Entrepreneurship, Middle Class Consolidation and Social Mobility in

Manuscript
Entrepreneurship, Middle Class
Consolidation and Social Mobility in Latin
America.
Scope and Limits.
Andres Solimano*
May 3, 2012
*Comments by Eduardo Lora, Francesca Castellani, Jose Anchorena,
Nestor Gendelman, Lucas Ronconi and Roberto Velez to previous
version of chapters of this manuscript are appreciated.
1
Outline.
Chapter 1. Introduction.
pp.3
Chapter 2. What do we (reasonably) know on
Entrepreneurship, the Middle Class and Social Mobility?
An Overview of Literature.
pp. 6
Chapter 3. Empirical Evidence for Latin America: Main
Findings of Six Country Studies.
pp. 46
Chapter 4. Public Policy Implications for Fostering
Entrepreneurship in Heterogeneous Societies and Issues of
Future Research.
pp. 80
2
Chapter 1. Introduction
Entrepreneurship is a critical process in a dynamic capitalist economy. It is a
source of creation of new productive capacities, innovation, new goods and
processes, fostering employment creation, growth and development. At the same
time, distorted patterns of entrepreneurship can lead to over-building of capital and
corrective cycles. Entrepreneurship is an important and fascinating topic. It cuts
across several disciplines: psychology, the theory of production, labor economics,
talent economics, risk-bearing theory, public policy and related fields. The
prototype view of the entrepreneur depicts him or her as an ambitious, competitive,
creative, independent-minded individual with the courage to undertake new
endeavors in uncertain contexts: the ideal of competitive capitalism. Business
schools literature, in turn, focuses on complex practical themes such as the
objectives of the entrepreneurs, his skills, and the core strengths of the firm, the
drawing of a business and strategic plan, the discovery of opportunities, market
niches and financing possibilities and so on.
From a public policy perspective we would like entrepreneurs coming not
only from rich elites but also from the middle class and low- income groups as a
way to broaden opportunities for realizing the hidden productive potential of
individuals at all levels in society. However, entrepreneurial traits -- such as a
propensity to envision opportunities, mobilize resources, take risks and innovate -are not widely distributed among the population. In fact, entrepreneurship is a
small proportion of the economically active population although the impact of
successful entrepreneurship can be large indeed.
Public policies in Latin America and elsewhere that wants to promote
entrepreneurship must engage the middle class and the bottom parts of the income
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distribution. The promotion of entrepreneurship is envisaged as a way to foster
upward socially mobility and boost economic dynamism, personal autonomy, and
productive transformation. Historically, the middle class was a main source of
entrepreneurship in the development of capitalism in England and other countries
when landed aristocracies in decline gave room to a nascent segment of
entrepreneurial middle class drawn from urban areas. In contemporary times,
major breakthroughs in technological innovations with a commercial orientation
(the development of software and of emblematic products such as goggle, facebook and others) were conducted by young, educated individuals operating
independently in small scale firms. The extent this largely spontaneous process can
be replicated in different places and contexts remains as an open question.
At the same time, these success stories coexist with a reality of widespread
―necessity entrepreneurs‖ in Latin America and the developing world. Necessity
entrepreneurs often operate in the informal sector and their ventures have low
technological levels and earn a rate of return equivalent to relatively modest salary
jobs but facing more risks than employees in the formal sector. The distance
between the bold, innovative and daunting Schumpeterian entrepreneur and the
numerous modest entrepreneur of the developing world is striking. Therefore
entrepreneurship is a very heterogeneous segment of the population making it a
potentially elusive target of public policy.
Still these policies would like to exploit synergies between educational
capabilities, family background in households with an entrepreneurial tradition and
the quest for independence and a drive to undertake productive projects. The
objective to promote an enlarging middle class viewed as a source of
entrepreneurial capacities and upward social mobility, political moderation and
social mobility also permeates the desires of many policy-makers around the
world.
4
This book looks at the potential but also the limits of policies to promote
entrepreneurship as a main vehicle for social mobility across broad social segments
in society, looking also at other forms of social mobility such as pursuing careers
as employees and self-employment and the constraints to entrepreneurship in credit
markets, education and other supportive factors. Of course, these obstacles can be
removed by appropriate public policies.
This volume assesses relevant literature on entrepreneurship and connects it
with new developments in middle class and social mobility analysis. The book is
organized around four chapters included this Introduction. Chapter two undertakes
a review of the economic literature on entrepreneurship and relates it with the
economic and sociological literature on middle class and social mobility. It dissects
some main theories, and evaluates its relevance and validity for promoting growth,
development and social in the developing countries of the early 21 st century. The
underlying focus is the Latin American and Caribbean region, although some of
the issues can be of more general validity for both advanced economies and
developing countries. Chapter 3 presents the methodologies and the main findings
and public policy potential implications of a set of six country empirical studies
comprising Argentina, Bolivia, Colombia, Ecuador, Mexico and Uruguay and
regional papers on entrepreneurship, middle class and mobility commissioned by
the Research Department of the Inter-American Development Bank. Chapter 4
explores public policy implications of the previous analysis and the results of the
empirical studies and closes with highlighting areas for further research.
5
Chapter 2. What do we (reasonably) know on
Entrepreneurship, the Middle Class and Social
Mobility? An Overview of Literature.
1. Introduction
The literature on entrepreneurship, the middle class and social
mobility often run in quite separate directions. Entrepreneurship is seen as
dynamic process of business creation and destruction and is therefore
naturally linked with the process of economic growth. However,
entrepreneurship was not always given a central role in economic analysis
dominated by theories of the production process that gave the main role to
the mechanical accumulation of capital and labor growth with little role for
the process of organizing production, envisioning opportunities, mobilize
factors of productions and link them with credit and product markets all in a
context of uncertainty and risk.
The literature on the middle class has been often the realm of
sociological approaches more concerned with issues of social identity and
class differentiation in which links with entrepreneurship and economic
growth was largely neglected. Social mobility is also a critical and dynamic
process for promoting equality of opportunity; reduce inequality and
intergenerational progress in the economic ladder. An integration of those
strands of thought is required not only for analytical purposes but also from
a public policy perspective. New avenues of thought to identify novel
economic and social mechanisms to spur economic dynamism and social
equity are required. Economists are rediscovering some alleged virtues of
6
the middle class as a source of entrepreneurship, values, consumer power
and socio-political stability. These propositions, of course, need proper
empirical verification using a variety of methods such as econometric
testing, historical evidence and country and micro case studies.
We need to know more about the nature and characteristics of
entrepreneurs and the determinants of the choice of becoming an
entrepreneur. We also need to know the extent to which entrepreneurship
advances social mobility. In addition, we are interested in understanding
better the influences of family background, education and values, risk-taking
and occupational choice, in shaping entrepreneurship. This chapter reviews
main issues and accompanying literature on the subject of middle class,
entrepreneurship and mobility keeping in mind its relevance for public
policy in the Latin American region.
2. Entrepreneurship
The word entrepreneur comes from the French, it intends to mean
―undertake‖ and was first used by Richard Cotillon in the 18th century.
Cotillon was an early writer on the functions of the entrepreneur as an agent
that deals with risk in business and production. John Stuart Mill and Jean
Baptiste Say, in the 19th century, influenced by Cotillon, elaborated on the
role of the entrepreneur as an organizer of new business, bearing risk and
exerting control of the production process. Marx developed a theory of the
―capitalist‖ (in some sense the equivalent of the entrepreneur) in the 19th
century stressing its role as a new class that revolutionizes the modes of
production and social relations along the way. This author highlighted the
function of the capitalist factory system in combining technology and the use
7
of wage-labor for attaining profits to be reinvested again in the search for
more profits. Let us look briefly how different schools of thought and main
thinkers viewed the entrepreneur and his main features in the economic
process.
Neoclassical Theory of Production: Is there a role for the
entrepreneur?
The theory of the entrepreneur is a complex subject in economic
theory. In neoclassical economics, production and growth follows from a
production function, whose origin is rarely discussed, that offers managers,
entrepreneurs and administrators a blueprint of economically efficient
combinations of factors of production such as labor, capital and technology
to produce goods and services. The production function, however, is
ultimately a ―black box‖. In fact, the question of who leads monitors and
carry-out the process of organizing production, hiring labor and combining it
with capital according to a blueprint of technologies is absent or hidden.
The role of the entrepreneur as an organizer and coordinator of the
production process and a linkage with goods and credit markets is nowhere
in the production function framework (e.g. a variable E, say for
entrepreneur, is not a factor of production). The preferences, skills, attitudes
and capabilities of such organizer of production, the entrepreneur, is absent
of the picture.
The Entrepreneur according to Joseph Schumpeter and Frank Knight.
The main theoretician of the entrepreneur in the 20th century was
Joseph Schumpeter. Frank Knight also offered important insight on the
subject that we shall review below. Schumpeter developed a theory of the
entrepreneurs based on a mix of direct observation, psychological theory and
economic analysis. Typically the entrepreneur has a talent for combining
8
capital, labor and for entertaining a vision of opportunities and the prospects
for profits (see Schumpeter 1934 [1989]). The critical role of the
entrepreneur in Schumpeter is making innovations such as introducing a new
good, a new line of production; open a market in a process of ―creative
destruction‖ in which new technologies and ways of doing business replace
the old ones. Schumpeter emphasized the peculiarities of the entrepreneur
that make him different from the manager, the pure inventor and the owner
of capital. The capacity to undertake new decisions in the unchartered waters
of new activities conducted under conditions of uncertainty and risk. A
―developing‖ economy in Schumpeter terms is one that jumps from one
circular flow to another driven by innovations. An economy may be growing
but is not developing if it stays in the same (stationary) circular flow under
the same technology and organization (remember that Schumpeter´s classic
1911 book (English edition, 1934) was called A Theory of Economic
Development).
Frank Knight, in turn, influenced both by the Austrian school of
economics of Menger, Von Mises, Bohm- Bawerk and Hayek and the
neoclassical theory, linked entrepreneurship and profits with risk and
uncertainty. He stressed the role of the entrepreneur and the manager to
organize production when the productivity of workers is unknown and other
contingencies relevant in production cannot be ascribed precise probabilities
chiefly because the presence of ―uncertainty‖. For Frank Knight profit was
the remuneration of risk taking, a different category than the return on the
capital invested in the firm. Some interpretations of Knight also emphasize
that the entrepreneur needs residual property right (as owners) to exercise its
function of ―specializing in judgment, common sense and intuition as
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vehicles to carry productive decisions in a world of uncertainty‖ (Langlois
and Cosgel, 1993).
Kenyes ´s volatile Investors.
The British economist John Maynard Keynes was interested in the
psychology of the ―investor‖ –both in financial assets and in physical
production -- as well as the context under which he undertakes his
investment decisions. In
contrast to Joseph Schumpeter, Keynes did not
share the almost romantic view of Schumpeter of the entrepreneur as the
―hero of capitalism‖ that against all odds carries forward his vision of
innovation and productive creativity. Keynes shares with Knight1 (and
Schumpeter) the awareness on the complications introduced by effects of
intrinsic uncertainty for rational economic calculation. However, he depicted
the investor-capitalist of the real world more as a ―casino player‖, a bit of a
gambler, rather than a hard-work puritan prone to delayed gratification
(sacrifice of consumption) in favor of capital accumulation. Keynes coined
the expression of ―animal spirits‖ to denote human behavior driven by
something more than enlightened values and a rational calculation of
pecuniary costs and benefits. The original passage by Keynes in the General
Theory (1936) reads:
Even apart from the instability due to speculation, there is the
instability due to the characteristic of human nature that a large proportion of
our positive activities depend on spontaneous optimism rather than
mathematical expectations, whether moral or hedonistic or economic. Most,
probably, of our decisions to do something positive, the full consequences of
1
See F. Knight classic book, Risk, Uncertainty and Profit.
10
which will be drawn out over many days to come, can only be taken as the
result of animal spirits - a spontaneous urge to action rather than inaction,
and not as the outcome of a weighted average of quantitative benefits
multiplied by quantitative probabilities. Thus, if animal spirits are dimmed
and spontaneous optimism falters, leaving us to depend on nothing but a
mathematical expectation, enterprise will fade and die. (pp. 161-162, The
General Theory.)
This quote conveys some important features that we ascribe to
entrepreneurs such an urge to action rather than inaction, the role of
optimism and so on. Keynes stressed also the point that investors are
affected by herd behavior, interdependent expectations and changes of mood
and perceptions that lead to waves of optimism, euphoria, and manias,
followed by periods of pessimism and depression generating sharp business
and financial cycles.
The Choice to be an Entrepreneur.
There is consensus that the psychology of the entrepreneur is different
of the employee. The wage- earner is supposed to be more risk averse than
the entrepreneur and has a lower quest for independence than the
entrepreneur and the self-employed. In terms of long run economic success
it is not clear that the entrepreneur is a superior choice. A well educated, apt
employee that can make a career in a corporation (and/or move to others)
can reach senior positions as a manager that can be well remunerated and
rewarding from a professional viewpoint. In contrast, entrepreneurship is
risky and not all succeed. In addition, pursuing an entrepreneurial career
may have an irreversibility component that prevent reinsertion in employee
positions as eventually (entrepreneurial paths) erode in people certain
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capacities such as developing reporting capacities and tolerance and patience
for collective decision-making required for holding successful employee
positions.2 As we shall see below empirical evidence tells that for many
individuals the choice of entrepreneurship comes after being an employee
for a while, although the reverse seems to be less frequently.3 Choice
theoretic models derive rules of occupational choice depending on risk
preference and other parameters including wage/profit ratios. Some authors
have tried to make endogenous the formation of preferences such as the
propensity to save the preference for leisure and work, the tolerance and
even love of risk-taking. The mechanism for preference formation is through
the efforts of the parents to instill their own values to their children (see
Doepke and Zillibotti, 2008 and references on cultural transmission of
values provided thereof). In fact, as we shall see below, the probability of
becoming an entrepreneur is higher in families in which parents are (or have
been) entrepreneurs than in households without an entrepreneurial
background.
The relationship between endowments of human capital and
entrepreneurship is also an interesting subject and not always obvious.
Entrepreneurs are not necessarily people with a high stock of formal
education (holding PhD‘s or Masters) such as the scientist, the expert or the
intellectual who we usually identify with ‗human capital‘. Empirical studies
confirm this assertion (see below). In this line, Lazear (2002) has put
forward the ―balanced skills hypothesis‖ of the entrepreneur and tested it
empirically. The basic notion is that entrepreneurs are people with various
2
I thank Jorge Rosenblut for making this point to me.
3
Of course some individuals start as entrepreneur’s right at the beginning of their economically active life.
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skills (for management, people interaction, a capacity to deal with financial
and technical problems) compared to employees and professionals –―the
specialists‖. Using longitudinal data of top universities in the United States
comprising study and employment stories of the same individuals over time,
Lazear found that those who in graduate school chose a greater variety of
subjects and also have a more varied occupational experience have a higher
propensity to become entrepreneurs than individuals that chose more
specialized educational strategies and employment experiences.
Entrepreneurship and Family Background
The previous discussion underlines the role of family background, risk
attitudes, education levels and preferences for understanding the formation
and development of entrepreneurship. Dynastic models tend to see
persistence across generations of father and sons (and daughters) regarding
patience, time preference, demand for leisure and attitude towards work.
According to these models entrepreneurial propensities of the parents tend to
be inherited, to some degree, to the children that also seek to be
entrepreneurs.4 An additional hypothesis is that the children of managers of
big corporations are less likely to become entrepreneurs than the children of
small firm owners (see Glaser, Rosenthal and Strange, 2009). This is an
interesting twist that underscores the importance of small scale firms in
promoting entrepreneurship.
An empirical study that sheds some light on these issues is Wadhwa,
et.al. 2009. The report, based on a sample of 549 survey of company
founders respondents covering mainly the technology sector in the United
4
It becomes an empirical task to determine the degree of persistence in entrepreneurship through
different cohorts and generations.
13
States (computer and electronics, defense, health care and services sector)
found that a majority of founders of new companies (71 percent) were of
middle class background (according to Dennis Gilbert (2008) six class
definition) with a very small percentage (less than 1 percent) coming from
extremely wealthy or extremely poor backgrounds. In addition, the study
found that the average age for starting a business is 40. Most company
founders had considerably high levels of education (over 95 percent had a
Bachelors degree and 47 percent had more advanced degrees). Their
academic performance located them among the top 30 percent in high school
and college (with better academic performance in the former). In turn,
company founders (entrepreneurs) generally did not initiate a start-up right
after graduating from college. They generally had previous work experience
as employees (around six years), suggesting that the choice between being
an employee or become an entrepreneur may be sequential in time. Finally,
slightly more than half of them were the first to initiate a business in their
families and the motivation to become an entrepreneur reflects a
combination of aspirations of building wealth, the lure of commercializing
an idea, being their own bosses and, when relevant, continue a family
tradition of entrepreneurship.
International mobility of entrepreneurs.
From an international perspective, entrepreneurs can transfer their
innovative and wealth-creating capacities from one country to another.
Historically, the immigration of people with entrepreneurial capacities and a
favorable attitude towards risk-taking contributed to business creation,
resource mobilization, colonization, and innovation, – all factors that
supported economic growth in countries of destination. In the Atlantic
economy of the 19th century and early 20th centuries, successful
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entrepreneurs (and bankers) – such as Mellon, Vanderbilt, Carnegie, and
Rockefeller, and, more prominently, the famous banking dynasty of the
Rothschild, with operations in London, Zurich, Paris, and other financial
centers – were foreign-born or first descendants of immigrants. In the south,
Argentina was the main recipient of migrants with entrepreneurial skills in
the late 19th century and early decades of the 20th century. This country
relied both on net immigration (entrepreneurs and working class), primarily
from Spain and Italy, and on capital, from England and Germany, for its
economic development, using both to mobilize its vast natural resources. In
turn, the Chinese Diaspora has been an important source for the supply of
entrepreneurs in South and East Asia, as have Palestine and Syria for the
supply of entrepreneurs in South America. More recently, in the late 20th
and early 21st centuries, entrepreneurial emigrants from India, Taiwan,
Israel and China have provided an important human resource to support the
creation of high-technology industries both in hardware and in software in
Silicon Valley in the United States and connect them with technological
industries in their home countries. These foreign-born entrepreneurs, who
many times came to study in the United States and Europe before turning
into entrepreneurs acting in both the receiving and home countries have
played a critical role in transferring entrepreneurial talent, market
connections and new products and technologies among distant economies.
Their location and mobility have helped also to develop technological
industries in developing nations traditionally importers of high-tech goods
(See Saxenian, 2006 and Solimano 2008).
Heterogeneity, firm-size, credit constrains and entrepreneurship.
15
Entrepreneurs in Latin America and other developing regions often
operate under highly differentiated productive structures. This heterogeneity
is reflected in significant differences between micro, small and medium size
companies (SME) and large firms in terms of capital intensity, employment
generation, technology development, credit access and export orientation.
The SME are often viewed as important sources of employment creation but
not necessarily of technological development. This view can be challenged
by the experience of the United States in which the Small Business
Administration reports that small firms innovate more than large firms and
have a higher percentage of patents per employee than big companies; in
turn, younger firms are more likely to have more patents per employee than
older firms (Wadhwa et.al, 2009).
Entrepreneurs are highly heterogeneous. The entrepreneurial profile of
Bill Gates or Michael Bloomberg is certainly different from that of a owner
of a hot dog vender in the US or a small shop owner in a developing country.
Large scale entrepreneurs with capacities to mobilize capital and technology
can have a different impact on economic activity than small entrepreneurs.
Urban economist Edward Glaeser5 makes the simple but important point that
the number of firms in an industry or city is an important consideration for
assessing levels of entrepreneurship (and employment growth capacity too).
In fact, for a given level of employment if it is distributed among a larger
number of firms then the number of firm leaders or entrepreneurs per worker
must be higher. This suggests that countries with relatively larger SME
sectors must have a higher degree of entrepreneurship.
5
Glaeser, 2007.
16
An interesting empirical result in Glaeser (2007)´s
reported
regressions is the negative relationship between the average size of firms and
employment growth. In turn, this result is statistically significant for a
sample of 533 firms in the US. In general, we think of an inverse relation
between firm size and employment in levels but here the relation is also in
terms of employment growth. So entrepreneurship and employment growth
seem to go hand in hand.
An important difference between large and small size companies is
the nature of the restrictions they face. The financial markets generally
operate with asymmetric information between credit suppliers and applicants
on the loan on their repayment capacity and economic viability of
companies. This point was raised years ago in a seminal paper by Stiglitz
and Weiss (1981) that proved that increasing credit costs (raising interest
rates) could be an inefficient mechanism to sort-out between good and bad
debtors. It is often the case that information asymmetries affect more serious
in small size companies that have their balances and financial information
less developed and systematized than in larger companies. Another factor
that inhibits making loans to smaller sized companies, encouraging banks to
concentrate on a portfolio of larger companies, is the size of the credit
operations. If banks want to serve small and medium sized companies, they
must reduce the size of their credits, which leads to dividing the fixed costs
of collecting information and client analysis amongst smaller operations.
This makes it less profitable for the bank from a private point of view – to
give credit to smaller companies. The result is often chronic lack of access to
working capital and investment funding for SME a hurdle that small
entrepreneurs have to face and that certainly tends to discourage this
activity.
The segment of micro, small and medium size firms often face
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various handicaps to grow besides limited access to financing. They face
disadvantages in market access, delays in paying practices from providers of
inputs and buyers of final products, backward technological platforms, more
time spend in dealing with the bureaucracy of the state for permits and
licenses; in turn, their managerial capacities are often more limited than in
large companies.
3. The Social Origins of the Entrepreneur and the Middle Class.
Business historians and economic historians have highlighted the
middle class origins of the entrepreneur in the historical context of 19th
century capitalism in England. The emerging middle class or ―bourgeoisie‖
was seen as different from the landed aristocracy that lived out of the rent on
land holdings. The new entrepreneurial class was interested in making
profits in industrial production organized around the capitalist factory using
wage-laborers rather than the pre-industrial revolution craftsman. Therefore
the social origin of the entrepreneur in nascent capitalism was more middle
class than aristocratic or coming from landed elite. That tradition of tracing
the social class origin of the entrepreneur was largely lost in economic
analysis.6 Nonetheless, there seems to be a renewed interest in reappraising
the social background of entrepreneurs using broader definitions of the
6
The two more influential figures in the analysis of social classes were Karl Marx (1818-1883) and Max Weber
(1864-1920). However, there were also important contributions by Wilfred Pareto (1848-1923), Gaetano Mosca
(1858-1941) and Thorsten Veblen (1857-1929) to social analysis, elites and classes. The “Italian school” (Wilfredo
Pareto and Caetano Mosca as main exponents) held a merit–oriented view of elites, its dynamics and interactions
with other social classes although were not very specific in linking elites with entrepreneurial activity. Veblen, in
turn, focused on the characterization of the business elite and the importance of symbolic (conspicuous)
consumption and a culture of leisure to signal prosperity and abundance in the gilded age in America.
18
middle class and more popular classes in the context of developing countries
and emerging economies, including of course the Latin American region.
In the Latin American context, the wide-spread presence of
―entrepreneurship by necessity‖, say people who cannot find jobs as
employees and workers in the formal sector of the economy and that choose
to engage in independent ―entrepreneurial‖ activities as a strategy of
economic survival rather than as rational choice among alternative
occupations. These people often come from the lower segments of the
middle class and the lot of the poor and often operate in a context of
informality. We shall return to this issue below and in the next chapter.
In terms of social class origin entrepreneurs may come from the
economic elites, from the middle class and from the poor. This underscores
their heterogeneity in terms of scale of operations, family background,
education levels, wealth, values and attitudes. A critical question is the
extent to which class background affects the decision --or the necessity-- of
becoming an entrepreneur. In turn, defining a social class is not an easy
matter. Marx, for example, defined social classes in terms of the relation of
people to the ―modes of production‖ a concept that entailed social relations,
technology and patterns of ownership of the means of production (feudalism,
capitalism, socialism are all economic systems and modes of production).7
7
Social classes also develop views of the world or ideologies in function of their place in society and the economic
process. Marx, who wrote in the middle of 19th century at the peak of the industrial revolution, stressed two
classes: the bourgeoisie (capitalists) who own the means of production and control wealth, shape institutions and
political power and proletarians that own their labor power and are disenfranchised. The dynamics of social
change and transformation of society was coming from class conflict and was viewed as an engine of long run
change. According to Marx, capitalism would lead to increasing polarization and social differentiation. He
dismissed the idea of a “permanent middle class” and portrayed the “petit bourgeoisie” – our equivalent of the
middle class – essentially as a class averse to social change due to their interest in protecting their asset and social
position in society, in spite that they are not in the higher echelons of social hierarchy.
19
Max Weber writing in early 20th century shared Marx´s notion that
social classes were important and largely determined by their role in
production and the ownership of productive assets. However, Weber created
a more complex concept of social class in which prestige, status, occupation
and mobility played an important role. For Weber social class were the main
determinant of the ―life chances‖ say the capacity of people to enjoy a good,
secure, prestigious and enjoyable life style or, in contrast a life of hardship,
insecurity and anonymity.
Modern analysis of stratification and social class (see Gilbert, 2008) is
eclectic and use insights of Marx, Weber and other authors. Stratification
and class analysis tend to use a multi-variable approach in which income,
occupation, education level, status and prestige, values, thinking and lifestyle are used to define social classes.
The Middle Class: The Economist Perspective
Economist had for a long time forgotten and even dismissed class
analysis. However, in the last decade we have witnessed a resurgence of
interest in the subject and a new vitality in middle class analysis. MIT
economist Lester Thurow, in the mid 1970s, did somewhat pioneering work
on the middle class in the context of the United States economy. At that time
the US economy was hit by the combination of higher inflation and supply
shocks (stagflation) that squeezed the possibilities of a rising middle class
used to steady prosperity in the three decades since the end of World War II.
Thurow stressed the importance for capitalism and democracy of having a
strong middle class and cautioned that the raise of lower pay jobs in the
United States as indication of economic polarization and eventual shrinking
20
middle class with adverse consequences for social cohesion. These trends
were reinforced in subsequent decades by increased inequality, stagnant
median wages and middle class indebtedness. The author used an income
metric and defined middle class as those between 75 and 125 percent of
median income.
In the early 2000s, Thurow´s arguments were taken up in the context
of international development, by Birdsall, Graham and Pattinato (2000) and
Easterly (2001). Later in the decade Solimano (2009) using a sample of 130
countries looks at cross-country correlations between the relative size of the
middle class and variables such as income per capita, inequality (Gini
coefficient), the size of the state, the share of small and medium size
enterprises and an index of democracy.8 The literature on the middle class
written by economists has grown rapidly and several of these studies are
reviewed in this chapter.
Easterly (2001) based on panel regressions argues for a ―middle class
consensus‖ showing that a higher share of income for the middle class (and
lower ethnic polarization) are empirically associated with higher income,
higher growth, more education and other favorable development outcomes.
In fact, Easterly (2000) says that countries with a middle-class consensus are
indeed ―fortunate societies‖ because they have
[H]igher levels of human and infrastructure capital accumulation (p. 24) . . . .
[Such countries also] . . . have a higher level of income and growth . . . And
because they have more human capital and infrastructure accumulation, they
have better national economic policies, more democracy, less political instability,
more ―modern‖ sector structure, and more urbanization. (p. 29)
8
The study finds a non-linear relation between income per capita and size of the middle class and inequality and an
strong inverse relation between inequality and the size of the middle class. The rest of the variables show a milder
relation with the middle class according to the existing data.
21
A caveat here is the need not to jump from correlation to causality. While it
is a well established empirical fact that advanced economies with higher per
capita incomes and good levels of social cohesion have also a large middle
classes it does not necessarily follows that the middle class causes these
positive outcomes (see Solimano, 2009).
Entrepreneurial and other Roles of the Middle Class in the
Development Process
The new interest on the middle class is closely linked to the
contribution the middle class can make to the development process, public
policy and the stability of democracy. In this perspective we can identify at
least three roles and the first of them highlights the entrepreneurial capacities
of the middle class:
(i) The middle class as a source of various types of entrepreneurs
(Supply Side). As already mentioned the identification of the middle class as
a source of entrepreneurial activities has an historical root. Before the
industrial revolution in England the dominant landed aristocracy was
considered as a low saving, low investment, segment of the population that
preferred more leisure than hard work, risk taking and entrepreneurship (see
summary of these views in Doepke and Zilibotti, 2007).
A somewhat similar theme, in the American context of the late 19th
century, was developed by Thorsten Veblen in his Theory of the Leisure
Class. Veblen stressed the propensity of economic elites for conspicuous
consumption and leisure rather than an orientation towards hard work and
22
savings.9 In that sense the leisure class was not an entrepreneurial class. Max
Weber noted the influence of an emerging capitalist class influenced by a
Protestant ethic more oriented to savings (a lower time preference), hard
work and a willingness to take risks. This new entrepreneurial middle class,
in this view, tolerated delayed gratification in order to save and accumulate
capital, earn profits and ascend in the social hierarchy. This new set of
values –the ―spirit of capitalism‖ factor-- would be embedded in the patterns
of behavior of this new bourgeoisie. In modern times with developed capital
markets and availability of credit, in principle, entrepreneurs may not need
to be strong savers to finance with their own resources their productive
ventures. However, the presumed efficiency of modern capital markets to
offer credit to all that need it has to be qualified. Small and medium size
entrepreneurs often face much tighter credit constraints than large firms and
well connected large scale entrepreneurs. The rise of venture capital industry
has somewhat filled this gap for start-ups a niche that commercial banks are
reluctant to enter.10
The identification of middle class with (idealized?) entrepreneurial
values of thriftiness, hard work and delayed gratification has to be
qualified11 as the ―middle class‖ is a heterogeneous segment of the
population that includes individuals with different values within the same
class. For example, the middle class contains several occupation categories
9
The work orientation of the economic elites probably changed again in the last decades of the 20 th century with
market liberalization and the lowering of income and corporate taxation in the 1980s and cut in taxes on capital
gains and inheritance taxes that led to apparently led to an increase in working hours (and salaries and bonuses)
earned by CEO´s of big corporations and banks.
10
See the Latin American Venture Capital Association (LAVC) for scores on availability of capital in Latin America.
11
The implicit theory is that different social classes have distinct values and cultural traits (the class-value
specificity hypothesis).
23
in it such as entrepreneurs, self-employed and employees, which are agents
with different attitudes and preferences towards risk.12 In addition, within the
middle class entrepreneurial segment it coexist entrepreneurs of opportunity
with ―entrepreneurs by necessity‖, (owners of small shops and firms that
earn a modest rate of return that provide an income for living).
An empirical study for 13 low to middle income countries, Banerjee
and Duflo (2008), provides evidence of the pervasiveness of the
entrepreneur by necessity in the developing world. The typical middle class
entrepreneur in their sample has one employee (in some cases a maximum of
three employees), their stores or ―firms‖ have minimal productive assets like
machine and equipment and the activities engaged display very low levels of
technological intensity. A comment to the findings of this study is that the
sample is dominated by low income countries with large informal sectors; in
turn, the low range definition of middle class individuals (those earning
between U$ 2 to U$10 per day) is highly likely to include people in poverty
and therefore capturing mostly entrepreneurs by necessity.
(ii) The middle class as a source of consumer power (Demand Side).
The argument here is that a strong middle class with growing purchasing
power can be a source of steady increases in aggregate demand good for
companies that seek to sale and also to avoid recessionary trends and keep
the economy at the vicinity of full capacity.13 The marginal propensity to
consume of the middle class may be higher than the propensity of the rich
12
Middle class individuals that are employees tend to prefer a steady more stable flow of income (salary) rather than
face potentially more profitable but also more risky income/profit profiles associated with entrepreneurial activities.
This is typically the middle class that work in the public sector in different levels of hierarchy from clerical work,
medium level staff and even executives of ministries and public agencies. A similar logic could be extended to
middle class individuals that are employees of firms and corporations in the private sector.
13
Solimano and Gutierrez (2009).
24
(albeit lower than the poor). The argument also highlights also that the
middle class can be an important source of expansion of consumer market in
education, health services, housing, durable goods, entertainment and other
goods and services.
14
The notion of the middle class as an economically
robust and solid social segment has to be qualified, however. Middle class
people and families many times rely on debt to finance the acquisition of
housing, purchases of durables, university education and so on; therefore
middle class expenditure is vulnerable to real and financial shocks that may
force to cut consumption in the wake of adverse shocks. Typically middle
class families depend on jobs as their main source of income. A recession or
a financial crisis is bound to affect them significantly.
(iii) The middle class as a stabilizing segment in society (Political
economy argument). The recent interest on the middle class comes also from
political economy considerations. The argument is that a moderate political
center would come along with a large and consolidated middle class and this
would reinforce economic and political stability. In contrast, unequal
societies that are economically polarized with strong elites, a weak and
frustrated middle class and a disenfranchised poor may be attracted by
authoritarianism and populism, which are inimical trends for a stable
democracy. The evidence shows that high inequality tends to be correlated
with social conflict, authoritarian cycles, populism and recurrent economic
crises in Latin America (see Smith, 2005 and Solimano, 2006).
As
mentioned before, Easterly (2001) has shown for a large sample of
developing countries, that a higher share of income going to the middle class
14
Banerjee and Duflo, 2008) find that as the share devoted to food falls as income increases and
middle class people spends more on entertainment, education and health care and domestic in
infrastructure.
25
(along with lower ethnic polarization) is empirically associated with higher
income, higher growth, more education and other favorable development
outcomes.
Econometric evidence may not be enough, however, to settle the
issue. In fact, the historical record of the behavior of the middle classes
during episodes of crises of democracy in Latin America and Europe in the
first half of the 20th century suggests a more nuanced story of the relation
between middle class and democracy. Authoritarian experiences in Latin
American such as the military coups of the 1960s, 1970s and 1980s do not
render convincing support for the hypothesis that the middle class is always
and everywhere a staunch guardian of democracy. In fact, the authoritarian
regimes that governed Brazil, Argentina, Chile, and Uruguay at different
times in those decades had different degrees of support from the middle
classes, apparently pleased that military rule was ―restoring order‖ in
societies affected by mass movements pushing for redistribution of
economic and political power away from the elites. Further back in history
the regimes of Mussolini in Italy and Hitler in Germany in the 1920s and
1930s were popular among wide circles of the Italian and German middle
classes frightened by the economic insecurity, unemployment, crises and the
rise of left-wing political movements that affected the Weimer republic and
Italy after the Great War.
15
Alternative Definitions of the Middle Class
In discussions of what constitutes a middle class in any one country,
whether in advanced capitalist economies or in the developing world,
15
See Hobsbawm (2002) and R Frieden (2006) for good historical accounts of those periods in Europe.
26
researchers have used a range of definitions and measurements. The
literature concurs that defining and measuring a ―middle class‖ is a task
subject to caveats and ambiguities. Economists tend to prefer an incomebased (or consumption-based) definition of the middle class. In turn,
sociologists use also definitions of occupations, of asset ownership, values,
of attitudes toward risk, of aspirations toward upward social mobility, or of
its conformity to a certain status- quo.
Income and Consumption based Definitions.
Relative definitions of the middle class work with shares of income
distributions. Easterly (2001) defines the middle class as those households in
the second, third and fourth quintiles (20th to 80th deciles).Solimano (2009)
adopts a definition of the middle class encompassing the 3rd to the 9th
deciles with a distinction made between a lower middle class (3rd to 6th
deciles) and an upper middle class (7th to 9th deciles).16 There are absolute
definitions of the middle class that include a range of income between 2 to
10 dollars per day ( Banerjee and Duflo, 2008), a range of U$ 2 -13 per day
in PPP (Ravallion, 2009). In turn, Kharas and Gertz (2010) use expenditure
in the range of U$ 10 –100 per day. A mixed definition is used by Birdsall
(2010) for income between U$ 10 a day up to the 90th percentile. Beyond
actual income or expenditure there are subjective definitions of the middle
class. In the subjective definition people is asked for their perceived position
in a wealth scale (ranging from 1 to 10) and then respondents are classified
into three subjective social classes: poor, middle class and rich, using the
16
This distinction could be useful for the dynamics of the middle class: the lower middle class is a segment
vulnerable to fall in poverty in the event of adverse shocks while the upper middle class may move up to the
segment of the rich under certain favorable economic conditions. A relative definition of middle class is the level of
income from the 75 to 125 percent of median income (Birdsall et.al. 2000),
27
relative sizes of the objective classes as a reference (Lora and Fajardo,
2011). Empirical estimates of the middle class in Latin America (16
countries) using objective and subjective definitions and the 2007 World
Gallup Survey produce a variety of values. 17
Occupation and source of income based definitions.
One body of literature exemplified by Dennis Gilbert—a sociologist
widely regarded as the expert on class structure in the United States —
associate classes with job positions (occupations) in the economic system
and their sources of income (capitalist property, job earnings and
government transfers). In the American Class Structure, Gilbert (2008)
provides a definition of middle class as the ―majority‖ class. His six social
classes taxonomy is the following: (i) A capitalist class, in which people
obtain their income from profits and the return on productive and financial
assets, (ii) An upper middle class of college-trained professionals and
managers, (iii) A middle class whose members have significant skills and
perform varied tasks of work, under loose supervision, (lower managers,
semi-professional, non-retail sales workers, craftsmen), (iv) A working
class are less skilled workers than the middle class and work at routinized
and supervised manual and clerical jobs, (v) a poor-working class of people
employed at low skill jobs often at marginal firms (laborers, service workers
and low-paid operatives) and (vi) An underclass of unemployed and part
time workers depending on government transfers. Gilbert then aggregates
these six classes into a three class scheme of: (a) A privileged class
17
Using absolute definitions yield between 58 percent and 66 percent of the population as middle class. When
relative definitions are used, around 60 percent of the population is middle class. Estimates based on percent of
the median income deliver a middle class of 42 percent. With mixed measures the size of the middle class is down
to 22 percent. It is apparent that the size of the middle class is very sensitive to the empirical definition used.
28
(composed by capitalists and upper middle), (b) A majority class (composed
by middle and working class) and (c) A lower class (formed by the working
poor and the underclass).18
The three class classification of Gilbert of privileged, majority and
lower class is not very different from the rich, middle class and poor
classification often used in income and consumption based definitions of
social classes. Gilbert‘s majority class comprises 60 percent of the
population. Gilbert´s approach puts more emphasis on the qualitative
characteristics of jobs and sources of income rather than total incomes.
The Values of the Middle Class and the Values of the Entrepreneur
A social class is not just a statistical abstraction concocted by economists
or sociologists. In the real world its members hold certain values, attitudes
and aspirations and play a political and economic role in society.
The popular notion of ―middle class values‖ point to a social segment
that attaches great importance to stability, having solid jobs, holding
moderate political views and a capacity to progress economically, educate
their children and own a house. In turn, the values of the entrepreneur are
subject to dispute: a capacity for delayed gratification, thriftiness and hard
work was stressed by Max Weber connected to the protestant ethic.
Schumpeter, in turn, emphasized the resilience of the entrepreneur and his
innovative capacities. Keynes viewed the investor (entrepreneur) dealing,
chiefly, with the intricacies of uncertainty and having features of a
―gambler‖. Business schools nowadays stress various features such as
18
Typical annual household income levels for the United States as calculated by Gilbert (2008) give a range
between U$ 150,000 and U$ 2,000.000 for the privileged class; U$ 40,000 to U$ 70,000 for the majority class and
U$ 15,000 to U$ 25,000 for the lower class.
29
resilience, innovative capacity, and vision and so on. Implicitly, they their
draw their views of the entrepreneur from some thinker on the subject
besides actual practice-based knowledge. In turn, empirical evidence
reviewed in the next chapter provides new clues on the subject.
Various theories have been formulated on the origin of values and
culture and their causal relations with the economic system. Neoclassical
economics considers values, tastes and culture as exogenous variables that
are generally constant or, at best, change very slowly over time. Max Weber
(1905 [2001]) highlighted the importance of religion, especially the
protestant ethic that rewards savings, work and the accumulation of wealth
in facilitating the spread of capitalism. Capitalism needed a value structure
functional to capital accumulation, technological change and accelerated
social mobility. These values are different from those prevailing in the
feudal order based on the divine origin of authority and tradition. In Max
Weber the implicit causality goes from values (affected by religious
preferences) to the economic system. However, this is not the only line of
causation or mutual interaction between values and culture and the material
base of society.
Karl Marx (1848[1979]) in his effort to contest Hegelian idealistic
philosophy prevailing in the early to mid 19th century stressed the role of the
economic structure, modes of production and the concomitants supportive
social relations in shaping ideas, beliefs, values and ideology in society19.
19
For a philosophically-oriented treatment of the issue see Wolff (2003). An economist perspective is provided in
Foley (2006).
30
Thus, Marx postulated a different line of causality (albeit his analysis did not
mention this term) than Max Weber.20
In turn, the Italian theorist and political activist Antonio Gramsci,
developed the concept of ―cultural hegemony‖21. This concept refers to the
prevalence and acceptance in the population of the beliefs, values and ideas
of the dominant social classes. Once these values and perceptions are shared
by the population at large (various social classes), they become ―common
sense‖ for society. In turn, this common sense helps to maintain the
legitimacy of the economic and social system. In this perspective, ideas and
culture could be even more important than traditional forms of political
power based on coercion, for the maintenance and cementing of social
orders. A variant of this thesis was developed by MIT Professor and father
of modern linguistic Noam Chomsky who coined the concept of the
―manufacturing of consent‖ as the action of the media and education to
legitimize certain values (chiefly among them the profit-motive) in a
capitalist society.
An important question in the literature on culture, values and social
structures is the extent to which they are class-dependent. If values are
―class-dependent‖ we may expect that the values of the middle class do not
necessarily coincide with the values of the rich or the values of the poor. 22
20
Marx highlighted, in his study of capitalism the ―commoditization‖ of human work under conditions of wage
labor and the creation of a market for labor power in which the typical worker has little or no control whatsoever of
the production process – different to the craft of the skilled artisan worker under previous, pre-capitalist, economic
formations. Karl Marx also emphasized the alienation of work in the factory system (see Hobsbawm, 2011).
21
22
See Forgacs (1988).
Note that the concept of “rich” varied over time (from landed aristocracy to new bourgeoisie to leisure class).
31
An additional question is to what extent the values of the middle class
overlap with the values of the entrepreneur. Of course we need to know first
what the values of these two segments are. Weber´s cultural story of the
―spirit of capitalism‖ is, certainly, class-dependent: the old elite (landed
aristocracy and the ―old rich‖) had different values from the new middle
class regarding delayed gratification, leisure, work-ethic and thriftorientation.
Another possibility, in line with cultural hegemony theories, is that the
values of the ―dominant social class‖ (the concept includes of course the
ruling elites which is a different concept to the entrepreneurial class) become
shared values by the rest of society through the construction of a common
sense shared by wide segments of society. Interestingly, the concept of
―cultural homogeneity‖ (a la Gramsci), would be equivalent to the
hypothesis of lack of middle class (or poor) particuralism in values advanced
more recently in the literature.
Empirical Verification
Recently there have been attempts to use large international panel data
sets to assess the values of the middle class and test their degree of
particularism (or the lack of it).23 These studies use, respectively, the World
Values Survey (around 80 countries and several years) and Ecosocial a
value-survey applied to seven Latin American countries. The results
obtained in these studies are based on (subjective) survey-responses and
people are classified in different social strata or classes according to various
criteria such as (subjective) self-perception and (objective) income and
expenditure measures. These studies look at the type of values held by
23
These empirical studies include Amoranto, Chun and Deolikan (2010) of the Asian Development Bank and LopezCalva, Rigolini and Torche (2011) at the World Bank.
32
middle class individuals and the degree to which these values are shared (or
not by) the rich and the poor. If the values of the middle class differ from the
values of the rich and poor then we talk of ―middle class particularism‖. The
World Value Survey identifies ―values‖ that are correlated with variables
such as economic growth and accountability and include questions about
market competition, gender equality, upward mobility, trust in others and
trust in institutions, social tolerance, nationalism, political activism and
technology adaptation.
The Asian Development Bank study ( Amoranto et.al. 2010) shows
significant regional variations in values. In addition, respondents from
OECD countries are found to be more liberal in some values than
developing countries. In addition, this study shows that the middle class has
a higher degree of political activism than the rich or the poor. In turn, the
World Bank study (Lopez-Calva et. al. 2011) finds no support for the
hypothesis of ―middle class particularism‖ (no statistically systematic
differences is detected in values between the middle class and the upper and
lower classes). Apparently, middle class values seem to be dictated by
moderation and lie between those of the poor and the rich. Lopez-Calva et.
al. (2011) also finds evidence of large cross-country and regional differences
in responses about values in line with the findings of Amoranto et.al (2010).
This may reflect underlying cultural attitudes that may have a strong
country, historical and religion bias. The paper also shows that income is a
reasonable good predictor of social and political orientation.
This new empirical work on class and values could be considered as an
advance in a complex and difficult topic. However, the results obtained are
better taken as tentative and suggestive. What is considered as ―values‖ in
these studies could reflect also ―opinions‖ of individuals. These opinions on
33
different topics tend to have more short term variation than values that are
more ―structural‖ and slow changing in time. In addition, we should not
rule- out the presence of mutual causation between social class and values.
