2013
Pierre Jolicoeur
Final Research Paper
5/2/2013
2013
Pierre Jolicoeur
Final Research Paper
5/2/2013

The Role of Entrepreneurial Class in Economic Development of LDCs
The Role of Entrepreneurial Class in Economic Development of LDCs

Table of Contents Page
Abstract……………………………………………………………………………………………………………..2
I. Introduction…………………………………………………………………………………………….3 Statement of Problem……………………………………………………………………………..3 Objectives of study……………………………………………………………………………….…4 Definition of Terms…………………………………………………………………………….……4 Limitations………………………………………………………………………………………….……5 II. Literature Review…………………………………………………………….....5

III. Methodology…………………………………………………………………......6

IV. Results and Analysis……………………………………………………………..9

V. Summary and Conclusions……………………………………………………..12

Summary………………………………………………………………………………………………….12
Conclusions………………………………………………………………………………………………13
Recommendations……………………………………………………………………………………14
References……………………………………………………………………………………………….15

Abstract The uncertain global economic recovery and the worsening Eurozone crisis continue to undermine those factors that enabled the least developed countries (LDCs) as a group to attain higher growth rates between 2002 and 2008. Despite seeing real gross domestic product (GDP) grow slightly faster in 2010, the group as a whole performed less favorably in 2011, signaling challenges ahead. LDCs have been most affected by financial crises caused by other countries. With less diversified economies, LDCs have neither the reserves nor the resources needed to cushion their economies and adjust easily to negative shocks. In addition, if another global downturn hurts the growth prospects of emerging economies, LDCs, as major commodity exporters, will be directly affected. Therefore, LDCs require increased external assistance to better protect their economies against external shocks and help them manage volatility. I will distinguish the impacts in which entrepreneurship plays in LDCs as well as a contrast on how it affects developing economies and countries as well.

Pierre Jolicoeur
April 21, 2013
Eco 303-01W
Topic #9

The Role of Entrepreneurial Class in Economic Development of LDCs: Problems and Prospects

I. Introduction
I will be investigating what the role of entrepreneurial class plays in economic development of LDCs. This will further analyze the prospects and problems. Moreover, it will be interesting to see how each LDCs benefits from the role of entrepreneurial class. LDC stands for Less Developed Countries. In economies that are slightly behind their modern industrial counterparts which refers to countries that are equal in certain aspects of general demographics, entrepreneurship is often viewed as an important component in stimulating economic growth, innovation, competitiveness, and even lessening poverty for these countries. However, before that is accomplished, there are several unique features that affect entrepreneurship in developing countries.
The first and perhaps most obvious factor affecting entrepreneurship in less developed countries is the lack of capital and financial innovation. Many people in these countries have limited personal savings and lack the necessary capital to start their own business. Entrepreneurs must then turn to external financing where they are charged high interest rates due to the risky nature of new business projects. With underdeveloped financial markets and expensive borrowing rates, entrepreneurs in emerging economies often use informal sources of finance to start their businesses and generate income from multiple jobs or businesses. With that being said, this is where an advantage of developing countries comes into play. With that being said, it is safe to say that Entrepreneurship is extremely important in developing countries. This is because in order for them to continue to grow as a country, there needs to be some sort of business being ran and functioning in order for there to be income and healthy economic growth.
A country is classified as a Least Developed Country if it meets three criteria: first being Poverty which includes the number of homeless individuals or just a poor country as a whole. Second being Human Resource weakness which is based on indicators of nutrition, health, education and adult literacy. Last but not least, based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration and so on so forth. These countries have the lowest indicators of socioeconomic development as well as low HDI ratings.
There is a unique strategy portfolio that the entrepreneurs in developing countries are using. The entrepreneurs strive to own more than one business to explore different avenues of income to not only provide for his family, but for his own personal life as well. Having multiple jobs and running several start-up businesses at one time provides a unique advantage for entrepreneurs in developing countries. For example, an entrepreneur may have a farming business while at the same time be involved in carpentry, construction, or commodity businesses to generate income for his farming business. This wide-ranging business nature is common in developing countries and allows entrepreneurs to successfully eliminate high levels of different market risks as they follow their diversified portfolio strategy. Prior to doing the research that I have done, I would have assumed that there would not be much opportunities for LDCs due to the fact that they are poor to begin with. Nonetheless, it is always hard for a LDC to overcome past crises. II. Literature Review
Entrepreneurship is not a well-developed component of modern economic theory. Many neoclassical economists find it difficult to merge the requirements of rational decision making with the functions ascribed to entrepreneurship; coordination, arbitrage, innovation, and uncertainty bearing (Barreto 1989). In the least developed countries, where aid dependency is high, donors have been shifting the emphasis in development cooperation towards private sector development. In many of these countries, including resource-poor North African countries, populations consist of many young people who see little prospects of gaining employment with decent wages. Promoting youth entrepreneurship here has become a vital policy objective of many development organizations and donors. It is expected that entrepreneurship will contribute to growth and employment creation in advanced, emerging and least developed economies alike. This is a reasonable expectation and one that is supported by recent findings of historians, economists and management scientists. The role of entrepreneurship in economic development has been the focus of a two-year United Nations University World Institute for Development Economics Research (UNU-WIDER) project, which resulted in the recent book ‘Entrepreneurship and Economic Development’. This book is said to be one of the most informative books in print on the subject itself.
In this book, the importance of innovative, high-growth entrepreneurship is emphasized and the important role of the state to support is discussed. The book also argues in favor of the need for entrepreneurial solutions to complex global challenges such as climate change, migration, and terrorism.
“With too many entrepreneurs, levels of aspirations in a country may rise - it is well-known that with increasing material wealth (or opportunities) people’s aspirations increase.” (Naude, 2011)

