Mises Wire

Entrepreneurship in Developing Countries: Still a Work in Progress

Entrepreneurial advocacy has surged in recent years. Quite frequently, policy makers pen articles elaborating the case for entrepreneurial activities. Rightly, the entrepreneur is perceived as an architect of value. Precisely, because of its importance, global policy makers propose the establishment of institutions and legal reforms to facilitate entrepreneurship.

However, ameliorating the policy environment when culture is incompatible with entrepreneurship is impractical. Proposing entrepreneurship as a remedy for poverty in the developing world is futile when the cause of the problem is more intricate. Usually, in the developing world the issue is not a shortage of entrepreneurs, but the paucity of high-growth entrepreneurship. Entrepreneurs in middle and low-income countries target entrepreneurship as an avenue to evade poverty. But, typically in prosperous countries, entrepreneurship is depicted as a value-maximizing endeavor.

Because the nature of necessity-driven entrepreneurship in the developing world lacks a growth-oriented focus entrepreneurship in poor countries is not associated with growth. Comparing entrepreneurs across countries researchers conclude:

While entrepreneurship is important for economic growth, the impact of different types of entrepreneurship indicators on GDP is not uniform.

For instance, entrepreneurial activity (comprised of indicators of business formation and necessity-based entrepreneurship) has a negative effect on growth in middle and low-income countries. However, entrepreneurial attitudes (perceptions, intentions, and role models) have positive effects on GDP in high-income countries.

Indeed, it is apparent that in developed countries entrepreneurship is both an economic activity and a cognitive process. As a cognitive process, entrepreneurship mandates that agents acutely test various channels to unleash value. Therefore, the opportunity-driven brand of entrepreneurship that prevails in the developing world is primarily interested in leveraging ideas to enhance value. Consequently, acquiring wealth is the result of creating value, and though important, financial enrichment is rarely the sole objective.

When the dilemma plaguing the developing world is a matter of cognitive orientation emphasizing short-term cash over value creation, recommending policies to bolster entrepreneurship is immaterial since this fails to reorient cognitive styles. Instead of promoting entrepreneurship in the developing world, multilaterals like the World Bank and the InterAmerican Bank for Development should invest in retooling education to ensure that graduates are resourced with the competencies to launch high-growth businesses.

Multilaterals only succeed in wasting money by sponsoring entrepreneurship in developing countries, when many consider it to be a mere hustle, instead of a value-enhancing venture. Interestingly, research even asserts a striking link between income and the level of productive entrepreneurship.

The countries listed as having the most productive levels of entrepreneurship in comparison to the levels of unproductive entrepreneurship are all located in the developed world: “Denmark, Singapore, Luxembourg, Sweden, and Australia.” As expected, the countries recorded as having the highest levels of unproductive entrepreneurship relative to productive entrepreneurship are situated in the developing world: Philippines, Jamaica, Bulgaria, Pakistan, and Bangladesh.”

Conversely, programs to nurture entrepreneurship in developing countries are also inhibited by dispositions such as collectivism and cultural embeddedness. In collectivistic cultures, the preference is to sacrifice individual motivations for the betterment of the group. Hence it is posited that collectivistic cultures are embedded because people are unlikely to deviate from group norms to pursue self-interests.

In contrast, individualistic cultures value autonomy, achievement, and self-actualization to the detriment of group solidarity. For example, a 2015 paper published in the International Small Business Journal found that individualistic cultures are associated with higher entrepreneurial intentions.

Although, entrepreneurship is a collaborative process it necessitates radical thinking so advocating disruptive ideas in cultures where group cohesion is prized would be difficult. Commenting on the nexus between collectivism and entrepreneurship in the article ’Culture as a facilitator and barrier to Entrepreneurship in Uganda, ‘‘ the authors contend: ‘In collectivist communities, able and wealthier individuals are expected to help or provide for less able members of society.

In the case of entrepreneurship, whereas such help may provide skills and resources that can contribute toward firm growth and development of the recipients, it may also deduct resources from entrepreneurial firms. When this happens, the firm may experience constraints in its growth.” Accordingly, research also submits that entrepreneurs with high communal investment have higher social obligations in contrast to those with minimal communal involvement.

Clearly, without massive reeducation effort in some societies, attempts to engender radical entrepreneurship are unlikely to succeed. Attempts to foster entrepreneurial hubs in developing countries have proven to be a daunting task because insufficient attention is accorded to the nuances of culture. A case in point is the failure to replicate Silicon Valley. As a risk-tolerant community, Silicon Valley is appreciative of failure.

However, tolerance for risk and failure is not universally embraced. Hence, the fact of cultural anomalies indicates that reforms ignoring these intimate distinctions are poised to fail. To nourish entrepreneurship in the developing world we must first address the thorny issue of culture.

Image Source: Adobe Stock
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute