THE ROLE OF SME s IN THE ECONOMIC DEVELOPMENT

Transcription

1 86 THE ROLE OF SME s IN THE ECONOMIC DEVELOPMENT Dr.Rashmi Gujrati Director, KC Group of Institutions, Una, H.P. Abstract The aim of the paper is to develop and scrutinizes the contributions of entrepreneurship in the economic development through SME. In the face of economic challenges, small businesses are developing new ideas, employing additional workers, and producing innovative products and services. In our paper we will express about the role of Small Business and Entrepreneurship in development the economy, which is very important. We chose to give definition of Small Business and Entrepreneurship, to give the most important differences between the small and big business, also we will communicate about the positives and Influence small business and entrepreneurship in the economy. Entrepreneurship is a very important topic throughout the world. In both developing and developed countries, entrepreneurship is seen as a driving force of economic growth, job creation, social amendment and innovation. This paper sets out to appraise the role that entrepreneurs and small businesses play in economic development. How important are entrepreneurs and small businesses in creating jobs, and are these the types of jobs that should be encouraged? How important are entrepreneurs and small businesses in the development of new products and new markets? Does promoting entrepreneurship and small businesses make sense as an economic development strategy? Keywords: Small and Medium Enterprises, Entrepreneurship, Economic Development Introduction Economic growth is a key issue both in economic policy making and in economic research. The interest in economic growth is growing fast in view of the persistently high rates of unemployment. In most OECD countries the first decades after World War II showed historically high rates of economic growth. In the 1960s and 1970s academic and political interest in many Western countries gradually turned to matters of demand management and income equality, whereas the interest in the causes of economic growth waned. Neo-classical theory explained economic growth by accumulation of production factors and by exogenous technological change. Mainstream economics however did not show any substantial interest in the ultimate causes underlying long-term factor accumulation and technological development.

2 87 Entrepreneurship is considered to be an important mechanism for economic development through employment, innovation and welfare effects (Schumpeter1934; Acs and Audretsch 1988; Wennekers and Thurik 1999; Baumol 2002). The dynamics of entrepreneurship can be vastly different depending on institutional context and level of economic development. There are considerable differences across countries in the orientation of entrepreneurial activities. The nature and structure of entrepreneurial activities varies across countries as reflected by, for example, the relative volumes of necessity and opportunity entrepreneurship. Acs and Varga (2005) studied 11 countries and found that opportunity entrepreneurship has a positive significant effect on economic development, whereas necessity entrepreneurship has no effect. The environment shaping the economy affects the dynamics of entrepreneurship within any given country. This environment is marked by interdependencies between economic development and institutions, which affect other characteristics, such as quality of governance, access to capital and other resources, and the perceptions of entrepreneurs. Institutions are critical determinants of economic behavior (North1990) and economic transactions (Williamson 1998) in general, and they can impose direct and indirect effects on both the supply and demand of entrepreneurs. Therefore, if one is interested in studying entrepreneurship within or across countries, the broad nexus between entrepreneurship, economic development and institutions is a critical area of inquiry. This nexus is especially important in helping understand why the relative contributions of entrepreneurship can vary significantly across countries and regions. Understanding this nexus is crucial to gain insight into what can work for economic development. This is for two reasons. First, the international economic development community has learned that a one-size fits-all approach simply does not work (Easterly2001). Second, economic importance attributed to the entrepreneur and concurrent policy interest in his/her activities has exploded in recent years. This combination suggests that public policy needs to be informed by the dynamics of entrepreneurship and economic development, as well as relevant local institutional conditions and context-specific variables. The Role of Small Businesses in Economic Development Promoting entrepreneurship and progress small businesses have received an enormous amount of attention in recent years from academics, politicians and the economic development community. Many times, especially in the economic development arena, the interest is sparked by the notion that small businesses create most new jobs in the United

