tel
ISSN Online: 2162-2086
ISSN Print: 2162-2078
DOI:
10.4236/tel.2021.115064 Oct. 29, 2021 1002 Theoretical Economics Letters
Out with the Old or Out with the New:
The Uncertain Role of Entrepreneurship in
Developing Countries in the Post-COVID-19
Context*
Rami Abdelkafi1, Salim Refas2
1Islamic Development Bank Institute, Jeddah, Saudi Arabia
2Istanbul Zaim University, Istanbul, Turkey
Abstract
The promotion of policies
and initiatives that support job creation through
entrepreneurship in developing countries is at the heart of the 2030 sustaina-
ble development goals (SDG) agenda, and, in particular, SDG 8 and 9. Yet,
entrepreneurship remains an abstract concept difficult to define and com-
prehend, and the literature on entrepreneurship has been developed mostly in
a developed country context. In the current global context, dominated by the
dramatic impact of the COVID-
19 pandemic, the relevant policies to be
adopted by deve
loping countries to face the socioeconomic consequences of
the pandemic must be identified and analyzed. One of the main concerns of
these policies is unemployment. The simultaneous supply and demand
shocks caused by the pandemic have raised calls for an u
nprecedented level of
public intervention in both developing and developed countries to prevent
massive unemployment and chains of bankruptcies. The objective of this pa-
per is to study the role of entrepreneurship in job preservation or job creation
at the macroeconomic level. After reviewing different taxonomies of entre-
preneur
ship and discussing motivations of entrepreneurs in a developing
country context, the fundamental relationship between entrepreneurship, job
creation, and macroeconomic performance i
n developing countries in both
the pre- and post-COVID-
19 contexts is analyzed. Using panel data for a
sample of 24 countries members of the Organization of Islamic Cooperation
(OIC) across the period 2009-2018, the paper demonstrates a U-shaped rela-
tionship between entrepreneurship and the level of economic development of
nations, which translates into a negative correlation between economic
*The views expressed in this article are purely those of the authors and may not in any circum
s-
tances be regarded as stating an official position of their respective institutions.
How to cite this paper:
Abdelkafi,
R., &
Refas
, S. (2021).
Out with the Old or Out
with the New: The Uncertain Role of E
n-
trepreneurship in Developing Countries in
the Post
-COVID-19 Context.
Theoretical
Economics
Letters, 11,
1002-1019.
https://doi.org/10.4236/tel.2021.115064
Received:
August 19, 2021
Accepted:
October 26, 2021
Published:
October 29, 2021
Copyright © 20
21 by author(s) and
Scientific
Research Publishing Inc.
This work is licensed under the Creative
Commons Attribution International
License (CC BY
4.0).
http://creativecommons.org/licenses/by/4.0/
Open Access
R. Abdelkafi, S. Refas
DOI:
10.4236/tel.2021.115064 1003 Theoretical Economics Letters
growth and entrepreneurial dynamism for developing countries with per ca-
pita income below a certain limit. This pro
ves that different phases of the
economic cycle require different policies and promotion of entrepreneurship
should therefore be adjusted to the economic conditions of each country.
Keywords
Entrepreneurship, COVID-19, Economic Recovery, Job Creation
1. Introduction
The promotion of policies and initiatives that support job creation through en-
trepreneurship in developing countries is at the heart of the 2030 Sustainable
Development Goals (SDGs) agenda, and, in particular, SDGs 8 and 9. Yet, en-
trepreneurship remains an abstract concept difficult to define and comprehend.
Entrepreneurship is frequently confused with self-employment, an important
source of employment in developing nations. Perry et al. (2007) relate that
self-employment may constitute up to 30% of the total employment in Latin
America, for example. In a more comprehensive study across 74 developing na-
tions, Gindling and Newhouse (2014) relate statistics for mainly low and mid-
dle-income groupings averaging 51.6% and 33.5%, respectively, according to
World Bank definitions. Owner-managers of small enterprises are therefore a
critical category of entrepreneurs that must be considered in any attempt to pro-
vide and preserve jobs for all those in line with the SDG targets. However, the
individual self-employed is not the only category of entrepreneurs in the econ-
omy. As Hagedoorn (1996) puts it, entrepreneurship can be broadly classified
into two streams for research: one that looks on entrepreneurship at the level of
individuals and the other that looks at corporate entrepreneurship and “intra-
preneurship” especially at the level of large firms. Both categories are affected at
times of crisis and this paper is specifically concerned about the drivers of suc-
cesses and failures of entrepreneurship policies at a macroeconomic level in de-
veloping countries, with a focus on the post-COVID-19 context.