Growth, Inequality and the Middle Class.
Recent economic literature has highlighted the positive effects of
economic growth on the formation of an ample middle class. The rise of a
new middle class in China, India and Latin America and even sub-Saharan
Africa, regions that have experienced respectable growth in recent years (or
decades), is shown as evidence of the positive effect of growth on the middle
class as growth leads people to pull-out of poverty. These findings, however,
should not lead us to think that economic growth is nearly all what we need
for having a strong and well consolidated middle class. The level of
inequality also matters. In an empirical cross-section study for 130
countries, Solimano (2009) shows a strong negative association between the
(income) Gini coefficient and the relative size of the middle class. The effect
of economic growth on expanding the size of the middle class could be, at
least partly, offset by the inequality factor. The rise of inequality in China
and India thus conspires against a stable middle class.
A statistically growing middle class –measured by income or expenditure-does not imply, per se, that the middle class has significant influence on the
process of policy-making in society or that is financially sound to deal with a
variety of contingences such as health , financial and employment shocks
and natural disasters.24
24
Lopez-Calva and Ortiz-Suarze , (2011).
34
A broader concept is that of empowerment. This concept refers to the
capacity of individuals to exercise their economic, social and political rights,
have voice and vote in the democratic process and exert a reasonable degree
of influence in the public policy process. A growing middle class in its role
of source of consumer power is not necessarily equivalent to a middle class
composed by individuals that assert their citizenship and hold authorities
accountable.
The effects of Vulnerability on the Middle Class.
An Economic Security Index (ESI) has been prepared at Yale
University (supported by the Rockefeller Foundation) that offers a
framework for identifying and measuring potential sources of vulnerability
and fragility of the middle class (and other social classes).25 The Index
focuses on three dimensions: (i) the labor market (loss of employment and
fall in wages), (ii) financial markets (over-indebtedness and the tightening of
credit) and (iii) health shocks such as catastrophic illnesses, injuries,
disabilities and death. The Index seeks to pick-up the impact on individuals
and households of a variety of events such as recessions, unemployment,
credit tightening, high debt and low financial protection to face adverse
health contingencies.
Economic insecurity affects all social classes but its impact on the
poor and the middle class is higher since these two large segments are less
protected to face adverse shocks. The ESI shows that in the last quarter of
century the degree of overall economic insecurity (across all social classes)
in the United States increased. Moreover, the Great Recession of 2008-09
25
www.economicsecurityindex.org.
35
has further exacerbated it. 26 As discussed before, ―the squeeze on the middle
class‖ was a trend already ongoing in the 1980s, 1990s and 2000s.
Moreover, the fall in private household savings since the 1990s and the rise
of household debt levels are serious warning of financial vulnerability of the
middle class.
In the Latin American context, a recent empirical analysis of
vulnerability of the middle class is Lopez-Calva and Ortiz-Juarez (2011).
The paper focuses on Chile, Mexico and Peru and identifies a relative
threshold of 60 percent of the income distribution and proposes a definition
of U$ 10-50 at 2005 PPP for defining middle class. This is certainly a more
reasonable threshold for defining the middle class than other studies that
offer definitions not very suitable for studying the behavior of this segment
in upper-middle income countries (low thresholds tend to include as middle
class many households living in poverty). The study makes also the relevant
point that not all people that are above the poverty line are middle class.
Those in the vicinity of the poverty line are very vulnerable to fall in poverty
and should not be considered as middle class according to this study. The
authors document an increase in the absolute number of households in the
middle class in the period 1992-2000 in Chile, Mexico and Peru and show a
reduced probability of falling into poverty in the late 2000s compared to the
late 19
4. Social Mobility
Social mobility is important as an indication of the efficiency of the
economic system to reward individuals that work hard and succeed in their
26
According to ESI calculations, one in five Americans has experienced a decline of over 25 percent of household
income between 2008 and 2010 without having the financial resources to cope with this decline.
36
productive or intellectual endeavors. Also mobility is relevant for income
distribution and for social integration. Milton Friedman who was a strong
believer in the capacity of competitive capitalism to properly reward
ingenuity and effort in his famous book Capitalism and Freedom
distinguished between temporary, short run differences in incomes and long
run differences in income status (see op.cit. pp. 170-71). He compared a
―dynamic society‖ in which every year individuals and families move up
(and down) in the income ladder with a ―status societies‖ with great
rigidities and lower mobility. In this case the dynamic society with high
social mobility would be less socially unequal in a longer term sense. Freeenterprise capitalism would be such dynamic society according to Friedman.
An important component of capitalism is entrepreneurship. Successful
entrepreneurship can foster upward social mobility. This upward mobility
takes place when the entrepreneur succeeds and makes good and sustained
profits. Conversely, this mobility can be in the downward direction if the
entrepreneur fails and descends into debt or go downright bankrupt.
However, it is important to note that entrepreneurship is only one
mechanism for social mobility. In general, an individual face at least four
such mechanisms for social mobility:
(a) Entrepreneurship
(b) Working as employee
© Education
(d) Independent activities and self-employment.
The choice between these different vehicles of mobility depends on several
considerations some of them discussed in this and next chapter. It is
37
important to note that these choices are not necessarily substitute one from
another: they may well sequential as mentioned before. Education is often a
pre-requisite for broader occupational choices including entrepreneurship. In
turn, the empirical evidence suggests that people chooses first to be an
employee and after acquiring enough experience and knowledge decide to
turn into an entrepreneur or an independent self-employed. However, this is
not always the case. Super-stars entrepreneurs such as Bill Gates from
Microsoft, Sergei Brin and Larry Page from Google or Mark Zuckerman
from Facebook all decided at some pointy to cut-short their education,
suspended or abandoned their studies and turn into entrepreneurial
endeavors with great success. Of course, there are many drop-outs from
college that do not succeed. Many studies of entrepreneurship and its merits
suffer from some degree of selection bias as they do not often include the
stories of failure.
Additionally, analysis of social mobility make a
distinction between:
(a) Short term mobility and
(b) Long run mobility
An additional, related, distinction is between:
© Intra-generational and
(d) Inter-generational mobility.
Intergenerational mobility refers to the correlation in economic and financial
outcomes between parents and children.27 It is an important measure of the
degree of equality of opportunity (or the lack of it). A society with a high
27
In the sociological tradition, the degree of social mobility in a society is linked to its productive and occupation
structure as well as the education background and social connections of the individual and more generally to
background of social class.
38
degree of intergenerational mobility is one in which the correlation between
the economic fortunes of parents and children is low. Conversely,
intergenerational mobility is low when that correlation is high. It is
important to note that this correlation refer to economic and financial
considerations. Inherited genetic attributes, the transmission of values and
family socialization are all important factors in society and families play a
critical role in this.
Variables identified to measure intergenerational mobility are the level of
occupation, income or wealth of the son compared to the occupation, income
and wealth of the father.28 In general transition matrices (of income,
occupation or education) tend to show that father´s occupation (income and
wealth) levels are a good predictor of son´s occupation (income and wealth)
but this prediction often has a range of variation. In fact, there can be
upward mobility (sons doing better than fathers), downward mobility (sons
doing worse than fathers) or no mobility. A mobile society is one in which
there tends to be a tendency towards upward mobility over time. Empirically
this is not simple to measure unless we have longitudinal data in which the
same individuals and cohorts can be followed over time in terms of various
measures of economic performance. 29 Some studies have found a greater
28
Torche (2009) provides a very useful overview of empirical studies of intergenerational studies for Latin America
and other developing countries.
29
Empirical studies have developed a variety of indices of social mobility based on rank ordering, timeindependence, positional movement, share movement, non-directional and directional income movement (see
Fields, 2010). Most of these measures tend to study social mobility using current (single-year) income as measure
comparing an initial and final year. As Fields (2010) shows the equalization of long term income is a very different
concept of the equalization of single –year income and develops a class of axiomatic statistical measures for
studying equalization (or the lack of it) of long term income compared to a base year. When these measures are
applied to the United States, the author finds a tendency to equalization of long term income for men in the 1980s
but not in the 1980s and 1990s. In contrast that tendency is observed in France since the 1960s, see Fields (2010).
39
influence of parental economic conditions on children´s outcomes in the
United States and the United Kingdom (two countries with relatively higher
income Ginis in the industrialized countries) compared to the more
egalitarian Sweden (see Torch 2009). The degree of intergenerational
mobility in the Latin American countries varies from country to country. For
Chile the evidence shows increased intergenerational mobility in the middle
and lower classes but closed patterns of mobility in the top decile (Torche,
2009). This is consistent with a high concentration of income and wealth at
the top but a more even distribution of income for the bottom 90 percentile
(Solimano, 2012). Studies for Brazil find an important role played by family
background in explaining overall earnings inequality (Bourguignon, Ferreira
and Menendez, 2007). In Mexico a changing occupational structure has led
to greater opportunities for social mobility in the last four decades or so but
family background continues to play an important role in the economic
possibilities of their children. In general the evidence for Latin America,
drawn mainly from cross-section surveys including retrospective
information about social origins and economic characteristics of parents,
point in the direction of strong mechanisms of reproduction of inequality of
wealth and status across generation but not necessarily of reproduction of
poverty.30
The transition from an agrarian to an industrial society reduced the
relative importance of low-wage jobs in agriculture and increased the share
of higher-paid jobs in the industrial sector. This led to social mobility from
rural to urban areas, leading to improved productivity and higher earnings
A similar interest of studying mobility in connection with long run income distribution is shared by inequality
experts such as Atkinson, Bourguignon and Shorrocks.
30
See Torche (2009).
40
but this mobility also entailed some costs and dislocations (stress, lower time
devoted to family-life and hardship associated with urban life in crowded
cities). Social mobility is not always equivalent to welfare improvement.
In turn, the transition from an industrial society to a post-industrial
society -- the post-industrial society is also called the ―knowledge
economy‖, the ―service economy‖ or simply the ―new economy‖. This
transition entailed also profound changes in the occupation structure (decline
in the share of manufacturing jobs and increase in the share of service and
tertiary occupations).31 This transformation also affected the nature of the
middle class, the patterns of entrepreneurship (of opportunity and necessity)
and created new dynamics of upward and downward social mobility. The
financial sector, technological entrepreneurs and big corporations are
identified as the big winners of the new economy. A new middle class is
created around these sectors as technological entrepreneurs come from the
middle class and a plethora of managers, professionals, financial and
technological experts linked to the newly dynamic industries have
developed.
The knowledge economy puts a premium to individuals with high
education levels, special skills and marketable knowledge. Still, many jobs
in the new economy are far from the glamorous high prestige jobs of well
paid lawyers, financial experts, engineers, technical experts and so coached
around the knowledge economy. In contrast, many new jobs locate in the
31
In the United States the transition from an agrarian to an industrial society took place between circa 1870 (end of
the civil war) and the 1930s. The transition to a post-industrial society started in the 1970s. In turn, the 1990s and
2000s were considered high points of the knowledge-economy, new economy or finance-dominated economy. see
Dilberg, 2008, chapter 3.
41
services sector such as retail trade, food services, cleaning and so on with
relatively modest remunerations.
There seems to be a tendency towards internal differentiation in the
middle class: successful entrepreneurs of opportunity, professionals, experts
and managers have tended to move up in the income, occupation and wealth
ladders. For them social mobility works and they become the upper strata of
the middle class (or the lower strata of the rich class). In turn, medium level
managers, office workers, clerical people and salesperson are also members
of the middle class but their economic fortunes are not the same of the
previous group.
A relevant question is to what extent choosing being an entrepreneur
improves the chances for upward social mobility compared with choosing
being an employee. The distribution of pay-offs of an entrepreneur may have
a larger mean but also greater variance. In turn, the mean income (salary) of
the employee may be lower but its variance is also smaller than the mean
income of the entrepreneur. In the case of the ―entrepreneur by necessity‖ it
was shown that the mean income is very similar to the salary of a worker of
comparable educational background and skills but the variability of incomes
tends to be higher as well.
The answer to what is a better strategy to improve the life- chances of
social mobility is very complex and will depend on the preferences for risk
of the individual and the different careers paths he or she face besides good
luck and other random factors. If an individual enters a big corporations,(but
not necessarily a SME) stays there for a sufficient time and performs well,
his or her chances of upward mobility within the firm may be higher than if
he/she chooses a more volatile occupation path involving entrepreneurial
activities.
42
Concluding Remarks
This review of issues and literature highlights the importance but also the
complexity of the subject at hand. Entrepreneurship is an intricate topic,
heterogeneity is serious and competing theories about the nature and
motivations of the entrepreneur are not easy to reconcile among themselves.
The historical record, casual evidence and empirical research indicate that
the middle class is a source of entrepreneurship (of various kinds) in nascent
capitalism in the 18th and 19th centuries and in the last wave of technological
entrepreneurship of the late 20th century and early 21st century. The nature of
entrepreneurship has varied through history and space and its determinants
involve a complex interaction of family background, quest for independence,
education, desire to accumulate wealth, the needs of economic survival,
ingenuity and risk- taking capacities. Heterogeneity is evident when we
compare entrepreneurship in low productivity areas in the service sector of
developing countries, largely dominated by entrepreneurs of necessity with
technological entrepreneurs of middle class background in advanced
economies. In Latin America entrepreneurs of opportunity can play also a
valuable role for promoting growth and create employment. Still the
pervasiveness of the entrepreneurship by necessity in the developing world
suggests its practical importance as a mechanism of economic survival for
lower middle class households and the poor to cope with informality, scarce
jobs at middle and lower-end occupations and public sector regulations and
taxation.
The international mobility of entrepreneurs is an emerging subject, albeit
comparatively little studied so far. It has the potential to increase the
43
presence of developing countries in the technological sector and as a vehicle
of transferring contacts, market information, skills and knowledge.
Middle class analysis is per se a complex subject. At an analytical level the
concept and definition of middle class is still not a settled issue and an
understanding the relation between middle class and entrepreneurship
requires further research. The middle class is certainly a source of consumer
power in a growing economy but its apparent reliance on debt to finance
durable consumption, pay education fees and acquire housing makes it
potential vulnerable to financial shocks, recessions, unemployment and
health contingencies. The potential contribution of the middle class to the
stability of democracy is a theme in the literature on the middle class.
Claims of a pro-democracy middle class seems to be broadly supported by
recent value surveys; however, contemporary and historical experiences of
Latin America in the 1970s and 1980s and Europe in the 1920s and 1930s
show that the middle classes were not unsupportive of authoritarian regimes
when democracy collapsed in these nations.
Upward social mobility is a desired feature in any dynamic society and is
viewed as an antidote for entrenched inequality of social origin and
institutional rigidities for economic progress. However, the mechanisms for
middle class mobility can be wide open. In principle, this mobility can be
achieved through various vehicles such engaging in entrepreneurial activities
or choosing the route of an employee (the ―intrapreneurial‖ option) and
being a self- employed person.
