article analyses the possible link between
entrepreneurship and economic development
for the case of India
This link has been studied extensively for
developed countries, but less so for developing
Koster is a Post-Doctoral Researcher at
the Urban and Regional Studies
Institute, Faculty of Spatial Sciences, Groningen
University, The Netherlands, and
Shailendra Kumar Rai is Assistant Professor at
the Management Devel-opment
Institute, Gurgaon, India.
Entrepreneurship is generally accepted to be a necessary
condition for sound long-term economic development
(Carree & Thurik, 2003).
Entrepreneurs introduce new products and new
production processes in an economy. In the
process, incumbent firms are forced to innovate in order
to withstand the pressure generated by new firms. As a
result, entrepreneurship has a rejuvenating effect on
economies. This theoretical relationship has inspired a
large body of empirical work, largely in agreement with
the expected positive effect between entrepreneurship
and economic growth (Praag et al., 2007).
entrepreneurship has the same positive
role in developing countries as it has in the
This study tries to contribute to
this literature by exploring the relationship
between entrepreneurship and development
level in the context of a developing country,
which is India in this case.
1991 onwards, India has displayed a
remarkable economic growth, averaging at 6 per
cent per year.
India has participated in the Global
Entrepreneurship Monitor (GEM) on several
The GEM is a unique project in which
a standardized methodology is used to assess
entrepreneurial activity all over the globe.
relationship between entrepreneurship and
Special attention is given to the methodology
and results of the GEM project.
Third section, India is introduced as a case
Fourth section describes data and methods used
for the analysis.
Fifth section, the results are described and
finally, section six concludes.
Entrepreneurship is commonly seen as a positive, even
pivotal, aspect of economic development.
Schumpeter discusses that by introducing new ideas,
products, production processes and organizational
structures, entrepreneurs challenge current economic
Existing firms need to adapt to the new standards set.
Firms that are unable to do this will experience
performance loss and will eventually disappear.
This process of ‘creative destruction’ enhances regional
productivity, regional competitiveness and as a
consequence, regional economic development.
In developing countries, many new firms are started for
The distinction between opportunity and necessity
entrepreneurship is relevant in this respect.
Opportunity entrepreneurs base their new firms on
perceived business opportunities.
Whereas necessity entrepreneurs are pushed into
entrepreneurship because all other options for work are
either absent or unsatisfactory
Opportunity entrepreneurs can be said to contribute to
the market by testing new combinations. It is not so for
included, both from
show high rates of
Source: GEM report 2006 (Bosma & Harding, 2007); Peru and UAE
Developing countries show high rates of
With development level rising, entrepreneurship
To start climbing again for countries with the highest
The high entrepreneurship rates in developing countries
are the result of a high share of necessity entrepreneurs.
In the last stage, entrepreneurship intensities increase
again because of a shift towards service industries.
In the second stage, larger manufacturing firms tend to
drive economic development,.
Whereas in the third stage service industries are seen as
most important .
Service firms are typically smaller and require
less start-up costs than manufacturing firms. This offers
good opportunities for small entrepreneurial firms. As a
result, entrepreneurship intensity goes up again
‘Nascent entrepreneurs are those individuals, between
the ages of 18 and 64 years, who have taken some action
towards creating a new business in the past year.
In order to qualify in this category, these individuals must
also expect to own a share of the business they are
starting and the business must not have paid any wages or
salaries for more than three months.
New business owners are individuals who are active as
owner-managers of a new business that has paid wages or
salaries for more than three months, but less than 42
months’. (Bosma & Harding, 2007, p. 2)
clear expectations can be formulated by GEM
First, a developing country that experiences GDP
growth should show declining entrepreneurship
intensity, because of increasing employment
Second, the composition of the types of
entrepreneurship should change.
A shift from necessity-based entrepreneurship
towards opportunity-based entrepreneurship is
India has been one of the fastest growing economies in
the world with an average growth rate of about 6 per cent
In the early 1990s, India witnessed an acute
macroeconomic imbalance, leading to a crisis in the
balance of payment (BOP) which and pushed the
inflation rate to 17 per cent, an all time high.
