WORLD ENTREPRENEURSHIP FORUM

2008 EDITION

Some conclusions about

entrepreneurship and
its support
Per Davidsson
Queensland University of Technology, Australia, and Jnkping International
Business School, Sweden

Introduction
In this manuscript I will argue a) that at least in developed economies the rate
of new firm formation is crucially important for economic development; b) that it
varies considerably over time and space; c) that policy programs aimed at increasing
or supporting entrepreneurial activity have a disappointing track record, and d) that
institutional reform aiming at the creation and maintenance of a transparent and
stable formal institutional framework that is conducive to entrepreneurial activity is
the most suitable task for entrepreneurship policy. In support of my argument I will
build heavily on experiences from my own research because it is what I know best
but even more heavily on the 'big names' in this branch of research because it
represents the most compelling evidence. I will only make cursory references to other
parts of the now relatively voluminous field we call 'entrepreneurship research'. In
order to enhance the credibility of my conclusions I would like to emphasize that for
the most part they do not reflect what my own research has tried to prove; neither do
they reflect any ideology I had as baggage when first entering the field. Rather, they
are a reflection of what the totality of knowledge development in this area over more
than twenty years has led me to believe.

Entrepreneurship is important
There is little doubt that entrepreneurship is important. In theory,
entrepreneurship understood as the entry of new firms in the market drives the
market process and develops the economy through the following mechanisms (cf.
Davidsson, 2003, 2004a; Kirzner1, 1973):

It provides buyers with new choices which some of them will consider better
than extant alternatives.

It provides incumbent firms with an incentive to shape up their game in order

to survive the new competition.

If successful, it attracts followers that further augment the two above effects.
Empirical research supports the notion that entrepreneurship is important.

Based on data from the Global Entrepreneurship Monitor (GEM) an estimated 500
million people around the globe are involved in on-going or recent business start-ups
at any one time (Reynolds2, 2007; Reynolds, Bygrave, & Autio, 2004). This sheer
volume of the phenomenon makes it very important. In the late 1970s, David Birch3
sparked much of the political and academic interest in entrepreneurship with his
(surprise) finding that small firms created the bulk of all new jobs (Birch, 1979). This
finding has since been replicated in many countries/studies including my own

(Davidsson, Lindmark, & Olofsson, 1994, 1996), which also singled out new firm
formation as an important driver of regional economic well-being. Importantly, later
works attribute the positive effects either to the influx of new firms or to a small elite
of rapidly growing young firms rather than to the population of established small
firms (Birch & Medoff, 1994; Davidsson, Lindmark, & Olofsson, 1998). Newness is
closely linked to innovation. Regarding this topic Arrow4 (1983) has provided
theoretical rationales why small, owner-managed organizations can be expected to
be over represented as innovators as long as development costs are not prohibitive.
Careful empirical analysis by Acs and Audretsch (1990)5 largely confirms his
predictions.
Importantly, it is not only the net additions to the economy that drive
development, but the churning and displacement as well. While this goes to the
heart of Joseph Schumpeter's (1934) ideas of creative destruction the first part of
that notion seems easier to embrace than the second part. New firms improve the
economy not only by introducing newness that is in one way or the other more
efficient or effective; they also force inefficient firms out of business so that their
resources can be redeployed for better use. Similarly, if no firms exited an economy
at full capacity there would be no affordable physical or human resources available
for new start-ups. In my research this importance of the churning has been
indicated by gross measures of regional economic dynamism explaining more of the
development of regional economic well-being than what net measures can explain
(Davidsson et al., 1998). In a more sophisticated analysis using unique, longitudinal
data, Aviad and Vertinsky (2008) have recently shown empirically that exits of old
firms increase entry and that on average new entrants are more productive.
Persistent high local rates of exit, however, deter entry.
This alleged importance of entrepreneurship is not based on idiosyncrasies of
a few studies. Through a careful review of 87 analyses in 57 recent studies of high
quality, van Praag and Versloot (2007) found support that young and small firms
contribute heavily to employment creation both directly and via regional spill-over
as well as to productivity growth and high quality innovations. However, as the
authors point out this does not mean that larger and more established firms are in
any way unimportant, it is just that different categories of firm perform different roles
in the economic system. The review by van Praag et al. demonstrates that there is
little doubt that in developed economies, entry of individuals into selfemployment/business ownership, and of independent firms into the market, are
major forces in economic development6.

