12 Enterpreneurship, Organization, and Innovation Perhaps one day a saga may be written about the modern captain of industry. Perhaps, in the civilization which succeeds our own, a legend of the entrepreneur will be thumbed by antiquarians, and told as a winter tale by the firelight, as today our sages assemble fragments of priestly mythologies from the Nile, and as we tell to children of Jason’s noble quest of the Golden Fleece. But what form such a legend may take it is not at all easy to foresee. Whether the businessman be the Jason or the Aetes in the story depends on other secrets which those unloved sisters keep hid where they store their scissors and their thread. We have, indeed, the crude unwrought materials for such a legend to hand in plenty, but they are suitable, strange to say, for legends of two sharply different kinds. The Golden Fleece is there, right enough, as the background of the story. But the captain of industry may be cast in either of two roles: as the noble, daring, high-souled adventurer, sailing in the teeth of storm and danger to wrest from barbarism a prize to enrich his countrymen; or else as a barbarous tyrant, guarding his treasure with cunning and laying snares to entrap Jason, who comes with the breath of a new civilization to challenge his power and possession. (Dobb 1926:3) The entrepreneur, with a dream and will to found a private kingdom, to conquer adversity, to achieve success for its own sake, and to experience the joy of cre- ation, is a heroic figure in economic development, according to Joseph A. Schumpeter (1961:3), sometime finance minister in an Austrian Socialist government and profes- sor of economics in Bonn, in Tokyo, and at Harvard. In a similar vein, the Harvard psychologist David C. McClelland (1961) perceives the efforts of the entrepreneur, in controlling production in both capitalist and socialist economies, as largely responsi- ble for rapid economic growth. For McClelland, the entrepreneur, driven by an inner urge to improve, is motivated by profits as a measure of achievement rather than as a source of enrichment. Economic historians emphasize that such Schumpeterian captains of industry as John D. Rockefeller (oil), Andrew Carnegie (steel), Cornelius Vanderbilt (railroads), James B. Duke (tobacco and power), and Jay Gould and J. P. Morgan (finance) led the 50-year economic expansion before World War I that made the United States the world’s leading industrial nation. Rockefeller combined managerial genius, capacity for detail, decisiveness, frugality, and foresight with a ruthless suppression of com- petition, the use of espionage and violence to gain competitive advantages, and a general neglect of the public interest to become the symbol of the virtues and vices of these “robber barons” (Nash 1964:347–348). But surely an economy does not require Rockefellers, Vanderbilts, and Goulds for rapid development. The functions of entrepreneurship, organization, and innovation are not limited to the large private sector but can be exercised by the Argentine flour miller, the Malaysian cobbler, or the Chinese government planner and factory manager. Except in an anarchist utopia, the need for entrepreneurship is free of ideology. Despite exceptions, such as Jamshedjee Tata, responsible for India’s first steel mill in 1911, the political, cultural, and technological milieu was not right for vigorous, industrial, entrepreneurial activity in present LDCs, especially before the 1960s or 1970s or so. Scope of the Chapter The entrepreneur can be viewed in at least four ways: (1) as the coordinator of other production resources – land, labor, and capital; (2) as the decision maker under uncertainty; (3) as the innovator; and (4) as the gap filler and input completer. The last two concepts, which are the most relevant for economic development, are discussed in the first two sections of this chapter. We next look at entrepreneurial functions in LDCs. After this, we consider the family as an entrepreneurial unit. The multiple entrepreneurial function is then dis- cussed. The next two sections examine McClelland’s and Hagen’s analyses of the effect of social and psychological factors on entrepreneurship. Subsequent sections consider the entrepreneur’s socioeconomic profile – occupational background, reli- gious and ethnic origin, social origin and mobility, education, and sex. The last sec- tion discusses technological mobilization and innovation in socialist and transitional economies. Entrepreneur as Innovator The rapid economic growth of the Western world during the past century is largely a story of how novel and improved ways of satisfying wants were discovered and adopted. But this story is not just one of inventions or devising new methods or products. History is replete with inventions that were not needed or that, more frequently, failed to obtain a sponsor or market. For example, the Stanley Steamer, invented early in the 20th century, probably failed not because it was inferior to the automobile with the internal combustion engine but because the inventors, the Stanley brothers, did not try to mass-produce it. No, to explain economic growth, we must emphasize innovation rather than invention. Economists have paid little systematic attention to the process of innovation – the embodiment in commercial practice of some new idea or invention – and to the innovator. SCHUMPETER’S THEORY Schumpeter (1961; 1939) is the exceptional economist who links innovation to the entrepreneur, maintaining that the source of private profits is successful innovation and that innovation brings about economic growth. He feels that the entrepreneur carries out new economic combinations by (1) introducing new products, (2) intro- ducing new production functions that decrease inputs needed to produce a given output, (3) opening new markets, (4) exploiting new sources of materials, and (5) reorganizing an industry. The Schumpeterian model begins with a stationary state, an unchanging eco- nomic process that merely reproduces itself at constant rates without innovators or entrepreneurs. This model assumes perfect competition, full employment, and no sav- ings nor technical change; and it clarifies the tremendous impact of entrepreneurs on the economic process. In the stationary state, no entrepreneurial function is required, as the ordinary, routine work, the repetition of orders and operations, can be done by workers themselves. However, into this stationary process, a profit-motivated entrepreneur begins to innovate, say, by introducing a new production function that raises the marginal productivity of various production resources. Eventually, such innovation means the construction of new plants and the creation of new firms, which imply new leadership. The stationary economy may have high earnings for management, monopoly gains, windfalls, or speculative gains, but has no entrepreneurial profits. Profits are the premium for innovation, and they arise from no other source. Innovation, however, sets up only a temporary monopoly gain, which is soon wiped out by imitation. For profits to continue, it is necessary to keep a step ahead of one’s rivals – the innovations must continue. Profits result from the activity