Entrepreneurship
& Small Business
Chapter 2: The economics of entrepreneurship & public policy
ESB
Economics of entrepreneurship
Marxist view
Growth of SMEs is explained by their
dependency on dominant large firms who
wish to mitigate risk & push down conditions
for workers
Schumacher’s view
Growth of SMEs is part of a trend towards a
more democratic & responsive society – ‘small
is beautiful’
Economics of entrepreneurship
Industrial economists’ view
Growth of SMEs is explained by the
attractiveness of an industry due to its
profitability, growth, barriers to entry &
concentration
Labour market economists’ view
Growth of SMEs is explained by an analysis of
the factors influencing individuals to set up
SMEs – their character traits, antecedent
influences etc.
Economics of entrepreneurship
Schumpeter’s view
Entrepreneurs set up SMEs to exploit
innovation and so create economic growth – a
process of ‘creative destruction’ with new firms
replacing inefficient firms
Industrial evolution view
Links innovation to ‘knowledge’ – uncertain,
asymmetric & with high transaction costs – so
as to create a financial incentive to set up a
new business which in turn generates
economic growth
The reasons entrepreneurship
encourages economic growth
It encourages competition by increasing the
number of enterprises
It is a mechanism for transferring
knowledge - ‘knowledge spill-overs’
It generates diversity & variety among
enterprises
Web 2.0
How easy is it to predict markets,
sectors or industries that will enjoy
this sort of growth?
Explanation of Web 2.0
Forms of innovation
Product innovation
Process innovation
Market innovation
Charles Babbage & Chuck Hall
1. Are Babbage and Hull entrepreneurs?
Explain.
2. Compare and contrast their personal
qualities
James Dyson
Is Dyson an entrepreneur? Explain.
Innovative intensity
Radical
Scale of Major
innovation
Incremental
Occasional Frequent Continuous
Frequency of innovation
Linkages with innovation
‘Gazelles’
Firm size
Industry structure
Industry age & stability
Location
Gazelles
1. Why is it more difficult to be included
in this list as a business gets bigger?
2. What are the implications of this list
changing every time it is published?
Technology, talent, tolerance &
economic growth
Tolerance Innovation
Technology Economic
growth
Creative Talent
class
Florida
Astex
1. How important is the link with Cambridge
University for Astex? Explain.
2. In the age of the internet, how important
is geographic proximity to sources of
knowledge in encouraging innovation?
Explain.
Seven Stories
Why is social innovation difficult
& what might precipitate it?
Policy interventions
The regulatory framework
Entrepreneurial capabilities
Enterprise culture
Access to finance
R&D and technology
Market conditions
Policy options framework
Nurturing Compensating
High
(e.g. Canada, (e.g. EU
New Zealand) countries)
Direct
assistance
to SMEs
Competing Limiting
Low (e.g. USA) (e.g. developing
counties)
Low High
Increasing
government Impediments to SMEs
intervention
Dennis, 2004
Policy options
Option 1
Option 2
Firms that Firms that Firms that Firms
never trade but survive that grow
trade fail but do not
grow
Most effective policy interventions
Low tax rates
Regulation
Competition policy
UK policy priorities for social enterprise
Increasing volunteering and social action
(Community First)
Increasing private charitable donations
Encouraging community action through
recognition and awards & by funding the
training of local community organisers
Encouraging the spin-out of government
services through the formation of public
service mutuals
Brompton Bicycle
1. Was the Brompton bike an invention or an
innovation?
2. What role has innovation played in the
growth of the company?
3. How are the problems of linking
innovation and company growth reflected
in the history of the company?
4. Why has the company been successful &
what are the lessons you learn from their
success?
The bicycle