There is considerable variance in entrepreneurship across space and time

There is considerable variability in the amount of entrepreneurship exercised
in different economies. For example, the GEM research shows that among the 42
countries participating in the 2006 survey, the proportion of the working age
population that is involved in early stage entrepreneurial activity either an on-going
business start-up effort or a firm that got up and running within the last 42 months, or
both varies between 2.7 percent (Belgium) and 40.2 percent (Peru). A quick
inspection of which countries have the highest and lowest prevalence rates shows it
is not a simple case of the more business start-ups, the better, although within the
sub-sample of developed countries that generalization largely seems to hold. In a
harmonized, seven country study on the causes of regional variation in new firm
activity (Reynolds, Storey7, & Westhead, 1994), found that the regional rates of
formation typically varied by a factor of two to four across regions within countries;
less than the enormous variability across countries in GEM but still very substantial
considering the apparent importance of new firm formation for economic
development.
As regards variation over time, Gartner8 and Shane (1995) show that a stock
measure of entrepreneurship the number of organisations per 1000 population
varies considerably over time. In the United States this measure was below 10 when
records started in 1857. It then increased steadily until it reached about 18 in 1890.
This was followed by a period of oscillation between 15 and 18 from 1890 to 1950,
after which time it started to decline steadily for three decades eventually levelling off
at around 12. From 1982 their data show a sharp increase of unprecedented strength
and in the early 1990s the end of the data series the number of organizations per
capita reached about 35 per 1000 people. While there are some questions marks
regarding the consistency of data quality and the suitability of a stock measure mean
these estimates are surrounded by some uncertainty, very high quality Swedish data
confirm a high level of variability over time. The number of genuinely new firms
entering the Swedish economy per annum in 1997-2006 varied between 34,000 and
44,000 about 30 percent up or down in a limited amount of time (ITPS, 2007).
Taking more of a historians perspective and a applying a broader notion of
entrepreneurship, Baumol9 (1990) provides a fascinating account of how
expressions of productive entrepreneurship have swung over time, with particular
emphasis on ancient Rome; Medieval China and the earlier vs. later middle ages in
Europe.
Accounts like these leave little doubt that there is considerable variation in the
level of entrepreneurship over time and space. There must be reasons for this

variation perhaps manageable reasons and this leads us to the topic of the next
section.
It is very difficult to manage the variation in entrepreneurship
A very popular idea, which also directed much of the early empirical research,
is that entrepreneurs are a breed apart; that their entrepreneurial inclination is the
result of some unique entrepreneurial personality that most of them have in common.
By and large, this is a false conjecture. It is likely rooted in a general human tendency
to seek reasons for outcomes in the characteristics of the actors even when these
characteristics have no influence on the outcome whatsoever what psychologists
have called the fundamental attribution error (Ross, 1977). Consequently the early,
personality-focused research yielded meagre results and fell into disrepute (Gartner,
1988). More recent, conceptually as well as methodologically more sophisticated
research has shown that personality does play a role in entrepreneurship (Baum &
Locke, 2004 Ciavarella, Buchholts, Riordan, Gatewood, & Stokes, 2004; Collins,
Hanges, & Locke, 2004). However, stable personality characteristics provide at best
a small part of the full explanation. More importantly, personality is not manageable
so knowledge of such relationships could be used for selection at best. The results
suggest that even for that limited purpose they would be rather blunt and ineffective
tools.
A consistent finding in many studies is that many business founders have
self-employed parents (Davidsson, 2004b) More recent research has ventured into
investigating the exact mechanism of this parental role model effect (Aldrich10,
Renzulli, & Langton, 1998). However, the relationship is very far from deterministic.
It is probably true in most countries and eras that a majority of business founders do
not have a close, parental role model and conversely that most children of
business founders do not choose an entrepreneurial career. And again we are
dealing with an effect that is not very useful for policy purposes; people have the
parents they have.
The third major type of explanation of entrepreneurial behaviour and success
on the individual level is Human Capital (Becker11, 1964) the comprehensiveness,
quality and suitability for the task of peoples education and work experience. Arnold
Cooper12 was one of the first to research the role of human capital for
entrepreneurship (Cooper, Gimeno-Gascon, & Woo, 1994). The effects found were
usually positive. This has been confirmed by other studies (e.g., Dahlqvist,
Davidsson, & Wiklund, 2000). However, while there is overwhelming evidence that
investing in general human capital is a good idea for nations, it is hardly something