COVID-19 has unleashed an unprecedented economic crisis expected to affect
the developing prospects of all nations across the globe for years to come. The
“swift and massive shock of the coronavirus pandemic” since its advent in early
2020 is expected to be the harbinger of the deepest recession since the Second
World War (Felsenthal, 2020). Entrepreneurial activities in all sectors have been
affected by the simultaneous supply and demand shocks caused by the pandem-
ic, and the World Economic Forum (WEF) estimates, for example, that the
pandemic has forced more than 70% of start-ups to terminate full-time em-
ployee contracts. Yet, the degree and extent of the impacts of the recession on
entrepreneurial activities are not well-understood. One of the reasons for that
gap is the lack of methodological tools to link the aggregate macroeconomic ac-
R. Abdelkafi, S. Refas
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10.4236/tel.2021.115064 1004 Theoretical Economics Letters
tivities of developing nations to the entrepreneurial intensity. This paper will,
therefore, after a brief review of the drivers of entrepreneurship in the literature
in the second section, discuss the relationship between national income and en-
trepreneurial levels in developing economies from a review of the literature in
the third section. Against this backdrop, the fourth section of the paper discusses
some stylized facts on the macroeconomic issues related to entrepreneurial suc-
cess in developing nations and develops an empirical model that is calibrated
and tested on a balanced sample of 24 member countries of the Organization of
Islamic Cooperation (OIC) over the post-crisis period 2009-2018 to demonstrate
the U-shaped relationship between national income and entrepreneurial levels.
This has an important consequence when looking at the macroeconomic im-
pacts of the COVID-19 recession on both entrepreneurial activity and employ-
ment in developing nations, and this is discussed in sections 6 and 7 with a brief
theoretical review of the main drivers of the relationship between wages and
employment levels. The policy options for developing nations with limited fiscal
space and growing unemployment levels in the context of such a major recession
are very limited, calling for great selectivity and a detailed understanding of the
most efficient mechanisms to achieve job preservation or job creation targets
despite challenges. The conclusion will hence propose some areas for further re-
search and some candidate policy approaches worth considering given the re-
search results presented in the previous sections.
2. The Drivers of Entrepreneurship
Despite the consensus on the role of entrepreneurship in economic growth, the
interactions between entrepreneurs and their environment are very complex and
difficult to comprehend. These interactions reflect the bidirectional relationship
between entrepreneurs and their environment and the way they are also affected
by several socio-economic factors in the economies where they operate. Over the
years, economic theory has gradually incorporated additional factors in analyz-
ing entrepreneurship as a driver of economic activity. Walia and Chetty (2020)
differentiate between three main types of theories of entrepreneurship, namely
the classical theories, the neo-classical theories, and the Austrian market process
as illustrated in Figure 1. While the classical and neo-classical approaches focus
on the actions undertaken by entrepreneurs for the production and distribution
of goods and services, the Austrian approach is based on the knowledge that en-
trepreneurs possess about the economy.
Casson and Wadeson (2007) consider four approaches to define the entrepre-
neur based on his function, role, personal characteristics, and behavior. Function
has to do with the action undertaken through innovation and risk taking, while
role is related to the action as an investor owning capital and exploiting produc-
tion factors. Personal characteristics and behavior are more related to attitudes
and decision making. In this context, the entrepreneurial function determines
his impact on the macroeconomic performance.
R. Abdelkafi, S. Refas
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Figure 1. Economic theories of entrepreneurship. Source: Walia and Chetty (2020).
As an investment activity, entrepreneurship is based on the knowledge of the
entrepreneur and on his ability to take a call regarding existing opportunities to
overcome the challenges resulting from his decision. At the same time, oppor-
tunities are the results of changes in several socio-economic conditions influen-
cing the demand and supply conditions. For Casson and Wadeson (2007), the
fact that the environment is volatile implies that opportunities are never ex-
hausted, and what is limited is just the stock of projects available to entrepre-
neurs. In studying the determinants of entrepreneurship, this leads to distinction
between the internal factors related to the entrepreneur’s skills and capabilities
and the external factors related to his environment and the way the environment
affects his decisions.
The question of how the environment affects entrepreneurship has been a
subject of divergence between economists and has triggered many empirical stu-
dies to identify the critical factors for success and failure in different contexts.
del Olmo-García et al. (2020) distinguish between economic environment and
institutional environment and their contribution to the failure of self-employed
entrepreneurs in the eurozone. Their results demonstrate that in addition to
economic factors, the culture and perceptions of society about entrepreneurship
are significant factors in reducing entrepreneurship failure. Furthermore, their
study shows that the quality of formal institutions (including protection of
property rights, the quality of the legal system etc.) plays a key role in reducing
the failure of entrepreneurship. Interestingly, Devece et al. (2016) show that in
Spain, while innovation remains the key success factor, opportunity-driven en-
trepreneurship tends to perform much better than necessity-driven entrepre-
neurship in periods of recession.
Overall, studying entrepreneurship is complex in the sense that it implies
analyzing the economic, social, and institutional factors responsible for the suc-
cess and failure of any entrepreneurial activity. Recently, an increasing number
of studies have been interested in the level of entrepreneurship in different eco-
nomic phases. In that sense, in addition to the multidisciplinary aspect of entre-
preneurship, the results of any study are conditioned by the context of the study.