The public policy implications of the literature reviewed is an important next
topic and is considered in chapter 4. The topic raise a range of issues
starting with the potential, but also the limits, to promote entrepreneurship
as a large scale policy, the perennial but ever present theme of how to ease
44
obstacles and restrictions to the latent entrepreneurial potential of
individuals facing constraints in the access to credit, education, technology
and markets, the ability of policies in promoting small and medium scale
entrepreneurship that create new jobs, enhance social mobility and income
generation when facing the power and influence of big corporations,
conglomerates and economic elites that pressure governments to limit
competition and make it difficult the entry of new actors to the market.
45
CHAPTER 3.
Empirical Evidence for Latin America: Main Findings of Six Country Studies.
1. Introduction.
In the previous chapter we analyzed the main issues and different
approaches to entrepreneurship, middle class analysis and social mobility. This
chapter summarizes the main findings of the six country studies and regional
papers on entrepreneurship, middle class and mobility commissioned by the
Research Department of the Inter-American Development Bank. These studies are
oriented to provide quantitative and qualitative information useful for an informed
comparative analysis of entrepreneurship in Latin America, its scope (and limits)
for promoting social mobility and the cementing of a new middle class. The six
country studies comprise Argentina, Bolivia, Colombia, Ecuador, Mexico and
Uruguay. The country studies use various sources of information including
national census data, household surveys, firm-level surveys and special
questionnaires for entrepreneurs. When considering values of the entrepreneur and
the middle class several of the country studies use the World Value Survey.
The chapter is organized in nine sections, including this brief Introduction.
Section 2 reviews several empirical measures of entrepreneurship used in the
literature and provide the definitions chosen in the country studies; section 3
analyses the links between macro cycles (booms and recessions) and
entrepreneurship; section 4 examines main socio-demographic and firm level
features of entrepreneurial activity.
The choice between entrepreneurship and employee already discussed
briefly in the preceding chapter is considered in section 5 and the links between
46
social mobility, entrepreneurship and class origin are taken up in section 6. Section
7 deals with the issue of values of the entrepreneur and section 8 highlights internal
and external obstacles for entrepreneurship detected in some of the empirical
studies. The chapter closes with a summary of the main findings of the country
studies in section 9.
2. Defining and Measuring Entrepreneurship
To assess the magnitude of entrepreneurial activity we need some empirical
measures of it. We can distinguish at least three main approaches to define
entrepreneurship.
(a) Self-employment with hired workers. The most natural measure of
entrepreneurship is self-employment measuring the share of people that lead their
own firm. The statistics of the economically active population typically
distinguishes between owners and managers, employees, and self-employed. The
country studies of the IDB project define entrepreneur as a self-employed who
owns or manages a firm of at least two people.32 An entrepreneur has to hire other
people as (paid) employees or workers for productive purposes as part of his
resource mobilization function. The self-employment measure still is a crude
measure of entrepreneurship as it can include both large scale entrepreneurs as well
as a small shop owner. In addition, it says nothing, per-se, if the entrepreneur is
successful or not. For that purpose including information of firm size and the
income bracket of the entrepreneur can add important insight to the self-employed
measure of entrepreneurship. Most of the country studies provide this information.
32
The self-employed person working alone, or as an independent professional, is not an entrepreneur.
47
(b) Business Creation. This second measure focuses on new business creation. The
World Bank Global Group Entrepreneurship Survey (WBGES), in particular,
focuses on new business creation in the formal sector. It measures the number of
newly registered firms in a given year over the total number of firms registered.
Registered firms are legal entities that can incur in debts with the banking system,
pay taxes and undertake legal transactions with other firms and the state.
(c) The stage of business development. This approach sees entrepreneurship as a
dynamic process and focuses on the stages of the process of business creation,
development and consolidation. The Global Entrepreneur Monitor (GEM)
publication that uses this measure focuses on early-stage entrepreneurial activity
regardless of formal registration. The approach distinguishes between nascententrepreneurs and baby entrepreneurship; the latter counted as the proportion of
the adult population that is currently involved in operating a business for less than
42 months. Each of these two approaches has some drawbacks. On one side, the
WBES may underestimate actual entrepreneurial activity by excluding informal
sector entrepreneurship. On the other side, the GEM method may overestimate new
business creation since nascent firms may eventually not materialize in an actual
firm and vanish from the market.
As mentioned in chapter 2 , the Types of entrepreneurship also matter. A person
(entrepreneur) is classified as entrepreneur by necessity when answering to the
survey question ―what is the reason that makes you dedicate yourself to this
business/firm/activity?‖ state that they do so because they cannot find a job; in
addition, they would prefer to be employees rather than a self-employed if the
choice were open to them. The rest of independent workers are classified as
entrepreneur of opportunity. As discussed before the necessity entrepreneur is a
48
strategy of economic survival in bad times and their patterns of economic behavior
are often different from the Schumpeterian idealization of an innovator and risk
taker. The opportunity entrepreneur, in contrast, is motivated by the opportunity to
earn higher incomes (an ambition element) besides the yearning for independence.
In contrast with the necessity entrepreneur, he or she does not engage in
entrepreneurial activities for the lack of a job or just to maintain a certain income
level.
Empirically, in the countries of this study, there are a greater proportion of
entrepreneurs of necessity compared with entrepreneurs of opportunity.
In the Argentina country study, two definitions of entrepreneurs are used:
employer-entrepreneur (e.g. business owner) and self-employed entrepreneur.
Total entrepreneurship (using both definitions) is estimated to be 9.2 percent of the
employed-population in the country. In turn, two –thirds are deemed to be
entrepreneur of necessity and one-third entrepreneur of opportunity.
In Bolivia the authors of the country study adopt a somewhat different definition
of entrepreneurship that reflects the economic and social realities of the country
(with a cooperative movement along with a significant self-employment sector
besides a purely capitalist sector). The study includes: (a) single-person
entrepreneur, (b) cooperative-entrepreneur and (c) and owner entrepreneur . In
turn, following the GEM criteria it is found a greater proportion of entrepreneurs in
as early stage entrepreneurs.33
33
See Hernani-Limarino, Eid and Villarino, 2012.
49
In Colombia the authors define entrepreneurs as those who identify themselves as
employers in the household survey.34 According to this definition the employer of
an economic unit, professional practice or trade independently with one or more
paid workers is an entrepreneur.35The study estimates that only 3.5 percent of the
working population of Colombia were entrepreneurs in 2010 (511,000
entrepreneurs against 7.6 million employed workers). This underscores the much
smaller proportion of people in the entrepreneurial option than in the employee
option.
The Ecuador study also uses the definition of self-employed individuals that work
in a firm of at least two workers and reports that the overwhelming proportion
(near 98 percent) of entrepreneurship activity generates between one to five jobs.
This denotes a high degree of ―micro-entrepreneurship‖. In turn, this seems to be
not a transitory phenomenon as the estimated probability of generating more than
ten jobs within the first five years of operation of an economic unit is a paltry 6.3
percent. Thus, entrepreneurial activity is concentrated in micro-enterprises (defined
as productive units with less than 10 workers)and with slim grow prospects.
Moreover, necessity-entrepreneurship is the dominant type of entrepreneurship in
the country.36
In Mexico, according to the Mexican Social Mobility Survey 2006 (MSMS-2006),
that collects current and retrospective information on respondents and their parents,
8.3 percent of the individuals (males) in the sample are entrepreneurs ( selfemployed people hiring at least two workers) . In comparison with the whole
34
Living Standards Surveys of DANE, the Nation Statistical Office.
35
See Mejia and Melendez, 2012.
36
See Ordeñada and Ortega, 2012.
50
sample, entrepreneurs‘ household monthly income is 35 percent higher than the
average of the sample. Once social classes are defined, 7.6 percent of middle class
individuals report being entrepreneurs, 5.7 percent for the poor and 16.9 are upper
class entrepreneurs.37
In the case of Uruguay the authors are only interested in entrepreneurs of
opportunity, considered as business –owners that have paid-employees. They
estimate that close to 5 percent of households are engaged in entrepreneurial
activity. Those who are in charge of their business but do not have employees
(self-employed) are probably necessity entrepreneurs and as such are left outside of
the entrepreneurship definition.
Summing –up, the size of the entrepreneurial sector is dependent upon the
definition used. Using the self-employment/owner definition the average size
across the six countries is less than 5 percent a number that can increase to near 10
percent (or more in some cases) using broader definitions of entrepreneurship. In
any case, it is apparent we are referring to a relatively small percentage of the
economically active population of the six countries that can be considered as
entrepreneurs. In turn, it is worth remembering that we are measuring
entrepreneurship in a given point in time. This does not imply we are referring
necessarily to successful entrepreneurs, measured by profit generation, innovative
capacity and so on over a certain time span.
3. Macro developments and Patterns of Entrepreneurial Activity
The conventional wisdom says that entrepreneurial activity and private sector
development will flourish in periods of macroeconomic and political stability and
37
The study uses the definition of middle class as a person that makes a daily income between U$ 10 and U$ 50 in
PPP-2005.
51
market deregulation and declines in recessions or crisis. Reality seems to defy,
partly, these simple characterizations. In Argentina, the percentage of
entrepreneurs of the economically active population increased between 1974 and
1980 from around 10 percent to 13 percent, followed by a decade of relative
stability in entrepreneurial activity, ending in an (unexpected) high peak in the
hyperinflation years of 1989-1992 (see figure 1, draw from Anchorena, Ronconi,
and Braun, 2012). This increase in entrepreneurial activity (unless it is completely
dominated by necessity entrepreneurship) is surprising. As it is well known, the
second half of the seventies and early eighties in Argentina was a period of high
inflation, failed stabilization, erratic policies and autocratic rule, all (or most)
elements that are expected to penalize (productive) entrepreneurship. From then
on the measure of entrepreneurship declines from almost 13 percent to near 8
percent in 2011, a trend that starts in the early 1990s, a phase of big inflation
followed by subsequent
stabilization, the convertibility plan, and pro-market
policies. That drift continues in the 2000s with more heterodox economic policies.
Figure 1 – Argentina. Evolution of Entrepreneurship (as a share of the EAP), 19742011.
52
13
12
11
percentage
10
9
8
1970
1980
1990
2000
2010
Source: Argentina Country Study, Anchorena and Ronconi, 2012.
Figure 2 separates employer entrepreneurs from self-employed entrepreneurs. We
observe that between 1974 and 1980 the share of both types of entrepreneurs
increased. In the next six to seven years, employer entrepreneurs diminished while
self-employed entrepreneurs increased. In the critical period of 1988-1992 again
both types of entrepreneurship increased. During the nineties entrepreneurial
activity decreased until around 2004. Indeed, since 2005, the trend for employer
entrepreneurs is increasing while the trend for self-employed entrepreneurs is
decreasing.
Figure 2 – Argentina .Evolution of types of Entrepreneurship (as a share of the
Economically Active Population), 1974-2011.
53
8
7
6
percentage
5
4
3
1970
1980
Employer entrepreneur
1990
2000
2010
Self-employed entrepreneur
The authors of the Uruguay country study, (Bukstein and Gandelman, 2012) report
that during the 2002 Uruguayan crisis (closely related with the crisis in Argentina),
income in households without entrepreneurial activity fell by 10 percent and in
households with entrepreneurial activity fell by 15 percent. These numbers show
more volatility in the incomes of entrepreneurs during a recession compared to the
evolution of employees. It is apparent that the entrepreneurial activity involves
substantially more uncertain incomes and risks than other occupational activities.
The Uruguay study also reports a lower volatility of income of the independent self
employed. The authors interpret these results as that ―they (the self-employed) are
really not true entrepreneurs‖. Entrepreneurships and self employment with fixed
workplace are pro-cyclical, a feature that could be expected of opportunity
entrepreneurs. In contrast, the behavior of households self employed without fixed
workplace is countercyclical. The lack of jobs destroyed during a recession force
54
many people to engage in independent activities to generate incomes; precisely the
main feature of necessity entrepreneurs. In turn, when the economic situation
improves they will likely prefer to be employees in a salary-based relation.
4. Main Socio-Demographic and Productive Features of Entrepreneurial Activity.
The Argentina study shows that the incidence of informality (that is, lack of
business registration for tax and banking purposes) is pervasive among
entrepreneurs in this country. Close to 40 percent of entrepreneurs are deemed to
be in informality; a high percentage indeed for a country with the development
level of Argentina (among the highest per capita income country in Latin America
along with Chile and historically a leading country until the 1930s). In turn, as it
could be expected, the incidence of informality is much higher for self-employed
entrepreneurs (54.4 percent) than for employer entrepreneurs (11.5 percent). In
addition, most of the employer entrepreneurs are male. The mean age is higher for
independent workers (entrepreneurs and self-employed) than for employees
rendering additional support to the hypothesis that entrepreneurs might start as
employees (in their twenties) to later become entrepreneurs (in their thirties and
forties). This life-cycle dynamics of occupational choice suggests a sequential
decision process over time rather than a discrete choice at one time-point. The
choice may not be of the type:‖I have to decide today whether I am an employer or
entrepreneur for the rest of my (working) life‖.38 Rather, it seems that individuals
tend to prefer a more gradual and cautious approach starting their occupational life
first as an employee and consider later switching to entrepreneurship if the
conditions are ripe for that decision. However, as discussed in chapter 2 we seem
38
Incidentally, it is interesting to note that a similar broad pattern of employee/entrepreneurial choice observed in
Argentina is found in a study of technological entrepreneurs in the United States (see Wadwha, V., R. Aggarwal, K.
Holly and A. Salkever,2009, quoted in chapter 2).
55
to know little about the reverse (or return) switch from entrepreneurship to
employee and the different skills required in that transition.
Regarding education levels, on average, employer entrepreneurs have higher
schooling than employees, s segment that, in turn, have, on average, higher
schooling than self-employed workers.
Most of the entrepreneurs work in small firms in Argentina, a common feature of
the productive structure of Bolivia, Colombia, Ecuador, Mexico and Uruguay. On
average, employer-entrepreneurs manage firms of nine workers, while selfemployer- entrepreneurs work in firms of three persons. In contrast, employees
work in firms of around 120 employees or more. The income differentials between
entrepreneurs by opportunity and entrepreneurs by necessity can be in the order of
one to four/five.39
In Bolivia entrepreneurs also tend to work in small firms, the education level of the
employer-entrepreneur (proxy for opportunity entrepreneur) is higher than for selfemployed entrepreneur, and also higher than for the cooperative entrepreneur and
informal paid workers. Also there is a positive relation between wealth levels and
type of entrepreneurship with opportunity entrepreneurs displaying higher access
to productive and financial assets. The Bolivia study also shows a tendency for
higher (or at least not lower) average incomes for employer-entrepreneur over
formal sector employees. In turn, self-employed entrepreneurs, cooperative
workers, informal sector employees all tend to have lower average incomes than
formal employees.
In Colombia entrepreneurship is concentrated in the middle class. Female
participation is much lower among entrepreneurs than among employed workers
and this holds true for all social classes. Like in Argentina and other countries in
39
see Anchorena, Ronconi and Braun, 2012.
56
our sample of six countries, entrepreneurs are on average older than their employed
counterparts. The mean middle class entrepreneur obtains a monthly income that is
nearly 30 percent higher than the mean middle class employee. A somewhat
smaller difference persists for individuals in the lower and upper classes. On
average females have lower labor incomes than males (a gender wage differential).
In turn, labor income is increasing in age and education for both entrepreneurs and
employees, with entrepreneurs doing better than employees of similar
characteristics.