policy makers would do for the specific purpose of furthering entrepreneurship in the
form of independent business start-ups. In the hypothetical case that they did there is
no guarantee the policy would be effective because for people with more valuable
education and experience the non-entrepreneurial alternatives at hand would also
increase in attractiveness (Gimeno, Folta, Cooper, & Woo, 1997). Besides, many of
the positive effects in an entrepreneurship context are ascribed to specific rather than
general human capital e.g., prior start-up experience and experience from the
particular industry (Davidsson & Honig, 2003; Shane, 2000) and these are not easy
for policy-makers to invest in.
Overall, the individual level determinants of entrepreneurial behaviour and
success do not appear very useful from an entrepreneurship policy point of view. For
one thing, they explain at best who becomes an entrepreneur; not how many will do
so. Additional limitations have been discussed above. This gives reason to look more
closely at aggregate level determinants. While research on such determinants has
been comparatively successful in terms of explanatory power a main lesson learnt
from such research is also that influencing the amount or quality of entrepreneurial
activity on, for example, the regional level is anything but easy. In the
aforementioned, harmonised seven-country study the conclusions were summarised
as follows:
Analysis of the processes associated with new firm births across seven
advanced market economiesindicates three processes having a positive
impact on firm birth rates:

growth in demand, indicated by population growth and growth in

income

a population of business organizations dominated by small firms

a dense, urbanized context, reflecting the advantages of

agglomeration ()

Other processesrelated to unemployment, personal wealth, liberal political

climate or government actionshad weak or mixed impact. (p. 453)

Few conclusions about entrepreneurship have as solid empirical backing as

these. Several things are worth noting about these results. First, the three factors that
have a consistent effect are not suitable targets for specific entrepreneurship policy.
Instead, they are such fundamental structural and dynamic forces that one can start
to understand what policy programs intended to stimulate business start-ups are up
against.

As a case in point our own research (Davidsson et al., 1994, 1996) suggested
that government business development expenditure per capita had a positive effect
on gross start-up rates but no effect on net start-up rates. On a more detailed level,
we found that in both time periods the economic upturn of the late 1980s and the
deep recession of the early 1990s a particular, sparsely populated region in the
northern inland of Sweden consistently made the 'top ten' list of regions for gross
start-ups and equally consistently ended up among the bottom ten in net start-up
rates. This was also one of the regions receiving the highest government investments
in direct government support for business development. More recently Greene, Mole
and Storey (2007) have provided much more comprehensive evidence of the same
kind. Following the development of the 'disadvantaged' northern English region of
Teesside over three decades they conclude that while some effects on financing and
business advice can be noted, the total effects of the varied and rather massive
business development support investments this region has received are very limited.
Findings like these illustrate the difficulty of achieving any real effects when more
fundamental factors like relative costs and local demand are not supportive.
Consequently, the level of investment is hard to defend from a cost-benefit
perspective.

What should be 'managed' if we could manage it?

A first aspect of this question is what category of start-up should be encouraged.
Roughly speaking, at least 80 percent of all independent start-ups sometimes
denoted the 'mice' tend to be relatively mundane, imitative start-ups in mature
industries, showing little innovation and having limited growth prospects and/or
growth aspirations. The remaining 20 percent are somewhat more innovative and
growth orientated but the proportion that is based on truly radical innovation, have
Venture Capital backing and are heading for an eventual stock market listing the
true 'gazelles' as the category is sometimes called is much smaller still; down to
fractions of a percentage point (cf. Reynolds, 2007; Reynolds & Curtin, 2008).
This begs the question of what category is more important the gazelles due
to their innovation and growth or the mice because of their sheer numbers and
marginal effects on many customers and incumbents. Some have concluded that it is
really the small elite of higher-potential start-ups that makes all the difference (Birch
& Medoff, 1994; Wong, Ho, & Autio, 2005). Based on my own research I have
concluded for Sweden in the 1985-1996 period that it was actually the many 'mice'
that added up to the large, positive effects of new firms on job creation and regional
economic development; there simply weren't enough true 'gazelles' around to add up

