Is entrepreneurship the solution to economic inequality in emerging economies or the force creating it?

Research Paper Title:

“Economic inequality – Is entrepreneurship the cause or the solution? A review and research agenda for emerging economies”

Authors:

Gary Brutton (TCU)
Christopher Sutter (Miami University)
Anna-Katherina Lenz (RMIT University)

Background:

Economic inequality is particularly problematic in emerging economies where it is associated not only with differences in economic status but also with differences in access to basic infrastructure and public goods such as education. It is unclear whether entrepreneurship helps to create or solve the economic inequality in emerging economies. This study seeks to clarify this issue and lay out a future agenda for entrepreneurship scholars. The two sectors of an emerging economy – formal and informal – experience different institutional worlds. The differences between these sectors shape the opportunities and resources that entrepreneurs have access to, with important implications for economic inequality.

Methodology:

Sample: Searched the Web of Science for articles pertaining to entrepreneurship and economic inequality in emerging economies
Sample Size: 40
Analytical Approach: review through an institutional theoretical foundation

Results:

• The literature provides evidence that entrepreneurship increases economic inequality in emerging economies when 1) it occurs exclusively in the formal sector and/or 2) it leads to more exclusionary institutions.

• The nature of economic gains and concentration of wealth from entrepreneurship in the formal sector becomes self-reinforcing as economic power often leads to political advantage over time.

• The literature suggests that entrepreneurship reduces economic inequality in two ways: 1) when it occurs in the informal sector and 2) when it leads to more inclusive institutions.

Future Research Agenda:

The study focuses this future research agenda specifically on the domains identified in the entrepreneurship literature on economic inequality in emerging topics - 1) resources and 2) human capital.

1) Scholars are encouraged to expand the understanding of how intermediaries (NGOs, micro-finance lenders) shape institutions and increase the growth opportunities for those in the informal sector as a way to reduce economic inequality.

2) Scholars could focus future research on how specific types of human capital could assist entrepreneurs in the informal sector grow and how entrepreneurs can be trained to help them develop their businesses.

Conclusion:

Entrepreneurship and economic inequality takes on additional complexity in emerging markets as opposed to a mature economy. Research on economic inequality and mature economies assumes that there is a robust institutional system that provides randomly distributed opportunities across society. The relationship between entrepreneurship and economic inequality in emerging economies depends to a large extent on where and how it occurs. While entrepreneurs in the formal sector with more resources and connections can bend formal institutions to their advantage, entrepreneurs in the informal sector lack these resources. Emerging economy governments and international development agencies hope to make the emerging economy the next Silicon Valley. However, nations and international grant agencies should be clear on whether they are helping the masses of people in those nations or exacerbating economic inequality. This research helps lay the foundation for future research to address this global challenge.