of the entrepreneur, even though he or she may not always receive them. New bank credit finances the innovation, which, once successfully set up, is more easily imitated by competitors. Innovations are not isolated events evenly distributed in time, place, and sector; they arise in clusters, as a result of lowered risk. Eventually, the waves of entrepreneurial activity not only force out old firms but also exhaust the limited possibilities of gain from the innovation. As borrowing diminishes and loans are repaid, the entrepreneurial activity slackens and finally ceases. Innovation, saving, credit creation, and imitation explain economic growth, whereas their ebb and flow determine the business cycle. THE SCHUMPETERIAN ENTREPRENEUR IN DEVELOPING COUNTRIES For William J. Baumol (2002), the pressures for innovation under oligopolistic competition, with a few giant firms dominating the market, has provided incentives for unprecedented growth in the last century or so. Indeed, among large, high-tech business firms, innovation has replaced price as the important competitive weapon in the market. Capitalism is more likely to encourage productive entrepreneurship rather than rent-seeking (that is, nonproductive) pursuit of profit. However, Schumpeter indicates that his theory is valid only in capitalist economies prior to the rise of giant corporations. Indeed, Schumpeter fears oligopolistic concentration may give rise to the fall of capitalism. Thus, Schumpeter’s theory, assuming perfect competition, may have limited application in mixed and capitalist  LDCs, as many industries in these countries, especially in manufacturing, are domi- nated by a few large firms. Moreover, it seems unrealistic to preclude the possibility that Schumpeterian innovation may mean expansion of already existing firms. In fact, in the real world, characterized by imperfect competition, an established organization would frequently have an advantage in developing new techniques, markets, products, and organizations. Furthermore, Schumpeter’s concept of the entrepreneur is somewhat limited in developing countries. The majority of LDC Schumpeterian entrepreneurs are traders whose innovations are opening new markets. In light of technical transfers from advanced economies, the development of entirely new combinations should not unduly limit what is and is not considered entrepreneurial activity. People with technical, executive, and organizational skills may be too scarce in less-developed countries to use in developing new combinations in the Schumpeterian sense. And, in any case, fewer high-level people are needed to adapt combinations from economically advanced countries. STAGES IN INNOVATION Technical advance involves (1) the development of pure science, (2) invention, innovation, (4) financing the innovation, and (5) the innovation’s acceptance. Science and technical innovation interact; basic scientific advances not only create opportunities for innovation, but also economic incentives and technical progress can affect the agenda for, and identify the payoffs from, scientific research. Links from production to technology and science are often absent in LDCs. Yet low-income countries can frequently skip stages 1 and 2 and sometimes even stage 3, so that scarce, high-level personnel can be devoted to adapting those discoveries already made (Maclaurin 1953:97–111; Fransman 1986:47–48). Entrepreneur as Gap-Filler The innovator differs from the manager of a firm, who runs the business along established lines. Entrepreneurs are the engineers of change, not its products. They are difficult to identify in practice, as no one acts exclusively as an entrepreneur. Although they frequently will be found among heads or founders of firms, or among the major owners or stockholders, they need not necessarily hold executive office in the firm, furnish capital, or bear risks. Entrepreneurship indicates activities essential to creating or carrying on an enter- prise in which not all markets are well established or clearly defined, or in which the production function is not fully specified or completely known. The Nobel economist Ronald H. Coase identifies two major coordinating instruments within the economy: the entrepreneur, who organizes within the firm through command and hierarchy, and the price mechanism, which coordinates decisions between firms. The choice between organization within the firm or by the market (that is, the “make or buy” decision) is not given or determined by technology but mainly reflects the transactions costs of using the price system, including the cost of discovering what prices are (Coase 1937:386–405).1 An entrepreneur (an individual or groups of individuals) has the rare capabil- ity of making up for market deficiencies or filling gaps. There is no one-to-one correspondence between sets of inputs and outputs. Many firms operate with a considerable degree of slack (Leibenstein 1966:392–415; Leibenstein 1968:72–83). Thus, the entrepreneur, especially in LDCs, may need to seek and evaluate economic opportunities; marshal financial resources; manage the firm; and acquire new eco- nomic information and translate it into new markets, techniques, and products, as it may not be possible to hire someone to do these tasks. To illustrate, if an upper skiving machine is essential for making men’s fine leather shoes; if no one in the country produces this machine; and if imports are barred, then only entrepreneurs who know how to construct the machine can enter the fine leather footwear industry. The entrepreneur also must be an “input completer.” For any given economic activity, a minimum quantity of inputs must be marshaled. If less than the minimum is available, the entrepreneur steps in to make up for the lack of marketable inputs by developing more productive techniques; accumulating new knowledge; creating or adopting new goods, new markets, new materials, and new organizational forms; and creating new skills – all important elements in economic growth. As indicated in Chapter 11, growth cannot be explained merely by increases in standard inputs, such as labor and capital. Entrepreneurial gap filling and input completing help explain why labor and capital do not account for all outputs. No fixed relationship between inputs and outputs exists, partly because entrepreneurial contributions cannot be readily quantified, predicted, planned for, or controlled. Functions of the Entrepreneur As we hinted earlier, we feel Schumpeter’s concept of the entrepreneur should be broadened to include those who imitate, adapt, or modify already existing innova- tions.2 Indeed, Addison (2003:5) finds that LDCs’ imitating DCs, boosted by higher educational attainment, is the major factor contributing to increased total factor pro- ductivity. Most business activity in a nonstationary state requires some innovation. Each firm is uniquely located and organized, and its economic setting changes over time. Thus, absolute imitation is impossible, and techniques developed outside the firm must be adapted to its circumstances. This necessity is especially apparent when an LDC firm borrows technology from an advanced economy with different, relative factor prices – for example, a higher