3 88 States, and the assumption is that these are good jobs. Further, one of the key characteristics of the new economy is flexibility in production. Increasingly, successful companies are those that constantly introduce new or improved products with greater variety. Small businesses are presumed to be more flexible and therefore better able to adapt to changing market conditions. Because of the purported job creation role and innovative prowess of entrepreneurs and small businesses, it is thought that creating an environment encouraging to many small businesses may therefore be a better economic development strategy than trying to lure one or two large enterprises. The hope is that new businesses will not only create jobs in the local community, but through innovation, may also have the potential to grow into rapid growth gazelle firms that can provide perhaps hundreds of jobs and become the industry leaders of tomorrow. This paper sets out to evaluate the role that entrepreneurs and small businesses play in economic development. How important are entrepreneurs and small businesses in creating jobs, and are these the types of jobs that should be encouraged? How important are entrepreneurs and small businesses in the development of new products and new markets? Does promoting entrepreneurship and small businesses make sense as an economic development strategy? The answer is yes, but with some qualifications. Small businesses are potent job creators, but so are large businesses. The attribution of the bulk of net job creation to small businesses arises largely from relatively large job losses in large firms, not to especially robust job creation by small firms. More importantly, data show that large businesses offer better jobs than small businesses, on average, in terms of both compensation and stability. Further, there is little convincing evidence to suggest that small businesses have an edge over larger businesses in innovation. However, research and experience show that pursuing large businesses is likely to be a poor economic development strategy, which suggests that promoting entrepreneurship and fostering small businesses may offer a more viable alternative. But more research is needed to evaluate the case, and indeed, to determine whether or not public engagement in economic development itself is a cost-effective and worthwhile pursuit. Entrepreneurs are people with a unique combination of traits: They are attuned to market openings and the investment environment, alert to opportunity, innovative, and tolerant of risk. Migrants may not be the first group that comes to mind when considering who is likely to become an entrepreneur. But emigrants and their posterities are, in fact, uniquely

4 89 positioned to recognize investment opportunities in their countries of origin and to exploit such opportunities by taking advantage of their ties in two worlds. Development practitioners and policymakers are beginning to examine the role of diaspora entrepreneurs in directing investments toward their home countries, there by promoting economic growth. Compared with remittances or diaspora bonds, entrepreneurial investments give diaspora members more direct control over the use of their funds. And Diaspora members are often more willing than no movement investors to risk starting or engaging in business activities in high-risk or emerging markets. Moreover, their knowledge of the local political, economic, and cultural environment, as well as their personal connections and linguistic abilities, may give members of diasporas a first mover advantage when investing in or starting businesses in their countries of origin. Role of Entrepreneurship in Economic Development The industrial health of a society depends on the level of entrepreneurship existing in it. A country might remain backward not because of lack of natural resources or dearth of capital [as it is many times believed] but because of lack of entrepreneurial talents or it inability to tap the latent entrepreneurial talents existing in that society. Entrepreneurs historically have altered the direction of national economies, industry or markets- Japan, Singapore, Korea, Taiwan to name a few. 1. Entrepreneurship and economic development Entrepreneurship is basically concerned with creating wealth through production of goods and services. This results in a process of upward change whereby thereper capita income of a country rises overtime or in other words economic development takes place. Thus entrepreneurial development is the key to economic development. In fact it is one of the most critical inputs in the economic development of a region. It speeds up the process of activating factors of production leading to a higher rate of economic growth, dispersal of economic activities and development of backward regions. If a region is unable to throw up a sufficient number of entrepreneurs then alien entrepreneurs usually step in to provide goods and services needed by the people. However the profits earned by these entrepreneurs are usually not ploughed back but repatriated to their place of origin. As a result development in that region cannot take place. Dr. M. M. Akhori refers to this practice as The Leech Effect. The above reiterates the importance of entrepreneurship development for fuelling economic growth of a region. Entrepreneurship begets and also injects entrepreneurship by starting a