Perhaps unsurprisingly the upper class entrepreneurs have the largest concentration
of individuals in the highest levels of schooling attainment albeit the difference
with employees is small (79 percent of upper class entrepreneurs and 77 percent of
upper class employees completed technical or higher education). In turn, 10
percent of middle class entrepreneurs have primary education or less; 41 percent
only completed high school; and 42 percent have a technical education or higher
(see Melendez and Mejia, 2012).
Like in other countries of our sample, in Colombia entrepreneurs are concentrated
in smaller firms than employees. Lower class and middle class entrepreneurs
concentrate in businesses of ten employees or less; upper class entrepreneurs in
businesses of more than 51 workers are rare. While a majority of entrepreneurs in
all social classes are in wholesale and retail trade activities, employees work more
in services.
In Ecuador middle class entrepreneurs are predominantly men (68 percent), are 42
years old on average, have a household with four members and have significant
levels of college education (50 percent). Predominantly they come from a middle
57
class background (59 percent) and lower class (33 percent) background.40 In line
with the findings of other countries in this study and in the United States, in
Ecuador most entrepreneurs were employees before becoming an entrepreneur, 41
suggesting that entrepreneurship comes at a later stage during the working lifecycle in line with the hypothesis of a sequential choice of employee-entrepreneur
status. In turn, the male-bias of entrepreneurship is more accentuated in the upper
classes, and their average age is slightly higher, than middle class entrepreneurs. In
fact, 75 percent of upper class entrepreneurs are men, have an average age of a 44
years old, have a household with an average of four members and , in a significant
proportion, come the from the middle class (58 percent). In turn, 55 percent of
them came from a national firm and 20 percent were independent professionals.
According to a survey of 203 entrepreneurs survey conducted in Guayaquil, Quito
and Cuenca the two main motivations for a middle class entrepreneur to start a
business were to be independent (86 percent) and improve their economic status
(85 percent). Thus, the quest for independence and the lure of higher income are a
common motivation of opportunity entrepreneurship that is common across
different studies and theories (see chapter 2).42
The average firm owned by a middle class entrepreneur is a family business (69
percent) with an average of six- years of continuous operation. They are focused
on the domestic market, mainly in wholesale or retail commerce and business
40
See Ordeñana y Arteaga (2012).
41
43 percent of them worked at a national company and 30 percent as an independent professional before turning
to entrepreneurship.
42
The most important skills for middle class entrepreneurs, are achieving goals, creative thinking and decision
making. Upper class entrepreneurs value significantly decision making, problem solving and creative thinking.
Achieving goals and communication skills are significantly more mentioned by the middle class entrepreneurs
compared to the high class ones.
58
services –such as real estate and consulting companies. They have an average of
four employees and annual sales of US$100,000. The initial investment averaged
US$10,000, funded mainly by own resources (75 percent), and only 25 percent
received funds from family and friends. 43 Regarding entrepreneurial training, most
entrepreneurs get it from their university education. However, when it comes to
managing a business, 32 percent (for both middle class and upper class
entrepreneurs) trust private seminars or short courses to obtain the needed skills.
Mexico. According to economic census data and a national entrepreneurial survey,
a total of 7.6 percent of middle class individuals report being entrepreneurs (the
number is slightly below the one quoted from the mobility survey). That share is
5.7 percent for the poor and 16.9 percent for the rich. Years of schooling increase
according to the class origin of the entrepreneur. Poor entrepreneurs have an
average of 5.6 years of schooling, middle class entrepreneurs have 8.1 and the rich
ones have 12.6.The Mexican study shows that most entrepreneurs are owners of
micro-enterprises, that is, firms with less than 10 employees. In the case of middle
class entrepreneurs, 33 percent report having only one employee, 36 percent have
two to four employees and 13 percent have five to nine employees. 44 That is close
to 70 percent of middle class entrepreneurs are concentrated in very small firms,
say with less than five employees. This suggests the prevalence of necessity
entrepreneurs.
43
The average firm owned by a upper class entrepreneur is also a family business with an average of 8 years of
continuous operation. They are also focused on the domestic market, mainly in services and wholesale/retail
trade. They have an average of 7 employees and annual sales of US$240.000. The initial investment averaged
US$50,000 obtained mainly by own resources (84 percent).
44
This distribution is similar for poor entrepreneurs (42 percent, 33 percent, and 9 percent, respectively). For
upper class entrepreneurs the distribution is (14 percent, 51 percent, and 15 percent, respectively).
59
Entrepreneurship is mostly concentrated in trade followed by industry, a feature
that extends also to middle class and lower and upper class entrepreneurs. The least
common are in the Construction and Transport sectors (4 percent and 6 percent,
respectively). A larger proportion of poor entrepreneurs (35 percent) own
enterprises in the agriculture sector than middle class (10 percent) and upper class
entrepreneurs (5 percent). Finally, around one third of rich entrepreneurs own firms
in the services sector while less than one sixth of middle class and poor
entrepreneurs own firms in that sector.
Uruguay. As mentioned before only in 5 percent of households the main income
provider is an entrepreneur (remember that in the Uruguay study opportunity
entrepreneurs is the only category of entrepreneurship). Most entrepreneurs belong
to the middle class (above 70 percent in 2010). In terms of share of the social class
of origin only 1-2 percent of the disadvantaged (lower class or poor) are
entrepreneurs while entrepreneurship among the middle class is 5-8 percent and
among the affluent (upper class or rich) is 15-16 percent.45 The class-bias of
opportunity entrepreneurs is apparent and they tend to come from the upper
classes. Besides the level differences, entrepreneurship is clearly pro-cyclical for
the affluent and middle sectors, a result we highlighted before when discussing the
evolution of entrepreneurship in Uruguay during the crisis of 2002-03. In terms of
socio-demographic characteristics, entrepreneurs have on average 1.8 more years
of education that the rest of the population. In 2010 they are also somewhat older
than non entrepreneurs and they trend to concentrate in the capital city of
Montevideo.46 The study also finds that it takes time until an individual is able to
45
The study defines the middle sectors as those individuals whose household per capita income is between 50
percent and 150 percent of the median per capita income (they also use the U$ 10-50 rage definition). Those below
50 percent of median income are considered as the ―disadvantaged‖ sector and those above 150 percent are the
―affluent‖ sector.
46
Gandelman and Roban (2012).
60
start his own business and that the first working experiences of people are as
workers (employees) rather than launching their own business. This confirms again
the notion of a sequential choice between being a paid- employee and becoming an
independent entrepreneur. It is worth noting that this is ―average behavior‖.
Individual stories vary. Some individuals just inherit a family business while others
choose at the start of their occupational careers to become an entrepreneur.47
5. Entrepreneurs ―versus‖ Employees.
An important question of this book is shedding some light on the determinants of
occupational choice. Is engaging in entrepreneurial activities a better ticket for
richness, prosperity and a higher social status, say compared to be an employee
status? Is entrepreneurship --versus ―intrapreneurship‖, say pursuing a career
within a firm-- a better vehicle for overall occupational satisfaction? To the extent
that the empirical evidence allows answering this complex question, it is clear that
this depends on various factors. For example an executive of a big corporation is
bound to be a much more prestigious position and better paid than a small shop
owner although the former is an employee and the latter an ―entrepreneur‖. So the
type of entrepreneurship, the size of the firm and the quality of jobs all matter a
good deal. Second, individual preferences and motivations are also of critical
importance. We noted previously that besides independence a main motivation of
becoming an entrepreneur-- and face the risks the entrepreneurial activity
inherently entails --is the lure of obtaining higher incomes and improve the
economic possibilities of their children and grandchildren. The empirical evidence
emerging from the country studies and additional international evidence shows that
the choice is sequential in time and individuals can experience both types of
47
In the case of family business it is often the case that until the retirement of the older family members that the
family allows the newcomers to take over the management of the business.
61
occupations during their economically active histories, although of course the
choice remains.
6. Entrepreneurship and Social Mobility: Empirical Possibilities.
Besides the question of occupational choice another critical question is to what
extent entrepreneurship is a good vehicle, at macro and micro levels, for upward
social mobility given its small quantitative importance (relevant at macro level)
and the risks involved in this activity (relevant at micro level). Most of the country
studies of this project analyze both short term (intra-generational) mobility and
medium to long run (e.g. inter-generational) mobility. For that purpose they use at
least one of the following empirical methods to gauge mobility:
a) Time-dependence approach. Econometrically-oriented studies of mobility
make a distinction between unconditional and conditional mobility (or
convergence). Typically in a simple regression framework of unconditional
convergence in which current income, y(t), is regressed against lagged income, y(t1), and a random term, the coefficient of lagged income lies in the interval [0-1].
In the case of full income convergence, say y(t)=y(t-1), ( lack of social mobility),
the coefficient of y(t-1) would be equal to 1. In turn, a coefficient of 0 would mean
a lack of persistence in incomes and thus a high degree of income mobility: past
incomes would have no effect in predicting current incomes. In turn, conditional
convergence adds to the regression a set of determinants of current income (e.g.
age, human capital, asset ownership, a productivity variable and so on). So income
convergence is conditional on the variables determining income. Most of the
empirical studies follow this framework for assessing entrepreneurial mobility in
their respective countries. It is importance to note that the analysis of time
dependence tell us only the degree of (in) mobility of an income processes. It does
62
convey information whether people are more likely to ascend or to descend along
the overall income distribution or different economic and social strata.
b) Positional mobility is an analysis of the degree to which the individual position
in the income distribution in the past determines his position in the present; this is a
natural complement to an analysis of time- dependence. In this approach typically
origin-destination transition matrices are constructed (estimated) to analyze the
transition between social classes or incomes levels across individuals (say from
poor to poor, from poor to middle class, from poor to rich and so on for other
social classes).
Ideally, for studying social mobility issues (in our case the mobility of
entrepreneurs) we would like to have a long longitudinal survey of the same
individuals over time to track their actual (rather than model-predicted) income
evolution over time and infer thereby patterns of upward and downward mobility.
In the absence of such longitudinal studies, which is the case in the Latin American
region, there are two empirical methodologies that set to assess mobility.
(i) The Pseudo-Panel Approach. This method was originally developed in Deaton
(1985). It allows applying the convergence methodology by constructing pseudopanels using a series of repeated cross sections. A pseudo-panel, an indirect
method (when longitudinal data is not available), yield synthetic observations
obtained from averaging observations from groups of individuals (usually called
cohorts) with similar time-invariant characteristics in a sequence of repeated cross
sectional data sets. The most used of these characteristics is the birth year
(although it may also be combined with gender, region of residence and/or
63
educational level or other characteristic the household). This way, the cohorts can
be thought to be ―followed‖ over time the same way individuals are followed over
time in true panel data, hence the name ―pseudo-panel‖.
(ii) The Social Mobility Index (SMI) Approach. This methodology was initially
developed by Behrman et al. (1999) and provides a way of measuring social
mobility in the absence of data that follow the same individuals through time. The
SMI approach48 uses surveys in which respondents are asked to self-assess the
wealth and income of their parents as an indirect or subjective measure of the intergenerational transmission of educational attainment between parents and children.
The SMI calculates for a family with children, an indicator of future opportunities
for them, based on the characteristics of the household in terms of income and
parental education. The basic notion in this methodology is that if family
background (parents' education and income) is important in determining
opportunities for children, then social differences tend to be perpetuated over time,
i.e. there is a low level of inter-generational mobility in the society. On the
contrary, if family background is not decisive in explaining education outcomes,
social mobility can be enhanced and the education system is functioning as an
equalizing device allowing for larger social mobility. In this methodology
schooling gaps (SG), are constructed to assess intergenerational mobility and
degree of equality of opportunities. The school gap is often defined as the
difference between the years of schooling that a child should have, as predicted by
the model (based on parental background conditions according to his/her age), and
the actual years of schooling.
Results
48
This method was followed in the Uruguay and other studies along with the time-dependence method.
64
Xxxxxxxxxxxxxxxx May 3 xxxxxxxxxxxxxxxxx
For investigating middle class entrepreneurship, most of the studies use an
absolute income definition of middle class individuals (see chapter 2). These are
those with a daily income in a rank between U$ 10 and 50 dollars (2005-PPP).
Some of the studies (e.g Uruguay) combine the above absolute income criteria with
relative definitions relative to mean income. The more widely used definition of
entrepreneur is of the business-owner that hires at least two workers. The data
sources vary across studies but most of them use national census, household
surveys combined with entrepreneurs or other ad-hoc appraisal for a specific year.
In Argentina, the majority of entrepreneurs (65.3 percent) were born in a middle
income family. In turn, 20 percent of the actual entrepreneurs come from rich
families and 14.7 percent from poor families. The responses to self-assessment
surveys that include recall questions indicate a relationship between parental
wealth and actual occupation: people born in richer families are more likely to
become entrepreneurs, and people from poorer families are more likely to end up
working as either employees or independent self-employed. But the differences
are small.49 That is, parental wealth is a predictor of entrepreneurial activity, but
not a very strong one. Moreover, the results indicate that people whose parents
were entrepreneurs (owners of a firm) are more likely to become entrepreneurs
compared to those whose parents were not owners of a firm. Although the
relationship is not perfect, it is stronger compared to the correlation between
parental wealth and entrepreneurship. In fact, the probability of becoming an
49
13.4 percent of people born in a rich family became entrepreneurs compared to 11.9 percent and 7.1 percent of
people born in middle and poor families. Entrepreneurs coming from upper class households are likely to have
received a better education, have access to a network of influential people, and their parents could finance their start
ups.
65
entrepreneur is 15.8 percentage points higher if your parents were owners of a
firm, while it is only between 1.5 and 6.3 percentage points higher if your parents
were rich (relative to middle class and poor), see table 2 from Anchorena,
Rondoni and Braun, 2012. This result suggests a greater importance of role
models effects—than parental wealth—in the choice of entrepreneurialism.
Table 1. Argentina .Parental Occupation of Entrepreneurs, Self-Employed and
Employees
Actual Occupation
Your parents were owners of a firm
when you were 15 years old?
Yes
No
Difference
Entrepreneur
25.0
9.2
15.8***
Self-employed
14.7
14.8
-0.1
Employee
60.3
76.0
-15.7***
Total
100
100
-
Note: *** Significant at the 0.01, ** 0.05 level.
Source: Anchorena, Rondoni and Braun, 2012.