labor price relative to capital. These adaptations require, if you will, innovation if defined in a less restrictive sense than Schumpeter used it. In a changing economy, it is difficult to distinguish between the adaptations of day-to-day management and the entrepreneur’s creative decisions. Peter Kilby’s following list (1971:1–40) of 13 entrepreneurial roles includes some management functions. Exchange relationships Seeing market opportunities (novel or imitative) Gaining command over resources Marketing the product and responding to competition Purchasing inputs Political administration Dealing with the public bureaucracy (concessions, licenses, taxes, and so forth) Managing human relations in the firm Managing customer and supplier relations Management control Managing finances Managing production (control by written records, supervision, coordinating input flows with customer orders, maintaining equipment) Technological Acquiring and overseeing plant assembly Minimizing inputs with a given production process – industrial engineering Upgrading processes and product quality Introducing new production techniques and products The economist who analyzes Western economies frequently limits the entrepre- neurial function to activities 1 and 2: It is assumed that the remaining skills can be purchased in the marketplace. But the extent to which the entrepreneur can delegate these activities to competent subordinates depends on many variables: the scale of production; how well developed the market is for such highly skilled labor; the social factors governing how responsible hired personnel will be; and the entrepreneur’s efficiency in using high-level managerial employees. Because many of the markets for skilled people in developing countries are not well developed, entrepreneurs fre- quently have to perform these tasks themselves. Studies of entrepreneurs in LDCs indicate that production, financial, and technological management are least satisfac- tory (ibid.).3 Kilby (2003:15), who later revisited his 1971 essay, stresses that LDCs have more of a deficiency in the demand (opportunity) for, rather than the supply (capacity) of, entrepreneurs. Deficient demand means impediments in the economic environment resulting from a lack of technology and complementary factors, including not only resources of production but also infrastructure, incentives, information, and bureau- cratic skills (ibid.; Nafziger 1977:83–89; Schatz 1963:42–56). Family as Entrepreneur The family enterprise, which is widespread in less-industrialized countries, is usually small and managed primarily by the father or eldest son. As the dominant form of economic organization in 19th-century France, the family firm was conceived of as a fief to maintain and enhance the position of the family, and not as a mechanism for wealth and power (Landes 1949: 45–61). However, some of the leading indus- trial conglomerates in developing countries are family-owned. For example, India’s largest private manufacturers are usually members of old trading families, who con- trol several companies. Frequently, family members specialize their roles according to industry, location, or management function. Family entrepreneurship can mobilize large amounts of resources, make quick, unified decisions, put trustworthy people into management positions, and constrain irresponsibility. Thus, among the Igbo people in Nigeria, families guarantee that debts are paid, and their solidarity provides strong sanctions against default, as individual failure reflects on family reputation. The extended family frequently funds apprentice training and initial capitalization, although it may hinder the firm’s expansion by diverting resources to current consumption (Nafziger 1969:25–33). In India, the extended family involved in business activity is usually methodical in choosing its investments in the human capital of its children. The family may use its income and enterprises to provide the training, education, travel, and business expe- rience of its children, and to purchase plant and equipment that is most appropriate for the young businessperson’s entrepreneurial development. As youngsters, the chil- dren in business families are exposed to a business milieu and learn about the family enterprises. Where the family has sufficient income, it enrolls the children in excellent schools, frequently encouraging its offspring to study law, economics, engineering, or business administration at the university, and sometimes even providing foreign travel and training. A family with several children may diversify their educations among subjects relevant for business. During school vacations and after graduation, each son, and increasingly in the last two decades each daughter, is moved from job to job within the family’s production units, gradually increasing the child’s responsi- bility. Moreover, families sometimes arrange marriages to further alliances with other prosperous business families (Nafziger 1975:131–148). Family entrepreneurship, however, may be conservative about taking risks, inno- vating, and delegating authority. Paternalistic attitudes in employer–employee rela- tionships prevail, and family-owned firms are often reluctant to hire professional managers. This reluctance, however, may reflect the critical shortage of professional and managers in LDCs – especially those who can occupy positions of authority without ownership – rather than the idiosyncrasies of the family. In addition, most family firms are too small to afford outside managers. And we must add that paternalism and authoritarianism are feudal legacies characteristic of many enterprises in developing countries, and not unique to family businesses. Multiple Entrepreneurial Function Frequently today, with the increased complexity of business firms, the entrepreneurial function may be divided among a business hierarchy. Such a hierarchical function- ing might be more appropriately labeled organization rather than entrepreneurship. Organization connotes not only the constellation of functions, persons, and abili- ties used to manage the enterprise but also how these elements are integrated into a common undertaking (Harbison 1956:364–379). Organization may be either profit- or social-service-oriented, giving the concept applicability to both private and public sectors. Achievement Motivation, Self-Assessment, and Entrepreneurship Psychological evidence indicates that in early childhood, a person unconsciously learns behavior that is safest and most rewarding and that such learning substan- tially influences adult behavior. For example, the individual who is encouraged to be curious, creative, and independent as a child is more likely to engage in innovative and entrepreneurial activity as an adult. Although a society may consciously attempt to nurture imagination, self-reliance, and achievement orientation in child rearing and schooling, scholars used to consider this process slow and uncertain at best and requiring at least a generation before it would affect entrepreneurship and economic growth. McClelland (1961) contends that a society with a generally high need for achieve- ment or urge to improve produces more energetic entrepreneurs, who, in turn, bring about more rapid economic development. He argues that entrepreneurs can be trained to succeed. Scholars are quite skeptical of the validity of McClelland’s findings. Nevertheless, achievement motivation training (along with practical train- ing in management, marketing, and finance and assistance in project conception and planning) is more and more a part of programs at entrepreneurship development centers (McClelland and Winter 1971).4 Boyan Jovanovic (1982:649–670) finds that differences in entrepreneurial ability, learned over time, determine a person’s business entry or exit. From business experi- ence, people acquire more precise estimates of their ability, expanding output as they revise their ability estimates upward, and contracting with downward revisions of ability.  