Studies from a variety of theoretical backgrounds have found that the fac- tors that affect countries’ levels of income inequality also affect their labor market structures, dynamics, and outcomes. These studies have focused mainly on how a country’s level of economic development (Kuznets 1953;
Nielsen and Alderson 1995) or position in the world system (Wood 1994)
Entrepreneurship and Inequality 15
affects the size and growth of various economic sectors, and how these sectoral dynamics affect income and wealth inequality and opportunities for social mobility. Typically, however, these studies ignore self-employment and entrepreneurial activity, even though they are an increasingly important part of labor markets across the globe (Aldrich 1999; but seeAronson 1991).
In this section, we review the literature on economic and industrial devel- opment in order to develop a set of propositions about factors that may create a link between inequality and entrepreneurship.
We examine seven structures and processes linked with varying levels of entrepreneurship and inequality: economic development, government pol- icies, foreign direct investment, growth in the service sector, increasing labor market flexibility, wealth transfer programs, and variation in the strength of the working class. We review each and explain how we feel it should be included in a comprehensive explanation of the linkage we identified. All seven are listed in Table 2.
Development and Economic Inequality
We begin with the pioneering work of Kuznets (1953, 1955), who argued that inequality follows an inverted U-shaped path coincident with economic and industrial development. According to his logic, as countries begin to develop an industrial infrastructure, newly created wealth becomes concen- trated in the hands of those who control that infrastructure. In Marx’s terms, others are forced to sell their labor power or engage in agriculture or small-scale production and thus do not share equally in the newly created wealth. However, as development continues, opportunities for increased income spread to more segments of the population; the agricultural sector shrinks and participation in the industrial economy becomes more wide- spread. Kuznets’ theory has been supported for income inequality in a va- riety of settings (Lindert and Williamson 1985), and a similar trend has been documented for wealth inequality (Lampman 1962).
Since a country’s level of economic development constitutes a major pre- dictor of its level of inequality, we offer the following proposition:
Proposition 1. Developing nations experience higher rates of entrepre- neurship.
Proposition 1 gains some support from the GEM data, as shown inFig. 4.
At low levels of development, as measured by energy consumption per capita, total entrepreneurial activity was high in 2001. According to the
GEM, developing Latin American countries and developing countries in Asia had entrepreneurship rates over 10%, figures well above the average rate of 7% for all of the GEM countries.5 As countries develop, more opportunities for entrepreneurship may emerge as underserved markets ex- pand and more people move into self-employment because traditional sec- tors of the economy shrink. However, it appears, in the quadratic relationship shown in Fig. 4, that after development reaches a certain
Table 2. Explanations for the Positive Relationship Between Entrepreneurship and Inequality.
Structure/Process Effect on Inequality Effect on Entrepreneurial Activity Economic development (+) U-shaped pattern
(Kuznets 1953)
(+) Provides new markets for goods and services Government policies
favoring development
(+)Creates new class of industrial elite, new industrial working class
(+) Provides finances and market opportunities for nascent entrepreneurs Foreign Direct investment (+) Creates an elite
managerial and financier class, increases the number of low wage, low skill manufacturing jobs
(+) Provides finances and market opportunities for nascent entrepreneurs
Rapid service sector growth (+) Bifurcation of labor market into highly skilled, high-wage service jobs and low skill, low- wage service jobs
(+) Creates new market demands
Increasing employment flexibility
(+) Returns to skill through occupational labor markets, increasing employment insecurity
(+) Individuals less tied to particular firms, responses to employment insecurity through individual opportunity Wealth transfer programs () Redistributes wealth
equitably across the population
() Reduces the need to rely on necessity
entrepreneurship as a last resort
Strong working class () Helps to encourage the redistribution of wealth, the formation of occupational labor markets, and protect their economic interests
() Reduces the need to rely on necessity
entrepreneurship because jobs are more secure due to occupational labor markets
Entrepreneurship and Inequality 17
stage, entrepreneurial activity declines and then picks up again at higher levels of development.