5 90 chain reaction when the entrepreneur continuously tries to improve the quality of existing goods and services and add new ones. E.g. when computers came into the market there was continuous improvement in the models, their functions etc. like first generation computers, personal computers, laptops, palmtops etc. Not only had this fostered the development of the software industry, computer education institutes, computer maintenance and stationery units etc. but also other industries like banking, railways, education, travel, films, medical and legal transcriptions, business process outsourcing [BPOs] etc. In this manner by harnessing the entrepreneurial talent a society comes out of traditional fatigue to modern industrial culture. India needs entrepreneurs to capitalize on new opportunities and to create wealth and new jobs. 2. Entrepreneurship and education Towards the end of the sixties, two significant contributions were made in the field of entrepreneurship.one was that there is a positive connection between entrepreneurship and economic development and the other was regarding the emergence of a strong hypothesis that entrepreneurship can be developed through planned efforts. Consequently planners realized that absence of a strong entrepreneurial base acts as a serious handicap in the industrial development of a region. The identification and development of first generation entrepreneurs through Entrepreneurial Development Programmes is an important strategy. There is a growing realization that presence of resources and satisfactory government policies cannot automatically manufacture economic development. It is the entrepreneurial spirit of the people, which can transform the economy of that region. Both the quantity and quality of entrepreneurs are of utmost significance for achieving the goal of economic development. The myth that entrepreneurs are born with some innate traits is fortunately no longer held. 3. Economic growth and entrepreneurship Where entrepreneurship was the focus in the preceding section, we have focus upon economic growth. In section 3.1 we briefly deal with growth theories. Some aspects of the history of economic growth are surveyed in section 3.2. Finally, in section 3.3, some modern views as formulated in industrial economics and in evolutionary economics are discussed. 3.1 Growth theory In this section, the distinction will be made between the old neo-classical growth theory and the new, endogenous growth theory. For a long period neo-classical growth theory concentrated solely on the contribution of labor and capital to the process of economic

6 91 expansion. In its different forms, either as growth accounting (Denison, 1985) or as a theory of long-run tendencies (Solow, 1970), there remained much to explain. Both forms generate a substantial residual, which was ascribed to the effects of technological change. This change is unaccounted for and is viewed as exogenous manna from heaven (Van de Klundert and Smulders, 1992, p. 177). The basic idea of the new growth theory is to endogenize the longrun rate of economic expansion. Baumol (1993a, pp ) suggests... that so far as capital investment, education, and the like are concerned, one can best proceed by treating them as endogenous variables in a sequential process in other words, these variables affect productivity growth, but productivity growth, in turn, itself influences the value of these variables, after some lag. These endogenous influences are, then, critical workings of a feedback process. Baumol (p. 260) continues: To some degree, the same story can be told about the exercise of entrepreneurship, investment in innovation, and the magnitude of activity directed to the transfer of technology. These too, clearly, are influenced by past productivity growth achievements and they also, in their turn, influence future growth. Yet it would seem plausible that there is a strong streak of erogeneity in these variables, which can help to account for the outbreak and spread of industrial revolutions and for the relative decline and even for the ruin of economies that formerly were models of success. These statements describe both the contribution of endogenous growth theory and the dilemma this theory is confronted with. Few attempts have been made to incorporate entrepreneurship in growth models. 3.2 Economic history and the causes of long term growth Growth accounting in a neo-classical frame work can decode economic growth into contributing factors such as labor inputs (correcting for hours of work and education), capital formation, economies of scale and advances in the state of knowledge. But it leaves a residual, and more importantly it misses the fundamental causes governing capital formation and innovation. Lewis (1955) already distinguishes between the proximate causes of economic growth (the effort to economize, increase of knowledge and increase of the amount of capital per head) and the underlying causes of these causes, which are to be found in beliefs and institutions. North and Thomas (1973) put it even more bluntly: The factors we have listed (innovation, economies of scale, education, capital accumulation, etc.) are not causes of growth; they are growth. According to them the causes of economic growth are to

7 92 be found in the factors which determine the efficiency of the economic organization: incentives, property rights etc. An interesting approach focusing on these factors is chosen by economists studying historical processes of economic growth. An introduction to this approach which aims at... comprehending the economy as a dynamic, historical process is provided by Lazonick.. The time span covered in these historical investigations is usually quite long (a century or more). This time span encompasses large differences in average growth rates between periods (usually referred to in terms of the rise and decline of nations ). It keeps track of slowly changing factors in the culture, the legal framework and the external organization of markets, and it covers the full length of time it may take for new technologies to circulate through the economic system. Paraphrasing Cipolla (1981) who regards growth accounting as highly artificial, because in reality everything flows together can summarize their approach. Referring to Schumpeter he states that economic growth cannot be understood without taking the role of entrepreneurship into account. Cipolla (p. 120) however continues: Entrepreneurial activity is a necessary ingredient, but not a sufficient one. It is the human strength of a whole society which, given the opportunity, comes into play and sets loose the creative responses of history. This field of the rise and fall of nations is extremely wide and diverse. Below we will certainly do no full justice to the analysis of each of the authors whom we cite. However, all is well if we will have succeeded in painting a picture of the role of entrepreneurship in the historical analysis of economic growth. We follow two approaches: historical case studies and generalizations (Lewis, 1955). First some major periods in European history will be summarized one by one, while another short case study will discuss the so-called East Asian miracle. Secondly, some general views on the role of culture and institutions will be discussed and the main findings will be integrated in our final framework. 3.3 Linking entrepreneurship to economic growth Entrepreneurship is at the heart of national advantage (Porter, 1990, p. 125). It is of eminent importance for carrying out innovations. Concerning the role of entrepreneurship in stimulating economic growth, many links have been discussed. Both the role of the entrepreneur in carrying out innovations and in enhancing rivalry are important for economic growth. Our assessment of the role of entrepreneurship as expressed in several fields of research. (such as historical views; management literature; growth theory; evolutionary economics), Competition is interpreted in the broad sense: contestability of markets, domestic