Theory of Technological Creativity HAGEN’S THEORY On the Theory of Social Change (1962), by the economist Everett E Hagen, uses psy- chology, sociology, and anthropology to explain how a traditional agricultural soci- ety (with a hierarchical and authoritarian social structure where status is inherited) becomes one in which continuing technical progress occurs. Because the industrial and cultural complex of low-income societies is unique, they cannot merely imitate Western techniques. Thus, economic growth requires widespread adaptation, cre- ativity, and problem solving, in addition to positive attitudes toward manual labor. Hagen suggests that childhood environment and training in traditional societies produce an authoritarian personality with a low need for achievement, a high need for dependence and submission, and a fatalistic view of the world. If parents perceive children as fragile organisms without the capacity for understanding or managing the world, the offspring are treated oversolicitously and prevented from taking the initiative. The child, repressing anger, avoids anxiety by obeying the commands of powerful people. Events that cause peasants, workers, and lower elites to feel they are no longer respected and valued may catalyze economic development. For Hagen, this process occurs over many generations. Increasingly, adults become angry and anxious; and sons retreat and reject their parents’ unsatisfying values. After several generations, women, reacting to their husbands’ ineffectiveness, respond with delight to their sons’ achievements. Such maternal attitudes combined with paternal weakness provide an almost ideal environment for the formation of an anxious, driving type of creativity. If sons are blocked from other careers, they will become entrepreneurs and spearhead the drive for economic growth. A CRITIQUE One problem with Hagen’s theory is that loss of status respect is an event so broadly defined that it may occur once or twice a decade in most societies. Nor does the theory explain groups, for example, 17th-century English Catholics, who lost status but did not become entrepreneurs. Furthermore, the interval between status loss and the emergence of creativity varies from 30 to 700 years, so that Hagen’s hypothesis fits almost any case. Although Hagen charges economists with ethnocentrism, he applies a Western- based personality theory to vastly different societies and historical periods. In addi- tion, his case studies provide no evidence of changes in parent–child relationships and child-training methods during the early historical periods of status loss. Moreover, the economic historian Alexander Gerschenkron (1965:90–94) convincingly argues that the position, training, and discipline of the child in modern Germany, Austria, and Sweden resemble those described in Hagen’s traditional society. Finally, Hagen slights the effect on entrepreneurial activity of changes in economic opportunities, such as improved transport, wider-reaching markets, the availability of foreign capi- tal and technology, and social structure. But, despite its inadequacies, Hagen’s work  has made economists more aware of the importance of noneconomic variables in economic growth. Occupational Background Many studies of industrial entrepreneurs in developing countries indicate trade was their former occupation.5 A trading background gives the entrepreneur a familiarity with the market, some general management and commercial experience, sales outlets and contacts, and some capital. A number of traders entered manufacturing to ensure regular supplies or because they can increase profits. Frequently, a major catalyst for this shift was government policy following independence from colonial control. At that time, governments often encouraged import substitution in manufacturing through higher tariffs, tighter import quotas, and an industrial policy that encourages the use of domestic inputs. Even with government encouragement, traders going into manufacturing often have had trouble setting up a production line and coordinating a large labor force. Writers on entrepreneurship occasionally mention a “trader mentality” that leads to an irrational preference for the quick turnover rather than the long-run returns that manufacturing offers. Frequently, however, the trader may lack industrial man- agement and technical skills. In addition, the business milieu, social overhead ser- vices, and government policies may not encourage industry. It is not irrational for entrepreneurs to prefer trade to manufacturing if they believe incomes are higher in trade. For some traders, an industrial venture may await government programs in technical and management training, industrial extension, and financial assistance. In most developing countries, numerous young people are apprenticed to learn such skills as baking, shoemaking, tinsmithing, blacksmithing, tanning, and dress- making from a parent, relative, or other artisan. Even though some have argued that artisans trained in this way have less drive and vision and direct relatively small firms, some of them have, nonetheless, become major manufacturers. This trans- formation is especially pronounced in early phases of industrialization, such as in England’s Industrial Revolution and today’s less-developed countries. The scale of the enterprise may gradually expand over several years or even generations. Even so, relatively few artisans can make the leap from the small firm owner to manufacturer. However, artisans and their students benefit from industrial innovation as well as from training and extension programs. Apprentice systems inevitably improve with the introduction of new techniques. Economists should not overlook these artisans, since they contribute to industrial growth. In general, most successful industrial entrepreneurs have borne or shared chief responsibility for the management of at least one enterprise before their present activity, whether this work was in another manufacturing unit or in handicrafts, trade, transport, or contracting. Few industrialists, however, were once farmers. Except for landowners, very few farmers have had the funds to invest in industry. And even landlords are poorly represented. They tend to place a high value on consumption and real estate expenditure and lack experience in managing and coordinating a production process with specialized work tasks and machinery and in overseeing