Desarrollo Carreras Profesionales

Baumol (1990), using extensive historical illustrations concludes that there is little evidence to suggest that entrepreneurial spirit differs across regions, rather regional differences in entrepreneurship result from different institutional arrangements across regions. He indicates that contrary to the conventional notion of the entrepreneur being innovative and constructive, entrepreneurs’ actions and outcomes of their actions depend on the rules of the game- the reward structure in the economy- that happened to prevail. For instance, Baumol (1993) explains that in environments where the benefits and rewards of rent seeking activities outweigh their cost, unproductive entrepreneurship (entrepreneurship that benefits the entrepreneur, not the economy as a whole) will flourish. If the benefits and rewards of engaging in illegal entrepreneurship outweigh their cost, entrepreneurs are inclined to engage in destructive entrepreneurship (entrepreneurship that is detrimental to economic development). Conversely, if the benefits and rewards for engaging in legal entrepreneurship outweigh their cost, then productive entrepreneurship (activities that contribute positively to economic growth) will prevail. Accordingly, Baumol suggests that entrepreneurs weigh the incentive structures, both in the form of regulations (formal rules) as well as the prevailing cultural values and norms (informal rules) present. The effect is that this assessment will guide individuals and lead them into a particular form of entrepreneurship.

Moreover, Sanders et al., (2010) suggest that entrepreneurship is widely recognised as a force for good in market economies; however, global capital markets show that institutions are important in channeling this force. They further argue that entrepreneurs have the choice of choosing between productive ventures that increase total welfare and redistributive practices in which they appropriate a share of their profits. They call this situation a rent-seeking behaviour and indicate that such situation reduces the incentive to engage in productive ventures; hence have negative impact on aggregate economic activities. Other scholars call such situations “stateless society”, a situation in which entrepreneurial talent will be allocated between productive and truly destructive activities, such as stealing and raiding productive inputs (Desai et al., 2010). Rent seeking can also be in the form of lobbying, litigation, tax avoidance and evasion, takeovers, use of illegal systems, acquiring

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monopoly, illegal and shadow activities (drug dealing, blackmailing, prostitution, illegal drugs, granting of exclusive licenses, racketeering, enactment of laws by which productive process is affected, various forms of corruption, and stealing), as well as abusive judicial compensation with the purpose of limiting economic competition and promoting particular interest (Sauka, 2008; Dejardin, 2011; Baumol, 1993; Sauka & Welter, 2007).

Institutions set the rules of the game (North, 1990) in an economy, structure incentive structures and hence affect resource allocation and growth. The institutional impact on growth depends on whether productive activities are rewarded, which create wealth, or unproductive activities are rewarded, which redistribute wealth away from its creators. In the latter scenario, resources which could otherwise have been invested for productive purposes are consumed, and thereby suppress the incentive to engage in productive activities, due to the reduction in the effective returns to such efforts (Natkhov & Polischuk, 2012). Other damaging effects of the allocation of talents to rent-seeking include their expansion to absorb labour and other resources, hence reduce income; secondly, tax imposed by rent-seeking sector on productive sector reduces incentive to produce and therefore reduce income; as well as the abilities of entrepreneurs is lowered if entrepreneurs become rent-seekers, hence the rate of technological progress and growth is likely to be lower. Thus, pure entrepreneurship (productive entrepreneurship) uses resources more efficiently and contributes to growth since technology is improved, income is raised and profits are taken away from competitors (Murphy et al., 1991). Olson’s (1982) idea on rent-seeking and growth rest on the idea that rent-seeking creates cumulative distortions and therefore reduces growth. To this end, Mehlum et al., (2003) argue that good institutions offer generous reward for entrepreneurs, and thus massively generate innovations, whereas poor institutions drag daring and creative individuals into rent-seeking, and consequently stifle productivity growth. In this study, the researcher aims to identify the nature of the institutional framework of Ghana, how that effects the (re)allocation process, and the resilience strategies to operate in such institutional arrangements. Acemoglu (1995) argue that rents that entrepreneurs pay and the profitability of their activities is dependent on the number of rent-seekers, hence societies with more rent- seekers reduce the returns to entrepreneurship and rent-seeking. In respect of this,

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Murphy et al., (1991) suggest that occupational choice depends on the returns on ability. Hence, Murphy et al argue that people choose occupations that offer them highest returns of their abilities. Murphy et al., further describes the compensation contract – how much of rents on their talent a superstar can capture – determines the sector’s attractiveness to talent. Thus, sectors where people are able to organise their activities and keep the profit become attractive to talent. Moreover, in some countries, talented people join specific activities because these activities offer the best prize. For instance, talented people in some countries would rather join government bureaucracy, army, organised religion and other rent-seeking (Tullock, 1967; Krueger, 1974) activities because these activities offer the best prize (Murphy et al., 1991). For example, in Latin America and parts of Africa, the most talented people may join the army so as to access resources from their countries (Murphy et al., 1991). Hence, Murphy et al., highlight that the allocation of talents to rent-seeking may account for stagnation in much of Africa and for the success of newly industrialising nations where rent-seeking is minimal. Nevertheless, there appear to be no consensus on which activities can be classified as productive, unproductive, or destructive (Sauka & Welter, 2007). Baumol (1993) argues that rent-seeking cannot in every case be regarded as unproductive. Moreover, unlike the perspective of Murphy et al., in transition countries, several studies show that legal and illegal activities coexist and most new and small firms are involved in productive and rent seeking activities at the same time (Glinkina, 2003; Rehn & Taalas, 2004). In view of this, in developing countries such as Ghana where legislation and rules are still emerging, rent seeking activities such as tax avoidance can be necessary for the survival and growth of firms, thus making some contributions to economic development (Smallbone & Welter, 2006).

