The Role of Entrepreneurship in Economic Growth

Topics: Economics, Economic growth, Gross domestic product Pages: 18 (6131 words) Published: May 3, 2015
Undergraduate Economic Review
Volume 6 | Issue 1

Article 7


The Role of Entrepreneurship in Economic
Daniel Smith
University of North Carolina at Chapel Hill,

Recommended Citation
Smith, Daniel (2010) "The Role of Entrepreneurship in Economic Growth," Undergraduate Economic Review: Vol. 6: Iss. 1, Article 7.
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Smith: The Role of Entrepreneurship in Economic Growth

One of the most important goals of contemporary economics is determining the factors that cause economic growth. Traditional neoclassical theory holds that the economic growth of a country is determined by the supplies of both labor and capital the country possesses and the level of technology present in that country (Todaro and Smith, p.129). Some neoclassical economists have suggested that both knowledge and pro-market government policies also have a significant influence on economic growth (Audretsch and Kielbach, p. 605; Todaro and Smith, p. 130). The level of technology in a given society is heavily dependent on the level of knowledge in that society; this paper will regard these two factors as essentially the same. The established neoclassical factors of economic growth are thus the levels of capital and labor present in a given society, the level of knowledge (or technology) present in that society, and the extent to which the government of that society pursues pro-market government policies. However, this model ignores any direct effect that entrepreneurship may have on economic growth.

This paper will provide evidence that entrepreneurship should be included as an important cause of economic growth independent of the other factors. We will begin with a review of relevant literature, and then move to an overview of the data and variables used along with a description of the statistical methodology. We present the analysis of the relevant empirical results and end with a conclusion detailing possible directions for future research. It is important to note that, for the purposes of this paper, entrepreneurship will be defined as simply the number of new businesses formed in a given time period. Innovation will be defined as the creation of previously unknown economically profitable ideas.

Literature Review
The traditional neoclassical theory of economic growth was first developed by Robert Solow in his 1956 paper “A Contribution to the Theory of Economic Growth” (Todaro and Smith, p. 128 and p. 139). In this paper, Solow argues that economic growth is a function of two inputs- the levels of capital and labor in a given area. The exact nature of this function is determined by the technological possibilities available to the society in question (Solow, p. 66).Thus, under this theory, the economic growth of a given country is determined by the amounts of labor and capital that country possesses and the technological possibilities to which that country has access (i.e., the level of knowledge within that country).

More recently, many economists have come to believe that marketfriendly government policies are another important cause of economic growth. Hans Pitlik opens his paper “The Path of Liberalization and Economic Growth”

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Undergraduate Economic Review, Vol. 6 [2010], Iss. 1, Art. 7

by saying that numerous empirical studies have shown that pro-market government policies have a positive effect on the economic growth of a given country. His explanation for this is that pro-market policies increase the benefits individuals receive...

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Pitlik, Hans. “The Path of Liberalization and Economic Growth.” Kyklos, Vol.29,
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