secondary labor relations. Few people in developing countries move from government employment to entrepreneurship. In studies in Lebanon, Turkey, Greece, Pakistan, and India, less than 10 percent of the entrepreneurs were once in the civil service. Frequently, poten- tially capable entrepreneurs in government service have relatively high salaries, good working conditions, attractive fringe benefits, and tenure. Leaving such a job to enter entrepreneurial activity involves substantial risk. Empirical studies indicate that an even smaller fraction of industrial entrepreneurs were previously blue-collar workers. Blue-collar workers are most likely to become entrepreneurs because of “push” factors, such as the lack of attractive job options or the threat of persistent unemployment, rather than “pull” factors, such as the prospect of rapidly expanding markets. Barton H. Hamilton (2000:604–632) examines whether self-employment in entre- preneurial activity pays as well as paid employment. He finds that the present value of income to the median entrepreneur of a long-lasting business is substantially less than that of a paid job with zero tenure. The finding is strengthened when you consider the large proportions of businesses that fail to survive for more than four years in both DCs and LDCs (Nafziger 1968:111–116). Could it be that prospective entrepreneurs face “push” factors of few alternative options or, at the other pole, inflated expectations of “striking it rich”? No, for Hamilton (2000:628), the evidence is consistent with the notion that entrepreneurship offers significant nonmonetary benefits such as “being your own boss.” It may be this motive – one that I encountered scores of time among LDC entrepreneurs I interviewed – that is most important in spurring entrepreneurial activity. Religious and Ethnic Origin WEBER’S THESIS: THE PROTESTANT ETHIC Capitalism is an economic system in which private owners of capital and their agents, making decisions based on private profit, hire legally free, but capital-less, workers. Max Weber’s The Protestant Ethic and the Spirit of Capitalism (1904–05) tried to explain why the continuous and rational development of the capitalist system originated in Western Europe in about the 16th century. Weber noted that European businessmen and skilled laborers were overwhelmingly Protestant and that capitalism was most advanced in Protestant countries, such as England and Holland. He held to the view, discussed in Chapter 3, that Protestant asceticism was expressed in a secular vocation. Although Puritans (or ascetic Protestants) opposed materialism as much as the Roman Catholic Church, they did not disapprove of accumulating wealth. They did, however, restrict extravagance and conspicuous consumption and frowned on laziness. These attitudes resulted in a high savings rate and continued hard work – both factors favorable to economic progress. Calvinists (Reformed churches and Presbyterians), Pietists, Methodists, Baptists, Quakers, and Mennonites made up the major ascetic Protestant denominations. The 16th-century French reformer John Calvin taught that those elected by God were to be diligent, thrifty, honest, and prudent, virtues coinciding with the spirit essential for capitalist development. EVALUATION OF WEBER The Protestant Reformation and the rise of capitalism, although correlated, need not indicate causation. A third factor – the disruption of the Catholic social system and loss of civil power – may have been partly responsible for both. Alternatively, the Protestant ethic may have changed to accommodate the needs of the rising capitalist class. Another explanation is that the secularization, ethical relativism, and social realism of Protestantism may have been as important as its “this-worldly” asceticism in explaining its contribution to economic development. Robert Barro and Rachel McCleary’s analysis (2003) is broader, examining the role of religion generally in economic growth. Their study of 59 countries finds that growth in real per-capita GDP, 1965–75, 1975–85, and 1985–95, responds posi- tively to religious beliefs, notably those in hell and heaven, but negatively to church attendance, suggesting that growth depends on believing rather than belonging. Their analysis is consistent with Gerhard Lenski’s classic study of Detroit, Michigan (1961), which shows that religious belief and commitment were linked to a spirit of capital- ism and a humanitarian outlook whereas religious communalism (belonging to or involvement in a socioreligious subculture, such as white Protestantism, Catholicism, Judaism, or African-American Protestantism) fosters a provincial view of the world. MARGINAL INDIVIDUALS AS ENTREPRENEURS Despite criticisms, Weber’s work has stimulated scholars to ask important questions about how entrepreneurial activity is affected by religious, ethnic, and linguistic communities. One question concerns marginal ethnic and social groups, that is, those whose values differ greatly from the majority of the population. To what extent do marginal individuals, because of their ambiguous position, tend to be innovative? In a confirmation of Weber’s study, Hagen (1962) finds that Nonconformists (Quakers, Methodists, Congregationalists, Baptists, Anabaptists, and Unitarians), with only 7 percent of the population, contributed 41 percent of the leading entrepreneurs during the English Industrial Revolution (1760–1830). Other marginal communities disproportionally represented in entrepreneurial activity include Jews in medieval Europe, Huguenots in 17th- and 18th-century France, Old Believers in 19th- century Russia, Indians in East Africa before the 1970s, Chinese in Southeast Asia, Lebanese in West Africa, Marwaris in Calcutta, and Gujaratis in Bombay. Refugees from the 1947 partition between India and Pakistan, and the exchange of minorities between Turkey and Greece in the 1920s, were overrepresented among industrial- ists in these four countries. Displaced Armenians, Jews, Europeans, Palestinians, and Arab expatriates, escaping persecution, political hostility, and economic depression, were responsible for the rise in entrepreneurial activity in the Middle East between 1930 and 1955. For migrants, the challenge of a new environment may have a bene- ficial educational and psychological effect, and the geographical dispersion of friends and relatives may allow the rejection of local values, obligations, and sanctions that impede rational business practice. In the contemporary world, most dominant communities value economic achieve- ment. Thus, leading business communities include the Protestants of Northern and Western European origin living in the United States, and Hindu high castes in India. In Lebanon in 1959, the politically dominant Maronites and other Christians comprised 80 percent of the innovative entrepreneurs, but only 50 percent of the population. The Yorubas and Igbos, the largest ethnic communities in the more industrialized region of southern Nigeria, are the leading entrepreneurs. Unlike the preceding groups, aliens have usually not been innovative in indus- try requiring large fixed investment, which can easily be confiscated. Furthermore, the technical change they introduce is