Institutions, human capital and entrepreneurial orientation: implications for growth policy

Pages135-160
Date09 July 2018
Published date09 July 2018
DOIhttps://doi.org/10.1108/JEPP-D-18-00002
AuthorThanti Mthanti,Kalu Ojah
Subject MatterStrategy,Entrepreneurship,Business climate/policy
Institutions, human capital and
entrepreneurial orientation:
implications for growth policy
Thanti Mthanti and Kalu Ojah
Wits Business School, University of the Witwatersrand,
Johannesburg, South Africa
Abstract
Purpose The purpose of thispaper is to establish a more robustempirical support for the long established
postulationby Adam Smith and Joseph Schumpeterthat human capital and institutions enable Schumpeterian
entrepreneurship, which, in turn, facilitates economicgrowth.
Design/methodology/approach Adopting entrepre neurial orientation (EO) (i.e. innovative ness,
proactiveness and risk taking; Mthanti and Ojah, 2017, Research Policy, 46:4, pp. 724-739) as the measure
of Schumpeterian entrepreneurship at the macro-level, and using a sample of 93 countries,over 1980-2008, the
authors employ system Generalised Method of Moments to investigate institutions and human capital as
possible determinants of Schumpeterian entrepreneurship (EO).
Findings The authors find that the human capital-EO nexus is robust across economic development levels.
However, there is a cross-country variation in the institutions-EO nexus. In line with theoretical predictions,
institutions indeed drive EO in middle-to-high-income countries. However, in low-income countries, building
institutions in order to foster EO yields perverse outcomes, which, for us and especially based on deeper
analysis, suggest that improving the quality of institutions may not be a necessary precondition for EO/
growth policy in low-income countries. Furthermore, the authors find that EO is a highly persistent series,
with self-reinforcing network effects, i.e. lofty EO behaviour encourages more lofty EO behaviour.
Research limitations/implications Drivers of macro EO are erroneously taken as of growth. This
empirical analysis corrects the sequencing.
Practical implications Policy practice must acknowledge macro-EO importantly has both direct and
indirect growth effects.
Originality/value This study is the first to empirically test the theoretical sequence between drivers of
growth/EO and economic growth.
Keywords Entrepreneurial orientation, Economic growth, Human capital, Institutions, Policy
Paper type Research paper
1. Introduction
The economics literature suggests that institutions and policy variables are possible
antecedents of economic growth because they enable productivity-enhancing Schumpeterian
entrepreneurship (Acemoglu et al., 2001; Glaeser et al., 2004) by increasing returns to private
endeavour. For instance, strong financial institutions may increase access to funds for
Schumpeterian entrepreneursinnovation and launching of new products to market
(Schumpeter, 1912); and consequently, enhancing technological diffusion and growth.
Additionally, high levels of corruption may increase uncertainty levels and transactions cost
for a Schumpeterian entrepreneur and, as a result, reduce the number of innovative and/or
productivity-enhancing opportunities that are exploited (Anokhin and Schulze, 2009).
Similarly, differing levels of human capital in middle-to-high-income countries explain the
cross-countryvariation in innovation, technological upgradingand thus catching up with the
income of advanced countries (Lee and Kim, 2009). Moreover, in a society with distributional
conflict (inequality), growth promoting activities such as the accumulation of human capital,
and the creation and diffusion of new production knowledge engendered by Schumpeterian
entrepreneurship, are likely to be constrained (Persson and Tabellini, 1991).
Based on the preceding insights, it follows that, theoretically, in both the institutions-growth
nexus and the human capital-growth nexus, the implied causal direction is from institutions and
Journal of Entrepreneurship and
Public Policy
Vol. 7 No. 2, 2018
pp. 135-160
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-18-00002
Received 8 January 2018
Revised 16 March 2018
31 March 2018
Accepted 3 April 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
135
Institutions,
human capital
and EO
human capital to productivity-enhancing Schumpeterian entrepreneurship, and only then to
growth. However, the broader macro-analysis literature has mainly investigated institutional
variables and human capital as direct determinants of economic growth (King and Levine, 1993;
Barro, 2000; Acemoglu et al., 2001; Glaeser et al., 2004), and not necessarily as drivers/
antecedents of Schumpeterian entrepreneurship. Yet, these variables are theorised to facilitate
growth either: indirectly, by increasing the private appropriation of returns to Schumpeterian
entrepreneurship through effectively securing property rights (Knack and Keefer, 1995); and/or
directly, by enabling learning and the diffusion of that learning (Devereux and Smith, 1994).
Nevertheless, scholars tend to just link institutional and human capital variables to
growth instead of establishing the causal link between growth and the hypothesised
channel to growth i.e. Schumpeterian entrepreneurship. This omission, in our view, may
partially emanate from the tenu ousrelationship, in empiric al analyses, between
entrepreneurship defined as entry density/small business activity[1] and growth[2].
Schumpeter (1942, p. 66) argued that new combinations that appear discontinuouslyfoster
economic development by creating, diffusing and exploiting productive knowledge. In this
model, entrepreneurial countries are deemed to engage in innovation, risk-taking and
business activities that lead to knowledge creation/appropriation and diffusion, and thus,
technological progress which facilitates economic growth. So, this inconsistent link between
entry density and growth is not surprising because entry density itself is a weak proxy of
Schumpeterian entrepreneurship[3]. Fortunately, Mthanti and Ojah (2017) addressed the
need for an improved macro-level proxy of Schumpeterian entrepreneurship and devised a
measure, i.e. aggregate level entrepreneurial orientation (EO), which is more in line with
Schumpeters (1912) conception of what entrepreneurial firms do, i.e. co-opting, creating,
diffusing and exploiting new production knowledge.
EO characterised as countries’“enhancing innovative capabilities; investing in risky,
unique and uncertain sectors; and proactively seeking new markets and advanced
production technology(Mthanti and Ojah, 2017) is a pervasive, country-wide strategic
posture that represents a larger concept than simply the sum of its dimensions.
And changes in macro-level EO would result in changes in macro innovativeness,
proactiveness and risk taking. It is important to countrieslearning through both imitation
and experimentation[4]. Moreover, empirically, lofty EO[5] behaviour seems a more
plausible channel, than entry density, through which institutions and human capital
facilitate growth because it (EO): is positively associated with knowledge diffusion;
correlates positively with high levels of income; correlates positively with economic growth;
and subsumes the impact of institutions and human capital on growth (Mthanti and
Ojah, 2017), as Schumpeter had theorised.
Therefore, based on a comprehensive review of the literature which suggests lofty EO
behaviour amongst firms might be a more appropriate proxy of Schumpeterian
entrepreneurship and consequently, and a more plausible channel through which institutions
and human capital shape growth, it follows that understanding the possible antecedents of EO
is vital for clarifying the institutions- and/or human capital-growth nexus[6].
Therearetwomotivationsforthislineofinquiry. First, EO has hitherto been researched
mainly as purely a firm-level phenomenon and although firm-level antecedents of firm-level EO
such as firm size, technology, the personality of the founder/CEO and environmental hostility
have been identified (Rauch et al., 2009), the empirical macro-level literature gives us little
guidance on the association between aggregate level EO and its potential antecedents/drivers.
For instance, for us, it is not self-evident that different personality types of founders/CEOs
wouldexplaincross-countryvariationsinmacro-level EO. So, there seems to be a clear research
gap which is a significant omission, particularly since entrepreneurial processes (such as macro-
level EO) are expected to manifest differently across: different institutional and policy set-ups,
and different levels of income (development).
136
JEPP
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