Entrepreneurship and economic development: A literature review

This paper makes a comprehensive review of entrepreneurship on economic development in economic theory. It indicates how entrepreneurship is crucial for economic development. The role of entrepreneurship on economic development originated from different understandings on the nature of economic system. It is argued that the role of the entrepreneur has been moved out of the neoclassical model because a crucial assumption of the model is that decision-making merely involves marginalist calculation to optimise production, based upon public information supplied by the price system. The explanation for the phenomenon of economic development depends on how we understand the nature of the market process. In this respect, the economics of entrepreneurship is different from mainstream economics. For mainstream economics, the market is generally characterised by equilibrium. For the economics of entrepreneurship, the market process is characterised by disequilibrium. The review of literature indicates that entrepreneurship has different essential features that all are critical to economic development and the market process. They are Kirzner’s arbitragers or Schumpeter’s innovators. They are Knight’s uncertainty-bearing people. They assume managerial or leadership roles and thus function as the main allocators of scarce resources in the economic system as identified by Baumol and Casson. Entrepreneurship is a solution to X-inefficiency, by motivating efforts within firms as argued by Leibenstein. All this has important implications for economic development. Millions of business decisions made by numerous entrepreneurs daily affect an economy a great deal. The pace of economic development ultimately depends on such endeavour of numerous entrepreneurs. It is normally believed that the lagging behind of many developing countries lies in their lack of entrepreneurship. The policy implication is that, in order to have good economic development, governments should create a favourable environment for entrepreneurs to carry out above-mentioned functions in the economy.