Entrepreneurship and Economic Development in a Developing Country: A Case Study of India

SIERDJAN KOSTER AND SHAILENDRA KUMAR RAI

This article analyses the possible link between entrepreneurship and economic development for the case of India From the year 1991 onwards , India has displayed a remarkable economic growth, averaging at 6 per cent per year. Assuming that the Gross Domestic Product (GDP) is connected to entrepreneurship levels, it can be expected that there is enough bandwidth over time to record changes in the characteristics of entrepreneurship. Using the GEM-model as a reference, we expect declining rates of entrepreneurship, as economic development opens up employment possibilities decreasing the number of necessity entrepreneurship. This pattern, however, is not found in the Indian case. Rather, entrepreneurship appears to be an important driver of recent economic growth. This can be explained by the fact that India is very much a service-based economy that facilitates smallscale firms. Service firms are typically smaller and require less start-up costs than manufacturing fi rms. This offers good opportunities for small entrepreneurial fi rms. As a result, entrepreneurship intensity goes up again. This process of creative destruction enhances regional productivity, regional competitiveness and as a consequence, regional economic development. In a nutshell, this is the basic reasoning often applied in assessing the role of entrepreneurship in economic growth for developed countries. By including nascent entrepreneurs, the rates published by GEM are generally higher than those from other sources. Still, it can be expected that the general trend in the EEA and other founding rates should be comparable. The decline in entrepreneurship levels with initial development is clear. However, the upward trend at the other extreme is much less pronounced. The GEM model offers a basis to test the relationship between level of economic development and entrepreneurship at the country level. Although the model has been formulated in a crosssectional environment, the arguments that explain the differences between countries also apply to one country that moves through the different phases of development.

On the basis of these arguments, two clear expectations can be formulated. First, a developing country that experiences GDP growth should show declining entrepreneurship intensity, because of increasing employment opportunities. Second, the composition of the types of entrepreneurship should change. The overall conclusion can be that for the case of India, GDP growth is not accompanied by a declining rate of entrepreneurial activity as expected from the GEM model. Quite the opposite seems to be the case; the number of small fi rms is growing at an average of about 8 per cent, whereas the total number of fi rms is growing with 6 per cent average The growth of small-scale enterprises outpaces both growth in larger fi rms and general economic growth as measured in GDP. The composition of entrepreneurship remains very much stable though. This indicates that many of the entrepreneurial efforts have a limited economic impact and do little more than provide a living for the proprietor. Although the level of entrepreneurship is increasing over time, the quality of the small firms remains rather stable; the share of registered firms remains equal over time. Given the importance of high-quality entrepreneurship for economic development, it seems that increasing the quality of entrepreneurship should be the main focus of policy measures.
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