Government Support for New Businesses
Several key factors associated with national economies in both developing and developed nations may account for variation in economic inequality and entrepreneurial activity. Clearly, development may be the result of an active strategy pursued by governments wishing to compete in the global economy. State agencies and programs in developing nations play a large role in industrial development through fiscal policies that favor business and entrepreneurial activity, including taxation, investments, loans, and other policies (Evans et al. 1985; Wade 1990). To compete in an increasingly global economy, developing nations may encourage the growth of certain targeted industries, which can create an industrial elite and increase
Energy Consumption (kwh per capita)
30000 20000
10000 0
Total Entrepreneurial Activity
20
10
0
Fig. 4. Total Entrepreneurial Activity and Economic Development. Source:
Reynolds et al. (2002)andWorld Bank Group (2004).R2¼0.260.
economic inequality. These same policies may also provide the seeds for new businesses.
Similar processes can occur in developed nations, as well. In Ireland, for example, the Industrial Development Authority worked throughout the 1990s to recruit existing high-tech companies. Ireland also formed an or- ganization called Enterprise Ireland to encourage and support entrepre- neurship in similar industries (Florida 2002). As a result, Ireland has the second highest rate of opportunity entrepreneurial activity (7.8) among Western nations, behind only the United States. We therefore expect that countries actively pursuing such strategies generate favorable contexts for opportunity entrepreneurship.
Proposition 2. Governments whose policies and regulations favor the emergence of a market economy and industrial development will expe- rience more opportunity entrepreneurship.
Rona-Tas (1994) provided support for this idea in his research on Hungary’s transition from socialism to capitalism, which distinguished between countries experiencing an erosion of socialism versus countries experiencing a transition from socialism. The erosion of socialism was a passive process in which socialist institutions dissolved. The transition from socialism, on the other hand, has become an active strategy followed by governments to create a market economy. According to Rona-Tas, coun- tries undergoing a transition provided many more opportunities for entre- preneurs and experienced greater levels of entrepreneurial activity.
Foreign Direct Investment
Industrial development may also be the result of foreign direct investment (FDI) in industrial infrastructure, with firms taking advantage of welcoming environments in many developing nations, including cheaper labor costs and more lax regulatory standards. FDI has been criticized by world-systems theory because of its role in developing countries (Bornschier and Chase- Dunn 1985). Critics argue that FDI creates long-term dependence of developing nations upon transnational corporations and contributes to inequality by creating a group of highly paid managers and professionals, in addition to low-wage manufacturing and other marginal jobs. However, recent research has shown that FDI might actually be of some benefit to the economies of developing nations (Alderson and Nielsen 1999; Soysa and Oneal 1999). As foreign firms invest money directly in their own operations
Entrepreneurship and Inequality 19
or through subcontracting and other outsourcing arrangements, they also create opportunities for entrepreneurial activity by stimulating new markets and pumping new financial resources into the economy.
Proposition 3. Foreign investment in developing nations increases their opportunity entrepreneurship rates.
Sectoral Shifts
Developing nations often undergo a dramatic sectoral shift away from ag- riculture and into manufacturing and services. As agriculture shrinks, those individuals or families formerly engaged in agricultural activity must com- pete in a new economic order. Early on, this process disrupts traditional means of securing a living and leads to increased economic inequality.
Although many make the adjustment by becoming employees of larger firms, many also turn to entrepreneurial activities (Rona-Tas 1994). For some, the decline of agriculture reduces traditional opportunities for secur- ing a living. As the sectoral balance shifts away from agriculture, these individuals may have few opportunities in the new industrial sectors that emerge. Entrepreneurship may be their best or only option. At the same time, the growth of the service sector may create new economic opportu- nities that entrepreneurs can exploit.
Proposition 4. As developing countries’ economies shift away from ag- riculture, both necessity and opportunity entrepreneurship increase.
Whereas developing nations industrialize and experience declines in ag- riculture and increases in their manufacturing activity, advanced industri- alized nations suffer a concurrent decline in their manufacturing sector. This dual dynamic represents the essence of globalization, as firms in advanced countries move production abroad to take advantage of cheaper labor, production chains span political boundaries, and economies become global (Alderson 1997). A major outcome of the globalization of production has been a relative decline in the size of the manufacturing sector in advanced industrial economies, and an overall shift in labor market demands in these nations, as highlighted by the U.S. case. Labor market restructuring has created an increasingly bifurcated labor force of high-skill, high-wage and low-skill, low-wage service work (Harrison and Bluestone 1988). For this reason, the dynamics of globalization have allegedly increased inequality among advanced industrial and post-industrial nations, leading to ‘‘the great U-turn’’ in the Kuznets curve (Alderson and Nielsen 2002; Harrison
and Bluestone 1988). In addition, the labor market options facing workers in the ‘‘new’’ economy have changed dramatically.