Economicth eories of
entrepreneurship
Classical theories:
entrepreneurs are pr oducers
and distributors of goods
Neo-classical theories:
entrepreneurs are pr oducers
and distributors of goods,
undertake business risks and
reduce costs
Austrian market process
theories: entrepreneurs are
creativeand im aginative;
identify a profi table business
opportunity
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For example, while several studies have been able to assess the situation in the
context of developed countries (Maritz et al., 2020; Galindo-Martín et al., 2021;
Devece et al., 2016; del Olmo-García et al., 2020), studies in the context of de-
veloping countries have been very limited until now (Mendoza et al., 2021;
Omri, 2020). Lastly, the nature of entrepreneurship is very important to assess
the sustainability of its impact on economic growth. In fact, opportunity entre-
preneurship is driven more by innovation and the opportunities it creates in the
economy. Hence, this kind of entrepreneurship, which is more predominant in
developed countries, can leave a lasting impact on economic growth by creating
added value and more jobs, as well as triggering other innovations through
competition. However, necessity entrepreneurship is in general driven by the
lack of alternatives and by the low level of employment created by the economic
activity. In this context, this kind of entrepreneurship can be terminated as soon
as some opportunities are created and become available to the entrepreneurs.
In addition to the distinction between developed and developing countries,
some recent researches have studied the dynamics of entrepreneurship in pe-
riods of crisis (Maritz et al., 2020; Galindo-Martín et al., 2021; Devece et al.,
2016). Similarly, the current crisis created by the COVID-19 pandemic has trig-
gered some questions about the potential impacts on entrepreneurship, as well
as the potential opportunities this crisis has created. For example, according to
the World Economic Forum (WEF), the pandemic has forced more than 70% of
start-ups to terminate full-time employee contracts. At the same time, the WEF
considers that the pandemic has also created new opportunities through the cre-
ation of new needs and the opening of new markets related to the attempts to
cope with the challenges posed by the new modes of life.
3. Relationship between National Income and
Entrepreneurship Levels
Since 2004, the Global Competitiveness Report published by the World Eco-
nomic Forum (WEF) ranks countries based on the Global Competitiveness In-
dex (GCI) developed by Xavier Sala-i-Martin and Elsa V. Artadi. In the frame-
work of the GCI, consisting of over 110 variables for each country, the countries
are classified into three stages of economic development (factor-driven, effi-
ciency-driven, and innovation-driven), each implying a growing degree of com-
plexity in the operation of the economy. The GCI in its new version since 2004
has partially addressed some of the caveats of the previous GCI framework,
which was deficient at several levels, including issues of methodology, consistent
bias, qualitative vagueness, incorrectness, or redundancy (Lall, 2001), but me-
thodologically, the framework of the GCI still suffers from multiple methodo-
logical issues including, for example, obvious issues of endogeneity and causality
(Workie and Hekelová, 2016). Yet, the GCI has now established itself as a global
indicator of the ability of countries to provide prosperity to their citizens and is
constantly adopted by policymakers and development institutions to assess the
R. Abdelkafi, S. Refas
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successful macroeconomic performance of nations. As a side effect to this con-
vergence of the global discourse on development prospects of nations, the para-
digm shift from managerial to entrepreneurial capitalism, which once characte-
rized the US economy (Baumol et al., 2007; Baumol, 2009), has now extended to
how “good” or “bad capitalism” can be defined for all nations (Baumol, 2009).
The economic literature on the relationship between entrepreneurship, eco-
nomic development, and growth is expansive. As Hagedoorn (1996) puts it, this
literature can be broadly classified into two streams of research: one looking at
entrepreneurship at the level of individuals and the other looking at corporate
entrepreneurship and “intrapreneurship” especially at the level of large firms.
Hagedoorn (1996) also explains how this dichotomy is created in reference to
early and late works of Schumpeter on innovation. Quadrini (2009) discusses,
however, an important definition issue pertaining to such research: the entre-
preneur can be alternatively defined as a self-employed individual, which is gen-
erally the focus of papers dealing with occupational choice; other studies focus
on the ownership of a business with an active management role to define entre-
preneurship; finally, studies concerned with corporate entrepreneurship usually
associate entrepreneurial activity to innovation, along the Schumpeterian lines
of thought, therefore not really imposing ownership of occupational choice in
the definition of entrepreneurs in the firms. This has an important consequence
when researching the macroeconomic impact of entrepreneurial activity in de-
veloping nations. Indeed, as Quadrini (2009) reminds us when looking at recent
macroeconomic papers published on entrepreneurship, due to the financing
constraints, the scale of entrepreneurial businesses in developing nations tends
to be smaller, and in fact self-employment is often the sole option for large seg-
ments of population entering the job market in search of an occupation. Against
this backdrop, the whole body of literature on corporate entrepreneurship and
the long-term impact of innovation in the economy arguably loses relevance in
the developing country context.