There are two major forewarnings however. The first is that for entrepreneurs to play an appropriate role, the role of the state remains important, if not more so than initially. Strong states, as regulators play a particularly vital role. In the absence of appropriate ‘rules of the game’, entrepreneurship may result in undesirable social outcomes, including corruption, crime, speculation and financial crises, and may worsen the vulnerabilities of people during natural disasters. The second is that while entrepreneurship may raise economic growth and material welfare, it may not always result in improvements happiness. Promotion of happiness is increasingly seen as an essential goal.

III. Methodology
Entrepreneurship is the active process of recognizing an economic demand in an economy, and supplying the factors of production to satisfy that demand, usually to generate a profit. High levels of poverty combined with slow economic growth in the formal sector have forced a large part of the developing world’s population into self-employment and informal activities. But this is not necessarily negative; microenterprises contribute significantly to economic growth, social stability and equity. The sector is one of the most important components through which lower income people can escape poverty. With limited skills and education to compete for formal sector jobs, these men and women find economic opportunities in microenterprises as business owners and employees. If successful, entrepreneurship is likely to result in a small- to medium-enterprise (SME).
Moreover, The LDCs’ total debt stock reached $161 billion in 2010, only marginally higher than in 2009. Their debt service decreased slightly from $8.2 billion in 2009 to 7.6 billion in 2010. The experience of the LDCs in the last ten years shows that the key to debt sustainability is development of productive capacities. High, sustainable GDP growth and rapid expanding exports increased the debt-servicing capacity of many LDCs. While external financial resources, in particular ODA and remittances, have recently been increasingly available to LDCs, there is no guarantee that this will continue to be the case.
It has been noted that, “SMEs constitute the most dynamic segment of many transition and developing economies. They are more innovative, faster growing, and possibly more profitable as compared to larger-sized enterprises.” Hence, the role of entrepreneurship in reducing poverty in LDCs is promising. Some distinctive attributes of entrepreneurship in developing countries appear to improve the probability of success for growth-oriented firms, while others appear to hold back these firms. These vary from Opportunities, Financial Resources, Human Resources and so on so forth. Opportunities for entrepreneurs in developing countries are broader in scope than in developed markets, allowing firms to pursue a portfolio approach to strategy that can efficiently manage the higher levels of business and market risk. Entrepreneurs in developing countries face a different set of circumstances than their counterparts in developed economies. These differences are rooted in the underlying economies in which they function. Emerging markets lack a stable of mature markets and the consistency that such markets offer. Therefore, the opportunity for entrepreneurship in emerging markets is pervasive. While Western entrepreneurs operate at the fringes of the economy, emerging market entrepreneurs operate closer to the core while the needs and opportunities become widespread. The specifics for Financial Resources are as follows.
Reflecting the unpromising odds of entrepreneurial success, internal finance comprises the majority of financing for small and medium enterprises in most developing countries. Entrepreneurs in emerging markets rely very heavily on informal sources of finance to start their businesses; these sources provided between 87% and 100% of the outside capital raised by entrepreneurs (Bygrave 2003). With that said, Very little is understood about the mechanisms by which potential entrepreneurs in developing countries gather the capital necessary to start a business.

IV. Results

Relative to other country groups (developed economies and developing economies excluding the LDCs), the real GDP per capita in LDCs decreased from the beginning of the 1970s until the mid-1990s. During that period, the LDCs real GDP per capita, relative to that of developed countries, declined from above 2 percent to only 1 percent. t. Relative to the real GDP per capita of other developing countries, the LDCs had fallen from almost 40 percent of their level in 1970 to less than 20 per cent by the mid-1990s. The increased dynamism of LDC economies during the 2000s has reversed these trends. But the real GDP per capita of LDCs was only 1.5 per cent of that of developed economies in 2009. Moreover, despite the economic boom in LDCs in the 2000s, there has been no improvement of the real GDP per capita of LDCs relative to other developing countries. Thus, even with the growth performance they recorded during the 2000s, LDCs were not able to start a process of closing the gap with other developing economies.

Another way of looking at these trends is to compare the share of total number of people living in extreme poverty in developing countries who are in LDCs. In 1990, China and India accounted for 61 percent of the people living in extreme poverty in all developing countries. By 2007, this figure has gone down to 42 percent, largely owing to China, where the number of poor people more than halved in 20 years. In contrast, the share of the global extreme poor who were living in LDCs has increased from 18 per cent in 1990 to 27 per cent in 2000, and reached 36 per cent in 2007. Given current trends, and the continuation of business as usual, it is clear that over time, LDCs will become the major locus of extreme poverty in the world.
Real GDP and real GDP per capita growth rates in LDCs, and forecasts until 2016:

This graph is just showcasing the Real GDP and real GDP per capita growth rates in LDCs, and forecasts until 2016 including all of the LDCs for further comparison. This is provided to have a clearer idea on what the GDP per capita growth is like for certain countries. V. Summary and Conclusion