Economic Growth and the Optimal Level of Entrepreneurship

38 Pages Posted: 19 Jul 2013

See all articles by Catherine Bampoky

Catherine Bampoky

Pepperdine University - School of Public Policy

Luisa R. Blanco

Pepperdine University School of Public Policy

Aolong Liu

Pepperdine University - School of Public Policy

James E. Prieger

Pepperdine University - School of Public Policy

Date Written: July 17, 2013

Abstract

What is the “growth penalty” when a country’s entrepreneurship deviates from its optimal level? We use data on entrepreneurship for a panel of developed and developing countries over 2003-2011 to estimate growth equations. We treat the impact of entrepreneurship on real GDP growth as heterogeneous across countries. The methodology accounts for unobserved heterogeneity among countries in the optimal entrepreneurship rate and other factors affecting growth. In less developed countries, there is not enough entrepreneurship, and increases in the entrepreneurship rate have a sizeable positive effect on growth. In high income countries, entrepreneurship appears to be close to the optimum. We also explore how the growth penalty varies across countries. Higher levels of R&D capability decrease the growth penalty of having too few entrepreneurs, suggesting that R&D and entrepreneurship are substitutes. Corruption increases the opportunity cost of having a suboptimal entrepreneurship level, a finding that is in accord with the hypothesis that corruption can “grease the wheels” of commerce by speeding up bureaucratic processes. Countries with greater entrepreneurial capability suffer a higher growth penalty: the higher the ability of the marginal entrepreneur, the higher is the opportunity cost to the economy of not taking advantage of her talents.

Keywords: Entrepreneurship, national economic growth, R&D, corruption, grease the wheels hypothesis, growth penalty, entrepreneurial economy

JEL Classification: L26, O11, O40

Suggested Citation

Bampoky, Catherine and Blanco, Luisa R. and Liu, Aolong and Prieger, James E., Economic Growth and the Optimal Level of Entrepreneurship (July 17, 2013). Available at SSRN: https://ssrn.com/abstract=2295612 or http://dx.doi.org/10.2139/ssrn.2295612

Catherine Bampoky

Pepperdine University - School of Public Policy ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

Luisa R. Blanco

Pepperdine University School of Public Policy ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

Aolong Liu

Pepperdine University - School of Public Policy ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States

James E. Prieger (Contact Author)

Pepperdine University - School of Public Policy ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States
3105067150 (Phone)
3105067494 (Fax)

HOME PAGE: http://sites.google.com/a/pepperdine.edu/jprieger/

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