8 93 rivalry and international competition. In the historical views of the Schumpeterian and the Austrians entrepreneurship is explicitly relevant for explaining economic growth. On the other hand, the neo-classicals have no explicit room for the role of an active entrepreneur. The endogenous growth theory may offer new theoretical perspectives for entrepreneurship. As yet it does not offer many concrete starting-points. Economic history is the foremost field in which entrepreneurship is considered crucial for the economic growth of nations. On the microeconomic level the management literature of large organizations devotes explicit attention to the importance of entrepreneurship for performance. Porter s work offers distinctive starting points for the role of entrepreneurship in explaining economic development and growth of nations. Entrepreneurship can be attached to the determinants of his diamond. In the work of Eliasson entrepreneurship is also considered crucial for economic growth. 4. The Importance of Entrepreneurship and Small Business Development The focus of economic development policy is to improve the economic wellbeing of a community, whether defined as a town, region or state, by creating jobs and wealth, and improving the quality of life. The primary focus of most state economic development strategies has been the attraction of businesses that can bring jobs and wealth to the state. However, the changing nature of global competition has altered the stakes for state policy makers, making past recruitment strategies more challenging as competitors now include countries in Asia, Latin America, South America, and others. This global competitive environment demands a more diversified approach to economic development, increasing the relative importance of supporting existing small businesses and entrepreneurs and establishing the conditions under which innovative, entrepreneurial endeavors can take root and grow in a state. These grow your own strategies have received increasing attention in recent years as communities, regions and states experiment with new types of policies to support entrepreneurs and small business owners. In order to be successful as part of an overall economic development strategy, entrepreneur and small business (ESB) policies need to focus on three related policies: Creating more entrepreneurs and small business owners who are actively engaged in enterprise creation building and filling the pipeline. Creating better skilled entrepreneurs and small business owners who apply these skills to enterprise development.

9 94 Building stronger, more productive and competitive businesses as a result of the activities of entrepreneurs and small business owners. The objective is to increase the number of people in a state who are actively pursuing entrepreneurial and small business ventures and providing them with the support they need to grow successful ventures. In turn, the state s role is to focus on creating an environment in which these new and existing ventures can take hold, grow and flourish. Together these policies can lead to the job creation and wealth creation that lie at the heart of any economic development strategy. A focus on ESB policies by the state requires the acceptance of a broad definition of an entrepreneur, one that casts a net wide enough to include existing business owners. At its simplest, an entrepreneur is one who organizes, operates and takes on the risk of a business venture. This definition may include a high tech, high growth gazelle firm, an existing business owner who adopts e-commerce strategies to build her business, as well as an artisan who markets his wares via a local farmers market and heritage trails program. The diversity encompassed in this broad definition reflects the diversity of entrepreneurial and small business talent that exists across the communities and regions of most states, Kentucky being no exception. The importance of advancing ESB policies as a recognized and valued component of Kentucky s overall economic development strategy is confirmed by understanding the current make-up of the economy. According to the U.S. Small Business Administration (SBA) Office of Advocacy, small businesses create most of the nation s net new jobs,and they bring dynamic ideas, innovative services, and new products to the market place. 5. The Role of the SME in the Emerging Market Economy In addition to the direct economic effects of making new services and products available and creating employment, the SME has several equally important effects on the functioning of transitional societies that move through more indirect channels. The development of this sector is essential to create the political and social environmental conditions necessary to allow desirable changes to occur elsewhere in the system. The SME sector must simultaneously absorb resources and workers from the large enterprise sector and at the same time help to create a labour market situation in which the process of reorientation and fundamental reorganization of the large enterprise sector can be carried through without threatening social peace. In addition to slowing down the restructuring process, the failure to develop the SME may increase the volume of required transfer payments for unemployment,