According to the GEM reports, the U.S. rates of total entrepreneurship and opportunity entrepreneurship are well above the average for all coun- tries included in the dataset, and remarkably above countries at similar levels of industrial development, as reported inTable 3. Models that focus on general characteristics of developing nations that might foster entrepre- neurship fall well short of explaining the United States’ unique level of entrepreneurial activity. Deindustrialization has had unique and significant effects on employment and labor market dynamics in the United States, which may account for its comparatively higher levels of entrepreneurial activity.
Why might deindustrialization in the U.S. lead to increases in entrepre- neurial activity as well as inequality? Some have argued that deindustrial- ization constitutes a natural outcome of economic growth, and that as societies become affluent and productivity rises, the demand for services increases (Alderson 1999). A hallmark of economic maturity is a decline in the manufacturing sector and an increase in the service sector. Therefore, the rapid growth of the service sector may create more opportunities for engaging in entrepreneurial activity to serve new and underserved niches.
Proposition 5. The rapid growth of the service sector during deindustri- alization leads to an increase in opportunity entrepreneurship.
Changing Employment Institutions
Others argue that deindustrialization, instead of being a natural outcome of the advanced stages of industrial development, constitutes one component
Table 3. Entrepreneurial Activity in the United States and Other Developed Nations in 2002.
Total Entrepreneurial Activitya Opportunity Entrepreneurshipb
All nations 8.08 5.63
Developed nations 6.52 5.20
United States 10.5 8.6
Source:Reynolds et al. (2002).
aPercent of labor force either actively involved in starting a new venture or the owner/manager of a business that is less than 42 months old.
bPercent of labor force electing to start a business as one of several possible career options.
Entrepreneurship and Inequality 21
of an active strategy by firms to move manufacturing overseas. According to Bluestone and Harrison (1982), deindustrialization is not simply the out- come of a natural evolutionary process, but rather part of a managerial strategy undertaken in the U.S. in response to increasing global competi- tion. In addition to massive reductions in capital investment and develop- ment, a large part of this strategy involved reducing labor costs. Millions of workers lost their jobs in unprecedented numbers as employers dismantled the social contract that had governed employer–employee relations after World War II. Workers were no longer guaranteed employment security in return for their commitment and loyalty. Union-busting campaigns under- cut the structural sources of labor’s power and employment in the U.S.
became increasingly unstable.
Early on, such instability generated a good deal of concern from labor market analysts (Bluestone and Harrison 1982; Harrison and Bluestone 1988;Osterman 1988) and policy makers (Reich 1983). However, as down- sizing and employment instability became a regular occurrence in the U.S.
labor market, these processes also became a more ‘‘institutionally regular’’
part of employment relations and career development (Osterman 1999).
Employees have slowly developed adaptive responses to this instability by making new investments in education and taking a more pro-active role in identifying opportunities for career advancement and mobility.
Not only are firms becoming less committed to long-term relationships with their employees, but employees also feel less committed to specific firms over the course of their careers (Osterman 1999). Perhaps in response to the decline of firm internal labor markets and stable employment, many work- ers have taken on a more individualistic approach to career development (DiTomaso 2001). Often, this means taking on more self-directed work within firms. As employment instability and an emphasis on self-direction evolve in tandem, however, many workers opt out of binding relationships with firms and behave like independent contractors. In particular, workers with high levels of education and valuable skills are seeking new opportu- nities for themselves. People in the emerging ‘‘creative class’’ often seek these opportunities through business start-ups (Florida 2002).
Proposition 6. Increasing employment flexibility leads to an increase in opportunity entrepreneurship.
We are not making a deterministic argument. Dynamic relationships be- tween development, inequality, and entrepreneurial activity create specific political and social structures at particular historical conjunctures. The po- litical and social structures that affect economic inequality do so in large
part by changing labor market structures and processes (Kalleberg and Berg 1987). Political policies influence the degree to which individuals must rely on the labor market to gain a living, and taxation policies determine how much wealth is transferred from those with large wealth holdings to those without. Class structures in societies depend upon the size of occupational and industrial groups and their degree of mobilization. When groups are highly mobilized and influential, they can protect their interests more ef- fectively. These structures alter the choices individuals must make about their labor force participation. Therefore, as we explain below, they should have an effect on entrepreneurial activity.
