Entrepreneurship and Economic Development: Evidence from Lower-Middle Income and Upper-Middle Income Countries

Abstract

Entrepreneurship has been acknowledged as an important element for economic growth of countries and communities during recent times of globalization and innovation. Entrepreneurship not only helps with job creation but also adds a lot of value through introduction of new products, processes and ways of doing businesses as emphasized by Organization of Economic Cooperation and Development, and Global Entrepreneurship Monitor. Classical approaches defined entrepreneurship as a phenomenon, however, it has transformed from a simple phenomenon to an ever evolving theory while responding to various endogenous and exogenous economic and non-economic factors simultaneously. (Alvarez & Barney, 2008). Although several research studies have been carried out discovering various dynamics of entrepreneurship, empirical evidence between entrepreneurship and regional economic development is still in the exploration phase. This research aims at contributing to this gap by empirically evaluating impact of certain macroeconomic indicators on entrepreneurship growth in lower-middle and upper-middle income countries respectively. Results of the study might help policy makers to prioritize and adjust their reforms related agenda in disciplines which are found to have significant impact over entrepreneurship growth. This research uses New Business Density (NBD) as proxy for measuring Total Entrepreneurial Activity (TEA) within sample countries because of limitations on availability of related data of TEA. A set of seven independent variables consisting of macroeconomic indicators namely GDP, tax, unemployment, inflation, foreign direct investment, domestic credit to private sector and economic fitness has been selected to test empirical relation of each macroeconomic variable with new business density. The study utilizes 11 years’ data for the period 2006-2016 for 20 middle income countries in aggregate, 10 each from lower-middle and upper-middle income categories, from the database of World Development Indicators for the sake of consistency and uniformity. According to empirical evidences obtained from this research, in lower middle income countries availability of adequate funding in the form domestic credit to private sector, unemployment, tax on profits and foreign direct investment are critical factors impacting the growth of entrepreneurial activity respectively in the order of significance. With respect to upper-middle income countries economic fitness, GDP, domestic credit to private sector and inflation have significant impact respectively in the vi Sensitivity: Internal order of significance. A policy framework in these countries that incentivizes innovation might help foster such entrepreneurs that introduces new processes and new ways of doing businesses. A cautious approach must be taken as impact of various economic variables vary according to stage of economic development of a country, maturity of business environment consisting of financial and legal institutions, and social attributes of individuals and society as whole.