However, according to the entrepreneurship literature, there is no consensus on what determines productive, unproductive and destructive entrepreneurship. For example, several authors argue that the separation between rent-seeking and productive activities is not always watertight (Bhagwati, 1982; Acemoglu & Vedier, 2001). Leff (1964) therefore argues that in practical terms rent-seeking does not need to be entirely unproductive. Acemoglu (1995) therefore indicate that when rent-seeking takes the form of trying to exploit monopoly rents accruing to another party, it may

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have productive aspects as well. Davidsson & Wiklund (2001) opine that in reality a few activities among, for example rent-seeking, make absolutely no contributions to economic output (Davidsson, 2004). Moreover, Baumol (1993) argues that activities tarnished by, for example, rent-seeking, cannot in every case be regarded as unproductive. Furthermore, in relation to the transition context, several studies show that legal and illegal activities co-exist and most new and small firms are involved in productive and rent-seeking activities at the same time (Glinkina, 2003; Rehn & Taalas, 2004; Smallbone & Welter, 2001). Smallbone & Welter (2006) therefore pointed out that in transition economies, with weaker institutions, rent-seeking activities such as tax avoidance can be necessary to ensure the survival and growth of their enterprises, hence making contribution to economic development.

Davidsson (2004) therefore posit that unproductive entrepreneurship can lead to some positive output at both the venture and societal levels, while productive entrepreneurship will not necessarily lead to a successful firm performance or contribute to society. Fairlie (2002) further concludes that illegal activities such as drug dealing experience have a large, positive and statistically significant effect on the probability of self-employment. Aidis & Van Praag (2007) report that in the former Soviet Union, illegitimate activities in colonies such as Lithuania, may become socially acceptable due to the benefit they provide to the general population by offering goods and services that were unavailable through the inadequacies of central planning. In this regards, several scholars pointed to the need to consider the output of SME activities, when productive, unproductive and destructive entrepreneurship is addressed at the conceptual level (Davidsson & Wiklund, 2001; Baumol. 1993). Consequently, Sauka & Welter (2007) assert that negative activities such as rent- seeking or tax avoidance that created positive output should not be regarded as unproductive, whereas productive activities such as innovation that make no contributions at venture and societal levels, should not be regarded as productive. Taking cognisance of this, this study will find out how rent-seeking affects the outcome of entrepreneurship.

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Other strands of literature deal with institutions as reallocation8 device of entrepreneurship. Oviedo (2006) builds on Hopenhayn’s (1992) and Hopenhayn & Rogerson’s (1993) industry equilibrium model by studying the role of institutions in the reallocation process, where “institutions” refer to the amount of regulation, but also to the environment in which regulation is implemented (for instance, the presence of corruption, uneven law enforcement, and lack of accountability). He argues that in the presence of uncertain regulation, caused by a poor institutional environment, the “creative destruction” process can lead to high observed reallocation, but low productivity. Specifically, his study focuses on the entry and exit decisions of firms, their innovative behaviour and subsequent industry evolution. The results indicate that, a more uncertain regulation environment leads to higher reallocation, but lower average productivity, size and innovative investments. Thus, in addition to the level of regulation, unpredictability of regulation is an important source of inefficiency in the reallocation process. Similarly, a study by Loayza et al., (2005) find that reallocation of resources contribute positively to aggregate productivity growth across countries, yet the contribution is smaller in countries with an excessive regulatory burden. In addition, Oviedo (2005) argues that institutional failures can cause inefficiencies in reallocation process by creating barriers to reallocation that distort firms’ optimal adjustment behaviour and by creating uncertainty about the cost faced by the firm. The implication could be that inefficient institutions can prevent entrepreneurial firms from optimising the exploration and exploitation of opportunities. Against this background, the case of entrepreneurship in Ghana will be understood through the lived experiences of the participants.

Aside from the study exploring the role of institutions as an allocation and reallocation devices for entrepreneurship, this study will attempt to understand how institutions may counter market failures by creating opportunities for individuals to participate in existing markets or new markets. Previous research regarding how institutions prevent anticompetitive practices to ensure equal participation by individuals in a society is highlighted. The review will shed more light on how institutions may counter anticompetitive practices in the developed world (as

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Relocation means the diversion of assets, resources and capabilities into less “productive” areas because of a lack of, or the wrong type, of institutional structure.

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discussed in the next section), which would later be adapted to the Ghanaian situation, in Chapter Eight.