In fact, in a developing country context, the mechanisms through which en-
trepreneurship levels under the first category (individual entrepreneurs) affect
national economies are still vastly obscure, and the main obstacle to that under-
standing is the lack of entrepreneurship data to reflect the specific stage of de-
velopment of each nation (Acs et al., 2008). A frequently cited relationship,
however, is demonstrated in Wennekers et al. (2005), wherein there stands a
U-shaped relationship between entrepreneurship and the level of development
of nations: in low-income countries, entrepreneurship is generally negatively
correlated with economic development while in high-income countries, the cor-
relation is positive. Such findings, although not explicit about the direction of
causality between entrepreneurship levels and national economic development,
tend to support national development strategies attracting foreign direct invest-
ment in lower income countries while policies that encourage entrepreneurship
and innovation such as high-growth startups are expected to yield nation-wide
R. Abdelkafi, S. Refas
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spillover effects in higher income countries only. This has important conse-
quences on policy options, especially at times of recession, as will be discussed in
the last section of this paper.
4. Stylized Facts on Entrepreneurial Activity and Outcome
Levels in Developing Nations
Even in the absence of relevant quantitative models and theoretical frameworks,
several stylized facts can be derived from data on developing nations and the le-
vels of self-employment or entrepreneurial activity. First of all, self-employment
is an important source of employment in developing nations. Perry et al. (2007)
relate that it may constitute up to 30% of total employment in Latin America, for
example. In more comprehensive studies across 74 developing nations, Gindling
and Newhouse (2014) relate statistics for mainly low and middle-income group-
ings averaging 51.6% and 33.5%, respectively, according to World Bank defini-
tions (see Table 1 below).
The fact that one out of two workers or one out of three workers, respectively,
in low income or lower middle-income countries is self-employed is in itself a
major finding. Gindling and Newhouse (2014) analyze the type and quality of
jobs that these self-employed workers occupy and their relative success. For ex-
ample, the proportion of self-employed workers is significantly higher in agri-
cultural jobs, reaching 60% or 47%, in the sample countries of the study for low
income or lower middle-income groups, respectively. More importantly, the au-
thors are able to demonstrate a clear “order” in such countries between em-
ployment categories, and wage and salary employees are revealed to be better off
in particular than own-account workers.
This leads to the second stylized fact regarding self-employment and entre-
preneurial activity in developing nations: the heterogeneity of the trajectories of
entrepreneurs with respect to their growth potential. Gindling and Newhouse
(2014) refer to two main groups among the self-employed workers: one group of
self-employed with “limited growth prospects who either are self-employed by
necessity, due to the lack of wage employment opportunities, or have voluntarily
chosen self-employment over wage employment” and, in contrast, a higher tier
of self-employed consisting of “innovative, successful entrepreneurs with greater
potential and ambition for growth”. This echoes the necessity-motivated entre-
preneurship (NME) and the opportunity-motivated entrepreneurship (OME) in
Bennett and Nikolaev (2019). A key conclusion of Gindling and Newhouse
(2014) along these lines is that only a small proportion of the entrepreneurs in
the first group (NME) are successful. Using different definitions of success (job
creation or per capita consumption in the household), less than a third of the
entrepreneurs are considered successful in the sample low income and lower
middle-income countries. In this paper, this will be referred to as the “entrepre-
neurship trap” whereby self-employed individuals driven by necessity are not
able to actually grow, accumulate capital or exit poverty and deprivation.
R. Abdelkafi, S. Refas
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Table 1. Proportion of workers by occupational status by country, region, and income.
Income levela (# of countries in sample) Wage and salary employee Non-paid employee Employer Own account
Low income (18) 25.2 21.6 1.6 51.6
Lower middle income (31) 46.0 18.2 2.4 33.5
Upper middle income (25) 73.1 4.2 4.2 18.6
High income (24) 85.9 1.0 3.7 9.3
aLow income less than 1006 - 2010 dollars; lower middle income 1006 - 3975 dollars; upper middle-income 3976 - 12,275 dollars; high income greater than
12,275 dollars. Source: Gindling and Newhouse, 2014.
A third major fact relates to the massive exclusion of individual entrepreneurs
from the formal economy in low income and lower middle-income countries.
The mechanisms are described in Auriol (2013). Starting from the well-known
fact that the shadow economy (or informal sector) has a significant size in low
income and lower-income countries, representing for example as reported by
(Enste and Schneider, 2003) up to 39% of the economy across a sample of 76
developing nations, Auriol (2013) explains how several administrative, economic
or cultural factors prevent entrepreneurs from entering the formal economy, even
when successful. This implies various adverse consequences among which two are
of significance in the context of this study: entrepreneurs in the informal sectors are
exposed to weakened property rights and heightened risks, and at the same time,
due to the heavy social costs incurred on them by the forced mutual help they have
to extend to family and relatives in replacement of social safety nets, there is a net
loss in job and wealth creation due to the inefficient allocation of resources.