The nation had protected her domestic industries against
foreign competition through a variety of devices such as
tariffs, quota restrictions, import licensing and other
This led to the situation in which Indian products
became highly uncompetitive
Indian government reformulated economic
strategy which is known as the new economic
policy (NEP) of which liberalization,
privatization and globalization were integral
Soon thereafter, India’s growth rate picked up
exchange started to flow into the nation
at an unprecedented rate and the information
technology sector boomed, making India a
recognized player on the global scene.
role of entrepreneurship in this process of
restructuring is notable.
Thereafter, small-scale entrepreneurship was
promoted much more as a viable development
Despite the impressive economic growth in
India, the country is still clearly developing in
terms of the GEM model.
key problem in entrepreneurship studies in
developing countries is data availability.
The ten-year census and yearly updated economic
surveys provide a consistent framework of data
collection that is represented by longitudinal data
about industry dynamics both at the country level
and the regional level.
The distinction between opportunity and necessity
entrepreneurship cannot be made directly. The
data, however, do allow for mapping the dynamics
in the Small Scale Industries (SSI), which is divided
in registered and unregistered firms.
An SSI is defined as an undertaking in which the investment
in fixed assets, held either on ownership terms or on lease or
on hire purchase, does not exceed Rs 10 million ($250,000)
subject to the condition that the unit is not owned or
controlled by or is a subsidiary of any other industrial
undertaking (Ministry of Micro, Small and Medium
Enterprise, Government of India).
SSIs are small to medium-sized, independent firms.
The SSI definition includes independent firms in all
industries that have limited fixed assets.
TEA directly assesses entrepreneurial activity, whereas SSI
represents the outcome of this activity.
describe the composition of
entrepreneurship, this study uses the distinction
between registered and unregistered SSIs.
as an SSI is voluntary in India.
for somewhat larger firms
though, registration has some important tax
the quantitative and the qualitative
differences in Indian entrepreneurship over
time and space are assessed here.
GEM Data on India
The data do show a distinct upward trend in the
first years, whereas the most recent year has a
somewhat lower TEA rate.
Refer table 1
the yearly growth
in the number of SSIs
and for the whole
GDP growth runs
parallel with an increase
in the entrepreneurial
activity in the Indian
Sources: http://www.indiastat.com and Handbook of Statistics
on Indian Economy (2006).
of the downsides of the longitudinal
analysis of India as a whole is that GDP
development, in absolute terms, is still limited
even though economic growth, in relative terms,
has been staggering.
Possible differences in the size and composition
of the small-scale industry are more visible
Sources: http//www.indiastat.com and Economic Survey, 2006–07.
seems to be no pattern in the relationship
between GDP and small-scale
seems to be somewhat more
entrepreneurial activity in the regions with the
greatest GDP per capita.
Source: Handbook of Statistics on Indian Economy (2006).
Here, for the poorest states, a positive relationship
between registered firms and GDP development is
This adds to the idea of GEM that economic
development leads to a qualitatively higher degree of
The relationship only holds for the least developed
states. If the five most developed states are included, the
upward trend disappears almost completely
This, however, could be explained by the fact that these
states are dominated by cities and as such attract
relatively great numbers of poor people who have to rely
on entrepreneurship for self-sustenance.
article addresses the link between small firm
development and economic growth in India. doing
so, it adds to the understanding of
entrepreneurship in the context of a developing
The issue is approached with the model developed
by GEM as reference. This model predicts that in
the early stages of economic development in a
country, entrepreneurship will decrease because a
wider range of employment possibilities becomes
available to the public.
The data, however, shows little support for the
expectations based on the GEM model.
Small-scale industries, a measure of entrepreneurship,
remain very important in the development of India and
the share is increasing rather than decreasing.
The share of registered firms, a measure of the viability
of businesses, is relatively stable over time.
Only for the least developed regions a weak positive
relationship between GDP level and the share of
registered firms is recorded.
This suggests that a shift to a more formal way of
entrepreneurship is not (yet) observable in India.
range of GDP covered by India covers only
a small part of the GEM model. It could be that
India has to grow more before the predicted
changes actually occur.
could be a special case to which the
mechanisms used as explanations of the model
do not apply.
There seem to be at least two reasons for that.
First, it has to be recognized that India comes from a
situation in which entrepreneurship was not stimulated
India appears to skip the phase of industrialization.
GEM expects a decrease of entrepreneurship
because of employment generation by larger, particularly
manufacturing firms. The Indian economic
development, however, is very much based on service
sector growth. This type of economic development
accommodates smaller firms much better than what
manufacturing-based growth does.