Abstract
This paper provides an endogenous growth model to illuminate the role of entrepreneurial start-up firms in structural economic transformation. We follow the Lewis-model distinction between a traditional and modern sector and underpin this distinction with micro-foundations. We specify mature and start-up entrepreneurs and make a distinction between survivalist self-employment activities in the traditional sector and opportunity-driven entrepreneurship in the modern. The model shows how opportunity-driven entrepreneurship can drive structural transformation in both the modern and traditional sectors through innovation and the provision of intermediate inputs and services (which permits greater specialization in manufacturing) and by increasing employment and productivity.
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Notes
In our model, growth and structural change are driven by new start-ups, and we highlight this as a mechanism of economic development. We abstract from considerations of growth of existing firms and their impact on change, which as shown by Henrekson and Johansson (2008) may also be an important source of transformation. The general contribution of entrepreneurship to economic development is explored in Naudé (2008).
Quadrini (2000) finds empirical evidence that entrepreneurs indeed have much higher savings rates than workers.
The matching approach has been applied to various fields in economics. Representative references for the labor market are Montgomery (1991), Mortensen and Pissarides (1999), Acemoglu and Shimer (2000) or Pissarides (2000); general coordination failures are provided by Diamond (1982) or Cooper and Andrew (1988); an application to the theory of money exchange is presented by Diamond (1984), or Kivotaki and Wright (1989 ).
In labour market matching models, the number of vacancies is determined by solving an intertemporal optimization problem. An Accounting of search and administrative costs leads to an optimal number of vacancies offered to the market.
For an introduction of the matching function in the labor market context see Pissarides (1990). While Chapter 1 introduces the idea, Chapters 4, 7 and 8 extend the fundamental idea to the discussion of factors intensifying the search intensity and improving the matching technology and efficiency. An overview of the discussion of the labour market matching function, including empirical findings, is also given by Petrongolo and Pissarides (2001). In this literature, the number of matches is positively dependent on the number of unemployed looking for a job and the number of vacancies offered.
See, for example, the labour market, Pissarides (1990, p. 5).
We assume a distinction between the start-up of firms in the modern sector and informal self-employment in traditional sector. The former takes place due to opportunities being spotted, whilst the latter reflects survivalist, necessity actions. Our concern in this paper is with the impact of opportunity-driven start-ups on economic development. This is consistent with empirical evidence based on data from the Global Entrepreneurship Monitor (GEM), which finds that only opportunity-driven entrepreneurship is associated with per capita GDP growth (e.g. Wong et al. 2005; Naudé 2009).
With this model we can analyze a variety of aspects concerning entrepreneurial start-ups, sectoral transformation and growth. Due to space limitation we will not illustrate these here. The interested reader is referred to Gries and Naudé (2008).
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Acknowledgements
We are grateful to two anonymous referees for their detailed and useful comments. Earlier versions of this paper were presented at the Max Planck Institute of Economics’ Workshop on the Allocation of Entrepreneurship on 4 April 2008 in Jena, Germany and at the UNU-WIDER workshop on Entrepreneurship and Economic Development on 22 August 2008 in Helsinki. We are grateful to the participants of these workshops, and, in particular, to Zoltan Acs, Sameeksha Desai, Mark Sanders, Adam Szirmai, Roy Thurik and Utz Weitzel for comments and suggestions. All errors and omissions remain our own.
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Appendices
Appendices
1.1 Appendix 1: Proof of Proposition 1
Start-up sector: Matching of ideas and opportunities:
Separation of contracts is a positive function of the surplus rate of business ideas
Start-up opportunities in modern sector O:
Probability of successful start-up
Contract tightness
Matching function
Business opportunities and start-up matching equilibrium:
Equilibrium surplus rate of business ideas
Equilibrium contract separation rate
1.2 Appendix 2: Proof of Proposition 2
Traditional sector: Wages per capita income and population dynamics.
a) Wage and per capita income in the traditional sector:
b) Population dynamics: \( \gamma_{L} \, \equiv \,\frac{{\dot{L}}}{L}\, = \,g_{L} (y_{T} )\, = \,\left( {\frac{{a_{T} }}{{(1 + \delta_{T} )}}} \right)^{\varphi } \)with φ < 0
c) Properties of the population dynamics curve in the \( \gamma_{L} \, - \,\delta_{T} \, -\,{\text{diagram}} \) slope:
Location:
1.3 Appendix 3: Proof of Propostion 3
a) Labour market frictions and surplus labour:
separation rate:
matching rate:
search and matching equilibrium and equilibrium surplus labor rate:
b) Properties of the surplus labour curve in the \( \gamma_{N} \,-\,\delta_{T} \,-\,{\text{diagram}} \) slope:
Location:
1.4 Appendix 4: Proof of Proposition 4
a) Deriving the start-up curve:
Combining (Eq. 20) and (Eq. 17) gives the deposit rate offered to the households
With this deposit rate, and (Eqs. 14, 23) and the Ramsey rule (Eq. 3), we can determine the optimal growth rate of the consumption path and the entrepreneurial start-up growth rate \( \gamma_{N} \) of the modern sector
b) Properties of the start-up curve in the \( \gamma_{N} \,-\,\delta_{T} \,-\,{\text{diagram}} \) slope:
Location:
1.5 Appendix 5: Proof of Proposition 5
Given the system
we want to solve for the set of implicit functions
a) Partial derivatives of F 1, F 2, F 3 with respect to all relevant variables exist and are continuous: For F 1 we obtain:
For \( F_{2} \) we obtain:
For \( F_{3} \) we obtain:
b) Jakobian of (Eq. 32) system can be determined by:
Considering (a) and (b) than there exists an m-dimensional neighbourhood (m is the number of exogenous variables), in which the variables \( \delta_{T} ,\,\gamma_{N} ,\,\gamma_{L} \) are functions of the form
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Gries, T., Naudé, W. Entrepreneurship and structural economic transformation. Small Bus Econ 34, 13–29 (2010). https://doi.org/10.1007/s11187-009-9192-8
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DOI: https://doi.org/10.1007/s11187-009-9192-8