A fourth major fact, especially in the context of development policies aiming
at fostering employment, is what Schoar (2009) calls the divide between subsis-
tence and transformational entrepreneurship. After reminding of the renewed
expectations in recent years that entrepreneurship will spur the development of
poor nations, Schoar (2009) rightfully observes that “most policy makers as well
as economic researchers treat entrepreneurs as a homogeneous group of actors
that are uniformly affected by economic conditions or policy interventions” and
in doing so they fall to keep in mind a significant characteristic of low income
and lower-middle income countries: the very low prevalence of medium-sized
companies. The evidence is scanty to show why a very large number of tiny
firms are unable to graduate into medium-sized firms which in the context of
developed nations are the primary employer and contributor to economic suc-
cess, but the facts are harsh and clear: the size distribution of firms in low-income
and lower middle-income countries is bimodal with many tiny firms and few
large firms. In this context, the characteristics of transformational entrepreneurs
and the levers to support them are not well-identified, and they are not rightfully
stimulated to boost the economy. Another dimension of this problem refers to
the largely reported issue of skill mismatch to support successful entrepreneurs
in their growth stage as discussed for example in Lee (2013). The following Ta-
ble 2 summarizes these four main facts reported in the literature about entre-
preneurial activity and income levels.
R. Abdelkafi, S. Refas
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Table 2. Main stylized facts on entrepreneurial activity and income levels in developing
nations.
1.
Prevalence of necessity-motivated entrepreneurship
2.
Heterogeneity of the trajectories of entrepreneurs with respect to their growth potential
3.
Exclusion of individual entrepreneurs from the formal economy
4.
Missed opportunities to support transformational entrepreneurship and skill mismatch
Source: Authors.
5. Quantitative Model and Empirical Results
In this section, an empirical analysis is conducted to test the relationship be-
tween entrepreneurial activity and economic growth in some members of the
Organization of Islamic Cooperation (OIC). The choice of the sample was moti-
vated by the availability of data. As mentioned earlier, this availability of data
was one of the main reasons of the dominance of studies on developed countries
compared to developing countries. We conduct a panel data analysis on a ba-
lanced sample of 24 OIC countries over the post-crisis period 2009-2018.
In addition to the availability of data, the choice of entrepreneurship indicator
has been one of the divergence factors between researchers. The data provided
by the Global Entrepreneurship Monitor (GEM) has allowed for more empirical
research on entrepreneurship in the last twenty years. However, the structure of
the data presented by the GEM makes a panel data analysis unfeasible given the
disparity of periods covered by the surveys between countries.
Following Omri (2020), we used the new business density as an indicator of
entrepreneurship, to estimate the following model with
1, , 24i=
representing
countries and
1, , 1 0
T=
for years included in the sample:
0it it it
YX
β βε
′
=++
(1)
where
it
Y
represents the dependent variable, in our case entrepreneurship.
it
X
is a
K
-dimensional vector of explanatory variables,
β
a (
K
× 1) vector of coef-
ficients independent of
i
and
t
and
it
ε
the error term varying over
i
and
t
.
The dependent variables included in the model are as follows:
- Economic growth is represented by the Gross Domestic Product (GDP) per
capita, which is based on purchasing power parity (PPP) and converted to
constant 2017 international dollars.
- Following Galindo-Martín et al. (2021), we include two variables representing
the social climate, which can affect entrepreneurship. These variables are the
Human Development Index (HDI) and unemployment (U).
- Government effectiveness is included to reflect the role of institutions in de-
veloping entrepreneurship (Galindo-Martín et al., 2021; Omri, 2020). This
variable
captures
perceptions
of
the
quality
of
public
services
,
the
quality
of
the
civil
service
,
the
degree
of
its
independence
from
political
pressures
,
the
quality
of
policy
formulation
and
implementation
,
and
the
credibility
of
the
government
’
s
commitment
to
such
policies
1.
1
https://databank.worldbank.org/source/worldwide-governance-indicators
R. Abdelkafi, S. Refas
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Table 3 below describes the different variables used in the model and the
sources of the data:
Based on that, we have estimated the following equation using a fixed effect
mode. This choice has been based on the Hausman test:
( )
2
01 2 3 4 5
ENTRE LGDPPC LGDPPC U GE HDI
it it it it it it
it
ββ β β β β ε
=+ + ++ +
(2)
In order to confer more homogeneity on our sample, we chose to test the
model on the sample excluding rich GCC countries. Table 4 demonstrates the
results of the estimations of Equation (2) on the whole sample of countries and
on the sample excluding GCC countries. Comparing different estimations on
both samples indicates that the non-linear model including a quadratic term for
the GDP per capita is more adapted to the relationship between entrepreneur-
ship and economic growth. Our results are the following:
Our results show that the coefficient related to unemployment is statistically
insignificant, although it has the expected sign showing a negative impact of
unemployment on entrepreneurship in all estimations. For the variable GE, re-
lated to government effectiveness, the coefficient is sensitive to the sample speci-
fication. While it has the opposite sign with a significance level of 10% in the
whole sample, it is positive and significant in the sample excluding the GCC
countries, expressing the importance of the impact that a better quality of public
services can have on entrepreneurship in developing countries. A deeper inves-
tigation of this impact by using different indicators of government actions would
be interesting; however, this is beyond the scope of this paper. The HDI has a
significant positive impact on entrepreneurship with a 1% significance level in
the whole sample. However, this impact turned insignificant in the sample ex-
cluding the GCC countries. One possible explanation of this result lies in the
need for decomposing this index and studying the role of its different compo-
nents. For example, it would be interesting to differentiate between the different
levels of education in the context of developing countries and observe their roles
in entrepreneurship development.