usually not imitated by other groups. The English Nonconformists, Huguenots, Old Believers, Marwaris, Gujaratis, and the south Asian and Mediterranean refugees mentioned previously are not considered alien groups, as their roots have been in their country’s culture. Even though there are instances in which aliens have made important contributions to technical change, there is no evidence they are generally more innovative than natives. Are marginal individuals especially innovative? Because no one has conducted a systematic worldwide test, we simply cannot say. Social Origins and Mobility THE UNITED STATES The dominant American folk hero has been the person who goes from rags to riches through business operations. One of the most celebrated was the steel magnate Andrew Carnegie (1835–1919), an uneducated immigrant, the son of a working man, forced to seek employment at a young age. Through cleverness and hard work, he rose from bobbin boy to messenger to assistant railroad superintendent to indus- trial leader. For him, “The millionaires who are in active control started as poor boys and were trained in the sternest but most efficient of all schools – poverty” (Carnegie 1902:109). Even so, his story is atypical. The Horatio Alger stories of the 19th cen- tury are largely legend. The typical successful industrial leader in the late 19th and early 20th centuries was usually American by birth, English in national origin, urban in early environment, educated through high school, and born and bred in an atmo- sphere in which business and a relatively high social status were intimately associated with his family life (Miller 1962). OTHER CAPITALIST AND MIXED ECONOMIES It should not be surprising that industrialists outside the United States have a similar sociological profile. Innovators during the English Industrial Revolution were primarily sons of men in comfortable circumstances (Hagen 1962). Industrial entrepreneurs from Greece, Nigeria, Pakistan, India, and the Philippines had an occu- pational and family status substantially higher than the population as a whole. Indus- trial corporate managers, mostly from families having the funds to pay for a university education, generally have an even higher socioeconomic status than entrepreneurs. SOCIALIST COUNTRIES In the Soviet Union in 1936, one of the few studies with reliable information on parental occupational origins, sons of white-collar employees, professionals, or busi- nessowners had six times the representation in industrial, executive positions that the sons of manual workers and farmers had. This situation existed despite the 1917 revolution, which had ostensibly overturned the existing class structure (Granick 1961). Even in China, capitalists, supporting the 1949 revolution that had not been allied to foreign interests, continued (except for the Cultural Revolution, 1966–76) to receive interest on their investments and to be paid fairly high salaries for manag- ing joint public–private enterprises. Members and children of the prerevolutionary Chinese bourgeoisie still hold a large number of positions in industry, administration, and education, despite attacks on their privileges from 1966 through 1976 (Deleyne 1971; Lyons 1987). ADVANTAGES OF PRIVILEGED BACKGROUNDS The entrepreneur or manager frequently profits from having some monopoly advan- tage. This advantage (except for inherited talent) is usually the result of greater opportunities, such as (1) access to more economic information than competitors, (2) superior access to training and education, (3) a lower discount of future earnings, larger firm size, and (5) lucrative agreements to restrict entry or output. All five are facilitated by wealth or position (Dobb 1926). Accordingly in India, high castes, upper classes, and large business families use such monopoly advantages to become industrial entrepreneurs in disproportionate numbers. In one Indian city, 52 percent of these entrepreneurs (in contrast to only 11 percent of blue-collar workers) were from high Hindu castes, which comprise only 26 percent of the total population. A disproportionate share of blue-collar workers (but none of the entrepreneurs), was from low-caste backgrounds (that is, Dalits and Protestant or Roman Catholic Christians). This lopsided distribution of business activity – shown in Table 12-1, which reflects differences in economic opportunities between the privileged and less-privileged portions of the population – is typical of many other countries as well. Entrepreneurial activity is frequently a means of moving one or two notches up the economic ladder. Research indicates that the socioeconomic status of entrepreneurs is higher than their parents’ status, which is substantially higher than that of the general population  TABLE 12-1. Caste and Religious Community of Entrepreneurs and Workers in an Indian City Caste/religion Percentage of entrepreneurs Percentage of blue-collar workers Percentage of total population High Hindu Brahmin (priest) 20.4 2.2 21.4 Kshatriya (ruler, warrior) 9.3 8.9 2.3 Vaishya (trader) Middle Hindu Sudra (artisan, peasant) 22.2 27.8 0.0 57.8 2.2 56.9 Low Hindu Dalit (outcaste) 0.0 15.5 11.2 Non-Hindu Muslim 13.0 6.7 1.3 Christian (high caste) 1.8 0.0 0.1 Christian (low caste) 0.0 8.9 4.5 Sikh, Parsi, other 5.5 0.0 0.1 Total 100.0 100.0 100.0 Source: Nafziger 1978:65. Education Most studies indicate a higher level of education among entrepreneurs than for the population as a whole, and a direct relationship between education and the entrepreneur’s success. People with more education probably make sounder business decisions; in addition, their verbal skills are better and make acquiring new ideas and methods, corresponding and conversing in business relationships, and understand- ing instruction manuals and other routine, written information easier. Finally, the educated entrepreneur probably has a sound mathematical background, facilitating computation and recordkeeping. However, the education of the entrepreneur may be negatively related to success in crafts requiring a lengthy apprenticeship such as weaving, blacksmithing, gold- smithing, shoemaking, and leathermaking. Time and money spent on formal edu- cation may represent relinquished opportunities in training more closely related to entrepreneurial activities (Nafziger 1977).6 Education may limit entrepreneurship by giving people other occupational choices. Thus, in the early 1960s, when Nigerians were replacing the remaining Britons in the civil service, Nigeria’s few university graduates turned to these jobs with their high salary, security, prestige, and other perquisites rather than to entrepreneurial activity with its relatively low earnings and high risk. By contrast, in areas where university graduates are in excess supply, such as pre-1990 south India, some choose entrepreneurship to avoid unemployment or blue-collar jobs. Gender In the United States, there are relatively few women in business – not merely because of sex discrimination (though that plays a part) but because of the whole female socialization pattern in America. Some feminists charge that girls are brought up to aspire to be secretaries, nurses, dancers, and kindergarten teachers rather than to