Foreign aid: boosting or hindering entrepreneurship?
| Published date | 03 September 2018 |
| Date | 03 September 2018 |
| DOI | https://doi.org/10.1108/JEPP-D-18-00031 |
| Pages | 248-268 |
| Author | Shaomeng Jia |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Foreign aid: boosting or
hindering entrepreneurship?
Shaomeng Jia
Department of Finance and Economics,
Mississippi State University, Mississippi State, Mississippi, USA
Abstract
Purpose –The current literature has not made any connection between foreign aid and entrepreneurship.
The purpose of this paper is to investigate if foreign aid influences entrepreneurial activities in a
recipient country.
Design/methodology/approach –Using system generalized method of moments (Blundell and Bond,
1998) estimators with a panel of 38 recipient countries during 2005–2014, the author tests for 33 measures of
entrepreneurial activities.
Findings –This paper finds that aggregate aid tends to only boost necessity-driven early-stage
entrepreneurship and benefit low-income entrepreneurs. Aid to infrastructure promotes entrepreneurship
driven by both opportunity and necessity motivations. It also incentivizes competition with homogeneous
products. Additionally, evidence suggests that both aggregate aid and infrastructural aid discourage
adoption of state-of-the-art technologies, raise business failure rate and are associated more with necessity-
driven early-stage entrepreneurial activities for females.
Originality/value –This is the first research examining “aid and entrepreneurship”relation.
Keywords Foreign aid, Entrepreneurship, Development
Paper type Research paper
1. Introduction
With increasing agreement, the importance of entrepreneurship is recognized as a key factor
for economic development (Brown and Thornton, 2013; Holcombe, 2007). In fact, there is a
strand of literature arguing that entrepreneurship is the driver of economic growth
(Audretsch, 2006; Audretsch et al., 2006; Coyne and Leeson, 2004; Harper, 2003). Specifically,
Schumpeter (1934, 1939) and Kirzner (1973, 1992, 1997) both emphasize the role of the
entrepreneur as an innovator. Innovation increases productivity, which is the source of
Smithian economic growth (Holcombe, 1998). Boettke and Coyne (2003) argue that
stimulating entrepreneurial activities will spur economic development and growth.
McCloskey and Klamer (1995) estimate that entrepreneurship generates about one quarter
of GDP by lowering transaction costs.
More than that different “types”of entrepreneurship –productive or non-productive –
may have opposite multiplier effects in an economy (Baumol, 1990; Coyne and Leeson,
2004). Productive entrepreneurship leads to innovation and economic progress, as
aforementioned, while non-productive entrepreneurs, “seek transfers from those who are
productive,”“reduce social welfare”(Coyne et al., 2010, p. 334) and create economic
stagnation (Coyne and Leeson, 2004; Coyne et al., 2010; Murphy et al., 1991).
For developing countries, the differentiation between productive and non-productive
entrepreneurship provides insights into the persistence of low growth and pervasive
poverty (Coyne et al., 2010).
In the policy realm,encouraging entrepreneurshiphas also become increasingly important
as a development policy tool. Policy makers in the international community widely
acknowledge the role entrepreneurs play in creating new businesses and jobs, promoting
productivity by utilizing new technology, or intensifying competition (Acs, 2006; Acs et al.,
2008). Entrepreneurship is also an effective tool in reducing poverty in underdeveloped
Journal of Entrepreneurship and
Public Policy
Vol. 7 No. 3, 2018
pp. 248-268
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-18-00031
Received 4 July 2018
Revised 12 July 2018
Accepted 12 July 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification —F35, O11, O19, L26
248
JEPP
7,3
countries (United Nations General Assembly (UNGA) Resolutions A/RES/69/320, 2014, p. 3).
For example, the Organization for Economic Co-operation and Development (OECD) Jobs
Strategy in 1998 launched the first cross-country policy synthesis on “Fostering
Entrepreneursh ip.”The report con cludes that the vib rance of entrepren eurship relies on
institutions, government programs and cultural factors (OECD, 1998).
The World Bank has similar projects aimed at promoting entrepreneurship, including
infoDev and the Women Entrepreneurs Finance Initiative (We-Fi). Specifically, these
programs and proje cts focus on technologi cal innovation and fi nancing early-sta ge
businesses. According to the Independent Evaluation Group (2013, p. 41), World Bank has
“an investment portfolio of $18.7 billion in innovation and entrepreneurship […]”during the
2000–2013 fiscal years. These projects target “R&D infrastructure, strengthening
entrepreneurial capabilities, and financing for early-stage start-ups”in lower and
upper-middle-income countries. Likewise, the United Nations Foundation, the Global
Entrepreneurs Council, and Entrepreneurs for Social Change Project all utilize the conceptof
entrepreneurship as a solution to global-and regional-level problems.Entrepreneurship is also
positioned to support sustainable developm ent (United Nations, 2015 Sustainable
Development Goals).
Focusing on entrepreneurship as a development policy tool is supported by prior
research that links entrepreneurship to various development outcomes. This includes
corruption (Anokhin and Schulze, 2009; Dutta and Sobel, 2016; Wiseman, 2015), the
functioning of government (Aidis et al., 2012), institutional quality (Coyne et al., 2010; Estrin
et al., 2013; Hall and Sobel, 2008), education (Oosterbeek, et al., 2010; Van der Sluis et al.,
2008) and infrastructure (Audretsch et al., 2015). However, there is no research directly
associating foreign aid with entrepreneurship[1].
In this paper, I investigate if foreign aid promotes entrepreneurship using a panel of
38 countries from 2005 to 2014. I analyze if overall foreign aid, the aggregate of grants or
concessional loans from the OECD Development Assistance Committee (DAC) countries is
directly linked to various entrepreneurial activities. According to Baumol (1990) and
Coyne and Leeson (2004), both productive and non-productive entrepreneurship exist in
all countries. Developing countries do not lack entrepreneurial activities. What they lack is
enough “productive entrepreneurial activities that trump the negative effects of
non-productive entrepreneurial activities”and “development ultimately requires effective
constraints on non-productive activities”(Coyne et al., 2010, p. 335). Therefore, foreign
aid may influence both productive entrepreneurship as well as non-productive
entrepreneurship.
On the one hand, when aid efforts of the international community (OECD/DAC, 2005;
United Nations, 2000, 2015) are associated with productive entrepreneurship,
we should expect more evidence of a positive “aid-entrepreneurship”relation. A
windfall of development resources tends to influence both the public sector and the private
sector, either in a direct or an indirect way, in a recipient country. For the public sector, aid
may enhance the accountability of political institutions (Eubank, 2012; Jones and Tarp,
2016) and “release governments from […] revenue constraints”(Bräutigam and
Knack, 2004, p. 255). Relaxing the recipient government budget constraints may
increase government investments and strengthen provisions of public goods and services,
the latter of which is positively linked to the flourishing of entrepreneurship
(Audretsch et al., 2015).
For the private sector, aid may also provide more financial assistance. Aid either directly
provides funding or indirectly induces more foreign direct investment (Donaubauer et al.,
2016; Selaya and Sunesen, 2012). In addition to investments, aid also assists technology
transfers (Sawada et al., 2012), finances education (Riddell and Niño-Zarazúa, 2016) and
directly builds infrastructure (Miyamoto and Chiofalo, 2015) and productive capacities
249
Foreign aid
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