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AEC 2012 - Income Level and Entrepreneurship in Developing Countries

16-Oct-2012

This paper analyses the relationship between income per capita and entrepreneurship, defined as the number of limited liability firms per 1000 active persons, registered in a country in one year. Using data on Africa and other regions, the paper finds that the relationship between entrepreneurship and income per capita is U-shaped and identifies an income threshold estimated at $7300 above which income per capita is associated with increasing entrepreneurship. This result is interpreted in the light of Maslow's Hierarchy of Needs Theory. Ceteris paribus, at low levels of income per capita, entrepreneurs establish firms as a survival strategy as they do not have access to well-paid employment. As incomes rise up to the $7300 threshold, the need to engage in necessity entrepreneurship declines. Paid employment provides higher risk-adjusted income than survival entrepreneurship. Beyond the threshold, high level of income per capita allows people who would otherwise be in paid employment to become creative, independent, and take more risk by choosing to engage in entrepreneurship. This paper differs from previous studies on the subject as it adopts a different definition of entrepreneurship, uses a large sample of developing countries, and adopts a quantitative approach rarely used in this literature. This analysis is relevant for policymaking in Africa and developing countries in general where countries are at different levels of income and require different policies in order to foster entrepreneurship and job creation.

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