to very impressive figures in the aggregate (Davidsson et al., 1994, 1996; Delmar &
Davidsson, 2006).
The true, relative importance of 'mice' vs. 'gazelles' is likely to vary across
time and space. However, one thing about the alleged job creation prowess of
'gazelles' is worth noting here. Almost no studies distinguish between organic growth
and growth obtained through acquisition. From a job creation point of view this
distinction is crucial. Our analysis showed that the majority of jobs 'created' by highgrowing firms were in fact jobs taken over via acquisitions. Somewhat larger and
older gazelles in particular were unlikely to show much organic growth arguably
'true' job creation at all.
In all likelihood the economy needs both the large pools of start-ups and a
significant sub-population of higher potential firms among them. The former is
important for keeping incumbents on their toes and facilitates the making of as many
important discoveries of new business opportunities as possible while the latter
ascertains that the full potential of the more important discoveries be exploited to the
full, often via copying or acquisition of what was first initiated elsewhere.
This brings us to the second aspect of what to support: How can we make
individuals more prone to create these two types of business start-ups? Perhaps by
trying to change the individuals themselves? Such an exercise in social engineering
would hardly be successful. As regards relevant personality and personal
background attributes people essentially are what they are; trying to change these
through policy measures would be hard or impossible (not to mention unethical). It
makes sense for a society to invest in general human capital but probably not for the
narrow purpose of increasing entrepreneurial activity in the form of independent
business start-ups.
As regards structural characteristics of regions we have noted that important
structural determinants do not easily lend themselves to effective policy making for
the purpose of increasing the number of start-ups. So what options remain? Perhaps
the cultural dimension should be the target? Research has demonstrated that
entrepreneurial activities seem to vary systematically with certain dimensions of
'culture' or prevailing attitudes in a society (e.g., Davidsson, 1995; Shane, 1992).
However, while ideological competition for the voters' hearts and minds lie at the core
of the democratic political system, effective 'brainwashing' through a ruling party's
total control over the media and the education system most certainly does not.
Moreover, the main findings from my own research into the issue were that a)
possible cultural and structural determinants of entrepreneurial activities were highly
correlated, and b) the structural determinants basically the current make-up of the

human and business populations were much more important than their cultural
counterparts in explaining variations in levels of entrepreneurial activity (Davidsson,
1995; Davidsson & Wiklund, 1997). This indicates that to a considerable extent,
'culture' is an epiphenomenon that is influenced by the more fundamental structural
(probably including institutional) conditions that are the more direct determinants of
entrepreneurial activity. If this is the case successful direct manipulation of prevailing
attitudes if it were possible would not in and by itself have the expected effects on
the number and type of business start-ups that emerge.

The 'impossibility' of (selective) entrepreneurship policy

The above gives a rather pessimistic portrayal of the prospects for active
entrepreneurship policy. While we know beyond reasonable doubt that in developed
economies the level of new firm formation is an important, positive determinant of
economic development we do not have any impressive, positive proof that further
increases in firm start-up rates induced by specific, directed policies have the same
positive effects as the 'naturally' occurring variation. Neither, I would argue, do we
have positive proof that policy makers actually can exercise effectively the winnerpicking strategies that would be right if it is only the 'high end' of entrepreneurial
activity that really matters. As regards evaluation of specific policy measures the
situation seems to be that most programs are not systematically evaluated at all and
among those that are the ability to demonstrate positive effects seems inversely
related to the quality of the evaluation (Storey, 1994, 2000).
Although I am not a trained political scientist and cannot even call myself an
economist (but rather a 'behavioural management researcher' and perhaps 'general
social scientist') let me offer some speculations about why policies aimed at
stimulating entrepreneurship seem to have so limited effects. It is likely not because
policy makers and their programs are inherently stupid. To suggest that would not
only be offensive; it would also be exceedingly naive. Rather, I would argue, the
limited success is attributable to the following three factors. First, the economic
system is such an intricate, inter-woven system of relationships that it is almost
impossible for anyone to correctly calculate, predict or trace even roughly the total
effects of any specific measure. In particular, it is a challenge to adequately consider
what would have happened in the absence of the measure: what else would that firm
or individual have done and how would this have contributed to the economy?
Similarly, it is almost impossible to know what did not happen as an unintended result
of and action: the seemingly successful support of a particular firm or region may well
crowd out an unseen an even more important development of another start-up or

