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& Small Business

Chapter 2: The economics of entrepreneurship & public policy

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 &
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

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?

2. Compare and contrast their personal
James Dyson

Is Dyson an entrepreneur? Explain.

Innovative intensity


Scale of Major


Occasional Frequent Continuous

Frequency of innovation
Linkages with innovation

 ‘Gazelles’

 Firm size

 Industry structure

 Industry age & stability

 Location

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

Creative Talent

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?
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
(e.g. Canada, (e.g. EU
New Zealand) countries)
to SMEs
Competing Limiting
Low (e.g. USA) (e.g. developing

Low High
government Impediments to SMEs

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
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

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

The bicycle