Welfare State Structure
The policies and provisions provided by modern welfare states vary greatly from nation to nation. In his path-breaking work,Esping-Andersen (1990) categorized these structures into three regime types. The regime types dif- fered in the level and type of provisions they guaranteed citizens and the effects they had on labor market dynamics. Esping-Andersen argued that the three regime-types – liberal, corporatist, and social democratic – differed in the degree of decommodification they allowed. The most generous social democratic welfare states go the furthest in allowing citizens to maintain a livelihood without reliance on the market, whereas liberal regimes tie benefit provision directly to market participation and stigmatize recipients, fur- thering dependence on the market for all except the most desperate citizens.
What effect does regime-type have on levels of income and wealth ine- quality? Nations with social democratic welfare state regimes often have a strong egalitarian ethic. Such nations bring down levels of wealth inequality by decommodifying labor and redistributing large amounts of wealth. On the opposite end of the spectrum, liberal regimes have high levels of wealth in- equality and mechanisms to encourage participation in the labor market as a source of income and mobility. We propose that welfare state policies also affect entrepreneurial activity, reinforcing the relationship between inequality and entrepreneurial activity. If necessity entrepreneurship is, by definition, a final effort to secure a living when other labor market options fail, then strong welfare state policies in the form of unemployment insurance and job training programs should reduce the need to rely on necessity entrepreneurship.
Proposition 7. Nations with more generous welfare state policies have lower rates of necessity entrepreneurship.
Entrepreneurship and Inequality 23
Figs. 5 and 6show the total and necessity entrepreneurial rates of coun- tries categorized by Esping-Andersen’s (1990) regime typology. As Fig. 5 makes clear, corporatist and social-democratic regimes, both of which dec- ommodify labor and transfer more wealth than liberal states, have lower rates of total entrepreneurial activity. The relationship between regime type and necessity entrepreneurship is even more striking. Social democratic regimes have two-thirds the amount of necessity entrepreneurship of
0 1 2 3 4 5 6 7 8 9 10
liberal corporatist social democratic
Fig. 5. Total Entrepreneurial Activity by Welfare State Regime Type. (Percentage of Labor Force involved in Nascent Entrepreneurship.) Source: Reynolds et al.
(2002).
0 0.2 0.4 0.6 0.8 1 1.2 1.4
liberal corporatist social democratic
Fig. 6. Necessity Entrepreneurship by Welfare State Regime Type. (Percentage of Labor Force involved in Nascent Entrepreneurship.)Source:Reynolds et al. (2002).
corporatist regimes, and only one-third of that of liberal regimes. According to the GEM data, citizens of regimes that decommodify labor rely less on necessity entrepreneurship to secure a living than citizens of other regime types.
Strength of the Working Class
Some theorists have argued that the negative relationship between economic equality and entrepreneurial activity stems from the strength of a nation’s working class. Nations with highly organized and influential working classes experience less inequality because unions and other working class organ- izations are able to exert their influence to gain a larger share of the eco- nomic and social fruits of their labor. In many industrially advanced European nations, labor parties after World War II were able to pursue policies of full employment, unemployment benefits, and related social ben- efits (Korpi 1989; Korpi and Palme 2000). In addition, many egalitarian countries have a strong working class (Esping-Andersen 1990, 1994). The presence of a strong working class curtails many of the negative effects of globalization and employment instability that we previously argued may cause an increase in entrepreneurial activity.
Proposition 8. The presence of a highly mobilized and influential working class will reduce necessity entrepreneurship rates.
McManus (2000)confirmed this association in her research on the quality of self-employment in Germany and the U.S. In Germany, the presence of influential union–employer associations and strong occupational labor mar- ket has contributed to more labor market stability and a higher earnings floor for many of the same occupations that are in decline in the U.S. These factors, in turn, have led to a lower rate of poor quality self-employment in Germany than in the U.S. Strong occupational labor markets and more labor market stability resulted in more stable, higher quality self-employ- ment in Germany.