In line with the importance of parental models, the probability of becoming an
entrepreneur is almost three times higher among those individuals whose parents
were entrepreneurs. The authors argue that this is so because entrepreneurs
66
emphasize certain qualities among their children (i.e., responsibility, tolerance and
respect, independence, determination and perseverance and imagination) that are
more conductive to entrepreneurship. This explanation resorts to the role of values
and attitudes in nurturing entrepreneurship, an issue we take up below in this
chapter. 50
The Bolivia study investigates social mobility using various approaches such as
estimating the parameters of time-dependence equations, positional transition
matrices and steady-state class distributions as equalizers of long run incomes. A
main result obtained is that the degree of social mobility depends on the type of
entrepreneurs. (Employers-opportunity) entrepreneurs that use hired labor in
production experience higher mobility relative to self-employed workers
(cooperative and own account) and also to paid-employed workers (formal and
informal). This result appears to be robust to different measures of economic
mobility such as time independence, positional movement and mobility as
equalizer of long-term incomes. In addition, the study finds that employers exhibit
significantly lower unconditional and conditional time dependence coefficients in
labor earnings, are significantly more likely to move upward in both labor and
overall income distributions, and much more likely to end-up in the upper incomeclass relative to other types of self-employed workers and even relative to paidemployed workers. Still, we have to remember that the segment of (employers)
entrepreneurs is small on Bolivia (as well as in other countries) as a proportion of
the working population. Therefore their higher potential for social mobility may
50
The study also shows that entrepreneurs that were born in a low income family earn substantially less incomes
than entrepreneurs born in middle and high income families (i.e., their earnings are less than half and they are less
likely to hire workers). The data suggests that this is in part because they have less human and social capital
(entrepreneurs from poor families have on average between three and four years less of schooling compared to
entrepreneurs from higher income families). The study also includes a methodology of endogenous cut-offs points
for defining social classes.
67
not trickle-down much to reach larger segments such as independent self-employed
workers and paid-employees that constitute the majority of the economically active
population.51
The Colombia case study investigates whether middle class entrepreneurs have
more social mobility than the average paid-worker. For that purpose it uses
microeconomic data about individuals and their parents‘ education available from
household surveys at national level for 1997, 2003, 2008 and 2010. The study
looks at transition matrices in which parents‘ schooling attainments are associated
with their adult children‘s education levels. Transition matrices are computed for
each year in which the survey is available, restricting the sample to the middle
class, and separately for entrepreneurs and employees. The study finds that
entrepreneurship is scarce and is socially segmented: it is more frequent in the
upper class than in the middle or lower classes. In turn, middle class entrepreneurs
are on average better off than middle class employees of similar characteristics.
Nevertheless, there are significant differences between middle class and upper
class entrepreneurs regarding schooling attainment, by the size of the businesses
they run, and by their outcomes. While entrepreneurs appear to have more intergenerational income mobility (lower income persistence) than the average worker,
the study fails to find ―middle class particularism‖ in entrepreneurship. In other
words, this mobility of middle class entrepreneurs is not systematically higher than
the mobility of lower class and upper class entrepreneurs. Therefore, social
mobility in Colombia seems to be associated with entrepreneurship in general,
irrespective of the social origin of the entrepreneur. The study also concludes that
the middle class entrepreneurs succeed at making a living from their businesses but
51
On school attainment, the study finds that a person has a below-average probability of being an employer if he
has not complete at least six years of schooling and an above-average probability if he has complete a university
degree, while other self-employment types (cooperative and own account) exhibit opposite patterns. On wealth, the
study suggests that the availability of assets exert a significantly and quantitatively important effect on the
―opportunity‖ to be an employer.
68
the empirical evidence does not find support for the hypothesis that their activity is
a strong engine of economic growth. On the contrary, the findings suggest that the
types of businesses they run are low-productivity businesses; the majority (over 60
percent) work in productive units with one to three workers and their export
orientation is minimal. In light with these findings the authors do not recommend
designing policies tailored to promote, directly, middle-class entrepreneurship. For
them these policies would be misguided. Instead, policy efforts should be directed
towards facilitating social mobility more generally. In their view, better education
for the (lower and) middle class individuals would be ―a cradle for true
entrepreneurship in the medium and long run‖.
The Ecuador study sets to address the important question: Is entrepreneurship
successful in improving social mobility? For addressing this query, the authors
construct a pseudo panel to analyze the dynamic effect of entrepreneurship on the
Ecuadorian household incomes during the period 2002 – 2010. Using three
estimation scenarios, the study finds a significant level of unconditional and
conditional mobility of entrepreneurship. The results of the estimations reveal that
entrepreneurship not only reduces income convergence (increasing mobility) but
also increases future average cohort income. This means that entrepreneurship not
only affects positively income generation, on average, but also makes it easier to
generate such increase. However, the authors highlight an important
methodological point, already mentioned in chapter 2: that by omitting failed
entrepreneurs (those who abandoned or went bankrupt) the results may somewhat
overestimate the contribution of entrepreneurship to future incomes. Another
interesting result is when women entrepreneurs are the head of household they tend
to experience more income mobility (both upward and downward). This feature
along with the fact that women´s income is significantly lower than those of male
69
households because of gender-discrimination or other causes is a clear indication
of vulnerability of households with women playing critical entrepreneurial roles.
Mexico .What is the role played by entrepreneurship in fostering social mobility in
Mexico? The Mexican Social Mobility Survey 2006 (MSMS-2006) is used to
examine intergenerational social mobility associated with entrepreneurial activity.
It is important to note that the MSMS-2006 only provides information on income
for the generation of respondents (not for the parent, thus it is not a longitudinal
survey). The study thus resorts to wealth to measure inter-generation mobility and
wealth persistence over time. Three main exercises are conducted. First, it is
analyzed if entrepreneurs experienced greater upward social mobility than selfemployed or employees. Secondly, discrete-choice econometric models (probit)
are used to identify if predetermined characteristics are main determinants of the
decision of becoming an entrepreneur. And third, the effect of entrepreneurial
activity on income is estimated using the propensity score matching method
(PSM). In line with the other country studies, the results for Mexico show that
entrepreneurs have more options for upward social mobility, than independent selfemployed and employees but this result is conditional on the socio-economic
characteristics of the parents. In fact, for entrepreneurs coming from families with
poor parents it is more difficult to move upward in the socio-economic ladder
compared with those entrepreneurs with parents who belonged to the middle or
upper class. Secondly, the probability of becoming an entrepreneur increases when
the respondents‘ father was also an entrepreneur, (a strong role model effect) a
result in line with those obtained for Argentina and other countries. This variable
(father´s occupation) is more important than initial wealth and education. Thus, a
family-transmission effect of occupational values (e.g. to become an entrepreneur)
seems at work here. And finally, it is found that the mean effect of entrepreneurial
70
activity on income is positive and bigger for those with parents who belonged to
the lower and upper classes of the socioeconomic distribution.
The Uruguay study reports a decline in inter-generational social mobility between
1982 and 2010 a proximate cause of increased social segmentation and inequality
in the country. Inter-generational mobility is measured as the relationship between
parents‘ schooling and income on children‘s schooling. The study finds that the
probability that the children of those more educated remain among those more
educated has increased over time. A similar trend is observed for the less educated.
These results suggest strong persistence in the education levels of different
generations reducing the degree of social mobility particularly for the
disadvantaged individuals in society. The computation of an index of social
mobility shows no significant changes in the Index in the case of mandatory
education (primary school and first three years of secondary school). In contrast,
there was a decrease in mobility for non-mandatory education (last three years of
high school and then university). Family background variables play a small role in
determining schooling outcomes for families of entrepreneurs and for middle
sector families. According to the authors the public system in Uruguay
successfully provides primary education for everybody and to a lesser extent the
first years of secondary school. Nevertheless, there are important differences in the
quality of education for children of entrepreneurs and middle sector. Finally, the
study argues that entrepreneurship is indeed a channel for higher inter-generational
social mobility. This finding is interestingly connected with the migration process.
In fact, evidence points to immigrant‘s individuals that were scarcely educated but
with tremendous creative spirits that progressed, ascended socially and provided
better living conditions for their descendants. Although Uruguay stopped long ago
to receive large contingents of immigrants, the potential of entrepreneurship as a
mobility device, similar to immigration, is still there.
71
Finally, intra-generation mobility is studied using time-persistence approach and
pseudo-panels. The pseudo panel provides evidence of low unconditional
convergence both when using an absolute measure of income and a relative
measure of income that controls for income growth. The authors note the
prevalence of entrepreneurship in small firms with modest productivity levels. In
this perspective they recommend that policies to foster entrepreneurship should
have productivity and efficiency orientation rather than a social assistance
motivation.
8. Values and Entrepreneurship
The previous section establishes the overwhelming importance of the role model
played by the father or mother entrepreneurs in shaping the choice of becoming an
entrepreneur in their children. This effect is stronger than parental wealth and
suggests the importance of values and perceptions in entrepreneurship. Values are
transmitted through generations and the family plays a critical role in this
transmission besides the general cultural environment, the type of social practices
and public policies in society. The World Values Survey (WVS), a dataset with
more than 50,000 interviews in more than 50 countries, for the 2005-2007 is often
used for investigating issues related to values. A main value question is ―qualities
that children can be encouraged to learn at home‖. Respondents have to choose up
to five of ten alternatives: independence, hard work, feeling of responsibility,
imagination, tolerance and respect for other people, thrift (saving money and
things), determination and perseverance, religious faith, unselfishness, and
obedience. It is worth considering that several of the values listed in the World
Value Survey are common to many endeavors and not only entrepreneurship. As
discussed at length in chapter 2, theories chiefly associated with Max Weber,
72
point-out to the importance of delayed gratification (patience), hard work,
perseverance, and the propensity to save in fostering entrepreneurship. The extent
this is a plausible characterization of the values of the entrepreneur is subject to
debate. In the 1930s John Maynard Keynes emphasized more ―animal spirits‖
rather than family inherited values or a cold calculation of costs and benefits in
driving investment behavior. Frank Knight stressed the role of entrepreneurial
personality in managing and coordinating multiple tasks and dealing with risk. As
the economic structures and institutions vary over time it is bound to expect that
the values of the entrepreneur will change as well over time. For example, now we
speak of ―social entrepreneurs‖, ―intellectual entrepreneurs‖ denoting the
importance of private non-for profit initiative in these activities. Also the role of
thriftiness in entrepreneurship, strongly emphasized in the 19th century literature on
the subject, has come into question in the 21st century given the separation between
saving generation and financial intermediation and the entrepreneurial function in a
modern economy.
Anchorena, Ronconi and Braun, (2012), using the WVS, investigates the value
issue for Argentina in comparative perspective with other countries in Latin
America (Brazil, Chile, Colombia, Mexico, Peru, and Uruguay), and resource-rich
nations such as Australia/New Zealand. The authors find that the ―Argentinean
society has values better aligned with entrepreneurship than the rest of Latin
America‖. According to the authors the data shows that Argentinean society
promotes six values supportive of entrepreneurship: higher responsibility, higher
tolerance/respect, higher independence, lower obedience, lower religious faith,
lower thriftiness, and higher imagination. However, while Argentinean society
73
may promote entrepreneurial values it does so less than some successful, natural
resources abundant economies, such as Australia and New Zealand. 52
7. External and Internal Obstacles for Entrepreneurship
There is a growing literature that emphasizes the impact of restrictions, obstacles
and policy-induced or big- corporation induced hurdles for the development of
entrepreneurship and business creation, particularly in the small size firms sector.
Kantis, Federico and Trantsberg (2012) identify three main problems facing
middle-class entrepreneurs: (i) to get qualified employees, (ii) to get clients and
(iii) to equilibrate the cash flow. These restrictions focus on the functions of human
resource management, market access and financing, clearly three critical
dimensions in any productive endeavor. Moreover, the evidence highlights that
these obstacles to entrepreneurship are more acute for poor and middle class
entrepreneurs than those for the upper classes. To overcome these problems,
middle-class entrepreneurs tend to rely on their networks. In addition, middleclass entrepreneurs tend to use information acquired in previous jobs and/or by
networking to identify their business idea. However, in the Latin American region,
their networks seem to be less professionalized and business specific than in the
case of high-class entrepreneurs and also when compared with their middle class
colleagues from other regions of the world.
Tables 2 and 3 presented below, drawn from the Ecuador study, show the external
and internal factors that hinder the entrepreneurial process for both middle and
high class entrepreneurs in Ecuador. These problems are bound to be qualitatively
52
In particular, the authors point-out that Argentinean society values relatively little determination and
perseverance and relatively high, obedience.
74
similar in other countries. Among several factors, paperwork (bureaucracy) and tax
policy are two important common external problems affecting both middle and
upper class entrepreneurs. Moreover, middle class business people find more
difficulties in obtaining adequate financing and inputs than upper class
entrepreneurs. In turn, the lack of access to competitor information, apparently a
less important factor for middle class entrepreneurs, is a key barrier for
entrepreneurship for the upper class.
Table 2. Ecuador. External Factors that Hinder the Entrepreneurial
Process
External Factors
Extensive paperwork
(bureaucracy)
Tax policy
Difficulties in obtaining
financing
High costs of materials,
human resources and
inputs
Difficulties in obtaining
human resources
Difficulties in obtaining
appropriate suppliers
Duties on imports
Difficulties in access to
competitor information
Difficulties in finding
adequate facilities
Difficulties in obtaining
information and
telecommunications
infrastructure
Difficulties in access to
the information of the
target or potential market
Middle
55%
High
51%
40%
38%
43%
28%
27%
22%
35%
39%
19%
20%
13%
11%
12%
29%
18%
10%
6%
10%
9%
9%
75
size
Lack of basic services
infrastructure
(communications, electricity,
etc.)
Difficulties in obtaining
machinery and equipment
9%
8%
4%
10%
-------------------Source. Ordeñana and Arteaga, 2012.
76
Table 3 highlights the importance posed by managing functional areas of the firm:
finance, human resources and advertising/marketing as a set of internal factors that
hindered the entrepreneurial process for both middle class and high class
entrepreneurs. Another important internal factor is the difficulty of networking, a
common problem for Latin American markets.
Table 3. Ecuador. Internal Factors that Hinder the Entrepreneurial Process
Internal factors
Managing human resources
Lack of knowledge in
managing advertising and
marketing
Lack of networking, that
caused difficulties to get
customers
Managing finance issues
Lack of knowledge about how
to start a business
Managing the business tax
aspects
Inexperience in the context of
the business
Inadequate planning
Inexperience in sales
Managing available financial
resources
Lack of knowledge about their
target segment
Lack of knowledge about how
to define their income model
Middle
40%
33%
High
30%
40%
36%
35%
28%
20%
24%
13%
26%
38%
23%
15%
13%
18%
1%
9%
30%
8%
5%
7%
3%
5%
77
The report underscores the importance of social capital – mainly in the form of
family, friends and community organizations- in determining the dynamism of a
business and as a way to solve the multiple obstacles facing the entrepreneur. The
authors recommend that public policy should help entrepreneurs in accessing
financing and new technologies allowing them to have more impact on their
business.
8. Summary
Entrepreneurs represent a small proportion of the economically active population
in our sample of six Latin American countries. They tend to be male, middle-age
and their education level comprises secondary and, often, tertiary education. They
also tend to come from families in which a parent is or was also an entrepreneur,
highlighting the importance of role models in this activity. In fact, the occupation
choice of the father, or mother, is more important in the decision to become an
entrepreneur than the parent´s wealth, income or education although these
variables tend to be correlated among themselves. Middle class entrepreneurship
tends to dominate the sample in part since this is the majority class in society.
