Promoting the Capabilities of Entrepreneurs

Promoting the Capabilities of Entrepreneurs

Beyond the operational environment, various factors are important for entrepreneurial experimentation. Figure 8.2 and the discussion that follows explore two main sets of factors.

Entrepreneurs’ Personality Traits and Regional Culture

Fundamentally, regions need people who can experiment with potential industries, evaluate the likely risks and returns, and successfully implement projects. Certain psychological, personality, or cultural traits of individual entrepreneurs affect their abilities to carry out these tasks. Three broad entrepreneurial characteristics have been found in the business and economics literature to be especially important: risk attitude and patience; entrepreneurial orientation (drive or grit, including aggressiveness and proactivity, autonomy, and innovativeness); and the ability to identify opportunities (see Grover, Medvedev, and Olafsen [2018] for a more detailed exposition). Regional differences in the distribution of these characteristics are frequently asserted—the Gujaratis in India or the Paisas (Antioqueños) in Colombia, for example—and closely associated with the relative prosperity of the region. Because the roots of such differences are often not well understood, the policy levers are still being explored.5

Human Capital

In addition, entrepreneurs require an array of human capital, ranging from general analytic and communication skills to sophisticated entrepreneurial and technical training.

Basic Human Capital To recognize a new technological opportunity and make it a business opportunity requires the ability to collect and interpret information; organize the project logistically; analyze the technical feasibility; form the long-term risk-return profile of the project; and compare it with other alternatives; as well as to navigate property rights, financial markets, and government regulation. Various other forms of human capital are explored next. In each case, a variety of market failures may impinge, reducing the socially optimal amount and depressing entrepreneurship.

Managerial Capabilities Sophisticated entrepreneurship will typically require general analytical skills at a high level. An additional skill required to arbitrage technological opportunities is the ability to make decisions that are neither routine nor repetitive. This is as central to entrepreneurs’ success as is their efficiency in acquiring information and in formulating and

acting upon their expectations (Schultz 1980). This capability is likely to involve higher-level generic skills. The role of education here is likely larger than the direct impact on worker productivity as usually measured. There are both larger private returns to entrepreneurial education (in the form of profits) and possibly also social returns through external spillovers (Gennaioli et al. 2013). The emerging literature on managerial quality (Bloom and Van Reenen 2007; Bloom et al. 2013; Maloney and Sarrias 2017; Grover and Karplus 2021) clearly stresses the importance of sound basic business strategies and human relations policies, but also the ability to view a longer horizon and to cope with crises. The Innovation Paradox (Ciera and Maloney 2017) and High-Growth Firms (Grover, Medvedev, and Olafsen 2018) emphasize the need for building managerial capabilities as a critical complement to innovation and hence a strategy for generating healthy firm dynamics.6 Weak capabilities impede the take-up of ideas and the generation of new economic activity that could percolate in these regions.

Recent studies find that management extension services tend to generate very high rates of return. Key channels through which skills improve firm performance include helping managers make better investment decisions—such as whether to invest in new plants or new machines—which made their production more efficient. Such decisions raised firm productivity 11 percent in one year in the Indian textile industry (see Bloom et al. 2013). However, two market failures appear to impede firms from taking up management extension services themselves. First, managers face an acute information asymmetry: They “don’t know what they don’t know.” Managers believe themselves to be far better informed and skilled than they are and hence neither realize how they could improve nor the likely returns to doing so. Second, given that such programs can be expensive, uncertainty about the quality of the provider also makes firms hesitant. Perhaps for this reason heavily subsidized management support programs have proliferated throughout the advanced world that encourage firms to benchmark and then upgrade their practices. Such programs were central to the productivity policies in Japan and Singapore. Here again, the design of such programs is critical. Those guided by market discipline and provided privately are more likely to succeed. Recent studies suggest that programs where firms learn collectively from one another as well as consultants can be much less expensive and potentially more effective, suggesting important spillovers and hence valuation effects (Iacovone, Maloney, and McKenzie, forthcoming).

Technological Capabilities Being able to recognize technological opportunities requires a minimum level of technological capability that general firm management skills may not offer. Again, history provides dramatic examples of the importance of such a capability. Technical capability (as proxied by the share of engineers) in the population in 1900 is associated with