region. Second, while the level of support is quite substantial in some countries and
regions way above the optimum in large parts of Europe would be my guess its
possible effects are still dwarfed by more fundamental forces like population growth;
industry structure; macro-economic swings and major technological breakthroughs.
For this reason micro level policies can at best expect to contribute on the margin.
Third, because of human ageing; the logic of promotion in organizations, and the
nature of the democratic political system, policy makers at all levels are relatively
unlikely to have thorough experience in their current role. This in combination with
the intricacies of the economic 'eco-system' increases the risk that the measures they
suggest and implement, while enthusiastic and well intended enough, will in fact be ill
conceived. Greene et al. (2007) give multiple examples of how specific policies are
recycled or resurrected over time although they did not prove successful the last time
it was tried, either. Even if well conceived there is considerable risk that at the local
level front line the implementation will be handled by individuals who are either under
qualified, under paid and unengaged, or by local champions who are enthusiastic
enough but who have a tendency to tweak the intentions of the policy towards
benefiting the visible, local businesses that exist today rather than to the optimal
working of the economic system, including the more effective competitor that could
have emerged tomorrow had not the policy been biased against it.
For these reasons I have come to believe that direct, selective, tax-funded
support to business start-up activity that is economically efficient is largely a mission
impossible. We simply lack the evidence that the tax funds spent that way does any
more good to the economy than the spending or saving consumers or firms would
choose to do, had they not been taxed that amount of money. Commercial providers
and non-government organizations (NGOs) that offer selective, micro level
assistance do not face the same impossibilities; at least not to the same extent.
While the task at hand is difficult enough for them as well, market pressures and/or
voluntary work may lower costs to the point that a positive net result is more
achievable. At the very least they do not face the dilemma of possible sub-optimal
use of taxpayers' contributions.
Instead I have come to embrace the idea that the proper way for policy to
improve the contributions of entrepreneurial action lies in the development of sound,
formal institutions. This largely means laws and law enforcement regarding such
things as taxation, property rights, bankruptcy, employment contracts, etc. This
theme will be elaborated on in the next section.
Institutions are the answer

10

On a somewhat personal note, let me explain that my conviction that

'institutions are the answer' does not reflect some political ideology I have always
embraced or an economic-theoretic paradigm I was trained in. In fact, it does not
even reflect what most of my research has been focused on. Early in my career (see,
e.g., Davidsson, 1989) I freely suggested selective, micro level policy measures and I
was highly sceptical regarding economists and lobby groups standard recipes
related to taxes and labour market legislation. I thought I knew that most of the
population of small business owner-managers would not change their behaviour
much in response to this or that change in taxes or laws; they had much more
fundamental reasons for defining their roles and goals the way they did and to act
accordingly (which often meant rather low-risk, non-growth strategies). To a
considerable extent I was right. However, I also totally missed the point. What is
important about institutional reform is not predominantly to achieve behavioural
change among current firms and entrepreneurs; it is about what the population of
entrepreneurs and firms will look like in the future. Who will be attracted to
entrepreneurship in the first place; how will they define their roles and goals; and how
will they act in order to reach these goals? Institutional reform must look beyond
current actors and create an economic system capable of continuously reinventing
itself within a stable and transparent framework. The goal ought to be to promote
productive newness, whatever specific form that may take in an unpredictable future.
One turning point for my thinking was the reading of William Baumol's 1990)
'Entrepreneurship: Productive, unproductive and destructive'. In this classical article
Baumol performs an important thought experiment: Let's assume that the supply of
entrepreneurship (or entrepreneurial talent or effort) is largely the same across time
and space. What varies is instead how this constant supply is distributed across
productive, unproductive and even destructive activities. While the underlying
assumption may not be entirely true his argument is compelling and provides a
foundation for a potentially productive refocusing of entrepreneurship policy: let's
make sure the natural, spontaneous entrepreneurship that will come about is geared
towards actions that do not only benefit the actors but also is beneficial to society.
Other inputs that helped re-shape my thinking were various readings in Swedish
economic history, which left little doubt that a series of institutional reforms in the
second half of the 19th century created a vibrant economy so that around the verge of
the 20th century direct involvement in various entrepreneurial projects was very much
a normal part of middle class life (see, e.g., Gratzer, 1996)), This was also the time
when what was to become the leading Swedish multinationals of the industrial era
were created. A third element in convincing me of the importance of institutions were