However, as percentage of each social class, entrepreneurship tends to be higher in
upper class, followed by the middle and lower class. Entrepreneurs concentrate in
the segment of micro enterprises with a strong dominance of productive units
below five employees. Their social mobility is greater than employees and the selfemployed but this mobility is not always in the upward direction. Their average
incomes are higher than employees and self-employed but also the variance of
their incomes is superior. Opportunity entrepreneurship tends to be pro-cyclical: it
increases in booming periods and fall in recessions, downturns and crisis
situations. The values of the entrepreneur are a topic subject to controversy. Good
qualities as high work, responsibility, imagination, tolerance and others are
common to success in any activity not only in entrepreneurship. Thriftiness and
78
saving-orientation may not be required as a fundamental characteristic of the
entrepreneur as those that save are not the same that those that invest and innovate
in a modern economy; although common sense and historical experience suggest a
reliance on internal funding (savings) and low to modest levels of indebtedness are
salutary features for sustainable entrepreneurship.53 The super rational calculator
of costs and benefits may not be a good description of the actual entrepreneur of
the real world subject to changes in mood, herd behavior, manias and panics. The
entrepreneur is faced to multiple obstacles of an internal and external nature.
External factors such bureaucracy, burdensome tax procedures, lack of financing
mechanisms, access to markets, market-dominance by big firms, corruption and
others pose a challenge to the desire for growth and profits. Internal obstacles are
often related to the ability of the entrepreneur to attract adequate human resources,
manage new technologies, and get costumers, lack of supportive networks and the
like. The evidence shows that support of family and friends and a modicum of
social capital can be very valuable traits to cope with external and internal
obstacles to the entrepreneurial function. A next step in the study of
entrepreneurship is to examine its impact on critical variables such as contribution
to value added, employment creation, innovation, exports and positive linkages
with other sectors of the economy to assess their impact on growth and
development.
53
See Solimano and Gutierrez (2009).
79
Chapter 4. Public Policy Implications for Fostering Entrepreneurship in
Heterogeneous Societies and Issues for Future Research.
The results reviewed in this chapter suggest important public policy implications
for the promotion of entrepreneurship in society. A reasonably well designed
public policy should answer the difficult question of ―what should be promoted‖?
Is it productive entrepreneurship, personal economic autonomy, business creation
and consolidation, economy-wide growth, innovation, employment generation or a
combination of all these factors? This book alerts on two critical characteristics of
entrepreneurial activity that will matter at the time of formulating public policies
for the promotion of entrepreneurship: (i) the small quantitative importance of
entrepreneurship in the economically active population (of course the impact of
this minority activity can be high) and (ii) the heterogeneity of the entrepreneurial
function.
In fact, entrepreneurial traits -- such as a propensity to envision opportunities,
mobilize resources, take risks and innovate -- are not widely distributed among the
population at large. Therefore, pro-entrepreneurial policies will hardly be ―massive
policies‖ in spite of their apparent objective of creating a majority of entrepreneurs
(los emprendedores) in the population and extend the reach of ―popular capitalism‖
to the middle class and the poor. The heterogeneity of the performing of the
entrepreneurial function between a small group of large scale entrepreneurs with
access to credit, technology and market and innovative capacities and a much
larger group of small and medium size entrepreneurs and micro-scale ―necessity
entrepreneurship‖, with much reduced access to these capabilities makes the
targeted segment -- ―the entrepreneur ― --potentially diffuse, elusive and very
heterogeneous.
Trade Offs in Pro-Entrepreneurial Policies.
80
These considerations highlight the various trade-offs implicit in the objectives of
policies oriented to the promotion of entrepreneurship. On the one hand,
entrepreneurial policies oriented to promote economic autonomy, employment and
income generation may collide with entrepreneurial policies oriented to promote
objectives such as innovative capabilities, new products, new technologies and
economy- wide economic growth. In the first case, entrepreneurial policies call for
supporting micro, small and medium scale entrepreneurship in activities with low
technological sophistication but with a capacity of employment generation and that
provides means of economic survival for those out of the reach of social protection
policies. In the second case, policies may require to support technological
entrepreneurs and larger scale entrepreneurship.
Should public policy discriminate in favor of middle class and lower class
entrepreneurship, putting the social origin of the entrepreneur as a valid criterion
for entrepreneurial policy? Some argue that promoting pro-middle class
entrepreneurial policy can be ultimately a misguided policy. A similar argument
could be extended to policies oriented to promoter lower class entrepreneurship.
Democratizing Entrepreneurship
These arguments against (directly) pro-middle class entrepreneurship and pro-poor
entrepreneurship can be evaluated on at least two accounts. First, fostering
entrepreneurship in the middle class and the poor may be a compensatory policy
that helps leveling the playing field of general entrepreneurship in view that nonrich entrepreneurs often start from disadvantageous conditions regarding education
levels, parental support, lack of role models, lack of financing and other
impediments to fulfill entrepreneurial motivation. We have to ensure that
entrepreneur´s functioning and capabilities 54are turned into actual realizations by
54
Extending Amartya Sen´s framework to entrepreneurship.
81
providing supportive factors such as training, financing and other forms of support.
Second, public policy can also help democratize entrepreneurship when markets
are dominated by few big players that impede entry and competition of small and
middle size participants through de –facto barriers such as their superior access to
funding, economies of scale, better technologies, and greater lobby capacities to
policy-makers and so on.
Once an agreement is reached on the need to have some entrepreneurial policy that
cut across individuals from different social class and ethnic backgrounds --and not
only having policies catered to entrenched, rich, entrepreneurial elites -- it is
important to develop clear guidelines and operational criteria to design and
evaluate the type of entrepreneurship that we want to promote. Reasonable criteria
for such entrepreneurial policy can include the contribution of entrepreneurship to
firm-creation, productivity, innovation, employment generation, incomes to the
poor and the middle class, resource mobilization and export orientation to list main
positive factors. The important thing is to realize is that there is trade-offs among
these objectives.
Role Models, Gender Biases and Capacity Shortages
The results of the country studies in Latin America we have presented in chapter 3
suggest some interesting considerations for the design of entrepreneurial policies:
(a) Exploit the importance of role models for encouraging entrepreneurship. These
role models often come from family parents but they also may come from outside
the family. The likes of Steve Jobs, to name some successful entrepreneurs, and
others constitute implicit role models for new generations of entrepreneurs can
contribute to disseminate their experiences and lives as entrepreneurs.
(b) The country studies show a male gender- bias in entrepreneurship in the Latin
American region. This can be a reason for promoting a greater incorporation of
women to entrepreneurial activities. In the case of mothers it is important that these
82
policies promote also a reasonable balance family-work framework, given the
critical importance of the mother in raising and nurturing children in the
household.
(c ) The studies show that internal obstacles to entrepreneurship such as a shortage
of capacities of many entrepreneurs and managers to deal properly with human
resource and technology management issues and cash flows. The empirical data
show that these obstacles are particularly acute in middle class and popular class
entrepreneurs given their comparatively lower social and political contacts and
comparatively lower educational levels. This calls for level playing –field
equalization in the design of entrepreneurial policies oriented to help entrepreneurs
to strengthen internal capacities to manage enterprises.
Red-Tape, Investment Climate and Regulations.
In recent years the concept of the ―cost and ease of doing business‖ has been put
forward and empirically assessed to denote the obstacles to entrepreneurship and
business creation and consolidation. The conceptual underpinnings of this line of
work are related to the importance of investment climate and regulations as a key
set of considerations for investment and entrepreneurship. Since 2003 the World
Bank Group has been publishing an annual report called Doing Business. In 2011
the report included 182 countries. The report gauges measures such as time,
number and costs devoted to comply with regulations rendering to the easiness or
difficulties of doing business in a vast array of countries of different per capita
incomes levels and stages of development. The Doing Business methodology
focuses on variables such as the requisites for starting a business, dealing with
construction permits, employing workers, registering property, getting credit,
protecting investors, paying taxes, trading across borders, enforcing contracts,
closing a business and getting electricity. In general the country rankings of
(easiness) of doing business are closely correlated with the per capita income of
83
countries. Typically these rankings countries are headed by high income OECD
nations. Conversely, in the bottom of the rankings we find Sub-Saharan African
economies preceded by South Asian countries. The Latin American and Caribbean
region is often in the lower- middle of the ranking in terms of easiness of doing
business using the variables we mentioned before. The Report also regularly
provide updates progress made by countries in reducing red-tape and stifling
regulations and these reforms take place in very different countries without a clear
pattern related to development levels.
The studies reviewed in this book highlight that red-tape and bureaucracy is
certainly an external obstacle of entrepreneurship, although is not the full story.
Reforms to facilitating the process of creating a firm in some Latin American
countries are a step in the positive direction. Reducing the time and cost of legal
incorporation of a firm will favor the creation of new enterprises. In several Latin
American countries, the cost of closing a firm and going-out of business is often
high due to the stringent bureaucratic procedures to stop a firm from functioning.
Policy-makers have to keep in mind that when the costs of exit are high, the entry
of firms is also penalized. Throwing sand to the process of firm-creation and firmclosing can be harmful to the entrepreneurial function. Bankruptcy procedures
have to be reviewed. The high pecuniary and legal costs of bankruptcy procedures
that prevail in several countries tend to impede the reallocation of resources after
the failure of a business. In addition, the social stigma of going bankrupt seems
higher in the Latin American culture than in Anglo-Saxon cultures.
Education, Training and Entrepreneurship.
The role of education and training in nurturing entrepreneurship is an important but
largely unsettled topic. Promoting the entrepreneurial option and skills‘
development processes through the educational system may help also to
compensate disadvantageous situations associated to the social origin at the very
84
beginning of the entrepreneurial career. However, if the access to the educational
system is strongly correlated with the socio-economic level of the student, a reality
in many developing countries, the education system will tend to reproduce-- more
than correct-- existing inequalities of income and wealth and is unlikely to
contribute to democratize entrepreneurship.
In any case, if university level training in entrepreneurship is pursued then it is
important to engage public universities in this effort since middle classes and low
income students have a greater access to public universities than to private
universities.
Universities in Europe and North America in recent years have been increasingly
promoting courses and master programs oriented to nurture and provide tools for
effective entrepreneurship. These programs seek to differentiate themselves from
the standard Masters in Business Administration (MBAs) that are oriented to
produce managers and not necessarily entrepreneurs. This trend started to spread
also to Latin America with a proliferation of short courses and diplomas catered to
foster ―el emprendimiento‖ (entrepreneurship) as the new mantra for growth and
development. It is important to ensure that training and education efforts are in line
with the vocation and interests of the students and appropriate systems of detecting
and nurturing entrepreneurial traits are developed.
Financing, Networks, Social Capital and Entrepreneurship
Beyond education and training, it is important to consider carefully what empirical
studies show as the main constraints and obstacles facing entrepreneurs
particularly those belonging to middle class and poor family background. The lack
of financing is an almost perennial obstacle that faces non-upper class
entrepreneurs and this can be extended also to the children of the affluent that do
not automatically inherit the wealth and contacts of their parents. Many funding
schemes through public banks and second tier commercial banks are probably far
85
from a resounding success in Latin America and other parts of the world. Still
some positive cases also exist and lessons from success and failure have to be
considered in this area. Public policy can make an effort in securing external
financing to the firm and connecting the demand and supply of loan funds markets.
Policies to monitor the cost of credit in markets and lack of financial education
facing many poor and middle class entrepreneurs is essential in markets plagued by
asymmetrical information and unethical lending practices. The studies also show
that deficits in attracting and managing human resources, securing clients, manage
new technologies, improve accounting and financial management are all internal
factors critical for impeding entrepreneurship. Also the studies show the growing
importance played by networks and family, friends and community institutions to
overcome these obstacles and give way to sound and vibrant entrepreneurship at all
social levels. Promoting social capital and facilitating communication and
networking can have a significant pay-off as a non-conventional entrepreneurial
policy. Finally, entrepreneurial policies must address the cost of entry and exit and
creating and closing firms. Entrepreneurship is a dynamic process in a capitalist
economy. However, many times industrial and entrepreneurs policies adopt a static
view of the firm.
Issues of Future Research
Entrepreneurship is an important topic that cut across different fields of
knowledge. An expansion of inter-disciplinary vistas of the topic can be rewarding.
Inviting dialogue and joint research among business experts, economists,
psychologists, labor market experts, industrial relations, venture capital and talent
specialists can have an interesting pay-off.
Basic issues such as the definition and measurement of entrepreneurship need
additional work. A similar comment can be made to the measurement of the
86
middle class. The use of measures of ownership, self-employment, size of firm,
business creation to gauge entrepreneurship shows the topic is still in a nascent
phase from an empirical viewpoint. In turn, the lack of longitudinal studies in
Latin America for properly tracking the family and occupational history of
individuals over long time spans is a limitation for the study of entrepreneurship in
this region. This is bound to be applicable also to other developing regions.
However, empirical methods that overcome this lack of longitudinal data are used
as reviewed in this book. Also more research is needed in areas such as the values
of the entrepreneur. The classic depiction of a frugal individual willing to postpone
consumption and endure sacrifices for materializing his vision of business
formation may remain valid but the role of sophisticated capital markets and
family inheritances change the picture somewhat. In addition, the role of generalist
traits and multi-task capacities versus specialization and technical knowledge
abilities in the entrepreneurial function deserves more analysis. The theme of how
to manage risk and embark in productive ventures in uncertain contexts remains as
critical topics. More work is needed in understanding and measuring the intergenerational transmission of values at family level given the importance found for
parental family roles in the propensity for entrepreneurship detected in the
empirical studies. It is important also to study more the important of role models
outside the family in shaping entrepreneurship. Understanding the determinants of
the gender component of entrepreneurship, strongly biased to maleentrepreneurship in Latin America, is an important emerging subject matter. We
need to understand better the influence of family factors, exclusion patterns, the
female participation rates in the labor force in shaping the role of women in
entrepreneurial activities.
More work is needed also on occupational dynamics and its impact on social
mobility. The empirical studies show the sequential role of employee first and
87
entrepreneurship latter prevalent in the occupational stories of individuals. These
studies identify age ranges lying between the late 30s and early 40s for the switch
between employee-status to entrepreneurial-status. Nevertheless, we need to know
more of how robust is this age-threshold to changes in occupation samples across
time and space. The influence of the age-level on the ability to take risks is an
interesting albeit largely neglected topic. A similar question can be extended to the
influence of class and ethnic background in the tolerance for risk-taking and
entrepreneurship.
An important question is the evolving form of internal and external constraints on
entrepreneurship. The growing importance of information technology in business
management and the importance of networks for gathering a client base and human
resource recruitment decision is a new topic for entrepreneurship.
Another important topic is the influence of cities, location and international
mobility of talent on entrepreneurship is a critical topic. Most of entrepreneurial
activity takes place in cities, rather than in isolated places, but there are also
important differences in entrepreneurial density across cities of relatively similar
size. The concepts of ―ecosystems‖, ―bottom-up innovation‖, ―clustering‖ in the
literature on entrepreneurship all denote the importance of favorable contexts,
interdependence, location, decentralization and spontaneity in the entrepreneurial
function. The role of consumer base, human resource accessibility, inputs
availability and the supply of entrepreneurial capacities are all dimensions in the
growth of cities that point to a dynamic, mutually causal, interaction between cities
and entrepreneurship. The international mobility of talent is a critical feature of
globalization and part of this talent pool engages in entrepreneurial activities.55 The
role of international differences in regulation policies, ease of doing business,
55
See Solimano (2008).
88
immigration regimes, availability of credit and venture capital and growth
prospects are all factors that affect the international allocation of entrepreneurship
among nations. The role of the Latin American region in this new landscape is an
important topic for further research.
89
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