Where Startups Spur No Growth

Economic-development experts have long held that higher rates of entrepreneurship in developing nations will lead to greater prosperity. But a paper published in the April issue of Small Business Economics reveals that when it comes to entrepreneurship in poor countries, more is not necessarily better.

Economists André van Stel, then with the Max Planck Institute of Economics, Roy Thurik of Erasmus University Rotterdam, and Martin Carree of Maastricht University set out to determine the effect of entrepreneurial activity on economic growth in rich and poor countries. They used data from the 2002 Global Entrepreneurship Monitor survey and the World Economic Forum's 2001-02 Growth Competitiveness Index to try to assess the impact of entrepreneurship on economies while controlling for differences in infrastructure and government institutions among nations. Their findings: In developing countries, entrepreneurship didn't help economic performance at all, and countries with higher rates of entrepreneurship actually had lower rates of growth. In richer countries, entrepreneurship and economic growth seemed to go hand in hand.

Thurik does not see the results as an excuse to discourage entrepreneurship in poorer countries, however. Instead, he says that developing nations need to build a sound foundation of large businesses first. Once established, those companies will support -- and require, as suppliers -- smaller ones. And he says that local entrepreneurs benefit from economies that are open to foreign investments and large international companies, both of which expose budding business owners to best practices, new technology, and, most of all, opportunity.

By James Mehring

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