Furthermore, our results show that the quadratic model confirms the U-shape
of the relationship between entrepreneurship and economic growth, as evi-
denced by the negative and significant coefficient of the GDP per capita and the
significant positive coefficient of the square of GDP per capita in both samples.
Another interesting way to look at the relationship between entrepreneurship
and economic development is to study the causality between the two variables.
As mentioned earlier, one of the main complexities in entrepreneurship lies in
the fact that this variable participates in economic growth, and at the same time
it is also affected by several economic factors related to economic development.
Based on that, we tried to perceive the causal relationship between entrepre-
neurship and economic growth by applying a Granger causality test on the va-
riables ENTRE and LGDPPC on both samples. The results are as shown in Table
5 below:
R. Abdelkafi, S. Refas
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Table 3. Definition and sources of variables.
Variable
Sign Definition Source
Entrepreneurship (ENTRE) New business density (new registrations per 1000 people ages 15 - 64) WDI
Economic growth LGDPPC Natural Log of the GDP per capita PPP (constant 2017 international $) WDI
Unemployment U Unemployment, total (% of total labor force) WDI
Government effectiveness GE Government Effectiveness WGI
Human Development Index HDI Human Development Index UNDP
Table 4. Results of estimation of Equation (2).
Whole sample
Sample excluding GCC
Variables
ENTRE
ENTRE
Constant −5.23
(−1.31)
27.66**
(2.18)
−4.58***
(−2.06)
25.15***
(3.34)
LGDPPC −0.03
(−0.05)
−7.79***
(−2.69)
0.41
(1.23)
−6.7***
(−3.81)
LGDPPC2 0.44***
(2.73) 0.42***
(4.12)
U −0.03
(−1.15)
−0.04
(−1.31)
−0.01
(−1.03)
−0.01
(−1.00)
GE −0.02
(−1.13)
−0.37
(−1.67)
0.54
(4.02)
0.51***
(4.01)
HDI 10.16***
(4.15)
10.34***
(4.29)
3.56***
(2.06)
3.06
(1.84)
Number of observations 240 240 190 190
R
2 0.84 0.85 0.90 0.91
Note: The t value is bracketed, and *** and **indicate significance at the 1% and 5% levels, respectively.
Table 5. Granger causality test between entrepreneurship and growth.
Whole Sample Sample excluding GCC
Null Hypothesis F-Statistic Prob. F-Statistic Prob.
LGDPPC does not Granger Cause ENTRE 5.93 0.01 5.51 0.02
ENTRE does not Granger Cause LGDPPC 0.3 0.58 3.4 0.06
Observations 216 171
The results presented in Table 5 prove that in both samples, the causality is
only from the GDP per capita to entrepreneurship. The causality from entrepre-
neurship to growth is insignificant. This could be explained by the quality of en-
trepreneurship created in developing countries. While this entrepreneurship can
be created following an increase in economic growth, it fails to drive economic
growth in these countries. As mentioned above, necessity-based entrepreneur-
ship is dominating the economies of developing countries. Lack of opportunities
and innovation in developing countries makes entrepreneurship less effective in
developing countries in comparison to developed countries.
Before concluding, the next sections will now discuss some theoretical con-
R. Abdelkafi, S. Refas
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10.4236/tel.2021.115064 1013 Theoretical Economics Letters
siderations regarding the possible impacts of recession on employment levels
and wages, due to the evidenced relationship between entrepreneurial activity
and economic growth on the development policy options for the concerned
countries.
6. What Are the Possible Impacts of Recession on
Employment Levels and Wages?
In spite of the appeal of innovation and entrepreneurship as drivers of develop-
ment in poor nations, the challenges standing in the way of fulfilling the
Schumpeterian development promise of creative destruction at a macroeconom-
ic level in low-income developing nations are many. These challenges grow into
major risks at times of crisis. Massive levels of unemployment are one of the
most common and immediate consequences of a sudden drop in trade or a re-
cession in the economy (Loayza et al., 2009). With a constant or decreasing
supply of labor, for example in mature economies, this is already a very critical
consequence of economic crises that has the potential of stirring up social unrest
and regime change, and profound socioeconomic changes have been unfortu-
nately observed during the course of the 20th century in both developed and de-
veloping nations. However, this is further heightened in factor-driven labor-rich
economies, which naturally supply an even higher number of job seekers in the
market. In this context, one may be tempted to simplistically describe the di-
lemma that decision makers are faced with: either jobs of current workers should
be saved on a priority basis with the limited levers available for government in-
tervention or the onus should be on supporting the economy to rapidly trans-
form to be able to create jobs for both the job seekers entering the market and
the current workers who will inevitably lose their jobs as a result of the crisis.
