Chapter 4 Institutional Environment and Entrepreneurship 95
4.2 Entrepreneurship in the Empirical Context
To examine the relationship between the institutional environment and the entrepreneurship, a quantity based empirical measure of entrepreneurship is required.
But entrepreneurship as a concept cannot actually be directly measured. Moreover, it can be envisaged either in the latent form as related to the personality traits (conceiving entrepreneurship) or in the overt form as performing entrepreneurship. While the former is largely unobservable and not considered as a reliable instrument, the latter can be used as a measure. Therefore, entrepreneurship researcher started to focus more on what the entrepreneurs do rather than what their character traits are (Ligthelm, 2010).
Economists have been struggling to find appropriate measures of entrepreneurship and the academic literature has used several different measures of entrepreneurship like sole proprietorship, number of private enterprises, net business formation etc. (Hall & Sobel,
2008). There is no consensus on how entrepreneurship should be defined and measured in empirical research (Henrekson and Sanandaji, 2014). Therefore, current measures of entrepreneurship are highly scattered and thus fails to provide a readily available and easy to understand tool for comparing entrepreneurship across regions (Godin, Clemens and Veldhuis, 2008; Henrekson and Sanandji, 2014). Nevertheless, the most common indicator of entrepreneurship tends to be the number of established enterprises, as the purposeful action in establishing firms or enterprises is at the heart of entrepreneurship.
But it is a static view of entrepreneurship as the number of enterprises within a region or state is a stock variable (Nystrom, 2008). It reflects past economic activity as well as current conditions; therefore, it may either understate or overstate the entrepreneurial activities of a region (Hall & Sobel, 2008). But a major advantage of using a number of enterprises is that it is measured and can be compared across the states or regions and over time. Therefore, the rate of entrepreneurship is commonly proxied using quantity based metrics such as small business activity, self-employment rate, or the number of start-ups (Henrekson and Sanandji, 2014).
4.2.1 Different Proxies for Entrepreneurship Measurement
Researchers in the economic and management sciences now focus on activity based entrepreneurship and entrepreneurial actions in the form of enterprises can be considered as proxies for entrepreneurship. But entrepreneurship can be performed in several forms (formal or informal) and through various means (Big, Small or Medium enterprises). It can occur in small start-up businesses as well as in large existing firms (Godin, Clemens and Veldhuis, 2008). Therefore, the question remains to answer is that which proxy should be used. One probable solution would be to use all the proxies: formal/informal or big/small enterprises. However, the dynamics of necessity/opportunity entrepreneurship are closely connected to the informal/formal status.
Most of the necessities driven entrepreneurship in developing countries are in the informal sector (Desai, 2009). Therefore, the disadvantages of using informal entrepreneurship/businesses as a measure of entrepreneurship are that it may not be necessarily driven by entrepreneurial activity rather by necessity or by demographic factors like huge population and unemployment (Godin, Clemens and Veldhuis, 2008).
One practical difficulty also in using this measure as a proxy for entrepreneurship is regarding its measurement and availability of related data. Quantitative data on the number of enterprises in the informal sector is hardly available. Whatever data are available regarding the informal sector are either in the form of employment in this sector (Number of workers employed in the informal sector) or in the form of a share of this sector in GDP.
Thus, it is conceivable that necessity-based entrepreneurs start out as self-employed and are less likely to register themselves. Instead, opportunity based entrepreneurs are much more likely to register as a limited enterprise (De Kok, Deijb, and Essen, 2013). Thus, formal and registered enterprises seem to be better proxies.
However, the implication for measuring entrepreneurship through formal and registered enterprises is that it can occur both in small as well as in large existing firms. But, most of the big enterprises are not evenly distributed across all the regions, at least in the developing countries like India and are concentrated on few states. Therefore, recent studies stress on small business counts as a second best link for measuring entrepreneurship (Ghani, Kerr and Conell, 2011).
Small businesses have also been single out as the fountain of new job creation and challenges to the large stagnant firms (Hwang and Powell, 2008). An implicit assumption appears to be that countries or regions with a large number of small firms also tend to be those where most innovative high-growth firms emerge (Henrekson and
Sanandji, 2014). Centre for Development and Enterprise (2004) found entrepreneurship in its strongest and purest form at the level of small and medium sized enterprises, where individuals’ self-reliance and risk-taking are particularly prominent (as cited in Ligthelm, 2010). Additionally, the service sector has expanded significantly in recent years and the growth of the service sector opened up opportunities that can at best be utilised by small businesses.
Nevertheless, this study uses both the proxies of formal entrepreneurship, in the form of industries (factories) as well as registered MSMEs, for the purpose of investigating the relationship between the measures of institutional environment and the measures of entrepreneurship. Number of firms or enterprises per million populations is being used as the indicator of entrepreneurship across the Indian states.