11

Swedish colleague Magnus Henrekson's careful analysis of how institutions

subsequently became geared towards supporting the continued success of these
large exporters at the expense of securing an undergrowth of new firms in emerging
industries (Davidsson & Henrekson, 2002; Henrekson, 2005).
To demonstrate the importance of institutions in empirical research is difficult
for a variety of reasons. First, within a country at a particular time institutional
conditions tend to be constants rather than variables so they cannot explain variance
and hence their importance cannot be demonstrated with conventional methods. In
addition, micro level studies often focus on current business owner-managers and
not on those who refrain from (productive) entrepreneurship because current
institutions make it unattractive. One opportunity to pin down the importance of
institutions is when some specific law is changed, potentially affecting very specific
behaviours of a likewise specific sub-population. An example is the Bayh-Dole act in
the US, which changed the incentives for researchers and universities to
commercialize research results. While some have concluded this institutional change
was not responsible for the subsequent, general increase in university patenting
(Mowery & Ziedonis, 2002) a more detailed analysis suggested it triggered a shift of
patenting towards industry sectors more conducive of licensing by (Shane, 2004).
Another research strategy is to systematically compare two countries that have
different institutional frameworks. One example is Henrekson and Davis (1999) who
convincingly explain under representation of certain industries in Sweden relative to
the US in this manner (see also Carlsson, 2002, for a similar approach, although
comparing Sweden with the similarly sized and structured economy of Ohio rather
than the entire US). However, many factors other than the focal institutional
dimensions also differ between countries or regions subjected to such pairwise
analysis. Therefore the disbeliever has rich opportunities to suggest other
explanations for the alleged effects.
This calls for research that assesses both levels of entrepreneurial activity
and institutional factors in a larger number of countries. This would make other
influences cancel out or be effectively controlled for. With data from over 40 countries
and up to 10 years, the GEM studies therefore present an unprecedented opportunity
to assess the influence of institutional factors, especially when the GEM data is
combined with other sources like OECD or World Bank statistics. Such investigation
has already commenced (see Small Business Economics, 2005, 2006). However, the
most important findings from such research have likely not as yet reached publication
in highly regarded academic outlets. Therefore, belief in the importance of the

12

institutional framework cannot at this point rely solely on solid empirical evidence; it
also requires some faith in the logic of the underlying argument.
Economists and not only those who regard themselves institutionalists
have of course long argued that changes in taxes and regulations are the key to
increased entrepreneurship. However, arguments based on basic training in
economics rather than the current frontier of the discipline (which may be the case
with lobbyists and politically coloured journalists) are often based on assumptions of
a single type of greedy, self-interested actors and over confidence in immediate
behavioural effects among current business owner-managers. Developing to the full
a fruitful institutional approach is beyond the scope of this paper and the abilities of
its author. Besides, such work should start from a careful analysis of the institutions
currently in place in a particular country, along with their likely effects. However, as a
rough, first sketch; let us assume there are different types of potential entrepreneurs:
optimists, realists and pessimists. On another dimension, let us assume there are the
greedy willing to do anything for personal gain the average, and the altruistic
the latter prone to engage in good deeds despite personal monetary loss (or
opportunity cost) and sometimes even though the project may be doomed because it
is not financially sustainable. On a third dimension let us assume they have either
low, medium or high levels of general human capital. We can now ask the
fundamental questions that should guide the (re-)design of the institutional
framework.
1. Who do we want to engage in entrepreneurship? For example, what does it
mean for an economy if realists have very good, objective reasons to refrain from
engaging in business start-ups and only people with rose-colored glasses ever do it?
Is there any use in trying to convert pessimists at all? Should the framework entice
those with the highest levels of human capital to strike out on their own? Perhaps
they would get greater leverage from their talent as independents but then again
this might drain large, established organisations of so much talent that the leverage
from the resources these organisations represent is diminished so much that the
societal net effect becomes negative?
2. How will they define their role and their goals as a result of their early
experiences as entrepreneurs? An important insight is that the future orientation of
the firm is not carved in stone at inception. Rather, it will be shaped by early
experience in the entrepreneurial role as well as through learning from peers.
Entrepreneurs will gradually form or change their opinion as to whether it is worth the
effort to be innovative or to take on responsibility as an employer. Arguably, it is early
in their entrepreneurial career that these things are malleable; later on they may be

