4 Economic Factors Affecting the Development of Entrepreneurship



From a strictly economic viewpoint, it can be said that the same factors which promote economic development account for the emergence and development of entrepreneurship also.

Some of these factors are discussed here under:

1. Capital:

Capital is one of the most important prerequisites to establish an enterprise. Availability of capital facilitates the entrepreneur to bring together the land of one, machine of another and raw material of yet another to combine them to produce goods.

Capital is, therefore, regarded as lubricant to the process of production. Our accumulated experience suggests that with an increase in capital investment, capital output-ratio also tends to increase. This, in turn, results in increase in profit which ultimately goes to capital formation.

This suggests that as capital supply increases, entrepreneurship also increases. Russia and France respectively exemplify how an adequate supply of capital promoted entrepreneurship development and the lack of capital for industrial pursuits impedes the same.

2. Labour:

The quality rather quantity of labour is another factor which influences the emergence of entrepreneurship. It is noticed that cheap labour is often less mobile or even immobile. And, the potential advantages of low-cost labour are negated by the deleterious effects of labour immobility.

Adam Smith (1776) also considered division of labour as an important element in economic development. According to him, division of labour which itself depends upon the size of the market leads to improvement in the productive capacities of labour due to an increase in the dexterity of labour.

Notwithstanding, it appears that the labour problem clearly does not prevent entrepreneurship from emerging. For example, the problem of low-cost immobile labour can be circumvented by plunging ahead with capital-intensive technologies, as Germany did. It can be dealt by utilizing labour-intensive methods as Japan did, for example.

By contrast, the disadvantages of high- cost labour can be modified by introduction of labour-saving innovations as was done in the U.S.A. Thus, it appears that labour problems can be solved more easily than capital can be created.

3. Raw Materials:

The necessity of raw materials hardly needs any elaboration and emphasis for establishing any industrial activity and, therefore, its influence in the emergence of entrepreneurship. In the absence of raw materials, neither any enterprise can be established nor can an entrepreneur be emerged.

Of course, in some cases, technological innovations can compensate for raw material inadequacies. The Japanese case, for example; witnesses that lack of raw material clearly did not prevent entrepreneurship from emerging but influenced the direction in which entrepreneurship took place.

In fact, the supply of raw materials itself does not influence the emergence of entrepreneurship but becomes influential depending upon other opportunity conditions. The more favourable these conditions are the more likely is the raw material to have its influence on entrepreneurial emergence.

4. Market:

The fact remains that the potential of the market constitutes the major determinant of probable rewards from entrepreneurial function. Alternatively speaking, if the proof of pudding lies in eating, the proof of all production lies in consumption, i.e., marketing. Both the size and composition of market influence entrepreneurship in their own ways. Practically, monopoly in a particular product in a market becomes more influential for entrepreneurship than a competitive market.

However, the disadvantage of a competitive market can be cancelled, to some extent, by improvement in transportation system facilitating the movement of raw material and finished goods and increasing the demand for produced goods.

Landes holds the opinion that improvement in transportation is more beneficial to heavy industry than to light industry because of their effects on the movement of raw materials. Wilkins (1979) claims that instances of sudden rather than gradual improvement in market potential provide the clearest evidence of the influence of this factor.

He refers to Germany and Japan as the prime examples where rapid improvement in market was followed by rapid entrepreneurial appearance. Thus, it appears that whether or not the market is expanding and the rate at which it is expanding are the most significant characteristics of the market for entrepreneurial emergence.