The two dynamics are simplistically described in the graphs below. In both
graphs, equilibrium employment level in the economy is defined as the intersec-
tion of a price-setting curve, which depicts the aggregate demand for jobs from
the economy at the production frontier, and the wage-setting curve, which is the
occupational demand for wage-jobs by job seekers (against the available alterna-
tives of unemployment or other activities). Since the first effect of the crisis is the
immediate impact on the revenues of firms and their ability to pay salaries, the
price-setting curve is immediately shifted downwards and the equilibrium em-
ployment level is shifted from wh to wl: a net amount of jobs (wh − wl) is imme-
diately lost in the economy. The dashed area 1 in Figure 2 below represents the
net income lost in the immediate term at an aggregate level by the working class
due to these job losses.
The secondary impact of the recession subsequent to the crisis is to shift the
wage-setting curve downwards, especially for low-pay workers. This effect is
particularly marked in developing countries with weak social protection struc-
tures (Arranz et al., 2020). Interestingly, and as pictured in Figure 3 at an ag-
gregate level, this could generate a positive employment outcome since the lower
R. Abdelkafi, S. Refas
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wages due to lower expectations from job seekers as well as the entry of new job
seekers in the market may lead to a higher equilibrium employment level wg. In
practice, achieving this new maximum employment level will pose a challenge
for the economy requiring transformation of jobs and recovery measures. The
net amount of jobs created (wg – wl) will possibly recover partly or fully the net
amount of jobs (wh – wl) that were immediately lost. At the same time, the ag-
gregate income impact is pictured by the net difference between the di-
amond-filled area 2, which is the additional aggregate income due to job crea-
tion, and the dashed area 3, which is the aggregate income lost due to salary re-
duction.
Figure 2. Immediate employment impact of the recession on job supply and demand
equilibrium. Source: Authors.
Figure 3. Medium-term employment impact of the recession on job supply and demand
equilibrium. Source: Authors.
Aggregate income lost by the working class due to downward pressure on salaries
Aggregate income earned by the working class thanks to job creation
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This analytical framework must however be complemented to account for the
role of entrepreneurship and self-employment when managers or workers do
not simply enter the job market as price-takers of the wages offered by the
available opportunities but in fact create their own jobs out of necessity or op-
portunity (Bennett and Nikolaev, 2019). Three populations are especially con-
cerned in the graphs above: 1) in the immediate term, the population which lost
their jobs as a consequence of the recession (wh − wl) in case there is no relief
policy to immediately preserve their jobs or provide them with temporary wage
support (necessity-motivated entrepreneurs) as pictured by area 1 in Figure 2;
2) in the medium term, the job seekers at the right of the equilibrium level wg,,
who do not occupy the jobs at the wages offered by the market, because it is be-
low the minimum expected wage for the concerned jobs (necessity-motivated
entrepreneurs); and 3) in the medium term or immediate term, any employed
individual who has a higher expectation from an entrepreneurial venture than
the equilibrium wage offered by the market (opportunity-motivated entrepre-
neurs). An analytical challenge posed by the uncertainties related to wage-demand
functions of the entrepreneurs, who intrinsically take risks by becoming entre-
preneurs but have high-reward expectations, is to reveal their wage (or profit)
expectations. Consequently, among the three populations just described the quantity
of necessity-motivated or opportunity-motivated entrepreneurs with higher ex-
pectations that equilibrium wages cannot be pictured in Figure 3. The next sec-
tions will discuss however how different trajectories can be expected for these
three populations of entrepreneurs, and how this will in turn lead to differen-
tiated aggregate outcome at the macroeconomic level.
7. The Difficult Timing of Policy Interventions
The question of the relevant policy interventions for preservation and creation
of jobs in times of recession at a macroeconomic level has two main dimensions:
an effectiveness dimension and a time dimension. Due to the specifics of the
agricultural jobs in a developing country context, these policies should be ideally
treated differentially for agricultural and non-agricultural jobs. However, for the
sake of simplification, this paper will present the candidate measures for job
preservation and creation along two timelines only: short-term relief and long-
er-term recovery measures. The proposals are derived from Loayza et al. (2009),
who discuss the time dimension of the policy interventions of developing nations
to limit the detrimental effects of the economic crisis caused by the COVID-19
pandemic.
Table 6 summarizes the most relevant recommendations along two dimen-
sions: labour supply and consumption or, in other words, policy interventions
on the supply and demand side of the economy. The “swift and massive shock of
the coronavirus pandemic” since its advent in early 2020 is expected to lead to
the deepest recession since the Second World War (Felsenthal, 2020). This is
partly because the simultaneous demand and supply shocks from the pandemic
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Table 6. Candidate measures for job creation and job preservation during recession.