10 95 early retirement and other programmes and (under certain fiscal policy assumptions) crowdout investment and other employment creating expenditures. The complexity of creating and sustaining the development of a SME sector in an emerging transitional economy becomes evident as soon as attention shifts beyond the more obvious retail and neighbor-hood-level services and considers directly productive small enterprises. Preliminary comparisons among China, Russia, other FSU countries, Hungary, Poland, Czech Republic and Slovak Republic support this view. Existing institutions and capabilities, including the extent of formation and survival of network sand other embedded relationships, appear to interact with the active policy measures and the legal environment to determine the transition period performance of the sector. Development of these types of small firm-large firm relationships appear to have played a major role in the highly successful business practices of the vertically integrated Japanese keiretsu financial-industrial groups over most of the post-war period. Similar linkages appear to be important in the more recent success of the Township and Village Enterprises (TVE) in the People s Republic of China during the post-1978 reform period. Another quite different synergistic relationship, based on both horizontally and perpendicular linkages, is represented by the kind of local co-operative/competitive development common for hundreds of years in Europe and North America, but only recently distinguished with the title of industrial district and cluster. The kinds of external economies of agglomeration and scope that have played a large role in the post-world War II success of small-scale industrial districts and clusters in Northern Italy and Southern Germany are not new. They can be found (unnamed) in many other times and places, including 18th Century England and 19th Century New England. Conclusion Reasonable people adjust themselves to the world. Unreasonable people attempt to adapt the world to themselves. All progress, therefore, depends on unreasonable people. Economic growth generated by entrepreneurs is the core engine of a virtuous cycle that develops an economy. Successful entrepreneurs, through their breakthrough technologies and rapidly growing businesses, create new wealth that can generate even greater economic growth. The policy environment needs to be one that will foster the growth of entrepreneurs. The burden is on policy makers to understand the key factors that help entrepreneurs to thrive. Some of the issues that require close attention include addressing infrastructure constraints, the disproportionate regulatory burden that entrepreneurs have to carry, enhancing access to

11 96 finance and the overall health of the capital markets, the financial incentives for entrepreneurs, and the 45protection of intellectual property. The papers included in this issue contribute to understanding the nexus among entrepreneurship, economic development. The conclusions of the papers in this special issue support the findings that the global economy is divided into three stages the factor-driven stage, the efficiency driven stage and the innovation-driven stage and that in order to understand entrepreneurship in all three stages, entrepreneurship data need to reflect the stages of development. This means moving away from simple measures of entrepreneurship across countries illustrating a U-shaped relationship to more complex measures, which are positively related to development and are S-shaped.

12 97 References - Acemoglu, D., Aghion, P., & Zilibotti, F. (2007). Distance to frontier, selection and economic growth. Journal of the European Economic Association, 4, Acs, Z. J. (2006). How is entrepreneurship good for economic growth? Innovations, 1(1), Acs, Z. J., & Amoro s, J. E. (2008). Entrepreneurship and competitiveness dynamics in Latin America. Small Business Economics, 31(3), this issue. doi: /s y. - Acs, Z. J., & Armington, C. (2006). Entrepreneurship, geography and American economic growth. - Acs, Z. J., & Audretsch, D. B. (1988). Innovation in large and small firms: An empirical analysis. - Acs, Z., & Szerb, L. (2007). Entrepreneurship, economic growth and public policy. Small Business Economics, 28(2/3), Ahmad, N., & Hoffmann, A. N. (2008). A framework for addressing and measuring entrepreneurship. OECD Statistics Working Paper, 2. Retrieved May 9, 2008, from: - Audretsch, D. B. (2007). Thee entrepreneurial society. Oxford: Oxford University Press. Audretsch, D. B., & Thurik, A. R. (2001). What s new about the new economy? From the managed to the entrepreneurial economy. Industrial and Corporate Change, 10(1), Schumpeter, Joseph A. (1911). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle translation. Cambridge, MA: Harvard University Press. - Thurik, Roy, and Sander Wennekers (2001). A Note on Entrepreneurship, Small Business and Economic Growth. Rotterdam: Erasmus Research Institute of Management Report Series.