start a business. In many developing countries, the percentage of female businesspersons is lower than in the United States. Despite certain exceptions, such as the concentrations of female traders in some large open-air market places in West Africa, only a small proportion of large-scale entrepreneurs in LDCs are women. Most LDCs have cultural norms dictating how males and females should behave at work. Frequently, a woman’s physical mobility and social contact are restricted in LDCs. The anthropologist Johanna Lessinger (1980) states that in India women are not allowed to deal directly with strange men, as it is assumed that all unmonitored contact between unrelated men and women must be sexual. Furthermore, according to Lessinger, Indian women are viewed as naturally weaker, more emotional, less socially adept, less rational, and inferior to men. These views have been used not only to limit competition between women and men in business but also, in some instances, to justify a woman’s restriction to the household. Moreover, the culture may view the characteristics of the successful entrepreneur – shrewdness, quick judgment, gregariousness, and force of personality – as inconsis- tent with those of a good and proper woman. Even where a woman is determined to be an entrepreneur, she is daily reminded that she is going against the norm: Sexual harassment is likely if she steps beyond the bounds of accepted behavior. Although a woman can get around these restrictions by surrounding herself with relatives, neighbors, and other women who can vouch for her good behavior, this strategy is cumbersome for the entrepreneur, who must be mobile. In addition to these social restrictions, bankers and suppliers may refuse the LDC businesswoman credit. In general, despite some slight variations, these attitudes toward female entrepreneurial activity are prevalent in developing countries. Technological Mobilization and Entrepreneurship in Socialist and Transitional Economies Chapter 19 will indicate how difficult it was to motivate innovative activity in cen- trally planned economies such as the Soviet Union. Soviet managers resisted inno- vation, because resources diverted to technological change usually threatened the rewards for plan fulfillment. From 1966 to 1970, the early years of the Cultural Revolution, China’s leaders took control of industrial innovation and management from the professional manage- rial elite. Management changed from one person to a “three-in-one” revolutionary committee, consisting of government officials, technicians, and workers. Campaigns urged workers to invent or improve machines, tools, and processes – a policy that began after Soviet technicians took their blueprints and withdrew from unfinished factories in 1960. According to the Chinese press in the late 1960s, numerous technical activists among the workers, previously unrecognized, introduced new techniques, persevered when criticized by bureaucrats and peers, and received support from the Commu- nist Party. Through its help, they acquired more sophisticated technical advice and frequently received further training and education leading to promotion (Suttmeir 1974). Since the 1978 industrial reforms, professional managers and technicians reasserted their authority and quelled the innovation of technical activists. Economic reforms began in the late 1970s and early 1980s, including the begin- nings of entrepreneurship in the individual economy. China’s individual economy grew rapidly as the number of privately self-employed in cities and towns increased about 50-fold from 1978 to 1988. During this period, privately owned and operated proprietorships could initially employ only five outside the family, whereas vertically or horizontally integrated cooperatives and corpora- tions had higher employment limits that varied by locality. In 1984, Wan Runnan persuaded six Academy of Sciences engineering colleagues to join him in borrowing $5,400 and renting a small office to found the Beijing Stone Group Company, which grossed $85.5 million in sales of electronic equipment, earned $6.7 million after taxes, employed 800, and had 15 subsidiaries (including in Japan and Hong Kong) by 1987. The Stone Group controlled ownership and provided technical knowledge for joint ventures with Japan’s Mitsui in producing an English–Chinese electronic typewriter, word processors, and printers suitable for China, and software. Chinese law and social sanctions limit annual after-tax income of company President Wan to $8,500, yet, as an entrepreneur, he had independence, prestige, and an income 25 times his academy salary (Harding 1987:124–128; Gould 1985:46–50; Zulin 1987; Ignatius 1988:10).7 Starting small enterprises involves many obstacles. Small businesses in Georgia, formerly a Soviet republic, find it difficult to cope not only with high rents, taxes, and fees but also “bribes demanded by the sanitary inspectors, fire inspectors, customs officers, and traffic police, not to mention extortion for organized crime.” Starting a business required at least $500 in bribes. Entrepreneurs in this transitional economy said it was essential to have a protector, to have good relations with the police, and to publicize this relationship to protect against unforeseen “accidents” (Dudwick et al. 2003:224). Long-Term Property Rights Perhaps a major barrier to innovation in socialist and some capitalist economies is the lack of secure property rights, discussed in Chapter 4. Are Chinese farmers going to invest and innovate when unsure that their use rights to the land are secure? Past experience suggests an uncertain continuity of a property rights regime, raising questions even about a 99-year lease. However, in 2004, China’s national legislature amended the constitution to formally protect private property rights. In many LDCs, government provides credit and subsidized location in industrial estates for start-up firms. However, the lack of established property rights may limit growth, an example of de Soto’s dead capital, unusable under the existing property system and inaccessible as collateral for borrowing (see Chapter 4). Conclusion The political and cultural milieu in LDCs was generally not conducive to large- scale industrial entrepreneurship before the 1960s or 1970s. Although LDC gov- ernments should encourage their entrepreneurs, it is not essential that they be captains of industry as glorified by Schumpeter. To Schumpeter, the entrepreneur is an innovator, one who carries out new combinations. These innovations are the source of private profit and economic growth. However, LDCs need not unduly emphasize developing new combina- tions, because some technology can be borrowed or adapted from abroad. Coase identifies the entrepreneur, who organizes within the firm, and the price mechanism as the two major coordinating instruments within the economy. The choice between organization within the firm or by the market reflects the trans- actions costs of using the price system. The entrepreneur differs from the manager of a firm, who runs the business on established lines. The entrepreneur can fill gaps, complete inputs, and make up for market deficiencies. Because they assume that most skills