Relief measures
Recovery Measures
Self-employed
Businesses
Direct income support to vulnerable
populations (e.g., cash transfers)
Temporary tax cuts and moratoriums
on debt repayments
Public loans and guarantees, and wage
subsidies
Formalization of jobs, direct income support, skill support programs, and job
transformation programs
Public loans and guarantees for capital investments, wage support, vocational
training programs, and
targeted subsidies
Business transformation programs (digitalization, sector transformation, etc.)
Partial/temporary nationalization programs to support employment and prevent
large bankruptcies
National/local preference programs to support local
industries/traders
Demand-side
interventions
Government expenditures, interest
-
rate cuts,
and widening lending facilities to banks
Macroeconomic stimulus packages, fiscal stimulus, public investment, and targeted
sector interventions
Challenges
Fiscal space, household targeting for
middle
-income countries
Financial market response to interest cuts, transmission to real economy, small
fiscal multiplier, knowledge economy, and time
-lag of the public interventions
Timeline
Immediate
Medium term
Source: Loayza et al. (2009) and Authors.
are unprecedented since the Second World War, or even the Great Recession
according to certain commentators.
The challenges pertaining to the timing of job preservation and creation poli-
cies, therefore, become extremely challenging in the context of this crisis for de-
veloping countries with limited fiscal space, weak financial markets, small fiscal
multipliers, and massive demographic pressure.
8. Conclusion
This paper is primarily about the relationship between entrepreneurship, job
creation or preservation, and macroeconomic performance in developing coun-
tries. This complex relationship, fundamental in the context of the sustainable
development agenda, is even more important in the context of massive supply
and demand shocks caused by the COVID-19 pandemic. The primary conclu-
sion of this paper is that in developing countries, the relationship between en-
trepreneurship and economic growth is determined by the current stage of eco-
nomic development: due to multiple challenges, the relationship is weak in the
lower income economies while in higher income economies GDP growth trans-
lates successfully into more entrepreneurial activity.
Other findings of the study include the observed prevalence of necessi-
ty-motivated entrepreneurship in developing countries, which starkly contrasts
with the corporate or individual entrepreneurial activity in high-income coun-
tries, predominantly opportunity-driven. In addition, the trajectories of entre-
preneurs with respect to their growth potential are found to be very variable and
a majority of entrepreneurs in developing countries context are constrained in
their growth potential due to administrative, economic or cultural factors, which
translates into lower aggregate economic performance at a macroeconomic level.
The observed exclusion of individual entrepreneurs from the formal economy in
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countries at a lower development stage poses significant socioeconomic chal-
lenges at the macroeconomic level, especially at times of crisis. Finally develop-
ing countries are found to effectively miss opportunities to support transforma-
tional entrepreneurship due to financing constraints or skill mismatch in partic-
ular.
The empirical study demonstrates that a non-linear model including a qua-
dratic term for the GDP per capita is most adapted to map the relationship be-
tween entrepreneurship and economic growth at a macro-economic level in a
developing country context. The model is calibrated and tested using panel
data for a sample of OIC member countries. The model successfully demon-
strates the quadratic relationship and the sample also shows a unidirectional
causality going from the GDP per capita to entrepreneurship. This demonstrates
that the low-quality entrepreneurship created in developing countries, in most
cases necessity driven, is hardly a strong pillar of economic growth or recovery
post-recession. In the context of an immediate and significant impact of the
COVID-19 crisis on employment in developing countries, the findings of this
paper would question therefore a one-size-fits-all policy-making approach which
leverages on entrepreneurship or innovation to sustain or create jobs for econo-
mies in recession. The dilemma between protecting the existing fragile jobs and
adopting entrepreneurship development policies is very acute and the right pol-
icy approach highly depends on the stage of development of the country. In this
context, a menu of candidate policy interventions most promising to address the
employment challenges in developing countries is briefly discussed in the last
section.
This paper can constitute a starting point for further research on the same
subject and in particular on the relevant approaches to fight unemployment
through targeted and multi-cycle entrepreneurship policies in a developing
country context. One of the main limitations of this research is the absence of
disaggregated information to characterize the demand functions at a micro-level
of necessity-motivated or opportunity-motivated entrepreneurs in a pre-crisis or
post-crisis context. Understanding how the expectations of entrepreneurs are
affected by the aggregate unemployment levels in particular is critical to under-
stand whether the appetite for entrepreneurship grows or reduces in a context of
employment crisis for wage jobs. Further research efforts are also required to
characterize with more depth the relationship between entrepreneurial activity
and economic growth and reveal in particular the mechanism by which GDP
growth effectively leads to more successful entrepreneurship for higher income
countries.
Conflicts of Interest
The authors declare no conflicts of interest regarding the publication of this pa-
per.
R. Abdelkafi, S. Refas
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10.4236/tel.2021.115064 1018 Theoretical Economics Letters
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