13

hard to change despite strong economic incentives to do so. In addition, the 'types'
as sketched above are not fixed; to a considerable extent the entire spectrum resides
within each individual. Consequently, aspects of the institutional framework can
appeal to and cultivate either the greedier or the more altruistic side of those who
venture into entrepreneurship.
3. How will they go about pursuing their goals? This speaks to Baumol's (1990) main
point. How can the institutional framework be shaped so that the way for the greedy
to achieve their goals is aligned with societal interests? So that the altruists find room
to do their thing in financially sustainable ways? And how can it entice not only
diehard optimists but also realists and perhaps even some pessimists to engage in
risky endeavours with outcomes that are highly uncertain but potentially very
beneficial for themselves and society?
Again, this is a sketchy outline by an amateur institutionalist. However, this is
where my experience from 20 odd years of entrepreneurship research has led me to
suggest policy makers look: to the experts in analysing the likely effects of current
and possible future institutional arrangements (see, e.g., Henrekson, 2007). This
advice comes with several caveats. First, there is reason to be alert to the possibility
of self-interested greed as the dominant assumption about humans underlying the
analysis. Importantly, a productive overview of institutions should not focus too
narrowly on the conditions for new and emerging firms in some 'absolute' sense but
also consider the 'other' alternative. That is, the self-employment option relative to
employment, studies, retirement or unemployment; staying self-employed without
employees relative to becoming an employer; the institutional conditions for start-ups
relative to those facing incumbent firms, etc. In addition, the analysis and possible
change should not only consider incentives for prospective entrepreneurs in a narrow
sense but also the incentives of various parts of the surrounding, supporting system
such as universities; private investors; venture capitalists, etc. For this purpose a
competence bloc perspective may prove fruitful (Eliasson, 2000).
Further, the secondary effects of institutional change in domains other than
entrepreneurship also need to be considered; otherwise what in a narrow
assessment looks like a successful change may in fact be detrimental in the bigger
picture. To have their full effect institutional arrangements also need to be
transparent and stable. Therefore, although initial changes are often likely to be
necessary it is imperative that the most fundamental of the conditions for
entrepreneurial activity achieve an almost 'constitutional' status. Therefore, overly
enthusiastic introduction of controversial measures that risk being reversed when
political majorities change may do more harm than good. Finally, no wonders should

14

be expected in the short run. Yes, the changes will likely affect at least marginally
the behaviour of some current business owner-managers. And yes again, others may
not change their behaviour directly but the outcome of their unchanged efforts may
change (for example, them may become more profitable) and this may indirectly
change their behaviour in the next time period. The main effect, however, is likely to
emerge over time as a change in the size and orientation of the population of
entrepreneurs and entrepreneurial ventures. Hence, considerable patience is called
for; there are no quick fixes.
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Endnotes

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10

11

12

Israel Kirzner was the 2006 recipient of the International Award for Entrepreneurship and Small
Business Research (from 2009 Global Award for Entrepreneurship Research); the most
prestigious award in this field of research.
Paul Reynolds was the initiator and coordinator of GEM and the 2004 recipient of the International
Award for Entrepreneurship and Small Business Research (cf. endnote #1).
David Birch was the recipient of the 1996 (inaugural) International Award for Entrepreneurship
and Small Business Research (cf. endnote #1).
Kenneth Arrow was (with J. Hicks) the 1972 recipient of The Sveriges Riksbank Prize in
Economic Sciences in Memory of Alfred Nobel (generally known as he Nobel Prize in
Economics).
David Audretsch and Zoltan Acs were the recipients of the 2001 International Award for
Entrepreneurship and Small Business Research (cf. endnote #1).
However, this may not be true for developing economies. GEM analyses suggest that in lowincome countries, which tend to have very high and often necessity based self-employment,
investing in the management qualities of their population and fostering the exploitation of scale
economies through foreign direct investment and the growth of young businesses may be
relatively more important (Wennekers, Stel, Thurik, & Reynolds, 2005).
David Storey was the recipient of the 1998 International Award for Entrepreneurship and Small
Business Research (cf. endnote #1).
William Gartner was the recipient of the 2005 International Award for Entrepreneurship and Small
Business Research (cf. endnote #1).
William Baumol was the recipient of the 2003 International Award for Entrepreneurship and Small
Business Research (cf. endnote #1).
Howard Aldrich was the recipient of the 2000 International Award for Entrepreneurship and Small
Business Research (cf. endnote #1).
Gary Becker was the 1992 recipient of of The Sveriges Riksbank Prize in Economic Sciences in
Memory of Alfred Nobel (generally known as he Nobel Prize in Economics) .
Arnold Cooper was the recipient of the 1997 International Award for Entrepreneurship and Small
Business Research (cf. endnote #1).

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