needed for an enterprise can be purchased in the market, Western economists frequently limit the entrepreneurial function to perceiving market opportunities and gaining command over resources. However, LDC entrepreneurs may have to provide some basic skills themselves, such as marketing, purchasing, dealing with government, human relations, supplier rela- tions, customer relations, financial management, production management, and technological management, which are all skills in short supply in the market. Although the family enterprise has the advantage of quick, unified decision mak- ing, its disadvantages include a conservative approach to taking risks, reluctance to hire professional managers, and paternalism in labor relationships. McClelland contends that a society with a generally high need for achievement produces energetic entrepreneurs who bring about rapid economic growth. Some training institutions have used achievement motivation training as a part of pro- grams at centers to develop entrepreneurship. Hagen argues that societies where children are raised democratically, so that they are encouraged to take initiative and be self-reliant, are more likely to pro- duce entrepreneurs. However, critics are skeptical about Hagen’s claim that this creativity is linked to an earlier period of lost status. Industrial entrepreneurs in LDCs come from a wide variety of occupational back- grounds, including trade, sales, and crafts. Few manufacturing entrepreneurs, however, come from farming, government employment, or factory work. According to Weber, the spirit of the modern capitalist entrepreneur in Western Europe in the 16th century was found disproportionally among Puritans, whose religious asceticism manifested itself in worldly activity. Despite crit- icism of Weber’s thesis, his work has stimulated scholars to ask questions about how differences among religious and ethnic groups affect entrepreneurial activity. One such question, concerning the representation of marginal eth- nic and social groups in entrepreneurial activity, has not been satisfactorily answered. Generally, entrepreneurs come from a much higher socioeconomic background than the general population. In addition, they tend to be upwardly mobile. Although education can increase the entrepreneurial supply by making available skills needed for business, it can decrease this supply by increasing a person’s job options. Cultural norms in LDCs defining how women should behave at work limit female entrepreneurial activity. (Such problems occur in developed countries as well.) Organization and innovation are important for growth in socialist as well as capitalist economies. It had been difficult for socialist countries, particularly the Soviet Union, to motivate managers and technicians to innovate. Under China’s post-1978 industrial reform, self-employed individuals can inno- vate, start a new enterprise, combine capital and personnel, and, albeit with cer- tain limits, expand the firm. The extent of China’s economic reform and protec- tion of private property will help determine how much individual entrepreneurial activity will expand. TERMS TO REVIEW entrepreneurship individual economy (China) innovation marginal individuals monopoly advantage need for achievement state-owned enterprises (SOEs) stationary state QUESTIONS TO DISCUSS What is Schumpeter’s theory of economic development? What is the role of the entrepreneur in this theory? How applicable is Schumpeter’s concept of the entrepreneur to developing countries Which steps in the process of developing technical advances are essential for LDCs? Which steps in the process can they skip in full or in part? How valid is Baumol’s view that the oligopolistic competition to innovate can explain capitalism’s recent “growth miracle”? What is meant by the entrepreneur as gap-filler? Why is this entrepreneurial concept more relevant to LDCs than DCs? What are the functions of the entrepreneur in LDCs? How might these functions differ from those of the entrepreneur in DCs? What are the advantages and disadvantages of family enterprises in LDCs? What are some of the noneconomic factors affecting entrepreneurship in LDCs? What are the socioeconomic factors that affect the supply of industrial entre- preneurs in mixed and capitalist LDCs? Are marginal individuals more innovative than nonmarginal individuals as entrepreneurs? Is the concept of entrepreneurship applicable to socialist economies? GUIDE TO READINGS Baumol (2002), like Schumpeter, views innovation as the prime source of economic growth, but unlike Schumpeter, Baumol thinks that oligopolies spur innovative com- petition. Some major contributions to explanations for the relationship between entrepreneurship and economic development – works by Schumpeter, Knight, Leibenstein, McClelland, and Weber – are available on the Internet (see Nafziger, Internet Assignment, 2006a). In a newly discovered 1932 article, Schumpeter (2005) emphasized development as fundamentally discontinuous (jerky or leap-like) change, based on novelty, and growth as incremental change. For Hamilton (2000:604–632), the major incentive to become an entrepreneur, despite its inferior returns to paid employment, is “being your own boss.” The U.N.’s Journal of Development Planning no. 18 (1988), edited by Harvey Leibenstein and Dennis Ray, devotes a whole issue to entrepreneurship and economic development, including Ray’s “The Role of Entrepreneurship in Economic Devel- opment;” Baumol’s, “Is Entrepreneurship Always Productive?” Stevenson’s, “Women and Economic Development: A Focus on Entrepreneurship;” Nafziger’s, “Society and the Entrepreneur;” Kim’s, “Entrepreneurship and Innovation in a Rapidly Develop- ing Country;” Kilby’s, “Breaking the Entrepreneurial Bottleneck in Late-Developing Countries: Is There a Useful Role for Government?,” and several other articles. Kilby (1971:1–40) discusses various perspectives on entrepreneurship, emphasiz- ing the correlation of the theoretical literature from a large number of disciplines with existing empirical literature. In addition, Schumpeter, McClelland, and Hagen summarize their views on entrepreneurship in short articles in the Kilby volume. Arena and Romani (2002:167–183) examine Schumpeter’s approach to entrepre- neurship. Kilby (2003:13–29) revisits issues about the entrepreneur. Nafziger (1978:12–23) sketches the concept of the entrepreneur in the history of economic theory and in contemporary economic analysis. Liedholm and Mead (1987) have a survey of the small-scale industry literature in developing countries. Grossman and Helpman (1991) analyze the contribution of innovation to economic growth. Lin, Cai, and Li (2003) concentrate on the role of economic reform and marketization in China’s “miracle” growth. Themes related to entrepreneurship in other parts of the book include: techno- logical innovation and adaptation (p. 372), barriers to entrepreneurship in weak states with pervasive rent seeking (pp. 115–117), the role of the state in spurring entrepreneurship (pp. 61–62, 64–65), the entrepreneur talking advantage of global production networks and shifts in the product cycle (Chapter 17), and group lending for microenterprises for women (pp. 203–204)